A spectrum of possibilities for carbon pricing

Carbon taxes and emissions trading are two ends of a spectrum of possibilities for carbon pricing.  One or other end of the spectrum may not be the best place to be.

As carbon pricing spreads around the world (see post from 7^th March) governments are differing in whether they choose to pursue emissions trading or carbon taxes.  For instance, South Korea is getting ready to implement its emissions trading scheme, for which legislation was passed last year, while the South African Government has recently reaffirmed its commitment to a carbon tax.   There many reasons for these differences in approach, which I’ll return to in future posts, but for the moment I want to look at how existing schemes illustrate that the distinction between the two types of instrument is not absolute.  Emissions trading schemes can have fixed price components or limits to price ranges, which introduce an element of price certainty, while taxes may allow a degree of trading in the form of offsets or credits generated from outperforming a baseline.  Emissions trading and carbon taxes are thus at two ends of a spectrum of possibilities.  The best policy choice is not necessarily at either end.

The chart shows major carbon pricing schemes around the world on a spectrum from pure emissions trading on the left to pure carbon taxes on the right.  The first thing that’s apparent is that there is a clear preponderance of emissions trading schemes, especially by volume of emissions covered.  But many ETSs contain some element of price certainty, and taxes may include elements of trading, so many schemes do indeed in practice lie somewhere between the two extremes.

A spectrum of possibilities between an emissions trading schemes (ETS) and a carbon tax

The EUETS and the Regional Greenhouse Gas Initiative (RGGI) in the Northeastern USA are almost pure emissions trading scheme, with minimal limits on price, although RGGI does have a low reserve price in its auctions (currently $1.98, indexed to inflation), and there are also some very limited auction reserve provisions available in the EUETS.  The prospective Beijing ETS appears to likely to follow this model quite closely, although there appears to be a possibility that the regulator will seek to exercise some influence on the price by buying and selling allowances centrally, rather analogous to the role a central bank might play in currency markets, or by some other means.  However, the Beijing scheme remains to be finalised and it is not yet clear what form this or the other trial Chinese schemes will take in practice.

Several other schemes diverge from the model of a pure ETS by having elements of fixed pricing.  The Australian scheme includes an initial 3-year fixed price period.  Before the link to the EU ETS was established late last year it was intended that after the 3-year fixed price period it would include a floor price in the auction and a ceiling related to the international carbon price.  (The price ceiling remains in principle following the EU linkage, but in practice will never be triggered).  This made its original design much closer to the California and Quebec schemes, both of which contain reserve prices in the allowance auctions to give a price floor, and also price ceilings in the form of reserve tranches of allowances.  Floor prices are currently just over $10/tonne, well above the levels found in RGGI, and indexed to rise at above the rate of inflation.

The Alberta scheme is a hybrid between a tax and an ETS.  It sets a baseline for emissions from an entity per unit of output (emissions intensity), rather than a fixed emissions cap.  If emissions are below this baseline then credits are generated.  If emissions are above the baseline then the entity has several options: it can buy credits from those in surplus, it can purchase offsets, or it can pay a fixed price of $15/tCO₂ which goes into a fund for clean technology investment.  It thus resembles a carbon tax payable above a threshold level of emissions intensity, but with some element of trading allowed.

The proposed South African carbon tax would, if introduced in its currently proposed form, allow some of any remaining obligation to be met through offsets.

At the other end of the spectrum the British Columbia carbon tax is a solely a tax, with no element of trading at present (and only very minimal provisions for offsets).

Political processes introduce dynamics which may ultimately limit the extent to which a carbon pricing scheme focus is exclusively on price and quantity.  Decisions about the level of the cap are likely to be influenced by expectations of the prices that will result.  And if a surplus of allowances leads to low prices a tightening of the cap may be considered, as in both the EUETS and RGGI at present.  Similarly the level of a tax may be adjusted over time to meet an environmental goal, or other policy objectives such as raising revenue.

So policy debates should perhaps be less about a preference for taxes or emissions trading in their pure form, and more about where a scheme should be positioned on the spectrum of possibilities, and how outcomes can be managed over time as the scheme develops.  And even if a scheme starts at one end of the spectrum, events may force changes that recognise that in practice there is always a balance to be struck between prices and quantities.

