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(Redirected from Carbon trading)
'Emissions trading' (or 'cap and trade') is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.[1]
In such a plan, a central authority (usually a government agency) sets a limit or ''cap'' on the amount of a pollutant that can be emitted. Companies or other groups that emit the pollutant are given ''credits'' or ''allowances'' which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their allowances must buy credits from those who pollute less than their allowances or face heavy penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus companies that can easily reduce emissions will do so and those for which it is harder will buy credits which reduces greenhouse gases at the lowest possible cost to society.
There are currently several trading systems in place with the largest being the European Union's. The carbon market makes up the bulk of these and is growing in popularity. Many businesses have welcomed emissions trading as the best way to mitigate climate change. Enforcement of the caps is a problem, but unlike traditional regulation, emissions trading markets can be easier to enforce because the government overseeing the market does not need to regulate specific practices of each pollution source. However, monitoring (or estimating) and verifying of actual emissions is still required, which can be costly. Critics doubt whether these trading schemes can work as there may be too many credits given by the government, such as in the first phase of the European Union's scheme. Once a large surplus was discovered the price for credits bottomed out and effectively collapsed, with no noticeable reduction of emissions.[2]
The overall goal of an emissions trading plan is to reduce emissions of the greenhouse gases that cause climate change. The cap is usually lowered over time - aiming towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap and trade systems, organizations which do not pollute may also buy credits. Environmental groups that purchase and retire pollution credits reduce emissions and raise the price of the remaining credits according to the law of demand. Corporations can also retire pollution credits by donating them to a nonprofit and then be eligible for a tax deduction. Allowances are accounted for in the balance sheet of the company as intangible assets, as recommended by the IAS 37 issued by IASB.
Because emissions trading uses markets to determine how to deal with the problem of pollution, it is often touted as an example of effective free market environmentalism. While the cap is usually set by a political process, individual companies are free to choose how or if they will reduce their emissions. In theory, firms will choose the least-cost way to comply with the pollution regulation, creating incentives that reduce the cost of achieving a pollution reduction goal.
Flexible mechanisms such as Clean Development Mechanism (CDM) and Joint Implementation (JI) are the methods by which the UNFCCC's Kyoto Protocol enables participants to comply with emissions objectives via the development or investment in a carbon project.
The textbook emissions trading program can be called a "cap & trade" approach in which an aggregate cap on all sources is established and these sources are then allowed to trade amongst themselves to determine which sources actually emit the total pollution load. An alternative approach with important differences is a baseline & credit program [3] In a baseline and credit program a set of polluters that are not under an aggregate cap can create credits by reducing their emissions below a baseline level of emissions. These credits can be purchased by polluters that are under a regulatory limit. Many of the criticisms of trading in general are targeted at baseline & credit programs rather than cap & trade type programs.
There has been longstanding debate on the relative merits of price versus quantity instruments to achieve emission reductions. An emission cap and permit trading system is a quantity instrument because it fixes the overall emission level (quantity) and allows the price to vary. In contrast, emission taxes are a price instrument because the price is fixed and the emission level is allowed to vary according to economic activity. One problem with the cap and trade system is that it creates uncertainty in the cost of compliance for firms as the price of a permit is not known in advance. On the other hand, a major drawback of emission taxes is that the environmental outcome (the amount of emissions) is not guaranteed. Hence the debate in academic circles.
Some economists have argued that an emission tax is the best choice of instrument for greenhouse gas abatement. The best choice depends on the sensitivity of the costs of emission reduction, compared to the sensitivity of the benefits (i.e., climate damages avoided by a reduction) when the level of emission control is varied. Because there is high uncertainty in the compliance costs of firms, some argue that the optimum choice is the price mechanism. The prices vs. quantities debate was first described in a paper by Martin Weitzman in 1974[4].
However, some scientists have warned of a threshold in atmospheric concentrations of carbon dioxide, beyond which a run-away warming effect could take place, with a large possibility of causing irreversible damages. If this is a conceivable risk then a quantity instrument could be a better choice because the quantity of emissions may be capped with a higher degree of certainty. However, this may not be true if this risk exists but cannot be attached to a known level of GHG concentration or a known emission pathway (see, for example, Certainty vs. Ambition)[5]
A third option, known as a ‘safety valve’ is a hybrid of the price and quantity instruments. The system is essentially an emission cap and tradeable permit system, but the maximum permit price is capped. Emitters have the choice of either obtaining permits in the marketplace or purchasing them from the government at a specified ‘trigger price’ (which could be adjusted over time). The system is sometimes recommended as a way of overcoming the fundamental disadvantages of both systems by allowing the flexibility to adjust the system as new information comes to light. It can be shown that by setting the trigger price high enough or the number of permits low enough, the safety valve can be used to mimic either a pure quantity or pure price mechanism. [6].
