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Putting a Price on Carbon

Pricing Carbon

Putting a price on carbon


Carbon Markets

Carbon cap and trade systems are regulatory policies in which countries, provinces, states, and even cities, set a limit (a cap) on the amount of carbon dioxide and other greenhouse gas emissions (GHGs) industries/ power plants can emit. Carbon pricing plans incorporating an emission trading system (ETS) are commonly referred to as carbon cap & trade systems in the U.S, although the term also applies to similar systems in Europe, as well as elsewhere globally where an ETS is legislated for any administrative area. [In this article, we will treat cap and trade systems and ETS as synonymous].

Utilities and industries in areas where cap and trade legislation have been mandated are subject to an ETS; which is the regulatory system that details what limits for GHGs industries have, and the value of carbon permits. Carbon-intensive industries that are considered for inclusion in emission trading systems include fossil fuel power plants & oil/ gas refineries (always included in carbon pricing systems). Other possible inclusions in ETS legislated across the world include fossil fuel intensive product manufacturing companies, and/ or cement and steel manufacturing industries, and/or transportation sectors that rely on fossil fuel energy (such as long-haul shipping including heavy trucking, ocean freight shipping, & aviation).

Governments may either “grandfather in” GHG allowances (essentially give away permits based on past GHG production), or auction permits off. Carbon pricing has a few purposes that benefit people generally; it can be used for the public good through encouraging/ increasing sustainability measures such as renewable energy projects and energy efficiency projects.

The primary function of carbon pricing is to lower GHGs, fight climate change, and therefore benefit all of humanity. An ETS, and/ or a carbon tax, makes using dirty fossil fuels more­ expensive, thereby encouraging utilities and industries to reduce consumption of fossil fuels and increase energy efficiency. An ETS and/ or a carbon tax also makes renewable energy a more attractive option than fossil fuels economically (adding economic benefits to the environmental benefits of renewable energy).

In an ETS that does use auctions, auctions for carbon permits (one carbon permit is usually = to 1 metric ton of CO2)  establish a price on carbon. ETS with auctions are much more effective than systems where carbon credits are just ‘grandfathered in”. The cost of carbon permits, or GHG emission permits, is essentially the price of carbon in these systems. As GHG emission permits are auctioned off, a price on carbon is established.

Companies can also keep carbon credits for future use in trading, or for their own allowances. For companies that run over their GHG emissions limits and don’t cover their allowances, a fine is often imposed. Carbon cap and trade systems are usually designed to adjust the cap annually and limit GHGs, gradually reducing the allowable limit of GHG pollution for those industries targeted by the cap and trade system.


Carbon Offsets

Carbon Offsets are a vital part of making ETS work; allowing companies to invest in international sustainability projects in order to fulfill their GHG reduction obligations. There are trades that offset GHG emissions in cap & trade systems; such as trades for credits with companies that have, or invest in – forestry projects, renewable energy, energy efficiencygreen building, and sustainable transit projects. Sanctioned GHG offsets also include investment in reforesting or projects that work to limit deforestation or trades with companies that have livestock projects that incorporate sustainable practices, or with companies that invest in carbon capture and storage (CCS) or other carbon sequestration measures.

To make cap and trade systems even more effective, there should be even more offset credits allowed in these systems for trades with companies that implement GHG emission saving renewable energy and energy efficiency technologies such as: solar and wind farms and other renewable energy projects, CCS, integrative gasification combined cycle (IGCC), anaerobic digestion (AD), combined heat and power (CHP), etc…

Carbon offsets can be purchased by individuals, non-profit organizations, and private businesses of every size, from small businesses to large international companies, and even governments; in order to lower their net carbon footprint and/ or in order to support sustainability efforts worldwide. Carbon offsets help balance out global GHGs and other environmental degradation; for instance, damage to the environment wrought by companies that commit deforestation, and companies that are reliant on fossil fuels, are a partial solution to the deforestation problem.

Carbon offsets for reforestation, planting trees, and other conservation projects provide fossil fuel intensive companies with “nature-based” offsetting solutions. Trees, plants, and wilderness ecosystems sequester carbon. Ideally, carbon offsets should be valued and calibrated to truly offset the company’s emissions, as reflected in the company’s investment in the offsets.

“Nature-based” carbon offsets act as land sinks, optimally sequestering carbon to the degree the company purchasing the offsets is emitting carbon – but, this depends on how the “nature-based” offsets are valued. Renewable energy and energy efficiency projects have the potential to directly lower emissions of the company if the investments are made for the company itself. Otherwise, the carbon offsets are valued as creating “avoided emissions” by investing in a 3rd party company’s renewable energy and energy efficiency projects.

In many cases, carbon offsets are purchased by international companies in industries running polluting factories, using carbon-intensive fuel for energy, and manufacturing fossil fuel intensive products; and this often includes companies involved in deforestation. Some offsets often formally offered in emission trading schemes globally include forestry projects (like planting and caring for trees; restoring, maintaining, and protecting forests and their ecosystems), as well as renewable energy and energy efficiency projects worldwide.