Adam Whitmore        27^th March 2013

How moral values shape estimates of climate risks

Our values play a large role in shaping our perceptions of the risks of climate change, and this is even more the case for those with higher general numeracy and scientific literacy.  Simply providing more information on the risks of climate change is unlikely to be enough to change perceptions of risks.  There  is a need to communicate with people in ways that speak to their values.

There has been much discussion in recent months of renewed impetus towards regulation of greenhouse gas emissions in the USA, in particular following the President’s State of the Union address.  But differences in public opinion on this issue continue (along with other factors) to be a major obstacle for the development of stable, long term policy on climate change in the USA.  Some decades of effort to communicate the science have not created a shared perception of the risks of climate change among Americans.  Recent research, on the American public’s perceptions of climate change and other risks (notably by the Yale Cultural Cognition Project) throws light on why this is so, and suggests some ways of developing more widely shared understanding in this area.

The research shows that people’s social and moral values are the strongest predictor of their perception of the risks of climate change – a stronger predictor than political orientation, education, income, gender, racial origin, or any other variable that the researchers looked at[i].   Values are characertised on two dimensions:  “hierarchy-egalitarianism” and “individualism-communitarianism”.  People with a “hierarchical” worldview tend to believe that rights, duties, goods, and offices should be distributed differentially and on the basis of clearly defined and stable social characteristics, while those of an “egalitarian” worldview tend to believe that these things should be distributed equally.  People who subscribe to a “communitarian” worldview tend to believe that societal interests should take precedence over individual ones and that society should bear the responsibility for securing the conditions in which individuals can flourish, while those who subscribe to an “individualistic” worldview tend to believe that individuals should secure the conditions in which they themselves can flourish, without collective interference or assistance.

There is a clear correlation between these world views and perceptions of climate risk[i].  Those with egalitarian and communitarian outlooks tend to perceive greater risks from climate change.  Those with hierarchical and individualist outlooks assess the risk of climate change as being less.

People’s values are a strong predictor of their perceptions of climate change risk …

 

 

This effect is so strong that general scientific literacy and numeracy does not always tend to increase the acknowledgement of climate change risks.  Rather, a recent study by the Yale team[ii] indicates that increased general scientific literacy and numeracy increases the difference in results between those with different values – a polarisation effect[i].  Increases in scientific literacy and numeracy, as measured by answers to a range of questions designed to test general scientific knowledge (rather than specific knowledge of climate science) and numeracy, lead egalitarian communitarians to perceive greater risks of climate change.  But hierarchical individualists perceive less risk as their scientific literacy increases, although for neither group is the effect very strong compared with the difference between the two groups. The authors of the study speculate that the decrease in risk perception among hierarchical individualists may be because those who are more generally scientifically literate are more successful in fitting evidence to their world view.

Increased general scientific literacy tends to increase differences in risk perceptions between people of different values …

How much risk do you believe climate change poses to human health, safety or prosperity?

 

 

The underlying driver for the strong relationship between values and risk perception appears to be the advantages we all find in sharing common outlooks with those around us.  Our own views have little influence on the course of climate change, but if our views differ from those to whom we feel close and with whose values we tend to identify we may find it socially costly – whether it is the Boston professor espousing to fellow faculty members the view that mainstream climate change science is a hoax, or the member of a conservative Scottsdale golf club arguing for large-scale concerted action to address the risks highlighted by climate science.  But while it may be a costless and socially congenial for any individual to form a perception of climate change risks on this basis, it is harmful for collective welfare for people in aggregate to form beliefs in this way.  The authors call this a “tragedy of the risk-perception commons”.

The research implies that additional presentations of the scientific evidence on climate change to address a supposed deficit of information or understanding is unlikely to be enough to persuade those who perceive a conflict between the science and their values to acknowledge the risks.  However an important caveat here is that as the survey tested general scientific literacy, not specific knowledge of climate change science, it remains possible that greater knowledge of climate science might shift perceptions, as some other work has found[iii].

So, if additional presentation of the science is not enough what can be done?  The research is specifically American, and does not deal with the extent to which the conclusions may transfer to other cultures.  Nevertheless, it suggests a number of important lessons for communication on climate change which may well prove transferable, and which may help to avoid unnecessarily alienating those with hierarchical and individualist values.

