Almost a year has passed since the COP15 in Copenhagen. An earlier note by the author highlights the aftermath of the Copenhagen Accord.
The Copenhagen Accord closed with a list of salient points to be observed but are not legally binding on the signatories. The next COP 16 is taking place in Cancun, Mexico from Nov 29 to Dec 10 2010. Over the past year, much has changed in the climate policies taking shape in the various countries.
Firstly, instead of a multilateral binding emissions cap on the countries, there have been more national level programs to reduce emissions. The cap-and-trade program which would have seen emissions targets in place for the various countries appears to be dead. Instead, with rising social awareness a carbon tax regime appears to be gaining popularity among many nations. Among countries which have implemented the carbon tax are India in Jul 2010 and South Africa in Sep 2010. Carbon taxes are not new and have been in place in several European countries like Switzerland, Denmark and Finland in one form or another. They have also been in debate recently in countries like Singapore, Taiwan and more importantly China for implementation starting from 2012. Being unpopular as they are, they are likely to face political pressure for passing into legislation. Any form of tax will likely see an equitable distribution to other forms of rebates as what have happened in several European countries in the past.
See the author’s note on hybrid of taxes and a state cap-and-trade program. https://erictham.wordpress.com/2010/01/23/a-carbon-state-taxes-and-a-nations-cap-and-trade-hybrid/
On a national level, countries have also invested heavily in R&D and pilot plants on renewable technologies. Notably China has poured billions into solar power, wind and nuclear (if it qualifies as renewable energy), and will emerge as the leading nation on such technologies.
The mid term elections victory by the Republicans in the USA has also put a damper on multilateral agreement on emissions targets. The Republicans have been moving backwards on pledges on emissions targets and have even cast doubts on the scientific bases of global warming. With a lack of impetus from the largest emitter, it is unlikely that the COP16 will see any binding agreement among the nations on emission targets. Whilst carbon taxes have been studied by economists to be more efficient and distributional in its effects to reduce emissions, it lacks a volume target which the cap-and-trade program offers. Further it lacks a carrot-and-stick discipline amongst nations which only a volume target can provide.
Looking ahead, the COP16 is more likely to see piecemeal agreements in place. These may include technology transfer to poorer countries, financial aid to countries for reforestation and forestalling deforestation, and a central body for carbon monitoring and measuring. The highly successful clean development mechanism (CDM) over the past few years is likely to decline in importance over the next two years. This is partly as the Kyoto Protocol expires in 2012 for the European countries without a new deal in place. The main recipient of the deals, China has also seen a saturation of deals over the past few years.
Many climate change bills and policies have arisen worldwide for climate mitigation and adaptation. These bills are still at the stage of being passed as legislation, with the most established being the European Emissions Trading Scheme. The development of these bills is important as the progress of multi-lateral global arrangements very often hinge on the outcome of national legislations. The COP15 in Copenhagen in Dec ’09 did not legally bind nations to reduction targets, and the Mexico COP16 will be important to resolve this.
A review of these bills shows the popularity of the cap-and-trade scheme. Carbon tax which in the opinion of most economists as being the most effective in climate change mitigation has not been proposed (although Japan has made a cursory mention of it). France, the only country that had previously proposed a carbon tax, has dropped it due to political opposition and being disadvantaged as the only country in EU to possibly implement it.
Most of the emissions trading scheme adopted by countries differ in slight aspects. Some adopt a fixed cap in emissions or cap on emissions intensity. Others adopt trading inter-firm only and limited international offsets. Countries adopt varying degrees of auctioning (and timeframe) for the emission allowances and exemptions for certain industries to prevent carbon leakages and maintain national competitiveness. All countries (including developing countries) mandate to have a greater use of renewable fuels. Below is an update of the climate bills worldwide, and their main propositions.
