As we get closer to COP21 there will be plenty of articles and opinion pieces put forward describing the process, speculating on the outcome and generally trying to help readers understand what exactly is going on. One such piece appeared in the Financial Times recently, written by Pilita Clark. It’s a good summary and has some thoughtful insights but requires some clarification around what the six oil and gas industry CEOs actually argued for in their letter to the UNFCCC.
Pilita Clark rightly points out that a Paris accord, if reached, will be based on many widely differing national contributions, rather than a single agreed policy such as a global carbon price. But the article further qualifies this conclusion with reference back to the letter that the CEOs of Shell, BP, ENI, BG, Statoil and Total wrote to the Executive Secretary of the UNFCCC and the French Presidency, with the following remark;
“. . . the European oil and gas companies that have called for a global carbon pricing framework ahead of the Paris meeting have done so safe in the knowledge this would never emerge from the talks.”
In fact the letter didn’t call for a global carbon price or pricing framework for the very same reason that Pilita Clark gave; this isn’t on the agenda and would never be agreed by the negotiators assembled in Paris.
Rather, the main agenda item for Paris is the negotiation of a framework within which the Intended Nationally Determined Contributions (INDC) will sit. This will probably include provisions for measurement, reporting, verification, peer review and financial assistance for implementation. An important tool for nations to meet their mitigation goals will be through carbon pricing mechanisms, which are referenced in a few Parties’ INDCs but not often enough. The framework agreed in Paris could also include another important provision; the notion of cooperative implementation through the transfer of the obligation under the INDC to another party. This would allow emission reductions to be made at lowest cost globally, which in turn could assist the process of review and agreement on greater ambition.
The International Emissions Trading Association (IETA) have been advocating for such a provision for over a year, with a proposal that would require such transfers to be reconciled in terms of carbon units of some description. The transfer of units would lead to price discovery and therefore the emergence of a carbon market at international level. IETA proposed the following short text insertion within the expected Paris agreement:
Cooperation between Parties in realizing their Contributions
Parties may voluntarily cooperate in achieving their mitigation contributions.
- A unified international transfer system is hereby established.
- A Party though private and/or public entities may transfer portions of its nationally determined contribution to one or more other Parties through carbon units of its choice.
- Transfers and receipts of units shall be recorded in equivalent carbon reduction terms.
IETA have also proposed alternative formulations of the same idea as various Parties (national governments) have put forward their own versions of the concept. Like almost every piece of language proposed so far, this has been incorporated to some extent in the 55 pages of text about to be negotiated, along with its multitude of bracketed options and alternative language possibilities. What survives remains to be seen?
In their letter, the CEOs alluded to this idea, when they called for the following;
Therefore, we call on governments, including at the UNFCCC negotiations in Paris and beyond – to:
- introduce carbon pricing systems where they do not yet exist at the national or regional levels
- create an international framework that could eventually connect national systems.
National carbon pricing systems make complete sense, such as the ETS in Europe and the proposed carbon tax in South Africa. The framework that could connect them would allow for the speedy and transparent transfer of a national obligation across a border through emissions trading, which is exactly what happens today between Norway and the EU, between countries within the EU and arguably even between the USA and Canada through the California – Quebec ETS linkage. But this needs to be a much more widespread activity in order to quickly leverage the full potential for emission reduction that exists at any point in time.
This isn’t an empty call for a global carbon price, but a reinforcement of the call that IETA has been making for some time and a plea to the UNFCCC, the French Presidency of the COP and the respective Parties to see such a measure included in the Paris agreement. It’s a simple practical step that is needed to catalyse the development of a global carbon market.
Last week New York hosted amongst other events, the Papal visit, the UN General Assembly where some 150 world leaders gathered and Climate Week. Arguably this had the makings of a bigger coming together than COP21 itself, although many other issues were also on the agenda, such as the UN Sustainable Development Goals. Nevertheless, the climate issue progressed and the subject of carbon pricing was widely discussed, both how it might be implemented by governments and how companies could use carbon valuation internally in relation to project implementation and risk management.
A highpoint of the Climate Week events was the release by the World Bank of its FASTER principles on implementation of carbon pricing mechanisms . This is work to support the overall push by that organisation for greater uptake of explicit carbon pricing mechanisms at national level as governments consider how they might implement their INDCs.
