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This Carbon Tax Guide was prepared for the Partnership for Market Readiness ( PMR), retail and wholesale prices often fluctuate substantially. Moreover.
Table of contents

These kinds of guarantees and policies provide some reassurances, but do they mean anything in the real world? Without actually visiting the offset projects ourselves, how can individuals be sure that the projects are functioning as they should?

Can a carbon tax save the planet?

To try and answer these questions, the voluntary offset market has developed various standards, which are a bit like the certification systems used for fairly traded or organic food. VGS-certified offsets are audited according to the rules laid out in the Kyoto protocol and must also show social benefits for local communities. The VCS, meanwhile, aims to be just as rigorous but without being as expensive or bureaucratic to set up, thereby allowing a greater range of innovative small-scale projects. Offsets with these standards offer extra credibility, but that still doesn't make them watertight.

Heather Rogers, author of Green Gone Wrong , visited a number of offset schemes in India and found all kinds of irregularities.

The Carbon Tax Impact On Business Electricity Customers

One VGS-certified biomass power plant refused to allow her around, though staff there reported a number of concerns such as trees being chopped down and sold to the plant, which was designed to run on agricultural wastes. Even if offset projects do work as advertised, some environmentalists argue that they're still a bad idea.

If we're to tackle climate change, they argue, the projects being rolled out by offset companies should be happening anyway, funded by governments around the world, while companies and individuals reduce their carbon footprints directly. Only in this way — by doing everything possible to make reductions everywhere, rather than polluting in one place and offsetting in another — does the world have a good chance of avoiding runaway climate change, such critics claim.

On the other hand, some carbon-neutrality advocates suggest offsetting carbon-intensive activities such as flights two or three or even ten times over. This, they argue, allows individuals not just to stop their total carbon footprint from going up, but actually to make it fall.

Many people are confused by the low prices of carbon offsets. If it's so bad for the environment to fly, can a few pounds really be enough to counteract the impact? The answer is that, at present, there are all kinds of ways to reduce emissions very inexpensively.

Singapore Will Levy a Flat Carbon Tax on Companies Starting Next Year

That's not to say that offsetting is necessarily valid, or that plugging in a low-energy lightbulb makes up for flying. The point is simply that the world is full of inexpensive ways to reduce emissions. In theory, if enough people started offsetting, or if governments started acting seriously to tackle global warming, then the price of offsets would gradually rise, as the low-hanging fruit of emissions savings — the easiest and cheapest "quick wins" — would get used up.

Another frequent point of confusion about the cost of offsetting is that different offset companies quote different prices for offsetting the same activity. There are two reasons for this. Second, different types of offset project will inevitably have different costs — especially given that projects may be chosen not just for the CO2 impacts but for their broader social benefits. Predicting carbon prices requires navigating and critically reviewing data and analyses from climate experts, research institutions, peer companies, and environmental agencies.

Forecasts produced by academics and government analysts are based on assumptions that are difficult for nonexperts to fully gauge. And relying solely on the estimates disclosed by peer companies may lead to groupthink effects and biased forecasts. Companies need to develop in-house expertise or rely on external professionals to identify the likely evolution of public policies and associated carbon prices. Ideally, they should project not only the level of prices but also the timeline of their changes, the extreme values that could be reached, and the probabilities attached to each possible scenario.

An essential part of setting an internal carbon price is anticipating not only the most likely level of external prices but also the consequences of possible extreme prices.

Key Elements of the U.S. Tax System

When evaluating carbon risk, managers and investors should consider enhancing their valuation approaches by using models based on scenarios and simulations. The standard valuation approach is to estimate future cash flows that reflect the cost impact of the most likely future price of carbon. Scenarios allow more-effective valuations than this standard method does. Scenario-based valuation requires at least two but often three scenarios: a best case, a most likely one, and a worst case. Consider this example: A company evaluates three scenarios.

But we can better judge the upside potential and the downside risk of the investment by weighting each scenario with the probability that it will occur. This scenario-based valuation is clearly more informative than one based on a single ICP. Expanding on this approach, simulation-based valuations focus on the full probability distributions of key variables affecting future cash flows, in lieu of a small set of possible scenarios. Representing the uncertainty over future carbon prices with a probability distribution, company analysts can deliver project valuations that reflect all possible states of the world.

This approach is mathematically complex, but it can be easily handled by common software packages such as Oracle Crystal Ball. With a sense of the likely trajectory of external carbon prices, companies can set their ICPs. This requires a deep understanding of both carbon economics and company operations and strategy. One consideration is the time period that an internal carbon price is expected to cover. It is not uncommon for a company to adopt different prices for decisions with different time horizons.

Department of Energy, and the U. Department of Transportation in many of their regulatory impact analyses over the past decade. Some companies have established specific emissions or carbon-intensity targets. Carefully considered ICPs can help them meet those targets. This price, rather than representing actual outlays today, may reflect the costs the firm expects to be imposed on carbon emissions as public policy and regulations evolve over the lifetime of the investment.

Suppose a firm is choosing among energy sources for a new power plant. Fossil-based energy may be the cheapest option given current regulations, but when a carbon price reflecting likely future climate policies is taken into account, a renewable power source may be more financially attractive. Similarly, shadow pricing may reveal hidden costs related to an investment.

