economics

January 16, 2010

Border taxes linked to cap-and-trade laws

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By Alan Beattie and Fiona Harvey in London

Published: June 29 2009 03:00 | Last updated: June 29 2009 03:00

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Cap-and-trade legislation passed by the House of Representatives late on Friday will make it easier for the US to impose import tariffs against countries that do not control their own carbon emissions.

Passage of the bill – it is likely to face an even tougher fight in the Senate – was welcomed by environmental groups and some sections of business, but others warned the so-called “border tax adjustment” provisions could aggravate tensions with the US’s trading partners.

Such border measures – intended to level the playing field by equalising carbon emission charges between domestic production and imports – might be permitted by World Trade Organisation rules, according to a report published last week by the WTO and the United Nations.

But judicial rulings on similar disputes made in the past by WTO arbitration panels leave considerable doubt. Countries such as China complain the measures can act as a form of backdoor protectionism.

Provisions added to the House bill at a late stage would automatically impose such border measures on imports in 2020 unless both the White House and Congress were to agree to waive them. “[That] automatically sets the switch for border measures to ‘on’ and makes it harder to turn it off,” said Jacob Werksman, programme director at the World Resources Institute.

Jake Colvin, vice-president for global affairs at the National Foreign Trade Council, a business association, welcomed the part of the bill that encouraged the US to negotiate a global deal to reduce carbon emissions.

But he added: “We are disappointed that, without a global deal, the legislation would all but require the president to impose border measures against any number of countries.” The strict rule “may harm relations with US trading partners – and could violate global trade rules”.

Environmental campaigners welcomed the bill, saying it put the US in a strong position to negotiate a climate change treaty to replace the Kyoto protocol. Talks will culminate in a conference in Copenhagen in December.

Annie Petsonk, counsel for the Environmental Defense Fund, said the emissions reductions laid out in the bill would be enough to hold global temperature rises to no more than 2°C – the level scientists reckon is the limit of safety, if other developed countries were to agree similar cuts and if large developing nations were to take action to curb emissions.

One easy way to start a trade war

Published: December 9 2009 20:14 | Last updated: December 9 2009 20:14

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// ]]>As if it were not depressing enough thrashing about trying to haul the Doha round of trade talks out of its sinkhole, ministers face a new problem. If threats of carbon border tariffs emanating from parts of the European Union and US are implemented, the world could enter the biggest trade war since the Great Depression.

Border tax adjustments, levied on the carbon content of imports from countries without an equivalent emissions scheme to the importer, are intended to prevent such countries gaining competitive advantage. In theory an economic and a legal case can be made for them. But in practice they are likely to prove an unworkable mess, way out of proportion to the problem they aim to solve.

The economic and legal arguments are straightforward. Just as governments charge the same VAT on imports as on domestic output, so forcing foreign and domestic companies to bear the same carbon costs of production will level the playing field between the home team and the visitors. It aims to prevent “carbon leakage” – emissions rising as industries decamp to countries with lax controls.

In principle, such a tax might well be compatible with World Trade Organisation rules. In practice, its blinding complexities are likely to kick off a series of trade disputes that will rapidly resemble a litigious version of the Hundred Years’ War: protracted, expensive and largely fruitless.

First, it is not easy to estimate the extra cost that, say, a cap-and-trade scheme imposes even on a domestic company. And given disaggregated supply chains, it will be all but impossible to calculate which country added which bit of the overall carbon content of the end product, and hence what the weighted average final tariff should be. The spectre arises of endless WTO dispute panels poring over flow-charts of east Asian production lines late into the night.

In any case, it is far from clear that carbon leakage is a serious problem. Most studies show some impact, though not a huge one, on very energy-intensive industries such as paper, glass and steel, but little effect on the economy as a whole. This is worth neither starting a trade war nor imperilling the future of the environment about.

As a ruse to keep trade lawyers in gainful employment, carbon border taxes are perfect. As policy, they would likely be a disaster. We must hope that the chatter in Paris and Washington is a tactical bluff designed to get the likes of China and India to the negotiating table. If it is for real, we are in trouble.

