A carbon tax and other alternatives
Header source: https://www.evolving-science.com/environment/carbon-taxation-00764
There are many initiatives available to governments to achieve the objective of limiting omissions. Would you prefer a carbon tax or direct action? Or would you rather an ETS, an EIS or a LET (pretty much the same as a CET) with or without an RET? The choices are endless, with political roadblocks at every turn. Let’s have a look at some of them.
The prevailing view among experts and in the Garnaut Review of a decade ago - the Garnaut Report is still the most comprehensive assessment of Australia’s options for climate change action - is that a carbon price with an emissions trading scheme and a cap on emission - a “cap and trade” scheme - is key to reducing emissions. In fact, it has clearly been demonstrated that a carbon price is far and away the best method of reducing emissions than other alternatives, and that countries that put a price on carbon achieve far higher emissions reductions than countries that do not. Over the decade prior to 2017, in the 30 countries that had a carbon price emissions fell by an average of 2% a year, a fall which has been described as "massive".
In the first place, just what is a carbon tax? [0]
Shortly put, it is a price on carbon waste and reflects a basis economic principle: that the waste produced from any activity is a cost that has to be paid. “We pay for throwing away our garbage, for cleaning our waste water, and we should pay for the carbon dioxide waste we create from activities such as burning fossil fuels”.
So how do we set the right carbon tax rate? This involves pinning down several assumptions that have great uncertainty. The first involves weighing income today (ie the worth of the money recouped as a carbon tax in today’s terms) as against the income of future generations. For that we need a discount rate. Any economist will tell you that any decision involving costs and benefits separated in time requires a discount rate, which will also need to take into account changes in income over time.
In 2006, a UK economist called Nicholas Stern concluded that the correct discount rate for climate policy was 1.4%, at which rate $1 million in 250 years would be worth nearly $31,000 today. Based on these calculations, Stern concluded that the costs of climate change were 5 times the costs of cutting emissions.
Other variables to be taken into account include measuring the damage caused by our CO2 emissions on the economy (according to one model, this calculates out at, roughly speaking, a function of the square of the temperature increase), and factoring in the possibility of low-probability/high-damage outcomes or so-called catastrophes, such as rapid sea-level rise from quick melting of the Greenland and West Antarctic ice-sheets or from significant changes in ocean-circulation patterns. About 30 or so countries countries have enacted carbon taxes with rates ranging widely from $0.08 per metric ton of CO2 in Poland to $121 in Sweden. It is projected that a US carbon tax of $40 per ton, increasing 5% each year, would put the country well on track to becoming carbon-free by mid-century.
A carbon tax and an emissions trading scheme (ETS) are different means of curbing pollution by putting the onus on companies that produce carbon dioxide but they go about it in very different ways[1]. A carbon tax in Australia was launched on July 1, 2012 by the Gillard Labor government to tackle the problem of pollution.
Australia’s rate was $23 per metric ton in 2012-2013 and $24.15 in 2013-2014, well down the list of comparable rates imposed by other nations. Companies in Australia that emitted over 25,000 tonnes of carbon dioxide were charged $25.40 per tonne emitted, payable to the Australian government, as an attempt to encourage companies to cut emissions of harmful greenhouse gases in order to reduce their operating costs. About 75,000 businesses paid the carbon tax or participated in a similar emissions taxing scheme. In its first two years, the carbon tax raised about $15.4 billion in gross revenue. Exemptions from the tax and overcompensation in the form of income tax cuts and direct payments meant that every cent the tax raised was handed back – and it did cut emissions[2].
The Abbott Government abolished Gillard’s carbon tax-cum-emissions trading scheme in July 2014, the ostensible reason for so doing being that removing the tax would boost economic growth and increase global competitiveness. (Prices did come down for a while, but then electricity pricing has continued its inexorable upward trend). In its place the Abbott Government set up the Emission Reduction Fund in December 2014. Emissions thereafter resumed their growth evident before the tax. It is worth noting that in his early days as opposition leader, Tony Abbott actually backed a carbon tax himself, but then for politically opportunistic reasons reversed course and opposed it[3].
Whereas the carbon tax charged companies by the amount of carbon they emit, it didn’t limit the amount they could emit. Under an emissions trading scheme (ETS), (also referred to as carbon trading, cap and trade and carbon emissions trading[4]), carbon wouldn’t be priced by the tonne. Instead, there would be a cap on how much carbon dioxide may be emitted. It is an approach used to control carbon dioxide (CO2) pollution by providing economic incentives for achieving emissions reductions. Under the scheme, carbon trading would be administered by a central authority such as a government or international organisation which sets a limit or cap on the amount of CO2 that can be emitted.
