The International Panel for Climate Change - Assignment Example

Introduction The International Panel for Climate Change (IPCC) has reported in that human have distinct influences on climate system, and recent anthropogenic induced emissions of greenhouse gases have reached the highest level in history. Figure 1 illustrates that the rate of growth in CO2 emissions is faster in the last 10 years when compared to that of the previous decades which clearly indicates that the emission rate of carbon dioxide in the last decade has also risen (Environment Canada, 2012). In the recent few years, changes in climate have also caused impact on natural and human systems such as extreme weather, increase in the sea levels, birds laying eggs earlier, earlier hibernation of mammals, and so on. Adaptation and mitigation strategies to limit climate change and its effect are today the focus of all nations. The 2°C target as a global stabilization target range guides today’s international climate policy. To limit warming below 2 °C, it requires substantial emission reduction in the next few years to come. In order to reduce emissions of greenhouse gases, carbon pricing as a market-based instrument was most favored by economists and widely used in many countries. The rational of carbon pricing is charging those who emit greenhouse gases into the atmosphere. Carbon pricing usually includes carbon tax, cap-and-trade or a combination of both. This paper will first introduce the concept of carbon pricing then look at five popular carbon pricing programs. The strengths and challenges of carbon pricing will also be discussed. The main strengths of carbon pricing are reducing greenhouse gases emissions, cost saving, and inducing technology innovation. The major challenges facing carbon pricing are carbon leakage, uncertainties, and distributional effects. Then, the next part of paper shall focus upon the future development of carbon pricing. The paper shall be concluded after discussing the implementation of other policies to accompany the policy of carbon pricing in order to limit the emission of carbon dioxide. Definition of carbon pricing Carbon pricing policy is a market-based mechanism which flexibly meets objectives and contains incentives for companies to develop more effective and sustainable instruments in order to contribute to the environment (Szijarto, 2012). Carbon pricing includes two policy approaches: carbon taxation and emissions trading (cap-and-trade). Aldy and Stavins gave the definitions for carbon tax and cap-and-trade(2012). Carbon tax has been defined as the revenue that the government sets in terms of dollars per unit of carbon dioxide emissions or its equivalent. To be cost-effective, carbon tax needs to cover all sources, which means that carbon price should be set equal to the marginal benefits of emission reduction. The government could apply carbon tax from upstream to downstream of the product cycle of fossil fuels. The cap-and-trade system is defined as the tradable emission allowances which are used by companies to cover their total emissions. Policy makers shall determine the level of the emission cap, the scope of the cap’s coverage, and whether to freely distribute or sell allowances. Cost-containment measures are incorporated in cap-and-trade system, such as offsets, allowances banking and borrowing, safety values, and price collars. Five carbon pricing programs There are different options available for designing carbon pricing programs. Tietenberg introduced five existing programs (2013). Swedish Carbon Tax Program, which prices carbon through both direct and indirect way. The direct way is levying a tax on each emitted unit of carbon dioxide, and indirect way is through an energy tax on fossil fuels. After the introduction of carbon tax in the year 1991, the emissions were simultaneously reduced by 50 percent in Sweden. In 2005, the European Union Emissions Trading System (EU ETS) was introduced. In order to avoid double regulation, the government exempted industries that were covered by EU ETS from the carbon tax. However, neither energy nor carbon taxes was applied on electricity production, although households needed to pay special electricity consumption tax. The second program is the British Columbia Carbon Tax Program. British Columbia has levied carbon tax on per metric tonne of carbon dioxide equivalent emissions from the combustion of fuel since 2008, which has affected approximate 77% total greenhouse gas emissions of British Columbia. The carbon dioxide equivalent emissions in this program are defined as carbon dioxide, methane, and nitrous oxide. Some fuels are exempted such as fuel for commercial aviation and ships. This carbon tax is ultimately passed forward to consumers through higher prices. Therefore, in order to protect low-income households, the Low Income Climate Action Tax Credit program provides adult residents with lump-sum tax credits. The third one is the European Union Emission Trading System. This program started in 2005, and operates in almost 30 different countries today and is regarded to be the largest emission trading system in the world. A cap of the total amount of specified GHGs that can be emitted from installations is established by the program. Under this cap, companies receive the allowances of emission unit that they can sell to or buy from other companies. If companies’ annual emissions exceed their allowances, they need to pay penalties on the excess emissions that are produced. But companies can deposit any spare allowances and use in the future. The total emission will fall with decreasing cap over time. For example, the emissions are targeted to be reduced 21% in 2020 compared in 2005. This program has covered almost half of the EU’s carbon dioxide emissions and 40% of its total GHG emissions. The fourth program which was launched in 2009 is the Regional Greenhouse Gas Initiative (RGGI) It is the country’s first carbon pricing program and is covered by ten states in the northeastern United States. Most allowances in RGGI are auctioned off and RGGI use a large proportion of the revenue from the auctions to promote energy efficiency. A price floor is bound in RGGI to remove the effects of inflation. The energy efficiency investments have reduced the energy cost of many large industrial facilities and made them more competitive. The last program is the Australian