Tag: cap and trade

Back in November, when Joe Biden had just been elected, we considered some of his proposed policies to tackle climate change (see A new era for climate change policy?). On 20th January, the day of his inauguration, he signed 17 executive orders overturning a range of policies of the Trump presidency. Further executive orders followed. Some of these related directly to climate change.

The first was to cancel the Keystone XL oil pipeline project. If it had gone ahead, it would have transported 830 000 barrels of oil per day from the Alberta tar sands in Canada to refineries on the Gulf Coast of Texas. It would have involved building a new pipeline from Alberta to Nebraska, where it would have linked to an existing pipeline to Texas. Extracting oil from tar sands is a particularly dirty process, involves cutting down large areas of forest (a carbon sink) and total emissions are around 20% greater per barrel than from conventional crude.

The pipeline would have cut across First Nations land and any spills would have been highly toxic to the local environment. In terms of profitability, returns on tar sands oil extraction and transportation are very low. This is likely to remain the case as oil prices are likely to remain low, with greater global energy efficiency and the switch to renewables.

Critics of Biden’s decision argue that the pipeline project would have created some 5000 to 6000 temporary jobs in the USA during the two-year construction phase. Also they claim that it would have contributed to greater energy security for the USA.

The second executive order was to rejoin the Paris Climate Agreement, a process that will take 30 days. Rejoining will involve commitments to cut greenhouse gas emissions and the adoption of various measures to bring this about. During the election campaign, Biden pledged to achieve economy-wide net-zero emissions no later than 2050. As we saw in the previous blog, under Biden the USA will play a leading role in the November 2021 UN COP26 climate change conference in Glasgow.

At present, the Paris agreement is for countries to aim to reach a peak of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century. Many countries have have made commitments about when they aim to achieve carbon neutrality, although concrete action is much more limited. It is hoped that the COP26 conference will lead to stronger commitments and actions and that the USA under Biden will play a leading part in driving this forward.

In addition, to cancelling the Keystone XL pipeline and rejoining the Paris Agreement, the executive orders reversed more than 100 other decisions with negative environmental effects taken by the Trump administration – many overturning environmental measures introduced by previous administrations, especially the Obama administration.

These orders included reversing the easing of vehicle emissions standards; stopping reductions in the area of two major national monuments (parks) in Utah; enforcing a temporary moratorium on oil and natural gas leases in Alaska’s Arctic National Wildlife Refuge; and re-establishing a working group on the social costs of greenhouse gasses.

Then there will be new measures, such as adopting strict fuel economy standards and investment in clean public transport. But it remains to be seen how far and fast the Biden administration can move to green the US economy. With the desire for bipartisanship and seeking an end to the divisive policies of Trump, there may be limits to what the new President can achieve in terms of new legislation, especially with a Senate divided 50:50 and only the casting vote of the chair (Kamala Harris as Vice-President) being in Democrat hands.

The articles below consider the various green policies and how likely they are to succeed in their objectives.

Articles

Questions

  1. Find out what other environmental policies are being pursued by President Biden and assess their likely effectiveness in achieving their environmental objectives.
  2. Would policies to reduce carbon emissions necessarily be desirable? How would you assess their desirability?
  3. When is it best to use the ‘precautionary principle’ when devising environmental policies?
  4. To what extent is game theory relevant in understanding the difficulties and opportunities of developing internationally agreed policies on carbon reduction?
  5. If the objective is to tackle global warming, is it better to seek international agreement on limiting the extent of global warming or international agreement on carbon reduction? Explain.

 
With the election of Joe Biden, the USA will have a president committed to tackling climate change. This is in stark contrast to Donald Trump, who has been publicly sceptical about the link between human action and climate change and has actively supported the coal, oil and gas industries and has rolled back environmental protection legislation and regulation.

What is more, in June 2017, he announced that the USA would withdraw from the UN Paris Accord, the international agreement to cut greenhouse gas emissions so as to limit global warming to ‘well below’ 2°C above pre-industrial levels with efforts to limit it to 1.5°C. The USA’s withdrawal was finalised on 4 November 2020, a day after the US election. Joe Biden, however, pledged to rejoin the accord.

