Carbon Credit &

Carbon Trading
 This presentation covers
What is carbon credit?
What is the EU system working?
Can carbon markets be part of the answer in controlling climate
change?
What is the basic economics of carbon trading?
What are the alternatives / complements?
What is Carbon Footprint?
 Carbon Credit
A carbon credit is a generic term for any tradable certificate or permit
representing the right to emit one tonne of carbon dioxide or the mass of
another greenhouse gas with a carbon dioxide equivalent (tCO2 e) to one
tonne of carbon dioxide.
What is Carbon Credit?
Carbon
Emissions
Trading
EU system
The EU-Emissions Trading
Scheme
EU ETS is a market-based mechanism to incentivize reduction of
greenhouse gas emissions in a cost-effective and economically-efficient
manner.
Similar system trialed in the USA - US acid rain program employed a
sulfur emissions cap and trade system and successfully produced a 50
percent cut in emissions
The scheme operates through the allocation and trade of CO2
emissions allowances
One allowance represents one ton of carbon dioxide equivalent.
Long term goal - de-carbonization of EU economy
Carbon trading scheme began in January 2005
Pressure to reduce CO2
emissions
The USA has the highest per capita
emissions of carbon but China and
India and other Asian countries have
huge populations – putting increased
pressure on carbon emissions
 EU Targets: 20-20-20

Energy
Green House Renewable
Consumption
Gas Target Energy Target
Target
• 20% cut in • 20% increase • 20% cut in
greenhouse in use of energy
gas emissions renewable consumption
by 2020, energy by 2020 through
compared with improved
1990 levels energy
efficiency by
2020
Trading the right to pollute
Market failure can occur with missing markets.
In the past there has been no market to trade and enforce
environmental property rights.
Carbon trading seeks to create incentives to reduce pollution.
A cap is set on the emissions allowed
The cap creates the scarcity required for the market
 Carbon Trading – Assets and Liabilities

Businesses in the EU-ETS must implement carbon management strategies in

the medium term
The new carbon market should develop a price that reflects the cheapest ways
of implementing emission cutbacks.
As the market price of carbon emissions rises, so there is an incentive for
businesses to invest in technologies that are more pollution efficient including
carbon sequestration.
• If a carbon emitting business can under-
use its initial allowance by better energy
Assets
efficiency, it can sell its surplus on the
market.
• If a business is faced by high costs to
Liabilities reduce its emissions, it must buy extra
allowances
Rewards and incentives?
Reward efficiency – e.g. those businesses that are pollution efficient
Reward action – e.g. capital investment in lower-carbon cleaner
factories and production processes
Reduce pollution without damaging the competitiveness of European
businesses.
 The Clean Development
Mechanism
CDM: allows industrialized
countries to invest in projects
that reduce emissions in
developing countries - as an
alternative to what would
undoubtedly be more expensive
emission reduction programmes
in their own country.
The CDM scheme has been
criticised – fraudulent use of it
 The EU-India Initiative on Clean
Development & Climate Change
AREAS OF CO OPERATION
Co-operation on clean technology
Clean Development Mechanism
Adapting to climate change and integrating adaptation into sustainable
development strategies.

SCOPE CDSC (clean

BIG (scalable development an
FOWIND
CSP optimised d sustainable
(facilitating off- CECI (clean
power plant cities) to
shore wind energy cooperati
engineered with integrate low-
development in on with India)
biomass carbon strategies
India)
integrated into urban
gasification) development

EU FINANCE EXAMPLES
Is a carbon tax a viable
alternative?
Carbon taxation
A Carbon tax is a specific tax on the consumption of goods which cause
carbon dioxide emissions
Case for a carbon tax:
◦ Cap and trade is like a tax so why not tax instead?
◦ Mandates a specific price on carbon – less uncertainty than the emissions-trading
price
◦ A way of internalizing externalities – the tax would raise the marginal cost of the
CO2 -emitting activities, up to the point that the marginal social cost of abatement
activities is equated to the marginal social benefit from these activities
◦ Incentive for firms to lower their emissions and for consumer behavior to change
◦ Consumers will respond … perhaps in surprising ways (behavioural economics has
something to say here!)
◦ Revenue generated can be “ring-fenced” and then recycled – i.e. spent on
environmental initiatives
Supporters of a carbon tax
Problems with a carbon tax
What are the chances of agreeing a carbon tax across different parts of the world?
How much to tax when emissions of carbon are difficult to measure accurately
What is the true economic cost of CO2 emissions and impact on climate change?
Involves discounting the future
Costs of compliance / risk of tax evasion
Possible regressive effects on lower income households
Less certainty about the effect on quantity of emissions
Countries may free ride on others carbon taxes i.e. enjoy a reduction in CO2
emissions without imposing their own tax
Unless introduced across many countries – would potentially damage
competitiveness and jobs of countries that bring a carbon tax in
Would countries be prepared to raise the carbon tax to reduce emissions? Low price
elasticity of demand?
Evaluating the alternatives
When evaluating consider some of these points:
1. Which interventions are likely to be most effective?
• In changing behaviour
• In encouraging innovation and investment
• In reducing emissions at lowest cost
2. What are the consequences for equity?
• Between rich and poorer nations
• Between rich and poorer within any one country
• Between current and future generations
• Between producers and consumers
3. What approach offers the best chance of a global programme?
4. Putting a price on carbon is a necessary but insufficient condition
for achieving the required reductions in CO2
 Carbon Footprint
What is Carbon Footprint?
A carbon footprint is historically defined as the
total emissions caused by an individual, event,
organisation, or product, expressed as carbon
dioxide equivalent.