Carbon Regulation Advances Globally Despite Stalled International Negotiations

Since the collapse of global climate negotiations in Copenhagen in 2009 negotiators have struggled to form a deal, sparking negative criticism and broad cynicism of attempts to address climate change. However, during this same period great progress has been made at the state and regional level, indicating a trend towards growing carbon regulation around the world. 

There are two main approaches to carbon pricing: carbon taxation and carbon trading. The relative advantages and disadvantages of both have been widely debated and its likely that a diversity of regulatory tools will continue to exist.

Carbon Pricing

As we look around the world at this diversity of implementation methods we see a clear increase in carbon pricing mechanisms to regulate emissions. Here’s a quick snapshot of key developments by region:

Europe

The European Union: The EU’s Emissions Trading Scheme (ETS) has been operational since 2005 and in 2012 was expanded to include aircraft emissions, although taxes on non-EU flights have been blocked by China and the US.  

However, the over-allocation of permits during the first two trading periods (2005 – 2012) as well as the economic recession meant that the carbon price has been too low to seriously deter industry from emitting. Prices are now around $5.20/tonne. Despite these challenges the ETS remains the largest such scheme in the world covering over 11,000 factories, power stations and other heat-emitting installations.

Norway, Iceland and Liechtenstein are also in the EU ETS. Switzerland, which currently has its own ETS covering around 50 companies, is set to join the EU scheme in 2014.

In addition to the regional scheme, many European countries have their own forms of carbon tax. In 1990 Finland became the first country in the world to introduce a carbon tax and in 2010 it stood at around $24/tonne. Another example is Denmark, whose carbon tax of $18/tonne applies to all energy users. Other countries such as Sweden apply carbon-based taxes to fossil fuel use in domestic travel. However, some countries, including the UK, also apply a reduced VAT rate on domestic energy consumption, which is has been described by some as a hidden fossil fuel subsidy.

The UK has one of the most advanced regulatory regimes in the world through the CRC Energy Efficiency Scheme covering 2,500 companies. The CRC, now in its 2nd year of reporting, levies a tax of £12/tonne ($17.87) of carbon and is set to rise in the coming years.

North America

Northeast and Mid-Atlantic: nine States in the US northeast and mid-Atlantic regions formed the Regional Greenhouse Gas Initiative (RGGI) in 2008 covering all fossil fuel power plants with 25 MW or greater generating capacity. Implementation appears to be going well with allowances experiencing busy trading due to plans to tighten the cap on allowances.

California: The United States’ first legally-binding emissions cap-and-trade scheme began in California in January 2013. It applies to the state’s 350 largest emitters and has set a minimum price of $10.71/tonne, although most of the permits were initially handed out for free.

Quebec: also beginning at the start of 2013, Quebec’s compulsory cap-and-trade scheme applies to around 80 industrial facilities, such as refineries, cement plants and paper mills. The price has been set at $10.70/tonne.

British Colombia: BC has also passed a carbon taxation scheme, which started back in 2008. Various reports indicate that the scheme’s successful implementation will lead to a $5 rise in the tax, bringing the overall price to $35/tonne.

Asia

Japan: Asia’s first carbon trading initiative began in Tokyo in 2010. It regulates the city’s 1,400 most energy- and carbon-intensive organisations.

South Korea: An emissions trading scheme covering the country’s 450 largest carbon emitters will begin in January 2015, building on current law which requires them to report their emissions. For the first two years of the scheme the South Korean government will give away all emitting permits for free.

China: In February 2013 Beijing proposed a national carbon tax, although it is unlikely to be implemented for some time. Commentators suggest that it would only be applied to its export industries, with prices being passed onto consumers in developed countries. Estimated prices are in the region of $1.60/tonne.

Even so, initial carbon trades have already taken place in China, for example between cement manufacturers wishing to expand. By the end of 2013 seven provinces will have their own trading schemes including a scheme in the industrial province of Guangdong covering over 800 companies.    

Southern Hemisphere

Australia: Australia’s carbon tax came into force in July 2012 and applies to the country’s 500 largest emitters. Until 2015 the price is fixed at about $24.50/tonne, after which it will integrate with the EU’s ETS to become a more conventional cap and trade scheme.   

New Zealand: In 2008 NZ introduced the world’s only emissions trading scheme outside of Europe. However, in 2012 the carbon price fell to $2.06/tonne and the scheme was put on hold.

South Africa: From 2015 a carbon tax will apply to emitters in the electricity, petroleum, iron, steel and aluminium industries. Starting at $14/tonne, the tax will increase by 10% every year for the first five years representing one of the most robust regulatory schemes in the world.

Brazil: Although a carbon exchange (Bolsa Verde do Rio de Janeiro) already exists, Brazil is looking to implement a nationwide cap-and-trade scheme by 2015. Analysts suggest it has the potential to become the largest in the world and also help curb deforestation.

 

As the various initiatives above show there has certainly been an advance in carbon regulation around the world. Many countries and regions are experimenting with new approaches and sharing lessons learned. I think this type of development will have a greater impact than the stalled global negotiations. It may even surpass such negotiations to become the real driver of a global greenhouse gas regulatory system.

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