A prominent example of an emission trading system is the SO2 trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act in the USA. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions are expected to be reduced by 50% from 1980 to 2010.
Some experts argue that the "cap and trade" system of SO2 emissions reduction reduced the cost of controlling acid rain by as much as 80% versus source-by-source reduction.
In 1997, the State of Illinois adopted a trading program for volatile organic compounds in most of the Chicago area, called the Emissions Reduction Market System.[7] Beginning in 2000, over 100 major sources of pollution in 8 Illinois counties began trading pollution credits.
In 2003, New York State proposed and attained commitments from 9 Northeast states to form a cap and trade carbon dioxide emissions program designated the Regional Greenhouse Gas Initiative or RGGI. This program will officially launch on January 1, 2009, and by 2018 each state's carbon "budget" will be reduced 10% below 2009 allowances.[8]
Also in 2003, corporations began voluntarily trading greenhouse gas emission allowances on the Chicago Climate Exchange.
In 2007, the California Legislature passed Ab-32, which was signed into law by Governor, Arnold Schwarzenegger. This bill is aimed at curbing Carbon emissions. Thus far flexible mechanisms in the form of project based offsets have been established for 5 main project types. A carbon project creates offsets by showing that it has reduced carbon dioxide and equivalent gases. The project types include; manure management, forestry, building energy, SF6, and landfill gas capture.
The European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world and was created in conjunction with the Kyoto Protocol. It commenced operation in January 2005 with all 25 (now 27) member states of the European Union participating in it.[9] It contains the world's only mandatory carbon trading program. The program caps the amount of carbon dioxide that can be emitted from large installations, such as power plants and carbon intensive factories and covers almost half of the EU's Carbon Dioxide emissions.[10]
Whilst the first phase (2005 - 2007) has received much criticism due to oversupply of allowances and the distribution method of allowances (via grandfathering rather than auctioning), the European Commission have been tough on Member States' Plans for Phase II, dismissing many of them as being too loose again.[11] In addition, the first phase has established a strong carbon market. Compliance has also been high in 2006, increasing confidence in the scheme.
On the 4th of June, 2007, Prime Minister John Howard announced a new Australian Carbon Trading Scheme to be introduced by the year 2012 but has been accused by the opposition that it is "too little, too late." [12]
The New South Wales (NSW) state government has set up the NSW Greenhouse Gas Abatement Scheme to reduce emissions from the electricity sector by requiring electricity generators and large users to purchase NSW Greenhouse Abatement Certificates (NGACs) to offset a fraction of their GHG emissions. This has resulted in the rollout of free energy efficient compact fluorescent lightbulbs and other energy efficiency measures in NSW funded by the credits generated by these measures. The scheme set up by the NSW government has enabled the creation and trading of verifiable greenhouse abatement certificates. NGACs are generated and can be purchased from companies such as NECO, The Carbon Reduction Institute and Easy Being Green
The Kyoto Protocol is a 1997 international treaty that took effect in 2005 which currently bind ratifying nations to a similar system, with the UNFCCC setting caps for each nation. Under the treaty, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations. (The United States did not sign into this treaty)
The development of a carbon project that provides a reduction in Greenhouse Gas emissions is a way by which participating entities may generate tradeable carbon credits. Kyoto Protocol provides for this facet of its cap and trade program with the Clean Development Mechanism (CDM). The CDM, as well as Joint Implementation (JI) provide flexible mechanisms to aid regulated entities in their compliance with their caps.
Green tags or Renewable Energy Certificates are transferable rights for renewable energy. A renewable energy provider is issued one green tag for each 1,000 KWh of energy it produces. The energy is sold into the electrical grid, and the green tag or REC can be sold on the open market for additional profit. The credits are purchased by firms or individuals who either want or are required to generate a portion of their energy from renewable sources.
:''This section deals with carbon emissions trading between nations. For carbon trading schemes for individuals, see Personal carbon trading.''
Carbon emissions trading is emissions trading specifically for carbon dioxide (calculated in tonnes of carbon dioxide equivalent or tCO2e) and currently makes up the bulk of emissions trading. It is one of the ways countries can meet their obligations under the Kyoto Protocol to reduce carbon emissions and thereby mitigate global warming.
Carbon emissions trading has been steadily increasing in recent years. According to the World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e)[13] which was itself a 41% increase relative to 2003 (78 mtCO2e)[14].
