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 equivalent 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 emissions

20-20-20 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 pollution. A cap is set on the emissions allowed The cap 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

Handout 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 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 (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

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 been criticised – fraudulent use of it

Weaknesses of scheme Government failure? Over-allocation of carbon quotas and national freedom to allocate Gave cash windfalls to some businesses Carbon price collapsed (recession) This has driven up the demand for coal fired energy! – a dirtier fuel! (law of unintended consequences) Uncertainty of future of the scheme makes it less likely that businesses will invest in greener technologies – all a question of incentives! Politicians unlikely to set emissions cap low enough to drive carbon prices to the right level The fool’s gold of carbon trading

Recession and carbon prices EU recession has caused reductions in output in steel, paper, cement and glass Has led to a sell off of carbon credits That has led to a big drop in the market value of carbon permits from Euro 35 to 9 There is less incentive for companies to stop polluting Fears for the future of many clean energy projects Is there a case for a minimum price on carbon emissions?

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 option

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 programme? Putting a price on carbon is a necessary but insufficient condition for achieving the required reductions in CO2

Handout ET Sept 2006 Should Governments be concerned about Greenhouse Gas Emissions? Answer Questions

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