Carbon pricing

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Carbon pricing is the generic term for placing a price on carbon through either subsidies, a carbon tax, or an emissions trading ("cap-and-trade") system.

Release of carbon dioxide to the atmosphere causes climate change, according to the consensus theory of anthropogenic global warming. Greenhouse gas emissions result from fossil fuel-based electricity generation. As a means of avoiding dangerous climate change, associating an approximate cost to damage such as from increasing extreme weather, carbon pricing may incentivize a reduction of carbon emissions and the discovery or implementation of low-emission technologies.^[1]

Contents 1 Subsidies 2 Taxes 3 Emissions trading: cap and trade 3.1 United States 3.2 European Union 3.3 Denmark 4 U.S. government interventions 5 References

Subsidies

Currently governments subsidize fossil fuels by $557 billion per year.^[2][3] Scientists have advanced a plan to power 100% of the world's energy with wind, hydroelectric, and solar power by the year 2030,^[4][5] recommending transfer of energy subsidies from fossil fuel to renewable, and a price on carbon reflecting its cost for flood and related extreme weather expenses. They expect the cost to generate and transmit power in 2020 will be less than 4 cents per kilowatt hour (in 2007 dollars) for wind, about 4 cents for wave and hydroelectric, from 4 to 7 cents for geothermal, and 8 cents per kwh for solar, fossil, and nuclear power.

Taxes

Carbon taxes have been discussed in Australia, New Zealand, various European countries, Canada, and the United States, and implemented in some of these locations.

In general, Germany does not have a carbon tax, only energy and electricity taxes. Renewables are exempt from the electricity tax. There is no formal link between tax rate and carbon content. Brown coal and hard coal, which are very high in carbon content, are exempt from the energy tax. Existing energy taxes, particularly on transport fuels, were increased and a new electricity tax introduced. The government announced that the electricity tax and petrol and diesel taxes would increase every year. This was achieved every year from 1999 to 2003.^[6]

The article How have ecotaxes worked in Germany? states that "ecotaxes are one of the most effective measures to speed the crucial transition from finite, climate-changing fuels like oil and coal to renewable, climate-neutral ones. Since their introduction in Germany in 1999, petrol consumption has fallen for the first time in the country's post-war history."^[7]

Buses, taxis and other forms of short-distance public transport have only paid the mineral oil ecotax at 1.5 Cent/litre for their fuel. Storage heating systems installed before April 1, 1999 which are only taxed at half the increased rate. Exemptions to promote efficient technologies and renewable energy sources are also being given. Electricity from combined heat and power generation with an efficiency rate of more than 70% is exempt from mineral oil and electricity taxes, while electricity from renewable sources used for on-site production is also exempt.^[7]

Germany also uses a "feed-in tariff" (FIT). Anyone generating electricity from solar photovoltaics, wind or hydro gets a guaranteed payment of four times the market rate—currently about 35 pence a unit—for 20 years.^[7] FITs have now been adopted in 19 EU countries, and 47 worldwide.^[8]

Emissions trading: cap and trade

Emissions trading has been discussed internationally—through the Kyoto Protocol—and in Australia, New Zealand, various European countries, Canada, and the United States; it has been implemented in some of these locations.

Under a cap-and-trade system, firm A can sell one of its "permits" at a higher price than the cost it would incur to reduce the emissions internally, it will sell one permit to B for, say, $5.00 – $1.00 less than the marginal cost ($6.00) for firm B to reduce its emissions internally.^[9] Project-based programs, also referred to as a credit or offset programs, earn credit for projects that reduce emissions more than is required by a pre-existing conventional regulation. These credits can then be traded to other facilities where they can be used for compliance with a conventional regulatory requirement. The decision to generate these credits usually is voluntary, but credits must be certified through an administrative process.^[10]

Credit programs can include a large variety of sectors and source types than other types of trading programs. Examples of these types of programs include offset requirements for new sources in areas that do not meet National Ambient Air Quality Standards and open market trading programs.^[10] Rate-based, also called averaging programs, is when a regulatory authority sets a constant or declining emission rate performance standard such as tons of emissions per megawatt hour. Emission sources with average emission rates below the performance standard earn credits that they can sell to other emission sources and sources with emission rates above the standard must obtain credits to cover the excess. Rate-based programs can lower emissions, but emissions can grow if activity grows.^[10]

Cap-and-trade programs have provisions that allow a covered entity to borrow allowances from the future to meet current compliance. Allowances generally have a "vintage", or grandfather clause, that defines the time period in which the allowance was created. Banking provisions permit the use of prior year allowances for compliance in a later period. This allows a compliance entity to over-comply in early periods, in anticipation of higher carbon prices in subsequent years.^[11] At the end of the compliance period, emission sources must have enough allowances to cover their emissions during the period. Sources that do not have a sufficient number of allowances to cover emissions must purchase allowances from other sources that have excess allowances from reducing emissions.^[10]

