Carbon Emissions Trading and Carbon Taxes

Transcription

1 Carbon Emissions Trading and Carbon Taxes EU Environmental Policy The challenge reaching towards a low carbon economy 1

2 This presentation covers Can carbon markets be part of the answer in controlling climate change? What is the basic economics of carbon trading? Is the EU system working? What are the alternatives / complements? Should carbon trading be replaced with a carbon tax? Negative Externalities and Market Failure Price Marginal social cost (supply) Marginal private cost (supply) Efficiency Loss Marginal private benefit (demand) Social Optimal Output Private Optimal Output Quantity 2

3 EU targets: % cut in greenhouse gas emissions by 2020, compared with 1990 levelsl 20% increase in use of renewable energy by % cut in energy consumption through h improved energy efficiency i by 2020 EU-Emissions Trading Scheme ETS is a market-based mechanism to incentivise reduction of C02 emissions The scheme operates through h the allocation and trade of CO2 emissions allowances One allowance represents one ton of C02 equivalent. Long term goal - de-carbonization of EU economy Carbon trading scheme began in January Now into 2 nd phase which lasts until end

4 Supply and demand analysis for carbon trading schemes Permit Price (Euro per tonne of C02) EU Carbon Trading Market in Theory Supply 2012 Supply 2010 Price 2012 Price 2010 Demand 2012 Demand 2010 Cap 2012 Cap 2010 Quantity of Permits EU Carbon Emissions Price Source: mselect/cmenvaud/290/29002.htm 4

5 Trading the right to pollute Market failure can occur with missing markets e.g. a market in environmental property rights. Carbon trading seeks to create incentives to reduce pollution. Cap is set on the emissions - creates the scarcity required for the market At the end of each year installations are required to ensure they have enough allowances to account for their installation s actual emissions. In Phase II increased penalties imposed on any excess emissions rise to 100 per ton of CO2 Carbon Trading assets and liabilities Businesses in the EU-ETS must implement carbon management strategies in the medium term Assets: If a carbon emitting business can under-use its initial allowance by better energy efficiency, it can sell its surplus on the market. Liabilities: If a business is faced by high costs to reduce its emissions, it must buy extra allowances The new carbon market should develop a price that reflects the cheapest ways of implementing emission cutbacks. 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. 5

6 Rewards and incentives? Reward efficiency e.g. those businesses that are pollution efficient Reward action e.g. capital investment in lower-carbon cleaner factories and production processes Reduce pollution without damaging the competitiveness of European businesses. The Clean Development Mechanism 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. The CDM scheme has The CDM scheme has been criticised fraudulent use of it 6

7 Weaknesses Carbon Trading as Fools Gold? Government failure? Over-allocation of quotas and national freedom to allocate Gave windfalls to some businesses Carbon price collapsed This has driven up demand for coal fired energy a dirtier fuel! (law of unintended consequences) Energy companies have found it easy to switch fuel sources as prices have changed (good example of elasticity of supply!) Politicians are unlikely to set emissions cap low enough to drive carbon prices to the right level carbon price generated by the EU ETS has so far suffered from being too low and too volatile to bring forward large-scale investment in long-term emissions cuts (House of Commons report) Recession and EU carbon prices EU recession has caused reductions in output in steel, paper, cement and glass Led to sell off of carbon credits That has led to a big drop in the market value of carbon permits (Euro13 in Feb 2010) There is less incentive for companies to stop polluting Fears for the future of many clean energy projects such as investment in bio-mass Is there a case for a minimum price on carbon emissions? Or an extra carbon tax? UK House of Commons Environmental Audit Committee said yesterday that 88 per tonne was the lowest price necessary for investment in green technologies to become economic 7

8 The recession and carbon prices Permit Price (Euro per tonne of C02) EU Carbon Trading Market in Theory Supply 2012 Supply 2010 P2012 P2010 Demand 2010 Demand 2012 Cap 2012 Cap 2010 Quantity of Permits A price floor for carbon permits? What about a minimum price for carbon? Would need EU governments to guarantee to buy any permits offered for sale at a specific price Alternative is to set a new carbon tax at the level of the desired floor price Would have to be done across the EU in order to be effective Another option is to have a minimum reserve price for auctions of carbon allowances 8

9 More videos on decarbonisation Is a carbon tax a viable alternative? 9

10 Carbon taxation A Carbon tax is a specific tax on the consumption of goods which cause carbon dioxide emissions Already in use in Denmark and Sweden (and France from Jan 2010 carbon tax set at Euro17 per ton) Case for Carbon taxation Cap and trade is like a tax so why not tax instead? Mandates a specific price on carbon less uncertainty than the emissions-trading price 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 Incentive for firms to lower emissions Consumers will respond perhaps in surprising ways (behavioural economics has something to say here!) Revenue generated can be ring-fenced and then recycled i.e. spent on environmental initiatives 10

11 Supporters of a carbon tax Potential problems with a carbon tax How much to tax when emissions of carbon are difficult to measure accurately? What is the true economic cost of CO2 emissions and impact on climate change? Involves discounting the future Costs of compliance / risk of tax evasion Possible regressive effects on lower income households Less certainty about the effect on quantity of emissions Countries may free ride on others carbon taxes i.e. enjoy a reduction in CO2 emissions without imposing their own tax Unless introduced across many countries would potentially damage competitiveness and jobs of countries that bring a carbon tax in Would countries be prepared to raise the carbon tax to reduce emissions? Low price elasticity of demand? Carbon taxes are vulnerable to political lobbying regulatory capture and government failure 11

12 Evaluating the alternatives When evaluating consider some of these points: 1. Which interventions are likely to be most effective? In changing behaviour In encouraging innovation and investment In reducing emissions at lowest cost 2. What are the consequences for equity? Between rich and poorer nations Between rich and poorer within any one country Between current and future generations Between producers and consumers 3. What approach offers the best chance of a global programme? 4. Putting a price on carbon is a necessary but insufficient condition for achieving the required reductions in CO2 tutor2u Keep up to date with economics, resources, quizzes and worksheets for your economics course. 12