Article by Hannah Klaus
Imagine that you are walking to work and that you are four blocks away when it begins to rain. Realizing that you have forgotten your umbrella and not wanting to show up to work soaking wet, you duck under an awning and pull up your Uber app in order to call an call to take you to the remaining distance. You see that the cost of your Uber has doubled. Now it is up to you to decide if you are willing to pay the surcharge, or if you would rather walk through the rain. We live in a world of trade offs. Each choice we make is informed by the benefits and costs of our available options. Although so many of our everyday decisions are informed by trade-offs, we seldom consider the costs of degrading the environment. On a planet where we can access natural resources for free, we have just begun the process of assigning a monetary value to clear air, abundant ecosystems, or potable water.
By placing a value on the Earth’s goods and services that we would otherwise access for free, these become integrated into the market such that we are forced to think the cost of our impact on the environment. This is what “cap and trade” or carbon taxes achieve (6).
Cap and trade is a system that limits the quantity of carbon emissions by setting an exact quantity of emissions permits that allow companies to emit a quantity of carbon emissions set by each permit. Typically, the permits are given away for free or they are auctioned off to industries. These permits can be traded between emitters. If there are two companies, company A, which emits has three 1 ton permits (allowing 3 tons of carbon emissions in total) and company B, which has two 1 ton permits (allowing 2 tons of carbon emissions in total). If company A yields a greater benefit from emitting 1 additional ton of carbon than company B. and if the cost of each permit is set at $100, then company A will buy one of company B’s permits for at price at or above $100. This system, in which the choice to emit carbon become a trade off, emitters are forced to their keep their emissions down or to buy an additional permit (5, 6).
The World Bank has estimated that 12% of current global carbon emissions are from industries with carbon permits (5), but have set a goal, along with the International Monetary fund, of pricing 25% of global carbon emissions by 2020 (2).
Carbon taxing charges emitters for carbon emissions by defining a tax rate charged per unit of carbon emitted. A key difference between cap and trade and carbon taxing is that with cap and trade, the emissions reduction is defined as soon as the policy is implemented, but with carbon taxing, the emissions reduction occurs over time. Currently, about 4% of carbon emissions are taxed worldwide (2, 3).
An added bonus of carbon pricing is that this mechanism can act as a subsidy for renewable energy. An increase in the cost of emitting carbon, can make alternative sources of energy, such as solar, wind, or hydroelectric power, the less expensive options by comparison (6).
In the past two decades, the international community made major efforts to make the choice to emit carbon a part of a trade off. The Kyoto Protocol, an international agreement created by the United Nations Framework Convention on Climate Change that aims to lower global emission by setting binding emission reduction targets (4).
A Clean Development Mechanism was developed from this agreement, which is an emissions reduction project that allows developing countries to earn certified emissions reduction (CER) credits. CER credits can be traded between developing countries, and are intended to foster sustainable development and emissions reductions (8).
The European Union (EU) made a similar effort to lower carbon emissions in 2005 when it launched the EU Emissions Trading System. The EU put a cap on the amount of emissions allowances available to emitters for purchase and trade and lowers this cap over time in order to reduce emissions over time. 45% of the EU’s emissions are permitted under this system (7).
The Carbon Disclosure Project, CDP, recently released a report on Carbon Pricing, found that more and more companies are putting a price on their carbon emissions and considering this cost in their business strategies. According to the report, 23% more companies reported the adoption of carbon pricing each year, internationally (1).
There is no fix-all solution to climate change. Carbon pricing is only one strategy to reduce emissions out of many other efforts to be made. However, the more that we put a cost on choices to impact the environment, it will become clear that reducing this impact is always the best choice.
- Embedding a Carbon Price into Business Strategy. Report. Carbon Disclosure Project. CDP. Accessed September 26, 2016
- Fairley, Peter. “If Carbon Pricing Is so Great, Why Isn’t It Working?” Ensia. July 12, 2016. Accessed September 26, 2016. http://ensia.com/features/if-carbon-pricing-is-so-great-why-isnt-it-working/.
- IPCC, 2014: Summary for Policymakers. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.
- “Kyoto Protocol.” Kyoto Protocol. Accessed September 26, 2016. http://unfccc.int/kyoto_protocol/items/2830.php.
- Oppermann, Klaus, Nicolai Prytz, Noémie Klein, Kornelis Blok, Long Lam, Lindee Wong, and Bram Borkent. State and Trends of Carbon Pricing. Report. World Bank Group. Washington, D.C.: World Bank and Ecofys.
- Stavins, Robert N. A U.S. Cap and Trade System to Address Global Climate Change. Report. John F. Kennedy School of Government, Harvard University. Washington, D.C.: Brookings Institution.
- “The EU Emissions Trading System (EU ETS).” European Commission. Accessed September 26, 2016. http://ec.europa.eu/clima/policies/ets/index_en.htm.
- “What Is the CDM.” CDM: About CDM. Accessed September 26, 2016. https://cdm.unfccc.int/about/index.html.