CARBON TAX AND CREDITSPresentation by: Robert Wensley and Jean Yang

International Economy and Business August 10, 2011

Global CO2 Emissions Since 1820

http://www.bit.ly/nzwFCa

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!