With the creation of a market for trading carbon dioxide emissions within the Kyoto Protocol, the London financial markets has established itself as the center of the carbon market, a potentially highly lucrative business. The New York and Chicago stock markets would like a share (unlikely as long as the current US administration rejects Kyoto).[15]
23 multinational corporations have come together in the G8 Climate Change Roundtable, a business group formed at the January 2005 World Economic Forum. The group includes Ford, Toyota, British Airways and BP. On 9 June 2005 the Group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases.[16]
Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by Green NGOs.[17]
Another critical part of the bargain is enforcement.[18] Without effective enforcement, the licenses have no value. Two basic schemes exist:
In one, the regulators measure facilities, and fine or sanction those that lack the licenses for their emissions. This scheme is quite expensive to enforce, and the burden falls on the agency, which then may need to collect special taxes. Another risk is that facilities may find it far less expensive to corrupt the inspectors than purchase emissions licenses. The net effect of a poorly financed or corrupt regulatory agency is a discount on emission licenses, and greater pollution.
In another, a third party agency certified or licensed by the government, verifies that polluting facilities have licenses equal or greater than their emissions. Inspection of the certificates is performed in some automated fashion by the regulators, perhaps over the Internet, or as part of tax collection. The regulators then audit licensed facilities chosen at random to verify that certifying agencies are acting correctly. This scheme is far less expensive, placing the cost of most regulation on the private sector. The transparency of this process helps act as a safeguard against corruption.
There are critics of the schemes, mainly environmental justice NGOs and movements who see carbon trading as a proliferation of the free market into public spaces and environmental policy-making.[19] They point to failures in accounting, dubious science and destructive impacts of projects upon local peoples and environments as reasons why trading pollution rights should be avoided.[20] Instead they advocate making reductions at the source of pollution and energy policies that are justice-based and community-driven.[21] Most of the criticisms have been focused on the carbon market created through investment in Kyoto Mechanisms. Criticism of 'cap and trade' emissions trading has generally been more limited to lack of credibility in the first phase of the EU ETS.
Critics argue that emissions trading does little to solve pollution problems overall, as groups that do not pollute sell their conservation to the highest bidder. Overall reductions would need to come from a sufficient and challenging reduction of allowances available in the system. Likely this would occur over time through central regulation, though some environmental groups acted more immediately by buying credits and refusing to use or sell them. The National Allocation Plans by member governments of the European Union Emission Trading Scheme came under fire for this recently when some governments issued more carbon allowances than emissions during Phase I of the scheme. They have also been criticised for the widespread practice of grandfathering, where polluters are given carbon credits by governments, instead of being made to pay for them.[22] Nevertheless, the transfer of wealth from polluters to non-polluters provides incentives for polluting firms to change, especially if the market price for pollution credits is very high. Tight controls are necessary in order to establish a reverse commodity market like Green Tags as well. Regulatory agencies run the risk of issuing too many emission credits, diluting the effectiveness of regulation, and practically removing the cap. In this case instead of any net reduction in carbon dioxide emissions, beneficiaries of emissions trading simply do more of the polluting activity.
Many environmental activists and foundations consider Al Gore's strong advocation of carbon trading to be a denial of the imminence of climate change and a formalized failure of international policy to address the gravity of the carbon increase. Critics of carbon trading, such as Carbon Trade Watch argue that it places disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change.[23]
A mistake may also be made by giving away emission credits rather than auctioning them. Emission credits are, in effect, money and therefore should be treated as such. The giving away of emission credits may also have the negative result of turning down investment dollars that might have been spent on sustainable technologies, if the government chooses to.[24]
Economists also point out disadvantages of carbon trading schemes compared to emission taxes which they argue are a simple and economically efficient means of achieving the same objective. Possible problems with cap and trade systems include:
★ Permit prices may be unstable and therefore unpredictable
★ Cap and trade systems tend to pass the quota rent to business
★ Cap and trade systems could become the basis for international trade in the quota rent resulting in very large transfers across frontiers
★ Cap and trade systems are seen to generate more corruption than a tax system
★ The administration and legal costs of cap and trade systems are higher than with a tax
★ A cap and trade system is seen to be impractical at level of individual household emissions
The problem of unstable prices can be resolved, to some degree, by the creation of forward markets in caps. Nevertheless, it is easier to make a tax predictable than the price of a cap. The problem of passing quota rents to businesses is a political one, and can also be avoided by auctioning permits instead of giving them away, but government may be compelled to give them away in order to make the scheme politically acceptable.
The ''Financial Times'' conducted a study on cap and trade systems that found that "Carbon markets create a muddle" and "...leave much room for unverifiable manipulation".[25]
Despite the criticisms and disadvantages, emission cap and permit trading systems are seen to be more politically feasible than emission taxes and are being adopted in various jurisdictions around the world. One explanation for their attractiveness could be that the cost increases are not as directly apparent to consumers as they are with a tax. Indeed, some would argue that any policy that contains the word 'tax' is a political taboo.
