Operational Cap And Trade And The Benefit Of Offsets

Offsets may be included in cap and trade schemes at both the global and national levels. An offset is a project initiated by a country or a company that will decrease emissions in another location or jurisdiction. Offsets encompass a range of projects, including the substitution of low emission fuels, the introduction of renewable energy to replace electricity from coal

Note: Trade is between an emitter with high cost of abatement and an emitter with a low cost of abatement under a mandatory cap and trade scheme with offsets. The two firms each emit 100 units, but the total of allowances issued is 160 units. After abatement, trading and offsetting, the two firms hold 160 allowances and so comply with the 20% cut at the lowest possible cost.

Note: Trade is between an emitter with high cost of abatement and an emitter with a low cost of abatement under a mandatory cap and trade scheme with offsets. The two firms each emit 100 units, but the total of allowances issued is 160 units. After abatement, trading and offsetting, the two firms hold 160 allowances and so comply with the 20% cut at the lowest possible cost.

Figure 1.2 A two-firm model of trade in CO2e emission allowances fired power stations and the sequestration of carbon by afforestation or reforestation. The emissions offset, by reduction or capture, can be claimed by the project initiator, be it country or company, against its allowances.

The motivation for undertaking projects by governments or companies is the desire to reduce the cost of compliance where offsetting a tonne of CO2e is cheaper than abatement. Under the Kyoto Protocol's CDM the motivation can also be to capture co-benefits such as sustainable development in the country in which the offset project is initiated.

A representation of the hypothetical trade in allowances between two firms and the use of offsets is shown in Figure 1.2, demonstrating how the firms make decisions that result in their compliance with the overall cap.

Table 1.2 shows the financial results of the same trade between the same two firms, A and B. Each firm saves money by trading allowances or purchasing offsets. Each has an obligation to meet the requirement at the end of the compliance period. A has a marginal cost of abatement of $10 per unit of reduction of CO2e but, instead of abating 20 allowances, purchases additional allowances from B and also purchases offsets at a relatively low cost. B

Table 1.2 A two-firm model of trade in allowances

A. High Cost of Abatement

• Allowances at start 100

• Must purchase, offset or abate = or > 20 allowances

• Marginal cost of abatement $10 per allowance

• Limit to offsets 5 allowances

• Fine for purchases plus offsets < 20 is $20 per allowance < 20 Record of emission trading and change in allowances for A

Number

Price $ per allowance

$ cost

1

Allowances start

100

-

-

2

Allowances purchased from B

15

-7.50

-112.50

3

Allowances offset

5

-6.50

-32.5

4

Allowances abated

0

0

0

5

Allowances traded

20

-7.25

-145

6

Fine (20 - (15 + 5))*20

-

-

0

7

Total costa

-

-

-145

8

Allowances finish 100 + 15 - 5

110

-

-

9

Total cost without tradea

20

-10.00

-200

B. Low Cost of Abatement

• Allowances at start 100

• Must abate (less allowances sold) = or > 20 allowances

• Marginal cost of abatement is $5 per allowance for first 30 allowances, and $7.50 thereafter

• Fine for abatement less sales <20 is $20 per allowance <20

Record of emission trading and change in allowances for B

Number

Price $ per allowance

$ cost

1

Allowances start

100

-

-

2

Allowances sold to A

15

7.50

112.50

3a

Allowances abated @ $5.00

30

-5.00

-150.00

3b

Allowances abated @ $7.50

5

-7.50

-37.50

4

Allowances abated less allowances

20

-3.75

- 75

sold

5

Fine (20 - (35 - 15))*20

-

-

0

6

Total costa

-

-

- 75

7

Allowances finish 100 - 15 - 35

50

-

-

8

Total cost without tradea

20

-5.00

-100

Note: a Both firms achieve a lower cost of compliance by trading.

Note: a Both firms achieve a lower cost of compliance by trading.

sells allowances to A at a price above its marginal cost of abatement, which rises as it abates more. B must abate 35 allowances, given that it sells 15 to A, but in doing so saves $25 because of its low cost of abatement relative to the sale price of allowances. Both A and B comply with the mandatory requirements and escape fines. The total of allowances held by A and B at the end of the period is 160, which corresponds to an overall reduction of 20 percent.

In this example the use of offsets is limited. This reflects the common practice of limiting access to offsets, thereby reducing the fear that a flood of cheap offsets into the market will lower the price of allowances and discourage abatement by emitters.

Getting Started With Solar

Getting Started With Solar

Do we really want the one thing that gives us its resources unconditionally to suffer even more than it is suffering now? Nature, is a part of our being from the earliest human days. We respect Nature and it gives us its bounty, but in the recent past greedy money hungry corporations have made us all so destructive, so wasteful.

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