The amount of carbon offsets required for a company to purchase in an emission trading system (ETS) is proportional to the amount of pollution, GHGs, released by the company involved in the ETS; and should also be measured by the deforestation that a company commits, and the subsequent effect of that behavior by the company on the environment. However, as of now, most ETS around the world only use the amount GHGs released by companies, not deforestation, as a metric to assess a companies’ responsibility for purchasing carbon offsets. ETS, and other carbon pricing mechanisms (such as a carbon tax), can be mandated by states, provinces, and entire countries.

For some companies, it might make more financial sense and be more cost-effective to make the effort to reduce emissions through emission saving and energy efficiency technologies and/ or expanded use of renewable energy; and then sell their permits to companies that are over their GHG limit. However, usually, most companies tend to buy carbon permits if it’s cheaper to buy them than to try to lower emissions. Carbon permits can be invested in by businesses, industries, or even the public in some regions, via a carbon futures market.


Global carbon pricing markets

Carbon pricing, either as carbon cap and trade systems or a carbon tax, are in effect in over 40 countries and 25 states/ provinces/ cities globally. The largest market for cap and trade is in the EU with the European Union Emissions Trading System (EU ETS). The EU ETS covers more than 11,000 power plants and industrial stations in over 30 countries, as well as airlines. The primary focus of the EU ETS is to fight climate change by lowering GHG emissions.

The EU ETS remains the largest international trading organization for trading GHG emission allowances. The EU ETS has successfully put a price on carbon, with its system of trading allowances of GHG emissions, and has also watched GHG emissions fall by a few percentage points annually since it began in 2005. The cap, or limit, set on GHG emissions will be, on average, over 20% lower on all power plants and industries by 2020 from 2005 levels (when the program started), as the EU continues to make efforts to reduce pollution.

Clean, energy efficient, low-carbon technologies like CCS, IGCC, CHP, and AD, as well as renewable energy, have grown in popularity throughout Europe, in part, because of the rising price of carbon resulting from the EU ETS. Here’s a helpful chart of carbon pricing for various ETS and carbon tax systems around the globe (carbon pricing is usually based on the basic per unit price of 1 metric ton CO2):

Ranges of carbon pricing worldwide

All countries deal with cap and trade differently. Most have cap and trade for industry and power sectors. For example, South Korea has cap and trade for heavy industry, power, waste, transportation, and building sectors. China has six provinces testing out cap and trade, and along with South Korea, represents a very large carbon market (with just those 6 provinces China is a large market, the entire country represents the single largest carbon market, by far).

The U.K., France, Switzerland, and the Scandinavian countries Norway, Sweden, and Finland, have legislated both carbon tax and cap and trade programs that regulate a broad swath of carbon-intensive industries. Finland and Sweden’s carbon pricing systems represent a high enough price per metric ton of CO2 to make a significant difference.

Finland’s carbon tax represents the type of carbon pricing needed to make a substantial impact on industries in order to stabilize GHGs, as represented in the global carbon pricing chart seen above of select countries’ price of a metric ton of carbon in their ETS or carbon tax. Over 40 governments worldwide have mandated a price on carbon. Here’s another map of carbon pricing systems around the globe:



carbon markets worldwide

 



The nine-state agreement in the U.S. northeast, the Regional Greenhouse Gas Initiative (RGGI) is another major carbon cap and trade trading pact, and is, at least partially, based on the pioneering EU program. These states have auctioned off carbon allowances to industries in RGGI states, and have thereby collected well over $1 billion from carbon cap and trade programs, much of which has been reinvested in energy efficiency, renewable energy, and other clean energy programs.

Since carbon cap and trade has started in the U.S. northeast, GHG emissions have steadily dropped. Like the EU, this in part due to investment in clean energy technologies, but also because some companies in the U.S. northeast have switched from dirtier fossil fuels like coal to cleaner natural gas generators in power plants, or to renewable energy.



A few current carbon cap and trade markets are:

EU ETS:

ec.europa.eu/clima/policies/ets


California cap & trade, linked with Quebec – Western Climate Initiative:


The U.S. Northeast region (RGGI):

bostonglobe.com/business/carbon-caps-help-northeast-economy-report-says

STORY – Cap & Trade Shows Its Economic Muscle in the Northeast, $1.3B in 3 Years (Regional Greenhouse Gas Initiative offers blueprint to all states) – By Naveena Sadasivam, InsideClimate News– insideclimatenews.org/cap-trade-shows-economic-muscle-northeast-13-billion-RGGI-clean-power-plan



 

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Carbon tax – a levy on pollution whose time has come

