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A carbon price is the amount that must be paid for the emission of 1 tonne of carbon dioxide into the atmosphere. Such payments usually take the form of a carbon tax or the cost of purchasing emission allowances (permits to emit) in a cap-and-trade system.
Purpose: The purpose of carbon pricing is to force emitters to pay at least part of the cost of the negative externalities (pollution costs) caused by CO2 emissions. If the price equals the full cost of externalities, then according to Pigou and now standard economics, emissions will be reduced to an efficient level. This means that emitting one tonne less would reduce the dollar benefits from activities (such as driving) by just as much as CO2 pollution costs are reduced. (In theory this could even be negative.)
The source of these negative externalities for CO2 is assumed to be climate change, since CO2 is a known greenhouse gas. However, the cost of the externalities is not well known. Of course CO2 emissions come mainly from burning fossil fuels, from the chemistry of making cement and steel, and from deforestation.
Advantage: A key dispute (outside of economics) concerning carbon pricing is whether it is better than subsidizing alternative energy sources. The economic argument favors pricing because of its efficiency. When carbon emissions are taxed, all alternatives are helped equally and without favoritism. This would include, wind, solar, nuclear, home insulation, choosing to drive your higher mileage car, living closer to work and installing LEDs, to name a few. It is essentially impossible to subsidize all of these equally and in practice the subsidies are extremely unequal. For this reason subsidies are less efficient. Essentially, economics argues for a level playing field for all forms of CO2 emissions reduction. Other advantages are claimed for renewable subsidies, but efficiency is considered decisive by most economists, as was attested to in the "Economists’ Statement on Climate Change," signed by over 2500 economist including nine Nobel Laureates in 1997. This statement succinctly summarizes the economic case for carbon pricing:
"The most efficient approach to slowing climate change is through market-based policies. In order for the world to achieve its climatic objectives at minimum cost, a cooperative approach among nations is required -- such as an international emissions trading agreement. The United States and other nations can most efficiently implement their climate policies through market mechanisms, such as carbon taxes or the auction of emissions permits."
In short, this statement argues that carbon pricing (either "carbon taxes or the auction of emissions permits.") is a "market mechanism" (in contrast to renewable subsidies) and hence is the way that the "United States and other nations can most efficiently implement their climate policies."
- 1 Types of Carbon-Pricing Policies
- 2 Emissions trading: cap and trade
- 3 U.S. government interventions
- 4 See also
- 5 External links
- 6 References
Types of Carbon-Pricing Policies
A carbon tax is typically a tax levied on hydrocarbon (fossil) fuels in proportion to (or related to) their carbon content. The resulting carbon price, being determined by the tax rate, is generally relatively predictable when compared with the price of emission permits under a cap-and-trade system. According to the main article (carbon tax), as of July 2014, such taxes have been implemented in India, Japan, South Korea, Denmark, Finland, France, the Republic of Ireland, the Netherlands, Sweden, the United Kingdom, Norway, Switzerland, Costa Rica, parts of Canada, and parts of the United States.
No country has a carbon tax or a cap-and-trade system that applies to all carbon emissions, so all are partial carbon, and all amount to fossil fuel taxes that vary by fuel type. Counting all taxes on fossil fuel as carbon taxes, would raise the number of countries with carbon taxes and the amount of revenue collected by carbon taxes dramatically. There has long been a debate between those favoring a carbon tax and those favoring cap and trade as to which is the better approach. Prominent proponents of carbon taxes have been Joseph Stiglitz, William Nordhaus and James Hansen.
Cap and Trade
A cap-and-trade system is typically applied to some hydrocarbons, or to hydrocarbons burned in some industries or by some consumers and not others. In theory, like a carbon tax, it should be applied equally to all source of CO2 emissions. Those under the cap must buy emission permits for the fuels they use. However, the number of permits issued is less than total tonnes of emissions that would occur with a carbon price of zero. Consequently, the scarcity of permits cause their price (the carbon price) to rise to a level that limits emissions to the "cap" — the total number of permits issued. From an economic point of view, paying for emission permits is no different than paying a tax on emission. The main difference between the two systems is that the market for permits automatically adjusts the carbon price to a level that insures that the cap is met, while under a carbon tax, the government and not the market sets the price of carbon (or equivalently, the effective tax rate).
