While we have already marked our calendars for the 21st Conference of the Parties (COP) to be held in Paris next year for the new post-2020 climate agreement, no promising development has been recorded in the negotiations yet.
Nevertheless, governments nowadays face a hot agenda in which they do feel the weight of heating the globe in their respective budgets. Pricing carbon pricing, which has been debated highly in recent years, was an agenda item in the upcoming United Nations Summit for Climate Change. The event, which took place in New York on 23rd of September 2014, witnessed country presentations regarding definition of a price for greenhouse gas emissions, in other words Pricing Carbon.
“Pricing Carbon” means accommodation of the social costs that come about as a result of climate change in economic terms. Global heating due to greenhouse gases that come primarily from burning fossil fuels is accompanied by its impacts on human health as well as many environmental problems such as floods in coastal cities due to the increased sea level and extinction of plant and animal species. The price of destruction caused by this impact manifests itself in different forms with different economic repercussions in different geographies and habitats as externalities of these emissions into atmosphere. A study in Yale University suggests that annual cost of all these impacts is 1.6 trillion dollars globally(*).
Carbon Tax or Trading?
Economists consider the fight against climate change as a market failure because the results of climate change load huge prices and risks on the shoulders of next generations despite the market mechanisms developed. They also suggest that what the solution takes is reflecting such prices and risks on market prices, and to this end, carbon emissions should be priced by internalizing the costs arising from environmental destructions.
Most commonly-used policy and instruments for pricing carbon include carbon tax and carbon/emission trading. The “Pricing Carbon Instruments” published by the World Bank with support of the Ecofys experts offer us many analyses of these economic instruments experienced worldwide. So far, there are practices in this realm in about 40 countries and 20 states/cities.
In many other countries including Turkey, preparations are still underway to carry out analytical studies for decision-makers.
Carbon taxes have a role to guarantee the price appraised for carbon in the economic system while emission trading systems can guarantee an environmentally-positive impact by limiting emissions with a given quota. Both practical mechanisms can be considered as instruments that help pricing carbon and accounting of this price.
Emission Trading Systems (ETS), also called as Cap and Trade, help defining a cap for emissions and enable trading among polluters based on the emission permits allocated to plants. Critical questions at this point include what cap emission values are applied when allocating these permits, whether this cap is based on plant based emission values or not, and by which method they are allocated. From this perspective, experience accumulated in the European Union ETS, which are in their 3rd phase now, gives critical lectures for countries such as Turkey.
On the other hand, significant achievements can be made in reducing emissions if treasury revenues coming from carbon taxing are channelized towards low-carbon incentive instruments and if these incentive mechanisms are designed and commissioned accurately. At this point, the delicate balance lies in finding the best practices to recover these revenues for low-emission development (emission reduction) without impeding welfare of the society.
In the past years, we have seen that some provinces in China and some states in the USA joined the initiatives to price carbon by using the ETS. Pilot practices are still underway in six provinces in China while they have already planned to implement a national ETS program by 2016. Furthermore, In California, USA, it is targeted that the ETS that started in 2012 cover 85% of all emissions in the state by 2015.
On the carbon taxing side, there are 13 countries implementing the taxation system. There are also others such as Sweden, who implements a hybrid system by using both the ETS and carbon taxing together. It is known that Sweden gained significant reduction thanks to shifting to biomass by implementing carbon tax at houses as well as ETS in industry where the electricity generating companies are primarily targeted.
The Appraised Value of Carbon
Prof. Dale Jorgenson from the Morris University examines the carbon tax with various fictions in his book “Double Dividend: Environmental Taxes and Fiscal Reform in the United States” published in 2013 and suggests that it could serve as an opportunity to increase the 2% annual growth target of the USA up to 2.4% thanks to the carbon tax. On the other hand, the price interval appraised for carbon is 10 to 50 USD per ton and the average price is foreseen as 30 USD, which shows that it would have an impact on low-income segment. Jorgenson also offers some solutions for this in his book.
In the UK, another country where carbon tax is implemented, the target is to reduce emissions by 80% by the year 2050 compared to that in the year 1990. The Government advisors in the climate change committee recommend value-appraising for carbon 30 pounds per ton by 2020 and 70 pounds per ton by 2030 in order to reach this target.
As all these national initiatives may result in unfair competition in global markets, what is ideal for the developed countries seems to be finding a common price for carbon at a global scale.
Situation in Turkey
As known, there is not a direct carbon-specific tax in Turkey while Turkey ranks 1st among OECD countries in terms of the indirect tax on oil. Turkey also ranks 3rd after Denmark and the Netherlands in environmental tax rates. On the other hand, it is very interesting that countries considering the carbon taxing option such as Mexico, the USA and Chile rank in the last places in terms of oil taxes among OECD countries.
In Turkey, greenhouse gas emissions will be calculated as plant-based by 2016 with the Regulation on Monitoring Greenhouse Gas Emissions dated at 17.05.2014 and no. 29003. Moreover, the Carbon Markets Preparation Partnership (PMR) Project aims at analyzing carbon market mechanism instruments including emission trading at a national scale and sharing the findings with decision-makers. In this field, it is of utmost importance to keep on following the developments worldwide closely and to act in the light of analytical studies that are planned to run in cooperation with other ministries.
