Taxing Emissions
Ecoal, Vol. 74, May 2011
At a time when the EU's Emissions Trading Scheme (EU ETS) has been experiencing a number of problems, including unpredictable price variations and online thefts of emissions allowances, carbon taxation has been gaining ground and is now viewed by many governments as an effective policy to address climate change mitigation.
Carbon taxes are now proposed by the governments of Australia, the UK and South Africa as a means of pricing CO2 emissions and a tool for reducing greenhouse gas emissions.
Recent Policy Proposals
The Australian government recently announced it would introduce a carbon tax in 2012 and then transition to an emissions trading scheme three to five years later. The proposal is politically divisive and many business groups in Australia fear it will act against the country's international competitiveness.
The UK government also proposed to introduce a carbon tax as part of its Electricity Market Reform. The tax would cover all fossil fuels used in electricity generation and is designed to play the role of a carbon price floor within the EU ETS, of which the UK is part.
Carbon taxation is also being considered by the National Treasury of South Africa, which is now finalising its carbon tax proposal. The South African government has resolved to advance its environmental policy agenda as the country is preparing to host the forthcoming climate talks under the UN Framework Convention on Climate Change (UNFCCC) in Durban at the end of this year.
Carbon Taxation vs. Emissions Trading
Carbon taxation and emissions trading schemes are designed to put a price on carbon and are intended to reduce CO2 emissions in the sectors they cover. While emissions trading schemes cap the overall amount of greenhouse gases and allow carbon prices to be set by markets, carbon taxation requires central authorities to fix a price for carbon. This can be done through a tax on major emitters, such as power plants or industrial plants, a tax on electricity generation or a tax on primary fossil fuels such as coal and natural gas.
The choice between carbon taxation and emissions trading is not exclusive. In a number of countries hybrid systems combine carbon taxation with emissions trading schemes. While carbon taxation is often a way of pricing carbon in sectors which are not covered by emissions trading schemes, in some countries the same sectors are covered by both schemes.
Carbon taxes have mainly been introduced in developed economies, such as Denmark, Sweden and the Netherlands; however, there are examples of carbon taxation being set up in emerging economies. India established a tax on coal which is equivalent to a carbon price of US$0.25 per tonne of CO2. However, this is much lower than the level of carbon taxation currently considered in Australia, South Africa and the UK, where carbon prices are expected to start at around US$30 per tonne of CO2.
Issues
Some countries see carbon taxation as a tool for reducing their fossil fuel consumption; however, carbon taxes have not yet shown that they will reduce the importance of fossil fuels in electricity generation. The amount of electricity generated from coal in the Netherlands and in Denmark, for example, has not changed since carbon taxes were established. According to European Commission statistics, 24TWh of electricity was produced from coal in the Netherlands in 1996, when a carbon tax was introduced, and 25TWh in 2007. In Denmark, 26TWh of electricity was generated in coal-fired power plants at the time a carbon tax was introduced, and 25TWh in 2006.
Moreover, if carbon taxes are imposed on all fossil fuels used for electricity generation, they can have a negative impact on a number of crucial technologies, such as carbon capture and storage (CCS). Most CCS demonstration plants only partially abate CO2 emissions. This means that even if CCS plants are exempt from carbon taxation, a carbon tax would still apply to fossil fuels supplied to the unabated parts of the power plants. This would raise the operating costs incurred by investors and potentially put investment in CCS demonstration at risk.
WCA Submissions
The World Coal Association has been vocal on this issue and has submitted its comments to a number of public consultations on carbon taxation, including both the UK and in South Africa.
In its submissions, the WCA acknowledged that carbon taxation, just like other environmental measures, are issues for consideration by national governments.
However, WCA also warned about the possibility that carbon taxes could deteriorate the electrification prospects for households currently living without electricity and further exacerbate the problem of income inequalities in South Africa.
The WCA also questioned the need for a carbon tax in the UK, where greenhouse gas emissions are already capped through the EU ETS. The WCA warned against a number of possible unintended consequences of carbon taxation, such as a disincentive for CCS demonstration, weaker security of energy supply and loss of international competitiveness.
