Evaluating Carbon Policies
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In this session we will look at some of the policy options for tackling climate change with the long term aim of de-carbonisation In 2015, the earth’s surface temperature was around 0.9 Celsius degrees warmer than the 20th century average Many economists recommend applying the polluter pays principle and placing a price on carbon dioxide and other greenhouse gases. This can be implemented either through a carbon tax (known as a price instrument) or a cap-and-trade scheme (a so-called quantity instrument).
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Evaluating Carbon Policies
- 1. Evaluating Policies to Cut Carbon Emissions A Level Economics Revision - 2017
- 6. Revision MC (2) SB 1200 1300 1300 1600 SC 250 350 250 500 Looking for the highest net social return = route D ($1100)
- 9. Revision MC (3) MPC + Subsidy
- 10. Recent fall in CO2 emissions in the UK • UK CO2 emissions fell by 38% between 1970 and 2014 • Much of the decline in carbon emissions has come from a fall in emissions from industry and power generation Source: ONS
- 11. CO2 Emissions from Cars falling in UK 171.4 169.4 167.2 164.9 158 149.5 144.2 138.1 133.1 128.3 124.7 120 130 140 150 160 170 180 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CO²ing/km Year Average carbon dioxide emissions from new cars in the UK between 2004 and 2014 (in grams per kilometer)
- 12. New investment in clean energy worldwide from 2004 to 2015 ($bn) 45.1 72.9 112.1 153.9 181.8 178.5 237.2 278.8 256.4 231.8 270.2 286.2 0 50 100 150 200 250 300 350 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 InvestmentinbillionU.S.dollars Sources: Bloomberg New Energy Finance; UNEP
- 13. World renewable energy consumption from 1998-2015 (million metric tons of oil equivalent) 44.4 48.2 51.8 54.5 61.4 66.9 75.7 83.2 93.9 107.8 123.9 144.2 169.9 203.6 238.5 281.1 316.6 364.9 0 50 100 150 200 250 300 350 400 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Consumptioninmillionmetrictonsofoil equivalent
- 14. Overview of key strategies Carbon trading Carbon taxes Emissions regulations Subsidies for Renewables
- 15. Global overview of carbon pricing
- 16. Interventions in different countries • Sweden CO2 tax (first introduced in 1991, Euro 137 per ton) • European Union emissions trading scheme (ETS) began in 2005 • China launching an emissions cap & trade system in 2017 • India (2010) introduced a nationwide carbon tax of 50 rupees per tonne of coal produced and imported to India • Chile (2014) became the first country in South America to impose a climate pollution tax – aim - fully implemented in 2018 • South Korea introduced carbon emissions trading in 2015 • Australia repealed its carbon tax in 2014 • 2017 – Alberta (Canada) starts a new carbon tax • 2017 – Iceland announces intention to double carbon tax • 2019 – Singapore plans to introduce a carbon tax
- 17. Emissions Trading (EU-ETS) • The EU Carbon Emissions Trading Scheme is cap-and-trade scheme for carbon dioxide • It operates in 31 countries (the 28 EU countries, Iceland, Liechtenstein and Norway) • It covers the 45% of the EU’s greenhouse gas emissions that come from energy intensive sectors. • It sets a decreasing cap for CO2 from energy intensive industries, and allocates or auctions emissions allowances which can be traded on the open market. • Businesses need to buy enough emissions allowances – the higher the price, the greater the incentive to cut pollution
- 18. Carbon trading Price of carbon permit Quantity of carbon permits Demand for carbon permits Supply of permits Euro 10
- 19. Carbon trading Price of carbon permit Quantity of carbon permits Demand for carbon permits Supply of permits Euro 10 S2 Euro 20 Increasing the scarcity of carbon permits leads to an increase in price. This then makes it more expensive for firms to emit carbon which in turn increases the incentive for investment in low carbon technologies. Carbon trading provides a quantity adjustment to the volume of CO2 emissions.
- 20. The Low EU-ETS Carbon Price Sources: Parliament Research Paper, Nov 2016 Evaluation 1. Carbon price has been too low to fundamentally change behaviour 2. Also limits revenues flowing to national governments 3. Excess supply of permits – the EU is now withdrawing some
- 21. The UK’s carbon price floor • The UK has a Carbon Price Floor which applies to fossil fuels used for electricity generation • The minimum price for carbon emissions is designed to provide a stable carbon price signal as a way of internalising externalities • In 2014 the government announced a price floor of £18/tCO2 from 2016-2020 • Carbon prices within the EU emissions trading system have been volatile but have also been low.
