Tag Archives: carbon tax

The $22 Trillion Global Carbon Market

Two of the world’s biggest oil companies, Royal Dutch Shell  and BP already have significant carbon-emissions trading arms, thanks to a relatively well-developed carbon market in Europe. Big carbon emitters such as steel producers receive emission allowances, and can buy more to stay under European emissions guidelines. Companies that fall below those limits can sell their excess carbon-emissions allowances.

Carbon traders get in the middle of those transactions, seeking to profit from even small moves in the price of carbon and sometimes betting on the direction of prices. The value of the world’s carbon markets—including Europe and smaller markets in places such as California and New Zealand—grew 23% last year to €238 billion, equivalent to $281 billion.

That is small compared with the world’s multitrillion-dollar oil markets and to other heavily traded energy markets, such as natural gas or electricity. But growth potential exists, the industry says. Wood Mackenzie, an energy consulting firm, estimates a global carbon market could be worth $22 trillion by 2050… An experienced carbon trader’s base salary can be roughly $150,000 to $200,000, although a lot of compensation occurs via bonuses, traders said…. BP’s overall annual trading profits were between $3.5 billion and $4 billion during the past two years, according to a person familiar with the matter.

Excerpts from Sarah McFarlane, Energy Traders See Big Money in Carbon-Emissions Markets, WSJ, Sept. 9, 2021

Can We Change Path? Saving Forests and Cutting Carbon

No ecosystem is more important in mitigating the effects of climate change than tropical rainforest. And South-East Asia is home to the world’s third-biggest patch of it, behind the Amazon and Congo basins. Even though humans release carbon from these forests through logging, clear-felling for agriculture and other disruptions, some are so vast and fecund that the growth of the plants within them absorbs even more from the atmosphere. The Congo basin, for instance, locks up 600m tonnes of carbon a year more than it releases, according to the World Resources Institute (WRI), an international NGO that is equivalent to about a third of emissions from all American transport.

In contrast, such is the extent of clearing for plantations in South-East Asia’s rainforests, which run from Myanmar to Indonesia, that over the past 20 years they have turned from a growing carbon sink to a significant source of emissions—nearly 500m tonnes a year. Indonesia and Malaysia, home to the biggest expanses of pristine forest, have lost more than a third of it this century. Cambodia, Laos and Myanmar, relative newcomers to deforestation, are making up for lost time.

The Global Forest Watch, which uses satellite data to track tree cover, loss of virgin forest in Indonesia and Malaysia has slowed for the fourth year in row—a contrast with other parts of the world…The Leaf Coalition, backed by America, Britain and Norway, along with such corporate giants as Amazon, Airbnb, and Unilever, aims to create an international marketplace in which carbon credits can be sold for deforestation avoided. An initial $1bn has been pledged to reward countries for protecting forests. South-East Asia could be a big beneficiary,

Admittedly, curbing deforestation has been a cherished but elusive goal of climate campaigners for ages. A big un initiative to that end, called REDD+, was launched a decade ago, with Indonesia notably due for help. It never achieved its potential. Projects for conservation must jump through many hoops before approval. The risk is often that a patch of forest here may be preserved at the expense of another patch there. Projects are hard to monitor. The price set for carbon under the scheme, $5 a tonne, has been too low to overcome these hurdles.

The Leaf Initiative would double the price of carbon, making conservation more attractive. Whereas buyers of carbon credits under REDD+ pocketed profits from a rise in carbon prices, windfalls will now go to the country that sold the credits. Standards of monitoring are much improved. Crucially, the scheme will involve bigger units of land than previous efforts, the so-called jurisdictional approach. That reduces the risk of deforestation simply being displaced from a protected patch to an unprotected one.

Excerpts from Banyan: There is hope for South-East Asia’s beleaguered tropical forests, Economist, May 1, 2021

Banning Gasoline Cars: Better than subsidies and taxes

More than a dozen countries say they will prohibit sales of petrol-fueled cars by a certain date. On September 23rd, 2020,  Gavin Newsom, California’s governor, pledged to end sales of non-electric cars by 2035. Such bans may look like window-dressing, and that could yet in some instances prove to be the case. But in the right circumstances, they can be both effective and efficient at cutting carbon.

Fully electric vehicles are not yet a perfect substitute for petrol-consuming alternatives. They are often more expensive, depreciate faster, and have a lower range of travel and more limited supporting infrastructure, like charging stations or properly equipped mechanics. But the number of available electric models is growing, and performance gaps are closing. A recent analysis concludes that in such conditions—when electric vehicles are good but not perfect substitutes for petrol-guzzlers—a ban on the production of petrol-fueled cars is a much less inefficient way to reduce emissions than you might think.

