Tag: Targets

GHG Targets

Categories
Uncategorized

Replace Carbon Taxes with Emission Trading

“Why not just put a tax on carbon?”, asked my Dad last Sunday. It was Father’s Day. We had organized a family video call, and somehow ended up talking about climate.

Economists believe pricing schemes are an important tool to fight climate change. They advocate for the use of market mechanisms which reduce emissions by pricing the costs of those emissions at the source. In other words, polluters should pay for the negative impact their emissions have on the planet.

According to the World Bank, at the start of 2021, globally there were 61 carbon pricing schemes in operation or planned. The largest planned is in China, which will come online fully in December of this year. As you might expect, the sheer number of schemes means there are many variations.

Carbon Pricing Approaches

There are two broad approaches to pricing carbon that are in common use today. These are carbon taxes, and emissions trading systems.

Carbon taxes are consumption taxation models. They encourage consumers to choose products that are more emissions efficient by levying a tax on those that aren’t. Need a litre of fuel? Maybe it will cost an additional 15% in tax. The taxing jurisdiction promises to put that money back into energy efficient or climate transition projects, further accelerating the transition to a decarbonized economy. In some jurisdictions (British Columbia, Canada for example) the carbon tax collected is offset by a reduction in other taxes. The promise is that the carbon tax will be revenue neutral, which satisfies at least some of the folks who object to new taxes.

Emissions trading systems (sometimes called “Cap and Trade” systems) use a different approach to driving emissions reductions. Emissions trading systems price the emissions directly. The government sets a cap on the total emissions permissible in a given period, and then allocates emissions quotas to companies that need them. Stiff penalties are imposed for exceeding the quota. Companies can then choose to become more emissions efficient, or continue to emit. If they continue to emit, they can purchase unused quota from another emitter who may be more efficient or pay the penalty. Over time, the government reduces the cap which creates pressure to be more efficient.

Sometimes emissions trading systems are also connected with an auction, as I wrote about Nova Scotia last week. When an auction is used, the quota allocation is done via auction rather than through some other scheme, which should lead to more optimal outcomes. An auction also has the benefit that it raises money for the government to spend on climate transition or energy efficiency projects, just as a carbon tax does.

Which is better?

So why choose one over the other? There are some major differences.

  1. Carbon taxes are easy, broad, blunt tools. If you’re buying fuel, they make a lot of sense. But how do you tax the carbon content of a new home, a car, a pair of jeans, or even a carrot? Each will have differing Scope 1,2, and 3 emissions depending on the efficiency of the producers supply chain. To tax the carbon content of a consumer product accurately, you need to know the contributions at each stage of the manufacturing process. We can’t do that accurately today. Emissions trading systems overcome that limitation. Each company in the supply chain has a quota for emissions, and has to live within the quota. (note: in today’s early stage emission trading systems it’s common to only make the largest emitters comply. Hopefully that will change.)
  2. Carbon taxes may also not be an accurate reflection of the true carbon emissions cost of a given product or service. They are simply implemented as a percentage of the end retail price. An emissions trading scheme allows the market to set the price. To return to the Nova Scotia example from last week, the government set a reserve price of $21 per ton, but the actual price paid was 74% higher, reflecting market demand.
  3. Carbon taxes are also impractical to implement across borders. How should we tax two vehicles, one made in China in a factory powered by coal/electric, and the other made in Detroit? One of China’s competitive advantages has been their willingness to use cheap, and dirty, coal power to power industry. Again, emissions trading schemes make this easier, since they target the emitters directly.
  4. And finally, carbon taxes do not create direct incentives to reduce emissions because there is no cap on emissions. With a carbon tax, you could conceivably have a rapidly growing economy with growing emissions. So long as the rate of growth is high enough, then the emissions tax is simply another tax. In a cap and trade emissions market, the government sets the amount of carbon allowed, and reduces that allowance each year, which creates incentives for companies to emit less.

For those reasons, emissions trading systems are preferable to carbon tax systems. Your thoughts?

Categories
Uncategorized

Nova Scotia Carbon Lots Price at 74% Premium

Nova Scotia has implemented a “cap and trade” program in order to price emissions. Twice a year, the province auctions off emissions allowances, which give the purchasers the rights to emit a fixed amount of green house gases. Each allowance is equivalent to one ton of emitted CO2. As a business you may emit up to the limit of the allowances you purchased. Any emissions beyond that are priced at a stiff 3x price of the auction price. The funds from the auction are paid into the provincial Green Fund, which is then used to make investments into sustainability projects.

Over time, the allowances made available reduce in number, increasing the price of emissions and providing the emitters an incentive to run cleaner business. This paper from Osler has more details.

  • 13,683,000 in 2019
  • 12,725,000 in 2020
  • 12,258,000 in 2021
  • 12,148,000 in 2022

That’s how it works.

