Carbon taxing

1. Carbon credit & Carbon
footprint
Prepared By
Archana

2. Global warming and climate change
• Earth's temperature has risen by an average of 0.14° Fahrenheit (0.08° Celsius) per decade
since 1880, or about 2° F in total. The rate of warming since 1981 is more than twice as
fast: 0.32° F (0.18° C) per decade.
• The Kyoto Protocol is an international agreement linked to the United Nations Framework
Convention on Climate Change, which commits its Parties by setting internationally binding
emission reduction targets for GHGs.
• Recognizing that developed countries are principally responsible for the current high levels of
GHG emissions in the atmosphere as a result of more than 150 years of industrial activity, the
Protocol places a heavier burden on developed nations under the principle of “common but
differentiated responsibilities”.
• It was adopted in Kyoto, Japan, on December 11, 1997, and entered into force on February 16,
2005. The detailed rules for the implementation of the Protocol were adopted at COP 7 in
Marrakesh, Morocco, in 2001, and are referred to as the “Marrakesh Accords.” Its first
commitment period started in 2008 and ended in 2012.
• Specifically, under the Protocol and during the first commitment period, the industrialized
countries had committed to reduce, during the period 2008–12, the emissions of six gases
responsible for global warming, namely carbon dioxide, methane, nitrous oxide,
hydrofluorocarbons, perfluorocarbons, and hexafluoride sulfur, at least by 5% compared to
1990 levels.
• In this context, EU member states pledged to reduce their emissions by 8% during this period.

3. The economics of clean energy
Pricing carbon
• In order to effectively limit emissions of greenhouse gases (GHGs) the cost
of using carbon as an energy source needs to be high enough to motivate the
necessary changes needed in economic behavior (Nordhaus, 1992).
• Through the market mechanism, a high carbon price raises the cost of
products according to their carbon content.
• Raising the price of carbon achieves awareness in consumers about what
goods and services are carbon intensive and which should be used more
carefully.
• Carbon pricing helps to educate producers about which energy sources are
the most carbon intensive, and thus encourages firms to substitute low-
carbon fuels.
• Pricing carbon provides the market with incentives for inventors and
innovators to develop and introduce low-carbon products and processes that
can replace the current generation’s technologies.

4. • Meanwhile, in 2019 the Clean Power Plan (CPP) issued by The U.S.
Environmental Protection Agency, which would reduce CO2 emissions by 19%
by 2030, remains bogged down in legal challenges; and, the current
administration's proposed replacement of the CPP with the Affordable Clean
Energy rule would reduce CO2 emissions by only 0.7%–1.5% (The Economist,
Aug 2018).That is moving in the wrong direction.
• The current global average concentration of CO2 in the atmosphere is 421
ppm as of May 2022. This is an increase of 50% since the start of the
Industrial Revolution, up from 280 ppm during the 10,000 years prior to the
mid-18th century. The increase is due to human activity.
• The data on decarbonizing the energy system show that if you want to avoid
catastrophic climate impacts from future atmospheric CO2 levels of ∼421 ppm,
a significant price for carbon will be more important than technology
breakthroughs, although mandates, subsidies, and other government
deployment programs will be needed before the CO2 price becomes effective
(Romm, 2008).

5. Carbon credits
• In the early 1980s the concept of swapping national debt with developing
countries to protect natural resources was proposed as a means of protecting
biological diversity (Lovejoy, 1984).
• The debt-for-nature swaps became a model for carbon credits.
• An objective of the Kyoto Protocol was to enable developed nations, which had
profited from economic development based upon high-carbon GDPs, to
economically assist the growing economies of developing nations, impacted by
carbon emission constraints and heavily indebted to foreign creditors.
• A carbon credit system was planned that imposed national caps on greenhouse gas
emissions of developed nations that approved the Kyoto Protocol.
• These countries were aligned as Annex B countries. Each of these countries was
given an allotment and corresponding number of emission allowances known as
Assigned Amount Units (AAUs).
• Participating countries were required to reduce their emissions to well below 1990
levels and more than 5% by 2012. They could also reduce their emissions by
trading in emission allowances with countries that already had surplus allowances.
They could meet their targets by buying carbon credits.