Companies or other groups are issued permits that require them to hold allowances (or credits) in order to emit an equivalent amount of CO2. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their allowance must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. The buyer therefore pays to pollute, while the seller is financially rewarded for reducing CO2 emissions. In theory, those that can easily reduce emissions most cheaply will do so. The carbon tax was legislated to transition into an emissions trading scheme in July 2015, but this did not eventuate owing to the change in government.
Mexico, which passed the developing world’s first climate law in 2012, affords a good example of how cap and trade can get under way in a developing country[5]. Mexico started 2017 with a 20% spike in fuel prices driven in part by the phasing out of subsidies followed by a consumer backlash. Now the Mexican government and stock exchange have switched to cap and trade. In most systems, the cap gets lower over time, giving businesses a choice: cut emissions further or buy permits on the market from another company.
More than 80 companies are signed up to simulate permit trading, and by 2018 the Mexican federal government will require Mexico’s biggest emitters to participate. The country also has a cooperation agreement with California, which already trades carbon permits with several Canadian provinces, and Mexico may eventually join that market. The European experience has been that price volatility discouraged companies from making long term investments in reducing their environmental footprint, despite a steadily lowering carbon cap. Mexico may also require a minimum price for carbon emission permits, as does California, so companies can better predict their future financial positions.
Under this kind of scheme, clearly the carbon price has to be high enough to incentivise a rapid transition away from carbon-intensive energy sources to renewables, says Professor Matthew England, of the Climate Change Research Centre at the University of NSW. He goes on to point out the Swedish and Swiss experience: "Sweden priced carbon dioxide emissions at $US130 [$189] per tonne and Switzerland at $US100 [$145] per tonne. These are the kind of values needed to ensure the world’s fossil fuel reserves remain in the ground. The price rightly factors in the vast cost of unabated greenhouse gas emissions – costs that will be borne by both present and future generations."
An emissions trading scheme right here in NSW
But there's no need to look to Europe, there is an emissions trading scheme running quite smoothly in NSW: the Hunter River emissions trading scheme. Decades ago, the river was heavily tainted by coal companies and other industries dumping salty water and other pollutants. But the NSW government designed a cap and trade scheme that made each company accountable for its emissions.
The scheme has transformed the river from an extremely polluted waterway into a place where dolphins now swim. The same type of scheme can work for the air as it does for the water – it’s the same basic model that the Garnaut Review proposed for a national greenhouse emissions scheme.
There are also other active trading programs as regards several air pollutants[6]. For greenhouse gases, which cause climate change, permit units are often called carbon credits. The largest greenhouse gases trading program is the European Union Emission Trading Scheme, which trades primarily in European Union Allowances (EUAs); the Californian scheme trades in California Carbon Allowances, and the New Zealand scheme in New Zealand Units.
Another alternative is an Emission Intensity Scheme (EIS), the idea of which is to encourage more renewable and low carbon electricity generation and to discourage high emissions power, particularly coal. For an example as to how this may work in the electricity context[7], the COAG Energy Council (Australia’s federal and state energy ministers) met in 2016 to discuss how Australia can transition from fossil fuels to renewable electricity to deliver a secure and reliable power supply resilient to increasingly severe climate change impacts.
The electricity sector is our largest emitter making up about 30-35% of Australia’s total greenhouse gas emissions. Without further action, electricity emissions are expected to grow 20% by 2030. To meet our Paris Agreement commitments – reducing emission by 26 to 28% on 2005 levels by 2030 – we need to move away from coal and gas plants towards more renewable power sources like wind and solar but also solar thermal, geothermal, hydro and biomass, and one way of doing this is by means of an emissions intensity scheme, which is designed to increase the cost of electricity production from high-emitting sources (like coal and gas) while decreasing the cost of less polluting sources (like renewables), the end result being that the market is encouraged to shift from high-emission to low-emission sources of energy.
The “emissions intensity of electricity” refers to the amount of carbon dioxide emitted per unit of electricity generated. Australia’s electricity emissions intensity is relatively high compared to other nations – 6% higher than China, and 60% higher than the United States, because we rely heavily on high emissions sources of energy like coal and gas-fired power.
