Carbon Market Mechanisms Cap & Trade vs. Carbon Tax Mike Pritchard Climate Science, SIO

Outline How much is a ton of CO2? Cap or Tax? Carbon cap & trade in practice EU-ETS CDM in practice Recommendations for Cali How much should a tCO2 cost?

The Past

How much is a ton of CO2? Combustion: C x H y xCO 2 + yH 2 O 12 g/mol 44 g/mol 1 lb 4 lb 60 lb 240 lb 6 lb/Gallon ~9 tanks of gas 1 tCO 2 1 credit ==

Cap & Trade “Cap” - impose a limit on the rate of cumulative CO2 emission “Allowance”: The right to emit a specific amount “Trade” - transfer of an allowance Buyer penalized for producing emissions in excess of allowance Seller rewarded for mitigating emissions Market reduces CO2 emissions at a low cost.

Carbon Tax Pretty much what it sounds like. Tax rate must be adjusted as economies evolve to achieve net emissions reductions

The Debate: Tax or Cap? Cap & Trade is a “quantity” instrument Fixes the quantity of CO2 output Pro: Concrete environmental outcome Con: Price uncertain, fluctuating Difficult for companies to plan ahead, especially if price is volatile Con: Potentially large enforcement Many trades: complicated monitoring

The Debate: Tax or Cap? Carbon Tax is a “price instrument” Fixes the price of CO2 output Pro: Long-term planning. Pro: Less overhead? Con: Ensure environmental outcome Net output could vary with total economic activity Have to sell “tax increases”

Cap & Trade in practice…. EU ETS First large carbon economy pilot project Phase I lessons Protectionism by local government Free allowances Some are necessary to ease transition Too many devalue/destabilize the currency

The market is growing fast… Carbon trading market: 2005: 9.4 billion euros 2006: 22.5 billion euros 80% of this is the EU-ETS

CDM: The Clean Development Mechanism

CDM in action: Bunge Agricultural commodities Overseas effluent capture Electrical co- generation Profit from carbon sale via CDM Farmer gets a cut

The CFC Gold Rush HCFCs 10,000 times the global warming potential of CO2. Pollution outvalues product!? Credit for less than €1 Sold for €11

Some Recommendations for Cap &Trade in California External offsets Special attention to industry, transport Utilities selling imported (i.e. coal- generated) electricity suffer an allowance Phased-in “free” vs. “auction” allowances Attention to data sufficiency

How much should carbon cost? For stabilization at 550 ppm CO2-eq by 2100 Between US$/tCO2 by 2030 between US$/tCO2 by 2050

Summary 1 tCO2e is 9 tanks of gas Cap vs. tax An international scheme is needed $/tCO2 for stabilization? On the order of $80-150