6. • Carbon credits and carbon markets are a component of national and
international attempts to mitigate the growth in concentrations of
greenhouse gases in the atmosphere.
• A carbon credit (often called a carbon offset) is a credit for greenhouse
emissions reduced or removed from the atmosphere by an emission
reduction project, which can be used by governments, industry, or
private individuals to compensate for the emissions they generate
elsewhere.
• Since GHG mitigation projects generate credits, this approach can be
used to finance carbon reduction schemes between trading partners
around the world.

7. • One carbon credit is equal to one metric ton of carbon dioxide, or in some
markets, carbon dioxide equivalent gases (CO2-eq), and are bought and sold
through international brokers, online retailers, and trading platforms.
• Businesses that find it difficult to comply with the carbon emission
requirements can purchase carbon credits to offset their emissions by
making finance readily available to renewable energy projects, forest
protection, and reforestation projects around the world.
• Projects which sell carbon credits include wind, solar, geothermal, and
biomass which replace fossil-fuel-powered plants.
• Offsetting one metric ton of carbon means that there will be one less Mt of
carbon dioxide in the atmosphere than there would otherwise have been.
• The Kyoto Protocol provides for three mechanisms that enable countries, or
operators in developed countries, to acquire greenhouse gas reduction
credits:

8. • Under Joint Implementation (JI) a developed country with relatively high
costs of domestic greenhouse reduction would set up a project in another
developed country.
• Under the Clean Development Mechanism (CDM) a developed country can
“sponsor” a greenhouse gas reduction project in a developing country where
the cost of greenhouse gas reduction project activities is usually much
lower, but the atmospheric effect is globally equivalent.
• The developed country would be given credits for meeting its emission
reduction targets, while the developing country would receive the capital
investment and clean technology or beneficial change in land use.
• Under International Emissions Trading (IET) countries can trade in the
international carbon credit market to cover their shortfall in Assigned
Amount Units (AAUs).
• Countries with surplus units can sell them to countries that are exceeding
their emission targets under Annex B of the Kyoto Protocol.
• These carbon projects can be created by a national government or by an
operator within the country.

9. Cap and trade
• One method to reduce carbon emissions is “Cap and Trade.”
• The Kyoto Protocol was the precursor to mandatory carbon credits. Cap and
trade and carbon taxing both involve putting a price on carbon emissions.
• Pricing carbon involves “costing” the environmental damage from
CO2 emission, a highly controversial topic.
• The carbon tax is expensive for fossil fuel interests, but the revenues can go
back to the public to offset increased power cost borne by the consumers
(Whitehouse, 2018).
• Taxing carbon moves energy markets toward cheaper renewables. On
balance, people save money.
• Taxing carbon moves energy markets toward cheaper renewables. The
savings from avoiding climate catastrophes can be immense.
• If you really want to innovate, there has to be a cost to carbon pollution.
Without that, there is little incentive to innovate.

10. • The cap on greenhouse gas emissions that drives global warming is a firm
limit on pollution.
• The trade part is a market for companies to buy and sell allowances that let
them emit only a certain amount of carbon, as supply and demand set the
price.
• Trading gives companies a strong incentive to save money by cutting
emissions in the most cost-effective ways.
• The Cap and Trade System is one of the best ideas available right now to
help limit emissions, but the system is not perfect as seen in comparing the
pros and cons of Cap and Trade (Gaille, 2015).
The pros of Cap and Trade are:
• New economic resources for industries are created. Companies lower their
emissions because there is a low cost for implementation.
• Companies with emissions credits can sell them for extra profit. This creates
economic resources, because more is spent to lower emissions and the
credits are a new product to be purchased for additional profits,

11. • A predetermined maximum level of emissions is set. However, it can
be difficult to track atmospheric emissions by companies that are not
regulated
• Taxpayer resources are supplemented. The government purchases
emissions credits when they are available and then sells them at a
higher price to businesses when they are needed.
• The incomes from these purchases help to supplement the resources
that taxpayers are providing to the government,
• Alternative energy resources can be funded. Research on alternative
energy resources can be funded with carbon taxes in those places that
work with the cap trade system,
• The average person can create change. The cap and trade system
creates a new knowledge base for consumers who can choose whether
or not to purchase from carbon-efficient businesses,

