Economics of Environment - Coursework Example

Introduction to EU ETS The European Union Emission Trading Scheme (EU ETS) was the response of the European Union to the rising dangers of global warming. Set up on the 1st of January 2005, the countries of the European Union came together and made a commitment to reduce the emissions of greenhouse gases in the continent by trading their unused allowance of carbon emissions. The EUETS is the largest and the first of its kind to adopt this system suggested by the Kyoto Protocol. Carbon Emissions Carbon dioxide is a greenhouse gas produced by the burning of fossil fuels such as gas, oil or coal. When carbon is released into the atmosphere it is normally absorbed by plants and trees which convert it into oxygen which they send out into the atmosphere. But the speed at which the world is burning these fuels to create the energy needed to run its vehicles, machinery, electricity etc. and the rapid disappearance of our rainforests, has made the rate at which carbon dioxide is converted to oxygen, go way out of proportion. The excess of carbon in the atmosphere is making the climate changes unpredictable leading to weather extremities, hence causing floods, hurricanes, heat waves and droughts. This situation is dangerous and needs to be controlled which simply means burning less fossil fuels and emitting less carbon. Carbon is a shortened way of saying carbon dioxide and when one talks about carbon emissions, it does not mean the emission or carbon dioxide alone. Six hazardous gases form the greenhouse gases and they have the same warming power and are measured in a unit called CO2-e or CO2-equivalent. Role of the Kyoto Protocol 1 In order to achieve the target of reducing carbon emissions, the Kyoto Protocol devised a mechanism that would encourage industrialized nations to participate. The Kyoto Protocol is an environmental treaty signed by 191 countries and every nation that ratifies the protocol commits to reducing their emissions of greenhouse gases and helps towards stabilizing the earth’s climate change. It created a system where each company is given an allowance of carbon emissions, which could be used or sold in the market. The companies which can control their emissions by using energy efficient machinery can sell their unused allowances and make extra income as well as do their part towards controlling global warming. The protocol’s target was to make the countries that came under it reduce their gas emissions by a minimum of 5% from the level in 1990 throughout the period 2008-2012. Origin of EU ETS Starting 2005 there has been a price paid for carbon dioxide emissions and from a part of the globe that emits 17% of the total energy related greenhouse gas emissions in the world. Emission trading was a concept innovated by an American environmental institution which was coerced by the United States into negotiations on the Kyoto treaty and ironically this scheme was then opposed by the European Union. After the U.S pulled out of the Kyoto Protocol the European opposition to trading carbon faded. Now Europe is a pioneer in the implementation of this climate change policy. Although it is motivated by the Kyoto Protocol, the EUETS came into force without any obligation under the protocol. The first period, the trial period, of emission trading, was done on the EU’s own initative from 2005 to 2007. The second period is in progress. Started in 2008 and ends in 2012. It is the first period under the Kyoto protocol. The EUETS is determined to go on even beyond 2012, when the current period ends, whatever may be the destiny of the Protocol. 2 Working of EU ETS Nearly 25 member states of the European Union are under the scheme and have been allocated emission allowances or permits.This is a cap and trade system that spans across Europe. Each member state develops a National Allocation Plan ( NAP) which needs to be approved by the European Commission. An overall cap is set on the total emissions that are allowed from all the installations that are covered by this system. Then this is converted into allowances which are distributed by the European Union member states to all the installations that are covered by the system. One allowance is equal to one ton of CO2. There are more than 10000 installations covered by the EU ETS which monitor the allowances and enable trading. The EU monitors and reports every year their CO2 emissions and it is mandatory that they return to the government a part of their allowance that equals their emitted amount of CO2 in that year. Keeping in mind weather irregularities, the system works in trading periods, giving scope for neutralizing any excesses in the usage of allowances. The first trading period was from 2005 to 2007. They are now in their second trading period which is from 2008 to 2012. There are many proposed changes to the EU ETS like the removal of the National Allocation Plan, auctioning a larger share of permits and adding more gases to the greenhouse gases. But all this can be done only in the new trading period starting 2013. Installations are made in companies that are energy intensive and these installations record The carbon emissions and calculate the allowances used or unused which will be then traded. The type of companies that the EU ETS covers, are the major energy utilizing industries and electricity generators such as iron and steel, refineries and offshore, power stations, paper, food and drink, cement and lime, ceramics, glass, engineering and vehicle manufacturers. These industries constitute 48% of the amount of carbon emitted in the UK alone. The allocations of 3 the limit on emissions are called EUAs. European Union Allowances. Although there was initial chaos and confusion in the allocation and the implementation of this system, the EU ETS has worked its way out of its problems and made a commendable effort to limit the