A carbon tax also has one key advantage: It is easier and quicker for governments to implement. A carbon tax can be very simple. It can rely on existing administrative structures for taxing fuels and can therefore be implemented in just a few months. In theory, the same applies to cap-and-trade systems, but in practice they tend to be much more complex.
More time is required to develop the necessary regulations, and they are more susceptible to lobbying and loopholes. Cap-and-trade also requires the establishment of an emissions trading market. Unite for bold climate action! Always grounded in sound evidence, the David Suzuki Foundation empowers people to take action in their communities on the environmental challenges we collectively face.
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What is a carbon tax? Email Submit. Join us on social! Learn more about climate change and discover ways to take action. Our work Always grounded in sound evidence, the David Suzuki Foundation empowers people to take action in their communities on the environmental challenges we collectively face. Carbon pricing. Clean Power Pathways. Methane pollution. Guest, Ross S. Carbon emission and climate change : global and national concerns. Sharma, Nidhi, Western river transportation : the era of early internal development ; - Haites, Erik F.
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In an inclusive system, it is this CO 2 -e that forms the basis for either the tradable commodity or the tax base. Including multiple gases can reduce the cost of reaching a specific concentration target by quite a bit. The disadvantages include not only that the GWP approach does not produce a perfect equivalency residency time in the atmosphere varies considerably among the different gases, for example , but also the fact that some of these gases may be more difficult to monitor.
In practice, for administrative ease, most programs currently focus on CO 2 emissions from fossil fuel consumption. This can be a viable transition strategy since it is not difficult to add additional gases as the monitoring capacity matures. Historically, some regulatory targets other than CO 2 have also been adopted.
For example, Boulder, Colorado, taxes only electricity use. While a uniform tax on energy does promote energy conservation, it fails to promote switching among fuels with different emissions per unit of energy. From the point of view of minimizing cost, more universal coverage of sources like gases is also better. Yet no existing program involves universal control. As noted above, the EU ETS covers only certain categories of large emitters, although expansion to other sectors is in process.
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RGGI covers only one sector large power generators. Aside from including some sectors and not others, source size commonly affects coverage. For most programs, even in covered sectors, only facilities over a specified size threshold usually incur pricing obligations. Expanding the original scope of coverage has occurred as a result of broadening the concept of where the carbon pricing can be applied.
A downstream point of regulation would focus control on the point of use, where GHGs are emitted into the atmosphere. An upstream system imposes the taxes or allowance requirements on the point of extraction, production, import, processing, or distribution of substances, which, when used or combusted, would generate GHGs. The downstream approach is probably the most common in practice.
For example, in the Bay Area Air Quality Management District, the fees are applied directly to the emitting facilities, and in RGGI, it is the emitting generators and not the fuel suppliers that are required to submit allowances. In Australia, the carbon pricing mechanism will apply directly to several hundred of their biggest polluters. Like so many other design choices, the point of regulation should not be considered simply as a binary choice.
Hybrids involving upstream control of some sources and downstream control of others have proved to be popular options and are becoming more common. For example, the British Columbia carbon tax is generally applied and collected upstream, except for the fee on natural gas, which is collected at the retail level. Overlaps double taxation are commonly avoided either by rebates or granting within-category exemptions to those facing the possibility of double taxation. Emissions trading systems offer more temporal flexibility by allowing banking, borrowing, and advance auctions. Banking means holding an allowance for use beyond its designated year.
Borrowing means using an allowance before its designated date. Advance auctions sell allowances that can be used after some future date, commonly 6 or 7 years hence. The economic case for allowing this temporal flexibility is based upon the additional options it allows sources in timing their abatement investments, which lower compliance costs. The optimal time to install new abatement equipment or to change the production process can vary widely across firms.
Factors such as the age of the equipment that is being replaced and the number of available technological options for additional control clearly matter. Price considerations also argue for temporal flexibility. Forcing firms to adopt new technologies at exactly the same time concentrates demand at a single point in time as opposed to spreading it out.
Concentrated demand would raise prices for the equipment as well as for the other complementary resources such as skilled labor necessary for its installation. Banking also has been shown to reduce the damage caused by price volatility.
SiCEM – Preparation of an Emissions Trading System (ETS) in Mexico
Storing permits for unanticipated outcomes such as an unexpectedly high production level, which triggers higher than expected emissions can reduce the future uncertainty considerably. Because stored permits can be used to achieve compliance during tight times, they provide a safety margin against unexpected contingencies. The existence of a banking system, where allowances can be stored for future use, may also contribute to the political durability of the policy.
