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Cap and trade systems

Page history last edited by Brian D Butler 14 years, 4 months ago

Dangers of a Carbon Trade war:

 

Proponents argue that the tariffs are needed to prevent the loss of US jobs and the shift of emissions-generating activities to other countries. Free trade advocates are horrified at the prospect, which they worry could violate global trade rules and spark an economic war.

 

The argument for carbon tariffs is simple. Cap-and-trade legislation will impose new costs on energy-intensive industries like steel, cement, and petrochemicals. Many of those industries are exposed to competition through international trade. If major rivals, such as China and India, do not impose similar new costs on their own companies, the playing field will tilt toward them. Not only will the United States lose manufacturing jobs, it will also fail to rein in emissions, as polluting activities move to places with even dirtier production processes.

 

A carbon tariff would help avoid this. Goods imported into the United States would see their prices rise by the same amount as their domestically manufactured counterparts.

 

Read more... CFR.com  and original here:  It was originally available here

 

Cap-and-Trade Costs

A new paper by the Brookings Institution finds that consumers, rather than corporations, are likely to bear most of the costs associated with a cap-and-trade system to control greenhouse gas emissions. The paper argues that governments should compensate consumers for these costs.

This CFR Backgrounder looks at the debate over the cap-and-trade program.

 

 

 

2009 - fiscal stimulus plan:

cap and trade favored by Obama + auction rights...like was done with Telecoms

 

Comments:

The Obama administration has already promised a cap-and-trade regime for carbon emissions. A carbon tax would achieve the same environmental goal with greater clarity, fewer opportunities for gaming and a firmer commitment to gather additional revenue. A cap-and-trade system with all permits auctioned and some other tweaks would be the next best thing.`  Clive Crook, FT columnist

 

News 09/2008:  Six American states were due to set the country’s first mandatory cap-and-trade scheme to combat global warming in motion on September 25th with an auction of permits to emit greenhouse gases. The Regional Greenhouse Gas Initiative will impose a limit on emissions from big power stations in ten north-eastern states from the beginning of next year

 

 

Cap and trade systems  - the government sets an overall limit on emissions and then sells or gives away an equivalent number of tradeable permits to pollute. This allows the firms that find it cheapest to reduce their emissions to do so, leaving those for which cuts would be costlier to buy permits.

 

All the leading Democratic candidates for president, along with John McCain on the Republican side, have endorsed this concept.  The Cap and trade system, however, is opposed by President Bush, and most republicans.  Past bills have foundered either because they seemed too ambitious to Republicans worried about the effects of a cap on American industry, or too feeble to environmentally-minded Democrats.

 

Also, Imports would have to be certified as to their carbon content, and would be taxed accordingly.  China and India might well come more swiftly to the negotiating table if they faced the possibility of losing their export markets. But the experience of America and Europe suggests that threatening trade sanctions is not the only way to bring a country round. After all, Europe set a carbon price without imposing tariffs on American goods, and America looks like following its lead anyway. What's more, the costs of a border tax could be huge, not just because of the massive bureaucracy needed to certify the carbon content of different goods imported from different factories in different countries, but also because such a tax would be a dangerous weapon in the hands of America's growing gang of protectionists.  But how to you measure the "greenness" of a business?  of a nation? Emerging is a new market of green accounting

 

The details of the different cap-and-trade schemes vary wildly. Some involve giving most of the permits away to businesses—a notion that green groups denounce as corporate welfare. By contrast, in the Regional Greenhouse Gas Initiative, a scheme that will soon get underway in the north-east (see article), all the permits will be auctioned. Hillary Clinton, for one, wants any federal scheme to take the same approach. ACSA aims for the middle ground by proposing that the proportion of permits sold at auction should rise gradually, from 24% in 2012 to 73% in 2036.