ConocoPhillips reported that after factoring in shadow pricing, it abandoned an investment project that otherwise looked financially worthwhile. Sometimes internal carbon prices are not just hypothetical costs; as we saw with Swiss Re, they can be used to set and then levy an actual fee on business units for their emissions.

The goal is to encourage a shift to low-carbon investments and behaviors, so the ICP must be set high enough to drive the desired change. Companies using this model charge each business unit an amount proportional to the emissions associated with its energy consumption. The fees generated can then be used either to reward the units with the best emissions-reduction performance or to make further investments to green the company. In Microsoft implemented an internal carbon-pricing system that holds business units accountable for their scope 1, 2, and 3 emissions.

If the company has ambitious targets and compensates its managers accordingly against those targets, higher ICPs can be instrumental in achieving objectives. When evaluating investments, a firm can assess the carbon footprint of each option and use its internal carbon price to estimate the potential carbon costs.

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For example, when deciding how to source energy for a new plant, an ICP can be applied to estimate the carbon costs of fossil-based electricity versus renewable sources. The product of the internal carbon price and the expected carbon footprint becomes a financial cost included in the net present valuation of the project.

The use of an internal carbon price enhances the quality of the financial valuation by allowing a more informed decision about production costs such as energy, machines, and materials, assigning them an implicit price that is more likely to increase than decrease over time.

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Michelin intentionally set an ICP higher than the carbon price imposed in Europe and China, with the objective of getting its operations climate-ready both in countries with no climate regulations and in those where existing rules are likely to become more stringent. Climate policies are changing fast, and the regulated prices of carbon can move abruptly.

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Internal carbon prices are useful for gauging the impact of regulatory changes and assessing exposure to carbon risk throughout the supply chain, beyond the operations directly controlled by the company. Managing carbon risk is similar to managing other financial risks such as currency and interest rate fluctuations and compliance risks. In jurisdictions that have cap-and-trade systems, power plants and factories must pay for allowances that grant them the right to emit carbon.

Higher carbon prices make it more expensive for utilities to burn fossil fuels, thus encouraging a shift to cleaner sources of power. Utilities are hedging their exposure to rising carbon prices through energy investment decisions and carbon-allowance transactions, including the purchase and banking of allowances for use in the future, when allowance prices are expected to be higher.

Internal carbon prices provide guidance for the hedging strategies of many utilities.

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  7. The U. Nevertheless, the U. On any moral calculus, the United States bears a heavy responsibility to cut emissions massively and rapidly. The potential carbon tax burden on low and moderate-income households can be averted by returning the tax proceeds to Americans. Shifting the tax burden to pollution and pollution-generating activities will create powerful incentives to use less energy and emit less CO2 while simultaneously promoting tax equity and minimizing the impact of the carbon tax on those with lower incomes.

    Energy standards have improved energy performance by forcing product design changes in critical sectors such as major appliances and U. Standard-setting takes a long time, however. Moreover, standards tend to be static whereas energy use is ever-evolving. Combining carbon taxes with efficiency standards will achieve far more than the latter alone by motivating manufacturers and builders to proactively maximize energy efficiency while giving consumers ongoing incentives to make cost-effective choices valuing efficiency in shopping, traveling and purchase of homes and other durables.

    But energy efficiency is just as vital. Unfortunately, subsidizing efficiency is impracticable due to the distributed and dispersed nature of energy efficiency investments and choices. Of course we should zero out tax breaks, lease loopholes and other giveaways to the fossil fuel industry, along with the bloated and unsupportable ethanol mandate. But the impact on U. Do the math: withdrawing those subsidies would lead to at most a percent rise in the market prices of fossil fuels — scant incentive to reduce their use and concomitant emissions of CO2.

    Market signals are too volatile in the short term and too weak in the long term to provide the incentives needed to rewire the U. Moreover, high prices alone, whether due to geological depletion or plain old gouging, line the pockets and magnify the political power of the energy industry and ravage the poor and middle class. Only carbon taxes combine market correctives with protecting American families and our environment. Why not let technology remove carbon pollution from coal-fired smokestacks? Rather than take positions on competing technologies, CTC works to remedy the market failure that allows burning of gas, oil and coal without charging for the resultant climate damage.

    In any event, every serious carbon tax proposal has a provision to credit working CCS systems via a rebate or netback for CO2 demonstrably sequestered from release to the atmosphere. You bet. According to our own modeling, Rep. Any flat tax is regressive, but the regressivity of a tax on carbon pollution could and should be minimized or even reversed by making sure a fair share of tax revenues flow to the less affluent. The key is that wealthier households use more energy, on average — they drive and fly more, have bigger and sometimes multiple houses, and buy more stuff that requires energy to manufacture and use.

    Another progressive approach is to rebate the carbon tax revenues equally to all U. Because income and energy consumption are strongly correlated, most poorer households will get more back in rebates or tax savings than they pay out in the carbon tax. Impacts of carbon taxes on poor families can be lessened by: 1 progressive tax-shifting as just described; 2 pro-rata distribution of the carbon tax revenues to every U.

    A lot, if taxes on carbon pollution rise briskly enough to have the needed climate impacts. We estimate that this brisk rise in the cost of CO2 pollution will reduce U.