An EIS has been described as a “rob-Peter-to-pay-Paul scheme”[8]. The Peters in the scheme are the coal-fired generators, particularly the emission-intensive brown coal generators. The Pauls in the scheme are those generators whose emission intensity is less than a “baseline” that the Government will define. The way that the money is taken from the Peters and distributed amongst the Pauls is critical.
How would an Emissions Intensity Scheme (EIS) actually work?
An EIS would “hit the power stations themselves and would set limits on the volume of greenhouse gases they can emit: if they go over, they have to buy credits from lower-emitting power stations. It is both a carrot and a stick — it is an incentive to opt for cleaner energy and a penalty for those who do not. Generators that have high emissions like coal may have to purchase low emissions credits from renewable generators to bring them below their target. Most industries — including the electricity generators themselves — actually support an EIS”[9].
An emissions intensity benchmark for the whole electricity sector would limit how much carbon dioxide can be emitted per unit of electricity, because:
However, an EIS does not necessarily guarantee a reduction in electricity sector emissions, because if overall electricity demand and supply increases, emissions intensity could go down while total emissions rise, but this could be mitigated by setting a schedule of benchmarks five years in advance, and then revising targets for the next five years if greater emissions reductions are needed.
How would an emissions intensity scheme change Australia’s electricity mix?
The overall intent of an emissions intensity scheme is to encourage more renewable and low carbon electricity generation and to discourage high emissions power, particularly coal. According to modelling by the Climate Change Authority, introducing an emissions intensity scheme in accordance with Australia’s Paris Agreement obligations would have a huge impact on Australia’s electricity mix, thus:
There are many initiatives available to governments to achieve the objective of limiting omissions. Would you prefer a carbon tax or direct action? Or would you rather an ETS, an EIS or a LET (pretty much the same as a CET) with or without an RET? The choices are endless, with political roadblocks at every turn. Let’s have a look at some of them.
The prevailing view among experts and in the Garnaut Review of a decade ago - the Garnaut Report is still the most comprehensive assessment of Australia’s options for climate change action - is that a carbon price with an emissions trading scheme and a cap on emission - a “cap and trade” scheme - is key to reducing emissions. In fact, it has clearly been demonstrated that a carbon price is far and away the best method of reducing emissions than other alternatives, and that countries that put a price on carbon achieve far higher emissions reductions than countries that do not. Over the decade prior to 2017, in the 30 countries that had a carbon price emissions fell by an average of 2% a year, a fall which has been described as "massive".
In the first place, just what is a carbon tax? [0]
Shortly put, it is a price on carbon waste and reflects a basis economic principle: that the waste produced from any activity is a cost that has to be paid. “We pay for throwing away our garbage, for cleaning our waste water, and we should pay for the carbon dioxide waste we create from activities such as burning fossil fuels”.
So how do we set the right carbon tax rate? This involves pinning down several assumptions that have great uncertainty. The first involves weighing income today (ie the worth of the money recouped as a carbon tax in today’s terms) as against the income of future generations. For that we need a discount rate. Any economist will tell you that any decision involving costs and benefits separated in time requires a discount rate, which will also need to take into account changes in income over time.
In 2006, a UK economist called Nicholas Stern concluded that the correct discount rate for climate policy was 1.4%, at which rate $1 million in 250 years would be worth nearly $31,000 today. Based on these calculations, Stern concluded that the costs of climate change were 5 times the costs of cutting emissions.
Other variables to be taken into account include measuring the damage caused by our CO2 emissions on the economy (according to one model, this calculates out at, roughly speaking, a function of the square of the temperature increase), and factoring in the possibility of low-probability/high-damage outcomes or so-called catastrophes, such as rapid sea-level rise from quick melting of the Greenland and West Antarctic ice-sheets or from significant changes in ocean-circulation patterns. About 30 or so countries countries have enacted carbon taxes with rates ranging widely from $0.08 per metric ton of CO2 in Poland to $121 in Sweden. It is projected that a US carbon tax of $40 per ton, increasing 5% each year, would put the country well on track to becoming carbon-free by mid-century.
A carbon tax and an emissions trading scheme (ETS) are different means of curbing pollution by putting the onus on companies that produce carbon dioxide but they go about it in very different ways[1]. A carbon tax in Australia was launched on July 1, 2012 by the Gillard Labor government to tackle the problem of pollution.
