15 June 2006, Argus Air Daily Volume 13, 114

Tax and trade: an end to uncertainty?

In this edition of Argus Air Daily, Anthony White, Head of Advisory at CCC, outlines what a hybrid system of tax and emissions trading could look like to incentivise real change amongst European emitters.

"Policymakers considering whether to regulate greenhouse gas emissions with a trading scheme or a tax should consider both instruments in tandem, a climate policy expert suggests today. Cap-and-trade schemes are gaining traction in policy circles in light of the success of the Acid Rain programme for SO², which has driven significant emissions reductions at a much lower-than-projected cost."

"The European Commission Trading Scheme has resulted in little change among emitters," said Anthony White, Head of Advisory at Climate Change Capital at an energy conference organised by Deloitte and Touche. The time scale of the programme out to 2012 is too short to get an adequate return on investment so participants are only slightly modifying behaviour. With no commercially available pollution control equipment to retrofit existing plants, switching to a less carbon-intensive fuel is the only real compliance option in the short term. But even prices as high as €30/metric tonnes have not been enough to persuade generators to switch from coal to more expensive natural gas. And the recent price crash when data revealed many countries' emissions were well within their caps abruptly shaved half the value from CO² allowances. Such volatility does not provide a good signal to potential investors in low-carbon technology,"You need another measure to know the price of carbon will not fall below a certain level. The UK already has a tax on industry called the Climate Change Levy. In a hybrid system, a tax like this could be raised when allowance prices sink below a certain level.Tax and trading together might be a long term solution."

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