Explain how the European Emissions Trading Scheme works.
The first carbon-dioxide trade was created by the Kyoto protocol in 1997 but it did not succeed. Launched in 2005, the EU Emission Trading Scheme works on the "cap and trade" principle. This means there is a "cap", or limit, on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. Polluters in capped industries are then given credits for each tonne of carbon dioxide they emit. For example, a coal power company may receive credits under the European Trading System for around 80% of its emissions. Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed. The limit on the total number of allowances available ensures that they have a value. At the end of each year each company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so. It is big business – the trade was worth $90bn in 2008, and globally is predicted to grow to up to $3.1 trillion in 2020.
What are the advantages and disadvantages of the ETS as a means of reducing carbon emissions?
ADVANTAGES:
· It is a way of reducing pollution
· It has started a public debate on an important issue
· It encourages investments in new technology
· The trade in such permits allows polluters to pay for emissions reductions made elsewhere.
DISADVANTAGES:
· The government's reliance on carbon trading schemes is inefficient and could cause a financial crisis similar to that seen with sub-prime mortgages, says Friends of the Earth
· Corruption
· Banks, investment funds and speculators have now become the middlemen in this shadowy trade and are packaging carbon credits into increasingly complex financial products, similar to sub-prime mortgages which triggered the recent economic crash.
· The system is so complex the World Bank's latest report claims the EU doesn't even know how many credits are in circulation.
Compare these advantages and disadvantages with those of green taxes.
· They give more control to regulators and businesses over future costs of an anti-pollution program. This is due to flexibility afforded in changing the tax rates and in not meeting the target pollution level if costs become prohibitively high. This feature isn't present in Cap and Trade Markets.
· Green taxes generate revenues for the instituting government.
· Tax is regressive in nature, as the extra cost is passed down to consumer. This harms low-income persons as they spend a higher proportion of their income on consumption of such goods as gasoline.
How does the market price of carbon traded within the scheme reflect the toughness of the policy? What else might the price reflect?
The higher the price the tougher the policy, because if the policy is not taught many people want to sell their limits and few want to buy them. During the first phase of the European Emissions Trading System so many permits were allocated the price of carbon fell to almost zero. But the global downturn meant companies reduced their emissions anyway and sold off their credits for cash. The result was another price crash.
What is likely to happen to the carbon price in the coming months? Explain.
In the coming months the carbon price is likely to rise because it is almost the end of the year and the demand for the limits will increase.
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