First, changing perceptions of solutions to limiting climate change can alter acceptance of the science.  Hierarchical individualists are more likely to accept the truth of a description the science of climate change if it is said to imply an increased role for nuclear power than if it is said to imply increased regulation of pollution.  This is because nuclear power is more consistent with their value system, for example involving mastery of nature and respect of technical elites, than is the increased control over the activities of firms and individuals implied by pollution control regulation.

Recent studies have also shown the communicating the extent of scientific consensus on climate change rather than the science itself can shift opinions (see post of 24th April)

Also, it matters a great deal who is giving the message.  People are more inclined to believe information coming from someone they think shares their values, especially if it is contrary to the views they might expect the person to espouse.  This implies, for example, a presentation from the US military about planning for climate related conflict may prove more persuasive to those with hierarchical values than a video by Al Gore.

Other researchers have found that framing of the story affects responses[iv].  The more a message speaks to issues that matter to people, like public health, the more effective it is likely to be.

And, finally, presentational form can matter, with graphical information[v] more effective than text.

Incorporating these finding into discussion of the issues will not make the task of creating a wider understanding of climate change risks easy.  But at least the tools of science are being applied to communicating the message, as well as ensuring that it is robust.

Adam Whitmore      22^nd March 2013  updated 24th April

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[i] The Yale Cultural Cognition Project, Second National Risk & Culture Study, September 2007

http://www.culturalcognition.net/projects/second-national-risk-culture-study.html

[ii] The polarizing impact of science literacy and numeracy on perceived climate change risks.  Kahan et. al.  Nature Climate Change May 2012 http://www.nature.com/nclimate/journal/v2/n10/full/nclimate1547.html

[iii] Tobler et. al. M. Climate Change 114, 189-209 (2012)

[iv] Nisbet et. Al. (BMC Public Health, vol 10. p.299

[v] Nythan and Reifler (2011)

 

Where the price of emitting carbon is $700/tonne

 Taxes on petrol can be the equivalent of nearly $500/tonne.  The UK’s annual tax on cars can bring the total up to over $700/tonne with typical mileage.  This is around two orders of magnitude greater than the carbon price that other sectors face at the moment under the EUETS, and one indicator of the challenges involved in decarbonising road transport.

With the UK budget due next week there is, as usual, debate about whether planned increases in petrol taxes should be abandoned.  Although emissions from cars are not subject to a carbon price under the EUETS at the moment, existing taxes put an effective price on emissions – the more petrol a car burns the greater the emissions and the greater the tax paid.  There is a price signal to reduce fuel burnt, and hence CO₂ emissions (although fuel duty is not labelled a carbon tax, and may, of course, also price other externalities associated with burning petrol or diesel).  Looking at this price signal gives important insights into how the transport sector would be likely to react to an explicit carbon price, and says much about whether proposed increases in fuel duty can be justified on the grounds of incentivising reductions in CO₂ emissions.

Fuel duties are strikingly high compared with carbon prices prevailing under emissions trading schemes.  The current excise duty on petrol in the UK is 61p/litre, with VAT of 20% also payable on the duty.  A litre of petrol emits around 2.3 kg of CO_2, so the duty plus VAT is equivalent to a tax of £318/tonne CO₂ ($484/tonne CO₂).  Tax levels are roughly similar in Germany and several other European countries.  Even in California, where fuel excise taxes are much lower, the equivalent carbon price is around $65/tonne, higher than under any emissions trading scheme or carbon tax at present.  (The California emissions trading scheme is due to be extended to transport in 2015, which will add at least around an extra $12/tonne – the 2015 floor price for the scheme – to the price of gasoline, assuming no accompanying change in excise taxes.)

Excise taxes on petrol (Fuel Excise Duty) expressed as a tax per tonne of CO₂ emitted are in the hundreds of dollars per tonne in some European countries …

 

VAT charged on the excise tax is included, but that on the petrol is not, as this is not a tax specific to petrol.  Emissions factor assumed is 2.3 kgCO₂e/litre.  Federal and state taxes are included in California, no sales tax is included.

This calculation excludes the effect of UK Vehicle Excise Duty (VED), sometimes called road tax.  This annual charge per vehicle depends on the vehicle’s emissions of CO₂ per km.  Although it does not vary with actual emissions, which depend on distance travelled and other factors such as traffic conditions, it nevertheless makes vehicles with higher carbon emissions more expensive to own on an annual basis.

