CARBON TAX AND CREDITSPresentation by: Robert Wensley and Jean Yang
International Economy and Business August 10, 2011
The World Today
•Global warming caused by carbon emissions.
•21st century - temperatures expected to rise 2.7 to 3.4 degrees Fahrenheit.
• As temperatures rise – glaciers will melt, sea levels will rise, the pattern of precipitation will change, and deserts will expand.
•Species extinction
Two methods of combating carbon emissions:
•Carbon Tax
•Carbon Credits
Welfare Loss of Negative Externality
SMC = Social Marginal Cost (total cost to society)
PMC = Private Marginal Cost (cost to individual)
PMB = Private Marginal Benefit (benefit to individual)
Purpose of Carbon Tax/Credits
SMC = Social Marginal Cost (total cost to society)
PMC = Private Marginal Cost (cost to individual)
PMB = Private Marginal Benefit (benefit to individual)
Carbon CreditsKyoto Protocol leading “cap-and-trade” initiativeCountry’s emissions are “capped”Carbon Credit Market (e.g., European Trading Scheme)
Countries that surpass cap must purchase credits from other countries.
Countries that do not reach gap may sell excess credits to other countries.
Allow market mechanisms to reduce carbon emissions Finland, Sweden, Great Britain, New Zealand, and areas of Canada and the United States.
Problems
Moral
Benchmarking
Excess supply in market
Plummeting prices In 2009, from €30 to
€1 in European markets
Carbon Leakage
"Under the Kyoto targets the supply of credits will outstrip the demand...We are going to see the same scenario as with the ETS whereby the price for a tonne of carbon starts high and then collapses to close to zero by the end of the scheme... which is precisely the wrong message." –C. J. Jepma
Carbon Tax
•Tax on each tonne of carbon released into the atmosphere.•Carbon emissions vary by fuel:
• Coal – High• Oil – Mid• Natural Gas - Low
•Fuels taxed according to carbon content
Carbon Tax Issues
If only some countries implement a carbon tax, then production will shift to countries with no carbon tax. This is known as carbon leakage and leads to trade anarchy.
Administrating the tax.
Estimating what the tax should be: the social cost of carbon emissions.
Possible low price elasticity.
Increased fuel prices.
Price Elasticity
Elasticity of gasoline is typically about - ‐0.3 in the short run and - ‐0.7 in the long run10% price increase reduces fuel consumption 3% in a year or two, and 7% in five to ten years.
(Lipow 2008; Litman 2008a)
Fuel Prices
Fuel prices and fuel consumption are directly correlated.
2006 International Fuel Prices
Implementation:
Broad
Gradual
Predictable
Structured
Effectiveness and Scope of Emission Reduction Strategies
Cap-and-trade programs only support large industrial emission reductions.
Carbon taxes support most forms of energy conservation.
Conclusion: Making Carbon Tax Work
Cap-and-trade system does not have nearly the same reach.Benchmarking makes cap-and-trade mechanisms ineffective Implementation and enforcement of tax is relatively easy
Conclusion: Making Carbon Tax Work
Implementation needs to be global – starting with developed markets and then developing.Global carbon price needed.Provisions necessary for retaliatory action against imports from carbon free‐riding nations (to avoid trade anarchy).Governments responsible for spending tax revenue will allow countries to:
Make the tax revenue‐neutral Finance the transition to a green economy
Other synergistic actions are required as well: personal, corporate, community and governmental responsibility for environment.
Thank you!