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As governments set about attempting to avert climate change, there is, according to World Bank Group President Jim Yong Kim a "growing sense of inevitability" about putting a price on carbon, either in the form of taxes, or through market-based mechanisms. This feature looks at some of the carbon pricing schemes already in place, as well as recent developments in the area of carbon taxation.
Why Carbon Pricing?
A watershed moment in carbon taxation seemed to occur ahead of last December's Paris climate talks, when the newly-formed Carbon Pricing Panel called on countries to put a price on carbon emissions. The panel includes German Chancellor Angela Merkel, Chilean President Michelle Bachelet, French President François Hollande, Ethiopian Prime Minister Hailemariam Desalegn, Philippines President Benigno Aquino III, Mexican President Enrique Peña Nieto, Governor Jerry Brown of California, and Mayor Eduardo Paes of Rio de Janeiro. The Panel was convened by World Bank Group President Jim Yong Kim and International Monetary Fund (IMF) Managing Director Christine Lagarde.
Largade said: "Finance ministers need to think about reforms to fiscal systems in order to raise more revenue from taxes on carbon-intensive fuels and less revenue from other taxes that are detrimental to economic performance, such as taxes on labor and capital. They need to evaluate the carbon tax rates that will help them meet their mitigation pledges for Paris and accompanying measures to help low-income households vulnerable to higher energy prices."
Then, in what the World Bank described as "a remarkable show of unity" on the first day the summit itself, business leaders joined political leaders in also calling for governments to put a price on carbon. "The goal is to gradually set a sufficiently high carbon price around the world to encourage better behavior," said Hollande. "Very quickly, a company consuming less CO2 should gain a decisive competitive advantage."
Lagarde added that given the slump in energy prices, "there has never been a better time to transition to smart, credible and effective carbon pricing. Policy makers need to price it right, tax it smart, and do it now."
The idea of discouraging the release of carbon emissions into the atmosphere by taxing such activities is nothing new. In fact, there are already dozens of carbon pricing schemes in place around the world, which include about 40 nations and more than 23 cities, states, and regions. These cover around 12 percent of global carbon emissions. Some of these are summarized in the following sections.
European Union Emissions Trading Scheme (ETS)
Launched in 2005, the ETS is said to be the lynchpin of the EU's policy to combat climate change.
Covering 12,000 industrial installations in 31 countries (including the EU and EEA/EFTA member states) and aviation emissions, the ETS works on a cap and trade principle. A cap is set on the total amount of emissions by the factories, power plants and other installations in the system. The scheme covers about 45 percent of total EU carbon emissions.
Within the cap, companies receive or buy emission allowances, which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects around the world.
The limit on the total number of allowances available is supposed to ensure that they have a value. After each year a company must surrender enough allowances to cover all its emissions. Otherwise heavy fines are imposed. If it reduces its emissions, a company can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.
The China Beijing Environment Exchange (CBEEX) was launched in November 2013 on a trial basis. Under the scheme, seven regional trading venues are in operation, including five cities (Beijing, Tianjin, Shanghai, Chongqing, and Shenzhen), and two provinces (Hubei and Guangdong).
In the pilot scheme, a cap is set on the total amount of GHG emissions in the trading venue, and then the limit is allocated to companies involved in the scheme in the form of carbon credits, based on historical data. Firms receive the initial credits for free, but those with excessive emissions will then have to buy credits from others.
China plans to have a national ETS in operation from 2017, when it would then have the biggest carbon market in the world.
However, At the China Development Forum in Beijing on March 20, 2016, Finance Minister Lou Jiwei confirmed that China will not set up a separate carbon tax.
While there is no national carbon pricing scheme in Canada, the province of British Columbia was one of the carbon tax pioneers, and more provinces looks set to join the carbon pricing club in the near future.
British Columbia's carbon tax was introduced in July 2008. This tax is imposed on the purchase and use of fuels in the province at a rate of CAD30 (USD23.20) per tonne (CAD25 prior to July 1, 2011). However, since different fuels generate different amounts of carbon when burned, CAD30 per tonne of CO2 equivalent must be translated into tax rates for each specific type of fuel. For example, effective July 1, 2012 the rate for gasoline is CAD0.667 cents per liter, while the tax rate for diesel is slightly higher at 0.767 cents per liter due to the higher carbon content of the fuel.
