What is the cost of earth cost? Earth cost?
Really – if you have to assign a financial worth to Earth or its land, and the use of its resources How would you determine the value of this? Are you able to think of a method to value the one known planet capable of maintaining and providing life?
Astrophysicist Greg Laughlin actually created a formula to calculate this, and calculated our planet’s house to have five quadrillion dollars (that’s the sum of fifteen (!) zeros). The price is not unreasonable considering the fact that our Earth is the best in the world even though it is a bit too crowded and too hot.
The majority of us who work in the fields of finance, economics, or business have always accepted that everything is priced (and as do the planets that make up the solar system). But in the case of climate changes as well as greenhouse gases we are concerned that we are not being heard by enough people and are pondering methods to charge industries, businesses, or even consumers for the usage of our most valuable resource, our home.
Carbon emissions provide a great instance of a “negative externality” which is a cost paid by a third-party who was not in agreement with the cost. In simpler terms, businesses that release GHGs (greenhouse gases) (GHGs) put an environmental burden that is shared by all through an evolving climate, and yet they do not incur any cost for their actions.
Carbon pricing is a method to establish a price for the carbon emissions into the atmosphere. It also aims to ensure that demand and supply are balanced by introducing a price for this significant externality.
Carbon credits are a tradable certificate that grants you the ability to emit one ton of carbon or the equivalent of a variety of GHGs (known by the name CO2e). However, how do carbon credits are priced? And what exactly is the way this process function?
Carbon credits: What do they mean?
The most significant aspect to carbon price is that it is based upon an important aspect of carbon pricing is the “polluter pay” principle. By setting a price for carbon emissions, the society is able to be able to hold the emitters accountable for the serious cost of the addition of GHG pollution to the air. These costs aren’t in any way monetary, but rather comprise pollution of the air, rising temperatures, and other health issues (i.e. risks to the health of people and also to water and food sources, and an increased risk of certain hazardous weather-related conditions).
In general there are two major methods for carbon pricing trading carbon credits through an emission trading scheme or managing them through the carbon tax.
Let’s examine them one at a time.
The concept of emission trading can be described as a form of trading to reduce pollution through providing incentives for reducing emissions. In this case, a central authority, or a governmental body puts a limit on the highest level of emissions and then creates carbon credits (or allowances) for each unit of emissions permitted within the limit. Credits allow emissions of GHGs equivalent to one tonne carbon dioxide. This concept is generally referred to as the caps and trade (CAT) or emissions trading scheme (ETS). Emitting companies must apply for and give up a permit per unit emissions. They can apply for permits through the government or by trading with other companies. The government can decide to offer the permits at no cost or auction the permits. In the meantime, if a firm does not require all of their credits due to switching to green energy or reduced their energy usage the company could transfer any credits that are not needed to another business that requires credits. Private businesses are therefore doubly motivated to lower carbon emissions. First, they’ll be penalized if they exceed the limit. Additionally, they could earn profit by reselling the emissions allowances they have. If this sounds fascinating, we’ll go into the economics of emissions trading later.
The brief background of emissions trading
The story of emissions trading goes back some time ago in the time of George H.W. Bush, the President of America George H.W. Bush demonstrated that cap and trade can work. In the 1980s, the president employed the program to stop pollution that causes acid rain. It was the first program to be used anywhere in the world!
The implementation of market-based and flexible mechanisms to reduce carbon dioxide emissions from greenhouse gases has gained broad political acceptance. The acceptance of the concept of emissions trading was evident within the Kyoto Protocol, which established various mechanisms for trading emissions. Parties to the Kyoto Protocol have signed legally binding agreements to cut emissions lower than those in 1990.
We’ve all been aware that even flight short-hauls cost a lot for our planet, despite being more affordable and appealing for everyone. With a variety of low-cost flights and the possibility of traveling even more within the next few years, offsets for carbon appear to be a viable option that allows passengers to pay , for instance to help finance renewable energy projects and forest projects in countries that are developing. A carbon offset is the absorption of a tonne of CO2 or an equivalent in any other greenhouse gas (CO2e) offsets are available in units that compensate for the carbon emissions that result from the trip.
After we’ve figured out the nature of mandatory carbon markets like the ETS are, it’s interesting to note that carbon markets are also available within voluntary programs like carbon offset programs. Carbon markets that are voluntary allow businesses as well as governments, nonprofit organizations municipalities, universities, and individuals to buy carbon offsets without a regulatory system.
In reality, you can find many reputable offset platforms online, through which you can offset your flights, or any other CO2 quantity you would like to offset.
The concept behind offsetting is very straightforward. The aim is to compensate for CO2 (CO2) emission that can’t be prevented at one location or through reducing emissions elsewhere, or by expanding the CO2 absorption from the carbon sinks in other places.
Emission trading vs Carbon Tax
Contrary to a cap and trade program, where a certain amount in emissions “allowances” are issued and distributed every year carbon tax direct sets a price for greenhouse gas emissions. As a result, businesses are charged a certain dollar amount per ton of greenhouse gas emissions they generate.
On the other hand with the carbon tax, there’s no emission limit. This means that the people can emit as large or as little they want, but should they emit, they have to contribute to the carbon tax.