★ Acid rain
★ Air pollution
★ AP 42 Compilation of Air Pollutant Emission Factors
★ Atmospheric dispersion modeling
★ Carbon credit
★ Carbon leakage
★ Carbon project
★ Coase Theorem
★ Demand Responsive Transit Exchange
★ Emission standards
★ European Union Emission Trading Scheme
★ Regional Clean Air Incentives Market (RECLAIM, an emission trading scheme in California)
★ Flexible Mechanisms
★ Green certificate
★ Green tags
★ Greenwash
★ Low-carbon economy
★ Mobile Emission Reduction Credit (MERC)
★ Personal carbon trading
1. DEFRA - Emissions Trading Schemes
2. Newsweek: The Carbon Folly - Emissions trading isn't working
3. Tietenberg, Tom and Nick Johnstone. 2004. "ExPost Evaluation of Tradeable Permits: Methodological Issues and Literature Review" in Organisation for Economic Co-Operation and Development. Tradeable Permits: Policy Evaluation, Design And Reform.
4. Weitzman, M. L., 1974. Prices vs. Quantities. The Review of Economic Studies, Vol. 41, No. 4 (Oct., 1974), pp. 477-491
5. Philibert, C., 2006. Certainty versus Ambition - Economic Efficiency in Mitigating Climate Change, International Energy Agency Working Paper Series, IEA, Paris
6. Jacoby, D.H. & Ellerman, A.D., The safety valve and climate policy, Energy Policy 32 (2004) 481–49
7. Illinois EPA - Emissions Reduction Market System
8. Memorandum of Understanding - Regional Greenhouse Gas Initiative
9. Climate Change: The European Union's Emissions Trading System (EU ETS)
10. http://www.washtimes.com/business/20060731-011601-7934r.htm (AP)
11. http://ec.europa.eu/environment/climat/2nd_phase_ep.htm
12. http://www.news.com.au/heraldsun/story/0,21985,21844556-5005961,00.html
13. http://carbonfinance.org/docs/StateoftheCarbonMarket2006.pdf
14. http://carbonfinance.org/docs/CarbonMarketStudy2005.pdf
15. http://observer.guardian.co.uk/focus/story/0,,1509761,00.html
16. http://www.weforum.org/pdf/g8_climatechange.pdf
17. http://www.defra.gov.uk/environment/climatechange/trading/eu/pdf/manifesto-uk.pdf
18. EMISSIONS TRADING IN THE KYOTO PROTOCOL - FINISHED AND UNFINISHED BUSINESS
19. http://www.carbontradewatch.org
20. http://www.thecornerhouse.org.uk/item.shtml?x=546606
21. http://www.thecornerhouse.org.uk/summary.shtml?x=544238
22. http://www.climnet.org/EUenergy/ET/NAPsReport_Summary0306.pdf
23. Carbon Trade Watch
24. http://economist.com/opinion/displaystory.cfm?story_id=E1_RVJTRQV
25. http://www.ft.com/cms/s/4b80ee18-f393-11db-9845-000b5df10621.html
★ The Carbon Folly: Policymakers have settled on 'emissions trading' as their favorite global-warming fix. But it isn't working. by Emily Flynn Vencat for Newseek, March 12, 2007
★ Emissions trading: The carbon game news@nature.com Nov. 17, 2004
★ Ministers know emissions trading is a red herring and won't work, by George Monbiot, The Guardian, December 19, 2006
★ Uhhh, explain that carbon credit deal again please - Gene Logsdon
★ Carbon trading's real colours by Clare Davidson, BBC News, May 16, 2006
★ US EPA's Acid Rain Program
★ Australasian Emissions Trading Forum
★ ClimateTop50 Emissions Trading Websites
★ Illinois' Emissions Reduction Market System
★ Texas' Emissions Banking and Trading program
★ International Emissions Trading Association
★ Carbon Trading: A Critical Conversation on Climate Change, Power and Privatisation edited by Larry Lohmann, the Corner House
★ Obscenity of Carbon Trading by Kevin Smith, Carbon Trade Watch, BBC News, Science and Nature
★ Point Carbon - independent carbon market analysis provider
★ International Emissions Trading Association
★ Carbon Trading White Paper
★ http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm The Stern Review on the economics of climate change] - Chapters 14 and 15 have extensive discussions on emission trading schemes and carbon taxes
★ Carry On Polluting - Comment and analysis piece by Larry Lohmann, published in New Scientist magazine on the 2nd December 2006
★ Ways Forward - Chapter 5 of the book, "Carbon Trading: A Critical Conversation on Climate Change, Privatisation and Power", published October 2006 by Dag Hammarskjöld Foundation, Durban Group for Climate Justice and The Corner House.
★ The New Carbon Cycle Blog dedicated to using carbon markets to harmonize human activities and economies with natural climate systems and cycles.
