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Last Updated: Friday, 8 June 2007, 05:43 GMT 06:43 UK
Paying for environmental damage
Eggborough power plant near Selby
Tackling climate change is one of the key issues at the G8 summit, with much talk of targets and global treaties.

And companies will play a key role in reducing greenhouse gases

Most experts believe that some sort of market mechanism will need to be developed to encourage them to curb their emissions of C02.

Two quite different models have been developed to price such emissions: a carbon tax and a cap-and-trade system - but disagreement remains over which model would be the most effective.


This proposal is simple - impose a levy on polluters based on the amount of emissions they release.

This is often known as a carbon tax, though in theory it could also apply to other greenhouse gases.

The money raised from the tax could then be channelled to research and develop low-carbon technologies and clean energy.

The idea is that polluters, such as large power firms, are encouraged to reduce their emissions, while entrepreneurs can be encouraged to develop alternatives.

Businesses often insist that the biggest hurdle is unpredictability - it makes managing risk or plan investment difficult.

The benefit of a carbon tax is that firms and investors can plan ahead.

Another benefit is that money raised can be collected by the government using the existing tax system.

But critics say such a tax is too blunt an instrument, and simply punishes certain sectors.

If, for example, a power firm has already significantly reduced its emissions, then the easiest available way to make further cuts might simply be to reduce output.

Some argue that a carbon tax would be politically difficult to pass, because of resistance from industry and strong lobby groups.

Proponents, meanwhile, say by dint of being universal it is not subject to the same pressures of handing out carbon credits.

But faced with another tax, some critics believe polluters might simply pass on the cost to consumers rather than actually reducing emissions - though this would only work if consumers remained loyal despite rising prices.

Moreover, once the government has collected the tax, there would be no guarantee that it would spend it in the best way to encourage cleaner technologies.


The main alternative to the carbon tax proposal is the cap-and-trade system.

Firms either opt to reduce their emissions directly - or they can buy the right to keep polluting.

The idea of a cap-and-trade model to tackle pollution goes back several decades. In the 1970s the US Environmental Protection Agency established a scheme to trade sulphur dioxide and nitrous oxide to tackle acid rain.

EU must cut emissions by 8% from 1990 levels by 2012
Each nation agrees to a National Allocation Plan with the European Commission
ETS covers about 40% of the EU's total CO2 emissions, including large polluters.
By 2012, all flights within, to and from EU will be covered

Today, there is only one scheme - the European Trading Scheme (ETS) started in January 2005 - that obliges firms in selected sectors to meet binding carbon emissions targets.

Industries in the ETS include power generation, iron and steel, glass and cement. About 40% of the European Union's total CO2 emissions are covered by the scheme.

The ETS will cover commercial flights within the EU from 2011, and all flights to and from the EU in 2012.

Interest elsewhere has grown for this model. Australia has a voluntary carbon trading scheme as does Chicago.

But the ETS scheme - deemed the benchmark in the industry - faced major criticism in 2006 after it transpired that the emissions limits on the large polluters had been too lax.

Governments distributed permits free of charge, allowing their recipients to keep polluting.

Several companies then discovered that they could meet the targets relatively easily. They found themselves with a surplus of credits, which they could then sell for a profit.

This surplus sent the price of carbon - measured per tonne - plummeting.

If permits are overly cheap, then there is no incentive for firms to reduce emissions because they can continue to pollute at relatively low costs.

The cap-and-trade model has been backed by some of the largest energy businesses, including Alcoa, Duke Energy and General Electric.

Unless the system is comprehensive and includes all sectors and nations, its impact will be limited.

Neither the US, the world largest greenhouse gas emitter, nor China, which is set to be the biggest this year, have binding targets.

As far as mitigating climate change goes, cap-and-trade only works if the limits are tight enough to bring about the necessary reductions in emissions.

Q&A: Europe's carbon trading scheme
20 Dec 06 |  Science/Nature

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