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Journal of Energy
Browse Press Browse and filter Bank of Canada press content by topic, author, location and content type. Staff Economic Projections These forecasts are provided to Governing Council in preparation for monetary policy decisions. Michael R. Available as: PDF. Content Type s : Staff research , Staff discussion papers. This is mentioned by Bart as the reason that an upstream approach is similar to a fuel tax [ 6 ].
On the other hand, the downstream approach affects motorists directly as the end user. An advantage of a downstream ETS is that fuel retailers are unable to express the cost of the carbon credits in the final price of their products. Thus, when energy prices rise, it is assumed to be associated with the usual volatility of fuel prices and not a government intervention. Nordhaus and Danish [ 15 ] attempted to design an ETS for the United States and concluded that a downstream system would be too difficult to manage due to the millions of vehicles that would have to participate. However, they proposed the use of a hybrid approach that would combine both upstream and downstream players in order to address this challenge.
Another study by Winkelman et al. There are several types of allocation methods. Grandfathering is the allocation of allowances based on historical emissions [ 17 ]. This was evidenced in the first phase of the EU ETS which distributed free allowances based on the grandfathering method. This led to more allowances being distributed than were verifiably necessary which affected the integrity of the system altogether [ 18 ].
In turn, this resulted in drastic carbon price fluctuations attributed to the way allowances were distributed [ 19 ]. Since the beginning of Phase 2 of the EU ETS, benchmarking has been the primary method of allocation in addition to auctioning of allowances. This is considered a high performing system compared to a purely grandfathering system [ 21 ]. Thus, the allowance method can determine the integrity of an entire ETS and must be one of the first considerations in the design of an ETS policy.
Unlike in air transport, an ETS for road transport will inevitably involve huge implementation costs due to the sheer number of vehicles in operation in any given jurisdiction.
This is in addition to the involvement of local governments which could provide for a practical scheme. Raux [ 1 ] discusses the key hindrances of introducing a market-based emissions trading system, being the millions of vehicles to manage and the subsequent costs of trading together with the administrative resources needed. He does, however, mention that these problems can be approached more effectively today as a result of the available technology. Even so, an ETS has been deemed more feasible for road transport if the point at which leverage is applied is not the millions of end users, but rather the more manageable number of fuel suppliers.
The cost implication of having an enormous number of moving emitters makes the inclusion of the sector impractical. With regard to administration, ETSs would most likely be better served through more dedicated institutional infrastructure [ 9 ]. Jochem [ 22 ], in his study about an ETS for road transport in Germany, refers to a paper by Debold and Lux in which showed that the installation of chip card readers in each petrol station and the cost and distribution of the chip cards to the German public would cost approximately 1, euros and 1.
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At the time, the combined total of these material costs alone was equivalent to about 0. This approach was also examined by Raux and Marlot [ 24 ] who analyzed the introduction of a decentralized car fuel consumption permit system for France and concluded that, due to the high transaction costs, it was not an ideal solution for implementation.
As is with road-based fee schemes currently in operation worldwide, the overall financial and administrative resources required to run an ETS would initially be enormous but would nevertheless drop significantly with time [ 25 ]. The social acceptance of personal carbon trading schemes which utilizes the same concept of the proposed downstream ETS model may be perceived as being fairer to carbon taxes, even though this comes at the cost of administrative burden [ 26 ].
Lyons and Chatterjee mention how protests have shown that public opinion is crucial when it comes to an increase in the price of fuels [ 27 ]. The sensitivity to fuel price increases can be attributed to the dependency on motor vehicles as a mode of transport.
Emissions trading in China: lessons from Taiyuan SO2 emissions trading program | Emerald Insight
Several countries have faced severe revolts by the public due to the increase of fuel prices including some in Europe in September when fuel prices rose significantly and in developing countries such as Kenya as seen in the August protests. Therefore, the economic impact of introducing such schemes should be very gradual and should start as soon as possible when the damage is most manageable.
This rationale justifies why it is necessary to incorporate a transport based ETS today since the results in the sector can be immediately felt. In terms of preference, a survey conducted by Harwatt [ 28 ] of 60 people whose educational level was higher than the national average showed that traffic participants in the UK would actually prefer a downstream trading system as opposed to a spike in fuel prices.