A growing number of countries are pledging to achieve carbon neutrality by mid-century or earlier. The EU is planning to achieve a 55% cut in greenhouse gas emissions by 2030 so as to reach neutrality by 2050. This will involve various taxes, subsidies and public investment. Similar pledges to achieve net zero emissions by 2050 have been made by Japan and South Korea and by 2060 by China. In the UK, legislation was passed requiring the government to reduce the UK’s net emissions 100% relative to 1990 levels by 2050 and thereby achieve net zero emissions.

Constraints on action

Short-termism. One of the problems with setting targets a long time in the future is that they take away the urgency to act now. There are huge time lags between introducing policies to curb carbon emissions and their impact on the climate. The costs of such policies for business and consumers, however, are felt immediately in terms of higher taxes and/or higher prices. Thus politicians may be quick to make long-term pledges but reluctant to take firm measures today. Instead they may prefer to appease various pressure groups, such as motoring organisations, and cut fuel taxes, or, at least, not raise them. Politically, then, it may be easier to focus policy on the short term and just make pledges without action for the future.

Externalities. Various activities that cause carbon emissions, whether directly, such as heavy industry, dairy farming, aviation and shipping, or indirectly, such as oil and coal production, thereby impose environmental costs on society, both at home and abroad. These costs are negative externalities and, by their nature, are not borne by those who produce them. There are often powerful lobbies objecting to any attempt to internalise these externalities through taxes, subsidising green alternatives or regulation. Take the case of the USA. Fossil fuel producers, energy-intensive industries and farmers all claim that green policies will damage their businesses, leading to a loss of profits and jobs. These groups were courted by Donald Trump.


International competition. Countries may well be reluctant to impose green taxes or tough environmental regulation on producers, when competitors abroad do not face such constraints. Indeed, some countries are actively promoting dirty industries as part of their policies to stimulate economic recovery from the Covid-induced recession. Such countries include China, Russia and Turkey. This again was a major argument used in the Trump campaign that US industries should not be hobbled by environmental constraints but should be free to compete.

Misinformation. Politicians, knowing that taking tough environmental measures will be unpopular with large numbers of people, may well downplay the dangers of inaction. Some, such as Trump in America and Bolsonaro in Brazil deliberately appeal to climate change deniers or say that technology will sort things out. This makes it hard for other politicians to promote green policies, knowing that they will face scepticism about the science and the efficacy of their proposed policies.

Biden’s climate change policy

Although it will be difficult to persuade some Americans of the need for tougher policies to tackle climate change, Joe Biden has already made a number of pledges. He has stated that under his administration, the USA will rejoin the Paris Climate Agreement and will play a leading role in the November 2021 UN COP26 climate change conference summit in Glasgow. He has also pledged a Clean Energy Revolution to put the USA on an ‘irreversible path to achieve economy-wide net-zero emissions no later than 2050’.

But readopting the pledges under the Paris Agreement and advocating a clean energy revolution are not enough on their own. Specific measures will need to be taken. So, what can be done that is practical and likely to meet with the approval of the majority of Americans or, at least, of Biden’s supporters?

For a start, he can reintroduce many of the regulations that were overturned by the Trump administration, such as preventing oil and gas companies from flaring methane on public lands. He could introduce funding for the development of green technology. He could require public buildings to use green energy.

According to the Clean Energy Revolution, the US government will develop ‘rigorous new fuel economy standards aimed at ensuring 100% of new sales for light- and medium-duty vehicles will be zero emissions and annual improvements for heavy duty vehicles’.

One of the biggest commitments is to tackle external costs directly by enacting ‘legislation requiring polluters to bear the full cost of their climate pollution’. This may be met with considerable resistance from US corporations. It is thus politically important for Biden to stress the short-term benefits of his policies, not just the long-term ones.

Given the damage done to the economy by the spread of the pandemic, perhaps the main thing that Biden can do to persuade people of the benefits to them of his policies is to focus on green investment and green jobs. Building a green energy infrastructure of wind, solar and hydro and investing in zero-emissions vehicles and charging infrastructure will provide jobs and lead to multiplier effects throughout the economy.