FASTER is an acronym, with each of the terms further elaborated in a fairly readable 50 page accompanying document. The short version is as follows;
- F – Fairness
- A – Alignment of Policies
- S – Stability and Predictability
- T – Transparency
- E – Efficiency and Cost-Effectiveness
- R – Reliability and Environmental Integrity
I have a slight feeling that the acronym was thought up before the words, but each of the subject areas covered is relevant to the design of a carbon pricing mechanism by governments, such as a cap-and-trade system.
Importantly, the principles recognise many of the key issues that early cap-and-trade and taxation systems have confronted, such as dealing with competitiveness concerns, managing competing policies and complementing the mechanism with sufficient technology push in key areas such as carbon capture and storage and renewables. The latter requires something of a Goldilocks approach in that too little can result in wasted resource allocation, but too much while also being wasteful can end up becoming a competing deployment policy.
In the various workshops held during Climate Week, one aspect of the FASTER principles that did draw comment was the call for a “predictable and rising carbon price”. Predictability should be more about the willingness of government to maintain the mechanism over the long term, rather than a clear sign as to what exactly that price might be. For the most part, commodity markets exist, trade and attract investment on the basis that they are there and that the commodity itself will continue to attract demand for decades to come. We are still some way from a reasonable level of certainty that carbon pricing policies will be in place over many decades, given that they do not enjoy cross-party support in all jurisdictions.
Particularly for the case of a cap-and-trade system, a rising carbon price cannot be guaranteed. Rather, the system requires long term certainty in the level of the cap, after which the market will determine the appropriate price at any given point in time. This might rise as the EU ETS saw in its early days, but equally the widespread deployment of alternative energy sources or carbon capture and storage could see such a system plateau at some price for a very long time. Even within this, capital cycles could lead to the same price volatility as is seen in most commodity markets.
The guarantee of a rising price may not be the case for a tax based system either. Should emissions fall faster than the government anticipates, there could be popular pressure for an easing of the tax. As carbon tax becomes mainstream, we shouldn’t imagine it would be treated any differently to regular income based or sales tax levels, both of which can fluctuate.
The release of the FASTER Principles coincides with my own book on carbon pricing mechanisms, which was launched just prior to Climate Week. I cover many of the same topics, but drawing more on the events that have transpired over the last decade. Both these publications will hopefully be of interest to individuals and businesses in China, the government of which formally announced the implementation of a cap-and-trade system from 2017. This will be an interesting implementation to watch, in that it may well be the first such system that operates on a rising cap, at least for the first few years. Irrespective, the announcement ensured that Climate Week ended on a high note.
An underpinning theme of my blog postings over the years has been discussion around government policy frameworks that seek to attach a cost to CO2 emissions – or so called carbon pricing. I have argued for them, commented on their inner workings and highlighted successes and failures along the way. At the start of each year I have published an overview of global progress, which of course has always featured the EU ETS, but now incorporates systems and approaches from countries such Kazakhstan and South Africa.
The importance of placing a cost on anthropogenic emissions of carbon dioxide cannot be understated, yet it took a fairly heroic effort from the World Bank this time last year to even get the subject of carbon pricing onto the agenda of the UN Climate Summit in New York. Despite the efforts in many countries, this important policy instrument still doesn’t get the recognition or attention it deserves. Yet, as I have argued on many occasions, including my e-book published to coincide with the Summit last year, the climate issue probably doesn’t get resolved without it.
So on the anniversary of that Summit, with Climate Week in New York coming around again, I have a second book being launched, devoted entirely to the all-important subject of carbon pricing as a national and global policy instrument.
“Why Carbon Pricing Matters” looks at how various national pricing mechanisms work, why some of them may not work at all, what is wrong with others and of course seeks to answer the very question it poses in its title; why this policy instrument matters so much. With COP21 in Paris approaching, I have also argued the case for recognition of this instrument at the global level as well; this isn’t just about national policy implementation.
Not surprisingly the EU ETS gets a chapter to itself; there is a great deal of history here and many lessons learned, but some still to be recognized. As an Australian I have also ventured into the murky waters of carbon pricing policy in that country, which changes constantly and always throws up surprises. With a new Prime Minister, another round of debate may well be on the cards; we shall see.
