Cap & Trade Vs Carbon Tax
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In the final paper/presentation for HPL480: Environmental Policy & Econoimics, I argue that we should pursue Cap & Trade policies rather than a straight carbon tax.
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Cap & Trade Vs Carbon Tax
- 2. The Problem Fossil Fuels Greenhouse Gasses Global Warming Sun (Ultimate source of energy) Energy Absorbed by plants & animals Remains of plants & animals decay Earth crushes and converts into fossil fuels Created by Robert A. Rohde for the Global Warming Art project
- 3. The Problem Fossil Fuels Greenhouse Gasses Global Warming 1 2 1:EPA 2011 GHG Inventory 2:http://www.windows2universe.org/earth/Water/co2_cycle.html
- 4. The Problem Fossil Fuels Greenhouse Gasses Global Warming
- 5. Why Should We Act? Air Quality Economic Agriculture Health Rising Sea Levels Ocean Acidification
- 6. What Can We Do? Make corporations incur the cost of their externalities Incentive for Innovation Efficiency & Renewable Energy.
- 7. How Can We Do It? Limiting Emissions Directly Reduces pollution Taxes/Fees on Emissions No Guarantees Government Spending International Cooperation Kyoto Protocol – 1997 “Almost 200 nations began global climate talks on Monday with time running out to save the Kyoto Protocol aimed at cutting the greenhouse gas emissions scientists blame for rising sea levels, intense storms, drought and crop failures.”
- 8. Tax - Economics Pigovian tax Implementing a fee Incentive to reduce pollution However, there are no guarantees. Tax-Shifting / Revenue Neutral Raise taxes on the “bad”; Decrease taxes on the “good” Must be gradual, predictable, and broad
- 9. Tax - Politics Relatively Simple Lobbying Conservatives more likely to oppose tax increases Where will the funds be redistributed?
- 10. Cap & Trade - Economics Coase Theorem - Harnessing free market forces Clearly defined property rights Liquid & Accessible trading Limit Emissions Trade-able permits for emissions Pollute less and profit Over-pollute and pay Offset programs
- 11. Cap & Trade - Policy As with Tax, corporations may not want these restrictions However, many are willing to participate in order to prepare for imminent future policy Corps have independence on how they will comply Much more bureaucracy involved – (CCX)
- 12. Pros & Cons With both methods Pro: Incentive to reduce pollution Con: Restricting economic growth Advantage of Taxing: Less Bureaucracy Funds can be redistributed No way to beat the system Advantage of Cap & Trade: Guaranteed reduction Independence Working with human nature, not against it Potential to create jobs / incentive to spend
- 13. U.S. Attempts at a Carbon Tax 1993 – Clinton Administration attempts but fails to implement a tax on all energy forms Widely opposed by oil companies In 2008 Clinton showed support for a cap & trade program Bush neglects to join Kyoto Protocol Political Turmoil
- 14. Canadian Carbon Tax 2008 – British Colombia Revenue Neutral $20/tonne of CO2, rising at $5 annually. Early results are showing some positive effects However, many argue that the tax is not high enough
- 15. The Acid Rain Program 1990 Clean Air Act Sulfur Dioxide Emissions from Electric Power Plants “The largest quantified human health benefits of any major federal regulatory program implemented in the last 10 years, with benefits exceeding costs by more than 40:1” - The U.S. Environmental Protection Agency
- 16. SO2 Cap & Trade Results The EPA has acknowledged that these results have shown that market-based solutions have a very high potential.
- 17. SO2 vs. CO2 Why the Acid Rain Program was simpler: Only involved power plants Little infrastructure & new technology needed Regulating All GHGs will require efforts in the industrial, commercial, and residential entities. Because of the effort needed to create a carbon cap & trade countries may be more inclined to attempt a straight tax.
- 18. Chicago Climate Exchange (CCX) Dr. Richard Sandor received corporate and government funding to start the CCX in 2003. Corps from all 50 states, 8 CA provinces, 16 countries VOLUNTARILY joined the program. 700 million metric tons of emissions covered CCX main goal: establish a market-based price for reducing emissions of carbon and other GHGs.
- 19. Chicago Climate Exchange (CCX)
- 20. Offsets Why? An incentive for non-regulated entities to generate emission reductions creating more opportunities for regulated entities to comply with the program Over 15,000 Farmers participated, earning permits by conducting mitigation practices It is very difficult to quantify the effectiveness of each offset program
- 21. Success or Failure? In 2010, the program ended and no new phases were created. Why it was successful: Experience – most participants found the program helped them prepare for whatever regulation comes in the future Why it was a failure: The offsets program eventually “crashed” the CFI market
- 22. U.S. GHG Cap & Trade In 2007, Obama promised to put an effort into creating a cap & trade program "Will set a hard cap on all carbon emissions at a level that scientists say is necessary to curb global warming”
- 23. Why we should avoid Carbon Tax Although Cap & Trade requires more bureaucracy, it will find much more support on Wall Street and thus easier to pass One a system is set up it will remain for decades The Cap & Trade system is much more flexible and transparent to future changes The effect of global warming could be catastrophic -We need to LIMIT emissions not make them more expensive As seen with the Acid Rain Program, C&T has tremendous potential
- 24. Hedging Risk of the “Fat Tails” Even if there is only a slight chance that the increase in global temperatures will drastically harm humanity, the risk is too serious to ignore. “If it turns out that our carbon emissions are rising too far, too fast – or not falling fast enough – then the system has to be able to dynamically adjust to that, and that's something a carbon tax finds pretty much impossible to do.” - Jon Anda, Head of Environmental Markets at UBS Securites
- 25. The Future of Cap & Trade The foundation for success has been established Intercontinental Exchange (ICE) Acquired the CCX ECX, CCFE The offsets component is where major changes need to occur. There will be much more support on Wall Street for a program like this The complexity should be recognized by all parties involved.