Articles

Questions

  1. Identify three specific climate change policies of Joe Biden and assess whether each one is likely to succeed.
  2. Draw a diagram to illustrate why a free market will lead to over production of a good which produces negative externalities.
  3. To what extent can education internalise the positive externalities of green consumption and production?
  4. What was agreed at the Paris climate change conference in December 2015 and what mechanisms were put in place to incentivise countries to meet the targets?
  5. Will the coronavirus pandemic have had any lasting effects on emissions? Explain.
  6. How may carbon trading lead to a reduction in carbon emissions? What determines the size of such reductions?

In 2015, at the COP21 climate change conference in Paris, an agreement was reached between the 195 countries present. The Paris agreement committed countries to limiting global warming to ‘well below’ 2°C and preferably to no more than 1.5°C. above pre-industrial levels. To do this, a ‘cap-and-trade’ system would be adopted, with countries agreeing to limits to their emissions and then being able to buy emissions credits to exceed these limits from countries which had managed to emit below their limits. However, to implement the agreement, countries would need to adopt a ‘rulebook’ about how the permitted limits would be applied, how governments would measure and report emissions cuts, how the figures would be verified and just how a cap-and-trade system would work.

At the COP24 meeting from 2 to 15 December 2018 in Katowice, Poland, nearly 14 000 delegates from 196 countries discussed the details of a rulebook. Despite some 2800 points of contention and some difficult and heated negotiations, agreement was finally reached. Rules for targeting, measuring and verifying emissions have been accepted. If countries exceed their limits, they must explain why and also how they will meet them in future. Rich countries agreed to provide help to poor countries in curbing their emissions and adapting to rising sea levels, droughts, floods and other climate-induced problems.

But no details have been agreed on the system of carbon trading, thanks to objections from the Brazilian delegates, who felt that insufficient account would be made of their country’s existing promises on not chopping down parts of the Amazon rainforest.

Most seriously, the measures already agreed which would be covered by the rulebook will be insufficient to meet the 2°C, let alone the 1.5°C, target. The majority of the measures are voluntary ‘nationally determined contributions’, which countries are required to submit under the Paris agreement. These, so far, would probably be sufficient to limit global warming to only around 3°C, at which level there would be massive environmental, economic and social consequences.

There was, however, a belief among delegates that further strong international action was required. Indeed, under the Paris agreement, emissions limits to keep global warming to the ‘well below 2°C’ level must be agreed by 2020.

Climate change is a case of severe market failure. A large proportion of the external costs of pollution are borne outside the countries where the emitters are based. This creates a disincentive for countries acting alone to internalise all these externalities through the tax system or charges, or to regulate them toughly. Only by countries taking an international perspective and by acting collectively can the externalities be seen as a fully internal problem.

Even though most governments recognise the nature and scale of the problem, one of the biggest problems they face is in persuading people that it is in their interests to cut carbon emissions – something that may become increasingly difficult with the rise in populism and the realisation that higher fuel and other prices will make people poorer in the short term.

Articles

Questions

  1. To what extent can the atmosphere been seen as a ‘global commons’?
  2. What incentives might be given for business to make ‘green investments’?
  3. To what extent might changes in technology help businesses and consumers to ‘go green’?
  4. Why might international negotiations over tackling climate change result in a prisoner’s dilemma problem? What steps could be taken to tackle the problem?
  5. How would an emissions cap-and-trade system work?
  6. Investigate the Brazilian objections to the proposals for emissions credits. Were the delegates justified in their objections?
  7. What types of initiative could businesses take to tackle ‘supply chain emissions’?
  8. How could countries, such as the USA, be persuaded to reduce their reliance on coal – an industry lauded by President Trump?

After two weeks of negotiations between the 195 countries attending the COP21 climate change conference in Paris, a deal has been reached on tackling climate change. Although the deal still has to be ratified by countries, this is a major step forward in limiting global warming. Before it can formally come into force, it must have been ratified by at least 55 countries, accounting for at least 55% of global greenhouse gas emissions.

