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					                            THE COST OF CO2




                                              The cost of CO2

                                                                  Author:
                                                         Peter Wlodarczak

                                                                    Date:
                                                          August 06, 2012




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Table of Content

1  The cost of CO2 ......................................................................................................... 3
 1.1    Introduction ........................................................................................................ 3
   1.1.1 The Kyoto gases ............................................................................................. 4
   1.1.2 REDD (Reduce Emissions for Deforestation and Degradation) ...................... 4
   1.1.3 Debt-for-Nature Swaps ................................................................................... 4
   1.1.4 Pollution markets ............................................................................................ 5
 1.2    The cost ............................................................................................................. 5
2 Appendix ................................................................................................................... 7
 2.1    List of figures ...................................................................................................... 7
 2.2    References ......................................................................................................... 7
 2.3    Web references .................................................................................................. 7




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1 The cost of CO2

1.1 Introduction
Currently a lot of effort is undertaken to reduce anthropogenic greenhouse gas (human
created GHG) emissions. Science suggests we need to reduce emissions by
approximately 76 percent by 2050 to stabilize the climate (Beinhocker et al. 2008, p. 10).
Following figure shows the estimated global “business as usual” GHG emissions till 2050
in GtCO2e (Gigatons of carbon equivalents, for explanation see chapter 1.1.1 The Kyoto
gases):




          Figure 1: Global "business as usual" GHG emissions (Beinhocker et al. 2008, p. 10)


Many countries have set ambitious reduction targets. The EU, for example, has set a
target that 2020 emission levels should be 20% lower than those of 1990, and has stated
its intention of aiming for a 30% reduction if other countries with high emissions also
commit to comparable emission cuts (Pathways to a Low-Carbon Economy 2009, p. 3).
There are many initiatives for GHG abatement. However the technical and economic
feasibility of these initiatives are under intense debate. One reason for the debate is that
the cost of different options for meeting the targets is not clear.




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1.1.1 The Kyoto gases

The Kyoto protocol nominates six synthetic (man-made) gases to be object of quantified
emission limitations and reduction obligations (Greenhalgh et al. 2003, p. 131):

      Carbon dioxide (CO2)
      Methane (CH4)
      Nitrous Oxide (N2O)
      Perfluorocarbons (e.g. C3F8)
      Hydrofluorocarbones (e.g. CHF3)
      Sulphur Hexafluoride (SF6)

They are the main targets for emission abatement; however there are other GHGs, e. g.
ozone or water vapor. Since different GHGs have a different warming effect on the
atmosphere, their relative effect is expressed in the global warming potential (GWP). For
example Methane is 21 times more effective than CO2, Methane has thus a GWP of 21.
Usually the GWP is expressed in CO2 equivalents, or CO2e. Thus 1 tone of Methane
releases 21 tCO2e.


1.1.2 REDD (Reduce Emissions for Deforestation and Degradation)

One of the initiatives that have drawn wide attention in recent years is REDD (Reduce
Emissions for Deforestation and Degradation). It has been discussed last year in the
climate conference in Durban. Deforestation and degradation account for around 20% of
global anthropogenic greenhouse gas emissions (Peskett et al. 2009, p. 5). Most
mechanisms for REDD are still on the drawing board but they are based on the idea that
developed countries should pay developing countries to reduce deforestation and
degradation. E. g. Norway has promised 1 billion dollars to Indonesia if they reduce
deforestation. So far Indonesia has failed to fulfill its REDD agreement with Norway
(Regenskogfondet 2011). REDD is an effort to estimate and create a financial value for
the carbon stored in forests. The simple equation is: a standing tree must be worth more
than a felled tree.
In the post-Kyoto regime a new initiative has been initiated, REDD+. “REDD+” goes
beyond deforestation and forest degradation, and includes the role of conservation,
sustainable management of forests and enhancement of forest carbon stocks (About
REDD+ 2009).


1.1.3 Debt-for-Nature Swaps

Debt-for-Nature swaps link the foreign debt to preservation projects, mostly rain forest.
By relieving the foreign debt burden carried by developing nations, it is possible to
secure their commitment to invest in local conservation projects and save imperilled
ecosystems (Debt-for-Nature Swaps, 2011, p. 105). The first debt-for-nature swap
project was conducted by Conservation International, when it purchased a portion of

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Bolivia’s foreign debt if the government would set aside 3.7 million acres around the Beni
Biosphere Reserve. Other debt-for-nature swap projects were conducted in Jamaica,
where in exchange for forgiveness of $311 million of the nation’s bilateral debt with the
US child development programs, along with projects such as water quality monitoring,
waste management, reforestation and biodiversity protections were administered. To
institutionalize the debt-for-nature swaps the U. S. Tropical Forest Conservation Act
(TFCA) was enacted and projects in more than a dozen countries, among other
Botswana, Bangladesh, Paraguay, the Philippines and Costa Rica have been executed.
The value of rain forest preservation is not only due to their ability to absorb CO2 and act
as carbon sinks, but they are also essential for the bio diversity, the well-being of local
communities like indigenous tribes and they are one of nature’s great treasures that
attract tourists.