Alberta is the latest province to have confirmed plans for the introduction of a carbon levy. The CAD20 per tonne levy will become effective on January 1, 2017. A year later, on January 1, 2018, the levy will increase to CAD30 per tonne.
In his Budget speech, Finance Minister Joe Ceci said that the Government was bringing in a carbon levy for two reasons. He explained: "First, a carbon levy sends a clear market signal to consumers and to businesses about the need to reduce their carbon emissions. And second, every penny raised will be rebated back to Albertans and reinvested in our economy."
Ontario also plans to introduce a cap-and-trade system in 2017 to limit greenhouse gas pollution will mean that more than 75 percent of Canadians will live in a province with some form of carbon pricing. Under the proposals, businesses will have their own greenhouse gas quota, which they will be able to sell if they no longer require it.
On November 2, 2015, as part of the Government's measures to address climate change and to reduce greenhouse gas emissions in South Africa, the National Treasury published draft carbon tax legislation for public comment. It is proposed that an initial carbon tax rate of ZAR120 (USD8) per ton of CO2 will be imposed. However, taking into account certain tax-free thresholds and allowances, the effective tax rate over the first phase of the carbon tax – from the eventual implementation date up to 2020 – is expected to vary between ZAR6 and ZAR48 per ton of CO2.
South Africa has committed to reduce GHG emissions below their current levels by 34 percent by 2020 and by 42 percent by 2025. However, given that the Government has been deliberating on the precise terms of the carbon tax since 2010, these targets now look quite optimistic.
South Korea, the world's seventh-largest carbon emitter, now has the world's second-largest ETS market, after the European Union. Under the scheme, a cap is imposed on carbon emissions by over 500 of South Korea's largest companies, who are responsible for about 65 percent of the country's emissions. During the first three years of the scheme's operation, from 2015 to 2017, companies and energy producers are allowed 100 percent of their benchmarked emissions limit without charge. They have to purchase credits if they wish to exceed their limits. Those that do not use their quota may sell their excess credits.
Interestingly, on December 21, 2016, the Korea Exchange and the CBEEX signed a memorandum of understanding (MOU) for cooperation on carbon emissions trading. The MOU covers market information exchange and the sharing of experiences. They have also agreed to explore how their markets could be linked, expanding upon ETS membership, the development of innovative carbon-related products, and joint seminars or forums. They will also cooperate on education and marketing activities.
Like Canada, there is no national carbon tax or pricing mechanism in place in the United States. However, also like Canada, America's carbon emissions could eventually be covered by carbon schemes introduced at state level.
The first of these is California's cap-and-trade system. Introduced in 2013, this covers large electric power plants and large industrial plants that emit 25,000 tonnes of CO2 per year. In January 2015, the scheme was extended to fuel distributors that meet the 25,000 tonne threshold, and the state has also linked its cap-and-trade scheme with a similar system operating in the Canadian province of Quebec, with Ontario also set to join.
However, it could take a considerable amount of time before a meaningful level of America's carbon emissions are covered under state carbon pricing schemes, because so far only California has taken the plunge, and just a handful of other states are considering similar systems, including New York, Oregon, and Washington State. This could change of course if Congress agrees on a national carbon tax or pricing scheme. Indeed, a cap-and-trade proposal was announced by President Barack Obama early in his presidency. However, the idea is highly controversial, very unpopular with most Republicans, and was quickly shelved.
A carbon tax of sorts was proposed in President Obama's Budget plan for 2017. This would entail placing a USD10 per barrel tax on oil, to be paid by oil companies, to encourage the switch to greener forms of energy. However, the chances of this becoming reality are extremely remote, as not a single one of President Obama's budget plans have been approved by Congress. There are no indications that other carbon pricing schemes will make it onto the political agenda any time soon.
While the United States hesitates, Australia is swimming against the tide of international opinion having ditched its carbon tax in 2014, just two years after it was introduced.
The Australian scheme required large carbon emitters to purchase a permit for each tonne of pollution they released into the atmosphere, initially at a rate of AUD23 (currently USD16.75) per tonne, rising to AUD24.15 per tonne before it was repealed. The former Labor administration, which introduced the tax, was preparing to link the scheme with the EU ETS before it was replaced by the Liberal/National Coalition, which made repealing the carbon tax one of its top priorities, in the September 2013 election.
