ASSIGNMENT

CARBON PRICING

SUBMITTED BY:

EMMA BABAR (03)

BS SEMESTER VIII (M)

SESSION 2015-2019

SUBMITTED TO:

MAM WARDA UZAIR KHAN

COLLEGE OF EARTH AND ENVIRONMENTAL

SCIENCES

UNIVERSITY OF THE PUNJAB, LAHORE

Contents
CARBON PRICING ............................................................................................................................... 2

Definition ............................................................................................................................................ 2

Approaches to establish carbon price...................................................................................................... 2

Carbon tax ........................................................................................................................................... 2

Cap and trade ...................................................................................................................................... 2

Examples ............................................................................................................................................. 3

UK ....................................................................................................................................................... 3

China ................................................................................................................................................... 3

South Africa ........................................................................................................................................ 3

Mexico ................................................................................................................................................ 3

Norway................................................................................................................................................ 4

Case of uniform carbon price .............................................................................................................. 4

Carbon Pricing Proposals ........................................................................................................................ 4

Lieberman-McCain (2007) ................................................................................................................. 4

Lieberman-Warner (2008) .................................................................................................................. 4

Waxman-Markey (2009) ..................................................................................................................... 5

Kerry-Lieberman (2010) ..................................................................................................................... 5

Generic Policy..................................................................................................................................... 5

Google.org .......................................................................................................................................... 5

Impact on Gross Domestic Product (GDP) ......................................................................................... 5

Impact on Energy Independence ......................................................................................................... 6

Impact on Gasoline Prices .................................................................................................................. 6

Impact on Utility Bills ........................................................................................................................ 6

Impact on Household Costs ................................................................................................................ 7

References ........................................................................................................................................... 7

1
 CARBON PRICING:
Definition:
A carbon price is a cost applied to carbon pollution to encourage polluters to reduce the amount
of greenhouse gas they emit into the atmosphere.

A carbon price not only has the effect of encouraging lower-carbon behavior (e.g. using a bike
rather than driving a car), but also raises money that can be used in part to finance a clean-up
of "dirty" activities (e.g. investment in research into fuel cells to help cars pollute less). With a
carbon price in place, the costs of stopping climate change are distributed across generations
rather than being borne overwhelmingly by future generations.

Approaches to establish carbon price:

There are two main ways to establish a carbon price.

 Carbon tax
 Cap and trade

Carbon tax:

First, a government can levy a carbon tax on the distribution, sale or use of fossil fuels, based
on their carbon content. This has the effect of increasing the cost of those fuels and the goods
or services created with them, encouraging business and people to switch to greener production
and consumption. Typically the government will decide how to use the revenue, though in one
version, the so-called fee-and-dividend model – the tax revenues are distributed in their entirety
directly back to the population.

Cap and trade:

The second approach is a quota system called cap-and-trade. In this model, the total allowable
emissions in a country or region are set in advance ("capped"). Permits to pollute are created
for the allowable emissions budget and either allocated or auctioned to companies. The
companies can trade permits between one another, introducing a market for pollution that
should ensure that the carbon savings are made as cheaply as possible.

2
Examples:
UK:

To serve its purpose, the carbon price set by a tax or cap-and-trade scheme must be sufficiently
high to encourage polluters to change behaviour and reduce pollution in accordance with
national targets. For example, the UK has a target to reduce carbon emissions by 80% by 2050,
compared with 1990 levels, with various intermediate targets along the way. The government's
independent advisers, the Committee on Climate Change, estimates that a carbon price of £30
per tonne of carbon dioxide in 2020 and £70 in 2030 would be required to meet these goals.

Currently, many large UK companies pay a price for the carbon they emit through the
EU's emissions trading scheme. However, the price of carbon through the scheme is considered
by many economists to be too low to help the UK to meet its targets, so the Treasury plans to
make all companies covered by the scheme pay a minimum of £16 per tonne of carbon emitted
from April 2013.

China:
China has launched six pilot emissions trading systems in four cities and two provinces, and
plans to launch in a fifth city, Chongqing, later this month. It has a goal to reduce emissions
intensity by 40-45 percent compared with 2005 levels by 2020, establish statistical and
verification systems for greenhouse gas emissions, and is considering a national emissions
trading systems to start in a few years.

South Africa:
South Africa’s ambition is to reduce emissions by 34 percent by 2020 and 42 percent by 2025,
though a carbon tax and offset system expected to be launched after the start of 2016.

Mexico:
Mexico has a national climate change policy and ambitious greenhouse gas emissions
reduction targets. It has a voluntary market now and is exploring innovative approaches to
carbon pricing as a member of the Partnership for Market Readiness, a group of 31 countries
developing carbon pricing systems of the future.

3
Norway:
Norway has had a carbon tax since 1991, and about half of its total greenhouse gas emissions
are covered today.

Case of uniform carbon price:

Ideally, there should be a uniform carbon price across the world, reflecting the fact that a tonne
of carbon dioxide does the same amount of damage over time wherever it is emitted. Uniform
pricing would also remove the risk that polluting businesses flee to so-called "pollution
havens"' – countries where a lack of environmental regulation enables them to continue to
pollute unrestrained. At the moment, carbon pricing is far from uniform but a growing number
of countries and regions have, or plan to have, carbon pricing schemes in place, whether
through cap-and-trade or carbon taxes. These include the European Union, Australia, South
Korea, South Africa, parts of China and California.