Finally, I have again challenged the business community to think long and hard about this policy instrument – there are so many reasons why it is the best course to follow. Policy to manage carbon dioxide emissions is inevitable, so the choices we make now may impact the economy and environment for generations to come.
The book is available exclusively on Amazon, either for Kindle or iPads, iPhones and other devices with the Kindle App. This year, the book is also available in hard copy, given the number of requests I had for such treatment over the last twelve months. For those that haven’t caught up with my first attempt, it is now also available in hardcopy.
The recent letter on carbon pricing from six oil and gas industry CEOs to Christiana Figueres, Executive Secretary of the UNFCCC and Laurent Fabius, Foreign Minister of France and President of COP 21 sent something of a tremor through the media world, to the extent that the New York Times picked up on it with an editorial on carbon taxation. The editorial transposed the CEO call for a carbon price into a call for a carbon tax (as is currently applied in British Columbia) and then set about building the case for a tax based approach and dismantling the case for mechanisms other than taxation; but their focus was on cap-and-trade (such as in California, Quebec and the EU ETS). The New York Times suggested that cap-and-trade doesn’t work, but apparently didn’t look at the evidence.
In January 2015 the EU ETS was ten years old. There were those who said it wouldn’t last and any number of people over the years who have claimed that it doesn’t work, is broken and hasn’t delivered; including the New York Times. Yet it continues to operate as the bedrock of the EU policy framework to manage carbon dioxide emissions. The simple concept of a finite and declining pool of allowances being allocated, traded and then surrendered as carbon dioxide is emitted has remained. Despite various other issues in its ten year history the ETS has done this consistently and almost faultlessly year in and year out; the mechanics of the system have never been a problem.
Comparing approaches and policies is difficult, but in general the various mechanisms can be rated as shown above. The most effective approach to mitigation is a widely applied carbon price across as much of the (global) economy as possible. Lost opportunities and inefficiencies creep in as the scope of approach is limited, such as in a project mechanism or with a baseline and credit approach; neither of which tackle fossil fuel use in its entirety.
The chart clearly shows carbon taxation and cap-and-trade competing for the top spot as the most effective mechanism for delivering a carbon price into the economy and driving lasting emission reductions. Both approaches work, so differentiating them almost comes down to personal preference, which can even be seen in the extensive academic literature on the subject where different camps lean one way or the other. My preference, perhaps influenced by my oil trading background, is to back the cap-and-trade approach. My reasons are as follows;
- The cap-and-trade approach delivers a specific environmental outcome through the application of the cap across the economy.
- Both instruments are subject to uncertainty, however the cap-and-trade is less subject to political change; conversely, taxation policy is regularly changed by governments. The New York Times made note of this with its reference to Australia, which has removed a fixed price carbon price that was effectively operating as a tax.
- The carbon price delivered through a cap-and-trade system can adjust quickly to national circumstances. In the EU it fell in response to the recession and perversely has stayed down in response to other policies (renewable energy goals) currently doing the heavy lifting on mitigation. Why is this perverse; because the other policies shouldn’t be doing this job when a cap-and-trade is in place to do it more efficiently.
- Acceptance is hard to win for any new cost to business, but particularly when not every competitor will be subject to that cost. The cap-and-trade system has a very simple mechanism, in the form of free allowance allocation, for addressing this problem for energy intensive (and therefore carbon intensive) trade exposed industries. Importantly, this mechanism doesn’t change the environmental outcome or reduce the incentive to manage emissions as the allowances held by a facility still have opportunity value associated with them.
- Most carbon policies are being formulated at country or regional levels, rather than being driven by global approaches. Cap-and-trade systems are well-suited to international linking, leading to a more harmonized global price, while tax coordination is complex and politically difficult. Linking leads to a level playing field for industry around the world which fosters acceptance.
