Category Archives: international comparisons

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 7th 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

spectrum chart

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        27th March 2013

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

Chart of emissions coverage revised May 2013

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      7th March 2013  (Updated 30th May 2013)


[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

[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/