Europe carbon-emissions-trading


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Carbon-emissions trading

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Europe carbon-emissions-trading

  1. 1. Carbon Emissions Trading<br />EU Environmental Policy<br />
  2. 2. This presentation covers<br />Can carbon markets be part of the answer in controlling climate change?<br />What is the basic economics of carbon trading?<br />Is the EU system working?<br />What are the alternatives / complements?<br />Should carbon trading be replaced with a carbon tax?<br />
  3. 3. Climate change – the biggest market failure the world has ever seen?<br />
  4. 4. The EU-Emissions Trading Scheme<br />EU ETS is a market-based mechanism to incentivise reduction of greenhouse gas emissions in a cost-effective and economically-efficient manner.<br />Similar system trialed in the USA - US acid rain program employed a sulfur emissions cap and trade system and successfully produced a 50 percent cut in emissions <br />The scheme operates through the allocation and trade of CO2 emissions allowances<br />One allowance represents one tonne of carbon dioxide equivalent.<br />Long term goal - de-carbonization of EU economy<br />Carbon trading scheme began in January 2005<br />Now into 2nd phase – which lasts until end 2012<br />
  5. 5. Pressure to reduce C02 emissions<br />The USA has the highest per capita emissions of carbon but China and India and other Asian countries have huge populations – putting increased pressure on carbon emissions<br />
  6. 6. 20-20-20<br />EU Targets:<br />20% cut in greenhouse gas emissions by 2020, compared with 1990 levels<br />20% increase in use of renewable energy by 2020<br />20% cut in energy consumption through improved energy efficiency by 2020<br />
  7. 7. Trading the right to pollute<br />Market failure can occur with missing markets. <br />In the past there has been no market to trade and enforce environmental property rights. <br />Carbon trading seeks to create incentives to reduce pollution.<br />A cap is set on the emissions allowed<br />The cap creates the scarcity required for the market<br />At the end of each year installations are required to ensure they have enough allowances to account for their installation’s actual emissions.<br />In Phase II increased penalties imposed on any excess emissions rise to €100 per ton of CO2<br />
  8. 8. Carbon Trading – assets and liabilities<br />Businesses in the EU-ETS must implement carbon management strategies in the medium term<br />Assets: If a carbon emitting business can under-use its initial allowance by better energy efficiency, it can sell its surplus on the market. <br />Liabilities: If a business is faced by high costs to reduce its emissions, it must buy extra allowances<br />The new carbon market should develop a price that reflects the cheapest ways of implementing emission cutbacks. <br />As the market price of carbon emissions rises, so there is an incentive for businesses to invest in technologies that are more pollution efficient including carbon sequestration.<br />
  9. 9. Rewards and incentives?<br />Reward efficiency – e.g. those businesses that are pollution efficient<br />Reward action – e.g. capital investment in lower-carbon cleaner factories and production processes<br />Reduce pollution without damaging the competitiveness of European businesses.<br />
  10. 10. The Clean Development Mechanism<br />CDM: allows industrialized countries to invest in projects that reduce emissions in developing countries - as an alternative to what would undoubtedly be more expensive emission reduction programmes in their own country. <br />The CDM scheme has been criticised – fraudulent use of it<br />
  11. 11. Weaknesses - Fools Gold?<br />Government failure?<br />Over-allocation of carbon quotas and national freedom to allocate<br />Gave cash windfalls to some businesses<br />Carbon price collapsed<br />This has driven up the demand for coal fired energy! – a dirtier fuel! (law of unintended consequences)<br />Uncertainty of future of the scheme makes it less likely that businesses will invest in greener technologies – all a question of incentives!<br />Politicians unlikely to set emissions cap low enough to drive carbon prices to the right level<br />The fool’s gold of carbon trading<br />
  12. 12. Recession and carbon prices<br />EU recession has caused reductions in output in steel, paper, cement and glass<br />Has led to a sell off of carbon credits<br />That has led to a big drop in the market value of carbon permits from Euro 35 to 9<br />There is less incentive for companies to stop polluting<br />Fears for the future of many clean energy projects<br />Is there a case for a minimum price on carbon emissions?<br />
  13. 13. More videos<br />
  14. 14. Is a carbon tax a viable alternative?<br />
  15. 15. Carbon taxation<br />A Carbon tax is a specific tax on the consumption of goods which cause carbon dioxide emissions<br />Case for a carbon tax:<br />Cap and trade is like a tax so why not tax instead?<br />Mandates a specific price on carbon – less uncertainty than the emissions-trading price<br />A way of internalizing externalities – the tax would raise the marginal cost of the CO2E-emitting activities, up to the point that the marginal social cost of abatement activities is equated to the marginal social benefit from these activities<br />Incentive for firms to lower their emissions and for consumer behaviour to change <br />Consumers will respond … perhaps in surprising ways (behavioural economics has something to say here!)<br />Revenue generated can be “ring-fenced” and then recycled – i.e. spent on environmental initiatives<br />
  16. 16. Negative Externalities and Market Failure<br />Price<br />Marginal social cost (supply)<br />Marginal private cost (supply)<br />EfficiencyLoss<br />Marginal private benefit (demand)<br />Private Optimal Output<br />Social Optimal Output<br />Quantity<br />
  17. 17. Supporters of a carbon tax<br />
  18. 18. Problems with a carbon tax<br />What are the chances of agreeing a carbon tax across different parts of the world?<br />How much to tax when emissions of carbon are difficult to measure accurately<br />What is the true economic cost of CO2 emissions and impact on climate change? Involves discounting the future <br />Costs of compliance / risk of tax evasion<br />Possible regressive effects on lower income households<br />Less certainty about the effect on quantity of emissions<br />Countries may free ride on others carbon taxes i.e. enjoy a reduction in CO2 emissions without imposing their own tax<br />Unless introduced across many countries – would potentially damage competitiveness and jobs of countries that bring a carbon tax in<br />Would countries be prepared to raise the carbon tax to reduce emissions? Low price elasticity of demand?<br />
  19. 19. Evaluating the alternatives<br />When evaluating consider some of these points:<br />Which interventions are likely to be most effective?<br /><ul><li>In changing behaviour
  20. 20. In encouraging innovation and investment
  21. 21. In reducing emissions at lowest cost</li></ul>What are the consequences for equity?<br /><ul><li>Between rich and poorer nations
  22. 22. Between rich and poorer within any one country
  23. 23. Between current and future generations
  24. 24. Between producers and consumers</li></ul>What approach offers the best chance of a global programme?<br />Putting a price on carbon is a necessary but insufficient condition for achieving the required reductions in CO2<br />