1.1.4 Pollution markets

One of the ideas of pollution markets is to make consumers pay for the environmental
damage caused by the product they buy. The cost of the damage will be included in the
product price. The internalization of these costs in the price of goods and services
creates incentives for the creation and adoption of clean technologies.
One of the most common examples is that of cap-and-trade pollution markets. Cap-and-
trade emissions trading schemes (ETS) set an upper limit to emissions, the cap, usually
at the country level and then sell emission permits to polluters. Some permits will be
given free to polluters during an initial period in order to reduce the impact of the scheme
during its introduction. The government can for example plan to issue ETS permits at a
price of 10 EUR per ton of CO2-e. A company can then sell, trade, a surplus in ETS
certificates if it has been below the cap for a reporting period.
The EU has launched the EU Emissions Trading System (EU ETS) in 2005. Being the
first and biggest international scheme for the trading of greenhouse gas emission
allowances, the EU ETS covers some 11,000 power stations and industrial plants in 30
countries (CLIMATE ACTION, 2010). The California Air Resources Board yesterday
passed a statewide cap and trade bill for greenhouse gas emissions, creating the
second-largest emissions trading scheme in the world after Europe's (treehugger 2010).
The earnings from ETS can be invested into afforestation or wind farm projects, e. g. into
the REDD+ initiative.
An option to ETS would be the introduction of a carbon tax. A carbon tax will vary from
country to country because the MAC curve (Marginal Abatement Cost) differs from
country to country. The MAC curve was introduced by McKinsey to develop an
understanding of the costs and potential of different options for addressing global and
national greenhouse gas emissions.

.

1.2 The cost
So what is the right price for e. g. 1 tone of CO2? The CO2 released in the air by one
country goes into the atmosphere of the whole world.

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Carbon permits in Europe’s cap-and-trade program in 2011 were priced at 12 to 13 euros
per metric ton of CO2-e (Bloomberg 2011). Since 2011 the CO2 price has continuously
dropped due to the economic downturn (CO2 Prices.eu, 2012). Some argue that these
permits are underpriced. The price paid for a certain amount of CO2 emissions could be
used for rain forest preservation or an afforestation project. The price could then be the
amount it costs to afforest enough trees to sequester one ton of CO 2-e. For example,
Indonesia is the biggest exporter of palm oil in the world (INAPALM 2012). Large parts of
the rain forest in Sumatra have been deforested for palm oil plants. The US government
has agreed to forgive nearly $30 million of debt payments owed by Indonesia in
exchange for commitments from Indonesia to preserve the Sumatran rain forest. The
question is what is the economic value of, say preserving 1million acres of rain forest for
10 years? Calculating the output of 1 acre of rain forest if it is being used by the palm oil
industry is easy if only the price of the quantity of palm oil produced is considered.
However there is a whole industry involved like transportation of the oil, the processing
industry or the production of fertilizer. These costs have to be factored into the total price
to determine the real value of 1 acre of rainforest.
What is the impact of a cap-and-trade ETS or carbon tax on a country? Some countries
like India reject Kyoto arguing that CO2 limits will harm the economy (Sheppard 2007).
What is the impact on the competiveness of a product if a pollution tax is added? Is it
going to negatively influence a company’s profitability?
So far ETS in Europe has been a failure. The EU issued ETS certificates for free to the
cement industry. The cement industry is one of the biggest CO2 polluters since producing
cement requires the calcination of lime stone. The calcination process (50%) as well as
the fuel combustion for the heating of the kilns (40%) releases a lot of CO 2 into the
atmosphere. The cement industry contributes almost 4% to global anthropogenic
emissions (Annual Review of Energy and the Environment, 2001). However with the
recent economic downturn cement production went down and as a consequence the
cement industries emissions went down. The industry sold the surplus in ETS certificates
and could finance unprofitable factories. The issuing of ETS had thus a reversed effect,
contrary to its purpose.
Currently the EU wants to force the airlines with destinations in Europe to pay a carbon
tax for their emissions. This has caused a lot of opposition from China and the US. They
claim that a carbon tax will push up airfares and harm the tourism industry. A total of 29
countries signed a joint declaration in Moscow on February 22 to oppose the carbon tax
plan (China daily, 2012).
There are many unanswered questions and there is no common agreement on the cost
of GHG emissions and their impact on a countries economy. Depending on how far one
goes upstream in calculating the cost, the results will vary. As long as these questions
haven’t been answered, the discussions will continue and the biggest polluters in the
world, China, USA, Russia in that order (AFOP 2012) will never reach a common
agreement.




