Lecture 6 Pricing Decision. 2 Pricing Direction Export pricing Within National Markets Pricing.
International Experience with Carbon Pricing...Current Spectrum of Carbon Pricing Instruments...
Transcript of International Experience with Carbon Pricing...Current Spectrum of Carbon Pricing Instruments...
http://mit.edu/ceepr
International Experience with
Carbon PricingOpportunities, Challenges and
Lessons Learned
Michael MehlingChile | May 2017
http://mit.edu/ceepr
Overview
• Background and Rationale
• Carbon Pricing: State and Trends
• Political Economy of Carbon Pricing
• Carbon Pricing Mix
• Climate Policy Mix
• Case Studies:
⎯ British Columbia Carbon Tax
⎯ German “Ökosteuer”
http://mit.edu/ceepr
Background and Rationale (1)
• Climate change belongs to a new generation of
environmental challenges that require scalable,
flexible and economically efficient policy solutions
• Climate Change is the “greatest market failure ever
seen” (Stern, 2006), and carbon pricing can help
correct it by making polluters pay for the cost
• Carbon pricing offers flexibility for abatement to occur
where it is cheapest, and it can generate revenue
• Overall, therefore, carbon pricing is considered a
“logical foundation of any policy regime for clean
energy” (World Economic Forum, 2009)
http://mit.edu/ceepr
Background and Rationale (2)
• Climate change belongs to a new generation of
environmental challenges that require scalable,
flexible and economically efficient policy solutions
• Climate Change is the “greatest market failure ever
seen” (Stern, 2006), and carbon pricing can help
correct it by making polluters pay for the cost
• Carbon pricing offers flexibility for abatement to occur
where it is cheapest, and it can generate revenue
• Overall, therefore, carbon pricing is considered a
“logical foundation of any policy regime for clean
energy” (World Economic Forum, 2009)
http://mit.edu/ceepr
Carbon Pricing: Policy Options
• Generally two approaches to create an explicit carbon
price:
• Taxes, fees and charges: payment obligations based on
carbon emissions or a proxy, such as energy content
Price signal is determined by government
• Emissions trading: a system of emission allowances
distributed to emitters and tradable in a market
Price signal is discovered by the market
• Traditional regulation creates an implicit carbon price,
but does not offer the same efficiency gains or potential
revenue
Carbon Pricing: State and Trends
6/5/2017Source: World Bank, 2016
Source: World Bank, 2016
Carbon Pricing: State and Trends
Carbon Markets: Mention in INDCs
6/5/2017Source: IETA, 2016
Political Economy: Carbon Taxes
• Compelling premise: “Tax Bads, not Goods”, i.e. shift fiscal
burdens from production factors to negative externalities
• “Double Dividend”: correct a market failure and generate
revenue for public expenditure or to lower fiscal burdens
• Implementation can build on existing taxes, such as energy
taxes, and existing administrative capacities for collection
• While emissions outcomes are uncertain, they can be pre-
dicted with some accuracy and tax levels adjusted over time
• A central challenge faced by any meaningful carbon or energy
tax initiative are the unfavorable politics
Political Economy: Emissions Trading
• Certainty of outcome with consistently lower prices than
forecast during the political process
• Emissions trading has proven politically resilient:
• New supportive stakeholders (market facilitators, net “winners”)
• Harnesses creative, proactive engagement by compliance entities
• Discussion of cap less controversial than price: justified by science
• Opposition can be softened by allowance distribution decisions
• Emissions trading offers the opportunity to link to other trading
systems, with multiple benefits such as increased liquidity and
flexibility, foreign revenue, and cooperation
• But like other markets, emissions trading is subject to its own
dynamics and governance challenges, such as volatility
Prices and Binding Political Constraints
6/5/2017Source: World Bank, 2015
US$ 36/tCO2
Social Cost of
CO2 in 2015, at
3% discount rate
Source: U.S. EPA
Factsheet,
Update Dec.
12/2015
6/5/2017
Current Spectrum of Carbon Pricing Instruments
Source: adapted from Munnings, 2016
“Pure” Quantity Rationing “Pure” Pricing
No Trading
Full Trading
Floating Price
Fixed Price
EU ETS
(-2017)British
ColumbiaSouth Africa Mexico
California, Quebec, RGGI
EU ETS (2018-)
“Prices v. Quantities”: A Moot Question?
UK, France (within
EU ETS)
Carbon Pricing Mix
• Climate policy is caused by a bundle of different
market failures, justifying an instrument mix
• Carbon pricing offers unrivaled static efficiency, but
does not address all underlying market failures
• No conclusive theoretical guidance on instrument
choice between price controls and quantity controls
• A coordinated carbon pricing mix can leverage
synergies and harness strengths of both approaches
• Absent coordination, a carbon pricing mix can result
in adverse interactions and distributional effects
Carbon Pricing Mix: Alternative Options
6/5/2017
TimingCoverage
Synchronous Asynchronous
Symmetrical
Price Floor/CeilingUncoordinated
OverlapPhase-In
Transition
ComplianceAlternative
AsymmetricalNo Coordination
NeededOpt-In
Uncoordinated Overlap
Flexibility
Option
Price
Management
OptionTransition
Option
Sou
rce:
McK
inse
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01
0;
Gö
rla
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al.,
20
12
Is Carbon Pricing Enough?