Hybrid System, which was introduced in 2012 from stage of a fixed-price regime to an emissions trading market. This means that the emitters face a fixed price for emissions of each metric tonne of carbon from July 1, 2012 to June 30, 2015. Then, the fixed carbon price regime will switch to a flexible price regime with the price fully determined by market. The coverage in the program includes carbon dioxide, methane, nitrous oxide, and perfluorocarbons from aluminum smelting. Households, use of light vehicles, and the agriculture, forestry, and fishery industries are not facing carbon pricing on the fuel they consume but need to pay fuel excuse taxes. Strengths Implementing carbon pricing policy could help in the reduction of GHG emissions. An extraordinary example is that after B.C. carbon tax implemented since 2008, fuel use in B.C. has dropped by 16%. However a 3% rise was also observed in the rest of Canada. Figures 2, 3, and 4 show that natural gas demand, coal use and motor gasoline sales in B.C. compared to that of Canada. Since 2007, a reduction of 6% (10% - 4%), 30% (36% - 6%), and 7% (5% + 2%) is noticed respectively. This finding supports that carbon tax can effectively affected the usage of fuels and the amount of carbon emissions. On the other hand, a cap with a price floor can prevent permit prices from falling below a lower limit. When the costs of reducing emissions are relatively low, a price floor can keep the price of emissions high, which can cause the additional emissions reduction as well (Higgins, 2013). In addition, he also pointed out that a quantity-based cap which is an emissions fee with a quantity ceiling could lead to even greater emission reductions. The reason is that if the quantity of emissions is higher than expected the pricing on emitting will keep high and this could lead to less climate change. Cost saving is another benefit of carbon pricing. The market-based measures like emissions trading or pollution taxes are more cost-effective than traditional regulatory measures, which mean that the market-based measures can achieve the similar reductions at a much lower cost. The evidence from Productivity Commission also pointed out that market-based measures achieve more emissions reduction per unit expenditure than other types of policies like biofuel subsidies(2011). Also, a carbon tax is administratively simple and straightforward to implement, therefore it could save financial expense for government (Aldy & Stavins, 2012). Moreover, because fuel suppliers face the emission tax, they will increase the cost of the fuels they sell. Therefore, tax can be effectively passed down through the energy system to stimulate more energy-efficient technologies in each department (Aldy & Stavins, 2012). According to Meltzer (2014), a survey of OECD countries shows that environmental taxes have a positive relationship with technology innovation. Therefore, carbon taxes have dual advantages that are internalizing the cost of the environmental harm from carbon dioxide emissions and stimulating green technologies through triggered technology innovation. In addition, the induced effect of environmental policy on technological change can reduce the social cost of environmental compliance (Jaffe, Newell, & Stavins, 2005). Besides that, technology innovations can reduce the marginal cost of achieving a given unit of pollution reduction, which means technology improvements are good for both environment and companies that must meet environmental mandates. On the other hand, technology innovation could increase the likelihood that firms will comply with their social obligation to educate public choosing lifestyle with more energy efficiency. Another major advantage of implementation of such policies is the speed and ease with which they can be implemented. Carbon pricing does not require and auctioning or registration and can be implemented with the shorted period. Challenges From Aldy and Pizer (2011), carbon tax could cause emission leakage. The implementation of a carbon tax could increase the cost of energy consuming, so it could adversely affect the competitiveness of energy-intensive industries. This means companies might relocate facilities to the countries without rigorous environmental policies. Therefore, emissions of new locations will increase, and this could offset some environmental benefits of the policy. Like what Figure 5 shows that there is a greater increasing gap of carbon dioxide emission in Asia compared to United States and Europe. The reason is that Asia does not have rigorous carbon pricing policy. Therefore, many factories in developed countries with higher level of carbon pricing policy move to Asian for cost reduction. In addition, the fuel prices will decrease because environmental policies reduce the consumption of fossil fuels. So the emission leakage could be also caused by those countries without environmental policies that will increase the consumption of fuel in response to the lower prices. On the other hand, carbon leakage could also have economic impacts including investment avoidance, investment relocation and shifting production outside without carbon constraints or with different level of carbon pricing, and social impacts including job losses and changes of livelihood or communities (Marcu, Egenhofer, Roth, & Stoefs, 2013). Another problem is that the carbon price should reflect the marginal cost of emitting an extra unit of carbon dioxide or the carbon dioxide equivalent and this marginal damage cost is also known as the social cost of carbon (Bowen, 2011). Moreover, Bowen (2011) points out those policy makers are hard to determine that price because of uncertainties in estimating the present value of the economic damage from carbon dioxide. The reason is that carbon dioxide is in the atmosphere which is difficult to estimate the economic impact of climate change, and there are uncertainties of science including the warming caused by emissions of carbon dioxide and other greenhouse gases, and the environment changes reflecting to warming like sea level rise and precipitation changes. These uncertainties could become greater because of long residence time of greenhouse gases in the atmosphere, which causes the social cost of carbon today depends on projection of greenhouse gases emissions in the future. Another uncertain that policy makers should face is the marginal