However, carbon tax and cap-and-trade programs share a few advantages. They both reduce emissions by encouraging emissions reductions with the lowest cost and do this without requiring anyone to know in advance when and where reductions in emissions will take place. Additionally, both policies encourage entrepreneurs and investors to create and deploy innovative low-carbon technologies.
Additionally, the money that the carbon tax generates could be used to stimulate investment in renewable energy sources by providing subsidy to companies who build low-carbon or zero-carbon power plants. The tax revenue can be used to fix the environmental damage due to carbon pollution and emissions.
Both choices provide advantages and negatives. Countries and their leaders must choose the right option for them.
Trading carbon creditsfor trading: How do carbon credits work?
The economics of trade and cap
Like I said, every large-scale emitter (like large companies) must adhere to limits in the quantity of GHG it is able to emit. The government distributes an unspecified amount of carbon dioxide “credits” to companies for every tonne carbon dioxide that is released in the environment. This is the “cap” portion. As time passes the limits will become more stringent which means lesser and less pollution until the goal of reducing emissions is reached. Companies are only allowed to emit the same amount of CO2 as they can afford to emit. Companies that are below their CO2 limits can sell their surplus credits to companies who exceed their limit. In simple terms, if firm A adopted new technologies and improved their production to make it more efficient and environmentally sustainable, they stand the potential to release less carbon dioxide than they are legally permitted to. The company A could sell the credits they have not used to firm B. B. would like to pollute much more than the credits they were issued permit and therefore is willing to purchase additional allowances. This is the trade carbon credits aspect.
The market created by this provides companies with flexibility and incentives to reduce their emissions and, consequently, reward creativity. Furthermore the government reduces the number of permits every year, which lowers the emissions cap total. This makes permits more costly. In time, businesses are encouraged to invest in green technology because it will eventually be less expensive than purchasing permits. (In case you’re tracking on the price of carbon, then you’re familiar with its soaring trend – in the event that you aren’t, stick here and we’ll talk about this further down the line.)
The primary goal is to reduce the global temperature by restricting the biggest emitters. This is also the reason why certain industries, such as Utilities are among the largest traders burning carbon and fossil fuels which release excessive carbon dioxide to the atmosphere that they then have to compensate for. In addition to the manufacturing costs, they need to pay for the permits they require. Renewable energy companies have the advantage of paying a premium for their emissions, they can offer carbon credits, which reduces their costs of production.
Okay, but what exactly is this to have to do with carbon prices?
We have realized that carbon credits may be traded, and transactions and purchases (supply as well as the demand) of credits produce an allowance price that is basically the price for one tonne CO2 emissions. How exactly does this function? Also, to put it in another way What are the economics behind pollution? To understand the reasoning that lies behind it, you have to comprehend externalities, market failures, as well as social cost.
Let’s begin at the beginning industrial processes and production create environmental harms, which is a fact that is crystal clear. This is where the negative externality, which we talked about earlier is in play: Businesses who emit GHGs create a burden for the environment, which is carried by everyone else in the change of the climate, but they do not pay a price for doing this. So, we can speak of a failure in the market when we talk about the negative impact of pollution since the environmental impact is not considered in the pricing decisions made by firms (as in contrast to e.g. cost of labor or production).
In the event of a market failure the private market is unable to deliver efficient output, because companies do not take into account all the costs that are incurred when producing output. That is the main reason we require the price of carbon. Without an emission tax in the first place, we’d be facing an oversupply of goods creating too much, and consequently being liable for environmental damage.
Explained: Why ignoring environmental costs can lead to an excess supply
If you’ve ever taken the time to attend a lecture or course in business or economics and you’ve learned the basic rule: Demand equals supply. This is when there isn’t a shortage or surplus of goods, and the market is at equilibrium or at least it is at its peak. What is the best way to make this choice it is a question you could be asking? When you set aside all the math that goes with this, we’ll look at the cost a company faces in its production. This, as we’ve said, is the place where market failure occurs! Because the supply-demand model originally used does not consider any environmental harm (here: MEC) occurred by a business which is why the costs are undervalued. In reality, a company faces the social cost (here: MSC),the sum of environmental and economic costs. In the diagram below, you will observe that the higher costs push downwards the price curve (blue) until it reaches a point at which the ideal quantity of goods supplied is lower than the previous level the event, preventing the oversupply of products.
Carbon prices have been implemented in over 40 countries.
In 2010, around 5percent of the global emissions were covered by the carbon price. In 2020, the figure was higher than 15% and , with the implementation of the Chinese emission program in 2021, the share is expected to increase.
A final note of caution A final note: The latest headlines is an announcement about the Chinese emissions trading scheme (ETS) that has just been introduced. China is recognized as the largest producer of greenhouse gas emissions. Therefore, scientists are now arguing that this system may not be sufficiently ambitious to allow China to reach its emission-reduction targets, which include the deadline of 2030 for peak emissions , and the 2060 target of zero net emissions. Chinese carbon prices are estimated to be around forty yuan ($6.18) per tonnes. It’s a bit low when in comparison against that of the EU ETS. Additionally, the distribution permit issuance is determined by the intensity of carbon rather than absolute levels which could make it less effective , and also make it appear less accurate.
But, we must be aware that carbon emissions per person in China are less than those in Germany and in the United States and other developed countries Therefore, who are we to decide?
