The carbon market beyond Kyoto?

A plea to include six measures into the post-Kyoto agreement

 

 December 02, 2012

‘Concerns about climate change have placed this threat to development prospects high on the international agenda, particularly in terms of its economic, trade and social impacts’[1].

The Kyoto Protocol officially ends in 2012, but delegates of the United Nations Framework Convention on Climate Change (UNFCCC) agreed in Qatar in December 2012 to extend the protocol until 2020 since the convention still lacks a new climate treaty[2]. The targets for the post-Kyoto Protocol were agreed upon during the conference in Bali in 2009 with a climate stabilisation goal of 2°C above original levels[3]. However, the Kyoto Protocol has not reached the collective goals since broad participation and compliance are not met [4], [5]. Furthermore, the price of carbon is currently around € 7,00 and has been low since the beginning of 2012. Emissions have also been low, but only due to the crisis and not so much due to the functioning of the carbon market. Here I explain the carbon market and explore the options of either keeping the carbon market while ‘setting aside’ the one billion emission rights left to be auctioned, or introducing a fixed carbon tax[6],[7]. Finally, I conclude that the post-Kyoto Protocol would have to meet six measures, including a carbon tax, in order to combat climate change and meet the needs of current and future generations.

The EU ETS

The carbon market acts as follows: the EU has set a limit or cap on the amount of emissions allowed for each sector or industry (the cap). The cap is allocated (currently for free) to firms through emission permits, representing their annual emissions and their right to emit or discharge a certain amount of the greenhouse gas. The total amount of permits cannot exceed the emission cap and therefore, the total emissions would be reduced. Next to this cap, Kyoto stated there would also be a price on the GHG emissions. This price could have been set in three different ways: a shadow price if emissions were regulated domestically; a market price if the cap was implemented by a tradable emission entitlement scheme; and a carbon tax if countries chose to implement their obligations. Since the EU ETS regulates its emissions domestically, a shadow price was introduced and the flexible mechanisms would ensure that the price would be equal internationally, making global abatement cost-effective[8]. A firm that emits above its quota, can buy extra emission rights from another company emitting less than its cap (trade). This would trigger emission reductions at the lowest cost possible. A company can also invest in trade-off mechanisms through Joint Implementation (JI) or the Clean Development Mechanism (CDM). The JI includes sustainable development projects in other developed countries and the CDM includes sustainable development projects in developing countries[9], [10]. The general critique on CDM projects is that they are mostly implemented in countries in transition (China, Brazil, South Africa), rather than developing and least-developed countries. The post-Kyoto protocol will also include Reduction of Emissions of Deforestation and Degradation (REDD) projects in forest-covered developing countries[11].

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The EU ETS is the only real EU market[12], but it has some problems. For the period of 2008 – 2012, governments had for 10.000 companies less than 2 billion rights per year, counting for 10% less than 2005. The price is now only € 7,00, per ton CO2, but the estimations are that it will increase from € 30,- to € 40,- in 2020. Indeed, 50% of emission reductions has been reached through the EU ETS and companies have reached together in 2005 8% less emissions than the 1990 benchmark[13]. These emission reductions goals have been met due to the crisis, not so much due to the carbon market. As such, 1 billion emission rights are left unused. Furthermore, the fluctuations in the carbon market triggers uncertainty and instability. With it, big firms can influence the market and speculate on it so much that a carbon market bubble can be developed, like firms have done with the housing market. Additionally, the biggest part of the companies still obtains their emission rights for free. However, as of 2012, energy companies will also have to buy their emission rights, which hopefully will stimulate more investments in energy efficiency and clean energy projects[14].

Set aside?

