Regulations aimed at reducing carbon emissions are now common – 33 countries and 18 sub-national jurisdictions will have a price on carbon in 2012 – but the topic is contentious in the United States and other countries as carbon emissions regulations take hold.
Most of the world’s current regulations, including those for the European Union and California, involve some form of cap-and-trade – a limit, or cap, is set and companies are permitted to sell or trade their unused portion to other companies that cannot meet the limit. As the cap decreases through time, total emissions should decline and renewable energy technologies expand.
This system is popular because it uses a market-based approach. Cap-and-trade systems successfully lowered sulfur oxides (SOx) and nitrogen oxides (NOx) emissions in the United States starting in the mid-1990s.
A carbon tax is popular with economists and policy analysts interested in reducing greenhouse gas emissions because it is simple – companies that produce fossil fuels pay a fixed amount for each ton of carbon dioxide emitted by the fuels they produce. The tax also can raise huge sums of money for use in stimulating renewable energy technologies or reducing other taxes.
A main concern is that a carbon tax is highly regressive and would require some form of rebate to people who spend a disproportionate share of their income on fuel. In Canada, British Columbia, Alberta and Quebec have carbon taxes.
Both cap-and-trade and carbon taxation are intended to encourage fuel users, from electric generating companies to car owners, to choose more-efficient technologies or switch to less carbon-intensive fuels. Higher costs for carbon are predicted to spur technical innovation and conservation.
Design and implementation of either system would involve political decisions on the industries to be included or exempted, the dollar value assigned to carbon or the emissions credits, and the level of the cap. Many governments that have implemented cap-and-trade or carbon taxes have chosen low taxes or high caps that have little impact on producers or consumers.
Pundits and policy analysts in Washington, D.C., have been talking about ways to reduce carbon emissions for many years, but now there is increased interest by environmental groups, many Democrats in Congress and the president. This expanded interest seems driven by the damage from super-storm Sandy that devastated parts of the northeast United States in October, and a pending government decision on whether to permit the Keystone XL pipeline to cross the U.S.-Canada border.
Ironically, both issues are weakly linked to carbon emissions: the storm was an unfortunate coincidence of two relatively common storms, a hurricane and a nor’easter; and the failure to build the Canada-to-U.S. pipeline will probably not reduce oil sand production.
Supporters of a U.S. cap-and-trade system include: President Obama, many Democratic members of the U.S. Congress, environmental groups and some big companies including Shell, GE, Dow Chemical and Duke Energy. Opponents include most Republicans in Congress and many conservative think tanks and advocacy groups.
Because of divided control of the U.S. government, no legislative actions are likely this year. However, executive branch action is possible this year because the Environmental Protection Agency (EPA) has the ability, confirmed by a Supreme Court decision, to regulate carbon emissions.
In his state of the union speech, the president asked Congress to pass carbon cap-and-trade legislation. He also stated that if Congress does not act he would take executive actions to reduce pollution, help prepare for the consequences of global warming and speed the transition to more-sustainable energy sources.
EPA already has instituted greenhouse gas emissions regulations for vehicles; the regulations call for light-duty vehicles to limit emissions to 163 grams of carbon dioxide per mile by 2025. The level is half the 2010 emissions. This carbon emissions portion of the regulation received little notice because it is paired with National Highway Traffic Safety Administration miles-per-gallon limits – the familiar CAFE (corporate average fuel efficiency) standards.
In March 2012, EPA announced plans to restrict carbon emissions from new fossil fuel-fired power plants. Public hearings in May and June and a public comment period lasting until late June will influence the final regulation.
The draft regulation would allow new natural gas combined-cycle power plants, but plants that use coal or petroleum coke would be required to have technology such as carbon capture and storage in order to meet the carbon emissions limits. Visit EPA’s carbon-pollution-standard website to register for the hearings or submit comments on the proposed rule.
States, including California, Washington and Oregon, currently have restrictions on coal-fired power plants.
California Carbon Regulations
Under a 2006 law, California instituted cap-and-trade regulation for power generators, oil refineries and industries that produce 25,000 metric tons per year of carbon emissions. The state also has regulations governing vehicle emissions.
The state’s carbon emissions trading program began with a November 2012 allowance auction. The second auction in February produced a price of $13.62 per ton for 2013 emissions. This price is expected to have little impact on consumers; however, future allowances will be more expensive as emissions caps decline.
Economists note that whether the California system has a positive or negative impact on the state economy depends on how the revenues are used.
The European Union in 2005 initiated its carbon cap-and-trade program, which applies to 12,000 facilities. Power plants, oil, steel, cement, glass, and pulp and paper sectors are required to participate.
The system initially issued more allowances than there were actual emissions. Revisions to reduce the surplus emissions have yet to pass and allowances are trading at values well below the level required to stimulate industry to reduce emissions.
The EU planned to charge a carbon-emissions tax on non-EU airlines flying into Europe starting in 2012; however, the tax has been delayed a year because of objections by non-EU countries and airlines.
British Columbia and Quebec plan to participate in the California emissions allowance auctions in the future.
In the meantime, British Columbia has a carbon tax of $30 (Canadian) per metric ton. The tax revenues are returned to taxpayers through cuts in business and personal income taxes. The tax is equivalent to 7.24 cents (Canadian) per liter of gasoline. According to The Economist magazine, the B.C. carbon tax is popular with a majority of citizens; the provincial economy is growing faster than the rest of Canada; and per capita fuel consumption has declined more than elsewhere in Canada.
Quebec’s carbon tax is very low – less than a cent per liter of gasoline. Because most of Quebec’s power comes from hydroelectricity, power prices are essentially unaffected.
Alberta has a carbon tax of $15 per metric ton for emissions that exceed emission limits and are not offset by purchased emissions credits. The proceeds go to a technology development fund.
The low tax rates in Quebec and Alberta should have little to no impact on producers or consumers.
Is it Possible to Measure Success?
It is difficult to determine if carbon emissions are responding to carbon taxes. Many of the carbon regulations have been in place only a couple of years. Other regulations have placed a value on carbon emissions that is too low to impact consumers’ energy decisions.
Complicating statistical analysis is the fact that the recent global recession and recovery distort yearly trends.
Despite these caveats, here are some statistics:
♦ Global carbon emissions rose 2.6 percent from 2011 to 2012, and global carbon emissions are 58 percent above 1990 levels (as per the Global Carbon Project, a multi-national partnership of carbon-cycle scientists).
♦ The European Environment Agency reported that the EU27 countries with a carbon emissions restrictions saw emissions rise from 2009 to 2010, an exception to a long-term downward trend that has carbon emissions down 17 percent from 1990 to 2011.
♦ The Energy Information Administration reports that the United States, without a national carbon tax, saw carbon emissions rise 3.2 percent from 2009 to 2010 as the country recovered from the recession. Carbon emissions declined in 2012, as natural gas replaced coal for power generation and renewable energy grew, but are still 4 percent above 1992 levels.
It is almost impossible to determine if carbon emission restrictions are stimulating or depressing jobs and gross domestic product (GDP). As expected, proponents and opponents of carbon taxes or regulations generate different forecasts.
Unbiased analyses will require several years of experience with these systems.