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Policy Memo


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Policy Memo

  1. 1. Carbon Emissions Regulation: An International Necessity Vanessa Ferrero Jonathan Kelman POS394: Energy Policy 7 May 2014
  2. 2. Executive Summary The United Nations Framework Convention on Climate Change (UNFCCC) was started to find a way to tackle the problem of climate change through international cooperation. The Kyoto Protocol was adopted in 2001, with the first commitment period beginning in 2008, “setting internationally binding emission reduction targets” for greenhouse gas emissions [1]. Some countries have taken their pledges more seriously than others, while some never signed the treaty and could therefore not be expected to make any changes. Furthermore, the timeline for this plan has expired, and while some countries have renewed their pledges for a second period, not all are expected to. There is no longer a debate on the effect greenhouse gas emissions have on climate change, and we know that anthropogenic emissions are exacerbating these effects. Yet nations have still yet to come to a consensus (a unanimous decision) on how to control emissions. The two chief ways that have been proposed are to either have an international emissions trading system (cap-and-trade) or to impose a carbon tax. Both plans are meant to encourage emission reduction by providing monetary incentives to do so. A carbon tax “levies a fee on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. The government sets a price per ton on carbon, then translates it into a tax on electricity, natural gas, or oil” [2]. Cap-and-trade schemes, on the other hand, “begins by setting a cap on allowable emissions. It then distributes or auctions off emissions allowances that total the cap” [3]. If a country or company needs more allowances, they can buy them from another member who has extra allowances. While many people have been arguing which of these systems would work the best, no true decisions have been made. I propose a hybrid model: a cap-and-trade scheme with an embedded price on carbon. This will help keep the allowances from fluctuating too much with
  3. 3. the carbon market and also provide further encouragement for countries to go below their caps instead of simply meeting them. While there will be some challenges associated with getting this plan to work, it is important to note that neither cap-and-trade nor a carbon tax will be very effective if only some countries adopt them. Both plans, and the hybrid I’m proposing, require international implementation for the results we want, and need, to see. I. Background International debates no longer center on whether climate change is real or not, or on whether humans are affecting it—they center on how we should go about changing to reduce these effects. The main problem with carbon emissions regulation is that countries have yet to come to a consensus on how to reduce their emissions, all the while recognizing that implementing a mandatory, official plan to reduce emissions is the only way to fully incentivize companies and people to adopt more sustainable behaviors. It is a sad fact that “unless people pay the cost of their pollution, they will not do much about it” [4]. “Paying the cost” of emissions comes from the idea that “transactions have effects that don’t show up in the price of a product”, as argued by British economist Pigou [5]. “Pigou proposed making the manufacturer and customer foot the bill for these unacknowledged costs”, which led to the phrase internalizing the externalities [5]. It is important to find a plan that all countries can agree to in order to reduce carbon emissions because the longer we wait to do so the more expensive it gets. Six years ago the estimated price to keep global temperature increases to less than two degrees Celsius was $1.375 trillion per year, according to the Intergovernmental Panel on Climate Change (IPCC), and this number can only have gone up due to a lack of worldwide commitment [6].