United States

Examples of cap-and-trade programs in the United States include the nationwide Acid Rain Program and the regional NOx Budget Trading Program in the Northeast. The EPA issued the Clean Air Interstate Rule (CAIR) on March 10, 2005, to build on the success of these programs and achieve considerable additional emission reductions.^[12]

European Union

In the European Union, a goal to achieve a 20 per cent reduction in emissions by 2020 is in place, but may soon be increasing to 30 per cent from 1990 levels. On April 27, 2010, Germany sold 300,000 carbon permits for approximately 15.30 euros per metric tonne. The EU hopes to lead the way in green products and energy resources by increasing the carbon price and forcing more green jobs.^[13] However, critics say that companies are purposefully increasing emissions in order to get paid to eliminate them.^[14]

On January 1, 2005, The European Union introduced the EU emissions trading system on electricity plants (EU ETS). The EU ETS sets caps for the CO₂ emissions of some 11,500 plants across the EU-25. Installations have the flexibility to increase emissions above their caps provided that they acquire emission allowances to cover emissions above, while electric plants with emissions below caps are allowed to sell unused allowances.^[15]

Denmark

The Danish CO₂ Emissions Trading System report by Sigurd Lauge Pedersen^[16] gives a background to and describes the functioning of the Danish carbon dioxide (CO₂) emissions trading system for the period 2000-2003 that was adopted by the Danish Parliament. According to this report, Denmark is another country that has committed itself to reducing the emission of CO₂ and other greenhouse gases (GHGs).Following the European Community's commitment to stabilize its GHG emissions at 1990 levels in the year 2000, Denmark committed to the EU that it would reduce GHG emissions by 5 per cent within this same period. To accomplish this, Denmark has made considerable progress in the energy area with respect to reducing CO₂ emissions through energy savings, increased use of combined heat and power (CHP) and renewable energy, as well as fuel switching and increased efficiency of the power plants. Legislation on the Danish CO₂ quotas (the CO₂ Quota Act) was passed by the Folketing in June 1999 together with a totally new Electricity Supply Act. The CO₂ Quota Act lays down a total CO₂ quota for electricity production of 23 million tonnes in 2000. This is reduced by 1 million tonnes per year, to reach a quota of 20 million tonnes in 2003. A number of energy planning exercises have ascertained that the CO₂ reductions laid down in the Act are in fact possible at moderate cost (0–30 US$/tonne).

The legal entities to receive emission allowances are the power companies. The allowances are issued per company, not per unit or per plant. The system covers all electricity producers operating in Denmark, except producers relying entirely on renewable energy. The cut-off threshold of 100,000 tonnes of CO₂ from electricity production per year still means that more than 90per cent of the total CO₂ quota for electricity production will be issued as emission allowances. On the other hand, only around eight of about 500 electricity producers will be covered by the CO₂ emission allowances regime. The emission allowances under the CO₂ Quota Act are tradable. The trading is done by the electricity producers without government interference. Whenever an emission allowance is traded, the Danish Energy Agency must be notified as to the volume of CO₂, the year(s) affected by trading and the price of allowances. Thus, the traded commodity is simply a right to emit X tonnes of CO₂ in a given year. Unused emission allowances can be banked and used in the following years. Thus the producers are not only provided with an emission allowance but also a saving limit, which is identical to the emission allowance. Banked CO₂ can also be traded. If an electricity producer exceeds the CO₂ emission allowance, taking into account traded CO₂ emission allowances and banked CO₂, they must pay a penalty to the state. The penalty is fixed at DKK 40 (about US$5) per tonne of CO₂ emitted in excess of the allowance.^[16]

The market for CO₂ trade has exploded in recent years and is worth an estimated 675 billion kroner globally.^[17] The money to be made within this industry creates a temptation to cheat. Since The Danish CO₂ Emissions Trading System report was issued, Denmark has been under investigation for CO₂ fraud. "Police and authorities in several European countries are investigating scams worth billions of kroner, which all originate in the Danish quota register. The CO₂ quotas are traded in other EU countries... Ekstra Bladet reporters have found examples of people using false addresses and companies that are in liquidation, which haven't been removed from the register".^[18] This speculated corruption highlights the downside of a cap-and-trade system but hopefully doesn't overshadow the strength of a cap-and-trade system in general.