In the USA, the two main legislations are the Kerry-Boxer Bill Clean (Energy Jobs and American Power Act EJAP) and the Waxman-McKay Bill (Clean Energy and Security Bill CESB). The Waxman-McKay Bill was narrowly passed in Congress in Jun ’09. It proposes a 17% cut in emissions relative to the 2005 level, while the Kerry Boxer Bill proposes a 20% cut in emissions. The steeper cuts by the EJAP however has exempted emission from new sources like LNG industries, coal mines and landfills from the cap. At the Copenhagen COP15 last year, President Obama actually proposed a 17% cut in emissions. Both bills are similar and endorse an emissions trading scheme and will be reconciled in the House, before being signed into law. Other features of the bills are:
- Mandates electric utilities to meet 20% of electricity demand by 2020 through renewable sources and energy efficiency
- Auctions 15% of the emissions allowance, with the rest being given free to the industries. The auction revenue will help in deficit reduction and be spent on R&D for renewables technology and carbon capture and storage.
- Allows for the Environmental Protection Agency (EPA) to regulate carbon dioxide as a pollutant, effectively giving it more powers to regulate it.
- New rules to encourage development of nuclear fuel, LNG and advanced biofuels.
- Floor of $10/t of CO2 rising each year and ceiling of $28/t.
The European emissions trading scheme (ETS link) is a cap-and-trade scheme that started originally in two phases (2001-2005) and (2006-2012) in response to the Kyoto Protocol. The latter phase saw an expansion of members from EU12 to EU27, with the inclusion of the East European states. The period 1990-2007 saw a reduction of 9.3% in emissions level.
There is presently no international accord to replace the Kyoto Protocol, when it expires in 2012. The EU has however committed to reducing 20-30% of its emissions by 2020 relative to 2005, pursuant to similar reducing measures undertaken by other OECD countries.
In the new EU ETS, emission allowances will be auctioned instead of being freely given to most sectors (aviation, power generation, certain industries) in the earlier scheme. The amount of emissions allowances auctioned will increase progressively from 2013, with the auction revenue going to research & development, and offset schemes in the developing countries. However, to combat leakages and maintain competitiveness, certain industries like steel and cement will still be allocated free emissions allowances.
The ETS scheme covers only 40% of emissions, with transport, waste and agricultural industries not included. These sectors are instead mandated to reduce emissions under National Allocation Plans (NAPs) according to their level of development from the highest reduction (Luxembourg) to an increase (in Belarus). The plan is by 2020 to have 20% of transport fuels met by renewables. Existing schemes for the CDM will also be changed to be based by sectors instead of by project basis.
Australian carbon pollution reduction scheme (CPRS)
The CPRS (link) scheme proposes a 5-25% reduction in carbon dioxide emissions by 2020 of 2005 levels, with the actual level of reduction depending on corresponding actions by developed countries. The bill was debated in Parliament in May 2009, but was rejected in Nov ’09. A revised version of it is to be re-voted in May ’10. The bill plans for a cap-and-trade scheme by 2012, with an initial fixed price of A$10/t of CO2 in 2011, and full trading after this.
The revised bill also raises the level of industry assistance for emissions trade exposed industries. These industries predominantly include the coal, mining and other energy-intensive industries. A buffer of emissions level has increased to 10% for 60% assistance and 5% for 90% assistance, essentially allowing more leeway for unplanned emissions. Agricultural emissions have also been exempted from the cap-and-trade. A Renewable Energy Target (RET) has also mandated that 20% of electricity to be generated from renewables by 2020.
Other OECD countries that have proposed climate mitigation measures include Japan, Canada and New Zealand. Japan has endorsed a cap-and-trade scheme with a target reduction of 25% from 1990 levels by 2020. The cap-and-trade scheme does not impose a flat cap on emissions but instead an emissions ceiling on some polluters and a per unit production ceiling on others. Details remain to be worked out. (link)
Canada is also pursuing domestic emissions trading (link), which will subsequently be linked to the US. It has proposed a 17% emissions reduction by 2020 of 2005 levels, pursuant to the US doing the same. Its emissions trading scheme is only done between firms, with each firm having to meet its intensity targets. Deviations (+/-) from these targets will allow credit/ debit on its trading account. Canada is also targeting international emissions offset schemes but has limited these offsets to 10% of their emissions target. Companies are also allowed to contribute to a carbon fund at C$15/t to offset their emissions. This amount is fixed at 2010, and rising each year thereafter. This fund is used in the R&D of renewable technologies and CCS technologies.