A guide to good carbon offsetting

By Fiona Harvey, Environment Correspondent

Published: April 25 2007 22:19 | Last updated: April 25 2007 22:19

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// ]]>Companies seeking to offset their emissions or to go “carbon-neutral” need to carefully consider their options. The FT has brought together some advice from companies that have taken this step, and carbon market experts.

Analyse your company’s carbon footprint

Measuring your company’s impact on the climate starts with the electricity bills and includes factors such as employee travel, equipment use, raw materials and recycling. Environmental consultants can help.

Reduce emissions first

Offsetting should never be the first step in any carbon-neutral strategy. Instead, companies should seek to reduce their impact on the climate by wasting less energy and by examining their industrial processes to see if they can be made more efficient or less carbon-intensive. An energy audit should assist with finding efficiency savings. Companies should only offset what emissions they cannot eliminate.

Regulated or voluntary market

There are two choices for companies looking to purchase emissions credits to offset their emissions: the regulated or “compliance” market, under the Kyoto protocol or the EU’s emissions trading scheme; and the voluntary market, which is unregulated.

If buying permits through the EU scheme, companies should ensure they are phase 2 permits. Tom Morton, director of Climate Care, one of the biggest offsetting intermediaries, says: “Phase 1 was overallocated so clearly [the permits] are not worth anything very much environmentally.” But the caps are expected to be tighter in phase 2, from 2008 to 2012.

Buying Certified Emissions Reductions through the CDM is more expensive than buying them on the voluntary market, but ensures that the emissions reductions satisfy stringent criteria. However, some companies prefer the voluntary market because they point out that more money goes on administration fees when the projects must pass through the UN bureaucracy. This also means small projects are less likely to gain CDM approval as the owners may not be able to afford the fees. Lawrence Hunt, chief executive of Silverjet, chose the voluntary market for his company’s offset scheme because he was concerned about the administration costs under the Kyoto protocol.

Go it alone or go through an intermediary

Companies also face a choice as to whether to buy credits in the voluntary market through an intermediary or to develop and fund its own projects. HSBC took the latter route, because it wanted more control over the projects. However, most companies use an intermediary.

Offset criteria

Setting strong criteria is essential to avoid any risk of damage to your company’s reputation if the project fails to deliver or turns out to be different than you expected.

Some widely accepted criteria are:

Additionality: Would the emissions reductions have happened anyway under “business as usual”? If they would, the project is not “additional” as defined under the Kyoto protocol. This is a tricky area: some companies view industrial efficiency projects, by which companies reduce their energy usage and are given credits as well, and subsidised wind energy projects in developed countries, as not additional. But other companies argue these reductions are valid, because the credits provide an incentive to ensure the reductions take place.

Type and location of projects: Many companies wish to make the most of their offsetting by ensuring that the projects they fund have other social benefits beside carbon reductions. For instance, Aviva funds a project to distribute treadle pumps in India that reduce emissions and give people access to clean water, and funds the distribution of more efficient cooking stoves in Swaziland which not only cuts emissions but also reduces the indoor air pollution which can cause respiratory problems.

Vintage: “I was wondering why they started talking to me about wine,” says Ben Stimson, director of corporate responsibility at BSkyB. In carbon terms, vintage does not refer to wine, however, but to the year in which the emissions reductions took place. Sky has chosen to ensure that all of its credits come from projects that reduce emissions in the same year as the emissions which the company is offsetting, rather than projects that will only bear fruit in the future.

Verification: Ensuring that a project is professionally verified is a must. The UN maintains a list of verifying companies, which it calls Designated Operational Entities or DOEs, that meet its criteria. SGS Group, TUV and Det Norske Veritas are the market leaders in carbon verification. Robert Dornau, director of the climate change programme at SGS, warns that companies should not have their projects verified by the same company that advised on how to set up the project, as that creates a conflict of interest.

Industry standards

There are several emerging standards in the voluntary market, which offer assurances to buyers. These standards use some of the principles of the Kyoto protocol, such as additionality and third party verification, to ensure that offsets are genuine. The two main standards are the voluntary carbon standard set up by the International Emissions Trading Association, the Climate Group and the World Economic Forum, and the “gold standard” endorsed by numerous environmental charities.

Registry

Having your emissions credits entered in a registry helps to guard against any possiblity of double counting. The Bank of New York operates a registry for carbon credits and the emerging voluntary standards will also use a registry in the future.

