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).
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
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• Australia repealed its carbon tax in 2014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
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
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