The economic effectiveness of both a carbon tax and a cap-and-trade system for carbon pricing means that countries and regions of all shapes and sizes have an implementation choice. For large, multi-faceted economies, the cap-and-trade system is ideally suited for teasing out the necessary changes across the economy and delivering a lowest cost outcome. At the same time it offers the many emitters considerable flexibility in implementation. Equally, for some economies or sectors where options for change are limited, the offset provisions that often feature in the design of an emissions trading system can offer a useful lifeline for compliance. Still, in some economies, a direct tax may be the most appropriate approach. Perhaps this is for governance reasons related to trading, or a lack of sufficient market participants to create a liquid market or simply to encourage the uptake of a fuel such as natural gas rather than coal.
The choice between these instruments isn’t as important as the choice of an instrument in the first place, which is why the letter from the CEOs is so important at this time.
At the UN Climate Summit last September, the World Bank and others put the carbon pricing – or perhaps more correctly carbon valuation – discussion squarely back on the agenda, first with a Statement on Carbon Pricing signed by over 1000 companies and 70 governments and then with a series of side events and meetings which also carried through to COP20 in Lima. The World Bank is now building on their initiative throughout 2015 as we head towards COP21 in Paris.
One important aspect of the initiative is the role of business and the way in which companies handle the carbon pricing (carbon valuation) agenda internally. This stems from another part of the World Bank initiative which was initially launched by the UN Global Compact, the Business Leadership Criteria on Carbon Pricing. The criteria are designed to encourage companies to incorporate an internal carbon price (value) within the business, advocate for carbon value generally and communicate on progress. The first of these has led to some interesting discussions in various forums, with a range of views emerging as to what an internal carbon price (value) does and how it is applied.
Some observers have concluded that an internal approach operates as a true proxy cost of carbon emissions within the business that is applying it, such that the business behaves as if it were subjected to an external carbon tax operating at the same price. This would be done in the absence of such an external price driver, therefore acting as a stand-in for the lack of government action. To some extent, wishful thinking is operating here, with some believing that internal carbon pricing can lead to widespread emission reductions as a major business led initiative. But this is not what is happening or what is meant by an internal carbon price.
Rather, the internal “carbon price”, also referred to as a “shadow carbon price”, “carbon price premise” or “carbon screening value” is normally a mechanism used to manage the future regulatory risk that parts of the company or a future project may be exposed to. For example, if a certain investment is to be made, that investment is then tested against a variety of future conditions, which could include an eventual cost incurred by the expected emissions of carbon dioxide. Although the project may not immediately be exposed to such a price, the development of climate legislation over the life of the project may create such an exposure, which in turn could threaten the future viability of the asset. The application of a screening value applied when the investment proposal is being assessed allows the investor to reconsider the project, change the scope, modify the design or simply accept the level of risk and proceed.
The practice of applying an internal carbon price (value) in this manner is one of many steps that a company may take as it prepares for a world in which a real cost on carbon emissions becomes an external reality. The World Bank has developed a series of case studies on these preparatory measures and these have been published very recently in a report titled “Preparing for Carbon Pricing, Case Studies from Company Experience: Royal Dutch Shell, Rio Tinto, and Pacific Gas and Electric Company”. The report was prepared by the Washington based Center for Climate and Energy Solutions (C2ES) under the auspices of the Partnership for Market Readiness, a World Bank initiative.
These case studies illustrate the benefits of incorporating climate change policies into corporate strategies; analyzing risks and opportunities in an environment of new public policies; and engaging effectively with relevant stakeholders—including governments. The case studies also show how carbon assets are traded and what systems are being constructed to monitor, report, and verify company level GHG emissions.
There is a well-known saying that “Politics makes strange bedfellows”. In recent weeks, carbon pricing has seen its share of media exposure and strange bedfellows, although this shouldn’t come as a surprise given that it is all about politics anyway. The good news is that this much maligned and misunderstood subject is finally getting some solid airtime, albeit from some interesting supporters.
The re-emergence of this subject has been building for some time now, but perhaps was highlighted by the June 21st op-ed by Hank Paulson in the New York Times. Paulson served as Secretary of the Treasury during the recent Bush administration, following many years at the helm of Goldman Sachs. Although his article was in part directed at the launch of the recent Risky Business report, Paulson used the opportunity to reach out to the Republican side of the political spectrum in the US and argue that a carbon price (a tax in this case) was “fundamentally conservative” and “will reduce the role of government” rather than the opposite which many opponents argue. At least in my view, he is right. Intervening in the energy mix, forcing certain technology solutions, requiring a given percentage from a particular energy source and so on are all big government steps towards addressing emissions. A carbon price is clean and simple and can get the job done.