- 22. Evaluating a carbon price floor Arguments for a carbon price floor • Reduces the risks, and thus costs, of investing in new nuclear capacity • Helps to reduce carbon price volatility – sends a clear signal to polluters • Makes low carbon electricity more competitive – gives boost to renewables Arguments against a price floor • Better to restrict total supply of carbon permits to increase the market price • A carbon tax is perhaps a more effective alternative and also raises useful tax revenues • Price floor might damage international competitiveness e.g. of the UK steel industry compared to China/Poland
- 23. Employment in UK renewable energy 35 30 21.5 8.4 5.4 3.9 3.2 2.9 1.1 0.8 0 5 10 15 20 25 30 35 40 Solar Photovoltaic Wind Energy Solid Biomass Geothermal Energy Hydropower (small) Liquid Biofuels Marine Energy Biogas Municipal and Industrial Waste Solar Heating / Cooling Number of jobs in thousands
- 24. Carbon Taxes – Internalising an Externality by putting a price on carbon MPB= MSB MPC Benefit, Cost Quantity supplied Q1 Q2 Deadweight loss of social welfare A B C MSC Over-production Social optimum is where MSB = MSC
- 25. Carbon Taxes – Internalising an Externality MPB= MSB MPC Benefit, Cost Quantity supplied Q1 Q2 A B C MSC Over-production A tax on carbon increases the private cost of emitting carbon – in theory this will cause output to contract towards the social optimum. It will also raise tax revenues that might be used by the government to fund other projects or use as a rebate to those affected (e.g. consumers) MPC + tax
- 26. Carbon Taxes – Internalising an Externality MPB= MSB MPC Benefit, Cost Quantity supplied Q1 Q2 A B C MSC Over-production A tax on carbon increases the private cost of emitting carbon – in theory this will cause output to contract towards the social optimum. It will also raise tax revenues that might be used by the government to fund other projects or use as a rebate to those affected (e.g. consumers) MPC + tax
- 27. Evaluating Carbon Taxes Pros A pollution tax internalizes the externality and makes the polluter pay – fairly easy to administer and tax is predictable Carbon fee on imported products will help reduce risk of domestic businesses re- locating to avoid paying a national carbon tax A tax raises extra tax revenue which can be ear-marked (hypothecated) for other uses e.g. research in clean energy Might be offsetting tax cuts on employment / child care or tax rebates to lower-income families
- 28. Evaluating Carbon Taxes Cons Low price elasticity of demand – the tax may not change behaviour, there might be more effective alternative policies on offer Risk of higher structural unemployment among workers in carbon intensive sectors such as mining, oil and gas – renewables employs relatively few people Risk that the burden of new / higher carbon taxes will fall more heavily on lower-income families Might damage the competitiveness of domestic businesses in overseas markets e.g. UK steel industry complaining about carbon price floor
- 29. Evaluating Policies to Cut Carbon Emissions A Level Economics Revision - April 2017
Editor's Notes
- In this session we will look at some of the policy options for tackling climate change with the long term aim of de-carbonisation In 2015, the earth’s surface temperature was around 0.9 Celsius degrees warmer than the 20th century average Many economists recommend applying the polluter pays principle and placing a price on carbon dioxide and other greenhouse gases. This can be implemented either through a carbon tax (known as a price instrument) or a cap-and-trade scheme (a so-called quantity instrument).
- The good news from a UK perspective is that carbon emissions are in long term decline UK emissions of greenhouse gases stood at 514 tonnes of carbon dioxide equivalent in 2014 The recession caused a particularly large fall in emissions in 2009, but there were similarly large falls in 2011 and 2014
- Increasing the supply of energy from renewable sources is motivated by the macroeconomic aim of achieving more environmentally sustainable growth Another long term aim of increasing output from renewable sources is to diversify energy supply and make the UK less reliant in imported oil, coal and gas. If the renewable sector can grow sufficiently large, it will be able to exploit economies of scale and therefore bring down the unit cost of energy for consumers. This will help to achieve another government aim, namely a more equitable distribution of income and wealth.
- The UK is currently part of the EU emissions trading scheme Canada: British Columbia introduced a carbon tax in 2008 and it now stands at $30 a tonne, adding an extra 6.67 cents to each litre of gasoline and 7.67 cents to each litre of diesel. British Columbia’s system is designed to be revenue neutral, meaning the government will take in no extra money from the tax and instead return it through tax cuts and credits The purpose of a carbon tax is to reduce emissions by equalizing the private and social cost of releasing carbon
- Carbon pricing either through emissions trading or a carbon tax is becoming more common in a number of countries
- Sweden introduced a CO2 tax in 1991. At the time, the price was EUR29 per ton, and it has since risen to today’s price of EUR137 per ton – the highest CO2 tax rate in the world Over 1,000 companies reported in 2015 that they are currently using an internal price on carbon or plan to do so within the next two years
- The EU Emissions Trading Scheme (EU ETS) is a mandatory cap-and- trade scheme for greenhouse gases, which is central to the European Union’s climate change target of reducing emissions by 40% by 2030 compared to 2005 levels.
- If the carbon price is high, power generators might decide to shift some investment towards renewable projects since this will have a lower carbon impact. And smaller businesses might also switch to small-scale wind and solar schemes to reduce the expenses of buying carbon permits in the market.
- Leaving the EU would not automatically remove the Carbon Price Floor, as this is a UK measure; neither would it necessarily mean the UK would have to leave the EU ETS, but it would depend on the approach to exit the UK chooses to take. The main problem with the EU carbon trading scheme is that the price per tonne of CO2 has been volatile and, in recent years, extremely low at less than Euro 5 per tonne. This means that the incentives to use renewable energy are weak and some power companies have gone back to burning imported coal.
- Approximately 112,100 people work in the renewable energy sector
- A carbon tax will be less effective if it's not universally applied, potentially leading to carbon leakage to countries with looser environmental rules.
- Key evaluation threads: Is a carbon tax effective in reducing emissions of greenhouse gases, and thereby mitigating climate change? Can a carbon tax be revenue neutral – taxing “bads” but with off-setting tax reductions on other areas? Comparing the two instruments, most economists favour a carbon tax over tradeable permits But Public support for carbon taxes, however, are generally low and people tend not to believe that they are environmentally efficient