Free Economics Essays - Global CO2 Reduction Programme
Emissions trading is set to become the major component of the global CO2 reduction programme. The EU scheme has now been launched and will supersede the UK scheme, which is due to end in 2006. The EU scheme initially targets larger emitters but is likely to be much more widely applied later in the decade. There are also Clean Development Mechanisms and Joint implementation plans. At the other end of the scale, energy consumers will be required to deliver the emissions reductions. Many are as yet only starting to get grips with the likely impact on their operations. This module has demonstrated that this is a rapidly evolving and in some cases controversial or confusing subject. The Energy manager must now deal with the newly emerging carbon market trader.
Select one aspect of emissions trading and explore what you consider to be the benefits, dis-benefits and issues, some of which are still to be resolved. Do you agree, that in the end, this is the only way to get there? Could this ultimately become a global scheme?
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Emissions Trading is a market-based instrument used for environmental protection1. It can be defined as an administrative approach used to reduce air pollution by providing economic incentives for reducing net emissions. In this plan, a central authority (the government or an International Agency) sets limits or “caps” on each pollutant. Companies which exceed these limits may buy emissions credits from entities that are able to stay below the designated limits (Wikipedia, 2005).
The Emissions trading or marketable rights has been in use since the mid-1970’s by the US. Some of the current trading systems are the “cap” on sulphur dioxide authorized by the Environmental Protection Agency after the passage of the 1990 Clean Air Act, The Regional Clean Air Incentives Market (RECLAIM) to reduce emissions of NOx and SOx by California state in 1994, emissions caps for NOx by the US Ozone Transport Commission (OTC) in 1999, the cap on CO2 emissions by Denmark for the year 2001-03, the UK GHG Emissions Trading Scheme in 2002 and “cap and trade” of carbon dioxide emissions by the New York State in 20031.
Emissions of greenhouse gases will be limited by the Kyoto protocol , if it comes into effect. The Kyoto Protocol involving International Emissions Trading(IET), the Clean Development Mechanism (CDM) and Joint Implementation will limit greenhouse gases in the industrialised nations that ratify it. Building on these innovative mechanisms set up under the Kyoto Protocol to the 1992 United Nations Framework Convention on Climate Change (UNFCCC), the EU has developed the largest company-level scheme for trading in emissions of carbon dioxide (CO2), making it the world leader in this emerging market. The emissions trading scheme (EU ETS) started in the 25 EU Member States on 1 January 2005 and due to end in 20061.
The benefits and issues of compliance-related aspects of Greenhouse Gas Emissions Trading in the EU are discussed in detail. The compliance-related components of trading include measurement and reporting of emissions, and sanctions for non-compliance which involve upstream or downstream or hybrid or Community vs. National approaches (CCAP, 1999).
The attractiveness of an upstream system to measure emissions depends on the accuracy of the data for each of the elements, Fuel combusted, carbon content and combustion efficiency. Fuel combusted should be straightforward to estimate as most member states collect energy data from fuel producers. It would be made less feasible though if the member states are not collecting energy data from fuel producers. Also, a number of accounting issues may arise; like need to distinguish fuel that is consumed domestically from exports, need to distinguish fuel that is eventually combusted from that which is used for non-energy purposes and the potential for double-counting fuels that are transferred between fuel producers. These issues require further attention to be resolved.
Carbon contents of fuels can be estimated reliably and easily especially for refined oil products and natural gas. Because of the variability of the coal carbon content, certain coal producers may be unfairly penalized. Carbon factors may attribute more emissions than they are actually responsible for. This problem could be addressed by instituting an appeals procedure which allows the producer to demonstrate the accurate lower carbon factor. Combustion efficiency can vary greatly between particular fuel types in a given country, then the use of default values may lead to inaccurate estimates of emissions. Generally the use of such values are acceptable as they do not have environmental impacts.
Measurement in a comprehensive downstream system, however, involving small sources, would not be economically feasible. It would be simple in a limited downstream system as it is likely that all regulated sources would be directly measuring emissions or documenting their fuel use already. Measurement in a downstream system rather than in an upstream system should be somewhat simpler because adjustments for imports and exports would not be necessary.
In a hybrid system, accounting complexities as in an Upstream system would arise and also some carbon may be double-counted. To avoid this, fuel producers must distinguish fuels sold to entities that are regulated downstream from fuel sold that are not. Further, regulated entities will have a financial incentive to perform the task. From Community vs. National approaches, community approach is preferable as it provides confidence in the accuracy of the emissions estimates, whereas, in a national systems approach, where different countries use different emissions measurement techniques, could lead to uncertainty about the ‘Quality’ of allowances.