If electric vehicles were in every way as satisfactory as alternatives, it would take little or no policy incentive to flip the market from petrol-powered cars to electric ones. If, on the other hand, electric cars were not a good substitute at all, the cost of pushing consumers towards battery-powered vehicles would not be worth the savings from reduced emissions. Somewhere in between those extremes, both electric and petrol-powered cars may continue to be produced in the absence of any emissions-reducing policy even though it would be preferable, given the costs of climate change, for the market to flip entirely from the old technology to the new. Ideally, the authors reckon, this inefficiency would be rectified by a carbon tax, which would induce a complete transition to electric vehicles. If a tax were politically impossible to implement, though, a production ban would achieve the same end only slightly less efficiently—at a loss of about 3% of the annual social cost of petrol-vehicle emissions, or about $19bn over 70 years… A shove may work as well as a nudge. 

Excerpts from Outright bans can sometimes be a good way to fight climate change, Economist, Oct. 3, 2020

The Carbon-Neutral Europe and its Climate Bank

The European Union (EU) Green Deal, a  24-page document reads like a list of vows to transform Europe into a living demonstration of how a vast economy can both prosper and prioritise the health of the planet. It covers everything from housing and food to biodiversity, batteries, decarbonised steel, air pollution and, crucially, how the EU will spread its vision beyond its borders to the wider world….The plan is large on ambition, but in many places frustratingly vague on detail.

Top billing goes to a pledge to make Europe carbon-neutral by 2050….Current policies on renewable energy and energy efficiency should already help to achieve 45-48% cuts by 2030. Green NGOs  would like to see the EU sweat a bit more and strive for 65% cuts by 2030, which is what models suggest is needed if the bloc is to do its share to limit global warming to 1.5-2ºC.

All this green ambition comes at a price. The commission estimates that an additional €175bn-€290bn ($192bn-$320bn) of investment will be needed each year to meet its net-zero goals. Much of this will come from private investors. One way they will be encouraged to pitch in is with new financial regulations. On December 5th, 2019 EU negotiators struck a provisional agreement on what financial products are deemed “green”. Next year large European companies will be forced to disclose more information about their impacts on the environment, including carbon emissions. These measures, the thinking goes, will give clearer signals to markets and help money flow into worthy investments.

Another lever is the European Investment Bank, a development bank with about €550bn on its balance-sheet, which is to be transformed into a climate bank. Already it has pledged to phase out financing fossil fuels by 2021. By 2025 Werner Hoyer, its boss, wants 50% of its lending to go to green projects, up from 28% today, and the rest to go to investments aligned with climate-change goals. Some of that money will flow into a “just transition” fund, worth €100bn over seven years. Job losses are an unavoidable consequence of decarbonising Europe’s economy; the coal industry alone employs around 250,000 people, mainly in eastern Europe. The fund will try to ease some of this pain, and the political opposition it provokes.

The Green Deal goes beyond the scope of previous climate policies. One area it enters with gusto is trade. Under the commission’s proposals, the eu will simply refuse to strike new trade deals with countries that fail to comply with the Paris agreement’s requirement that signatories must increase the scale of their decarbonisation pledges, known as “nationally determined contributions” or NDCs, every five years. That would mean no new deals with America while Donald Trump is president; it is set to drop out of the Paris agreement late in 2020. And, because the first round of enhanced ndcs is due next year, it would put pressure on countries that are dragging their feet on these, of which there are dozens—including China and India.

The deal also sketches out plans for a carbon border-adjustment levy. Under the eu’s emission-trading scheme, large industries pay a fee of about €25 for every tonne of carbon dioxide they emit. Other regions have similar schemes with different carbon prices. A border-adjustment mechanism would level the playing field.

Excerpts from, The EU’s Green Deal, Economist, Dec. 2019

Taxing Carbon Emissions: EU

The European Union wants to slash greenhouse-gas emissions to 80% below 1990 levels by 2050. It is on course to cut just half that amount. To get back on track, on February 15th, 2017 the European Parliament voted for a plan to raise the cost for firms to produce carbon. It has prompted growing calls for the bloc to tax the carbon emissions embodied in the EU’s imports. At best, such a levy will barely curb emissions. At worst, it could cause a trade war.

The EU’s latest reforms try to put up the price of carbon by cutting the emissions allowances firms are granted. They include the EU’s first border tax on carbon, levied on cement imports.

Under the EU’s reforms, steelmakers in Europe would pay up to €30 ($32) to emit a tonne of carbon, but foreign producers selling in the EU would not have to pay a cent. Putting an equivalent tax on these imports is a neat solution to this problem. “It’s wonderful in theory,” says Jean Chateau, an economist at the OECD, a club of rich countries. But “in reality it’s very problematic.”

One big problem is how to calculate the carbon in imports. This is not easy even for simple steel sheets; for items made of several bits of metal from different sources, it is hellishly complex. Some countries might even refuse to provide the information. And any method brought in for foreign firms, if not applied to local ones, could fall foul of WTO rules,..

A global carbon price would produce far greater economic benefits than border taxes, but would require closer international co-operation. A trade war is not the way to get there.

Excerpts from Steely defences: Carbon tariffs and the EU’s steel industry, Economist,  Feb. 18, at 62