Enacting a well-designed carbon pricing policy will not be sufficient if it cannot be maintained when public attention wanes and the policy faces the threat of being undermined or distorted by special interest politics. Even just the credible threat of dismantlement can have a strong negative effect on investment incentives. History suggests that reforms are sustainable when the major participants have an interest in their continuation and, in general, when policy preservation incentives are aligned in a way that is self-reinforcing.
Those holding banked allowances as well as entities involved in and profiting from the infrastructure of the carbon market, such as brokerage houses, registries, etc. In recognition of these substantial advantages, banking is widely used in emissions trading programs. Borrowing, on the other hand, has experienced more limited use, in part due to a fear that firms that borrow heavily could become enforcement problems later.
The Australian ETS plans to allow limited borrowing of permits such that, in any particular compliance year, a covered source can surrender permits from the following vintage year to discharge up to 5 percent of its obligation. So far, the fact that borrowing has been limited has not seemed to raise costs in any significant way.
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Advance auctions are now more common, but little analysis of their impact has made it into the literature. Carbon taxes and auctioned allowances not only provide incentives for reducing emissions, but they raise revenue as well. Operating programs provide experience with a wide variety of choices, which can be helpful in seeing whether experience matches expectations. Containing the Burden on Target Groups. It is not uncommon for nations setting up carbon pricing programs to have to deal with powerful political concerns about their possible economic impacts, especially on energy-intensive businesses.
These concerns have resulted in several design strategies that use potential or actual revenue to contain possible cost increases faced by these businesses, including exemptions, preferential tax rates, or gifted allowances. Exemptions are a common strategy for targeted burden containment especially in European tax systems. Types of exemptions include 1 exempting all emissions from sources that emit fewer emissions than some established threshold a strategy followed by most programs , 2 exempting emissions from sources that are covered by another policy to prevent double taxation also common , 3 exempting emissions from sources deemed unacceptably vulnerable to cost increases, and 4 exempting emissions where international legal issues introduce special implementation barriers.
While the first two types of listed exemptions may not normally raise significant cost-effectiveness issues, exemptions of the third and fourth types can. Because facilities that receive exemptions face no controls on GHGs from that instrument, their incentive to reduce emissions is eliminated. Furthermore, when the instruments are designed to reach specific quantitative targets, the other facilities must pick up the slack created by exemptions, which raises compliance costs for the program as a whole.
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Preferential tax rates are even more common. In Norway, for example, the pulp and paper industry, fishmeal industry, domestic aviation, and domestic shipping of goods pay reduced rates. In Sweden, manufacturing, agriculture, cogeneration plants, forestry, and aquaculture face lower rates. Another possibility with mixed results for reducing the cost burden on vulnerable firms, issuing rebates, is illustrated by the Swedish Nitrogen Charge System Box 8.
Gifting can occur in either a tax system or an ETS. With a tax system, it involves taxing only emissions above the gifted threshold, a strategy found in some European effluent charge systems. Alternatively, in emissions trading, some proportion of the allowances in a cap-and-trade system can be gifted given free of charge to favored sectors. Either approach eliminates the financial burden associated with paying for gifted emissions, but in contrast to an exemption, it does not relieve the sector of its obligation to control GHGs.
The Swedish Nitrogen Charge took a different approach to cost containment. It was intended from the beginning to have a significant incentive effect, not to raise revenue. Although the charge rate is high by international standards thereby producing an effective economic incentive , the revenue from this tax is not retained by the government, but rather is rebated to the emitting sources thereby reducing the impact of the tax on competitiveness. It is the form of this rebate that makes this an interesting scheme. While the tax is collected on the basis of emissions, it is rebated on the basis of energy production.
In effect, this system rewards plants that emit little NOx per unit of energy and penalizes plants that emit more NOx per unit of energy. This approach provides incentives to reduce emissions per unit of energy produced, but not to reduce the amount of energy. Hence, it reduces fewer total emissions than an unrebated tax. Over the period —, the average emission intensity was nearly cut in half, but total output of useful energy from participating plants increased by more than 70 percent due to expanding energy demand.
As a result, total NOx emissions from the units targeted by the nitrogen charge barely fell. The EU ETS and California, at least initially, gifted some or all of the allowances to parties based upon some specified eligibility criteria.