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Global Application and Economic Analysis of Carbon Pricing for Emissions Reduction Energy industry, Environmental policy

Author MOON Jin-Young, HAN Minsoo, SONG Jihei, and KIM Eunmi Series 17-31 Language Korean Date 2017.12.27

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  The Paris climate agreement catalyzed international efforts to reduce greenhouse gas (GHG) emissions. Countries are actively considering various policy measures to reduce emissions themselves, as well as the external uncertainty derived from these emissions. In these circumstances, carbon pricing is a measure taken by many governments to regulate emissions from the private sector by imposing a price on emissions. As of December 2017, 42 countries and 25 local governments are levying taxes on carbon emissions, and this trend is likely to expand further.
  This study examines emissions and emission regulation policies in major countries. We further analyze various carbon pricing measures taken by the international community. Based on this analysis, we analyze the impact of carbon pricing on the global economy and derive implications for Korea.
  First, we compare the GHG emissions of major emitters, namely China, the United States, the European Union and Japan. During the review period (1995-2013), China pursued rapid economic growth, emitting GHG at a significantly increasing rate. However, this pace is slowing down recently. The U.S. and Japan show fluctuating GHG emissions during the same period. In the long-term perspective, emissions from the U.S. are at a declining rate. Likewise, the EU displays steady and visible decline of GHG emissions since 2006. These countries generate more than 80% of all greenhouse gases, mostly carbon dioxide, in the energy sector. In 2013, more than 95% of total emissions came from fossil fuels such as coal and petroleum.
  China is practicing government-led efforts to bring down its GHG emissions, for instance through the carbon trading system it piloted in 2011. The cap-and-trade system is practiced in seven regions including Beijing and is targeted to limit carbon dioxide emissions mainly. Based on this pilot, the government announced that it would expand the trading system nationwide. If realized, this would result in the world’s largest single market being formed. Furthermore, starting in 2018, the government will enact the Environmental Protection Tax Act, imposing monthly tax on activities that cause environmental pollution. Despite the adoption of various regulatory measures, Chinese measures to impose cost on GHG emissions are deemed rather conservative compared to other developed countries. The Chinese government refers to carbon emissions per GDP as the main index for environmental performance, whereas other developing countries aim to reduce their total amount of emission.
  The United States is undergoing radical policy changes since the inauguration of President Trump. President Trump has pledged to review or abolish greenhouse gas emission reduction policies set by the preceeding administration, including the Clean Power Plan. Consequently, the federal government is unlikely to pursue policies which would regulate heavy emitting industries. On the other hand, state-level emissions trading schemes such as California’s cap-and-trade system and the Regional Greenhouse Gas Initiative (RGGI) are noteworthy. Introduced in 2006, the California cap-and-trade system officially linked its emission trading with Quebec, Canada in 2014. California seeks to expand the emission market, and thus stabilize the price of emission credits, and to expand the targets to be regulated. Initiated in 2009, the RGGI is a joint initiative of nine northeastern states, targeting coal-fired power plants with a capacity of over 25MW. The Initiative aims to cut down carbon dioxide emissions produced by the power sector by 50%. The RGGI stabilizes prices through measures such as offsetting, price floor, and emission reserves.
  As the world’s first and largest emission trading system, the EU ETS regulates about 45% of GHG emissions in the region, as of 2016. The EU ETS has announced a four-phase transition plan from 2005 to 2030, stipulating emission caps to power plants, energy-intensive industries, and aviation. Thirty-one countries with varying income levels participate in the EU ETS. Compared to other trading schemes, the EU ETS specifies a relatively long implementation period (4-9 years). In addition, the system regulates more diverse sectors when compared to the U.S. regional trading system. Despite the fluctuating price of carbon credits, the EU ETS is valuable for it aims at regulating GHG emissions in a large geographical environment, including countries with different income and technology levels.
  Since the adoption of the Kyoto Protocol in 1997, Japan has made assiduous efforts to reduce GHG emissions, especially through energy- efficiency measures. In 2005, voluntary emission trading began in some regions. However, this is mandatory only in selected areas such as Tokyo and Saitama prefecture. Tokyo-ETS is the first emission trading system in Asia. It regulates energy-related carbon dioxide emissions from roughly 1,400 facilities, including office buildings. Furthermore, Japan employs a number of policy measures to reduce emissions from households and offices. For instance, it introduced a carbon tax named Tax for Climate Change Mitigation in 2012, which is deemed as the first carbon tax scheme in Asia. Japanese awareness on carbon emissions and the environment has also matured during this period.
