U of M CE 5212 - A Price on Carbon - Carbon Taxes v. Carbon Trading

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1 A Price on Carbon: Carbon Taxes v. Carbon Trading CE 5212/PA5232 October 31, 2008 Robert Jorgenson Alex Peritz Jie Sun2Introduction This paper discusses greenhouse gas emissions and the current issues regarding the regulation of emissions worldwide. The primary focus will be concentrated on carbon emissions worldwide and the paper will discuss how these emissions are being reduced. The two ways which are discussed on how to reduce emissions are by use of a cap and trade system, used under the Kyoto Protocol, and the carbon emissions tax used in several different countries. Beginning Greenhouse gas (GHG) emissions being produced by humans has been happening in a relatively short time (approximately 250 years) when considering the entire history of the world. GHGs in the earth’s atmosphere are essential to keeping the earth at a steady temperature. The problem occurs when there is an increase in greenhouse gas emissions in the atmosphere. Increasing emissions according to most scientific organizations will increase the earth’s temperature to dangerous levels. Since this is the case there is plenty of controversy about this topic which will not be discussed in this paper. GHGs consist of ozone O3, methane CH4, sulfur dioxide SO2, nitrous oxide NO2, and Hydrofluorocarbons (HFCs), but the most important gas emitted into the atmosphere is carbon dioxide CO2. CO2 is a GHG that is emitted by practically everything that is used in society across the globe. This gas is not new to the earth and is actually essential to life on earth. In fact plants use CO2 during photosynthesis which helps produce the energy that is needed for plant life. Since this gas is emitted by practically every industry in every country it is difficult to say who is responsible to decrease CO2 outputs. The following figure shows the annual carbon emissions that are emitted by different regions across the world. Annual Carbon Emissions by Region in the World Source: Global Warming Art Looking at this figure shows that there has been a tremendous increase in CO2 emissions in the last 150 years. The major regions that have contributed to these emissions for the entire time period show that the United States, Canada, and Europe have lead the way in producing emissions. In more recent years though, there has been an increase in emissions from the rest of the world, particularly Southeast Asia.3Actors • United States • China • European Union • Kyoto Protocol Countries • EPA • Sweden • Finland • British Columbia, Canada • New Zealand • Sulfur Dioxide Trade • Clean Air Act Timeline • 1824 The greenhouse effect was theorized by Joseph Fourier • 1990 Clean Air Act establishes Sulfur Dioxide trade • 1990 Finland is the first to enact a carbon tax • 1991 Sweden enacts carbon tax • December 11, 1997 Kyoto Protocol initial adopted • 2001 Great Britain introduces climate change tax • 2005 New Zealand proposes carbon tax, but abandoned • January 1, 2005 European Union Emissions Trading System introduced • April 1, 2007 Boulder, Colorado taxes electricity for carbon emissions • October 1, 2007 Québec, Canada is first province in Canada to tax carbon • July 1, 2008 British Columbia, Canada enacts carbon tax Emission Trading Emissions trading are not a new concept and have been used for different emissions in different parts of the world. This includes trading SO2 emissions in the United States. SO2 emissions were first being reduced during the Clean Air Act Amendment of 1990. This act set up a goal of reducing annual SO2 emissions by 10 million tons below the 1980 levels. In order to do these two phases were undertaken to reduce the emissions. Phase I began in 1995 and affected 110 coal-burning electric utility plants in 21 states in the east and Midwest. Phase II began in 2000 and tightened the annual emissions limits imposed on large, higher emitting plants. This includes all new utility plants and any current operating plant that produces 25 megawatts or more (EPA). With these regulations to meet certain air quality requirements, the EPA decided to begin a market-based cap and trade system. In order to properly conduct a cap-and-trade system, allowances had to be given initially and are considered currency in this system. Allowances are equal to one ton of SO2 emitted by a utility or industry. The allowances were allocated for each year beginning in 1995 for Phase I and then continued allocating allowances for Phase II in 2000. Phase II added additional constraints to the SO2 emissions in the United States and4spread the allowances across the entire country. Goals that are achieved by this act are the same goals that are involved in carbon trading as well. The United States is not the only country in the world that has a current emissions trading system in place. European countries have adopted a European Union Emission Trading System which began in the beginning of 2005. The European Union Emission Trading System is in place to regulate all GHG emissions, but is primarily in place to reduce CO2 emissions. The first phase of the trading system which began in 2005, went until 2007, and included approximately 12,000 installations in 15 European countries. This includes power producers, mineral oil refineries, mineral industries, and pulp and paper industries, along with other high emitting industries. Emissions from these sources contribute to approximately 40% of the European Unions CO2 emissions. Carbon Trading Definition Carbon trading is using an organizational approach in order to control the amount of CO2 released into the atmosphere. Carbon trading is when a specific amount of carbon allowances are given for an entire group and cannot exceed a set amount or cap. These allowances are given by governments in order to set limits, or cap, of the amount of pollutants allowed into the atmosphere. In order for parts of the group emitting carbon to meet the reduction goals, the allowances can be traded between parts of the group. Trading carbon units benefits both parties involved by letting one reach its mandatory goals while the other receives additional profit for selling the allowances. Additional credits can also be received from using sustainable energy. These credits can be traded in order to reduce emissions and help groups meet goals set by the government. Carbon Tax


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U of M CE 5212 - A Price on Carbon - Carbon Taxes v. Carbon Trading

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