★ EU shows carbon trading is not cutting emissions
'Emissions trading' (or 'cap and trade') is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.[1]
In such a plan, a central authority (usually a government agency) sets a limit or ''cap'' on the amount of a pollutant that can be emitted. Companies or other groups that emit the pollutant are given ''credits'' or ''allowances'' which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their allowances must buy credits from those who pollute less than their allowances or face heavy penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus companies that can easily reduce emissions will do so and those for which it is harder will buy credits which reduces greenhouse gases at the lowest possible cost to society.
There are currently several trading systems in place with the largest being the European Union's. The carbon market makes up the bulk of these and is growing in popularity. Many businesses have welcomed emissions trading as the best way to mitigate climate change. Enforcement of the caps is a problem, but unlike traditional regulation, emissions trading markets can be easier to enforce because the government overseeing the market does not need to regulate specific practices of each pollution source. However, monitoring (or estimating) and verifying of actual emissions is still required, which can be costly. Critics doubt whether these trading schemes can work as there may be too many credits given by the government, such as in the first phase of the European Union's scheme. Once a large surplus was discovered the price for credits bottomed out and effectively collapsed, with no noticeable reduction of emissions.[2]
Overview
The overall goal of an emissions trading plan is to reduce emissions of the greenhouse gases that cause climate change. The cap is usually lowered over time - aiming towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap and trade systems, organizations which do not pollute may also buy credits. Environmental groups that purchase and retire pollution credits reduce emissions and raise the price of the remaining credits according to the law of demand. Corporations can also retire pollution credits by donating them to a nonprofit and then be eligible for a tax deduction. Allowances are accounted for in the balance sheet of the company as intangible assets, as recommended by the IAS 37 issued by IASB.
Because emissions trading uses markets to determine how to deal with the problem of pollution, it is often touted as an example of effective free market environmentalism. While the cap is usually set by a political process, individual companies are free to choose how or if they will reduce their emissions. In theory, firms will choose the least-cost way to comply with the pollution regulation, creating incentives that reduce the cost of achieving a pollution reduction goal.
Flexible mechanisms such as Clean Development Mechanism (CDM) and Joint Implementation (JI) are the methods by which the UNFCCC's Kyoto Protocol enables participants to comply with emissions objectives via the development or investment in a carbon project.
Cap & trade versus baseline & credit
The textbook emissions trading program can be called a "cap & trade" approach in which an aggregate cap on all sources is established and these sources are then allowed to trade amongst themselves to determine which sources actually emit the total pollution load. An alternative approach with important differences is a baseline & credit program [3] In a baseline and credit program a set of polluters that are not under an aggregate cap can create credits by reducing their emissions below a baseline level of emissions. These credits can be purchased by polluters that are under a regulatory limit. Many of the criticisms of trading in general are targeted at baseline & credit programs rather than cap & trade type programs.
Prices versus quantities and the 'safety valve'
There has been longstanding debate on the relative merits of price versus quantity instruments to achieve emission reductions. An emission cap and permit trading system is a quantity instrument because it fixes the overall emission level (quantity) and allows the price to vary. In contrast, emission taxes are a price instrument because the price is fixed and the emission level is allowed to vary according to economic activity. One problem with the cap and trade system is that it creates uncertainty in the cost of compliance for firms as the price of a permit is not known in advance. On the other hand, a major drawback of emission taxes is that the environmental outcome (the amount of emissions) is not guaranteed. Hence the debate in academic circles.
Some economists have argued that an emission tax is the best choice of instrument for greenhouse gas abatement. The best choice depends on the sensitivity of the costs of emission reduction, compared to the sensitivity of the benefits (i.e., climate damages avoided by a reduction) when the level of emission control is varied. Because there is high uncertainty in the compliance costs of firms, some argue that the optimum choice is the price mechanism. The prices vs. quantities debate was first described in a paper by Martin Weitzman in 1974[4].
However, some scientists have warned of a threshold in atmospheric concentrations of carbon dioxide, beyond which a run-away warming effect could take place, with a large possibility of causing irreversible damages. If this is a conceivable risk then a quantity instrument could be a better choice because the quantity of emissions may be capped with a higher degree of certainty. However, this may not be true if this risk exists but cannot be attached to a known level of GHG concentration or a known emission pathway (see, for example, Certainty vs. Ambition)[5]
A third option, known as a ‘safety valve’ is a hybrid of the price and quantity instruments. The system is essentially an emission cap and tradeable permit system, but the maximum permit price is capped. Emitters have the choice of either obtaining permits in the marketplace or purchasing them from the government at a specified ‘trigger price’ (which could be adjusted over time). The system is sometimes recommended as a way of overcoming the fundamental disadvantages of both systems by allowing the flexibility to adjust the system as new information comes to light. It can be shown that by setting the trigger price high enough or the number of permits low enough, the safety valve can be used to mimic either a pure quantity or pure price mechanism. [6].