Carbon Pricing Proposals:

Lieberman-McCain (2007):

Senators Lieberman and McCain introduced the Climate Stewardship and Innovation Act of
2007. This bill would have capped greenhouse gas (GHG) emissions at 22% below their 1990
levels in the year 2030, and 60% below 1990 levels in 2050. The Energy Information
Administration (EIA) analyzed this bill using the National Energy Modeling System (NEMS),
and the US Environmental Protection Agency (EPA) analyzed the bill as well.

Lieberman-Warner (2008):

Senators Lieberman and Warner introduced the Climate Security Act of 2008. The bill called
for a steadily-declining GHG cap, reaching 15% below 2005 levels by the year 2020 and 70%
below 2005 levels by 2050. It was analyzed by the EPA using results from two economic
forecasting models: the ADAGE model developed at Research Triangle Institute (RTI) in
North Carolina; and the IGEM model run by a consulting firm founded by Dale Jorgenson, a
professor at Harvard. The Massachusetts Institute of Technology (MIT) analyzed this
bill using their Emissions Prediction and Policy Analysis (EPPA) model, and
the EIA and Congressional Budget Office (CBO) also analyzed the bill.

4
Waxman-Markey (2009):

Congressmen Waxman and Markey introduced the American Clean Energy and Security Act
of 2009. This bill would have reduced greenhouse gas emissions 17% below 2005 levels by
2020 and 83% by 2050. It was analyzed by the CBO, EPA, EIA, and Science Applications
International Corporation (SAIC).

Kerry-Lieberman (2010):

Senators Kerry and Lieberman introduced the Clean Energy Jobs and American Power
Act. This bill would have reduced greenhouse gas emissions 17% below 2005 levels by 2020
and 83% by 2050. It was analyzed by the Peterson Institute, EPA, EIA.

Generic Policy:

Research groups (MIT, RTI, and the Department of Energy's Pacific Northwest National
Laboratories [PNNL]) have also analyzed the economic impacts of a generic comprehensive,
economy-wide climate policy to reduce GHG emissions 50-80% by the year 2050.

Google.org:

An analysis done by Google.org using McKinsey & Company's US Low Carbon Economics
Tool evaluated the economic impact of various scenarios involving strong investment in green
technologies, 'clean policy', and/or a price on carbon emissions from the power sector of $30
per ton.

Impact on Gross Domestic Product (GDP):

The majority of these analyses find that the evaluated climate policies impact the US GDP by
less than 1% as compared to BAU. The main exception is the IGEM analysis, which finds a
2.15% reduction in GDP for the Lieberman-Warner by bill by 2030, and a 3.59% reduction by
2050. The IGEM model is an outlier because it assumes when the price of energy (and other
goods and services) rises, people will respond by choosing to work less than they otherwise
would (EDF 2008). This is a counter-intuitive and illogical assumption, since increasing costs
generally result in people working more to increase income correspondingly.

5
Another outlier was the SAIC analysis of Waxman-Markey, which was funded by the National
Association of Manufacturers, which has strongly opposed climate legislation. The study
incorporated some unrealistically conservative and pessimistic assumptions, for example that
American companies will be unable to deploy clean energy and energy efficiency technologies
in a timely manner. Nevertheless, the report concluded that by 2030, GDP would grow 95%
as much under Waxman-Markey as compared to BAU.

The MIT analysis in the generic 80% GHG emissions reductions below 1990 levels below
2050 (the scenario with the largest GHG emissions decrease) found that by 2030, GDP would
increase by just 0.44% as compared to BAU.

Impact on Energy Independence:

In the MIT analysis of Lieberman-Warner, the United States would spend $20 billion less on
foreign oil in the year 2020, and $81 billion less in 2030. The Google.org analysis found that
US reliance on petroleum products would decrease by nearly 50% by 2050 if we invest strongly
in green tech and implement a carbon pricing system.

Impact on Gasoline Prices:

The EIA study of Lieberman-Warner found that the bill would add 42 cents per gallon to gas
prices in 2030 as compared to BAU (a 12% increase). Analyses of Waxman-Markey found
that it would increase gas prices 22 to 35 cents per gallon by 2030 (6 to 9%). The Peterson
Institute analysis of Kerry-Lieberman found it would increase gas prices by approximately 10
cents per gallon (3%) by 2030.

Impact on Utility Bills:

Analyses of Waxman-Markey found that its impacts on monthly utility bills by 2030 ranged
from a $5.60 decrease to a $2.80 increase. The Peterson Institute analysis of Kerry-Lieberman
found that by 2030, monthly utility bills would range between a $0.67 decrease and a $2.62
increase.

The potential decrease in monthly electric bills is due to the energy efficiency programs
established through the bill's provisions. Though energy prices are expected to increase
modestly, energy consumption is expected to counteract these increases as households take
advantage of these energy efficiency programs.

6
The Google.org study found that through electric car breakthroughs as a result of investment
in green tech and carbon pricing, household energy bills (electric plus transportation fuel)
would decrease 53% by 2050, by approximately $950 per year.

Impact on Household Costs:

The analyses of Waxman-Markey concluded that the bill would cost the average American
household between $84 and $160 per year by 2020, which corresponds to $0.67 to $1.28 per
person per week. The majority of the increase comes through increased gasoline costs. The
studies also concluded that the costs would be lower for lower income families. For example,
the CBO analysis of Waxman-Markey concluded that families in the lowest income quintile
would see a net decrease in average annual costs of about $125 in 2020 due to low-income
assistance provisions (CBPP 2009).

Over the entire span of the Waxman-Markey bill (to 2050), EPA found the average annual cost
would be $80 to $110 per household in current dollars (64 to 88 cents per person per week).

References:
https://www.theguardian.com/environment/2012/jul/16/carbon-price-tax-cap

https://www.skepticalscience.com/co2-limits-economy-intermediate.htm