On Wednesday, the province announced the results of their July 9 auction, which is the third since the program was implemented. The headline was that the settlement price was C$36.71/ton, a premium of 74% over the reserve price of $21.09. Two other facts:

  • 767,000 allowances were offered.
  • There were an average of 1.23 bids per allowance.

Although this is an encouraging result, it is also a very limited experiment. Three ways that Nova Scotia could improve their program are:

  • As mentioned above, Nova Scotia’s program creates a fixed number of allowance’s annually, but distributes most of them free of charge to qualifying companies. Only 6.25% of 2021’s allowances went to auction. However, this is also increasing over time. A year ago, at the July 10, 2020 auction, 640,000 allowances were offered which represented 5.1% of the annual allowances. It appears that the province is creating fewer allowances, and charging for more of them, which is driving the auction price to market competitive levels.
  • Link their carbon market with other carbon markets like California and Quebec, so that a more open market for emissions can be created. Right now, Nova Scotia’s program is limited to the province.
  • Expand the scope of companies covered. At this point, only businesses emitting more than 50,000 tons of CO2e in any year are required to participate.

Cap and trade programs make sense, versus carbon taxes. A carbon tax is a blunt tool, penalizing consumers for the emissions of the business they’re buying from. Proponents of carbon taxes like to point out that they can be used to fund governmental green energy initiatives, which is true. Cap and trade programs, however, create incentives for the business to reduce emissions directly and also raise money for green initiatives, which is a double benefit. Nova Scotia is moving in the right direction.

Categories
Uncategorized

Another Day… Another Corporate Call for Action

Yesterday, we saw The Investor Agenda call on government to step up with more comprehensive commitments to meeting Paris Accord climate change targets. The World Economic Forum’s CEO Alliance for Climate Change also issued a similar call for action. The CEO Alliance represents roughly 400 of the top 2000 publicly traded global companies. The letter, signed by 78 of the CEOs participating in this group, called on governments to deliver policy changes including:

  • Publish new NDCs, aligned to a 1.5C target, and halving emissions by 2030.
  • Commit to net-zero by 2050, with roadmaps to get there.
  • Ensure that developed countries meet and exceed their $100B commitment to support developing countries mitigate and adapt to climate change.
  • Develop broadly accepted carbon pricing mechanisms, with escalating carbon prices to drive the transition.
  • Compel all business to establish credible decarbonization targets, and fully disclose all emissions.
  • Eliminate fossil fuel subsidies, and cut tariffs on green goods.
  • Boost R&D spending.
  • Invest in climate adaptation. This means resilient cities and infrastructure.
  • Create and implement sector-specific incentives for power, transport, buildings and cities, industry, land and agriculture, and finance.

It encompasses the same policy actions as the Investor Agenda open letter, and then takes them a step further asking government to provide incentives and R&D as well.

Both the Investor Agenda letter, and the CEO group letter ask for the elimination of fossil fuel subsidies, and for synchronized carbon pricing mechanisms to be introduced. What would this do?

  • Direct fossil fuel consumption subsidies are substantial, according to the IEA, at about $320B annually. The incentives and R&D asked for could be funded by the elimination of these subsidies.
  • Similarly, carbon pricing mechanisms send a signal to markets that low-carbon investments will be valuable and also create incentives for companies to be more efficient. Carbon pricing has momentum. According to the World Bank’s 2020 State of Carbon Pricing report, there are now 61 carbon pricing initiatives scheduled or implemented, and to-date some 14,500 projects registered. One challenge for business is the diversity of models. 30 of these initiatives are carbon taxes and 31 are carbon exchange trading systems.

Taken together, these two open letters are a strong endorsement by business. Rather than fight climate change efforts and regulation by government, they are calling for public/private partnerships to make progress more quickly.

Categories
Uncategorized

Investors Group Asks Governments to Step Up

The Investor Agenda is a policy advocacy organization with the mission of accelerating a net-zero emissions economy. Today 457 of their members with a combined $41 trillion in assets asked governments to do more than meet their Paris Agreement commitments. Specifically, they are asking government to:

  1. Strengthen their NDCs to align with a 1.5 C target for 2030. NDCs are simply the commitments that governments made at the Paris conference.
  2. Commit to mid-century (2050, presumably) net-zero emissions targets, and outline the interim steps to get there.
  3. Implement policies to deliver these targets, including phasing out fossil fuel subsidies, carbon trading systems and more.
  4. Use COVID-19 recovery plans to double down on the transition to net-zero.
  5. Commit to mandatory climate risk disclosure requirements.

One of the misunderstood stories of the climate transition is the opportunity in it. The capital and operation costs of both solar and wind power are now well below corresponding fossil fuel generation, creating massive opportunities for investment. You can see this in the financial performance of renewable assets as a class. These investors are saying “we have the capital to make help make this transition”. They’re asking governments to commit with them, to require disclosure of climate risk by business, and to remove the subsidies that artificially support the fossil fuel industry.

Transforming the global economy will be a hugely expensive, but hugely profitable opportunity. This is a relatively small, entirely understandable, and fair ask on the part of the investment community.