The amount of CO2 in the atmosphere is increasing at an unprecedented pace. The rate of CO2 growth over the last decade is 100 to 200 times faster than what the Earth experienced during the transition from the last ice age. The monthly global average nosed above 400 parts per million for the first time in March 2015, and in 2017 it breached the 410 thresholds. As we twiddle our thumbs, CO2 just keeps going up and up. In 1960, they were about 300 parts per million, that means CO2 levels have dramatically increased by more than 40% in the lifetime of many people on Earth.
However, the nature of earth’s warming atmosphere has been hotly debated for decades. The “hockey stick” diagram was proposed by scientists as definitive evidence of the warming planet. Many have expressed criticism that this recent warming trend is anthropogenic, or man-made. The fundamental argument for climate change, that carbon dioxide is a greenhouse gas, and levels of this gas have been increasing, is no longer in debate. The debate now revolves around the mechanisms that govern our planet’s climate and the effects that increased levels of carbon dioxide will have.
Broadly speaking, cap and trade, is a shorthand term for regulation which requires companies which are emitting a certain pollutant to collectively hold total emissions at some pre-determined value; they can then either buy or sell allowances which allow a certain level of pollution each. Cap and trade is therefore government-mandated, market-based approach designed to reduce emissions and to provide an economic incentive to control pollution. It is widely known as carbon trading, since it focuses on trading carbon dioxide, CO2, out of the vast portfolio of greenhouse gases.
The nature of earth’s warming atmosphere has been hotly debated for decades. The “hockey stick” diagram was proposed by scientists as definitive evidence of the warming planet. However, many have expressed criticism that this recent warming trend is anthropogenic, or man-made.
There are two major carbon pricing mechanism that reduce these man-made causes of climate change: carbon tax and cap-and-trade programs (ETS). While both reduce emissions, the first one sets a price floor for carbon and is perceived more as punishment that a measure to mitigate a climate change. The latter possesses more positive connotations, because it directly rewards the companies for reductions. ETS is therefore vastly superior to carbon tax since it creates competition between the emitters and triggers new investments and R&D.
As mentioned before, the main draw of ETS is its efficiency. Companies which can reduce their emissions at a low cost will do so, and sell the emissions credits to companies who cannot. This is the “trade” aspect of the program. In ETS there is a cap which reflects the fact that there is some given level of emissions which is a maximum. This maximum is pre-determined, and a certain number of emissions allowances are made available to businesses for free. By gradually decreasing the maximum level of emissions, long-term goals to reduce emissions can be met. This maximum level can be decreased, for example by backloading, or government purchases of emissions which are then “retired,” or removed from the market. Simply put, the major benefit of ETS is that is is inherently efficient.
For instance, one company (A) which invested in cleaner technologies will sell the surplus to one that didn’t (B). Company A can afford to maintain the same price for end customers because its investments in clean technology and profit from selling the surplus but Company B most likely will have to increase the price for end customer. In time only the companies which developed the proper solution will survive. At least this is the logic behind ETS system. In a case of carbon tax, companies will pass on majority of the costs directly to the end consumers.
In conclusion, carbon tax is a good launching pad for the future ETS, however, as such, it has mostly disciplinary affect. In contrast to carbon tax, ETS compensates and motivates polluters to reduce their emissions and is a type of flexible environmental regulation that allows organizations to decide how best to meet policy targets. Benefit of both mechanisms is the possibility of increased governmental revenue. By auctioning allowances or taxing polluters, the government is able to make a profit on what is cynically called the “right to pollute.” However, the revenues can be used to further energy efficiency, make energy more affordable for low-income families, or simply decrease the budget deficits.
The way it works in practice is that a central authority (usually a governmental body such as European Commission or NDRC in China) allocates or sells a limited number of permits to discharge specific quantities of a CO2 per time period. Emitters are required to hold allowances in amount equal to their emissions. Emitters that want to increase their emissions must buy permits from others willing to sell them.
In theory, polluters who can reduce emissions most cheaply will do so, achieving the emission reduction at the lowest cost to society. Cap and trade is meant to provide the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth.
Various countries, states and groups of companies have adopted such trading systems, notably for mitigating climate change. According to ICAP, there were 18 emissions trading systems (ETSs) in place in 35 countries, 13 states or provinces and seven cities. These jurisdictions are responsible for around 40% of global GDP.
While price expectation up to 2020 for the world’s major carbon markets are relatively stable, year-on-year between $6–16/ton, the Paris Agreement will require prices of $45/ton. However, according to London-based fund managers Schroders, carbon prices will have to increase to well over $100 a ton to incentivize decarbonization on the scale needed to meet the 2C goal of the 2015 Paris Agreement.
The world’s two largest emitters, EU and China are now home to carbon pricing instruments. China currently ranks as world’s largest emitter of CO2. China, US, EU, India, Brazil, Japan, Indonesia, Canada, Russia and Mexico are the top 10 absolute emitters. Canada, the US, and Russia emit more than double the global average per person.
Canada, the US, and Russia emit more than double the global average per person. See the chart below:
However, if we want to accurately identify the genuine responsibility for climate change we must not omit mentioning the cumulative emissions. In short, cumulative emissions describe a country’s total historic emissions and they are a proxy for current warming caused by specific countries. It is important to mention that this measurement varies significantly depending on the chosen start date and inclusion of gases and sector.
According to World Resources Institute almost half of the emissions during the period 1990 to 2011 were caused by just four countries: The United States, China, European Union and Russian Federation.
If we expand the time period from 1850 to 2011, the five major emitters contributed to two-thirds of the world’s historic CO2 emissions, using up around 37 percent of our global carbon budget. These are: The United States, European Union, China, Russian Federation, and Japan.
What is alarming today is that only 90 companies are causing two-thirds of global emissions. The decision makers, the CEOs, or the ministers of coal and oil if you narrow it down to just one person, they could all fit on a bus or two.
The list of 90 companies include names such as Chevron, Exxon, BP, Aramco, Gazprom or Statoil. ChevronTexaco was the leading emitter causing 3.5% of emissions. Many environmentalist and analyst believe that those companies that are historically responsible for polluting our atmosphere have an obligation to be part of the solution. The list should bring greater scrutiny to oil and coal companies' deployment of their reserves if we clearly fingerprinted them as the sources of future emissions. Increased accountability is key in reducing future emissions.