Policies that promote Energy Transition

Nowadays, human activities such as industrial processes, energy production, transportation, etc. have an impact on the environment due to the long-term change in global temperature and weather systems. The impacts of climate change include extreme heat, biodiversity loss, sea level rise, health impact, storms and so on.

Source: (Human Health Impacts of Climate Change, 2022)

The UN Climate Change Conference (COP21) in Paris on December 12, 2015, focused on the Paris Agreement’s goal of keeping the global average temperature below 2 degrees Celsius and limiting temperature increases to 1.5 degrees Celsius due to the high risk of additional climate change impacts such as extreme drought, heatwaves, and rainfall, among others.

Source: (Beg, 2021)

As a result, the purpose of this article is to discuss policies or climate actions that can reduce GHG emissions associated with climate change.

The EU Emission Trading System (ETS)

ETS is the abbreviation form of the term “Emissions Trading System” in European Union which aims to solve the global warming resulting from greenhouse gas effect efficiently. The European Union emissions trading system can be through back to the year 2005 where policy makers regulate the energy trading market. Surprisingly, it used to be the largest emission trading system in the world until the Chinese emissions trading system launched. The way the European Union energy trading system reduces and solves the greenhouse gas effect by providing EU Allowances (EUAs) for companies allow those companies to be able to emit a certain amount of carbon emission.

Key point of ETS:

1. Transform from fossil fuels such as gas and coal to renewable energy.

2. Taxation on carbon (carbon tax).

3. Technology development incentives for firms to ensure energy efficiency.

4. Reducing greenhouse gas emissions.

Figure 1: Carbon market

(Source: https://wp2.enrex.io/2.-carbon-offsetting-options-and-market-data/2.1.-co2-allowances)

The figure above demonstrates an example of how carbon market works. Where Emitter A has emitted over the cap or over the greenhouse gas emissions, meanwhile Emitter B emitted less than its quota which is under the greenhouse gas emissions or cap. Hence, Emitter B is able to sell the rest of its carbon credit to Emitter A. As return Emitter B has monetary return.

Potential advantages and disadvantages:

Advantages:

1. It reduces greenhouse gas emissions.

2. Beneficial from trading carbon credit.

3. Incentives the firms to invest in renewable energy technologies.

Disadvantages:

1. The price of carbon credits will fluctuate.

2. In terms of the government sector, it will increase administrative costs.

 

CBAM (Carbon Border Adjustment Mechanism)

The Carbon Border Adjustment Mechanism (CBAM) is a mechanism used by members of the European Union to determine the price of commodities imported from other nations that are produced with carbon emissions. Non-EU firms have to submit the carbon emission report of manufacturing before entering the EU Regions. This mechanism aims to reduce greenhouse gas emissions by 50%-55% within the year 2030 and achieved net zero emission target by the year 2050. The transitional period of CBAM starts from 1^st October 2023 to 31^st December 2025. Furthermore, it incentivizes the firms to turn into investing in clean and renewable energy technologies in order to achieve clean industry. 

Why add a carbon fee to imports?

The idea behind a carbon tax is straightforward and simple to comprehend it raises the price of goods that emit carbon dioxide. In the short term, buyer demand is often inelastic. Nevertheless, the price of goods that consumers could originally afford will rise and will not readily come down in the near future. As a result, over time, consumer demand becomes elastic and results in the discovery of substitute goods. As a result, businesses must invest in renewable energy technology.

However, it also causes an issue where the carbon tax leads to the high price that only applies to EU citizens and the producers. Therefore, the export commodities with air pollution from other countries may have unfair advantage. It may be harmful to the EU domestic industry where they are seeking direct to the cheaper commodities instead of clean ones. Where it defined as the term “Carbon Leakage”

Therefore, CBAM is the solution for this situation whereby adding the tax on those imported commodities from other countries to equal with the domestic carbon charge. Even though the EU has applied the CBAM to those imported commodities with carbon emissions, however, there still is way for producers to escape the CBAM. If the exporting countries have their own carbon price, then CBAM will adjust to only cover the difference between its price in home countries and EU CBAM price which will prevent the double taxing of carbon emissions. Exporters will pay for the carbon fee; hence governments of home countries may decide to collect the fee or carbon tax by themselves for the government revenue instead of being charged by the host government. In real life, CBAM was first launched by the European Union in October 2023 and until now, some countries start to launch and set their own carbon price for the purpose of prevent European CBAM. For instance, Turkey, Indonesia, Vietnam and Thailand.