emissions of greenhouse gases. Problems in the EU ETS The biggest problem faced by the system was the allocation of allowances which was due to the absence of data at the installation level. Collecting data at the installation level is rather difficult and sometimes impossible as data is collected based on aggregates of fuel use and most of the time emissions do not break out at such an early stage. Denmark was the only country that did not face this problem as their installations were already in use from their previously used carbon trading system. Added to the data problem was a low threshold of about 20MW thermal rating, for including sources of combustion. This created distortions among installations in the countries under the EU ETS and complicated the data problem even further. There are two main consequences to this problem. One, there were no legal authorities present while collecting the data, as it had to be collected within the time frames needed to implement the system. Thus data had to collected directly from the sources and it was through voluntary effort. In this process there was scope for participants to submit fraudulent data. A Global Trading System: Its possibilities and problems A global approach to dealing with climate change will mean including fast emerging economies such as India and China who have high population rates and high production rates. 4 Some reports say China leads the word in carbon emissions, the simple reason being its population. The Kyoto Protocol’s inability to include these economies made the United States reject the treaty in 1997. A global cap and trade system will be a tough task to formulate. To start off, will the problem of allocating allowances between countries. Take, for example, USA and China. If the historical baseline method is used to allocate allowances, then USA would get more whereas China’s per head count outdoes America several times. China’s production requirement will be much higher to be able to cater to its population as well as its every growing manufacturing sector. Thus they will never agree to this allocation method. If allowances are allocated based on population, then the United States will not give up its high standard of living and instead buy allowances from China. This will lead to higher energy prices in the USA and will amount to a foreign aid program to one of the world economy’s reckoning forces, which will not be appreciated by the Americans. The aviation sector is responsible for a huge quantity of greenhouse gas emissions. Aircrafts not only emit carbon dioxide, but also nitrogen oxides which form cirrus clouds, endangering the planet. The need to drastically control aviation emissions is apparent. The major air carriers , the USA and the EU, must get into a trading agreement for emissions, which willbecome a huge market in itself. The establishment of an aviation ETS under the control of the UNFCCC (United Nations Framework Convention on Climate Change) to monitor and control emissions while in the air, will lead o a huge percentage decrease in global warming. The players in the Emissions trading system should increase. All Leading economies and growing economies should be brought into the scheme. Countries such as the USA, Australia, India and China contribute to the pollution problem enormously. Without ensuring their participation , most of the potential decrease in greenhouse gas emissions is wasted. 5 Carbon Tax is an answer that some economists have to the problems of climate change. As against any global transactions in relation to carbon emissions, it is suggested that every country levies taxes on its own companies for carbon emissions. Though this seems to be an easier option as the installations can be easily monitored and the tax collected will be revenue to the government, Emissions trading is highly preferred.. If carbon trading is to go global, there are several factors to be taken into account when formulating the policies. A central organization, such as the UNFCCC, will preside over allocations and trading, as the EU has the European Commission. Poorer countries that cannot afford energy efficient machinery will lose out as they will have to buy allowances. Yet they will have an opportunity to earn foreign exchange by reducing their carbon emissions. It will be much more difficult to monitor emissions at every installation as they will be too many. There may be many challenges at the inception stage or a global program, but the final result will be the saving of our planet, which is well worth the trouble. References Bataller, Maria Mansanet., Kyoto Protocol, EU ETS and Determinants of CO2 Prices, (21 Sept 2007) [online] Available at: http://scitizen.com/climate-change/kyoto-protocol-eu-ets-and-determinants-of-co2-prices_a-13-1077.html [Accessed 10 Apr 2011] Ellerman, Denny A., Buchner K. Barbara, The European Union Emission Trading Scheme, Review of Environmental Economics and Policy, Volume 1, Number 1, (2007) 66-86 [Online] Available at: http://www.oxfordjournals.org/our_journals/reep/press_releases/freepdf/issue/pdf [Accessed 10 Apr 2011] EU Emission Trading System (EU ETS) [Online] Available at: http://www.decc.gov.uk/en/content/cms/what_we_do/change_energy/tackling_clima/emissions/eu_ets/eu_ets.aspx [Accessed 10 Apr 2011] 6 European Union Emissions Trading Scheme [Online] Available at: http://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme [Accessed 10 Apr 2011] Mankiw, Gregory N., Smart Taxes- An Open Invitation to Join the Pigou Club, (2009) [Online] Available at: http://www.professays.com/wp-content/uploads/2009/12/Harvard-Format-Essay-Sample.pdf [Accessed on 10 Apr 2011] Paul, Linda V., Master Thesis International Economics and Finance, [Online] Available at: http://www.tilburguniversity.edu/research/institutes-and-research-groups/tilec/publications/termpapers.html/paul.pdf [Accessed on 10 Apr 2011] 7 6 Read More