According to the main article (cap and trade), as of July 2014, cap and trade has been implement (and not rescinded) in New Zealand, 24 EU countries, Japan and parts of the United States. Prominents of cap and trade have been Robert Stavins , the European Union Emissions Trading Scheme, and the Environmental Defense Fund.
International Emission Trading
The Kyoto Protocol provides the only example of an international policy on emissions trading. This is distinct from the EU's Emissions Trading Scheme, which was implemented under the Kyoto Protocol, but was not prescribed by or defined by the Protocol. Instead the Kyoto Protocol defined Assigned Amount Units and rules for trading these "carbon credits." Trade of AAUs takes place between countries, and their price represents a carbon price faced by countries under the Protocol. However, since businesses and individuals cannot purchase AAUs that price is not necessarily passed through to emitters. It would be passed through to emitters if countries took them into account when setting their emission caps, and purchased and sold AAUs according to whether these were cheaper or more expensive than local emission permits.
The Kyoto Protocol also provided the basis for the European Union Emission Trading Scheme by allowing countries in the "EU bubble" to commit to a joint emissions target. The Protocol also allowed countries to meet their emission targets with carbon taxes and non-pricing policies such as renewables subsidies. It also allowed a somewhat ambiguous (due to the problem of additionality) carbon price to develop on some carbon emissions in developing countries by allowing “Annex I” (developed) countries to purchase Certified Emission Reduction Units (CERs) under the Clean Development Mechanism.
In short, the Kyoto Protocol demonstrates that an international emissions trading policy need not result in a single carbon price on all carbon emissions that it pertains to, and can consist of a complex array of incentives. In the case of the Kyoto Protocol, the result has been a constantly declining coverage of global carbon emissions (down to about 21% in 2013) and an erratic and generally declining price of carbon.
An International Carbon Price Regime
A new proposal for an international carbon pricing policy comes from William Nordhaus president of the American Economic Association, and perhaps the only economist to have been publishing on climate change in top-level economics Journals since 1977. In Chapter 21 of his 2013 book, The Climate Casino (ISBN 978-0300189773) he proposes an international "carbon price regime." Like the Kyoto Protocol, it allows flexibility in how nations would achieve their climate commitment. Unlike under the Protocol, nations would commit to a unifor global carbon price rather than to individually emission caps. To meet this uniform price commitment, “some countries might simply use carbon taxes. Others might implement their commitment using a cap-and-trade mechanism … Yet another approach would be a hybrid cap and trade with a minimum price floor.”
As of June 2014, the World Bank has begun suggesting an essentially similar approach “Depending on each country’s different circumstances and priorities, various instruments can be used to price carbon, such as domestic emissions trading systems, carbon taxes, and/or payments for emission reductions.” A similar international carbon price regime has also been proposed by Joseph Stiglitz, Martin Weitzman, and Stéphane Dion among others.
Four ideas lie behind this approach and are shared by the three authors just mentioned as well as by a number of others with similar proposals. First, climate change is a problem of the global commons, which means countries have a strong tendency to free-ride on each other's carbon abatements. Second, negotiating a single global price will be far easier than negotiating many emission caps. Third, to further ease the negotiation problem, countries must be allowed to chose their approach to carbon pricing. And fourth, to encourage poor countries to participate, developed countries must transfer funds and technology to them through something like a Green Climate Fund.
Emissions trading: cap and trade
Emissions trading has been discussed internationally—through the Kyoto Protocol—and in Australia, New Zealand, various European countries, Canada, and the United States; it has been implemented in some of these locations.
Under a cap-and-trade system, firm A can sell one of its "permits" at a higher price than the cost it would incur to reduce the emissions internally, it will sell one permit to B for, say, $5.00 – $1.00 less than the marginal cost ($6.00) for firm B to reduce its emissions internally. Project-based programs, also referred to as a credit or offset programs, earn credit for projects that reduce emissions more than is required by a pre-existing conventional regulation. These credits can then be traded to other facilities where they can be used for compliance with a conventional regulatory requirement. The decision to generate these credits usually is voluntary, but credits must be certified through an administrative process.