Reporting of Emissions under upstream, downstream and hybrid systems require regular reporting by regulated entities. It seems that reporting burdens imposed by the different systems would be very similar and manageable in all cases. It is worth noting that a comprehensive downstream system would require reporting by small sources, which probably would have little or no experience with energy use or emissions reporting. Also, monthly emissions reporting may impose an unnecessary administrative burden on regulated entities. The reporting frequency needs to be clarified further.
If a community-level system is set up with a community institution controlling the allocation and compliance by individual companies, a reporting system similar to that set up under the regulation on ozone depleting substances would be required. If a national systems approach is taken, a directive specifying minimum reporting requirements probably would result in improved reporting and lead to better environmental performance of the trading system.
During verification either by upstream, downstream or hybrid systems, regulators will rely on sampling techniques and other measures to choose regulated entities for audit. Verification of emission reports, therefore should be feasible under any of the design options. It should be noted, however, that upstream and to a lesser extent hybrid designs would impose a verification burden on government than a downstream system, due to a smaller number of facilities included.
In a community system it would be up to the EC to verify emissions reports itself or it would set minimum verification requirements that member states were obliged to follow. The policy to leave the frequency and methods of verification to the member states is controversial as differences in verification efforts between two member states are increasingly seen as distorting the internal market and reducing the effectiveness of the legislation. For the purpose of environmental integrity, centralization of verification function is desirable. It is possible, however, that the verification procedures adopted by the EU would not be as stringent as those that some Member States would adopt on their own. Centralised verification might not be politically feasible, the competition policy precedent above notwithstanding, because it would not be sensible to centralise some compliance functions but not others, and as noted above monitoring and reporting activities will be decentralised if European regulatory traditions hold. If a national systems approach to trading is taken, like as with monitoring and reporting, an EC Directive establishing minimum verification requirements would improve the environmental effectiveness of the trading system.
Sanctions by upstream, downstream and hybrid systems should include strong financial penalties that far exceed the price of the allowances. If a community approach is chosen, the penalties should be harmonized across member states of the EU. If harmonizing penalties does not work out, it may be that the problem would work itself out, because countries that are likely to end up in non-compliance due to last-minute transfers could avoid the problem by increasing their penalties. On the other hand, it may result in weak sanctions throughout the EU, which would weaken the effectiveness of the trading system.
The severity of the problem of climate change due to greenhouse gases has been acknowledged internationally (more than 180 countries according to the UNFCCC). There are scientific uncertainties and political differences about ways of addressing the problem (Richardson, 2003). Using tradable rights as a means of pollution control was first suggested by the Canadian economist, John Dales in 1968. Economic modeling indicates that emissions trading can lead to cost savings of up to 30-90% (Baron, 2001). According to analysts from the International Energy Agency, the use of economic instruments such as domestic and international emissions trading could reduce the costs of complying with emissions targets by up to 50 per cent. However, theory is not always the same as practice. Climate stabilization will require tremendous changes in the way energy is produced and consumed globally.
Emissions trading has been an effective tool for climate protection. It offers many companies the opportunity to create a competitive advantage for themselves. Trading emission credits offers an additional source of income (Federal Ministry for the Environment, Nature conservation and Nuclear Safety, Germany 2003). The United States has used market-based approaches to phase out lead in gasoline, to cut emissions of sulphur dioxide (SO2) as a means to reduce acid rain, and to control urban pollutants in Los Angeles. The cost savings in the lead and SO2 cases were substantial, as much as 50 percent or more compared to a control policy in which no trades were allowed. The SO2 trading policy also stimulated energy efficiency investments and the use of new abatement technologies (Tebo, 1998). The Danish and British Emission Trading systems seems to fit in well in the broader picture if the Kyoto mechanisms (Baron, 2001).
Another related benefit of trading involves the flow of substantial resources to developing countries, which would shift these countries to a more prosperous but lower-emissions development path. Developing countries would benefit from an increased capacity for local economic development and from investment in social priorities such as local health and environmental problems (Tebo, 1998).
Any system has its negative side as well. Emissions Trading can be difficult to initiate, monitor and manage. Searching for trading partners, negotiating deals, securing regulatory approval, monitoring and enforcing deals and insuring against the risk of failure can involve higher transaction costs. The government may attempt to influence the market to their advantage or market power allowance or credit prices may be exercised by large players in the market (Tebo, 1998). The different political and technical issues remain to be studied and if they are successfully resolved, the world will have gained a new and very effective way of combating climate change.
International Emission Trading is full of promise. It can be effected with meaningful participation of countries with mutually agreed reduction or limitation targets. Optimising advantages internationally on the long run by limiting the maximisation of advantages in the short run is the economic rationale for setting reduction targets globally. To live in partnership by extending it to all the regions of the world and making Emissions Trading global would imply to respect nature’s freedom.
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