  This study categorizes the various approaches to imposing price on emissions into three types. The first type of approach is the assumed cost of emission used when countries undertake a cost-effectiveness analysis prior to introducing carbon reduction policies. One of the examples is the Social Cost of Carbon estimate presented by the United States. With an inter-governmental working group (IWG) composed of experts, the United States calculated the cost of emissions using a climate-integrated evaluation model. On the other hand, the United Kingdom considered marginal abatement cost (MAC) in a “target consistent approach.” One other example surveyed the value of carbon emission in twenty-three OECD member countries. According to this survey, the average carbon cost (per ton of carbon dioxide) by 2020 is projected to be USD 66 for the transportation sector, USD 47 for energy, and USD 69 for other investments.
  Secondly, we categorized carbon pricing schemes and effective carbon prices as the second set of approaches utilized to impose a price on carbon emissions. We reviewed carbon pricing schemes such as emission trading, carbon tax, carbon offset, and result-based finance. We also reviewed “effective carbon rates (ECRs),” an assumed price on carbon which combines both carbon pricing and energy taxes. In 2016, the OECD established the term and produced its first review on the ECRs in forty-one countries. According to the report, the countries lacked a price-bearing mechanism on 60% of the carbon dioxide emissions from the energy sector. The adequate emission price of EUR 30 was imposed on only 10% of the emissions. The remaining 30% of the emissions were priced between EUR 5 to 30. In Korea, ECR is imposed on 88% of the carbon dioxide emissions from the non-road sector. This figure is among the highest of the surveyed countries. However, the average price imposed on carbon emissions is moderate at EUR 9.76.
  Finally, internal carbon prices voluntarily implemented by major global companies are divided into internal carbon tax, potential price, and implied price. CDP is an NGO which compiles and publishes climate change-related information from major global companies. According to the CDP report in 2017, the number of current and potential bearers of internal carbon prices reached roughly 1,389. The ratio of corporations introducing such prices has increased rapidly since mid-2010. Such a trend implies that companies are preparing for potential risks presented by climate policies, and are seeking new opportunities that may arise during the transition to a low carbon economy.
  In the following section of our report, we analyzed impacts on the domestic and international economy when major countries introduce GHG emission policies. In the scenario where carbon tax or emission costs increased in certain countries, carbon emission as well as production in the countries plummeted. Such a measure is likely to urge companies to turn to less carbon-intensive production. However, the global influence of such measures is deemed as marginal. In the second scenario, we assumed that major global economies implement the same policy (carbon tax fixed at EUR 30, coverage extended). As a result, the production and welfare increase in the U.S. and China is likely to be greater than other countries, including the EU, Japan, and Korea. In order to reduce global carbon emissions by 30%, we estimate that all countries should increase carbon taxes by EUR 8.2. Moreover, we estimate that Korea must increase its carbon tax by 50.1% if the country wishes to achieve its 2020 emission target. The analysis suggests that individual governments’ policies are insufficient to meet the global emission reduction target. That is, major countries must align their GHG reduction policies, while individual countries transform into low-emission industries and achieve technological innovations.
  In the final chapter of the study, we present ideas on how to adequately respond when the global community adopts carbon pricing. First, we suggest for private firms to voluntarily set carbon emission prices and disclose relevant information. By setting high levels of internal carbon prices, including but not limited to carbon credits, companies can reduce carbon emission and prepare for potential carbon pricing policies at the same time. Furthermore, private firms should make available climate- relevant information so that investors can consider this in decision- making.
  Moreover, we highlight the need to establish specialized agencies for climate-related investments, and to facilitate the use of financial instruments in such investments. Many countries have recently established specialized entities to enhance the effectiveness of climate-resilient investments such as green investment banks. Korea could also review the potential establishment of such specialized entities and at the same time seek out measures to support relevant investments, for instance through green bonds.
  Finally, we recommend that the government increase climate-related support to developing countries, especially considering the potential to introduce emission trading systems. In the near term, we should share our experiences while expanding related businesses. In the long-run, we could explore possible carbon market linkages. These efforts can be made in conjunction with policies to foster the development of partners vulnerable to climate change, to extend competent Korean businesses globally, and to seek out opportunities to enhance private sector participation in international development activities. 

 

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