ECON7760 The Economics of Climate
Change
Lecture 6: Economic Instruments – Practice
Dr Suzanne Bonner
University of Queensland
• To understand the various economic instruments used to control carbon dioxide
• To critically analyze the various institutional structures of cap-and-trade schemes
within Australasia, North America, and Europe.
• To understand the wide scope of methods to control carbon dioxide
Objectives
2
command & control
cost effectiveness efficiency Gains research of development & or P
No
No None No O
Taxes Yes No government gains Yes p
cap of trade
Yes ?
Firms who sell/ Yes a
government auction
• First international trading scheme for CO2
• 46% of total EU CO2 emissions
• covers 12,000 installations
• Sectors included: energy; mineral refining; steel production; glass; cement manufacturing;
paper and pulp
• Phase I:2005-2007
• Phase II:2008-2012 (Kyoto commitment period)
• Phase III: 2013-2020
- Each member state has created a National Allocation Plan (NAP):
EU-ETS Overview
3
• Pilot Scheme: learning-by-doing
• National Allocation Plans (NAPS)
ņ Frequently revised by European Commission
ņ Excess supply due to best guesses of baseline
emissions
ņ Allocation mostly given for free (except some minor
auctions)
ņ Penalty 40 Euros per tonne
Phase I
4
• Kyoto compliance period
• changes from Phase I:
ņ New participants (Iceland, Liechtenstein, Norway)
ņ Expansion of gases to NOx
ņ Penalty increased to 100 Euros
ņ Allowed CDM/JI trading
ņ Economic crisis reduced emissions
Phase II
5
EU-ETS Price Path 2005-2011
6
• Single EU-wide cap
• For each year after 2013, this cap will decrease by 1.74% of the average total quantity of
allowances issued annually in 2008-2012. In absolute terms this means the number of
general allowances will be reduced annually by 37,435,387.
• Auction now becoming dominant allocation mechanism (40% and rising)
ņ 88% of volume given to Member States share of 2005 verified ETS emissions
ņ 10% of volume give to least wealthy EU states for investment in reducing carbon
intensities
ņ 2% of volume as Kyoto bonus to states that had reduced emission by at least 20%
(mainly eastern European)
• Free allocation: increased harmonization rules, why?
ņ Free allocation will stop by 2020
ņ Only installation emitting before 2009 can obtain free allocation
ņ Maximum quantity of free allowances than can be granted in 2013
Phase III (2013-2020)
7
• Applies to all airlines that travel within the EU
• As a “gesture of good will” EC is deferring scheme’s application until agreement can be reach
later in 2013 (about now)
ņ Exemptions apply if recognized that origin country is “taking measures”
• Controversial:
ņ objections by China and US
ņ can either sell or bank used permits
Aviation in the EU-ETS
8
9Objections
Reaction from Russia and China
• Cap-and trade market on carbon (as well as N20 and PFC) emissions
• Now in Phase IV
• Key challenges and solutions:
ņ Excess permits: backloading and the Market stability reserve
ņ Free allocation versus auctioning
EU-ETS: Phase IV
10
11
Source: Perino (2018)
12
• First US scheme to reduce greenhouse gases
• Cooperative effort amount 9 North-Eastern US states
• Regional cap on power sector: 2012 cap 165m short tons
• Phases (compliance periods):
• 2009-2011
• 2012-2014
• Timing of reductions:
• 2009-2014: cap stabilizes emissions
• 2015-2018: cap reduces by 2.5% each year to max of 10%
• Offsets allowed
• 90% permits auctioned
• Auction proceeds $1 billion through June, 2012. Overall, 80 percent invested in
consumer benefit programs, including energy efficiency, renewable energy, direct energy
bill assistance and other greenhouse gas reduction programs
Regional Greenhouse Gas Initiative (RGGI)
13
• Auction revenues and a “memorandum of understanding”
ņ Appears to be weaker and susceptible to manipulation more than the EU-ETS
Each RGGI participating state directs its own strategy for the investment of CO2
allowance auction proceeds.
• New Jersey left scheme
RGGI Issues
14
• Quarterly auctions
• Reserve price of $1.98 per short ton
• Sealed-bid multi-unit auction
• States every quarter supply permits for auction (firms can
also do this)
RGGI Auction Revenues
15
P
x
regulatee
How the RGGI Auction Has Developed
16
Current Auction Design
17
RGGI Prices
18
• Commenced in July 2021
• Based on intensity of carbon not absolute levels of carbon emissions
• Free allocation of permits
• Seems not strignent enough: lack of incentive to invest in R&D?
Chinese National Carbon Trading
19
• One per for every 2 tonnes of carbon
• No cap: unlimited permits for sale by
government at 25 NZD
• No auctioning and free allocation
• focus on linking to International markets
• Coverage:
ņ Energy
ņ Industry
ņ Waste
ņ Pastoral agriculture
ņ forestry sector (offsets)
• Market is small and heavily influenced
by market for CERs:
NZ-ETS
20
• Price
ņ Fixed price period—3 years at $23 per tonnes with 2.5% increase each year
ņ 1 July 2015 fully flexible price
• Coverage
ņ Energy
ņ transport
ņ industrial processes
ņ waste
ņ fugitive emissions
• International linking
ņ Linking with EU-ETS
ņ at least 50% must be domestic
• Price collar
ņ apply for first 3 years of flexible price
ņ ceiling $20 above international price with increase in 5% increase in real terms per
annum
ņ floor $15 rising by 4% in real terms per annum
Previous: Australian Carbon pricing
21
• Interim link from 2015: Australian businesses can use EU allowances to help meet
domestic targets (can meet up to 50% of liabilites with EUAs)
• Full two-way line start no later than 2018, where any entity in EU or Austrlaian can use
permits from both schemes
• Price being set by the EU-ETS
Linking
22
• Fund provides polluters with cash incentives to reduce emissions
• A reverse auction: contract set up, then delivery
• Fund value: $300m (2014-2015), $500m (2015-2016), and $750m (2016-2017)
Emissions Reduction Fund (Direct Action Plan)
23
9 To understand the various economic instruments used to control carbon dioxide
9 To critically analyze the various institutional structures of cap-and-trade schemes
within Australasia, North America, and Europe.
9 To understand the wide scope of methods to control carbon dioxide
Objectives