Alan Lee Presentation to Beijing Energy Network, May 2011

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Evolving carbon prices in an uncertain world

the case for cooperation but not too much

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These slides are a partial record of a presentation to the Beijing Energy Network delivered in May 2012 in the author’s personal capacity. Slides were used as prompts only, with slide animation not available here, and should not be taken to represent the content as delivered in context.

Material cited does not necessarily represent the views of the author, nor any entity with which the author may be affiliated, and should not be relied upon for any purpose.

Key messages

•  Carbon is arguably being “priced” already in China and other countries, albeit in various different ways.

•  Governments and businesses at all levels can do much more to bring about effective carbon prices, even without a specific clear plan agreed at higher levels.

•  With appropriate measures to track progress in

place, this can help achieve ambitious climate action.

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1.  Carbon pricing concepts and history

2.  Carbon pricing in China and beyond

3.  Discussion and recommendations

Overview

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What is a carbon price?

A measure of the value of keeping greenhouse gases out of the atmosphere.

¥/t CO2e

Whose value? What price level? How to create the price?

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?

Polluters to pay e.g. Pork production emits more per unit than chicken.

This can be reflected explicitly in menu prices or implicitly in consumer choices

? ? 6

A carbon price reflects the difference between the cost of a product’s emissions to individuals and society

LOW EMISSIONS

HIGH EMISSIONS

Original emissions

LOW PRICE

HIGH PRICE

Original price

DEMAND (PRIVATE MARGINAL

BENEFIT)

Subsequent emissions

Carb

on p

rice Subsequent

price

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More than one way to price carbon

Trading scheme Coal plant subsidy

Policy

• Cap on emissions set by government

• Liable entities trade allowance units and offsets

• Government gives money to coal plant operator

• Cost of electricity from coal gains a relative price advantage

Carbon price

• Positive

• Explicit

• Market-based

• Negative

•  Implicit

• Non market-based

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A negative carbon price reflects a social value on an emissions-intensive product

LOW EMISSIONS

HIGH EMISSIONS

Original emissions

LOW PRICE

HIGH PRICE

Original price

DEMAND (PRIVATE MARGINAL

BENEFIT)

Subsequent emissions N

egat

ive

carb

on p

rice

Subsequent price

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More than one way to price carbon

•  Positive Negative •  Explicit Implicit •  Market-based Non market-based •  International Local •  Public Private •  Compulsory Voluntary

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UN Multinational

bodies Nations

Provinces

Local governments

Big business

SMEs NGOs

Policy at any level can affect emissions directly, indirectly or unintentionally

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Explicit carbon pricing has a history including taxes and more recently cap-and-trade

Carbon tax

• Norway/Finland/Netherlands (1990/91) • Costa Rica (1997) • Canadian provinces (2007/08) • South Africa: vehicles 2010 •  India: coal production & import (2010)

Cap-and-trade

• EU + Norway (2005) • New Zealand (2010) • US Regional Greenhouse Gas Initiative (2009)

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Implicit prices result from various policies

Clean energy obligations

•  EU Renewable Energy Directive •  US Bio-energy mandates

Emissions performance or

efficiency standards

•  EU and California standards for vehicles •  Building standards •  China 12th Five-Year Plan targets

Baseline-and-credit

•  New South Wales and Australian Capital Territory electricity •  California Low-Carbon Fuel Standard

Project mechanism

•  CDM, Joint Implementation •  Voluntary emissions reductions •  REDD+

Social commitments •  Japan

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1.  Carbon pricing concepts and history

2.  Carbon pricing in China and beyond

3.  Discussion and recommendations

Contents

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For year 2009 Coal Oil

Total value of subsidies US $11.7 billion US $24.1 billion

Total fuel consumption 2.5 Gt 0.6 Gt

Subsidy per tonne of fuel $4.68 $38.91

Emissions per unit of fuel 2.7 t 3.1 t

Implied carbon price in use of fuel -$1.74 -$12.55

Proportion electricity from this fuel 81% 1%

Implied carbon price weight by share of electricity production -$1.41 -$0.13

Vivid Economics estimate an implicit carbon price of China’s fossil fuel ‘subsidies’

Dat

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2010

15

$7.58

$1.52

$0.25

$0.11

$0.10

$0.03

$0.03

-$0.13

-$1.41

$8.08

$- $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

Large-for-small generator substitution (2%)

Mandating better coal technology (9%)

Gas subsidies (1%)

Wind/solar feed-in tariff (0.3%)

Infrastructure loans (10%)

Biomass feed-in tariff (0.03%)

Solar subsidies (0.03%)

Oil subsidies (1%)

Coal subsidies (81%)

TOTAL

China’s electricity policies price carbon in effect US $/t CO2-e (market exchange rate) Policy and percent coverage

of electricity sector

Dat

a fro

m V

ivid

Eco

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ics

2010

Only covers policies at Dec 2009 16

Vivid found China’s electricity carbon price beats Japan, rivals US, lags behind UK

Vivi

d Ec

onom

ics

2010

US $

/t C

O2-e

$-

$5

$10

$15

$20

$25

$30

UK China US (all

states)