On the opposite page of the New York Times was the reality check from Nobel Prize winning economist Paul Krugman. While Krugman made it clear that Paulson had taken a “brave stand” and that “every economist I know would start cheering wildly if Congress voted in a clean, across-the-board carbon tax”, the sobering reality from Krugman is “we won’t actually do it”. Rather, he imagines a set of secondary measures, the “theory of the second best” as he calls it, including vehicle efficiency standards, clean energy loan guarantees and various other policy measures. My view is that while all of these are important parts of a coherent energy policy, they are approaching third best when it comes to CO2 emissions.
Meanwhile, another strong advocate of carbon pricing has emerged, namely the World Bank. They have never been silent on the issue and indeed have pioneered policy approaches such as the Clean Development Mechanism of the Kyoto Protocol, but this time they have gone much further and are being considerably louder and bolder. The World Bank have produced a statement, “Putting a Price on Carbon” and have called on governments, companies and other stakeholders (e.g. industry associations) to sign up to it. The statement calls for:
. . . the long-term objective of a carbon price applied throughout the global economy by:
- strengthening carbon pricing policies to redirect investment commensurate with the scale of the climate challenge;
- bringing forward and strengthening the implementation of existing carbon pricing policies to better manage investment risks and opportunities;
- enhancing cooperation to share information, expertise and lessons learned on developing and implementing carbon pricing through various “readiness” platforms.
This is all good stuff, but of course now it needs real support. A further look at the World Bank website illustrates the growing patchwork of activity around carbon pricing. It’s quite heartening.
To finish where I started, the strange bedfellows, perhaps nothing could be closer to this than seeing Australian mining magnate and now Member of Parliament, Clive Palmer, on the same stage as climate crusader Al Gore. Only weeks before Mr Gore had made the very clear statement that “We must put a price on carbon in markets and a price on denial in politics”, but nevertheless stood with Palmer as he announced that he would support the Government’s decision to repeal the Carbon Pricing Mechanism (there isn’t a colour for repeal on the World Bank map). I don’t think Mr Gore was particularly happy about that bit, but hopefully was there for the follow-on, where Palmer announced that his party would require a latent ETS to be established in Australia for use once Australia’s main trading partners were also pricing carbon. Given PUP’s (Palmer United Party) hold on the balance of power in the Australian Senate, this might at least mean that Australia will stay in the ETS club and emerge again as a player in the years to come. However, considering the fact that New Zealand, the EU, parts of China, Pacific North America (i.e. California, British Colombia), Japan and (soon) South Africa all have some sort of carbon price, latency may indeed be short lived.
With the USA (at a Federal level) going down the regulatory route instead, the Australian Prime Minister touring the world arguing against it and the UNFCCC struggling to talk about it, perhaps it is time to revisit the case for carbon pricing. Economists have argued the case for carbon pricing for over two decades and in a recent post I put forward my own reasons why the climate issue doesn’t get solved without one. Remember this;
Yet the policy world seems to be struggling to implement carbon pricing and more importantly, getting it to stick and remain effective. Part of the reason for this is a concern by business that it will somehow penalize them, prejudice them competitively or distort their markets. Of course there will be an impact, that’s the whole point, but nevertheless the business community should still embrace this approach to dealing with emissions. Here are the top ten reasons why;
- Action on climate in some form or other is an inconvenient but unavoidable inevitability. Business and industry doesn’t really want direct, standards based regulation. These can be difficult to deal with, offer limited flexibility for compliance and may be very costly to implement for some legacy facilities.
- Carbon pricing, either through taxation or cap and trade offers broad compliance flexibility and provides the option for particular facilities to avoid the need for immediate capital investment (but still comply with the requirement).
- Carbon pricing offers technology neutrality. Business and industry is free to choose its path forward rather than being forced down a particular route or having market share removed by decree.
- Pricing systems offer the government flexibility to address issues such as cross border competition and carbon leakage (e.g. tax rebates or free allocation of allowances). There is a good history around this issue in the EU, with trade exposed industries receiving a large proportion of their allocation for free.