Major trading systems
United States
A prominent example of an emission trading system is the SO2 trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act in the USA. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions are expected to be reduced by 50% from 1980 to 2010.
Some experts argue that the "cap and trade" system of SO2 emissions reduction reduced the cost of controlling acid rain by as much as 80% versus source-by-source reduction.
In 1997, the State of Illinois adopted a trading program for volatile organic compounds in most of the Chicago area, called the Emissions Reduction Market System.[7] Beginning in 2000, over 100 major sources of pollution in 8 Illinois counties began trading pollution credits.
In 2003, New York State proposed and attained commitments from 9 Northeast states to form a cap and trade carbon dioxide emissions program designated the Regional Greenhouse Gas Initiative or RGGI. This program will officially launch on January 1, 2009, and by 2018 each state's carbon "budget" will be reduced 10% below 2009 allowances.[8]
Also in 2003, corporations began voluntarily trading greenhouse gas emission allowances on the Chicago Climate Exchange.
In 2007, the California Legislature passed Ab-32, which was signed into law by Governor, Arnold Schwarzenegger. This bill is aimed at curbing Carbon emissions. Thus far flexible mechanisms in the form of project based offsets have been established for 5 main project types. A carbon project creates offsets by showing that it has reduced carbon dioxide and equivalent gases. The project types include; manure management, forestry, building energy, SF6, and landfill gas capture.
European Union
The European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world and was created in conjunction with the Kyoto Protocol. It commenced operation in January 2005 with all 25 (now 27) member states of the European Union participating in it.[9] It contains the world's only mandatory carbon trading program. The program caps the amount of carbon dioxide that can be emitted from large installations, such as power plants and carbon intensive factories and covers almost half of the EU's Carbon Dioxide emissions.[10]
Whilst the first phase (2005 - 2007) has received much criticism due to oversupply of allowances and the distribution method of allowances (via grandfathering rather than auctioning), the European Commission have been tough on Member States' Plans for Phase II, dismissing many of them as being too loose again.[11] In addition, the first phase has established a strong carbon market. Compliance has also been high in 2006, increasing confidence in the scheme.
Australia
On the 4th of June, 2007, Prime Minister John Howard announced a new Australian Carbon Trading Scheme to be introduced by the year 2012 but has been accused by the opposition that it is "too little, too late." [12]
The New South Wales (NSW) state government has set up the NSW Greenhouse Gas Abatement Scheme to reduce emissions from the electricity sector by requiring electricity generators and large users to purchase NSW Greenhouse Abatement Certificates (NGACs) to offset a fraction of their GHG emissions. This has resulted in the rollout of free energy efficient compact fluorescent lightbulbs and other energy efficiency measures in NSW funded by the credits generated by these measures. The scheme set up by the NSW government has enabled the creation and trading of verifiable greenhouse abatement certificates. NGACs are generated and can be purchased from companies such as NECO, The Carbon Reduction Institute and Easy Being Green
Kyoto Protocol
The Kyoto Protocol is a 1997 international treaty that took effect in 2005 which currently bind ratifying nations to a similar system, with the UNFCCC setting caps for each nation. Under the treaty, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations. (The United States did not sign into this treaty)
The development of a carbon project that provides a reduction in Greenhouse Gas emissions is a way by which participating entities may generate tradeable carbon credits. Kyoto Protocol provides for this facet of its cap and trade program with the Clean Development Mechanism (CDM). The CDM, as well as Joint Implementation (JI) provide flexible mechanisms to aid regulated entities in their compliance with their caps.
Green tags
Green tags or Renewable Energy Certificates are transferable rights for renewable energy. A renewable energy provider is issued one green tag for each 1,000 KWh of energy it produces. The energy is sold into the electrical grid, and the green tag or REC can be sold on the open market for additional profit. The credits are purchased by firms or individuals who either want or are required to generate a portion of their energy from renewable sources.
The carbon market
:''This section deals with carbon emissions trading between nations. For carbon trading schemes for individuals, see Personal carbon trading.''
Carbon emissions trading is emissions trading specifically for carbon dioxide (calculated in tonnes of carbon dioxide equivalent or tCO2e) and currently makes up the bulk of emissions trading. It is one of the ways countries can meet their obligations under the Kyoto Protocol to reduce carbon emissions and thereby mitigate global warming.
Market trend
Carbon emissions trading has been steadily increasing in recent years. According to the World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e)[13] which was itself a 41% increase relative to 2003 (78 mtCO2e)[14].