U.S. government interventions

The Clean Air Act was signed by President Nixon in 1970, with the aim to strengthen both the U.S. economy and air quality.^[19]

"One of the first modern environmental protection laws enacted in the United States was the National Environmental Policy Act of 1969 (NEPA), which requires the government to consider the impact of its actions or policies on the environment. NEPA remains one of the most commonly used environmental laws in the nation. In addition to NEPA, there are numerous pollution-control statutes that apply to such specific environmental media as air and water. The best known of these laws are the Clean Air Act (CAA), Clean Water Act (CWA), and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) commonly referred to as Superfund. Among the many other important pollution control laws are the Resource Conservation and Recovery Act (RCRA), Toxic Substances Control Act (TSCA), Oil Pollution Prevention Act (OPP), Emergency Planning and Community Right-to-Know Act (EPCRA), and the Pollution Prevention Act (PPA)."^[20]

United States pollution control statutes tend to be numerous and diverse, and many of the environmental statutes passed by Congress are aimed at pollution prevention, they often need to be expanded and updated before their impact is fully realized. Pollution-control laws are generally too broad to be managed by existing legal bodies, so Congress must find or create an agency for each that will be able to implement the mandated mission effectively.^[20]

The United States Environmental Protection Agency (EPA) responds to all violations of pollution-control laws in one of four ways, depending on the violation. In some cases, EPA issues informal letters that advise violators to change their behavior. The next level of violation leads to a formal agency response, a legal order that requires violators to come into compliance. In other, more severe violations, the EPA initiates civil lawsuits, demands compliance, and imposes potential financial penalties. Finally, the agency may bring criminal charges against the most defiant violators, leading to large fines and prison sentences. In all cases involving court actions, the U.S. Department of Justice takes over as attorney for the agency.^[20]

During World War I, U.S government intervention mandated that cars be replaced with machinery to successfully fight the war. Today government intervention could be used to break the U.S dependence on oil by mandating U.S automakers to produce electric cars such as the Chevy Volt. Recently, Michigan Gov. Jennifer Granholm (D) said, “We need help from Congress,” namely, renewing the clean energy manufacturing tax credit and the tax incentives that make plug-ins cheaper to buy for consumers.^[21] It is possible that government mandated carbon taxes could be used to improve technology and make cars like the Volt more affordable to consumers. Unfortunately, current bills suggest carbon prices would only add a few cents to the price of gasoline, which has negligible effects, compared to what’s needed to change fuel consumption.^[21] Washington is beginning to invest in car manufacturing industry by partially provinding $6 billion in battery-related public and private investments since 2008, and the White House has taken credit for putting a down payment on the U.S. battery industry that may reduce battery prices in the coming years.^[21] Currently, opponents believe that the carbon dioxide emissions tax, that the U.S. government introduced, on new cars that is unfair on consumers and looks like a revenue-raising fiscal intervention instead of limiting harm caused to the environment.^[22] A national fuel tax means everyone, no matter what vehicle they drive, will pay the tax. The amount of tax each individual or company pays will be proportional to the emissions they generate. The more they drive, the more that they would need to pay.^[22] This tax is supported by the motor manufacturers , however stipulations confirmed by the National Treasury, state that minibuses and midibuses will receive a special exclusion from the emissions tax on cars and light commercial vehicles, which comes into effect from September 1, 2010. This exclusion is because these taxi vehicles are used for public transport, which opponents of the tax disagree with.^[22]

During George W. Bush’s 2000 campaign, he promised to commit $2 billion over 10 years to advance clean coal technology through research and development initiatives. According to Bush supporters, he fulfilled that promise in his fiscal year 2008 budget request, allocating $426 million for the Clean Coal Technology Program.^[23] During his administration, Congress passed the Energy Policy Act of 2005, funding research into carbon-capture technology to remove and bury the carbon in coal after it is burned. The coal industry received $9 billion in subsidies under the act, as part of an initiative supposedly to reduce U.S. dependence on foreign oil and reduce carbon emissions. This included $6.2 billion for new power plants, $1.1 billion in tax breaks to install pollution-control technology and another $1.1 billion to make coal a cost efficient fuel. The act also allowed redefinitions of coal processing, such as spraying on diesel or starch, to qualify them as “non-traditional,” allowing coal producers to avoid paying $1.3 billion in taxes per year.^[23]

The Waxman-Markey bill, also called the American Clean Energy and Security Act, that recently passed the House Energy and Commerce Committee a couple of years ago, mandates that CO2 reduction would dramatically increase automatically after 2020, as the price of the permits would rise to further limit consumers’ demand for CO2-intensive goods and services. This legislation requires the CO2 level in 2050 to be an amazing 83 percent less than it was in 2005, and a study by the EPA estimates that the price of the permit would rise from about $20 a ton in 2020 to more than $75 a ton in 2050.

The US Office of Management and Budget (OMB) shows that federal subsidies for coal in the United States will be reduced significantly between 2011 and 2020, provided the budget passed through Congress and reduces four coal tax preferences: Expensing of Exploration and Development Costs, Percent Depletion for Hard Mineral Fossil Fuels, Royalty Taxation, and Domestic Manufacturing Deduction for Hard Mineral Fossil Fuels.^[24] President Barack Obama's fiscal 2011 budget would cut approximately $2.3 billion in coal subsidies during the next decade, which makes coal companies and states that produce larger amounts of coal nervous.^[25]

References