Australia’s rate was $23 per metric ton in 2012-2013 and $24.15 in 2013-2014, well down the list of comparable rates imposed by other nations. Companies in Australia that emitted over 25,000 tonnes of carbon dioxide were charged $25.40 per tonne emitted, payable to the Australian government, as an attempt to encourage companies to cut emissions of harmful greenhouse gases in order to reduce their operating costs. About 75,000 businesses paid the carbon tax or participated in a similar emissions taxing scheme. In its first two years, the carbon tax raised about $15.4 billion in gross revenue. Exemptions from the tax and overcompensation in the form of income tax cuts and direct payments meant that every cent the tax raised was handed back – and it did cut emissions[2].
The Abbott Government abolished Gillard’s carbon tax-cum-emissions trading scheme in July 2014, the ostensible reason for so doing being that removing the tax would boost economic growth and increase global competitiveness. (Prices did come down for a while, but then electricity pricing has continued its inexorable upward trend). In its place the Abbott Government set up the Emission Reduction Fund in December 2014. Emissions thereafter resumed their growth evident before the tax. It is worth noting that in his early days as opposition leader, Tony Abbott actually backed a carbon tax himself, but then for politically opportunistic reasons reversed course and opposed it[3].
Whereas the carbon tax charged companies by the amount of carbon they emit, it didn’t limit the amount they could emit. Under an emissions trading scheme (ETS), (also referred to as carbon trading, cap and trade and carbon emissions trading[4]), carbon wouldn’t be priced by the tonne. Instead, there would be a cap on how much carbon dioxide may be emitted. It is an approach used to control carbon dioxide (CO2) pollution by providing economic incentives for achieving emissions reductions. Under the scheme, carbon trading would be administered by a central authority such as a government or international organisation which sets a limit or cap on the amount of CO2 that can be emitted.
Companies or other groups are issued permits that require them to hold allowances (or credits) in order to emit an equivalent amount of CO2. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their allowance must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. The buyer therefore pays to pollute, while the seller is financially rewarded for reducing CO2 emissions. In theory, those that can easily reduce emissions most cheaply will do so. The carbon tax was legislated to transition into an emissions trading scheme in July 2015, but this did not eventuate owing to the change in government.
Mexico, which passed the developing world’s first climate law in 2012, affords a good example of how cap and trade can get under way in a developing country[5]. Mexico started 2017 with a 20% spike in fuel prices driven in part by the phasing out of subsidies followed by a consumer backlash. Now the Mexican government and stock exchange have switched to cap and trade. In most systems, the cap gets lower over time, giving businesses a choice: cut emissions further or buy permits on the market from another company.
More than 80 companies are signed up to simulate permit trading, and by 2018 the Mexican federal government will require Mexico’s biggest emitters to participate. The country also has a cooperation agreement with California, which already trades carbon permits with several Canadian provinces, and Mexico may eventually join that market. The European experience has been that price volatility discouraged companies from making long term investments in reducing their environmental footprint, despite a steadily lowering carbon cap. Mexico may also require a minimum price for carbon emission permits, as does California, so companies can better predict their future financial positions.
Under this kind of scheme, clearly the carbon price has to be high enough to incentivise a rapid transition away from carbon-intensive energy sources to renewables, says Professor Matthew England, of the Climate Change Research Centre at the University of NSW. He goes on to point out the Swedish and Swiss experience: "Sweden priced carbon dioxide emissions at $US130 [$189] per tonne and Switzerland at $US100 [$145] per tonne. These are the kind of values needed to ensure the world’s fossil fuel reserves remain in the ground. The price rightly factors in the vast cost of unabated greenhouse gas emissions – costs that will be borne by both present and future generations."
An emissions trading scheme right here in NSW
But there's no need to look to Europe, there is an emissions trading scheme running quite smoothly in NSW: the Hunter River emissions trading scheme. Decades ago, the river was heavily tainted by coal companies and other industries dumping salty water and other pollutants. But the NSW government designed a cap and trade scheme that made each company accountable for its emissions.
The scheme has transformed the river from an extremely polluted waterway into a place where dolphins now swim. The same type of scheme can work for the air as it does for the water – it’s the same basic model that the Garnaut Review proposed for a national greenhouse emissions scheme.
There are also other active trading programs as regards several air pollutants[6]. For greenhouse gases, which cause climate change, permit units are often called carbon credits. The largest greenhouse gases trading program is the European Union Emission Trading Scheme, which trades primarily in European Union Allowances (EUAs); the Californian scheme trades in California Carbon Allowances, and the New Zealand scheme in New Zealand Units.
