Archive for tax

Why does carbon offsetting struggle with its reputation?

Posted in Climate Change with tags , , , , , , , , , on August 23, 2009 by Dan

Carbon offsetting has a reputation problem. Some parts of the ‘carbon’ industry act dishonestly or are not environmentally motivated, and people outside the industry tend to lump the diverse organisations involved in carbon trading together. When an exposé story appears in the media, we all suffer.

This week there was a story about suspected VAT fraud in carbon markets. Dodgy brokers were buying carbon credits abroad (which does not attract VAT), and then selling them in the UK and applying VAT. They are thought to have made £38m. It’s called carousel fraud or ‘missing trader’ fraud (because the broker disappears with the tax). One funny thing about this story is that none of the coverage says which market the fraud was in. Were these CDM credits (the carbon offsets that the UN allows governments to use)?

Twitter was full of people saying that this story confirmed carbon trading to be a con. Several newspapers referred to “so-called carbon credits”. Why “so-called”?

Another example is the campaigns by NGOs like Friends of the Earth and WWF against the use of offsets in statutory carbon trading schemes. Under the Kyoto Protocol, governments of rich countries can offset some of their emissions by funding projects in the developing world. The NGOs feel this allows them to wriggle out of their responsibilities.

Friends of the Earth said:

Dangerous climate change will be unavoidable if the UK, EU and USA succeed in increasing the use of carbon offsetting, Friends of the Earth is warning in a new report released today [Tuesday 2 June 2009] that exposes carbon offsetting as ineffective and damaging.

WWF:

The problem with carbon offsetting is that at best it robs Peter to pay Paul – with no net benefit for the planet. All too often, offsetting is simply used to justify business-as-usual behaviour in the UK and other countries.

These charities are referring to the CDM or whatever succeeds it when the Kyoto Protocol expires in 2012. While both have misgivings about voluntary carbon offsetting, neither would object to its use by a company or individual who is doing all they can to reduce their own footprint. Unfortunately most people are not aware of the difference between voluntary and statutory carbon markets and articles like the above cast the whole sector in a poor light.

The challenge for organisations involved in carbon trading is to help their market understand what happens to their money. No customer can be expected to spend their money if they believe it will be appropriated by fraudsters.

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Cap and trade in the context of shrinking production

Posted in Climate policy with tags , , , , , , , , , on December 28, 2008 by Dan

Questions are being asked of the two working installation-level cap and trade schemes in light of economic recession. The EU ETS – the world’s largest carbon market – is trading at about 16 Euros per tonne and is volatile because no-one is quite sure of the impact of shrinking production. Analysts believe that all reductions could now be met through purchase of CERs. Essentially this means that industry within the EU ETS has lowered its output and can comply with the cap by offsetting rather than making additional internal reductions.

The other scheme, RGGI, a scheme covering power plants in north-east US, held its second pre-compliance auction on 18 December and sold 31.5m allowances at a price of $3.38 per short ton (up 31c from the first auction, which is surprising given the commentary that follows). An article on BusinessGreen says:

… the auction came amid fears that the economic downturn meant the US scheme could repeat the mistakes evident in the first phase of the EU’s emissions trading scheme by setting the cap too high – a scenario that led to a glut of available emission permits and a collapse in the price of carbon.

Non-profit policy thinktank Environment Northeast released RGGI Emissions Trends & the Second Allowance Auction, a report which said emissions were currently 16 per cent below the cap. It pointed to skyrocketing fossil fuel prices earlier in the year as the primary reason for a lower than expected emissions rate.

“RGGI was negotiated back in early 2003 through 2005, and at that time everybody thought the trend would be up,” said Derek K Murrow, director of policy analysis at Environment Northeast. “Since it was negotiated we’ve seen a signfiicant decline, which is really a good thing. Now the question is whether that trend will continue as the programme starts up in 2009, in which case the cap might need to be bought down more quickly after the first compliance period. Or will emissions return to their historic levels, in which case the cap would be constraining?”

Comments like this suggest that cap-and-trade must deliver a carbon price that is neither zero nor unbearably high, and also force emission reductions beyond anything that happens ‘naturally’ (as a result of lower consumption or developments in eco-efficiency, for example). These characteristics sound more like tax than cap and trade. Cap and trade provides an absolute limit for emissions and a price crash indicates that the limit can be met with no unusual investment. Equally, if emissions rise unexpectedly, a cap and trade market will force decisions about where additional reductions will be made.

That’s the strength of cap-and-trade: unforeseeable events that effect emission levels are reflected in the permit price. If the price crashes due to unforeseen cuts in emissions, the cap and trade scheme is not a failed policy.

UK should ringfence EUA auction proceeds

Posted in Climate policy with tags , , on September 18, 2008 by Dan

HM Treasury just announced that Defra is going to hold the UK’s first EUA auction on 19 November. I’m not sure how many will be auctioned on that day, but over phase 2 the government will auction 85 million (7% of the UK’s total allocation). Assuming an average price of EUR 25, that’s over EUR 2 billion of revenue.

