Carbon Market Mechanisms

Cap & Tradevs.

Carbon Tax

Mike Pritchard

Climate Science, SIO

Outline How much is a ton of CO2? Cap or Tax? Carbon cap & trade in practice

EU-ETS CDM in practice Recommendations for Cali

How much should a tCO2 cost?

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The Past

How much is a ton of CO2?Combustion: CxHy xCO2 +

yH2O12 g/mol 44 g/mol

1 lb 4 lb

60 lb 240 lb6 lb/Gallon

~9 tanks of gas 1 tCO2 1 credit

= =

Cap & Trade “Cap” - impose a limit on the rate of

cumulative CO2 emission “Allowance”: The right to emit a specific

amount “Trade” - transfer of an allowance

Buyer penalized for producing emissions in excess of allowance

Seller rewarded for mitigating emissions Market reduces CO2 emissions at a low cost.

Carbon Tax Pretty much what it sounds like. Tax rate must be adjusted as

economies evolve to achieve net emissions reductions

The Debate: Tax or Cap? Cap & Trade is a “quantity” instrument

Fixes the quantity of CO2 output Pro: Concrete environmental outcome Con: Price uncertain, fluctuating

Difficult for companies to plan ahead, especially if price is volatile

Con: Potentially large enforcement Many trades: complicated monitoring

The Debate: Tax or Cap? Carbon Tax is a “price instrument”

Fixes the price of CO2 output Pro: Long-term planning. Pro: Less overhead? Con: Ensure environmental outcome

Net output could vary with total economic activity Have to sell “tax increases”

Cap & Trade in practice….

EU ETS First large carbon economy pilot project

Phase I lessons Protectionism by local government Free allowances

Some are necessary to ease transition Too many devalue/destabilize the currency

The market is growing fast…

Carbon trading market: 2005: 9.4 billion euros 2006: 22.5 billion euros

80% of this is the EU-ETS

CDM: The Clean Development Mechanism

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CDM in action: Bunge Agricultural

commodities Overseas effluent

capture Electrical co-

generation

Profit from carbon sale via CDM Farmer gets a cut

The CFC Gold Rush HCFCs

10,000 times the global warming potential of CO2.

Pollution outvalues product!? Credit for less than

€1 Sold for €11

Some Recommendations for Cap &Trade in California External offsets Special attention to industry, transport

Utilities selling imported (i.e. coal-generated) electricity suffer an allowance

Phased-in “free” vs. “auction” allowances Attention to data sufficiency

How much should carbon cost? For stabilization at 550 ppm CO2-eq by 2100

Between 20-80 US$/tCO2 by 2030 between 30-155 US$/tCO2 by 2050

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QuickTime™ and aTIFF (Uncompressed) decompressor

are needed to see this picture.

Summary 1 tCO2e is

9 tanks of gas Cap vs. tax An international scheme is needed $/tCO2 for stabilization?

On the order of $80-150