12. While the cons of Cap and Trade are:
• Emission credits can be given away.
• Credits can be sold at auction to the highest bidder. This means that a
business can expand their emissions which harm a local economy that
receives no economic gain in return,
• Governments can retire emissions credits. Governments also have access to
credits because they also have an economic impact on society.
• What makes the government different from a business when an emissions
credit is received is that the credit can be canceled and removed from
circulation.
• This means taxpayer money is used to purchase something that isn't used
and could potentially stagnate industrial development,
• Some credits may be artificially high in price. Many environmental
agencies have discovered that they can purchase these credits and choose
not to use them and hold them indefinitely, creating artificially high credit
prices,

13. • Emissions credits are almost always cheaper than converting. For industries
that use fossil fuels, the cost of converting to renewable resources can be
very high.
• The emissions credits, offsets, and even penalties and fines for exceeding a
cap limit, often are all cheaper than going through a conversion to a new
source of energy.
• This means there is no real incentive for those industries to change their
practices.
• Renewable energy resources are still relatively new and are still relatively
expensive.
• For industries that transition into lower emissions and follow cap rules, the
products that they produce will be more expensive in the future.
• Different nations may have different standards for a maximum cap. Some
nations create more emissions than others.
• This means a maximum cap will be defined differently in every society.
Some countries may be very lenient about their emissions caps and credits.
Others may be very strict.

14. Carbon tax.
• Another method for national governments to meet their CO2 reduction goal
is to tax the emissions of CO2 generators.
The advantages of a carbon tax are:
• Less complex, expensive, and time-consuming system to implement. This
advantage is especially great when applied to markets like gasoline or home
heating oil.
• Reduced risk for certain types of cheating. But under both credits and taxes,
emissions must be verified.
• Reduced incentives. Companies may delay efficiency improvements prior
to the establishment of the baseline if credits are distributed past emissions.
• More centralized handling of acquired gains. It is simpler to administer,
easier to ensure compliance, and better to monitor progress.

15. Carbon Footprints
• Carbon footprint accounting can be carried out at a variety of levels (e.g., national,
per person, product, service, etc.).
• Despite the high level of interest in carbon footprinting, there is a surprising lack
of agreed upon definitions as to what a carbon footprint is.
• The Guide to PAS 2050 (BSI, 2008) suggests that: “The term ‘product carbon
footprint’ refers to the greenhouse gas emissions of a product across its life cycle,
from raw materials through production (or service provision), distribution,
consumer use and disposal/recycling.
• It includes the greenhouse gases carbon dioxide (CO2), methane (CH4) and nitrous
oxide (N2O), together with families of gases including hydrofluorocarbons (HFCs)
and perfluorocarbons (PFCs)”.
• Carbon Footprint as a measure of the total amount of GHG emissions that are
directly and indirectly caused by an activity or are accumulated over the life stages
of a product.
• This includes activities of individuals, populations, governments, companies,
organizations, processes, industry sectors, etc. Products include goods and
services. In any case, all direct (on-site, internal) and indirect emissions (off-site,
external, embodied, upstream, and downstream) need to be taken into account.

16. • Greenhouse gas emissions arise at every point in the life of a product.
Emissions may be direct (from animals, fertilizer application, fuel use) or
indirect (e.g., from electricity generation).
• Each GHG has a different potential to increase atmospheric temperature.
• To enable them to be discussed in a common language, characterization
factors are applied to the gases against a standard radiative effect (the act of
emitting or causing the emission of radiation).
• The characterization model for climate change, as developed by the
Intergovernmental Panel on Climate Change (IPCC), contains a series of
internationally recognized characterization factors.
• Factors are expressed as global warming potential (GWP) for a time horizon
of 100 years (GWP100), in kg carbon dioxide equivalent (CO2 eq)/kg
emission. For a calculation of lifetimes and a full list of greenhouse gases
and their global warming potentials please refer to Solomon et al. (2007).