Forestry

There are scientific question marks over how far trees can be used to offset carbon emissions. In general, trees in tropical countries are regarded as better at reducing emissions than trees in temperate forests, because they grow faster. Trees have to grow to maturity, which could take 70 years in some places, in order to store the carbon, and there are also concerns over how this can be ensured. If trees burn down, are cut down or die, are new ones planted in their place? Another issue where companies offer to preserve forest that would otherwise be cut down is “leakage”, which is the question of whether preserving a forest in one place simply displaces loggers, who move on to another bit of forest, thereby negating the environmental benefits.

Cost

The costs of emissions credits on the voluntary market vary widely, from a few dollars per tonne of carbon to $20 or more.

Another view on cap-and-trade giveaways

May 28, 2009 7:26pm

The revised Waxman-Markey bill now plans to give away about 85 per cent of initial carbon allowances for free – despite President Obama’s first budget back in February planning for all allowances to be auctioned; with no freebies.  Many commentators, including the FT, have been critical of the giveaways.

Robert Stavins at Harvard has written a defence of giving away allowances; in principle, he says, they are not as bad as they sound.

In short he argues the political pressures of the day do not affect the cost-effectiveness or the environmental effectiveness of the scheme itself.

Generally speaking, the choice between auctioning and freely allocating allowances does not influence firms’ production and emission reduction decisions.  Firms face the same emissions cost regardless of the allocation method.  When using an allowance, whether it was received for free or purchased, a firm loses the opportunity to sell that allowance, and thereby recognizes this “opportunity cost” in deciding whether to use the allowance.  Consequently, the allocation choice will not influence a cap’s overall costs.

While political pressures affect the initial allocations of allowances, they do not affect the environmental effectiveness or even the cost effectiveness, he says.

Contrast this with what would happen when political pressures are brought to bear on a carbon tax proposal, for example.

Stavins also says the fighting over allocations can actually help support the cap-and-trade scheme, by creating a political constituency in support of the system.

But there are a few problems.

First, the foregone revenues from auctions could be spent on social measures (or, perhaps, other measures to reduce emissions).

Second, allocations given to utilities could be used to lower electricity costs, thereby affect the amount by which electricity demand could otherwise fall. (Stavins notes Waxman-Markey seeks to address this by insisting utilities pass on credit to customers in lump sum payments).

Third, if free allowances are allocated according to an ‘updating’ view of the recipient’s emissions, rather than a snapshot of past use, this can provide “perverse incentives”. In otherwords:

If allowances are freely allocated, the allocation should be on the basis of some historical measures, such as output or emissions in a (previous) base year, not on the basis of measures which firms can affect, such as output or emissions in the current year.  Updating allocations, which involve periodically adjusting allocations over time to reflect changes in firms’ operations, contrast with this.

An output-based updating allocation ties the quantity of allowances that a firm receives to its output (production).  Such an allocation is essentially a production subsidy.  This distorts firms’ pricing and production decisions in ways that can introduce unintended consequences and may significantly increase the cost of meeting an emissions target.  Updating therefore has the potential to create perverse, undesirable incentives.

And Waxman-Markey DOES use updating allocations for some sectors – as an attempt to prevent the scheme from giving an advantage to imports, without upsetting international trade relations.

Stavin also points out that most of the free allowances go towards consumers and public purposes, and only 17 per cent goes directly to private industry – not quite the ‘massive corporate giveaway’ that it is often characterised as, then.

Calculation of free allocations should be scrutinised closely, he says, especially those such as the updating mechanism which provide perverse incentives. But the horse-trading over allocations actually underlines an advantage of cap-and-trade: it provides a way to get political support for a system that does ultimately reduce greenhouse gas emissions.

Related stories:

The wonderful politics of cap and trade: a closer look at Waxman-Markey (Harvard, 27/05/09)
Editorial: Cap and trade or coach and horses
(FT, 18/05/09)
The case for a carbon tax over a cap-and-trade system (FT, 03/05/09)

Budget outline: Cap-and-trade timeline ‘optimistic’; no permit giveaways

February 27, 2009 11:50am

From CNN:

Commit more money for renewable energy efforts: Obama’s budget will call on Congress to create a cap-and-trade program in which companies would have to pay for permission to emit greenhouse gases. Revenue from the program is intended to pay for a $150 billion renewable energy fund among other things.