CBAM has the following implications for the manufacturing sectors: 1) Cement; 2) Aluminum; 3) Steel and Iron; 4) Fertilizer; and 5) Electricity. During the process, the manufacturing sectors released a lot of pollutants. Companies operating in such industries that fail to disclose their greenhouse gas emissions before exporting goods to the European Union may face fines ranging from 10 to 50 euros per carbon released. The following sectors will be considered into appeal the CBAM: 1) Refinery products, 2) Organic chemicals, 3) Hydrogen, 4) Ammonia and 5) Plastic Polymers.

Even though CBAM can be the essential tools leading to a cleaner industry with lower greenhouse gas emissions. However, some scholars argue that the impact of CBAM may affect developing countries’ GDP and development. For instance, countries with abundant natural resources such as South Africa with abundant coal resources. Africa regions are likely to be affected by EU’s CBAM mechanism in a negative way.

The data in Table 1 shows how many manufacturing-related exports there are from African areas. Without a doubt, the EU’s application of CBAM to these five industrial sectors with high pollution levels results in a significant decline in exports. The Center for Global Development reports that CBAM has an influence on their capacity to trade with the EU, with exports to the EU decreasing the region’s GDP by 1.12% and 5.72%, respectively. (The Carbon Border Tax in the EU: How Can Developing Nations React?, n.d.)

What are Challenges and Objections?

Theoretically, the aims of CBAM are to reduce carbon emissions. However, in practice, it may not be as efficient as what policy makers expected. The biggest challenge is the carbon emissions report and measurement for the foreign exporters. The possible explanation is that CBAM is hard to measure those who take carbon emissions abroad, it is difficult to check the reality and audit it.

It may be the debate of protectionism and fairness. International agreements such as the Paris agreement and Kyoto protocol agreement proposed that those developed countries with advanced industrialization have to take responsibility for the climate change issue. Since those countries contributed the most carbon emissions at the initial stage than other countries and they have more resources to address the issue. However, CBAM may prevent the development of developing and least developed countries. The exporters are natural abundant resources but low-income countries.

 

Carbon Credit and Carbon Allowance

Carbon Market is a financial market for buying and selling carbon credit. The market was created under the order of government which aims to reduce the greenhouse gas emission and address the world climate change and global warming issue.

Types of carbon markets:

1. Compliance market: The market response to legally binding carbon emissions under international agreements. For instance, the Kyoto protocol and the Paris agreement. These are governed by national, regional, and international authorities and that manage trading and credit supply through cap-and-trade programs (ETS). However, certain nations can employ GHG reduction plans in place of the Kyoto Protocol.

2. Voluntary market: Organizations and individuals can purchase carbon credits on voluntary basis without legally binding. Hence, the market can help firms and private enterprises to offset their carbon footprint.

Types of carbon credit:

1. Carbon offset: This is a project for storing or preventing greenhouse gas emissions emitting over a certain quantity. The majority carbon credit unit is the Australian carbon credit unit (ACCU) as tradeable financial instrument. The organizations and individuals are able to pay for a broker or agency to purchase the credit for the amount of carbon emissions that they emitted more than the regulations.

(Source: https://www.investopedia.com/terms/c/carbon_credit.asp)

How Do Carbon Credits Work?

Carbon credits are meant to lessen the amount of greenhouse gases released into the atmosphere. The right to emit greenhouse gases equal to one ton of carbon dioxide is represented by carbon credits. In terms of carbon dioxide emissions, that is the same as driving 2,400 miles, according to the Environmental Defense Fund. Firms and nations are being provided with a certain amount of carbon credits where those credits can be trade voluntarily or mandatory depending on the regulations. The concept of this action is to try to address emissions issues from the worldwide perspective. It is not just trying to reduce greenhouse gas emissions but also incentivizing companies to transform from the old technology into new technologies with renewable energy.

