A global problem of unprecedented magnitude requires unprecedented solution. Carbon dioxide emission is the chief anthropogenic cause of global warming and climate change. The sources of carbon dioxide are widespread and varied--automobiles, industries, thermal power plants, you name it. Unless we do something to reduce emissions of carbon dioxide into the atmosphere, scientists say that climate change can potentially cause unprecedented adverse environmental effects, causing widespread and, possibly, irreversible damage to many parts of the world.How do you reduce carbon dioxide emissions? Currently, there are essentially three ways of doing it--command and control or mandates, taxes and fines, and tradeable permits. None of these three instruments are adequate when used as the only means of reducing emissions. I think there ought to be an emission control regime that combines all three approaches.
Command-and-Control or Regulatory Mandates:
The first approach is the "command-and-control" method. The government can introduce legislation to require action by industry. Traditionally, governments around the world has used this "command and control" policy to protect the environment from various pollutions.
In British Columbia, an example of this approach is the Contaminated Sites Regulation under the Environmental Management Act. The government may use this legislation to require the landowner of a contaminated site to remediate it. Noncompliance could lead to government-enforced restriction on the use or development of the land.
In the U.S., the Clean Air Act and the Clean Water Act are examples of this command-and-control approach. The command-and-control policy does not promote optimal reduction in carbon dioxide. It simply motivates the polluters to do just the minimum work required stay in compliance. Under this scheme, companies are not motivated to do more than they can to reduce emissions.
Carbon Emission Tax:
The second approach is using tax incentives to promote environmentally responsible behavior. Tax incentive is based on the concept of internalizing the negative externality by putting a price tag on pollution. A negative externality is a price that is paid by an unwilling third party. Unless internalized, the negative externality remains as a burden on the society. There are two ways the government can use tax incentives--positive and negative incentives.
When government gives tax credits to companies for implementing voluntary measures to cut down on carbon emission, you call it positive tax incentive. When government levies tax to companies that do no comply with government regulated emission targets, you call it negative tax incentive. Either way, government assigns certain monetary value to emission targets and companies either pay tax or receive tax credits for their behavior. Under the tax incentive scheme, the government sets up a tax regime for industries that emit carbon dioxide.
Such carbon tax instrument puts a price on the carbon dioxide emission. Industries are allowed to emit carbon dioxide, but they have to pay tax for such emission. The tax collected would then be used in paying for emission reduction from other sources. While levying tax encourages industry to not emit carbon dioxide, providing tax rebates encourage them to reduce emission. You can also include punitive fines for non-compliance under this category. Government generates tax revenue from this scheme, as long as the net carbon dioxide release exceeds a certain level set by the government.
Carbon Emission Trading or Cap-and-Trade:
The third and newest approach is the use of a mechanism often known as "cap-and-trade" or "emission trading" policy. This policy involves the use of tradeable permits to emit carbon dioxide to a limit or cap set by the government or an international body. You can think of tradeable permits as something similar to company stocks that you can trade in a financial stock exchange.
In this scheme, the government sets a limit or cap on overall carbon dioxide emission by all sources of carbon emission within a jurisdiction. Such overall emission limits are based on the target that the government wants to reach. Each source (e.g., a company that emits carbon dioxide) is alloted certain units of tradeable permit to emit a determined level of emission. Each company that participates in this scheme is required to hold equivalent number of allowances or credits as they are issues the emission permit. These permits allow them to emit a specific amount of carbon dioxide. The companies can then trade these emission permits, much like company stocks, among themselves.
A company that emits carbon less than the permitted level will be able to sell it to another company that emits higher level than allowed. A company that pollutes more than its allowance will have to pay for the extra pollution; and a company that pollutes less than its allowance is rewarded monetarily through trading. Under this scheme, the government's role is limited to setting the cap or the maximum limit on overall level of carbon dioxide emission and making sure verification measures are in place for permit trading. The price of each unit of tradeable permit is set by the market (i.e., the companies that buy and sell these tradeable permits).
It is also up to the companies to decide what technology to use to achieve their alloted level of carbon emission. In theory, the cap-and-trade scheme is supposed to be self-governing and is driven by demand and supply mechanism of the market. The scheme generates no revenue for the government, except for, maybe, nominal administrative fees. This is, therefore, more cost effective for the companies to achieve government's goal. The society achieves carbon emission goals cost effectively.
In Canada and the United States, the Western Climate Initiative (WCI), about which I wrote three months ago in July, is developing a cap-and-trade program for greenhouse gases. Alberta and Saskatchewan, the two Canadian provinces that are rich in oil and gas reserves, have refused to join the WCI and criticized the WCI's cap-and-trade policy as "cash grab" attempt by resource poor provinces.
Europe is ahead of Canada and United States in the implementation of emission trading schemes. The European Union Emission Trading Scheme, which commenced operation in January 2005, is the largest trading scheme for greenhouse gases. It is by far the largest multi-country, multi-sector greenhouse gas emission trading scheme worldwide.
Under the Kyoto Protocol, an international treaty that was signed in 1997 that came into force in 2005, most developed countries are bound to comply with a cap and trade system for six major types of greenhouse gases, including carbon dioxide. China and India, the two countries that are among the largest emitters of greenhouse gases never ratified the the Kyoto Protocol. The United States, complaining that China and India did not sign the treaty, did not ratify the treat. Canada, under the Liberal Prime Minister Jean Chretien, had ratified the treaty, but later under the Conservative Prime Minister Stephen Harper, backed out of the treaty, saying the major polluters (i.e., USA, China and India) have not ratified the treaty.
More Reading:
http://www.westernclimateinitiative.org/ewebeditpro/items/O104F19866.PDF
http://ec.europa.eu/environment/climat/emission/index_en.htm
http://en.wikipedia.org/wiki/Emissions_trading
http://en.wikipedia.org/wiki/Kyoto_Protocol
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