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Carbon cap, auction & trade: (CCAT)

This approach was proposed by Peter Cramton and Suzi Kerr in 2002 and provided the basis of Kyoto’s emission trading.

“An auction of carbon permits is the best way to achieve carbon caps set by international negotiation to limit global climate change. To minimize administrative costs, permits would be required at the level of oil refineries, natural gas pipe lines, liquid sellers, and coal processing plants. To maximize liquidity in secondary markets, permits would be fully tradable and bankable. The government would conduct quarterly auctions. A standard ascending-clock auction in which price is gradually raised until there is no excess demand would provide reliable price discovery. An auction is preferred to grandfathering (giving polluters permits in proportion to past pollution), because it allows reduced tax distortions, provides more flexibility in distribution of costs, provides greater incentives for innovation, and reduces the need for politically contentious arguments over the allocation of rents”.

“The Kyoto Protocol, which entered into force in 2005, established a market-based mechanism to allow developed countries with binding emissions targets to reduce greenhouse gases such as carbon dioxide, methane, carbon tetrafluoride, trifluoromethane, and nitrous oxide. Under the cap-and-trade system, industries would be allocated allowances limiting them to a certain amount of greenhouse gas emissions each year. Most trading schemes use one ton carbon-dioxide units for sale, or convert non-CO2 gases into CO2-equivalent units for the purposes of trading.

The buying and purchasing of allowances provide incentives to make emissions reductions more economical. Some facilities could find it cheaper to reduce their emissions and then sell their surplus allowances as credits, while others may find it cheaper to buy credits to offset their emissions rather than make direct reductions. Greenhouse gas emission credits can be purchased or sold from a carbon market as well as through projects and emissions credits certified by the UN. Cap-and-trade systems have been used before to reduce emissions. The cap-and-trade system instituted under the 1990 Clean Air Act in the United States is credited with achieving significant reductions in acid-rain-causing sulfur-dioxide emissions by power plants."

Our view:

The main weakness of Carbon Cap, Auction and Trade (CCAT) is that it does not set a finite target for future global carbon emissions. This makes the price of carbon, rather than the weight of avoided carbon emissions, the unit of account and the focus. This has been demonstrated as recession has slashed the value of carbon credits. CCAT operates on a company basis within geographic markets, e.g. EU Carbon Trading Scheme (EU ETS), but its ability to cut carbon emissions is bound to market forces. Under the Kyoto Protocol, countries that signed up to legally binding targets for 2008-12 were each given a set number of tradeable allowances called Assigned Amount Units (AAUs), with each equal to one metric tonne of CO2 equivalent. However, recession caused the market to collapse, leaving an over-supply of carbon entitlements for 2008-12 of 13 billion tons of CO2 (13.1Gt), far higher than the estimated demand of 11.5 million tons (Mt). Current rules under the Kyoto Protocol allow this excess to be carried forward to 2012-20, which will further reduce the odds of meeting future emissions targets.
The co-author of the report that highlighted this surplus has blamed 'a lack of political ambition, undermined further by economic recession'.

The European Emissions Trading Scheme (EU –ETS) is the best established cap auction and trade system, but it only applies to major polluting companies.  The price of a tonne of CO2e in 2006 was 30 euros.  In 2007 it fell as low as €1.  It is currently (Sept 2012) €7.5 per ton and EU officials are meeting soon to encourage low carbon investment by choking CO2 permits – in other words, the system is not working as its originators had hoped and its impact on carbon emissions is impossible to quantify.   California is introducing its own ETS in 2013.

For a summary of existing and future ETS initiatives:

In October 2012, Thomson Reuters Point Carbon warned that UN carbon credits (Certified Emissions Reduction (CER) could be worth just €0.50 by 2020, due to the huge over-supply of allowances (as much as 1.43 gigatons of carbon by 2020). The current value under the scheme is less than €2 per tonne of CO2, compared to the peak of €30 per tonne in 2006, but analysts estimate that a price between €40 and €50 per tonne is needed to drive large-scale low carbon investment.

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