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Financial mechanisms to reduce carbon emissions – why they are important

The topic of climate change has been hotly debated for the past 20 years. Until recently, scientists, politicians and business leaders, especially in North America, have not been able to agree on the existence of the problem let alone what measures should be taken to mitigate it. It is only recently that consensus levels have dramatically increased. Even the Terminator, Arnold Schwarzenegger, admits that climate change is real when he says: “The facts are there, that we have created... a self-inflicted wound through global warming.” It is now generally accepted that climate change is real, immediate and requires substantive action. 


January 13, 2010
January 13, 2010
By Peter Rowles

Why is this important to energy managers? Since the production and use of energy accounts for 80 per cent of carbon emissions, energy is the major contributor to global warming and climate change. Most energy managers know that they can have a significant impact on the levels of carbon emissions by how they source energy and how efficiently they use this resource. If energy managers have this ability then why are we not seeing it happen? The answer is quite simple — money. Up until now, no cost or value has been placed on the carbon that is being pumped continuously and increasingly into the atmosphere. The potential economic impact of climate change on biodiversity, agricultural production, human health, and business is huge and yet none of these costs (referred to as externalities) have been assigned to the production or use of energy.
 
Since 1997 and the introduction of the Kyoto accord, there has been a recognition that financial mechanisms are required. These mechanisms offer various forms of a carrot and stick approach, that is, rewarding those who reduce emissions and penalizing those who do not. A carbon tax on energy is one type of financial mechanism. This is currently being tried in British Columbia. Arguments in favour of carbon taxes include:

  • • higher cost savings for energy efficiency projects,
  • • predictability,
  • • fast implementation,
  • • transparency and simplicity,
  • • less opportunity for manipulation, and
  • • possible rebates to taxpayers.

The main detriment would be the unwillingness of politicians to introduce new taxes, which could have a substantial negative economic impact on companies or organizations incapable of responding in a timely manner. There are also concerns that the increased tax revenue will not be used as effectively or wisely by the government as it could be in the private sector.

This leads to the introduction of carbon markets to curb emissions using a mechanism commonly referred to as “cap and trade.”

A functioning carbon market has three primary participants — the buyer, the seller and the regulator. The buyer is typically an organization mandated by a regulatory body to achieve a certain level of greenhouse gas reduction or maintain emissions below a certain threshold. The seller is normally a regulated organization that has exceeded its targets, resulting in emission reduction credits which can be sold in a carbon market. The seller can also be a non-regulated organization that has created offset credits through direct emission reduction projects.

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The attractiveness of this system is that it directs the emission reduction activity to those most able to cost effectively implement the reductions. Those who are unable to make reductions in a timely or economic fashion are able to purchase credits in the marketplace to meet their regulated obligations. Ideally, the price per unit for a carbon credit would be less than the equivalent cost to make the reduction from directed action for the buyer. This process provides a mechanism for the market to quickly and economically achieve targeted emission reductions.

The sulfur dioxide cap-and-trade system instituted in the U.S. in the early 1990s was effective in efficiently reducing acid rain emissions from power plants. Although a cap and trade system for carbon will be significant larger and more complex than the sulfur dioxide system it is intended that, if designed properly, the following benefits will be realized:

  • certainty on the level of emissions reductions achieved,
  • reductions are attained at the lowest cost,
  • the development of new cost effective technological solutions, and
  • lower cost to governments to implement.

 
From an energy manager’s perspective, either approach, carbon tax or cap and trade, will improve the economics of alternative energy and energy efficiency projects. Applying a value to carbon emission reductions associated with energy use presents an greater opportunity for energy managers to meet or exceed their energy management objectives while making a significant contribution to saving the planet. For more information on this subject, check out the White Paper prepared by Shane Pepin of Energy Advantage, available on our web site at www.energyadvantage.com.

Peter Rowles (peter.rowles@energyadvantage.com) is the vice-president of energy efficiency / environment with Energy Advantage, a Toronto-based provider of independent energy and environmental management services.