 

 

The steps to offset Carbon dioxide.

1. Calculate and measure emissions: Organizations and companies are able to use GHG protocols as tools to measure and manage the greenhouse gas emissions which can be divided into three scopes: 1) direct emissions, 2) indirect emissions, and 3) other indirect emissions.

2. Reduce emissions: reducing emissions can be done by individual’s action in a micro level. However, in a macro level such as operating and following Paris agreement with the advise from Science Based Target initiative (SBTi) that entity and companies should use renewable electricity by 2025.

3. Offset remaining emissions: if the emissions cannot be offset, what we can do is the reduction projects. These projects must be certified and able to issue carbon credit. For instance, vivo, gold standard and climate action reserve.

(Source: https://www.techtarget.com/whatis/definition/carbon-offset)

2. Carbon Allowance: Carbon allowance is a government-issued permit or the right to emit a certain amount of carbon dioxide into the atmosphere. In the case of the Emission trading system of European Union, firms and enterprises must obtain the European Union Allowance (EUA) in order to have the right to emit Greenhouse gas emissions which works on cap-and-trade program. It can be trade between firms, if the amount of greenhouse gas emissions doesn’t exceed and reported the result to the government.

Conclusion

All of the policies mentioned above have the main aim of tackling climate change by reducing greenhouse gases. Each policy has different conditions and suitability. There are countries that benefit more and less equally, depending on many factors in each country. As in the article above, developing countries like Africa lose benefits because exporting goods to the EU is more limited and has a negative effect on the economy, causing them to export goods or trade with China and India instead.

 

This article is a part of the class “751447 SEM IN CUR ECON PROB” supervised by Asst. Prof. Napon Hongsakulvasu Faculty of Economics, Chiang Mai University.

This article was written by 621615062 – Sasiprapa Chaikittikhun, 631615045 – Wathanyu Tragoonrattanamutcha, 641615029 – Naphat Phasang, 641615501 – Chuyi Luo, and 641615523 – Yuchen Luo

 

 

Reference

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Carbon Border adjustments | MIT Climate Portal. (2023, December 11). MIT Climate Portal. https://climate.mit.edu/explainers/carbon-border-adjustments

Ferris, N., & Ferris, N. (2023, November 2). How CBAM threatens Africa’s sustainable development. Energy Monitor. https://www.energymonitor.ai/policy/carbon-markets/how-cbam-threatens-africas-sustainable-development/

Food and Agriculture Organization of the United Nations. (n.d.). CARBON MARKETS – WHICH TYPES EXIST AND HOW THEY WORK. https://www.fao.org/3/i1632e/i1632e02.pdf

Human health impacts of climate change. (2022, November 7). National Institute of Environmental Health Sciences. https://www.niehs.nih.gov/research/programs/climatechange/health_impacts

Kenton, W. (2023, December 17). Carbon credits and how they can offset your carbon footprint. Investopedia. https://www.investopedia.com/terms/c/carbon_credit.asp

Lutkevich, B. (2021, December). Carbon offset. WhatIs. https://www.techtarget.com/whatis/definition/carbon-offset

Stoefs, W. & the Emissions Trading Extra consortium. (2022). EU ETS 101 A beginner’s guide to the EU’s emissions trading system. February 2022. https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf

Sustainable Investing – Carbon allowances, credits and offsets  | Robeco Global. (2023, September 15). Robeco.com – the Investment Engineers. https://www.robeco.com/en-int/glossary/sustainable-investing/carbon-allowances-credits-and-offsets

The EU’s carbon border tax: How can developing countries respond? (2023, November 15). Center for Global Development. https://www.cgdev.org/blog/eus-carbon-border-tax-how-can-developing-countries-respond

The Securities and Exchange Commission. (2023). มาตรการปรับคาร์บอนก่อนเข้าพรมแดน (CBAM) ของสหภาพยุโรป และผลกระทบต่อธุรกิจในประเทศไทย. https://www.sec.or.th/TH/Template3/Articles/2566/220866.pdf

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