Negative abatement costs: apparently, cost is not the main issue
here – other barriers are at work. Carbon pricing can help, but will not
remove the primary obstacles
Slightly negative to positive abatement costs: carbon pricing can correct market failure and encourage
deployment at scale
High abatement costs: even with carbon pricing, technologies will not
become competitive. R&D investment can bring down costs and
encourage deployment at scale
Instrument Mix: Another Perspective
(Source: Grubb et al., 2014)
Blunt, unfit to scale or risk of
rebound effects
Politically difficult,
competitiveness issues, results
temporary
Risk of failure or lackluster
returns
British Columbia’s Carbon Tax
6/5/2017
• Started on 1 July 2008: $10/t CO2
• Rising $5/t each year to 2012 (now $30/t)
• Covers all domestic fuel use and most
greenhouse gas emissions
• Revenue-neutral: 100% of revenue goes
towards reducing income tax
• Additional reductions for vulnerable (low income,
rural) communities
• Pioneer in carbon pricing in North America
BC: Political Economy
6/5/2017Source: Elgie et al., 2013
• Political leadership: Premier Gordon Campbell
• Good timing harnesses window of opportunity:
– High concern for global warming
– Healthy economy, steady gas prices
• Carbon tax becomes a central issue in 2009
provincial elections
– Recession dominates political debate
– Opposition party campaigns on “Axe the Tax”
– ENGOs
BC: Political Economy
6/5/2017Source: Elgie et al., 2013 17
Window)of)Opportunity:)2006-2008)
''Global'Warming'''''''''' ''Carbon'Tax '''' ''Recession'
BC&C&Tax&
29'
2004' 2005' 2006' 2007' 2008'
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Search'term'volume'
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BC: Effect on Fuel Consumption
6/5/2017Source: Elgie et al., 2013
BC: Effect on Fuel Sales
6/5/2017Source: Elgie et al., 2013
BC: Effect on GHG Emissions
6/5/2017Source: Elgie et al., 2013
BC: Effect on the Economy
6/5/2017Source: Elgie et al., 2013
Change in GDP (in %) 2008-2011
BC: Fiscal Impacts (1)
6/5/2017Source: Elgie et al., 2013
Net Income Tax Rebates (in $ million)
BC: Fiscal Impacts (2)
6/5/2017
Distribution of Revenue Uses, 2008–2018
Source: Murray et al., 2015
BC: Public Opinion
6/5/2017Source: Murray et al., 2015
Polling Results on the BC Carbon Tax, 2008-2014
Germany’s “Ecological Tax Reform”
27
• Increased tax rates on mineral oil and gas
(“Mineralölsteuer”):
– 3.07 cents per liter and year for gasoline and diesel from 1999
to 2003
– 2.05 cents per liter and year for heating oil from 1999 to 2003
– 36 cents per kWh of natural gas by 2003
• Introduced new levy on electricity (“Stromsteuer”):
1.02 cents per kWh, increased by 0.26 cents per kWh
from 2000 to 2003
• Tax of 33 cents per Gigajoule introduced in 2006 for coal
used for heating purposes, but further increases of tax
rates deferred until further notice
6/5/2017
Reactions to the “Ökosteuer”
28
• Perception of undue
burden on industries and
competitiveness
• Consequence: Politically
negotiated tax exemptions
(60%) and rebates for
manufacturing industries
and agriculture
• Increased social
transfers to the public
instead of exemptions
6/5/2017
Ecological Tax in 1l of Transport Fuel (ct/l)
29
6/5/2017
Source: UPI
Ecological Tax in 1l of Heating Fuel (ct/l)
30
6/5/2017
Source: UPI
Changes in the Consumption of Gasoline and Diesel
31
6/5/2017
Source: UPI
Changes in Transport Fuel Consumption (kt/year)
32
6/5/2017
“Double Dividend” of the Ecological Tax Reform
33
• Revenue largely earmarked to reduce non-wage
labor cost: In 2003, roughly 16.1 billion EUR in
revenue allowed a reduction of pension contributions
by 1.7 % of wage costs
• Empirical studies suggest a positive macroeconomic
balance: Tax reform is officially estimated to have
created 250.000 new jobs by 2005, and yielded 100
mio. annually invested in subsidies and tax credits for
renewable energy and energy efficiency
• Behavioural change: By 2010, the reductions of CO2
emissions were estimated at 3 percent, or roughly 24
million tons of CO2eq per year
6/5/2017Sources cited in Bühler et al., 2011
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