Credit programs can include a large variety of sectors and source types than other types of trading programs. Examples of these types of programs include offset requirements for new sources in areas that do not meet National Ambient Air Quality Standards and open market trading programs. Rate-based, also called averaging programs, is when a regulatory authority sets a constant or declining emission rate performance standard such as tons of emissions per megawatt hour. Emission sources with average emission rates below the performance standard earn credits that they can sell to other emission sources and sources with emission rates above the standard must obtain credits to cover the excess. Rate-based programs can lower emissions, but emissions can grow if activity grows.
Cap-and-trade programs have provisions that allow a covered entity to borrow allowances from the future to meet current compliance. Allowances generally have a "vintage", or grandfather clause, that defines the time period in which the allowance was created. Banking provisions permit the use of prior year allowances for compliance in a later period. This allows a compliance entity to over-comply in early periods, in anticipation of higher carbon prices in subsequent years. At the end of the compliance period, emission sources must have enough allowances to cover their emissions during the period. Sources that do not have a sufficient number of allowances to cover emissions must purchase allowances from other sources that have excess allowances from reducing emissions.
Examples of cap-and-trade programs in the United States include the nationwide Acid Rain Program and the regional NOx Budget Trading Program in the Northeast. The EPA issued the Clean Air Interstate Rule (CAIR) on March 10, 2005, to build on the success of these programs and achieve considerable additional emission reductions.
In the European Union, a goal to achieve a 20 per cent reduction in emissions by 2020 is in place, but may soon be increasing to 30 per cent from 1990 levels. On April 27, 2010, Germany sold 300,000 carbon permits for approximately 15.30 euros per metric tonne. The EU hopes to lead the way in green products and energy resources by increasing the carbon price and forcing more green jobs. However, critics say that companies are purposefully increasing emissions in order to get paid to eliminate them.
On January 1, 2005, The European Union introduced the EU emissions trading system on electricity plants (EU ETS). The EU ETS sets caps for the CO2 emissions of some 11,500 plants across the EU-25. Installations have the flexibility to increase emissions above their caps provided that they acquire emission allowances to cover emissions above, while electric plants with emissions below caps are allowed to sell unused allowances.
The Danish CO2 Emissions Trading System report by Sigurd Lauge Pedersen gives a background to and describes the functioning of the Danish carbon dioxide (CO2) emissions trading system for the period 2000–2003 that was adopted by the Danish Parliament. According to this report, Denmark is another country that has committed itself to reducing the emission of CO2 and other greenhouse gases (GHGs).Following the European Community's commitment to stabilize its GHG emissions at 1990 levels in the year 2000, Denmark committed to the EU that it would reduce GHG emissions by 5 per cent within this same period. To accomplish this, Denmark has made considerable progress in the energy area with respect to reducing CO2 emissions through energy savings, increased use of combined heat and power (CHP) and renewable energy, as well as fuel switching and increased efficiency of the power plants. Legislation on the Danish CO2 quotas (the CO2 Quota Act) was passed by the Folketing in June 1999 together with a totally new Electricity Supply Act. The CO2 Quota Act lays down a total CO2 quota for electricity production of 23 million tonnes in 2000. This is reduced by 1 million tonnes per year, to reach a quota of 20 million tonnes in 2003. A number of energy planning exercises have ascertained that the CO2 reductions laid down in the Act are in fact possible at moderate cost (0–30 US$/tonne).
