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News : International Last Updated: Dec 19th, 2007 - 13:17:15

Taxes or Carbon Emissions Trading in Post-Kyoto Regimes?
By Finfacts Team
Nov 29, 2007, 05:43

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French President Nicolas Sarkozy receiving a copy of a university newspaper from a student of Tsinghua University in Beijing on Tuesday, Nov. 27, 2007.

Sarkozy in an address to the students warned China that the European Union could penalise cheap imports from high carbon-emitting countries in order to defend EU companies obliged to meet strict environmental standards.

“We cannot have one response from Europe and one from Asia, one from the north and one from the south,” he said. “China can and must play its full part.” But he said the EU, would not indefinitely let its companies bear the brunt of this campaign if countries that mass-produced cheaper goods delayed adopting similar standards.

“I will defend the principle of a carbon compensation mechanism at the EU’s borders with regard to countries that don’t put in place rules for reducing greenhouse gas emissions,” Sarkozy said.

The distribution of real or perceived costs and benefits of reducing greenhouse gas (GHG) emissions will play a crucial role in upcoming negotiations on a Post Kyoto climate regime. The distribution of these costs depends to a large degree on the choice of the policy instrument for effectively reducing emissions such as a harmonized international carbon tax or a “cap-and-trade” emissions trading system with different rules for allocating the emission allowances.

Some of these rules might lead to a distribution of costs particularly for major developing countries including China and India that might not be acceptable to them and thus fail to provide incentives for these countries to participate. This is the result of a working paper, Distribution Matters – Taxes vs. Emissions Trading in Post Kyoto Climate Regimes by Sonja Peterson and Gernot Klepper released recently by the German-based Kiel Institute for the World Economy.

The UN Development Programme in its report published on Tuesday criticised the European Union's emissions trading system and questioned the efficacy of the Kyoto protocol in its report, Fighting climate change.

Kevin Watkins, the report's lead author, told the Financial Times that carbon cap-and-trade systems had a part to play in the short term but that carbon taxes would be more effective in the longer term.

"You could go for a really stringent cap-and-trade system in the short term then gradually introduce a tax, with cap-and-trade being phased down and the carbon tax phased up," he said.

He said the arguments were in favour of taxation: "Long-term investment needs predictability of price, and a tax is the way to do that. Cap-and-trade is not particularly working. We need to develop the strategy into a carbon tax."

Watkins referred to "serious problems" with the carbon trading system under the Kyoto protocol. He said: "We are still along way from an integrated carbon trading system."

French President Nicolas Sarkozy on Tuesday, Nov 27th, warned China that the European Union could penalise cheap imports from high carbon-emitting countries in order to defend EU companies obliged to meet strict environmental standards.

In a speech to students at Beijing’s Tsinghua University, Sarkozy urged China to shoulder its environmental responsibilities as a global economic power that energy experts predict will soon emerge as the world’s biggest emitter of carbon dioxide.

"The increase in China's energy demand between 2002 and 2005 was equivalent to Japan's current annual energy use," according to the International Energy Agency's latest World Energy Outlook. Japan is currently the world's second biggest economy.

In the report, the IEA, the energy adviser to 26 industrialised countries, said China was likely to overtake the US as the world’s largest energy consumer soon after 2010. Chinese primary energy demand is forecast to more than double from 1,742 m tonnes of oil equivalent to 3,819m tonnes by 2030.

China was “by far the biggest contributor” to an expected 57% increase in global energy-related CO2 emissions between 2005 and 2030, the IEA said.

Discussions on a successor to the Kyoto Potocol, will begin in Bali, Indonesia, next week.  The United Nations Climate Change Conference is scheduled for Dec 3-14th.

The host is the world's third largest emitter of greenhouse gases.

The world's top greenhouse gas emitter, the United States, reported on Wednesday that emissions decreased by 1.5% in 2006.

When the Kyoto Protocol finally came into effect in the spring of 2005, the first international GHG-emission regulations became binding. But, besides the fact that it is unclear whether the emissions targets will be met, the major GHG-producing industrialized nation, the United States, have not ratified the Protocol, meaning that they are not bound to its terms. In addition, rapidly growing Asian countries such as India and China are currently exempt from emission reduction regulations, even though China is in the process of surpassing US emissions levels.

The increasing share of the big developing countries in GHG emissions and the nonparticipation of the United States, together with the recent evidence for a faster than expected climate change that can be found in the fourth assessment report of the IPCC have made clear that a Post-Kyoto agreement needs to include the biggest emitters of GHGs. The forecast that by 2030 developing nations will account for more than 50 per cent of GHG emissions makes the necessity of including developing nations in any Post-Kyoto agreement even more clear. Also obvious is the fact that an agreement can only be reached if it provides a fair distribution of emissions reduction responsibilities, and some sort of real or monetary incentives in order to be internationally accepted.

Peterson and Klepper conduct a quantitative assessment of the distribution of the costs of climate policies by comparing a harmonized international carbon tax with two variants of a cap-and-trade system: The first requires reductions in all countries by the same percentage relative to some historical reference year (“grandfathering rule”), the second allocates emission rights in such a way that over time the rights are distributed among countries according to the size of their population. This proposal – it has been also called the “Contraction and Convergence” approach – eventually leads to a system where every person receives the same emission right. This last proposal has recently been introduced by the Chancellor of Germany into the inter­national debate.

Peterson and Klepper find that a harmonized carbon tax tends to favour industrialized countries whereas it puts a relatively high burden on developing coun­tries. The “Contraction and Convergence” approach of emission trading leads to welfare gains for countries like China, India, and the countries of sub-Saharan Africa whereas it imposes welfare losses upon industrialized countries which are larger than those under the grandfathering rule or a tax scenario.

Under all policy instruments the energy exporting regions such as the countries of the former Soviet Union and the Middle East face high welfare losses when compared to all other countries. Two forces are at work as the authors find out: The “Contraction and Convergence” assignment of emission rights gives developing countries large amounts of emission rights. At the same time they have comparatively low cost of reducing emissions. In sum, they can sell a significant amount of their emission rights to industrial countries and can thus use emission rights as an additional source of income. In fact, India and China are expected to sell about 30 to 35 percent of their emission rights to countries with higher abatement costs. At the same time Europe will import emission rights in the order of about one third of its reduction requirement thus avoiding the higher cost of meeting their emission target. This explains the gains of developing countries and the relatively low losses of industrialized countries.

The second force concerns the response of energy demand to the climate policy. Significant worldwide emission reductions can only occur if the demand for energy is reduced. This means that an important determinant for regional welfare changes – induced by the different climate policy instruments – is a country’s status as either an exporter or importer of energy. The reason is that a reduction in GHG emissions will automatically lead to lower net prices for fossil energy sources and thus to a welfare loss in energy exporting countries.

Peterson and Klepper stress the importance of the choice of policy instruments and their particular use in implementing a Post-Kyoto Climate Regime, but conclude that there is no policy instrument that looks immediately acceptable to all countries. However, they indicate that for a Post-Kyoto climate regime that intends to include the countries with the most emissions the “Contraction and Convergence” approach with emission trading could be a good starting point since it balances the overall cost of climate policies between the rich and the not so well-off countries and it simulta­neously has the appeal of leading to a fair distribution of emission rights in the future.


Climate change: EU on track towards Kyoto target - Ireland to meet target via purchase of carbon credits

Finfacts Climate Change Reports - access on right-hand column of home page.

© Copyright 2007 by Finfacts.com

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