According to EPA (environmental protection agency), gas emissions from the United States totaled 6,821.8 million metric tons CO2 in 2010 and rose by 3.2% from 2009 to 2010. In 2009, the Unites States account for 18% of the total green house gas emission in the world.
Currently, the two most popular emission control policies are cap-and-trade system and carbon taxes. Those approaches are not incompatible with each other and a number of countries use one or both across various business sectors to control emission. Hence, in my paper, I would like to investigate which approach is best suited to which sector and recommend an emission control for the next government.
A carbon tax directly associates a price to the carbon content of fossil fuels—coal, petroleum products, and natural gas—used for electricity generation, transportation, residential and commercial space heating, industrial processes, and other activities. By making carbon-intensive activities and consumption even more expensive, a carbon tax can encourage behavioral changes that reduce consumption and investing in green technologies and infrastructures. Advantages of carbon tax include simple and minimal regulatory involvement from the government, economic certainty for the industry regarding the cost of the program, and generation of revenue for the government. The revenue can be used to mitigate tax burden on other aspects of business operations, such as labor or income, and increase the overall efficiency of the business. However, the tax system does not provide environmental certainty because it is impossible to predict how much emission level the industry will get.
Another approach is for the government to set a target emissions level (cap) and allow firms to buy and sell (trade) permits under this cap. The government issues pollution permits through either free allocation or auction. Allowance prices are set by the market and fluctuate in line with demand for permits. By allowing market forces to dictate the price of permits, the price fluctuation closely matches the industry trends and other micro and macro-economic environments. Within a cap-and-trade system, including the ability for the business to save and borrow emissions allowances and use offsets can further reduce costs for individual firms without weakening the environmental effectiveness of the policy overall. Free allocation of emissions allowances by the government to some critical sectors also maintains the integrity of the domestic cap. Advantages include emission level certainty, more cost-effectiveness and less government involvement, but compared to carbon tax, there is less price certainty for permits.
Fundamentally, I think both carbon tax and cap-and-trade approaches are not perfect because both give a firm a right to emit to a certain level. By internalizing the cost, carbon tax does not provide any visible reward for a firm that emit lower level of green house gas. On the other hand, incentive for emitting lower than the cap comes in the form of revenues generated from carbon credit trades in cap-and-trade system but the economic theory is based on the assumption that there must always be some firms that are for one reason or other, could not reduce emission below the cap. If more firms can reduce emission below the cap, the value carbon credit will deteriorate due to less demand.
Resources: The following are the resources I have found so far
Environmental protection agency: www.epa.gov
Houser, Trevor; Rob Bradley, Britt Childs Staley, Jake Werksman, Robert Heilmayr (2008). Leveling The Carbon Playing Field: International Competition and U.S. Climate Policy Design.
Clean Air Act : http://epa.gov/oar/caa/index.html
As far as the sources are concerned, the environmental protection agency (EPA) is quite reliable for a wealth of data on emission statistics.
In the United States, five industries fit this bill: ferrous metals (iron and steel), nonferrous metals (aluminum and copper), nonmetal mineral products (cement and glass), paper and pulp, and basic chemicals. Together these five account for more than half of all carbon dioxide (CO2) emissions from the manufacturing sector (Houser 2008). In 2010, industrial processes generated emissions of 303.4 teragrams of CO2 equivalent (Tg CO2 Eq.), or 4.4 percent of total U.S. greenhouse gas emissions. Carbon dioxide emissions from all industrial processes were 139.7 Tg CO2 Eq. (139,726 Gg) in 2010, or 2.4 percent of total U.S. CO2 emissions (EPA).
These finding make me realize that the most of the green house gas emission is not coming from industrial sector, where cap-and-trade and the carbon tax policies take most visible effects. The top three emitters are fossil fuel combustion, electricity generation, and transportation. Hence, I will look for the government policies for emission control in those sectors as well and explore whether cap-and-trade or carbon tax can be applied to those sectors as well. For instance, households cause more energy waste than business firms. It’s been a few days since I last switched off my laptop. But businesses rarely waste a lot of energy because it adds up into the operation costs. Hence, should carbon tax also be applied to individual household to cut down the energy waste? Or should we add carbon tax to the gas price to discourage driving? Should the government provide carbon credits for top fuel-efficient car models? What approach is best suited for major power plants? Those questions will be addressed in detail in my white paper.