The UK government is consistently opposed to any type of hypothecation (ringfencing of revenue for particular purposes) and will not promise to use this money for any climate-related purpose. The EUR 2 billion is ultimately passed down to consumers. Given that the government has no obvious ownership of the climate, EUAs do not seem like an appropriate source of general public funds.

In an economist’s perfect world, the money would be recycled to consumers who pay the EUR 2 billion through embedded carbon costs. This is difficult to do, of course, and the next best thing is to use the money for environmental projects.

Two good options for the money would be

  • a fund for retrofitting domestic property with insulation and energy efficient heating systems. This would be a reasonable way to compensate for the incremental increase in energy bills resulting from emission trading. It would not create net emission reductions (energy generation is within the EU ETS, so lower domestic energy use means that other sectors can use the EUAs no longer required), however.
  • investments in public transport. This would be my favourite option. While it has less symmetry with the costs imposed by the trading scheme, it does encourage reductions outside the EU ETS.

Are long-life products too expensive, or do we just want new ones?

Posted in Other with tags , , , , on August 20, 2008 by Dan

I like the suggestion from the House of Lords Science and Technology Committee (Waste Reduction – pdf) that the government should cut VAT on products with long life-cycles and on repair services.

But why is it necessary at all? Given that sturdy products are generally cheaper in the long run, why don’t people just buy them?

Two reasons:

  1. People’s discount rate is sufficiently high (or their access to capital is sufficiently low) that they don’t want to pay higher upfront costs despite long term savings.
  2. In many sectors goods depreciate quickly because they go out of fashion or new, more attractive versions come onto the market.

The tax cut addresses the first reason. The Committee’s chair, Lord O’Neill says:

Currently a lot of people can not justify spending a huge amount on a product just because it lasts longer but if this recommendation is followed through, it should encourage modern electronics manufacturers to produce more sturdy products.

I wonder about the extent to which a tax cut would address the second reason. If it makes longer-life products affordable for more people, many of those people will not believe they save money if the products are not worth anything after a few years. Someone who wants a bigger TV or a faster laptop is unlikely to value several extra years of life in the old one.

Obviously, taxing or otherwise pricing the pollutants we ultimately care about would produce a similar impact to differential VAT with lower risk of unintended environmental consequences or errors in categorising products as ‘sustainable’.

As an aside, there are lots of other (non-tax) things in the report too.

Are aviation taxes too high already?

Posted in Climate policy with tags , , , , on August 4, 2008 by Dan

Apparently the government has concluded that tax paid by the aviation industry is worth more than the environmental damage it causes. The British Air Transport Association commented:

The Government now admits that UK air travel more than covers its climate change costs. But they still seem intent on increasing the environmental taxes that air travellers are forced to pay.

Does the aviation industry more than cover its climate change costs? Asking two questions might indicate that the statement does not have a lot of meaning:

  1. Do the taxes have an appropriate impact on the level of aviation consumption? The airlines are arguing that the increases in Air Passenger Duty (or other tax) mean aviation should not be included in the EU ETS. Cap-and-trade delivers defined emission reductions – the effect of taxes on pollution depends on demand elasticity, which is unpredictable.
  2. If the taxes do cover the ‘climate change costs’, are they redistributed to the people upon whom the costs are imposed?

These questions a bit facetious, of course – the point is that climate change mitigation can only be measured in emission reductions, not just charges.

Finally, APT and other aviation taxes are not really environmental taxes. Although they are often framed in environmental terms their actual purpose is unclear. They are essentially sales taxes.

The proviso on a carbon tax – determining the price of carbon – is a show stopper

Posted in Climate policy with tags , , , , on February 16, 2008 by Dan

We Europeans have settled on cap-and-trade and are about to get serious with it. In the States, it looks fairly certain federal carbon pricing law will be put in place, but whether that is a tax or cap-and-trade is still up in the air. The Congressional Budget Office came out in favour of tax earlier this week, and the American economics blogosphere has been chewing the debate over.

The key argument in favour of a tax is that reductions over a period of several decades can be made more cheaply. This is because the cost of reducing emissions is volatile and depends on a range of unpredictable factors, such the weather, credit markets and technological developments. If the carbon price is fixed, companies can make reductions in years when it is cheap to do so, and pay the tax when reductions are expensive. Because cap-and-trade schemes use fixed, time-bound limits, the emissions price could be prone to short term spikes that make reductions pricey.

The problem, of course, with a tax, is that while you do know the cost of emissions, you don’t know what level of reduction that cost will achieve. This is critical – it is not possible to accurately determine the cost of carbon necessary to achieve the targets that climate science gives us. The CBO report says that:

Provided that the tax was set equal to the expected benefit of reducing a ton of CO2, a tax could thus result in substantially greater net benefits (benefits minus costs) than a comparable cap-and-trade program.

Agreed. But the proviso is understated. We have only very rudimentary ideas about what carbon price will deliver the reductions we believe are necessary.

During some years, cap-and-trade will pinch an economy, even with flexibilities such as the facility to bank credits for use in future phases. To deliver a certain volume of emissions reductions, these costs must be accepted.