 

How should the revenue from such auctions be spent? Most bills envisage compensation of some sort for dirty industries, which would suffer most from an emissions cap. Friends of the Earth estimates that ACSA would dole out $324 billion to the coal industry, for example, in addition to awarding it free permits worth hundreds of billions of dollars more. Beyond that, most congressmen want to funnel any spare cash to pet causes: renewable energy, biofuels and perhaps even nuclear plants, even though they produce no emissions and so should prosper under a cap. Mrs Clinton wants both to cut taxes and to help poor families cope with the higher fuel and power costs that an emissions cap would bring.

 

Some senators worry that the costs of a cap-and-trade scheme may spiral out of control. They suggest that the government should cap the price of permits by agreeing to sell more of them at a fixed rate if they get too expensive. That, in turn, has angered the green lobby, who say that it is the bill's environmental benefits, rather than corporate profits, that should be sacrosanct. ACSA attempts to square this circle by setting up a sort of central bank of carbon, which would allow firms to borrow permits against their future allocations. That might help to smooth out spikes in the carbon price, without lifting the overall cap. The bill also allows firms to pay for “offset” schemes to reduce emissions in industries that do not have a cap, such as agriculture and forestry, in lieu of making cuts of their own.

 

 

ACSA's biggest concession to industry, however, is a clause that would penalise imports from countries that do not have an emissions cap. To get such goods through customs, importers would have to buy permits to cover the greenhouse gases emitted during their manufacture. One of the biggest fans of this idea is the AFL-CIO, America's trade union federation, which worries that a cap-and-trade scheme would further sap the competitiveness of American manufacturing and hasten the exodus of jobs to China, India and Mexico.

 

source:  economist 

 

 

Problems with Europes "cap and trade" system 

 

IT SOMETIMES seems that plans for emissions trading are piling up even faster than the greenhouse gases they are designed to curb. In late July the first emissions exchanges in Australia and Canada opened, in anticipation of mandatory carbon-trading schemes in both countries. America already has a healthy voluntary carbon market, and will soon add an obligatory one for utilities in certain states. But the evidence from the most advanced such “cap-and-trade” programme, the European Union's Emissions Trading Scheme (ETS), suggests that companies are struggling to make the most of carbon markets.

 

In theory, cap-and-trade schemes allow firms to reduce their emissions at the lowest possible cost. Governments put a limit on the amount firms can pollute, and issue an equivalent number of allowances. Those companies that find they do not have enough must either cut emissions or buy spare allowances from others. But for the system to work efficiently, firms must take advantage of all opportunities to reduce the costs of participation.

 

Not all of them do, however. Last year, after the price of European allowances plunged, New Carbon Finance, a research firm, and Cantor CO2e, a brokerage, surveyed 452 participants in the ETS. The price had fallen because it had become obvious that governments had issued too many allowances and the market would soon be flooded. Yet 31% of respondents with allowances to spare said they would not sell them until the end of 2006, just in case a last-minute surge in their emissions left them short. Another 16% said they would wait until the end of this year, when the first phase of the ETS winds up. This caution has cost them dearly. The price of permits, which was roughly €15 ($19) at the time, is now less than €0.15 ($0.21).

 

The root of the problem, says Guy Turner of New Carbon Finance, is that many companies view the ETS as a regulatory burden, rather than a chance to make money. They tend to put environmental experts, rather than financial whizzes, in charge of their participation in the scheme. The former, in turn, tend to concentrate on making sure that their firm has enough allowances, rather than on maximising their value. They are seldom used to trading, and are sometimes uncomfortable with the idea of “profiteering” from a system designed to cut pollution. Moreover, they have little incentive to stick their necks out by proposing elaborate transactions in the carbon markets, since they are unlikely to be rewarded if they succeed, but risk dismissal if something goes wrong. Governments do not help matters by handing out allowances to polluters for free, giving them little incentive to capitalise on what are actually valuable assets.