For the carbon market there is a safety cap on top: when the CO2 price increases rapidly, extra emission rights can be auctioned. Cozijnsen[15] argues there should also be a safety cap on the bottom, which could be the ‘set-aside’ measure for the one billion emission rights left to be auctioned, opted by the EU. When setting aside these emissions for auctioning after 2013, companies can estimate on the higher price when more emission rights can be auctioned. This would have to stimulate more and cheaper investments in low – carbon and green energy solutions. Setting aside these rights therefore anticipates on the market, but does not decrease the amount of emission rights. However, the price of carbon will increase also without this measure because the allocated emission rights decline after 2013 with 1,74% per year, leading to emission rights scarcity. The results for a ‘set aside’ measure would be to stabilize the price range from € 20,- to € 35,- within the period 2013-2020. Higher yields should be the result of auctioning more emission rights instead of allocating them for free. Cozijnsen argues in favour of this measure as it would be a technical solution and therefore, increasing feasibility. However, this option may not have the desired goals as possibly a fixed carbon tax or price would have [16], [17], [18].

 

Carbon price or tax?

In 1992, the European Community proposed a carbon tax to stabilize EU emissions at 1990s level if OECD countries would adopt it as well. However, the OECD countries rejected this proposal and the EU dropped it. But times have changed and more stakeholders see the advantages of a fixed carbon price or tax[19]. Professor James Hansen, famous climate scientist, is a proponent for this fixed carbon price due to its stability and certainty. Furthermore, also companies such as Shell, Unilever, EDF Energy, Statoil, Swiss Re and Skanska request governments to introduce a carbon price which will have to stimulate investments in innovative and energy efficient projects. The companies are convinced that a carbon price will provide legal certainty and a level playing field for conventional energy producers. Critics argue that such a tax or price can be difficult on the administrative level and during a crisis, companies will lobby for lowering the price. They also argue that a CO2 tax will not be sufficient to stimulate the transition towards a carbon-low economy. Other long-term goals and measures have to be introduced next to such a fixed price, such as up scaling the CO2 reduction goals. The multinationals also acknowledge these aspects but argue that the time for a CO2 tax has come and agree that additional measures for combating climate change are necessary for large-scale investments in low carbon technology and innovation projects [20], [21].

Conclusion

Cozijnsen argues we should ‘calibrate’ the carbon market by introducing a technical solution such as the ‘set-aside’ measure, and not ‘politicizing’ the carbon market by implementing a carbon tax. I would disagree in the sense that enforcing a fixed price is not necessarily ‘politicizing’ the carbon market. Furthermore, since we speak of climate change, we should acknowledge that governments should take the prudent principle and the precautionary principle into account[22]. After all, governments are responsible for the ‘common good’: planet earth and its atmosphere[23]. Additionally, the Kyoto Protocol, it was agreed that the caps should be tightened in future agreements, increasing the price and stimulating a range of activities for the transition towards a low-carbon society [24]. The ‘set aside’ measure does incorporate more responsibility of the state, but not sufficiently. As such, I would argue governments would have to address six main issues with the post-Kyoto agreement: (1) globally agree upon a carbon tax which increases over time and the funds will be invested in green technologies and projects; (2), setting tighter caps and avoiding free riding and free allocations; (3) including other sectors within the emission rights scheme (shipping and aviation); (4) implementing CDM projects only in developing countries rather than economies in transition; (5) implementing REDD+ projects in developing countries; and (6), as proposed by Ecuador, going beyond Kyoto by implementing Net Avoided Emission (NAE) projects in different countries [25],[26],[27]. The new treaty will have to address broad participation and compliance simultaneously in order to be successful[28]. With it, emission reduction targets are earlier met and may even go beyond the collective goals, stimulating the necessary transition to post-oil societies. Then, the aims, rights and needs of both current and future generations will be met, while stabilizing the global climate system within safe boundaries.



[1] UNCAD. (2012). On: http://unctad.org/en/Pages/DITC/ClimateChange/Climate-Change.aspx

[2] Nu.nl (8 December 2012). On: http://www.nu.nl/buitenland/2977711/kyoto-protocol-2020-verlengd.html

[3] UNFCCC. (2012). On: www.unfccc.int

[4] Barret, S. (2008). ‘Climate treaties and the imperative of enforcement’. In: Oxford Review of Economic Policy, Volume 24,Number 2, 2008, pp. 239- 258.