The legal entities to receive emission allowances are the power companies. The allowances are issued per company, not per unit or per plant. The system covers all electricity producers operating in Denmark, except producers relying entirely on renewable energy. The cut-off threshold of 100,000 tonnes of CO2 from electricity production per year still means that more than 90per cent of the total CO2 quota for electricity production will be issued as emission allowances. On the other hand, only around eight of about 500 electricity producers will be covered by the CO2 emission allowances regime. The emission allowances under the CO2 Quota Act are tradable. The trading is done by the electricity producers without government interference. Whenever an emission allowance is traded, the Danish Energy Agency must be notified as to the volume of CO2, the year(s) affected by trading and the price of allowances. Thus, the traded commodity is simply a right to emit X tonnes of CO2 in a given year. Unused emission allowances can be banked and used in the following years. Thus the producers are not only provided with an emission allowance but also a saving limit, which is identical to the emission allowance. Banked CO2 can also be traded. If an electricity producer exceeds the CO2 emission allowance, taking into account traded CO2 emission allowances and banked CO2, they must pay a penalty to the state. The penalty is fixed at DKK 40 (about US$5) per tonne of CO2 emitted in excess of the allowance.
The market for CO2 trade has exploded in recent years and is worth an estimated 675 billion kroner globally. The money to be made within this industry creates a temptation to cheat. Since The Danish CO2 Emissions Trading System report was issued, Denmark has been under investigation for CO2 fraud. "Police and authorities in several European countries are investigating scams worth billions of kroner, which all originate in the Danish quota register. The CO2 quotas are traded in other EU countries... Ekstra Bladet reporters have found examples of people using false addresses and companies that are in liquidation, which haven't been removed from the register". This speculated corruption highlights the downside of a cap-and-trade system.
U.S. government interventions
President Richard Nixon signed amendments to the Clean Air Act in 1970, that expanded it to mandate state and federal regulation of both automobiles and industry. It was later further amended in 1977 and 1990.
"One of the first modern environmental protection laws enacted in the United States was the National Environmental Policy Act of 1969 (NEPA), which requires the government to consider the impact of its actions or policies on the environment. NEPA remains one of the most commonly used environmental laws in the nation. In addition to NEPA, there are numerous pollution-control statutes that apply to such specific environmental media as air and water. The best known of these laws are the Clean Air Act (CAA), Clean Water Act (CWA), and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) commonly referred to as Superfund. Among the many other important pollution control laws are the Resource Conservation and Recovery Act (RCRA), Toxic Substances Control Act (TSCA), Oil Pollution Prevention Act (OPP), Emergency Planning and Community Right-to-Know Act (EPCRA), and the Pollution Prevention Act (PPA)."
United States pollution control statutes tend to be numerous and diverse, and many of the environmental statutes passed by Congress are aimed at pollution prevention, they often need to be expanded and updated before their impact is fully realized. Pollution-control laws are generally too broad to be managed by existing legal bodies, so Congress must find or create an agency for each that will be able to implement the mandated mission effectively.
During World War I, U.S government intervention mandated that the manufacturing of cars be replaced with machinery to successfully fight the war. Today government intervention could be used to break the U.S dependence on oil by mandating U.S automakers to produce electric cars such as the Chevy Volt. Recently, Michigan Gov. Jennifer Granholm (D) said, “We need help from Congress,” namely, renewing the clean energy manufacturing tax credit and the tax incentives that make plug-ins cheaper to buy for consumers. It is possible that government mandated carbon taxes could be used to improve technology and make cars like the Volt more affordable to consumers. Unfortunately, current bills suggest carbon prices would only add a few cents to the price of gasoline, which has negligible effects, compared to what’s needed to change fuel consumption. Washington is beginning to invest in car manufacturing industry by partially provinding $6 billion in battery-related public and private investments since 2008, and the White House has taken credit for putting a down payment on the U.S. battery industry that may reduce battery prices in the coming years. Currently, opponents believe that the carbon dioxide emissions tax, that the U.S. government introduced, on new cars that is unfair on consumers and looks like a revenue-raising fiscal intervention instead of limiting harm caused to the environment. A national fuel tax means everyone, no matter what vehicle they drive, will pay the tax. The amount of tax each individual or company pays will be proportional to the emissions they generate. The more they drive, the more that they would need to pay. This tax is supported by the motor manufacturers, however stipulations confirmed by the National Treasury, state that minibuses and midibuses will receive a special exclusion from the emissions tax on cars and light commercial vehicles, which comes into effect from September 1, 2010. This exclusion is because these taxi vehicles are used for public transport, which opponents of the tax disagree with.