- 26. How we can improve it Direct Government Involvement & Cooperation with ICE New Jobs: New agency for research and implementation Divisions for Large Industrial sources vs. small commercial/residential Committee focused solely on Offsets Committee focused on the prevention of “gaming” the system Extensive study on the effectiveness of offset programs If CFI market were to begin a collapse gov’t intervention U.S. cooperation with Europe Kyoto Protocol
Editor's Notes
- Since the Industrial Revolution, the burning of fossil fuels has increase drastically
- -Since fossil fuels originate from organic material, carbon is very abundant.-Other abudant GHGs include water vapor, methane, and nitrous oxide.-Without any GHGs, the Earth would be about 59°F.
- -Agriculture: Disruption of fresh-water supply, increase chance of wildfire-The negative impacts of global warming on agriculture, health, economy and environment far outweigh any positives-Economic: Damage to infrastructure due to rising sea levels, disruption of water supply, increased likelihood for war as resources become scarce.-Ocean Acid:About a quarter of the carbon dioxide in the atmosphere goes into the sea. Although this area is less researched, the continual decrease in pH is likely to disrupt the food chain in ocean life.
- -A perfectly free-market does not account for environmental impacts.-No incentive for a company to stop polluting -InnovationTo use the fossil fuels more efficiently and to develop alternative energy sources
- Cooperation: Many countries hold back on implementing fees or programs within their country to allow their corporations to remain competitive with others around the world. Kyoto Protocol: Initially adopted by 37 countries in Kyoto, Japan - Rejected by George Bush, although the us does attend the annual conferences. -The protocol encourages countries to take national policy measures to reduce carbon emissions but offers a few market-based strategies. They established an international emissions trading program. It was cap and trade, however countries rather than corporations would be able to buy/sell surplus emission rights.
- Pigovian tax – term for a tax which attempts to correct a mispricing due to externalitiesNo guarantees: Not actually limiting the amount of carbon, only making it more expensive for the companies so if companies don’t actually reduce emissions, the only outcome is harm to the economyTax shifting: Tax received from carbon emissions is returned to residents and businesses in some way Economists suggest this is necessary for achieving a certain objective Transparency is necessary so corps. Can prepare for future increases
- Simplicity – There’s not much bureaucracy involved in implementing a straight tax -simply a fee put on the amount of carbon which is emittedLobbying- Huge corporations will put millions of dollars into preventing policy that will hurt their profit-There’s also the issue of where the taxes will be re-distributed if they are to be revenue/neutral
- Cap & Trade is an application of the coase theorem limit on the amount of carbon which can be emitted and allow companies to sell their remaining permits to companies which go over the capOffset programs – aimed at entities which are not necessarily covered by the cap and trade program – small businesses can either reduce emissions or undergo a project which is beneficial to the atmosphere in order to earn permits which they can sell to make a profit. - This ended up causing problems in the U.S. implementation
- Still the potential for lobbyingImminent future policy – corporations know that something must be done eventually, cap & trade allows for a gradual shift some cap & trade programs have been created and were strictly voluntary a mandatory program would impose strict penalties for not participatingBureaucracy – there’s much work to be done to set up a program like this, the chicago climate exchange was created in the us which I will discuss later
- Both methods have the potential to harm the economy, especially domestically if countries around the world do not implement similar policies
- Oil companies & big energy usersCongressmen became hesitant to support ideas like this, as it could hurt political careerIn 2008 Clean energy sumit, Clinton expressed support for Cap & Trade and pointed to this failed attemptAs you can see from the current debt talks, US politicians have a very hard time agreeing on anything as party lines and political games get in the way
- BC – First carbon tax in north america (it also covered other green house gasses)
- The EPA has also said that this has shown that market-based solutions like this one have very high potential
- The acid rain program only restricted one type of business, with carbon many different industries with different cost structures will have to be regulatedIf only large industrial sources were regulated, only about 50% of GHG emissions would be covered
- Most from the utilities sectorWilling to vounteer as preparation for potential regulationsThe CCX is taking on a difficult role of valuing the environment they did this using a market rather than contingent valuationSet two operate in 2 phases, ending in 2010
- CCX members made legally-binding commitments during Phases I and II to meet annual reduction requirements.
- To work properly, a given amount of CO2 emissions reduced from an offset program should be equal to the amount of excess emissions from a regulated entity.
- There are some voluntary offsets program still in existence, but very limitedPeople are divided on whether the program was a success or failureCorps became familiar with the process of trading allowances & offsets.Congress seems to believe the program was a failure
- Companies like the flexibility of the programIf it turns out that our carbon emissions are rising too far, too fast – or not falling fast enough – then the system has to be able to dymaically adjust to that, and that's something a carbon tax finds pretty much impossible to do.
- I’m here to argue that the cap and trade program was not a failure, corporations have gained valuable experience over othersA program like this requires much more bureaucracy, but on the other hand corporations are much more willing to participate in a program like this European climate exchange, Chicago climate futures exchangeCCFE – should not worry about this in next attempt at carbon – although it has proven useful for sulfur