Another alternative is an Emission Intensity Scheme (EIS), the idea of which is to encourage more renewable and low carbon electricity generation and to discourage high emissions power, particularly coal. For an example as to how this may work in the electricity context[7], the COAG Energy Council (Australia’s federal and state energy ministers) met in 2016 to discuss how Australia can transition from fossil fuels to renewable electricity to deliver a secure and reliable power supply resilient to increasingly severe climate change impacts.
The electricity sector is our largest emitter making up about 30-35% of Australia’s total greenhouse gas emissions. Without further action, electricity emissions are expected to grow 20% by 2030. To meet our Paris Agreement commitments – reducing emission by 26 to 28% on 2005 levels by 2030 – we need to move away from coal and gas plants towards more renewable power sources like wind and solar but also solar thermal, geothermal, hydro and biomass, and one way of doing this is by means of an emissions intensity scheme, which is designed to increase the cost of electricity production from high-emitting sources (like coal and gas) while decreasing the cost of less polluting sources (like renewables), the end result being that the market is encouraged to shift from high-emission to low-emission sources of energy.
The “emissions intensity of electricity” refers to the amount of carbon dioxide emitted per unit of electricity generated. Australia’s electricity emissions intensity is relatively high compared to other nations – 6% higher than China, and 60% higher than the United States, because we rely heavily on high emissions sources of energy like coal and gas-fired power.
An EIS has been described as a “rob-Peter-to-pay-Paul scheme”[8]. The Peters in the scheme are the coal-fired generators, particularly the emission-intensive brown coal generators. The Pauls in the scheme are those generators whose emission intensity is less than a “baseline” that the Government will define. The way that the money is taken from the Peters and distributed amongst the Pauls is critical.
How would an Emissions Intensity Scheme (EIS) actually work?
An EIS would “hit the power stations themselves and would set limits on the volume of greenhouse gases they can emit: if they go over, they have to buy credits from lower-emitting power stations. It is both a carrot and a stick — it is an incentive to opt for cleaner energy and a penalty for those who do not. Generators that have high emissions like coal may have to purchase low emissions credits from renewable generators to bring them below their target. Most industries — including the electricity generators themselves — actually support an EIS”[9].
An emissions intensity benchmark for the whole electricity sector would limit how much carbon dioxide can be emitted per unit of electricity, because:
- coal-fired power plants above the benchmark can purchase credits from wind and solar farms or energy efficiency schemes to help them reach the benchmark.
- the emissions intensity benchmark would reduce overtime until it eventually reaches zero emissions. In order to meet Australia’s Paris Agreement obligations, this must happen well before 2050.
- closing the scheme to international permits would drive local investment in renewable energy and energy efficiency.
However, an EIS does not necessarily guarantee a reduction in electricity sector emissions, because if overall electricity demand and supply increases, emissions intensity could go down while total emissions rise, but this could be mitigated by setting a schedule of benchmarks five years in advance, and then revising targets for the next five years if greater emissions reductions are needed.
How would an emissions intensity scheme change Australia’s electricity mix?
The overall intent of an emissions intensity scheme is to encourage more renewable and low carbon electricity generation and to discourage high emissions power, particularly coal. According to modelling by the Climate Change Authority, introducing an emissions intensity scheme in accordance with Australia’s Paris Agreement obligations would have a huge impact on Australia’s electricity mix, thus:
[0] This is an edited summary of aspects of the article "What should carbon cost?" by Gilbert metcalf, which appeared in the Scientific American in June 2020 at pp 56-63.
[1] Source for material on the difference between a carbon tax and an ETS: http://www.sbs.com.au/news/article/2014/06/25/carbon-tax-versus-emissions-trading-scheme-whats-difference
[2] Peter Martin, “Getting your head around the lingo”, SMH, 8 June 2017, 20-21.
[3] Ibid.
[4] Source for material on carbon trading: http://www.sourcewatch.org/index.php/Carbon_trading
[5] Source for material on Mexico: Lucas Laursen, “Emission permission – Mexico’s stock market pilots a programme to buy and sell the right to pollute”, Scientific American, August 2017, 17.
[6] https://en.wikipedia.org/wiki/Emissions_trading See also http://theconversation.com/australias-new-cap-on-emissions-is-a-trading-scheme-in-all-but-name-47035
[7] For this material, see https://www.climatecouncil.org.au/emissions-intensity-scheme
[8] For this explanation, see http://reneweconomy.com.au/emissions-intensity-scheme-another-act-in-tragic-comedy-of-errors-62142/
[9] http://www.abc.net.au/news/2017-06-09/finkel-energy-report-explained/8602524