US (RGGI states)

Japan Australia South Korea

Market exchange rates (Sep 2010)

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Data: Vivid Economics 2010. Map: Pew Centre

Regional Greenhouse Gas Initiative (RGGI) states have lead the US in carbon pricing

$5.1/t US

average

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Pricing carbon can vary in cost-effectiveness

Vivi

d Ec

onom

ics

2010

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Implicit carbon prices are lower than needed to meet Copenhagen commitments

Vivi

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onom

ics

and

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al (

2010

)

US $

/t C

O2-e

$-

$10

$20

$30

$40

$50

$60

UK China US Japan Australia

Electricity sector

Economy-wide 2012 price consistent with Copenhagen commitments

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Future direction of carbon price/s in China?

•  Pilot emissions trading in key provinces/cities ahead of national scheme?

•  Environmental tax?

•  Resource tax?

•  Power price control?

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1.  Carbon pricing concepts and history

2.  Carbon pricing in China and beyond

3.  Discussion and recommendations

Overview

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Paul

Bar

an (1

964)

On

Dis

tribu

ted

Com

mun

icat

ions

Centralised Decentralised Distributed

What is an optimum level of coordination?

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Centralised Decentralised Distributed

Evolution of climate policy features more or less coordination at different levels

Montreal Protocol UNFCCC

Kyoto Protocol

CDM methodology & project approval

IPCC

GHG Inventory guidelines

Compliance mechanisms KP land-use coverage choices Inventory reports

Copenhagen/ Cancun pledges

National policies Voluntary carbon market standards

Carbon prices

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Each level of coordination presents its own challenges and opportunities

More centralised Less centralised

+

• Global outcome •  Institutional legitimacy • Harmonised rules with

streamlined bureaucracy and efficiency

• Early action and innovation • Resilience to failed

experiments, lessons learnt •  Localised solutions,

responsive to rapid change

--

•  Lowest common denominator outcome • Agenda subject to hijack

and compromise • Slow •  Inflexible

•  Leakage •  Laggards • Risk of perceived illegitimacy •  Inefficiencies from

fragmentation • Harder to track global action

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Adap

ted

from

Geo

ffrey

Lew

is (2

009)

ENVIRONMENTAL PERFORMANCE

(CARBON PRICE)

TIME 26

How to achieve a middle ground?

•  Some diversity is unavoidable. How much diversity can be tolerated?

•  To what extent is trust versus unity needed for effective cooperation?

•  Is complete consensus on all elements necessary from the outset?

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Centralised Decentralised Distributed

What minimal level of centralisation best suits different policy elements?

UNFCCC Global objective (2°C)

Tracking of

global progress

IPCC

Carbon market guidelines

Carbon price

pledges?

National targets

and policies

Detailed carbon market rules(voluntary/ mandatory)

Compliance mechanisms

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Recommendations

A.  Governments at all levels can act now to increase carbon prices, while working to coordinate and improve policies over time.

B.  Governments and observers should regularly and rigorously quantify policies’ climate impact and share findings, to track and inform global action.

C.  Measures of effective carbon price provide useful insights to effort and to certain risks of trade exposure.

D.  Businesses and individuals can position themselves now for high, long-term carbon prices.

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Judi

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Karl

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r (19

99) Can society self-regulate without centralisation?

Certain termites regulate temperature and CO2 of their surroundings through cooperation rather than central leadership

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References (1) •  Paul BARAN (1964) On Distributed Communications Networks. The RAND

Corp., Santa Monica.

•  Daniel BODANSKY (2010) A tale of two architectures: the once and future UN climate change regime. Available at SSRN: http://ssrn.com/abstract=1773865

•  CENTRE FOR INTERNATIONAL ECONOMICS (2010) Comparing effective carbon prices: methodological issues. Available at http://www.thecie.com.au/content/news/Carbon_Price_Comparisons.pdf

•  Fergus GREEN, Warwick McKIBBIN and Greg PICKER (2010) Confronting the crisis of international climate policy: rethinking the framework for cutting emissions. Lowy Institute for International Policy, Sydney.

•  Judith KORB and Karl Eduard LINSENMAIR (1999) The architecture of termite mounds: a result of a trade-off between thermoregulation and gas exchange? Behavioral Ecology Volume: 10, Issue: 3, Pages: 312-316.

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References (2) •  Geoffrey LEWIS (2009) China Green Buildings: a two-pronged approach.

Available at http://chinagreenbuildings.blogspot.com/2009/04/two-pronged-approach-top-down.html

•  PRODUCTIVITY COMMISSION (2011) Carbon Emission Policies in Key Economies. Australian Government, Canberra. Available at http://pc.gov.au/projects/study/carbon-prices/report

•  VIVIC ECONOMICS (2010) The implicit price of carbon in the electricity sector of six major economies. The Climate Institute, Sydney.

•  WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT (2011) Carbon pricing: the role of a carbon price as a climate change policy instrument. Available at www.wbcsd.org/web/energy.htm

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