Defining effective carbon taxes

A carbon tax is a levy in countries and regions on: fossil fuel power plants, oil refineries, and/or industries, and/or companies; that use fossil fuels (tax applies directly), or on those that consume energy-intensive goods and services that depend on fossil fuel energy generation (the tax applies indirectly); and emit carbon dioxide and other greenhouse gas emissions (GHGs) in the process. An indirect consequence of carbon taxes may ultimately be higher prices for energy and gasoline/ diesel. The relationship between a carbon tax and higher energy prices is arbitrary, as it’s up the the fossil fuel company whether to raise prices for the end-use consumer, take financial losses as a result of the tax, or use more renewable energy and energy efficiency measures to lower CO2 output and thus lower the applicable carbon tax. A carbon tax puts a price on carbon for (at least some of) the cost to humanity and the planet of the use of fossil fuels. The cost of carbon dioxide emissions produced with the burning of fossil fuels is also known as the social cost of carbon. Carbon-intensive industries that could be in carbon tax systems include: fossil fuel power plants (always in carbon tax systems), and/ or industries and companies such as fossil fuel intensive product manufacturing companies, and/ or cement and steel manufacturing, and/or transportation sectors that rely on fossil fuel energy.

This cost cannot be tabulated in exact terms, for it’s the accumulated cost of the damages of the burning of fossil fuels to the environment, damages from climate change, damages to human health, and related costs (negative externalities) of the use of fossil fuels that can only be estimated. The carbon tax itself can be seen as an added fee on the production and distribution of fossil fuels,. The government sets a price per ton on carbon, and then that translates into a tax on oil, coal, and natural gas. This does usually mean higher prices for the end-use consumer for things like gas and electricity, due to higher costs for production and distribution of fossil fuels, and fossil fuel-intensive products and services; in the case of top-down industry carbon taxes.

Businesses and utilities who face a carbon tax then have the incentive to invest more in energy efficiency, renewable energy, and other GHG reducing technologies (such as carbon capture); to try and lower their applicable carbon taxes. Another option would be for companies facing a carbon tax to maintain the market price for their goods and services set prior to implementation of the tax, and absorb the cost of the tax. Yet another option, and along with companies’ making an effort to produce cleaner energy, this is a commonly implemented option; higher prices due to carbon taxes may result in higher prices to end-consumers (the carbon tax simply gets passed on to the consumer, allowing the company to keep profits from lowering). Individual consumers then have the incentive to reduce consumption of fossil fuels and fossil fuel-intensive products subject to carbon taxes, switch to electric vehicles and renewable energy (thus avoiding higher prices stemming from the carbon tax), and increase their energy efficiency habits. Revenue from carbon taxes can, in some cases, go to energy efficiency measures, sustainable transportation, renewable energy, and other clean energy projects.

The revenue from carbon taxes can also simply be distributed or refunded to the public through tax rebates or payroll tax reductions (revenue-neutral carbon taxes). With revenue-neutral carbon taxes, higher energy prices may be offset by tax dividend refunds, or tax cuts, of roughly similar value. Carbon tax revenue can be distributed, at least in part (if not completely), as: personal income or business income tax cuts, rebates, tax credits, payroll tax cuts, a “carbon dividend” in the form of a monthly, quarterly, bi-annual, or annual refund; or carbon tax revenue can be used to reduce taxes for the public and businesses in other sectors of the national economy. Carbon tax revenue is sometimes both invested in clean energy projects and given back to the public as refunds.

The principle of mitigating negative externalities (the damage caused by fossil fuels), and having the relative costs of pollution paid for, is the primary purpose of the carbon tax. Who bears the ultimate burden of the tax is a hypothetical question that has a couple of answers. Unless the carbon tax is specifically aimed at consumers, businesses that produce and distribute fossil fuels should at least consider bearing the brunt of the tax. However, in practice, individuals may ultimately end up paying more for gas and on the utility bill, among other fossil fuel related goods and services; instead of the fossil fuel-intensive companies in industries subject to carbon taxes, that haven’t already fully embraced renewable energy and/ or energy efficiency.

A carbon tax is enacted with the goal of lowering greenhouse gas emissions. Sustainable public transit, energy efficiency products, renewable energy, and GHG reduction technologies such as carbon capture and storage, become even greater alternatives as fossil fuel use is penalized; and clean energy is made relatively cheaper. One other benefit of carbon taxes, besides the revenue generated for the public good, and the incentives to reduce fossil fuel consumption and increase clean energy efforts; is the increased attractiveness of the cost of renewable energy, which is made cheaper than fossil fuels.

Carbon taxes worldwide

Denmark, Finland, Ireland, the Netherlands, Norway, Sweden, Switzerland, British Colombia, Canada, and the UK (among other countries and localities) have all successfully implemented a partial carbon tax on some industries, as well as some fossil-fuel-intensive goods and services. Thus far, these countries have not being able to implement a broad, universal carbon tax. Generally, reports of lower greenhouse gas emissions follow the passage of a carbon tax (to the tune of 2-3% annually in most cases). The province of British Columbia, Canada, has reported drops of around 5% annually of greenhouse gas emissions due to its aggressive carbon tax policies.

This is a global map of carbon tax and cap-and-trade systems that are existing and planned for implementation:


carbon markets worldwide

Please also see:

Putting a price on carbon