Increasing vehicle emissions from just over 100g/km to just over 200g/km adds £250 p.a. of VED to the annual cost of a vehicle.  Assuming the vehicle clocks up 16,000 km (around 10,000 miles) per year, and emissions per km are at the standardised level used to set VED, the additional emissions are 1.6 tonnes p.a., so the change in VED adds another £156/tonne ($238/tonne) to the effective carbon price, to give a total effective price of over $700/tonne (see chart).  This figure is lower for those who travel more, higher for those who travel less than the 16,000km p.a. assumed, but it’s a large number for any typical car owner, and leads to a total effective carbon price about a 100 times greater than the current carbon price under the EUETS.

Taxes on emissions from cars in the UK including both fuel and vehicle taxes are over $700/tonne, assuming 10,000 miles per year …

 

There are additional policy measures to encourage lower emissions vehicles in place in the UK designed.  Vehicles’ CO₂ emissions are clearly labelled in advertisements for cars.  EU regulation sets limits to average fleet emissions over time.  Electric vehicles receive a subsidy to encourage their uptake, and there are efforts to create a grid of charging points.

Yet people still choose to drive conventional internal combustion engine cars.  A carbon price of several hundred dollars per tonne is not enough to reduce emissions from cars to anywhere near zero with present technologies.  People have a high willingness to pay for personal mobility and the alternatives to internal combustion engine cars are not available at the price and travelling range that would lead people to switch.

Furthermore, despite high oil prices as well as high taxes, many people continue to drive cars with much higher emissions than others on the market.  People place a high value on many of the features that go with additional emissions, whether it’s better acceleration, increased size, or greater social prestige.  Continuing innovation will be needed from the world’s car makers if the transport sector is to be decarbonised, even with an effective carbon price vastly greater than that currently found in emissions trading schemes.

And whatever justifications there may be for increases in petrol duty in the forthcoming budget, creating a carbon price signal comparable with that prevailing in other sectors is certainly not one of them.

Adam Whitmore     15^th March 2013

 

References and data sources

http://ec.europa.eu/taxation_customs/taxation/excise_duties/energy_products/rates/index_en.htm

http://ec.europa.eu/taxation_customs/resources/documents/taxation/excise_duties/energy_products/rates/excise_duties-part_ii_energy_products_en.pdf

http://www.boe.ca.gov/sptaxprog/spftdrates.htm

The continuing spread of carbon pricing

Within the next two or three years some form of carbon pricing will be in place in jurisdictions accounting for nearly a quarter of the world’s CO₂ emissions from energy and industry (although not all emissions in those jurisdictions are priced).  This will have been put in place in little more than a decade, a remarkable achievement.

For the first post on this blog, it seems appropriate to take a look at how far carbon pricing, a central tool of climate change policy, has spread.

There are now more than a dozen major carbon pricing schemes either in place or under development around the world.  Two or three years from now, assuming current programmes run to schedule, carbon pricing will be in place in jurisdictions accounting for just under a quarter of total global CO₂ emissions from energy and industrial processes.

This will have been achieved in little more than a decade (see chart).   In the early 2000s carbon pricing was in place in just a few jurisdictions, mainly in northern Europe, accounting for less that 1 % of world emissions.  The first major increase in the coverage of carbon pricing was the introduction of the EUETS in 2005.  Since then several countries and provinces have introduced pricing.  Schemes in Australia, California and Quebec have all gone live in the last year.  The next big step up in coverage is just beginning, with seven trial emissions trading schemes being introduced in China, in provinces and cities which account for around a sixth of China’s emissions.   The South Korean scheme, for which legislation was passed last year, will go live two years from now.  If South Africa implements a carbon tax, as announced in the recent national budget statement, this will add about another 1% of world emissions, bringing the total proportion of emissions in jurisdictions with pricing to around 24%.  If China were to introduce a national emissions trading scheme or carbon tax the proportion of world emissions in jurisdictions with carbon pricing would rise to over 40%.

The proportion of world energy and industrial carbon dioxide emissions taking place in jurisdictions with carbon pricing is increasing rapidly

Source:  Emissions data is for 2010, from the EDGAR database[i], with no adjustment for changes in relative volumes over time.  Data for North American states and provinces is taken from official statistics.  Data for China is from Zhao et. al.[ii] Timings for regional schemes in China are estimated.  The Tokyo scheme is excluded as its current status is unclear.  The small carbon tax introduced in Japan last year by modifying energy taxes is also excluded.   The Swiss scheme is included in the total for the EU.  There is also some uncertainty around the Kazakhstan scheme, although this is included.

