Carbon Tax and Carbon Trading Solutions
If you look at the indirect costs, a gallon of gas wouldn’t cost $3 but $12. The challenge is to get the market to be honest and that means restructuring the tax system to incorporate those indirect costs. We can lower income tax and raise a carbon tax. We wouldn’t change the amount of tax we would pay but we would adjust the cost of carbon to reflect the real cost to society, not just the direct cost. If we can do that, the world economy can begin to restructure itself.
- Lester Brown, Founder Earth Policy Institute, Author of World on the Edge
Socialism collapsed because it did not allow the market to tell the economic truth, Capitalism may collapse because it does not allow the market to tell the ecological truth
- former vice president Exxon, North Sea
If China, Brazil, Chile, and the other emerging economies eyeing these (carbon trading) mechanisms are included, carbon pricing initiatives could…cover almost half of total global emissions
- Niklas Hohne, co-author, World Bank 2013 report - Mapping Carbon Pricing Initiatives: Developments and Prospects
Ultimately, global warming comes down to a social and political problem. If we had the political, governmental, investment and social motivation, we could reduce emissions to a safe level. As extreme weather and its impact become a global norm and predictions only growing worse by the day, policy and trade mechanisms are now aggressively being pursued in both carbon taxation and trading schemes. This movement to reflect real environmental costs of fossil fuel on the bottom line is gaining momentum rapidly. Ultimately, businesses in the old economic paradigm have to be compelled and guided by governmental, social and scientific institutions to act in the best interest of humanity.
Divestment and Stranded Assets
Two synergistic movements are Stranded Carbon Assets, spearheaded by the Carbon Tracker initiative and Fossil Fuel Divestment, initiated by 350.org. A recent study by Oxford’s Smith School of Enterprise and the Environment indicate that the fossil fuel divestment campaign is growing faster than any previous divestment campaign. Another recent sign that the investment community is paying attention is the March 20, 2014 announcement by Exxon-Mobil, the world’s largest fossil fuel company, that it will to publish a report on “carbon asset risk”, in response to a shareholders resolution filed by Arjuna Capital. The company will disclose data regarding the risks to their business model posed by stranded assets, as well as their corporate plan to deal with new potential climate regulations.
The campaign, built on research by the British group Carbon Tracker, aims to put pressure on companies to get out of coal, oil and gas holdings on the grounds that potential regulations could reduce the value of fossil fuel reserves.
Market forces such as carbon-reducing regulations, weakening demand for oil and coal in many parts of the world and rapid growth of renewables clearly show that energy leaders of tomorrow will be those that address carbon asset risks today.
These reserves are not only the most carbon intensive, risky, and expensive to extract, but the most vulnerable to devaluation.
The study compared the current divestment campaign with others of the recent past and analyzes the campaign impact on three consecutive groups:
- religious groups and public organizations
- universities, cities, and public institutions
- international market
It found that comparatively speaking, the fossil fuel divestment campaign has achieved a lot in the relatively short time since it’s inception. As of the time of the report, it has impacted:
- 6 colleges and universities
- 17 cities,
- 2 counties,
- 11 religious institutions,
- 3 foundations,
- 2 other institutions
Figure 1: Divestment campaign with South Africa Apartheid regime and the three sectors approached
Direct Capital Impact of Divestment Campaign is Small
The report concludes that of the $12 trillion in assets among university endowments and public pension funds, the largest potential limit of divestment is between $240-600 billion, with another $120-300 billion in debt, which translates to:
- 2-3% fossil fuel equity exposure for US university endowments
- 4-5% for UK university endowments
- 2-5% of public pension funds
An analysis by Aperio Group analysis called Building a Carbon-free Portfolio found fossil fuel divestment only increases ordinary market risk for higher education investors by less than 0.01%. With the exception of coal, direct impacts of fossil fuel divestment on equity or debt for fossil fuel companies will be limited at best, and their share prices are “unlikely to suffer precipitous decline” because divested stock will likely find neutral investors. Coal companies only represent a small fraction of overall fossil fuel market capitalization but due to being less liquid and the scarcity of alternative investors, they are at greater risk.
But Indirect Impact due to Reputation Loss is Large
The outcome of the stigmatization process, which the fossil fuel divestment campaign has now triggered, poses the most far reaching threat to fossil fuel companies and the vast energy value chain.
- Oxford Smith School of Enterprise and the Environment - Stranded assets and the fossil fuel divestment campaign: what does divestment mean for the valuation of fossil fuel assets
The study finds a cascading or multiplying effect on the larger campaign by:
- driving away suppliers, subcontractors, potential employees, and customers,
- leading shareholders to demand management changes
- barring stigmatized firms from competing for new business or completing mergers
- leading to restrictive new legislation by governments – a trend found in every existing divestment campaign
For fossil fuel companies, this could bring about a carbon tax or other laws that could reduce their corporate valuation, and the study finds that a handful of fossil fuel companies are likely to become scapegoats, bearing the brunt of the devaluation.
