1898 words
Simplified Carbon Trading for a Net Zero Carbon Economy
Klaus S. Lackner,* and Richard Wilson#
* Columbia University
# Harvard University
In Rio de Janeiro, the signatories of the 1992 UN Framework on Climate Change agreed to halt
the rise of atmospheric greenhouse gas concentrations. This requires curtailing carbon dioxide
emissions close to a net zero carbon economy. First attempts at regulating carbon dioxide
emissions have done little and the recent collapse of carbon prices on the European Carbon
Exchange have raised doubts about the viability of conventional cap and trade approaches. Good
mechanisms must be simple, have the flexibility to respond to changing conditions and not stifle
economic growth. We propose a simple scheme that, if adopted without exceptions, has the
potential of controlling carbon emissions with a minimum of financial cost and risk.
Rather than controlling a multitude of emitters and types of emission in excess of arbitrary
baselines, we propose to control the influx of all carbon from permanent reservoirs like fossil
carbon deposits into the mobile surface pool. The surface pool .includes the atmosphere, the
biosphere and the upper layers of the oceans. Our plan is to trade anthropogenic introduction of
carbon into the surface pool (emission) against engineered carbon removal from the surface pool
(sequestration). Because removal options will initially be limited, we close the gap with a permit
scheme that aims at stabilizing the price of carbon dioxide disposal. By focusing on the point of
mobilization, i.e., the extraction of fossil carbon from the ground, the number of control points is
greatly reduced simplifying carbon management. By eliminating baselines, the system is less
ambiguous and fairer.
We only distinguish between surface carbon and sequestered carbon. Surface carbon is
carbon in the atmosphere or carbon that can readily be exchanged with the atmosphere.
Sequestered carbon, in contrast, is well insulated from the atmosphere. Underground reservoirs
of fossil carbon are sequestered, as is carbon in natural or man-made carbonate minerals. The
precise boundary between sequestered and mobile carbon can be debated, but the distinction
ultimately rests on the residence time of carbon in a reservoir. In the course of fossil energy
consumption, sequestered carbon, i.e. fossil fuels, are transformed into surface carbon, i.e.
atmospheric carbon dioxide. On a fifty-year time scale, it is not important whether the carbon
enters the surface pool initially as carbon dioxide, methane or elemental carbon. The ease by
which these modalities are transformed into each other makes this distinction only of short-term
value. The different components of the surface pool are in close contact and cannot be isolated
from each other.
We envisage a governmental body, the “Carbon Board” to supervise balancing of carbon
emissions against carbon sequestration. The Carbon Board issues permits to address the initial
imbalance between supply and demand. A permit allows the introduction of a specified mass of
carbon into the surface pool without corresponding sequestration. By charging a permit fee at
the introduction of carbon into the surface pool, one minimizes the cost of the regulatory process.
Rather than dealing with myriad points of emission, carbon permits would only be required for
extraction of fossil fuels from the ground, calcining of lime – and in the absence of international
permits – the import of fossil fuels into the country. Since all these activities are already well
monitored, permit accounting would not add significant new burdens to the economy. Such
carbon trading, while allowing for the continued use of fossil fuels, would also improve the
competitive position of enhanced energy efficiency and alternative forms of energy, as these
technologies avoid costly carbon mobilization.
A certificate of carbon sequestration would be issued for removing carbon from the
surface pool and returning it to a sequestered carbon pool. In contrast to a carbon permit, which
would always be required when carbon enters the surface pool without being balanced by a
certificate of sequestration, a certificate would only be issued if it is applied for, if the transfer of
carbon can be proven, and if it follows a certified method of sequestration.
The Carbon Board would certify methods of carbon removal as acceptable, if it
demonstrably removes carbon from the surface pool and places it into the sequestered pool.
Sequestration must do more than what would occur naturally and the excess must be
quantifiable. If the disposal method is deemed permanent by the Carbon Board, then an applicant
for a certificate only needs to prove that the action has been performed. If the method involves
storage in a non-permanent reservoir, than beyond proving that sequestration has been
performed, the applicant needs to demonstrate ownership of the reservoir, accept the cost of
continued carbon accounting for the reservoir, and agree to purchase permits or certificates if the
carbon stored at the site decreases, or cannot be accounted for any longer. In effect, nonpermanent storage sites are treated like a new class of carbon emitters that remobilize
sequestered carbon. While applicants would bear the cost of accounting, the Carbon Board
would be responsible for certifying the use of different reservoir types and accounting
methodologies.
There are a number of options to bring permits into circulation, each with its own
advantages and disadvantages. Simply assigning permits to current polluters, like in sulfur
dioxide emission trading, skews the playing field in favor of entrenched interests. Politically,
this may be difficult to avoid, but is far from optimal. We propose that every party, large or
small, new or old, must purchase permits for all net carbon it transfers into the surface pool.