Business reaction
With the creation of a market for trading carbon dioxide emissions within the Kyoto Protocol, the London financial markets has established itself as the center of the carbon market, a potentially highly lucrative business. The New York and Chicago stock markets would like a share (unlikely as long as the current US administration rejects Kyoto).[15]
23 multinational corporations have come together in the G8 Climate Change Roundtable, a business group formed at the January 2005 World Economic Forum. The group includes Ford, Toyota, British Airways and BP. On 9 June 2005 the Group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases.[16]
Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by Green NGOs.[17]
Enforcement
Another critical part of the bargain is enforcement.[18] Without effective enforcement, the licenses have no value. Two basic schemes exist:
In one, the regulators measure facilities, and fine or sanction those that lack the licenses for their emissions. This scheme is quite expensive to enforce, and the burden falls on the agency, which then may need to collect special taxes. Another risk is that facilities may find it far less expensive to corrupt the inspectors than purchase emissions licenses. The net effect of a poorly financed or corrupt regulatory agency is a discount on emission licenses, and greater pollution.
In another, a third party agency certified or licensed by the government, verifies that polluting facilities have licenses equal or greater than their emissions. Inspection of the certificates is performed in some automated fashion by the regulators, perhaps over the Internet, or as part of tax collection. The regulators then audit licensed facilities chosen at random to verify that certifying agencies are acting correctly. This scheme is far less expensive, placing the cost of most regulation on the private sector. The transparency of this process helps act as a safeguard against corruption.
Criticism
There are critics of the schemes, mainly environmental justice NGOs and movements who see carbon trading as a proliferation of the free market into public spaces and environmental policy-making.[19] They point to failures in accounting, dubious science and destructive impacts of projects upon local peoples and environments as reasons why trading pollution rights should be avoided.[20] Instead they advocate making reductions at the source of pollution and energy policies that are justice-based and community-driven.[21] Most of the criticisms have been focused on the carbon market created through investment in Kyoto Mechanisms. Criticism of 'cap and trade' emissions trading has generally been more limited to lack of credibility in the first phase of the EU ETS.
Critics argue that emissions trading does little to solve pollution problems overall, as groups that do not pollute sell their conservation to the highest bidder. Overall reductions would need to come from a sufficient and challenging reduction of allowances available in the system. Likely this would occur over time through central regulation, though some environmental groups acted more immediately by buying credits and refusing to use or sell them. The National Allocation Plans by member governments of the European Union Emission Trading Scheme came under fire for this recently when some governments issued more carbon allowances than emissions during Phase I of the scheme. They have also been criticised for the widespread practice of grandfathering, where polluters are given carbon credits by governments, instead of being made to pay for them.[22] Nevertheless, the transfer of wealth from polluters to non-polluters provides incentives for polluting firms to change, especially if the market price for pollution credits is very high. Tight controls are necessary in order to establish a reverse commodity market like Green Tags as well. Regulatory agencies run the risk of issuing too many emission credits, diluting the effectiveness of regulation, and practically removing the cap. In this case instead of any net reduction in carbon dioxide emissions, beneficiaries of emissions trading simply do more of the polluting activity.
Many environmental activists and foundations consider Al Gore's strong advocation of carbon trading to be a denial of the imminence of climate change and a formalized failure of international policy to address the gravity of the carbon increase. Critics of carbon trading, such as Carbon Trade Watch argue that it places disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change.[23]
A mistake may also be made by giving away emission credits rather than auctioning them. Emission credits are, in effect, money and therefore should be treated as such. The giving away of emission credits may also have the negative result of turning down investment dollars that might have been spent on sustainable technologies, if the government chooses to.[24]
Economists also point out disadvantages of carbon trading schemes compared to emission taxes which they argue are a simple and economically efficient means of achieving the same objective. Possible problems with cap and trade systems include:
★ Permit prices may be unstable and therefore unpredictable
★ Cap and trade systems tend to pass the quota rent to business
★ Cap and trade systems could become the basis for international trade in the quota rent resulting in very large transfers across frontiers
★ Cap and trade systems are seen to generate more corruption than a tax system
★ The administration and legal costs of cap and trade systems are higher than with a tax
★ A cap and trade system is seen to be impractical at level of individual household emissions
The problem of unstable prices can be resolved, to some degree, by the creation of forward markets in caps. Nevertheless, it is easier to make a tax predictable than the price of a cap. The problem of passing quota rents to businesses is a political one, and can also be avoided by auctioning permits instead of giving them away, but government may be compelled to give them away in order to make the scheme politically acceptable.
The ''Financial Times'' conducted a study on cap and trade systems that found that "Carbon markets create a muddle" and "...leave much room for unverifiable manipulation".[25]
Despite the criticisms and disadvantages, emission cap and permit trading systems are seen to be more politically feasible than emission taxes and are being adopted in various jurisdictions around the world. One explanation for their attractiveness could be that the cost increases are not as directly apparent to consumers as they are with a tax. Indeed, some would argue that any policy that contains the word 'tax' is a political taboo.
