PRICE ON CARBON EMISSION

An emissions trading system (ETS) is a system where emitters can trade emission units to meet their emission targets. To comply with their emission targets at the least cost, regulated entities can either implement internal abatement measures or acquire emission units in the carbon market, depending on the relative costs of these options. An ETS establishes a market price for GHG emissions by creating supply and demand for emissions units. The two main types of ETSs are cap-and-trade and baseline-and-credit:

• Cap-and-trade systems, which apply a cap or absolute limit on the emissions within the ETS, and emissions allowances are distributed, usually for free or through auctions, for the number of emissions equivalent to the cap.
• Baseline-and-credit systems, where baseline emissions levels are defined for individual regulated entities, and credits are issued to entities that have reduced their emissions below this level. These credits can be sold to other entities exceeding their baseline emission levels.
• A carbon tax directly sets a price on carbon by defining an explicit tax rate on GHG emissions or more commonly on the carbon content of fossil fuels, i.e. a price per tCO₂e. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.
• A crediting mechanism designates the GHG emission reductions from the project- or program-based activities, which can be sold either domestically or in other countries.  Crediting Mechanisms issue carbon credits according to an accounting protocol and have their own registry. These credits can be used to meet compliance under an international agreement, domestic policies, or corporate citizenship objectives related to GHG mitigation.
• RBCF is a funding approach where payments are made after pre-defined outputs or outcomes related to managing climate change, such as emission reductions, are delivered and verified. Many RBCF programs aim to purchase verified reductions in GHG emissions while at the same time reducing poverty, improving access to clean energy, and offering health and community benefits.

4. Ways of carbon pricing

• Three ways of pricing carbon are the establishment of a carbon tax domestically, as in Korea and Singapore; the use of an emissions trading system (ETS), as in the European Union (EU) and China; and the application of an import tariff on the carbon content, as the EU is proposing.
• Some 46 countries price carbon, although covering only 30% of global greenhouse gas (GHG) emissions, and at an average price of only $6 a ton of carbon, a fraction of the estimated harm from the pollution.
• The International Monetary Fund has proposed price floors of $75, $50, and $25 a ton of carbon for the United States, China, and India, respectively.
• It believes this could help achieve a 23% reduction in global emissions by 2030.  

5. Impact on India

• Among the three ways of pricing, India could find a carbon tax appealing as it can directly discourage fossil fuels while raising revenues which can be invested in cleaner sources of energy or used to protect vulnerable consumers.
• It could replace the more inefficient scheme of petroleum taxes which are not directly aimed at emissions.
• By the way, Saudi Arabia and Russia are at the low end of gasoline prices (including
  taxes and subsidies), China and India in the mid­range, and Germany and France at the high end.
• In most countries, including India, fiscal policy has set in place the basic structures needed to implement a carbon tax.
• For example, they can be woven into road­fuel taxes, which are established in most places, and extended to industry and agriculture.
• India could start with the IMF figure of $25 a ton.
• The main obstacle is the argument by industrial firms about losing their competitive advantage to exporters from countries with a lower carbon price.
• It would stand to reason, therefore, for all high, middle, and low­ income countries to set the same rate within each bracket.
• It might also make sense to allow companies to use high­quality international carbon credits to offset up to a certain percentage of their taxable emissions.
• The EU excludes transport, where higher costs would have been passed on to consumers directly, Singapore provides vouchers for consumers hit by utility price rises, and California uses proceeds from the sales of carbon permits partly to subsidize purchases of electric cars.
• Some make a case for exempting “emission intensive trade exposed” enterprises from the carbon tax, but output­based rebates would be superior ways of doing the same.

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