  4. 4. II. Policy Critique The main steps to tackle the problem of emissions have been the Kyoto Protocol, the beginning of some cap-and-trade schemes, and the adoption of carbon taxes by various countries. During the first commitment period of the Kyoto Protocol, “37 industrialized countries and the European Community committed to reduce GHG emissions to an average of five percent against 1990 levels” [1]. This was facilitated by international emissions trading, which “allows countries that have emission units to spare - emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets” [7]. Countries can also earn emission reduction units through joint implementation projects wherein a country with a commitment under Kyoto could fund “an emission-reduction or emission removal project in another Annex B Party, each equivalent to one tonne of CO2, which can be counted towards meeting its Kyoto target” [8]. This general idea of cap-and-trade has been adopted by other entities, notably the European Union and California. The European Trading Scheme includes around 12,000 factories and utilities among 25 countries, and is mandatory across the European Union [3]. In this system, “each member state sets its own emissions cap, or national allocation plan, based on its Kyoto and national targets. Countries then distribute allowances totaling the cap to individual firms” [3]. California has a similar approach, and “the inclusion of offsets in California's program demonstrates how low-cost measures throughout the country - and potentially the world - can be integrated in domestic climate policies” [9]. Other entities have approached regulation from a different angle and implemented carbon taxes. British Columbia inaugurated a tax in 2008, with a starting rate of $10 (Canadian) per metric ton of carbon dioxide [10]. This tax, reaching $30 (Canadian) per tonne of CO2 in 2012, “qualifies as the most significant carbon tax in the Western Hemisphere by far”, and “British
  5. 5. Columbians’ use of petroleum fuels (subject to the tax) has dropped by 15.1%” [10]. The carbon tax revenues are being returned to taxpayers through income tax cuts, so that “the tax is popular: it is backed by 54%” [10]. While this seems like a great way to address climate change, other countries haven’t been so receptive to the change. Australia implemented a carbon tax in 2012 which they will be rescinding later this year, as “voters have never stopped hating the tax and its effect on their electric bills” [10]. More Australians have personally felt the effects of the carbon tax (rated at $23/metric ton of CO2) because “the power sector accounts for about half of Australia’s emissions and a larger share of the carbon tax, because some of the largest emitters have free permits” [10]. Many people also dislike the program because they feel it will be useless in the long run. As one person puts it, “Even if Australia’s emissions went to zero, even if we stopped breathing, which is what we’d have to do, China’s emissions would still go up. This is why I am so angry about the current program” [11]. This complaint regarding carbon taxes also applies to cap-and-trade schemes: “climate change is a global problem. No single state or country…can solve it alone” [9]. This is the reason why any attempts to regulate carbon thus far have been so inadequate, because they haven’t required global participation. As a critic puts it, “of the approximately 3°C of global warming that is being projected to occur between now and the end of the century as a result of anthropogenic carbon (dioxide) emissions, the U.S. contribution will only be about 0.2°C, or about 7 percent of the total warming” [12]. This same idea applies to all countries, showing that a single country changing won’t actually do much to reverse and control climate change. The only way to ensure that programs aren’t futile is to implement them worldwide.
  6. 6. III. Policy Recommendations Both cap-and-trade and a carbon tax provide incentives for lowering greenhouse gas emissions, but it is hard to tell which one would be better to implement. A carbon tax ensures everyone know the amount being paid per ton of carbon, while a carbon cap allows this price to fluctuate depending on the market for allowances [13]. Because of the uncertainty with the pricing under the trading scheme, many can argue that a carbon tax would be better. However, it is also hard to set a price on carbon that would guarantee that countries would reduce emissions by as much as they would under the cap-and-trade program, in the long term. Due to these issues, “some economists recommend a hybrid model that may offer the best of both worlds. This tends to comprise of a cap on emissions (to regulate the quantity of pollution), but with adjustment mechanisms such as a carbon price floor or ceiling, to keep the price of a permit within acceptable bounds” [13]. Such a model is exactly what I suggest should be implemented worldwide. The first part of the plan would be based off of the general emissions trading model, with industrialized countries aiming to be at 20% below 1990 levels by 2025 (or ten years from whenever the plan is accepted). Developing countries (especially Brazil, India, and China) would have a cap based off of the 1990 emissions of industrialized countries. That is to say, these countries would be capped at 20% below the average emissions per capita of the industrialized world in 1990. In this way, these countries could continue to develop while still having limits to their emissions. The goal is that by setting caps to start off with, developing countries could work on industrializing sustainably instead of going through the same “dirty” industrialization process we’re currently paying for. Third world, or slowly-developing, countries, would not incur any caps to start with, but would be encouraged to develop renewables in order to trade credits with