He concludes that the impact on fuel demand might be stronger because the participants are more aware of their limit than the impact on demand through a sole fuel price increase [ 28 ]. ETSs have some powerful driving forces. They have also been shown to improve not only economic but also green sustainability whilst lowering emissions [ 30 ]. Gilbertson and Reyes discuss the effective use of the tradable permit system, which consists of a finite number of distributed permits that are gradually reduced thereby ensuring a reduction of total emissions [ 31 ].
This decrease is substantiated by an abatement cost which in road transport is limited especially to existing vehicle owners to better management of driving style, travel decisions, etc. For vehicle ownership, ETSs influence the shift towards newer, more efficient technology [ 32 ].
The success of an ETS is not only based on the emissions reduction, but also price volatility, revenues raised, and administrative issues [ 33 ]. California achieved a 4. The Tokyo and Saitama ETSs have reported reductions in emissions until the recent shutdown of the nuclear plants which resulted in higher emissions from alternative coal fired plants [ 34 ]. Still, as a market mechanism, an ETS has its flaws. For instance, Gilbertson and Reyes noted that there is a risk of allocating an excessive number of allowances which would not give the parties involved enough incentives to reduce their emissions.
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They go on to say that even in the case where allocation is done correctly at the upstream or midstream level, these additional costs would simply be trickled downstream, compromising the very purpose of the system [ 17 , 31 ], hence, the importance of incorporating the source of demand in an ETS, i. However, neither upstream nor downstream approaches were acceptable due to the lack of feasibility for end users and the administrative complexities, respectively. Nevertheless, in , the EC noted that road transport remains a legislative possibility.
They determined that, at the time, an upstream approach would be the most economical due to the smaller number of participants yet the least effective in emissions reductions which the downstream approach would be able to achieve. Literature has shown addressing the cost implications and the administrative complexities, as is proposed for the California Cap and Trade scheme [ 44 ], could justify the inclusion of the downstream approach for the road transport sector. To date, research has yet to develop an ETS for road transport [ 10 ] with full consideration of the administrative complexities and costs.
Based on this, we develop the rationale for a feasible road transport-based ETS that addresses the hindrances of administrative and financial complexities. The characteristics of the proposed model are compared with those of the EU ETS, and conclusions drawn on the likelihood of success of the new model.
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First is the fact that EU ETS, which was established in and, until the China ETS becomes fully implemented, is by far the largest system globally and has developed significantly through several phases as opposed to China which started its ETS pilot phase in with plans to operationalize it announced in December Secondly, the recent addition of aviation in the EU ETS makes it an ideal case study to cross-examine in a bid to justify the proposed scheme for road transport.
In what follows, the design of the ETS is substantiated through a qualitative assessment and involves justification of each proposed element using literature and the vast experiences of the EU ETS. Also, a hypothetical model is presented that illustrates the operation of a scheme of this type.
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The ETS scheme introduced in this paper functions both like a BAC and a CAT in that an implicit overall cap is established on fuel using a baseline year with individual caps being determined by using fuel consumption data from the pilot phase of the scheme and redistributing the allowances minus the potential abatement factor.
From the perspective of the local governments, each jurisdiction has a predefined overall cap allocated to it since the aggregate emissions at the end are fixed for each period. These are addressed below.
Allowance allocation matters in China's carbon emissions trading system
With regard to the high transactional and operational costs, the EU ETS liable entities can opt to trade their permits through an agent. This method can be used to minimize the number of trading actors in a downstream road transport ETS. For the proposed scheme, the motorists, upon registering to participate, would have automatically appointed their respective local government as their agent to transact on their behalf for the trading of allowances which happens only once: at the end of an accounting period more likely every year. It also drastically reduces the frequency of trading transactions to one period.
The main justification for this crucial suggestion is the fact that both local and central governments have autonomous administrative powers and develop transport policies. The challenge they would face would be the constant administration and management of each participating motor vehicles that are constantly moving [ 45 ].