- Carbon pricing is transparent and can be passed through the supply chain, either up to the resource holder or down to the end user.
- A well implemented carbon pricing system ensures even (economic) distribution of the mitigation burden across the economy. This is important and often forgotten. Regulatory approaches are typically opaque when it comes to the cost of implementation, such that the burden on a particular sector may be far greater than initially recognized. A carbon trading system avoids such distortions by allowing a particular sector to buy allowances instead of taking expensive (for them) mitigation actions.
- Carbon pricing offers the lowest cost pathway for compliance across the economy, which also minimizes the burden on industry.
- Carbon pricing allows the fossil fuel industry to develop carbon capture and storage, a societal “must have” over the longer term if the climate issue is going to be fully resolved. Further, as the carbon pricing system is bringing in new revenue to government (e.g. through the sale of allowances), the opportunity exists to utilize this to support the early stage development of technologies such as CCS.
- Carbon pricing encourages fuel switching in the power sector in particular, initially from coal to natural gas, but then to zero carbon alternatives such as wind, solar and nuclear.
- And the most important reason;
It’s the smart business based approach to a really tough problem and actually delivers on the environmental objective.
Whether it is via the auction of allowances or the taxation of carbon emissions, climate policy is increasingly being seen as a source of revenue into the national treasury. For example, the Australian carbon pricing mechanism will raise several billion dollars per annum in its fixed price period (currently $23 per tonne CO2) and EU member state revenues from the ETS have risen as power generators in particular now face full auctioning of allowances, rather than the mainly free allocation that has existed since the system started in 2005.
The issue that the collection of revenue raises is what to do with it. Government already has a long established process for this. Money flows into the national treasury, with spending set through the Budget process that occurs on an annual basis. The principal link between revenue collection and spending is the political agreement on the size of the deficit or surplus, otherwise the two are largely independent. But carbon revenue challenges this model. For example, although the EU ETS Phase III Directive doesn’t (nor can it) dictate how auction revenue should be spent by Member States, it does suggest that it is used as follows:
Member States shall determine the use of revenues generated from the auctioning of allowances. At least 50 % of the revenues generated from the auctioning of allowances referred to in paragraph 2, including all revenues from the auctioning referred to in paragraph 2, points (b) and (c), or the equivalent in financial value of these revenues, should be used for one or more of the following:
- to reduce greenhouse gas emissions, including by contributing to the Global Energy Efficiency and Renewable Energy Fund and to the Adaptation Fund as made operational by the Poznan Conference on Climate Change (COP 14 and COP/MOP 4), to adapt to the impacts of climate change and to fund research and development as well as demonstration projects for reducing emissions and for adaptation to climate change, including participation in initiatives within the framework of the European Strategic Energy Technology Plan and the European Technology Platforms;
- to develop renewable energies to meet the commitment of the Community to using 20 % renewable energies by 2020, as well as to develop other technologies contributing to the transition to a safe and sustainable low-carbon economy and to help meet the commitment of the Community to increase energy efficiency by 20 % by 2020;
- measures to avoid deforestation and increase afforestation and reforestation in developing countries that have ratified the international agreement on climate change, to transfer technologies and to facilitate adaptation to the adverse effects of climate change in these countries;
- forestry sequestration in the Community;
- the environmentally safe capture and geological storage of CO2, in particular from solid fossil fuel power stations and a range of industrial sectors and subsectors, including in third countries;
- to encourage a shift to low-emission and public forms of transport;
- to finance research and development in energy efficiency and clean technologies in the sectors covered by this Directive;
- measures intended to increase energy efficiency and insulation or to provide financial support in order to address social aspects in lower and middle income households;
- to cover administrative expenses of the management of the Community scheme.
A new report out recently from the International Council on Mining and Metals (ICMM) provides a detailed look at the current revenue recycling practices around the world. These include areas such as the following;
- Compensating trade exposed industries
- Support for lower income people to offset the carbon price.
- Support for Research and Development on low carbon technologies.
- Investing in low carbon / low emission projects and energy efficiency schemes.
- Adaptation to climate change.
