Carbon Pricing

carbon tax

Carbon pricing is the generic term for placing a price on carbon through either subsidization, taxation, or emissions trading (‘cap-and-trade’). Release of carbon dioxide to the atmosphere causes climate change, according to the consensus theory of anthropogenic (produced by humans) global warming.

Greenhouse gas emissions result from fossil fuel-based electricity generation. As a means of avoiding dangerous climate change, associating an approximate cost to damage such as from increasing extreme weather, carbon pricing may incentivize a reduction of carbon emissions and the discovery or implementation of low-emission technologies.

Currently governments subsidize fossil fuels by $557 billion per year. Scientists have advanced a plan to power 100% of the world’s energy with wind, hydroelectric, and solar power by the year 2030, recommending transfer of energy subsidies from fossil fuel to renewable, and a price on carbon reflecting its cost for flood and related extreme weather expenses. They expect the cost to generate and transmit power in 2020 will be less than 4 cents per kilowatt hour (in 2007 dollars) for wind, about 4 cents for wave and hydroelectric, from 4 to 7 cents for geothermal, and 8 cents per kwh for solar, fossil, and nuclear power.

Carbon taxes have been discussed in Australia, New Zealand, various European countries, Canada, and the United States, and implemented in some of these locations. In general, Germany does not have a carbon tax, only energy and electricity taxes. Renewables are exempt from the electricity tax. There is no formal link between tax rate and carbon content. Brown coal and hard coal, which are very high in carbon content, are exempt from the energy tax. Existing energy taxes, particularly on transport fuels, were increased and a new electricity tax introduced.

The government announced that the electricity tax and petrol and diesel taxes would increase every year. This was achieved every year from 1999 to 2003. Ecotaxes are one of the most effective measures to speed the crucial transition from finite, climate-changing fuels like oil and coal to renewable, climate-neutral ones. Since their introduction in Germany in 1999, petrol consumption has fallen for the first time in the country’s post-war history.

Buses, taxis and other forms of short-distance public transport have only paid the mineral oil ecotax at 1.5 Cent/liter for their fuel. Storage heating systems installed before 1999 are only taxed at half the increased rate. Exemptions to promote efficient technologies and renewable energy sources are also being given. Electricity from combined heat and power generation with an efficiency rate of more than 70% is exempt from mineral oil and electricity taxes, while electricity from renewable sources used for on-site production is also exempt.

Germany also uses a ‘feed-in tariff’ (FIT). Anyone generating electricity from solar photovoltaics, wind, or hydro gets a guaranteed payment of four times the market rate—currently about 35 pence a unit—for 20 years. FITs have now been adopted in 19 EU countries, and 47 worldwide.

Emissions trading has been discussed internationally—through the Kyoto Protocol. Under a cap-and-trade system, firm A can sell one of its ‘permits’ at a higher price than the cost it would incur to reduce the emissions internally, it will sell one permit to B for, say, $5.00 – $1.00 less than the marginal cost ($6.00) for firm B to reduce its emissions internally.

Project-based programs, also referred to as a credit or offset programs, earn credit for projects that reduce emissions more than is required by a pre-existing conventional regulation. These credits can then be traded to other facilities where they can be used for compliance with a conventional regulatory requirement. The decision to generate these credits usually is voluntary, but credits must be certified through an administrative process.

Cap-and-trade programs have provisions that allow a covered entity to borrow allowances from the future to meet current compliance. Allowances generally have a ‘vintage,’ or grandfather clause, that defines the time period in which the allowance was created. Banking provisions permit the use of prior year allowances for compliance in a later period.

This allows a compliance entity to over-comply in early periods, in anticipation of higher carbon prices in subsequent years. At the end of the compliance period, emission sources must have enough allowances to cover their emissions during the period. Sources that do not have a sufficient number of allowances to cover emissions must purchase allowances from other sources that have excess allowances from reducing emissions.

In the European Union, a goal to achieve a 20 percent reduction in emissions from 1990 levels by 2020 is in place, but may soon be increasing to 30 percent. The EU hopes to lead the way in green products and energy resources by increasing the carbon price and forcing more green jobs. However, critics say that companies are purposefully increasing emissions in order to get paid to eliminate them.

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