The worldwide movement to reduce greenhouse gas (GHG) emissions has gathered much momentum. Future actions taken to reduce GHG emissions will affect all industries and even our personal lives. One part of the effort that is frequently discussed is the need to set a price on GHG emissions – often referred to as a price of carbon. Advocates want a minimum carbon price that penalizes GHG emissions and results in lower GHG emissions.
Many specialists in the field argue for a global negotiated carbon price. Currently there is no global carbon price.
Most proponents of a carbon price advocate for a minimum floor price to ensure reductions are met and for stability if a Cap and Trade system is implemented.
A national or global price on carbon can take several forms including one or a combination of the following:
- Carbon taxes
- Carbon price used in a Cap-and-Trade System
Carbon taxes are a type of Pigovian tax that accounts for the social cost of carbon. Many economists prefer a carbon tax to reduce GHG emissions because it is easier to measure results and administer. Corporate managers and shareholders like certainty; a carbon tax would provide some certainty on the costs.
At the same time, some economists argue that high carbon taxes may not effectively reduce GHG emissions unless cheap alternative technologies are available.
One commonly proposed type of carbon tax is a federal tax on fossil fuels that is collected at the point of production. This could include a tax assessed at the:
- Wellhead or import terminal for crude oil or natural gas
- Mine for coal
A dollar amount could be assigned to each fuel type based on the carbon content of the fossil fuel used such as:
- $ per barrel of oil
- $ per thousand cubic feet of natural gas
- $ per ton of coal
Assessing the tax at the point of production simplifies the system. The tax would increase the price at the gasoline pump, natural gas meter or electricity meter for all consumers based on consumption.
Some commentators argue that such a tax would be a regressive tax and would affect lower income earners more than higher income earners. Proposals to offset this is to make the tax revenue neutral and/or use the tax revenue to fund renewable energy or fund adaptation to climate change.
Specific States and regions could also enact additional carbon taxes on fuels such as gasoline and diesel or on electricity use. Also, GHG emission fees (taxes) could be charged on a per ton of GHG emissions from specific sources. This could be revenue source to fund environmental regulatory agencies. These have not been proposed as approaches to reduce GHG emissions on a global or national scale.
Reasons for a Carbon Tax include:
- Incentivizes reduction of GHG emissions
- Encourage marketplace innovation to increase the development and use renewable energy sources
- Encourages consumers to use available renewable energy sources
- Accounts for the social cost of GHG emissions
- Could be used to fund low carbon energy systems
Cons of Carbon Tax
- Administration costs
- No set GHG reduction target – uses market forces to reduce GHG emissions
- Regressive tax
- Requires global compliance to be effective
- Targets consumers
Cap and Trade System
In a Cap and Trade System, a limit, known as an “cap” is placed on GHG emissions. Then, with time, the cap is reduced. Companies or sectors of the economy may have an annual cap or GHG allowance imposed on their emissions. The company would then only emit the amount allocated by the allowance. If the company cannot meet the allowance, then it must reduce its GHG emissions or can buy GHG emission offsets also referred to as Carbon Credits.
The 1990 Clean Air Act Amendments established the Acid Rain Program (ARP). The ARP created a Cap and Trade system that successfully reduced emissions from power plants that cause acid rain.
As stated earlier, a minimum or floor price on carbon would be used.
Reasons for a Cap and Trade System
- Uses a GHG emissions cap that is lowered with time to meet reduction goals
- Uses market forces that can result in the lowest cost methods to reduce emissions
- May increase investment in lower GHG emitting technologies
- Encourages innovation
- Creates a trading system with carbon credits that have a monetary value
- May be easier to determine attainment off reduction goals
Cons of Cap and Trade System
- Caps can be difficult to establish and enforce
- Costs to implement, manage and certify ongoing compliance
- Bureaucratic burden
- Price volatility of carbon credits
- Potential for fraud
- Economic downturns can make countries relax requirements
- Does not encourage reductions beyond target levels
- Global systems need compliance by most/all participant countries to be effective
The global movement to reduce GHG emissions will only increase in the coming years. Understanding the ways that worldwide actions could be implemented are crucial for business planning and sustainability. Establishing a minimum floor price on carbon (GHG emissions) would create a more stable way to reduce GHG emissions.
Setting a price on carbon would be a step for implementing carbon taxes and a Cap and Trade systems to attain a carbon neutral economy. To prepare for these actions, companies should implement systems to track and reduce their GHG emissions.
Cimarron – Who We Are
Cimarron’s vision is to work with our clients to create a cleaner environment.
The company engineers and manufactures environmental, production and process equipment for the upstream, midstream and downstream energy industries, as well as environmental control solutions for biogas at wastewater facilities, digester tanks and landfills.
Cimarron offers our customers the know-how and environmental expertise to meet the environmental standards of today and tomorrow. Cimarron is committed to bring value to the Energy industry and their shareholders based on our financial strength, experienced personnel, and engineering capabilities.
As a company, we thrive every day to make a difference through innovation (e.g. ESG), customer focus, and operational efficiency. In addition to being present in all major regions in the US, Cimarron serves more than 45 countries around the world, ranging from offshore to desert. From key operational centers in the United States, Italy and the United Arab Emirates, Cimarron offers ongoing service and support through its own field service personnel and strategic third-party partners, creating a cleaner environment for our customers and their shareholders.
Since its founding in the mid-1970’s in Oklahoma, the company’s product offering has expanded from production equipment to include the largest line of environmental solutions that capture or incinerate fugitive vapors. With the acquisitions of HY-BON/EDI in 2019 and AEREON (including Jordan Technologies) in 2020, Cimarron has added strong brands, products, and services to its portfolio.