Scitech | It’s time to implement hybrid carbon pricing schemes

Why recent cap-and-trade programs need replacing

The recently released “State of the Climate in 2012” report, published in the Bulletin of the American Meteorological Society, presented a dire assessment of our global climate. The peer-reviewed paper, with contributions from hundreds of authors worldwide, reported that 2012 was one of the ten warmest years on record. Furthermore, average global sea levels attained a record level in 2012, while global mean CO2 concentration reached a level of 392.6 parts per million (ppm). In 2005, the concentration was 379 ppm – and it is important to note that 450 ppm is commonly regarded as the maximum allowable concentration before temperatures rise to two degrees Celsius above pre-industrial levels.

In June, President Obama offered a few green initiatives, such as investment in technology to improve energy efficiency, development of flood mitigation programs, and encouraging renewable energy projects. Other governments have taken bolder approaches. Quebec, Alberta, and British Columbia have implemented a carbon tax, and Quebec has also recently introduced a cap-and-trade scheme. In a cap-and-trade, the government sets a cap on the amount of emissions that can be released by industries. Through an auction process, the government then distributes emission permits to industry members. Firms that have taken measures to reduce emissions and have not exceeded their quota can sell their excess permits to other firms that have already passed their limits. Furthermore, Europe and, more recently, China have also adopted cap-and-trade schemes; however, Europe’s emissions trading scheme has been plagued by a low (almost nil) carbon price from an excessive amount of permits flooding the market. Experts predict China’s emissions market may succumb to the same fate. The outcome of these regional cap-and-trade markets mirrors the outcome of the United Nations’ (UN) Clean Development Mechanism, which was declared “imperilled” by a high-panel UN dialogue convened to explore the price collapse.

Political efforts have increasingly concentrated on reducing CO2 to address the greenhouse gases effect; however, progress is stunted by discourses on the dilemma of choosing between carbon taxes and cap-and-trade systems. The experiments, pursued by various countries, have revealed significant vulnerabilities when either system is implemented in isolation; problems which were exacerbated by clashing parochial interests and the sway of lobbying efforts. Hence, it seems that a hybrid pricing scheme, which combines aspects from both systems, is the most appropriate economic tool for curbing emissions.

Since humanity’s impact on greenhouse gas (GHG) emissions affects the earth’s climate adversely, the importance of a universally binding treaty on climate change policy is paramount. The Durban Platform is a key step toward that goal, but we note that the architecture of a GHG emission control mechanism is non-trivial. It would take concerted efforts from all stakeholders: policymakers in execution and providing transparency, and the citizenry through research, analysis of information, and protecting the integrity of a system from self-inflicted catastrophe.

Interested readers can read an analysis of carbon pricing programs and review the results of estimates on the Quantdary website at quantdary.wordpress.com. The series will be released in a fortnightly basis, starting from September 13.


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