The deal goes much further than previous agreements and includes the following:

  • A limit on the increase in global temperatures to ‘well below’ 2°C above pre-industrial levels and efforts pursued to limit it to 1.5°C.
  • A recognition that the pledges already made ahead of the conference by 186 countries and incorporated into the agreement are insufficient and will only limit global temperature rise to 2.7°C at best.
  • Countries to update their emissions reductions commitments every five years – the first being in 2020. Such revised commitments should then be legally binding.
  • A global ‘stocktake’ in 2023, and every five years thereafter, to monitor countries’ progress in meeting their commitments and to encourage them to make deeper cuts in emissions to reach the 1.5°C goal. This requires a process of measurement and verification of countries’ emissions.
  • To reach a peak in greenhouse gas emissions as soon as possible and then to begin reducing them and to achieve a balance between sources and sinks of greenhouse gases (i.e. zero net emissions) in the second half of this century.
  • Developed countries to provide the poorest developing countries with $100bn per year by 2020 to help them reduce emissions. This was agreed in Copenhagen, but will now be continued from 2020 to 2025, and by 2025 a new goal above $100bn per year will be agreed.
  • The development of market mechanisms that would award tradable credits for green projects and emissions reductions.
  • A recognition that the ‘loss and damage’ associated with climate-related disasters can be serious for many vulnerable developing countries (such as low-lying island states) and that this may require compensation. However, there is no legal liability on developed countries to provide such compensation.

Perhaps the major achievement at the conference was a universal recognition that the problem of global warming is serious and that action needs to be taken. Mutual self interest was the driving force in reaching the agreement, and although it is less binding on countries than many would have liked, it does mark a significant step forward in tackling climate change.

But why did the conference not go further? Why, if there was general agreement that global warming should be tackled and that global temperature rise should ideally be capped at 1.5°C, was there not a binding agreement on each country to apply this cap?

There are two reasons.

First, it is very difficult to predict the exact relationship, including its timing, between emissions and global temperature rise. Even if you could make limits to emissions binding, you could not make global temperature rise binding.

Second, even if there is general agreement about how much emissions should be reduced, there is no general agreement on the distribution of these reductions. Many countries want to do less themselves and others to do more. More specifically, poor countries want rich countries to do all the cutting while many continue to build more coal-fired power stations to provide the electricity to power economic development. The rich countries want the developing countries, especially the larger ones, such as China, India and Brazil to reduce their emissions, or at least the growth in their emissions.

Then there is the difference between what countries vaguely pledge at a global conference and what they actually do domestically. Many developed countries are keen to take advantage of currently cheap fossil fuels to power economic growth. They are also still investing in alternative sources of fossil fuels, such as through fracking.

As we said in the previous blog, game theory can shed some useful insights into the nature and outcome of climate negotiations. ‘The global optimum may be for a strong agreement, binding on all countries. The Nash equilibrium, however, may be a situation where countries push for their own interests at the expense of others, with the final agreement being much more minimalistic.’

‘Minimalistic’ may be too strong a description of the outcomes of the Paris conference. But they could have been stronger. Nevertheless, judged by the outcomes of previous climate conferences, the deal could still be described as ‘historic’.

Videos

With landmark climate accord, world marks turn from fossil fuels Reuters (13/12/15)
COP21 climate change summit reaches deal in Paris BBC News (13/12/15)
COP21: Paris climate deal is ‘best chance to save planet’ BBC News (13/12/15)
COP21: Climate change deal’s winners and losers BBC News, Matt McGrath (13/12/15)
The Five Key Decisions Made in the UN Climate Deal in Paris Bloomberg, video: Nathaniel Bullard; article: Ewa Krukowska and Alex Morales (12/12/15)
The key factors in getting a deal in Paris BBC News on YouTube, Tom Burke (13/12/15)