However, unlike in sulfur trading, in this approach the permit cost does not only apply to the
margin where technology makes a difference. Permits resemble carbon taxes The money
collected could support research and development in alternative energy, energy efficiency,
carbon sequestration and verification and quantification of carbon sequestration. To avoid the
negative impact of a tax increase, governments should strive for a revenue neutral
implementation by reducing or eliminating other general or energy related taxes.
Limiting excessive influx of carbon into the mobile carbon pool is the first goal of the
Carbon Board. Another is to set the atmospheric carbon dioxide concentration or rate of change
in that concentration. Just like the Federal Reserve Board maintains the value of the currency,
the Carbon Board would also need to maintain a stable price for carbon by adjusting the permit
supply to match demand. The Carbon Board would need to be given the discretion to optimize
its strategy in achieving these different goals. If the carbon board were to simply adjust supplies
to keep the price of a permit constant, the permit would effectively act as a carbon tax. However,
only experience will tell what the right price of carbon is. If the Carbon Board were to strictly
set a fixed permit supply target, permits would act like a commodity. The experience at the
London Carbon exchange suggests that fixing targets in advance makes it extremely difficult to
achieve price stability. The Carbon Board’s flexibility in adjusting the number of available
permits would allow it to maintain prices. The Carbon Board, like the Federal Reserve Board,
would need a certain amount of independence, but at the same time it would need to be guided
by general government policy.
The advantage of the carbon permit scheme is its simplicity. Unlike in many carbon credit
schemes there is no need to define baseline plants to calculate emission reductions. As suggested
by various bodies, the National Academy of Sciences, the World Federation of Scientists, and an
MIT study, all carbon reduction technologies would have equal incentives. The simplicity of the
approach comes from focusing on excess carbon in the environment rather than lumping together
a diverse group of greenhouse gases including methane. Since excess carbon in the environment
leads to other environmental problems than just climate change, e.g. the acidification of the
oceans and ecological change driven by carbon eutrophication, a focus on excess carbon is very
justified.
Discriminating between different greenhouse gases forces an implementation of controls at the
point of emission, and thus requires complicated and expensive accounting. Consider for
example, the questions that arise in waste incineration. For a baseline should one consider the
plant to replace a natural gas combined cycle plant or a coal plant? Should one treat the carbon
dioxide derived from wood residues differently than those from petroleum based plastics? How
does one keep track of the different types of carbon present in the waste? The approach outlined
here, does not require a baseline to compare with, nor will it distinguish between different forms
of carbon in the input fuel. All carbon that arrives at the waste-to-energy plant is part of the
mobile pool. Since no fee is levied, the waste to energy plant enjoys a competitive edge. By
capturing its own carbon, it could generate a certificate of sequestration and thus create a
separate revenue stream.
If deemed necessary one could consider a separate control regime for methane completely
decoupled from the carbon control regime. This offers some advantages over the current
regime, where oxidizing methane to carbon dioxide -- rather than reducing fossil fuel injections
into the atmosphere – is becoming a preferred strategy. Since today’s methane will be oxidized
to carbon dioxide in about a decade even without intervention, it is not clear that methane
oxidation will contribute much to solving the long term climate change problem.
A permit system could be introduced by issuing in the first year permits for 100% of
anticipated demand. This would allow all players to get used to the scheme. In subsequent
years, the number of permits would be gradually reduced. It is important to give the market time
to adjust. Too fast an implementation would drive cost up by forcing abandonment of past
investments. However, too slow an implementation would favor strategies that would be cheap
in achieving small reductions, but not useful in reaching the deep reductions that are ultimately
required. A good strategy would incentivize construction of new plants that nearly completely
eliminate carbon dioxide emissions from new infrastructure, while avoiding costly retrofits or
abandonment of existing infrastructure. Without the flexible response of a Carbon Board such a
balanced strategy would be impossible to implement.
A class of international certificates of sequestration would be a first step in harmonizing
the price of carbon in different countries. More challenging is the internationalization of permit
systems. This would require complex negotiations allocating carbon rights to all nations.
Ideally permits would be allocated to a country on roughly a per capita basis. The incentive to
join for developing nations would initially be the profits possible from exporting carbon
allocations and carbon sequestration. The world would benefit, as most of the technical
opportunities for emissions reductions will arise in the developing nations, while the
responsibility for reductions is largest in the developed world.
Unlike sulfur credits and carbon dioxide permits, which represent a right to pollute, certificates
of sequestration provide a means for brokering between potential sinks and sources. As the
system approaches a net zero carbon economy, instead of issuing permits, governments could
purchase certificates and retire them unused to further reduce atmospheric carbon dioxide levels.
The use of biomass fuels combined with carbon capture or outright capture of carbon dioxide
from air could provide excess certificates that if used in this way would allow the world to adjust
the atmospheric carbon dioxide level to whatever will be considered optimal.