  7. 7. other countries. In this manner, they could develop their infrastructure sustainably while keeping emissions low and making money off of the credits they can sell off. This cap-and-trade scheme would be the backbone of the hybrid model, since “cap-and-trade is designed to deliver an environmental outcome, in that the cap must be met… while a carbon tax ensures an increase in energy prices, it does not ensure that emissions will be reduced to the necessary level” [14]. However, the hybrid model would still have a provision regarding carbon taxation. The model would set a price on carbon to ensure that the cost of a carbon allowance is never lower than the actual cost of carbon (a carbon floor price). This would prevent the market from completely determining the price of the carbon allowances, which is necessary to keep the incentive to go below your cap going. If some countries had an excess of allowances and there were no carbon price floor, then countries could end up “getting lucky” and paying less for allowances than the actual cost of the carbon they are putting out. This is why the carbon floor price is necessary. However, this does not mean that if you go over your allowances you would simply pay the carbon tax price on the extra carbon you emitted—you would still have to pay market price for your emissions. The carbon price floor simply ensures that the allowances never get so cheap that companies don’t worry about reducing their emissions. By combining cap-and-trade and carbon taxation, we end up with “a steadily declining ceiling on carbon emissions” due to the caps, and a floor price on carbon [15]. This is, as the economists said, the best of both worlds, and more likely to encourage emission-cutting than either plan alone. IV. Challenges The main challenge with this plan, as with all other global propositions, is to get all of the countries to agree to follow it. The IPCC recognizes that “International cooperation is necessary
  8. 8. to significantly mitigate climate change impacts…due to the fact that greenhouse gases (GHGs) mix globally in the atmosphere, making anthropogenic climate change a global commons problem” [16]. My goal is that developing countries, who generally argue against cutting back on emissions (as it would negatively affect their industrialization), will agree to the caps proposed, as they will still allow for industrialization. A particular country to worry about is China, as it “emphatically opposes a hard emissions cap on its economy. Yet China must be part of any climate deal or within 25 years…its emissions of CO2 could amount to twice the combined emissions of the world's richest nations” [6]. It is important to get a global agreement because “good intentions to limit big polluters in some countries but not others will turn any meaningful cap into Swiss cheese” [6]. The same is true for a carbon tax: “we will need the same price on carbon everywhere, or it won't work anywhere” [6]. In other words, if only some countries take action, the small effects their reductions will have on global climate won’t be worth the trouble.
  9. 9. References [1] "Kyoto Protocol." United Nations Framework Convention on Climate Change., n.d. Web. 6 May 2014. [2] Dowdey, Sarah. "How Carbon Tax Works." HowStuffWorks., 30 Aug. 2007. Web. 24 Mar. 2014. [3] Dowdey, Sarah. "How Carbon Trading Works." HowStuffWorks., 27 Aug. 2007. Web. 24 Mar. 2014. [4] Helm, Dieter. "Kyoto Won't Save Us from Climate Change – but a Carbon Tax Could." Guardian News and Media., 8 Nov. 2012. Web. 6 May 2014. [5] Conniff, Richard. "The Political History of Cap and Trade." Smithsonian Magazine., Aug. 2009. Web. 6 May 2014. [6] Nader, Ralph, and Toby Heaps. "We Need a Global Carbon Tax." The Wall Street Journal. Dow Jones & Company, 3 Dec. 2008. Web. 6 May 2014. [7] "International Emissions Trading." United Nations Framework Convention on Climate Change., n.d. Web. 6 May 2014. [8] "Joint Implementation (JI)." United Nations Framework Convention on Climate Change., n.d. Web. 6 May 2014. [9] Gero, Gary. "California's Cap-and-Trade Program -- More Than Just a Solution for California." The Huffington Post., 18 Nov. 2013. Web. 6 May 2014. [10] "Where Is Carbon Taxed." Carbon Tax Center. Carbon Tax Center, 6 Sept. 2013. Web. 24 Mar. 2014. [11] Taylor, Lenore. "Carbon-taxed Companies Cut Emissions by 7% in past Year, Investor Group Says." Guardian News and Media., 6 Mar. 2014. Web. 6 May 2014.
  10. 10. [12] Knappenberger, Paul C. "A U.S. Carbon Tax Wouldn't Slow Down Global Climate Change."US News. U.S.News & World Report, 7 Dec. 2012. Web. 24 Mar. 2014. [13] "Carbon Tax v Cap-and-trade: Which Is Better?" Guardian News and Media, 31 Jan. 2013. Web. 24 Mar. 2014. [14] "Why Emissions Trading Is More Effective than a Carbon Tax." International Emissions Trading Association., n.d. Web. 6 May 2014. [15] "Putting a Price on Carbon: An Emissions Cap or a Tax?" Yale Environment 360. Yale Environment 360, 7 May 2009. Web. 6 May 2014. [16] International Cooperation: Agreements and Instruments. Rep. IPCC Working Group III, 2014. Web. 6 May 2014.