The percentages on the graph include the total energy and industry CO₂ emissions for each jurisdiction with carbon pricing, although not all of the emissions in these jurisdictions are priced.  For example, the EUETS prices a little under half of its energy and industrial CO₂ emissions, focusing on large point sources, with other sectors targeted by other policies.  Thus, if all jurisdictions in the world  had carbon pricing in place the total coverage would be shown as 100%.  A chart showing the proportion of world CO₂ emissions that are priced would show a lower percentage.  A recent study by the World Bank estimated around 3.3 Gt of GHGs will be priced, around 10% of world energy and industry emissions, although this total appears to exclude some of the regional Chinese schemes for lack of data [iii].

Also, CO₂ emissions from land use and other greenhouse gases are excluded from the calculations.  Including these would reduce the proportion of emissions in jurisdictions with pricing, in part because of emissions from deforestation in countries without national carbon pricing, notably in Brazil and Indonesia.  There are also issues to be resolved with some of the schemes, and it remains to be seen how effective the Chinese and Korean schemes, which have yet to go live, will prove in practice.  Nevertheless the trend is remarkable, and implies that any country considering carbon pricing is very much part of the worldwide policy mainstream.

The picture of increasingly widespread action extends beyond carbon pricing.  The legislators’ policy network Globe International recently published the third edition of its climate legislation study recently [iv].  It found significant progress on climate legislation in countries as diverse as Chile, Indonesia, Mexico, Pakistan and Vietnam.  Indeed, examining policy in 33 countries, it found substantial progress 18 countries and limited progress in a further 14.

Policy was found to have regressed in only one country, Canada.  And even this was because the methodology looked at the national level only.   There has been significant progress in Canada with carbon policy at the regional level, with three separate provinces having introduced carbon pricing, one of which (Quebec) is new this year and another of which (British Columbia) has a higher carbon price than found anywhere else, at C$30/tCO₂.  Even at the national level Canada has now finalised a national emissions performance standard for new power plant at 926lb/MWh (420 kg/MWh), similar to that in place in California and being legislated in the UK, which effectively prevents new unabated coal plant from being built [v].

The challenge for the future will be to maintain this momentum, but the extent of progress on climate change policy to date, although falling far short of what is needed to prevent dangerous climate change, gives a cautiously hopeful perspective with which to start this blog.

Adam Whitmore      7^th March 2013  (Updated 30th May 2013)

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[i] http://edgar.jrc.ec.europa.eu/overview.php?v=CO2ts1990-2011

[ii] Zhao et. al. China’s CO₂ emissions estimated from the bottom up: Recent trends, spatial distributions, and quantification of uncertainties  Atmospheric Environment, Volume 59.

[iii]  The World Bank Study quotes just over 10Gt out of 50Gt of emissions in jurisdictins with pricing.  This is for GHGs.  The total shown here is 8Gt out of 33Gt (2010 data) for carbon dioxide emissions from energy and industry.  The main difference in the total covered appears to be due to the inclusion of a number of jurisdictions where pricing is at an earlier stage than shown here, notably Turkey, Ukraine and Brazil.  However South Africa is excluded from the World Bank total.  The total emissions actually priced is quoted as 3.3 Gt, which is 10% of carbon dioxide from energy and industry and 7% of total GHGs.  If the other pilot Chinese schemes were included this coverage would likely increase by about a percentage point (11% and 8% respectively), and thus a little under half the emissions in the jurisdictions with carbon pricing on average are estimated to be priced.  The World Bank study can be found at: http://documents.worldbank.org/curated/en/2013/05/17751166/mapping-carbon-pricing-initiatives-developments-prospects

[iv] http://www.globeinternational.org/index.php/legislation-policy/studies/climate

[v] http://ghgnews.com/index.cfm/canada-unveils-softened-final-ghg-performance-standard-for-coal-units/

This post deliberately does not say much about the current status of the UNFCCC process, which must await future discussion.  In the meantime coverage of this can be found on other forums, for example see http://climatestrategies.wordpress.com/