The new cap-and-trade program would pay in large part for making the Making Work Pay credit permanent, which the White House estimates will cost $537 billion over 10 years.

Brad Plumer reports from a media conference call:

The administration is aiming for a cap and trade system to be up and running by 2012, but that assumes an extremely fast passage through Congress which an official admitted is ‘optimistic’

– The White House is expecting the price of carbon will settle at around $20 per tonne.

– They are assuming zero free giveaways of new permits – auctions only

Cap and trade or coach and horses

Published: May 18 2009 19:47 | Last updated: May 18 2009 19:47

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// ]]>Whether a climate change bill emerges from the US Congress this year is much in doubt. Most Republicans still oppose the very idea of reducing emissions of greenhouse gases. Democrats are less than united in their commitment to it, once forced to consider the implications. The signs are that if a bill does somehow pass, it will be ugly.

A subcommittee of the House of Representatives has taken the lead in drafting a cap-and-trade plan – the approach promised by Barack Obama – but its initial efforts give one pause.

Under cap and trade, emitters require permits and the supply of these allowances is capped at a level that reduces total emissions. So long as the cap binds, the permits have a value and the system creates a market to trade them. This ensures that cuts in emissions happen where they can be made at least cost. As a result, cap and trade is much more efficient than decreeing a uniform cut regardless of the source of emission.

The problem is not with the basic idea. A well-designed cap-and-trade scheme, though lacking the simplicity and transparency of an outright carbon tax, can do the job nearly as well. Unfortunately, Congress seems keen to take the opportunities for gaming that cap and trade presents, and increase them tenfold.

During the campaign for the presidency, Mr Obama promised that all permits would be auctioned. His first budget counts on revenues from that source to finance his “Make Work Pay” tax credits for the low-paid – to the tune of more than $600bn over 10 years. The House committee’s current proposal chooses to give 85 per cent of the permits away. The hole in Mr Obama’s long-term fiscal arithmetic just got bigger.

That is not all. Predictably, in the disbursement of this enormous windfall gain, the House proposes to reward favourites, such as regulated utilities, and punish villains, notably the oil companies. Some emitters will receive more permits in relation to their needs than others. This would create a perpetual struggle for political advantage. If you wanted to promote corruption, this would be a good way.

Still not content, the House wants to set conditions on its gifts of permits – including commitments to shield consumers from higher energy costs. Yet the whole point of this exercise is to make high-carbon energy dearer. On the drawing board is a vast and unfathomably complex new system, which fosters corruption, raises little revenue and tries to suppress the incentives that are its entire purpose. Otherwise, it all looks quite promising.

Europe not liking the possibility of carbon trade wars

January 13, 2010 12:24pm

Europe itself looks unlikely to introduce a carbon border tax any time soon, with the EC’s trade commissioner-designate warning that such a move could lead to a ‘trade war’.

This is despite some powerful EU interests being in favour. Nicolas Sarkozy is calling for an EU-wide carbon tax and specifically, a carbon tariff on imports. He has vowed to press ahead with new taxes in his own country, despite a setback to those plans at the end of last year.

US lawmakers have also taken a shine to the idea, with the Waxman-Markey bill passed by the House of Representatives including provisions for a border tax.

The idea of a carbon border tax is appealing because it could not only protect domestic industries, but remove the likelihood of the emissions cuts by one country simply being offset by another. As the FT opined last year, it might even be legitimate under WTO rules.

But it could also be blindingly complex and counterproductive, raising the spectre of “endless WTO dispute panels poring over flow-charts of east Asian production lines late into the night”.

Meanwhile the size of the carbon leakage risk itself is actually quite hard to determine. Think about the ‘additionality’ problem with carbon offset projects, and add in the complexity of determining exactly how big business decisions, such as relocating production overseas, are made – and you’ll see the challenges involved.

The EU, in determing sectors that are susceptible to carbon leakage, allows for those that would bear at least a 5 per cent cost increase as a result of the domestic carbon regulations, and where net imports equate to at least 10 per cent of the industry; a pretty rough reckoner, in otherwords.

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