ICMM have built the report around a core principle which they extol, namely “apply climate change related revenues to manage a transition to a low carbon future”. The report is excellent and well worth reading, but it does raise a very fundamental issue around the direct hypothecation of carbon revenue. This is isn’t just a governance issue though.
Australia serves as an interesting recent example. The decision to link the Australian ETS with the EU ETS followed by the precipitous drop in EU carbon prices has caused Australian government carbon revenue projections to be adjusted (down) accordingly. Recent headlines in Australia suggest that those relying on government support for various energy initiatives are now concerned about the certainty of that support and the overall level of it going forward. This concern stems from the fact that carbon revenue has been earmarked against certain objectives, such as in the categories listed above.
The alternative approach is to largely delink the collection of revenue and its use, which is the standard practice for most government expenditure. After all, why should we imagine that the collection of carbon revenue and the needs of the economy to make the transition to a much lower emission state should follow the same path. In the very early years, expenditure on R&D and demonstration projects (e.g. CCS, solar thermal etc.) may require funding far in excess of the available carbon revenue, which is often low at this stage as governments introduce a new tax at a modest level or give the bulk of the ETS allowances away for free. Further, at this time the need for guaranteed support for those first tentative investments is critical for long term deployment pathways.
Some years down the road carbon revenue may be very large and probably in excess of the transitional needs, which then argues for the bulk of the money to flow to general revenue. This will lead indirectly to reductions in other taxes, but the linkage would be unspecified. In this case, forcing the use of a large revenue stream on specific objectives may become a market distortion in itself. It is the job of the underlying mechanism (e.g. carbon tax, cap-and-trade, energy pricing) to drive deployment of a new set of energy technologies, not government against the need to spend earmarked revenue.
This is an issue that will likely run and run, assuming carbon prices ever recover to some meaningful level. The ICMM report is a useful contribution to the discussion and certainly gives an excellent overview of current practices. However, it does enter the discussion with the somewhat myopic view of ongoing hypothecation.
In a year which saw extreme weather rise up the political agenda and the consequences of a changing climate starting to sink into our collective psyche, action to actually address the issue of rising levels of CO2 in the atmosphere remained limited.
With regards issue recognition and despite arguments about attribution, the Bloomberg Businessweek headline after Hurricane Sandy was a telling moment. But events such as this seem to have a short half life, so it remains to be seen how lasting this will be.
The principal policy instrument to trigger action, a price on CO2 emissions, did gain political traction and coverage, but its impact remained mute. Several jurisdictions introduced carbon pricing and others continued developing approaches and/or starting up schemes already in the pipeline. Notably, despite industry resistance, Japan introduced a modest carbon tax (although there has been a change in government since then so watch this space) and Kazakhstan leapt ahead of the pack by introducing an emissions trading system for startup this week. The Chinese trial systems began to take shape and there is now serious discussion about national implementation in the 2016 5-year plan. As of January 1st the California ETS is up and running, as is the Quebec system. The Australian carbon price mechanism started in 2012 and importantly the Australian Government passed legislation to link their system with the EU ETS. But fierce opposition forced the EU to take a step back with regards its plans to cover international aviation under the EU ETS.
The EU did however take one major step forward during 2012, in its recognition that a carbon market created as a result of an ETS may need some government intervention from time to time to keep it on track and relevant. Although the issue is far from settled, there is at least a proposal on the table aimed at supporting the weak market in the EU. The move also establishes an important precedent for the future, not just in the EU but probably in the minds of policy makers globally.
With global carbon prices remaining low, the one critical technology for actually rescuing the emissions problem, carbon capture and storage (CCS), struggled badly. Shell did announce an important project in its oil sands in Alberta, but other than this little else happened. At the end of the year the EU managed to deliver a damaging blow to the technology by not coming up with a single project to support with its NER300 CCS funding mechanism, despite having nearly €2 billion in hand to spend. Instead, the money went to some twenty or so small renewable energy projects. It’s hard to overstate the importance of CCS, yet it seems increasingly distant in terms of commercialization and deployment.
From a climate perspective, the year concluded in Doha with two weeks of talks that did a lot to tidy up the UNFCCC process, but hardly pushed the agenda forward at all. If the “holy grail” of a global deal really is to be agreed by 2015, then something remarkable needs to happen during 2013.
Happy New Year!