 

James Emanuel of Cantor CO2e points to several signs that firms are not exploiting carbon-trading opportunities to the full. One example is the difference in price between European allowances and Certified Emission Reductions (CERs), which are carbon credits derived from emissions cuts in poor countries. Under the ETS, CERs are interchangeable with European allowances, within certain limits. Yet they are much cheaper. Firms holding European allowances could sell them now, buy CERs instead, and pocket the difference. The persistent difference in price suggests that few are doing so.

 

By the same token, on the futures market, there is hardly any difference between the price of European allowances to be delivered in 2008 and those to be delivered in 2009. Since firms receive their allowances from governments more than a year before they actually need them for compliance purposes, they could sell them and sign a futures contract agreeing to buy the permits they need a year later, at only marginally higher cost. This is tantamount to taking out a loan at an enticingly low interest rate (see chart).

 

But a growing number of firms, says Louis Redshaw of Barclays Capital, an investment bank, are now starting to take advantage of such opportunities. Emissions trading got off the ground earliest and has become most sophisticated, he points out, in the most economically liberal countries and in the most competitive industries. In Britain, for example, it got under way before the ETS was officially launched in 2005. In Poland, by contrast, it did not take off until last year.

 

Similarly, utilities in countries with liberalised energy markets were already used to trading power on a daily basis and to adjusting their power sources based on the changing costs of different fuels. Such firms already had plenty of experienced traders, and business models that could adapt to a variable emissions-price with relative ease. But utilities in regulated markets, let alone cement-makers, faced a far more daunting transition.

 

There are good reasons why some firms might be wary of emissions trading. For small firms the cost of analysing how to make money from their allowances could outweigh the benefits. Virtually all the 55 eligible paper mills in Britain opted to join a more rigid emissions-capping scheme instead of the ETS, simply to avoid the extra administrative burden, according to the Confederation of Paper Industries, a lobbying group. Other firms are so big that the profits to be made from permits, although substantial, would not be worth managers' time. Analysts say some big oil firms, for example, treat emissions trading as a distraction from their main business.

 

To complicate matters further, there are still some uncertainties about the legal regime for exchanging allowances and CERs across national borders. Lack of liquidity might account for some of the anomalies seen in carbon markets. And in a business driven by government regulation, there is always the risk that fickle politicians might change the rules of the game, with unpredictable consequences. On July 31st, for example, Latvia became the latest country to sue the European Commission for an increase in its allocation of allowances. If any of six such cases succeeds, it could contribute to another glut in allowances, and another slide in the price.

 

Nonetheless, a reluctance to trade allowances, whether driven by timidity or prudence, adds to the overall cost of emissions abatement. Despite misgivings about brokers keen to drum up clients for complicated transactions, Cameron Hepburn, an academic at Oxford University, agrees that most firms should pay more attention to emissions trading. “The faster they do,” he says, “the quicker we'll have an efficient carbon market.”

 

source: economist 

 

 

Learning from Europe

 

COULD America's first experiment with a cap-and-trade scheme for greenhouse gases go awry? That is the fear of some observers of the Regional Greenhouse Gas Initiative (RGGI), an agreement among ten north-eastern states to cut emissions from power plants by 10% between 2009 and 2018.

 

The states in question formed RGGI (pronounced “Reggie”) out of despair at the federal government's failure to tackle emissions growth. Some states in the West and the Midwest are working on similar schemes. But RGGI will be the first to start up: emissions will be capped from January 1st 2009.

 

RGGI's designers hope to avoid some of the flaws that have dogged the Emissions Trading Scheme (ETS), the European Union's ongoing experiment with cap-and-trade. European governments handed out emissions permits to existing power plants and factories free of charge; that turned out to be a windfall for big polluters, who were able to sell on unneeded permits for huge profits. Moreover, it gradually became clear that governments had handed out too many permits, causing their price to fall to almost nothing in the first phase of the scheme, which ends this year. If permits are so cheap, why cut emissions?

 

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