During George W. Bush’s 2000 campaign, he promised to commit $2 billion over 10 years to advance clean coal technology through research and development initiatives. According to Bush supporters, he fulfilled that promise in his fiscal year 2008 budget request, allocating $426 million for the Clean Coal Technology Program. During his administration, Congress passed the Energy Policy Act of 2005, funding research into carbon-capture technology to remove and bury the carbon in coal after it is burned. The coal industry received $9 billion in subsidies under the act, as part of an initiative supposedly to reduce U.S. dependence on foreign oil and reduce carbon emissions. This included $6.2 billion for new power plants, $1.1 billion in tax breaks to install pollution-control technology and another $1.1 billion to make coal a cost efficient fuel. The act also allowed redefinitions of coal processing, such as spraying on diesel or starch, to qualify them as “non-traditional,” allowing coal producers to avoid paying $1.3 billion in taxes per year.
The Waxman-Markey bill, also called the American Clean Energy and Security Act, passed by the House Energy and Commerce Committee in 2010, targets dramatic CO2 reductions after 2020, when the price of the permits would rise to further limit consumers’ demand for CO2-intensive goods and services. The legislation is targeting 83 percent reduction in CO2 emissions from 2005 levels in the year 2050. A study by the EPA estimates that the price of the permit would rise from about $20 a ton in 2020 to more than $75 a ton in 2050.
The US Office of Management and Budget (OMB) shows that federal subsidies for coal in the United States were planned to be reduced significantly between 2011 and 2020, provided the budget passed through Congress and reduces four coal tax preferences: Expensing of Exploration and Development Costs, Percent Depletion for Hard Mineral Fossil Fuels, Royalty Taxation, and Domestic Manufacturing Deduction for Hard Mineral Fossil Fuels. The fiscal 2011 budget proposed by the Obama administration would cut approximately $2.3 billion in coal subsidies during the next decade.
- Carbon Tax Center – Argues for a carbon tax
- WSJ: Cap-and-Trade's Unlikely Critics: Its Creators - They are critical of using it for carbon
- European Emissions Trading System - Web site of largest cap and trade experiment
- Regional Greenhouse Gas Initiative (RGGI) - Cap and Trade in the US Northeast
- California's Cap and Trade Program
- The Economists' Statement on Climate Change - favors carbon pricing over subsidies
- IPCC, Glossary A-D: "Climate price", in IPCC AR4 SYR 2007.
- Economists' Statement on Climate Change. Retrieved Feb. 25, 2014.
- Robert N. Stavins (2007). "A U.S. Cap-and-Trade System to Address Global Climate Change". The Hamilton Project. Retrieved 2014-07-26.
- Robert N. Stavins (2008). "Addressing climate change with a comprehensive US cap-and-trade system". Oxford Review of Economic Policy. Retrieved 2014-07-26.
- Elizabeth Lokey Aldrich and Cassandra L. Koerner (2012). "Unveiling Assigned Amount Unit (AAU) Trades: Current Market Impacts and Prospects for the Future". Atmosphere (Journal). Retrieved 2014-07-26.
- Benito Müller (2009). "Additionality in the Clean Development Mechanism". Oxford Institute for Energy Studies. Retrieved 2014-07-26.
- The Climate Casino, Chapter 21, 2013, by William Nordhaus
- World Bank (2014). "Statement: Putting a Price on Carbon".
- Joseph Stiglitz, (2010-01) "Overcoming the Copenhagen Failure"
- Martin Weitzman (2013). "Can Negotiating a Uniform Carbon Price Help to Internalize the Global Warming Externality?".
- Stéphane Dion and Éloi Laurent (2005). "FROM RIO TO RIO: A GLOBAL CARBON PRICESIGNAL TO ESCAPE THE GREAT CLIMATE INCONSISTENCY".
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- Natural Gas Is Cheap; Green Power Isn't March 07, 2013 BusinessWeek