See also
★ Acid rain
★ Air pollution
★ AP 42 Compilation of Air Pollutant Emission Factors
★ Atmospheric dispersion modeling
★ Carbon credit
★ Carbon leakage
★ Carbon project
★ Coase Theorem
★ Demand Responsive Transit Exchange
★ Emission standards
★ European Union Emission Trading Scheme
★ Regional Clean Air Incentives Market (RECLAIM, an emission trading scheme in California)
★ Flexible Mechanisms
★ Green certificate
★ Green tags
★ Greenwash
★ Low-carbon economy
★ Mobile Emission Reduction Credit (MERC)
★ Personal carbon trading
Notes
1. DEFRA - Emissions Trading Schemes
2. Newsweek: The Carbon Folly - Emissions trading isn't working
3. Tietenberg, Tom and Nick Johnstone. 2004. "ExPost Evaluation of Tradeable Permits: Methodological Issues and Literature Review" in Organisation for Economic Co-Operation and Development. Tradeable Permits: Policy Evaluation, Design And Reform.
4. Weitzman, M. L., 1974. Prices vs. Quantities. The Review of Economic Studies, Vol. 41, No. 4 (Oct., 1974), pp. 477-491
5. Philibert, C., 2006. Certainty versus Ambition - Economic Efficiency in Mitigating Climate Change, International Energy Agency Working Paper Series, IEA, Paris
6. Jacoby, D.H. & Ellerman, A.D., The safety valve and climate policy, Energy Policy 32 (2004) 481–49
7. Illinois EPA - Emissions Reduction Market System
8. Memorandum of Understanding - Regional Greenhouse Gas Initiative
9. Climate Change: The European Union's Emissions Trading System (EU ETS)
10. http://www.washtimes.com/business/20060731-011601-7934r.htm (AP)
11. http://ec.europa.eu/environment/climat/2nd_phase_ep.htm
12. http://www.news.com.au/heraldsun/story/0,21985,21844556-5005961,00.html
13. http://carbonfinance.org/docs/StateoftheCarbonMarket2006.pdf
14. http://carbonfinance.org/docs/CarbonMarketStudy2005.pdf
15. http://observer.guardian.co.uk/focus/story/0,,1509761,00.html
16. http://www.weforum.org/pdf/g8_climatechange.pdf
17. http://www.defra.gov.uk/environment/climatechange/trading/eu/pdf/manifesto-uk.pdf
18. EMISSIONS TRADING IN THE KYOTO PROTOCOL - FINISHED AND UNFINISHED BUSINESS
19. http://www.carbontradewatch.org
20. http://www.thecornerhouse.org.uk/item.shtml?x=546606
21. http://www.thecornerhouse.org.uk/summary.shtml?x=544238
22. http://www.climnet.org/EUenergy/ET/NAPsReport_Summary0306.pdf
23. Carbon Trade Watch
24. http://economist.com/opinion/displaystory.cfm?story_id=E1_RVJTRQV
25. http://www.ft.com/cms/s/4b80ee18-f393-11db-9845-000b5df10621.html
External links
General trading
★ The Carbon Folly: Policymakers have settled on 'emissions trading' as their favorite global-warming fix. But it isn't working. by Emily Flynn Vencat for Newseek, March 12, 2007
★ Emissions trading: The carbon game news@nature.com Nov. 17, 2004
★ Ministers know emissions trading is a red herring and won't work, by George Monbiot, The Guardian, December 19, 2006
★ Uhhh, explain that carbon credit deal again please - Gene Logsdon
★ Carbon trading's real colours by Clare Davidson, BBC News, May 16, 2006
★ US EPA's Acid Rain Program
★ Australasian Emissions Trading Forum
★ ClimateTop50 Emissions Trading Websites
★ Illinois' Emissions Reduction Market System
★ Texas' Emissions Banking and Trading program
★ International Emissions Trading Association
★ Carbon Trading: A Critical Conversation on Climate Change, Power and Privatisation edited by Larry Lohmann, the Corner House
★ Obscenity of Carbon Trading by Kevin Smith, Carbon Trade Watch, BBC News, Science and Nature
Carbon trading
★ Point Carbon - independent carbon market analysis provider
★ International Emissions Trading Association
★ Carbon Trading White Paper
★ http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm The Stern Review on the economics of climate change] - Chapters 14 and 15 have extensive discussions on emission trading schemes and carbon taxes
★ Carry On Polluting - Comment and analysis piece by Larry Lohmann, published in New Scientist magazine on the 2nd December 2006
★ Ways Forward - Chapter 5 of the book, "Carbon Trading: A Critical Conversation on Climate Change, Privatisation and Power", published October 2006 by Dag Hammarskjöld Foundation, Durban Group for Climate Justice and The Corner House.
★ The New Carbon Cycle Blog dedicated to using carbon markets to harmonize human activities and economies with natural climate systems and cycles.
★ EU shows carbon trading is not cutting emissions
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