New Zealand has proposed a 10-20% reduction in emissions by 2020 of 1990 levels. (link) It has adopted a trading scheme starting from 1 July 2010 for transport, energy and industrial sectors. There is a transitional phase until Jan 2013 with a 50% obligation only and a C$25/t of CO2 fixed price option.
Developing countries fall under the non Annex I category in the Copenhagen and emissions targets reductions are voluntary. However, emissions growth in developing countries (especially China, Brazil and India) is high and instrumental to most increases in global emissions.
Brazil (link) for example has committed to reduce deforestation in the Amazon, and increase further use of renewable fuels, including bioethanol and hydropower. This reduces an expected 36% of its emissions in 2020 relative.
China (link) has committed to 40-45% reduction of its emissions intensity of GDP, increases its share of non fossil fuel usage by 15% by 2020, and increases forest coverage by 40 million hectares. India just stated to reduce its emissions intensity by 20-25% by 2020 of its 2005 levels.
Carbon taxes and a cap-and-trade scheme have been cited as measures to curb greenhouse gas emissions. The carbon tax is a price measure which affixes a price of carbon into goods and services, while the cap-and-trade scheme is a quantity measure limiting the amount of emissions. In this scheme, producers emitting carbon are given a cap quota for the total amount of carbon emissions in a certain phase period. If this cap is exceeded, they have to buy from the open market emission rights. On the other hand, if their total emissions are below this cap, they are able to sell in the open market the balance in the open market. The existing European Trading Scheme (ETS) is an example of a cap-and-trade scheme. The first phase was from 2005 Jan -2007 Dec while the second is from 2008 Jan -2012 Dec. Additional features in the scheme like banking and borrowing allow them to carry over or bring forward the emissions rights from the next phase.
Economists have generally agreed that carbon tax is a more feasible and economical way to regulate the greenhouse emissions. Firstly a tax affixes a fixed price to carbon, whilst in a cap-and-trade scheme, prices are more volatile. Reduced price volatility allows for more decisive actions into clean technology investments. Quoting Caterpillar’s CEO in a Bloomberg article: “We are calling for a definitive price on carbon that will help drive the choice of individuals to reduce the amount of carbon consumed in this country, and also creates a revenue source to help fund incentives to insulate homes, to improve the energy grid,”
Nowhere is price volatility more undesirably seen in October 2009, where fraudulent trades overstated volume by 40% in the Europe ETS. This inflated carbon prices, and when the trades were discovered, the prices fell 22% overnight. In this fraud, carousel traders bought permits in countries other than the EU countries they were based in without VAT. These permits in turn were sold in their EU countries, and VAT collected for their benefit.
Some may point out cap-and-trade does a better job of price discovery than a fixed tax. It also draws in much-needed capital from investment banks. This is a fallacy. Thus far, 4 years of trading on the ETS has not resulted in reduced carbon emissions. Further, climate science has not matured enough to determine the level of carbon dioxide concentration correlating with temperature changes. It will be easier to determine the carbon taxes rate than to let the market fluctuate and set a price for carbon.
A carbon tax is also easier to implement administratively than cap-and-trade since a tax system is already existent in all countries. Some argue that a cap-and-trade scheme allows for integration amongst different countries. A global market will allow for greater efficiency in taking advantage of lower abatement costs in developing countries. This is however subject to corruption and fraud, especially in developing countries, where monitoring can be difficult. Even domestically in the US, the Waxman –Markey Bill will give away about 85% of all allowances to emit gases, which is not much of a disincentive. Companies which produce LNG are also excluded from these allowances, presumably as they are mostly in Republican states, and the Bill is pushed forward by the Democrats.
A hybrid system that combines taxes and cap-and-trade appears apt. At the level of the states, a tax system is used to internalises the price of carbon into goods and services. On an international level or a more marco level, countries are allowed to trade their permits in intermediate phases under a ratified accord. For example, suppose they commit to 30% reduction of 2005 levels by 2020, and overshot their monthly intermediate targets, they may buy permits from countries that have excess permits. This retains the benefits of global market integration, and also removes the risks of excess volatility as the trading players are sovereign nations that do not trade that frequently. It further incentivises nations to adhere to their commitment targets, with a stick-and-carrot approach.