Open assessment on the location of burden of greenhouse gas trade

Open assessment on the location of burden of greenhouse gas trade is about the question who should pay for the right to emit greenhouse gases. This is only a potential assessment; it is not actively performed. However, the question is important and timely. If a critical mass of interested people shows up, the questions presented in the assessment should be assessed, answered, and communicated to policy-makers.

Scope

Purpose

The assessment compares two alternative greenhouse gas emission permit systems. One is the current system where major GHG emitters (notably large energy plants and factories) have to pay for their own emissions. The other one is a hypothetical system where manufacturers or importers must pay for the quota when they bring such products to the market that have caused or potentially will cause greenhouse gas emissions.

Boundaries

Time: The new trade period will start at 2013. The assessment looks at the situation from 2013 to 2023.
Spatial: The effects will be assessed within the countries currently participating in the GHG trade. However, the border between participants and non-participants is critical, so special emphasis will be placed there.
Outcomes: Economic impacts will be assessed.

Scenarios

The burden of GHG emissions can be allocated in two ways:

Current system (business as usual, BAU): Emitter pays (selected sectors).
Alternative: Manufacturer or importer pays based on the potential emission of the product produced or imported (selected sectors).

Intended users

Politicians and authorities that prepare the GHG trade agreements and decide about them.
Anyone interested.

Participants

This is an open assessment. Anyone who accepts the rules of open assessment may participate.
A core group of participants is needed but does not yet exist. The assessment will start when the core group is found.

Definition

The current trade on greenhouse gas emission permits (GHG trade for short) is based on the principle that the economical actor who actually releases GHG into the atmosphere is the one who must buy emission quota to compensate for the emission (derived from the polluter pays principle). In practice, the major actors are large energy plants and factories, especially in ferrometal, cement, and wood industry. Agrochemical, petrochemical, and aluminium sectors are likely to be included in the GHG trade system at 2013. A major problem in this system is that it measures factory-based emissions, which is not a trivial task. Therefore, small industrial or energy production units are exempted from the GHG trade.

An alternative to the existing GHG trade system is to measure - not the actual emissions but - potential GHG emissions attached to products within the countries participating in the GHG trade (trade area for short). For example, when someone imports or produces crude oil to the trade area market, almost all of it will be burnt into CO₂ within a short time period. If the greenhouse gas emission permit (GHG quota for short) must be paid when the product is brought to the market, there is no need to follow the fate of the oil to see who actually burns it and when and where. The manufacturer or importer includes the cost of GHG quota into the price of the product, and the cost transfers in the price to the final end user.

Of course, this system requires solid information about the actual emissions (those that have occurred already during the production phase before the product was brought to market) and the potential emissions (those that will occur during the use of the product) related to products. But this information does not need to be individual data from each factory like in the current system. Even if the system applies only to fossil fuels, the system is likely to cover more of the GHG emissions than the current system, which excludes all traffic.

The current trade system makes an unequal difference at the trade area border. Products contain the price of quota, if they are produced within a participating country and industrial sector. But if they come from outside they do not have this extra cost. Also, products from within the trade system will have a disadvantage when they are exported. There are no good ways to remove this inequality in the current trade system. One attempt is that sectors where this inequality is critical can have an exemption. However, this is just dispersing the inequality wider, to those sectors that are not critical in this respect.

The alternative system may fix this problem. There is a known amount of emission quota that must be bought when a particular product is imported. This can simply be applied in the reverse situation: an equal amount of emission quota is given to those who export the product. Of course, typically the import and export products are different. For example, the import of fossil fuels to the EU is much larger than export, while the export of some other products is larger than import. But the system even in this simple form is more equal than the current trade system.

However, there are sectors that are clearly disadvantaged in this situation. For example, the production of stainless steel uses a lot of imported fossil fuels, and they export a large part of their products. If fossil fuels are within the GHG trade and stainless steel is not, this sector is in trouble. So, the stainless steel industry has a clear incentive to get their products within the GHG trade. This can be done, if the GHG emissions per ton of stainless steel can be reliably estimated and used as the basis for GHG quota requirements. The industry can obtain this information and is probably very happy to provide it to the authorities, if they can get the emission quota back from all their exported products. The same quota requirement will then be applied to the importers as well, so the industry will have a double benefit.

It is important to notice, however, that the double benefit is fair. Within the trade area, everyone must pay for the quota, and outside the trade area, nobody has to pay for it. It might be considered unfair that outsiders are free-riders, but this is the same situation in both GHG trade systems.

Causal diagram

Not yet determined.

Analyses