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2 Appendix

2.1 List of figures
Figure 1: Global "business as usual" GHG emissions (Beinhocker et al. 2008, p. 10) ....... 3


2.2 References
Beinhocker, E, Oppenheim, J, Irons, B, Lahti, M, Farrell, D, Nyquist, S, Remes, J,
Nauclér, T, Enkvist, P 2008, The carbon productivity challenge: Curbing climate change
and sustaining economic growth, McKinsey Global Institute.

Dimas, S, Gabriel, S 2008, The economics of ecosystems & biodiversity, A Banson
Production, Cambridge, UK.

Greenhalgh, S, Broekhoff, D, Daviet, F, Ranganathan, J 2003, The GHG Protocol for
Project Accounting, World Business Council for Sustainable Development, Geneva,
Switzerland.

ISO 14064-1:2006, Greenhouse gases – Part 1, First Edition, ISO copyright office,
Geneva, Switzerland.

Debt-for-Nature Swaps, 2011, Journal of Applied Finance, Volume 23 Number 3, A
Morgan Stanley Publication.

Mayrand, K, Paquin, M 2004, Payments for Environmental Services: A Survey and
Assessment of Current Schemes, Unisféra International Centre, Montreal, CA.

Pathways to a Low-Carbon Economy, 2009, Version 2 of the Global Greenhouse Gas
Abatement Cost Curve, McKinsey & Company.

Peskett, L, Huberman, D, Bowen-Jones, E, Edwards, G, Brown, J 2009, Making REDD
work for the poor, A Poverty Environment Partnership (PEP) Report.

REPORT OF THE INFORMAL WORKING GROUP ON INTERIM FINANCE FOR
REDD+ (IWG-IFR), 2009, UNFCCC.


2.3 Web references
About REDD+ 2009, UN-REDD Programme, viewed 3. March 2012,
<http://www.un-redd.org/AboutREDD/tabid/582/Default.aspx>.

AFOP, Action for our planet, 2012, POLLUTING COUNTRIES, viewed 6. August 2012,
<http://www.actionforourplanet.com/#/top-10-polluting-countries/4541684868>

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Annual Review of Energy and the Environment, 2001, Volume 26, Page 303-329, viewed
11. March 2012,
<http://www.wbcsdcement.org/index.php?option=com_content&task=view&id=32&Itemid
=113&limit=1&limitstart=2>.

Bloomberg, 2011, ‘EU CO2 Price Should Be More Than Three Times Higher, BNEF
Says’, viewed 8. August 2012,
<http://www.bloomberg.com/news/2011-09-13/eu-co2-price-should-be-more-than-three-
times-higher-bnef-says.html>.

China daily, 2012, ‘Chinese airlines oppose EU carbon tax’, viewed 11. Match 2012,
<http://www.chinadaily.com.cn/bizchina/2012-03/10/content_14805205.htm>.

CLIMATE ACTION, 2010 ‘Emissions Trading System (EU ETS)’, viewed 3. March 2012,
<http://ec.europa.eu/clima/policies/ets/index_en.htm>.

CO2 Prices.eu, 2012, analysis of the EU CO2 Market, viewed 8. August 2012,
<http://www.co2prices.eu/>.

INAPALM 2012, Welcome to INAPALM 2012, viewed 3. March 2012,
<http://www.inapalm-exhibition.com/>.

Kenny, C 2012, ‘Forest Bump’, Foreign Policy, 23 January, viewed 23. January 2012,
http://www.foreignpolicy.com/articles/2012/01/23/forest_bump?page=0,0>.

Regenskogfondet 2011, Indonesia fails to fulfil its REDD+ agreement with Norway', 23.
January, viewed 1. February 2012,
http://www.regnskog.no/languages/english/rainforest-and-climate-change/press-release-
indonesia-fails-to-fulfill-its-redd-agreement-with-norway>.

Sheppard, N 2007, 'India Rejects Global Warming Hysteria, Says Kyoto Hurts Economy,
Worsens Poverty', NewsBusters, viewed 5 March 2012,
<http://newsbusters.org/node/13061>.

treehugger 2010, California Passes Cap & Trade Bill - Creates World's Second Largest
Emission Trading Scheme', viewed 3. March 2012,
<http://www.treehugger.com/corporate-responsibility/california-passes-cap-trade-bill-
creates-worlds-second-largest-emission-trading-scheme.html>.




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