World Bank report finds growing number of national carbon markets
These regional markets are growing while international carbon prices are at historic lows and the prospect of coordinated international emissions reduction measures uncertain. Kyte believes that “Carbon pricing is emerging and carbon markets have a future.” These emerging schemes can have a significant impact on global emissions – at the same scale that the failed UN Kyoto
Figure 2: World Bank map of 60 regional carbon trading schemes in 2013
The report is a collaboration between the World Bank and consultancy Ecofys. The Bank report highlights cap and trade systems in:
- New Zealand,
- the Regional Greenhouse Gas Initiative,
- regional markets in Japan,
- South Korea’s developing system
- British Columbia,
- South Africa,
- United Kingdom
The report does not fully consider China, which has is already taken concrete steps to reduce pollution and has begun pilot programs in major cities, with expectations to roll out nationally in 2020. “If China, Brazil, Chile, and the other emerging economies eyeing these mechanisms are included, carbon pricing initiatives could…cover almost half of total global emissions,” said Niklas Hohne of report co-author Ecofys.
James Hansen and 17 other scientists propose a 6 % Carbon Tax to Avoid Disaster
In the paper Scientific case for avoiding dangerous climate change, Hansen and 17 top scientists propose an immediate carbon tax to avert looming disaster. The 17 other experts, including climate scientists, biologists and economists calls for an immediate 6% annual cut in CO2 emissions, and a substantial growth in global forest cover, to avoid catastrophic climate change by the end of the century.
The paper argues that our current emergency situation has arisen due to the emissions to date of just a small fraction of the total potential emissions from known reserves and potentially recoverable resources. The teams research shows that the fossil fuel industry receives 450 Billion USD of subsidies a year – $45 USD from each person on the planet.
Figure 3: CO2 emissions by fossil fuels (1CO2 ~ 2.12 GtC). Estimated reserves and potentially recoverable resources are from EIA (9) and GAC (10). (Source: Hansen et al. Scientific Case for Avoiding Dangerous Climate Change to Protect Young People and Nature)
Although there are uncertainties in reserves and resources, ongoing fossil fuel subsidies and continuing technological advances ensure that more and more of these fuels will be economically recoverable. Burning all these reserves of fossil fuels would create a very different and potentially unsurvivable planet than the one that humanity currently knows.
Fossil Fuels are only Cheap because they are Subsidized
Price per Ton of CO2 Emitted Strategy is Supported by Policy Director of Republicans for Environmental Protection – Use Legal System to Protect our Grandchildren
Putting Carbon Tax on Consumption
It is a stark and frightening fact that, despite more than two decades of international effort — including enormous time and energy expended on the Kyoto Protocol — and significant economic costs, carbon emissions are now rising even faster than they were in 1990. Back then they were going up by about 1.5 parts per million () per year. Now it is 2 . The critical 400 global threshold will shortly be crossed, and there is little reason to believe that this trend is likely to be halted any time soon.
- Dieter Helm, professor of energy policy at the University of Oxford, Fellow in Economics at New College, Oxford, and author of The Carbon Crunch: How We Are Getting Climate Change Wrong and How to Fix It.
Dieter Helm cites a frightening statistic – China and India together currently add around three new coal stations a week, and between now and 2020 around 400 to 600 gigawatts of new coal is likely to come onto the world’s energy systems if there is no effective policy tool to prevent it. Helm warns us, however to think a little before blaming China and India. China’s phenomenal economic growth has been based on exports of mostly energy-intensive goods, from steel and petrochemicals to a host of manufactured products – we all know where our iphones and iPADs come from. These have been bought largely by the U.S. and Europe, which together account for nearly 50 percent of world GDP.
What Helm suggests is a Carbon Consumption tax, not a Carbon Production tax. It is carbon consumption that measures the actualand hence the responsibility. Remarkably the Kyoto framework does not take consumption into account but instead focuses on carbon production. This incorrect focus explains anomalies such as how carbon production can be falling in Europe in line with its Kyoto targets, while global carbon emissions continue rising. Deindustrialization in Europe and the collapse of the former Soviet Union made compliance to Kyoto Protocol targets easy. For example, the UK’s carbon production fell by more than 15 percent between 1990 and 2005, but once imported carbon is taken into account, carbon consumption increased by more than 19 percent.
Unless people pay the cost of their pollution, they will not do much about it, and this is best measured by carbon consumption, not carbon production. There must be a tax for carbon consumption, complete with border adjustments to ensure that imports of carbon-intensive goods from countries without a carbon price are treated on the same basis as domestic production. If you want an iPAD, you should be prepared to pay the carbon consumption tax for it. Then it represents the real previously externalized costs of the product. This high cost will economically force manufacturers such as Apple to redesign their products to truly have a lowand in turn, to reduce the burning of carbon in Chinese coal plants.
Eliminating Fossil Fuel Industry Subsidies
- contributing to continual reliance of dirty energy and lowering incentives for clean energy
- contributes to ballooning government debt
Aside from leveling the playing field for clean energy, there are other compelling reasons for eliminating subsidies:
- Countries that subsidize fossil fuels significantly increase national budget deficits and make them vulnerable to external shocks such as rising interest rates
- Expensive subsidies means less money available to invest in public services like infrastructure, health or education
- Subsidies promote inequality because they mostly benefit the rich. IMF research shows that a measly 7% of fuel subsidies in poor countries end up in the hands of the bottom 20% of households while 43% end up in the pockets of the richest 20%. Put simply, richer people are the ones most likely to drive cars.
In June 2013, Indonesia cut its annual $20 billion subsidy bill by increasing petrol prices by 44%. Malaysia soon followed suit; in an attempt to reduce its budget deficit of 4.5% of GDP, it has reduced its petrol subsidies. As a result, household energy bills immediately climbed by 15%. Egypt’s 2014 deficit stands at 14% of GDP and is considering following suit.