Carbon Emissions Trading

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Transcript Carbon Emissions Trading

Questions on Green Taxes
Pollution Permits/ Tradable Permits
Tradable Permits
• Alternative to taxation
• Licenses to produce a specific amount of
the product (or pollutant) as laid out by
the government.
• ‘Permits to pollute’.
• Permits are tradeable on the open market
The EU-Emissions Trading Scheme
• EU ETS is a market-based mechanism to incentivise
reduction of greenhouse gas emissions in a cost-effective
and economically-efficient manner.
• 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
• The scheme operates through the allocation and trade of
CO2 emissions allowances
• One allowance represents one tonne of carbon dioxide
• Long term goal - de-carbonization of EU economy
• Carbon trading scheme began in January 2005
• Now into 2nd phase – which lasts until end 2012
Pressure to reduce C02 emissions
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
• EU Targets:
• 20% cut in greenhouse gas emissions by
2020, compared with 1990 levels
• 20% increase in use of renewable energy
by 2020
• 20% cut in energy consumption through
improved energy efficiency by 2020
Trading the right to pollute
• Market failure can occur with missing markets.
• In the past there has been no market to trade and
enforce environmental property rights.
• Carbon trading seeks to create incentives to reduce
• A cap is set on the emissions allowed
• The cap creates the scarcity required for the
• 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
• What are the arguments for Cap & Trade?
Rewards and incentives?
• .
Carbon Trading- Advantages
• If a carbon emitting firms can under-use its initial
allowance by better energy efficiency, it can sell its
surplus on the market.
• If firm is faced with 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
• 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 (carbon capture & storage)
• Reward efficiency – i.e firms that are pollution efficient
• Reward action – i.e. capital investment in lower-carbon cleaner
factories and production processes
• Reduce pollution without damaging the competitiveness of
European businesses
Weaknesses of scheme
Government failure?
Over-allocation of carbon quotas
and national freedom to allocate
Gave cash windfalls to some
Carbon price collapsed
This has driven up the demand
for coal fired energy! – a dirtier
fuel! (law of unintended
Uncertainty of future of the
scheme makes it less likely that
businesses will invest in greener
technologies – all a question of
Politicians unlikely to set
emissions cap low enough to
drive carbon prices to the right
The fool’s gold of carbon
Climate change – the biggest market
failure the world has ever seen?
What are the policy options for Gov?
• Carbon trading scheme
• ‘Green’ Tax
• Subsidise clean energy production
• Increase public transport
• Evaluate the benefits and issues of each
Evaluating the alternatives
When evaluating consider some of these points:
Which interventions are likely to be most effective?
In changing behaviour
In encouraging innovation and investment
In reducing emissions at lowest cost
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
What approach offers the best chance of a global
Putting a price on carbon is a necessary but
insufficient condition for achieving the required
reductions in CO2
• ET Sept 2006
• Should Governments be concerned about
Greenhouse Gas Emissions?
• Answer Questions
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