Articles

COP21 agreement: All you need to know about Paris climate change deal Hindustan Times, Chetan Chauhan (13/12/15)
COP21: Paris agreement formally adopted Financial Times, Pilita Clark and Michael Stothard (12/12/15)
Let’s hail the Paris climate change agreement and get to work Financial Times, Jeffrey Sachs (12/12/15)
COP21: Public-private collaboration key to climate targets Financial Times, Nicholas Stern (13/12/15)
Paris climate change agreement: the deal at a glance The Telegraph, Emily Gosden (12/12/15)
Climate Accord Is a Healing Step, if Not a Cure New York Times, Justin Gillis (12/12/15)
Paris Agreement Ushers in End of the Fossil Fuel Era Slate, Eric Holthaus (12/12/15)
Paris Agreement: the reaction Business Green, James Murray and Jessica Shankleman (12/12/15)
World’s First Global Deal to Combat Climate Change Adopted in Paris Scientific American, David Biello (12/12/15)
COP21: Paris climate deal ‘our best chance to save the planet’, says Obama Independent, Tom Bawden (13/12/15)
Grand promises of Paris climate deal undermined by squalid retrenchments The Guardian, George Monbiot (12/12/15)
Paris Agreement on climate change: the good, the bad, and the ugly The Conversation, Henrik Selin and Adil Najam (14/12/15)
COP21: James Hansen, the father of climate change awareness, claims Paris agreement is a ‘fraud’ Independent, Caroline Mortimer (14/12/15)
Paris climate agreement: More hot air won’t save us from oblivion Sydney Morning Herald, Peter Hartcher (15/12/15)

Draft Agreement

Adoption of the Paris Agreement United Nations Framework Convention on Climate Change (12/12/15)

Questions

  1. Could the market ever lead to a reduction in greenhouse gas emissions? Explain.
  2. What are the main strengths and weaknesses of the Paris agreement?
  3. Is it in rich countries’ interests to help poorer countries to achieve reductions in greenhouse gas emissions?
  4. How might countries reduce the production of fossil fuels? Are they likely to want to do this? Explain.
  5. Is a ‘cap and trade’ (tradable permits) system (a) an effective means of reducing emissions; (b) an efficient system?
  6. What is the best way of financing investment in renewable energy?

The Paris Climate Change Conference (COP21) is under way. At the opening on November 30, 150 Heads of State gathered in Paris, most of whom addressed the conference. With representatives from 195 countries and observers from a range of organisations, the conference is set to last until 11 December. Optimism is relatively high that a legally binding and universal agreement will be reached, with the aim of keeping global warming below 2°C – what is generally regarded as a ‘safe’ limit.

But although it is hoped that a successor to the Kyoto Protocol of 1997 will be put in place, there are many problems in getting so many countries to agree. They may all wish to reduce global warming, but there is disagreement on how it should be achieved and how the burden should be shared between countries.

There are several difficult economic issues in the negotiations. The first is the size and impact of the external costs of emissions. When a country burns fossil fuels, the benefits are almost entirely confined to residents of that county. However, the environmental costs are largely external to that country and only a relatively small fraction is borne by that country and hardly at all by the polluters themselves, unless there is a carbon tax or other form or penalty in place. The problem is that the atmosphere is a common resource and without collective action – national or international – it will be overused.

The second problem is one of distribution. Politicians may agree in principle that a solution is necessary which is equitable between nations, but there is considerable disagreement on what is meant by ‘equitable’ in this context. As the third Guardian article below puts it:

The most important hurdle could be over whether industrialised countries like the US, UK and Japan, which have contributed the most to the historical build-up of emissions, should be obliged to cut more than developing countries. India, on behalf of many poor countries, will argue that there must be “differentiation” between rich and poor; but the US wants targets that are applicable to all. A collision is inevitable.

A third problem is that of uncertainty. Although there is general agreement among scientists that human action is contributing to global warming, there is less agreement on the precise magnitude of the causal relationships. There is also uncertainty over the likely effects of specific emissions reductions. This uncertainty can then be used by governments which are unwilling to commit too much to emissions reductions.

A fourth difficulty arises from the intertemporal distribution of costs and benefits of emissions reductions. The costs are born immediately action is taken. Carbon taxes or charges, or subsidies to renewables, or caps on emissions, all involve higher energy prices and/or higher taxes. The flows of benefits (or lower costs), however, of reduced emissions are not likely to be fully experienced for a very long time. But governments, whether democratic or dictatorships, tend to have a relatively short time horizon, governed by the electoral cycle or the likelihood of staying in power. True, governments may not be solely concerned with power and many politicians may have genuine desires to tackle climate change, but their political survival is still likely to be a major determinant of their actions.