Why was the Australian scheme scrapped? According to the Liberals, the tax pushed up prices because it was passed along to consumers, and made Australia's economy uncompetitive at a time when there were few comparable national carbon taxes in place. Indeed, the Australian Competition and Consumer Commission has said that Australian households are saving an average of AUD550 a year following the repeal of the carbon tax. In the final report into its formal carbon tax repeal monitoring role, the ACCC calculated direct cost savings, ranging from AUD153 to AUD269, that have been passed through to customers by electricity and natural gas retailers.
Australia is now pursuing its emissions reduction target through the Emissions Reduction Fund, which provides incentives for businesses and organizations to come forward with emissions reduction opportunities they have identified.
Will The Australians Be Proved Wrong?
Or, to put it another way, does carbon pricing actually lead to a reduction in carbon emissions? It is a difficult question to answer, because carbon pricing schemes are still relatively few and far between, and most haven't been up and running long enough to tell us whether they are having a long-term effect on the level of carbon emissions. However, the studies that have been undertaken suggest that there is a link between the taxation of carbon, and falling emissions.
According to the European Commission, the ETS led to a reduction of carbon emissions of "at least" three percent in 2013, and "emissions from installations in the scheme are falling as intended."
In British Columbia, a preliminary estimate by an independent consulting company MK Jaccard and Associates suggests that in absence of all other carbon reduction strategies, the carbon tax alone could cause a reduction in BC's emissions in 2020 by up to three million tonnes of CO2 equivalent annually. This is roughly the equivalent to the greenhouse gas emissions created by 787,000 cars per year.
Even in Australia, research showed that the country's emissions fell by seven percent during the first full year of the carbon tax. The pitt&sherry Carbon Emissions Index indicates that electricity generation in the National Electricity Market (NEM), which accounts for just under 90 percent of the country's electricity supply, decreased by 2.2 percent. Emissions were down by 12.2m tonnes of CO2.
However, whether there is enough evidence to suggest a firm link between the price of carbon and the level of carbon emissions is inconclusive. It could be that falling emissions over a certain period of time could be linked to weak economic activity and falling production, or because of increased efficiencies in manufacturing processes. It could be argued of course that carbon pricing is driving more efficiency, but there is no absolute proof of this either. But this is for another debate.
What's more, what is the best carbon pricing approach? An out-and-out carbon tax, or a market-based mechanism. And if a tax, what and who do you tax? And, of course, the key question is, how do you price a tonne of CO2 in the first place? At the moment, we have a patchwork quilt of different systems, lots of questions, and few answers.
So Is Carbon Pricing Inevitable?
It certainly felt like last year's climate summit in Paris was some kind of "tipping point," and that the trickle of carbon pricing schemes and taxes we've seen over the last 10 years or so will increase into a steady flow. The fact that China, responsible for about 30 percent of global carbon emissions, has decided to go down the carbon pricing path will probably encourage other large industrial nations to follow suit. Anxieties about losing competitiveness because your neighbor doesn't tax carbon, and therefore their costs of production are lower, appear to be receding. Australia take note! Indeed, according to a recent World Bank report, the number of implemented or planned carbon pricing schemes around the world has almost doubled since 2012 and are now worth about USD50bn.
However – and there usually seems to be a however where international cooperation on climate issues is concerned – there are still going to be considerable gaps in global carbon pricing coverage for several years to come. Recently, the Carbon Pricing Panel challenged world leaders to expand carbon pricing to cover 25 percent of global emissions by 2020. Obviously, that leaves three-quarters of global carbon emissions uncovered. Yet given that 25 percent is double the current coverage, it still seems like an ambitious target. And it remains to be seen if the panel's next target of 50 percent coverage within a decade is achievable or wildly optimistic.
Not that the Carbon Pricing Panel's target is out of the question. Human beings are capable of great feats when they put their collective minds to a task. After all, the US managed to put men on the moon and bring them home safely within a decade of President Kennedy's famous request, at a time when the country was being embarrassed by the USSR in the space race. And given scientists' predictions that we are heading towards an irreversible climate catastrophe, you might think that minds will focus in the international community.
However, getting a global agreement on anything, no matter how pressing, is always going to be difficult when faced with so many competing national interests and internal domestic debates. The world's largest economy – the US – has hardly set a shining example to other countries in this respect, having been reluctant to participate in international efforts to reduce carbon emissions since Kyoto more than a quarter of a century ago. But despite the US-shaped gap in global carbon emission coverage, it does appear inevitable that the number of carbon pricing schemes will increase in the years ahead. So don't be at all surprised to see one come to a country near you.
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