cost of abatement. There are many factor influence marginal abatement cost, such as the low-carbon innovation in the future, the chances of major technological development and the substitution of low-carbon products in business and households. Therefore, the uncertain in the costs of abatement could cause the uncertainty relating to the allowance price in a cap-and-trade system and the emissions under a tax. In an emission trading program, cost uncertainty such as unexpectedly high or unstable allowance prices can break climate policy supports and discourage investment in new technologies and research development (Aldy & Stavins, 2012). The third weakness is the distributional effects caused by uneven impact of carbon pricing on different groups. According to Sustainable Prosperity (2011), the cost burden regarding to carbon pricing is shifted onto the public through higher prices or lower wage. It also indicates that the net impact of a household is relating to its dependence on carbon-intensive products or employment in a carbon-intensive sector, and its ability to substitute lower-carbon alternatives. The increasing price of fossil fuels will directly affect transportation, housing, fuel expenses, and most services and goods that are embedded carbon. Research carried out in Canada (Sustainable Prosperity, 2011) shows the carbon pricing affects lower-income groups more. From Figure 2 (the first column represents the lowest income group and in ascending order, the fifth column represents the highest income group), lower-income groups tend to spend more proportions of their income on carbon-intensive goods (more than 10% for lowest quintile) than higher income group (around 4% for highest quintile). In addition, lower-income groups also have different carbon spending patterns compared to higher income groups. For example, in Figure 3, the lower-income groups spend more on home heating (electricity) and less on motor fuels (gasoline). The reason might be their homes are less energy efficient and more difficult to own the vehicles. Therefore, low-income groups have less ability to substitute low-carbon alternative, because their life style are less energy efficient and they do not have enough money to support their life style shifting to high energy efficient. . The future of carbon pricing The market-based climate policies like carbon taxes and emissions trading systems in most countries have been or will be implemented. To reduce greenhouse gas emissions effectively by carbon pricing, a uniform global carbon price would be desirable in the future. Although there is absence of a strong binding international agreement, it is worthwhile that policy makers from all nations move gradually towards a broadly equivalent carbon price across sectors so that the burden of cost is distribute effectively across economics (Bowen, 2011). A carbon pricing policy could shift behavior away from fuels and carbon intensive goods through increasing cost from the way of households spending their incomes, the inputs of companies using for production, and the allocation of labour and capital between economic sectors (Sustainable Prosperity, 2011). However, the distributional consequences of carbon pricing should be considered during price deciding. If policies cannot set a proper carbon price for different parts of the economy, it will increase the total cost of emission abatement and some households will have heavier burden than others. In addition, the consequences for competitiveness have to be assessed too. From Fullerton (2008), in order to maintain competitiveness, companies might cut cost elsewhere, which could lead to lower wages, and indirectly shifting the burden to consumers. Also, the job losses as a decrease of output could happen in the most carbon-intensive sectors. Furthermore, the policies need to face uncertainty when setting the carbon price, so a more flexible policy framework would be used in further decision making. Therefore, an effective climate change strategy with carbon pricing not only need to control carbon leakage, diminish distributional effect, and consider uncertainty as comprehensive as possible; but also that policy makers need to communicate to business and public why carbon pricing is necessary with very clear and understood words. In addition to this even though carbon pricing seems promising and even effective against emissions the main challenge with the carbon pricing solution is its effectiveness to tackle the problem of global warming on its own. It is obvious that carbon pricing alone is not sufficient to meet the challenges that world faces today. Thus more intensive policies also need to be adopted along with carbon pricing to assist in reducing the emissions of carbon dioxide. As a matter of fact, it is too soon to accurately determine the effectiveness of such market based policies advised to tackle climate change. Conclusion For internalizing the externalities associated with emissions of greenhouse gases, carbon pricing is an efficient policy measure to promote cost-effective abatement, deliver powerful innovation incentives, and ameliorate instead of exacerbates government fiscal problems (Aldy & Stavins, 2012). Government could motivate firms and individuals to find and exploit the lowest cost ways of emission reduction and invest in the development of new technologies for further emission mitigation through pricing greenhouse gases emissions. Although carbon pricing policies are designed to stimulate major economic shifts, the policies should not regressive and should design to protect the most vulnerable population (Sustainable Prosperity, 2011). Many counties have set their goals for the greenhouse gases emissions. For instance the Kyoto Protocol commits developed countries to reduce their carbon dioxide emissions to 5% below 1990 levels by 2012 (Meltzer, 2014). Some countries do make a remarkable achievement on this reduction, like European Union has already reduced emissions over 15% from 1990 to 2010 (Figure 7) through improvements in energy and fuel efficiency, increase in renewable energy, development of technology. Setting long term objectives in the fight against climate change are substantial in avoiding catastrophic consequences. In order to achieve this long term goal, although carbon pricing is crucial, other policies are needed too, like command and control regulations, Read More