[5] UNFCCC. (2012). On: www.unfccc.int

[6] Doha also looks at the possibility to account national projects as emission rights, the ‘domestic offsets’.

[7] Duurzaam Bedrijfsleven. (2012). On: http://www.duurzaambedrijfsleven.nl/48002/multinationals-pleiten-voor-co2-belasting/

[8] Barret, S. (2008). ‘Climate treaties and the imperative of enforcement’. In: Oxford Review of Economic Policy, Volume 24,Number 2, 2008, pp. 239- 258.

[9] Warnars, L. (2009). The Yasuni ITT initiative: an equity mechanism? Available on: http://laviniaes.com/files/9113/4134/6170/Thesis-Yasuni-ITT_equity_mechanism.pdf

[10] Bloomberg. (2012). On: http://www.bloomberg.com/quote/EUETSYR1:IND

[11] UN REDD. (2012). On : http://www.un-redd.org

[12] The EU ETS will be combined with the developing market in Australia and new upcoming markets are seen in China and South Korea.

[13] Cozijnsen, J. (2012). Aanpassing Co2 Prijs; kalibreren, niet politiseren. On: http://www.energieexpert.nl/aanpassing-co2-prijs-kalibreren-niet-politiseren/

[14] Cozijnsen, J. (2012). CO2 market and emissionrights studyday and reader.

[15] Cozijnsen, J. (2012). Aanpassing Co2 Prijs; kalibreren, niet politiseren. On: http://www.energieexpert.nl/aanpassing-co2-prijs-kalibreren-niet-politiseren/

[16] Cozijnsen, J. (2012). Aanpassing Co2 Prijs; kalibreren, niet politiseren. On: http://www.energieexpert.nl/aanpassing-co2-prijs-kalibreren-niet-politiseren/

[17] Point Carbon. (2012). On: http://www.pointcarbon.com/news/euets/

[18] Cozijnsen, J. (2012). CO2 markt en emissiehandel studiedag 2012.  Inclusief reader. Utrecht.

[19] Barret, S. (2008). ‘Climate treaties and the imperative of enforcement’. In: Oxford Review of Economic Policy, Volume 24,Number 2, 2008, pp. 239- 258.

[20] Carbon Disclosure Project. (2012). On: https://www.cdproject.net/en-US/Pages/HomePage.aspx

[21] Duurzaam bedrijfsleven (2012). Multinationals pleiten voor Co2 belasting. On: http://www.duurzaambedrijfsleven.nl/48002/multinationals-pleiten-voor-co2-belasting/

[22] For further information on the prudent principle see: http://laviniaes.com/articles/revolution-justified/

[23] Cox, R. (2012). Revolutie met Recht. On: www.revolutiemetrecht.nl

[24] Barret, S. (2008). ‘Climate treaties and the imperative of enforcement’. In: Oxford Review of Economic Policy, Volume 24,Number 2, 2008, pp. 239- 258.

[25] NAE are the greenhouse gas emissions which could occur under ‘business as usual’, but are avoided. Such a ‘NAE’ project is the Yasuni-ITT Initiative of Ecuador, see www.yasuni-itt.gob.ec. or www.laviniaes.com.

[26] Republic of Ecuador. (2012). Net Avoided Emissions. Bonn, Germany. Available on: http://unfccc.int/files/bodies/awg-lca/application/pdf/20120519__ecuador_1500.pdf

[27] Pelligrini, L., Arsel, M., Falconí, F., and Muradian, R. (2012). A New Conservation and Development Policy: Exploring the Tensions of the Yasuní ITT Initiative. Working paper

[28] Barret, S. (2008). ‘Climate treaties and the imperative of enforcement’. In: Oxford Review of Economic Policy, Volume 24,Number 2, 2008, pp. 239- 258.

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