Of course, if there is strong public opinion in favour of action to reduce emissions, governments are likely to respond to this. Indeed, all the expressions of public support for action ahead of the conference from all around the world, do give some hope for a strong agreement at the Paris conference. Nevertheless, there is still widespread scepticism in many countries over the relationship between human action and climate change, and many argue that the costs of policies to tackle climate change exceed the benefits.

Game theory can shed some insights into the difficulties ahead for the negotiators. The global optimum may be for a strong agreement, binding on all countries. The Nash equilibrium, however, may be a situation where countries push for their own interests at the expense of others, with the final agreement being much more minimalistic.

There do, however, seem to be more reasons to be cheerful at this summit that at previous ones. But negotiations are likely to be hard and protracted over the coming days.

Videos and webcasts
Paris Climate Conference: The Big Picture Wall Street Journal on YouTube, Jason Bellini (30/11/15)
Why is the Paris UN climate summit important? PwC, Leo Johnson (14/10/15)
Paris climate change summit 2015: ‘the near impossible task’ Channel 4 News on YouTube, Tom Clarke (30/11/15)
COP21: Rallies mark start of Paris climate summit BBC News, David Shukman (29/11/15)
With climate at ‘breaking point’, leaders urge breakthrough in Paris Reuters, Bruce Wallace and Alister Doyle (1/12/15)
COP21: Paris conference could be climate turning point, says Obama BBC News (30/11/15)
Leaders meet to reach new agreement on climate change BBC News, David Shukman (30/11/15)
Poll: Growing Doubts Over Climate Change Causes Sky News, Thomas Moore (30/11/15)
Paris climate protesters banned but 10,000 shoes remain The Guardian (29/11/15)

Articles

COP-21 climate deal in Paris spells end of the fossil era The Telegraph, Ambrose Evans-Pritchard (29/11/15)
Is there an economic case for tackling climate change? BBC News, Andrew Walker (28/11/15)
World Leaders in Paris Vow to Overcome Divisions on Climate Change Wall Street Journal, William Horobin and William Mauldin (30/11/15)
Experts discuss how to build a carbon-free energy industry The Guardian, Tim Smedley (25/11/15)
Africa could lead world on green energy, says IEA head The Guardian, Anna Leach (11/11/15)
Climate change talks: five reasons to be cheerful or fearful The Guardian, John Vidal (30/11/15)
The Paris climate change summit, explained in 4 charts The Washington Post, Philip Bump (30/11/15)
Why This Goal To Curb Climate Change ‘Is Not Ideal’ Huffington Post, Jacqueline Howard (30/11/15)
Paris climate change talks: What the different groups attending expect from these crucial meetings Independent, Tom Bawden (29/11/15)
UN Climate Change Conference: World Leaders Call For Price On CO2 Emissions Despite Uphill Battle At Paris Summit International Business Times, Maria Gallucci (30/11/15)
World Bank, six nations call for a price on carbon SBS (Australia) (1/12/15)
Uruguay makes dramatic shift to nearly 95% electricity from clean energy The Guardian, Jonathan Watts (3/12/15)

Questions

  1. Why is COP21 considered to be so significant?
  2. For what reasons is there hope for a binding agreement to limit global warming to 2°C?
  3. What would be the effect on global warming of the commitments made by more than 180 countries prior to the conference?
  4. What market failings contribute towards the problem of global warming?
  5. Why, if all countries want to achieve a binding agreement at the Paris conference, is it likely to be so difficult to achieve?
  6. Explain what is meant by a ‘Nash equilibrium’ and how the concept is relevant to international negotiations.
  7. Why is China investing heavily in solar power?
  8. Could Africa lead the world in green energy?
  9. Is a ‘cap and trade’ (tradable permits) system (a) an effective means of reducing emissions; (b) an efficient system?
  10. What is the best way of financing investment in renewable energy?
  11. How does the structure/order of the Paris conference differ from previous COPs? Is such a structure more likely to achieve substantial results?