Day seven: Environmental economic policies

1. Has the policy adapted by the UK and US with regards to biofuels contributed to price inflation?

France, Germany, The United Kingdom and The United States governments have supported biofuels with tax breaks, mandated use, and subsidies. These policies have the unintended consequence of diverting resources from food production and leading to surging food prices and the potential destruction of natural habitats. A World Bank policy research working paper concluded that biofuels have raised food prices between 70 to 75 percent.

2. The US imposes tariffs on sugar cane from Brazil which is the most energy efficient form of biofuel and subsidies corn production which is inefficient – is this an example of government failure?

Report of OECD is also critical of limited reduction of GHG emissions achieved from biofuels based on feedstock used in Europe and North America. It is stating that the current bio-fuel support policies would reduce greenhouse gas emissions from transport fuel by no more than 0.8 percent by 2015, while Brazilian ethanol from sugar cane reduces greenhouse gas emissions by at least 80 percent compared to fossil fuels.

It is therefore huge misallocation of resources, not to use the more efficient Brazilian ethanol. Hence a government failure.

3. What are the major environmental policy objectives of the EU?

sustainable development
Promote renewable energy
Market incentives should have a role to play
The precautionary principle should apply:
Fiscal harmonization to achieve environmental goals
Reduction of the CO2 in the atmosphere
making the polluter pay

4. What factors explain the 50% growth in fuel consumption by cars and trucks in the EU in between 1985 and 2004?

Because of the growth in consumption in China and India, because of the fall of the USSR – that also increased the demand. Moreover there was an overall increase in the road infrastructure, especially in so called ‘new Europe’ and developing countries such as India and China.

5. What is the Kyoto Protocol and how likely is that the EU will reach its 2012 emission target?

The Kyoto Protocol establishes legally binding commitments for the reduction of four greenhouse gases. The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC or FCCC), an international environmental treaty produced at the United Nations Conference on treaty is intended to achieve "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system."

According to the protocol of the United Nations Framework Convention on Climate Change, countries should reduce their emission of greenhouse gases to 5% below the 1990 level by 2008-2012. The EU and its Member States have committed themselves to an 8% reduction.

It was unlikely that the EU is going to manage to reach the target. However, after the credit crunch and the recession, as the output fell in most of the countries, it is much more likely to happen. On the other hand the transport, especially cars and trucks are producing more CO2 than it was planned.

6. What is the CAP policy with regards to set aside land and biofuel production?

In 1990 the set aside plan was introduced. It was commitment of the agricultural workers to set aside 10% of their land, to reduce the overproduction. As the biofuels were introduced, farmers were encouraged to start to use their land which was earlier set aside.

7. What are ‘energy crops’ and what policies have the EU put in place to encourage production of these products?

Fuel for agricultural use often does not have fuel taxes (farmers get duty-free petrol or diesel fuel). Biofuels may have subsidies and low/no retail fuel taxes. Biofuels compete with retail gasoline and diesel prices which have substantial taxes included.

8. What is the EU emissions trading scheme (ETS)? What is the ‘second stage’ of the ETS that is running from 2008 to 2012?

ETS is the largest in the world emission trading scheme. Under the EU ETS, large emitters of carbon dioxide within the EU must monitor and annually report their CO2 emissions, and they are obliged every year to return an amount of emission allowances to the government that is equivalent to their CO2 emissions in that year.

It operates in system of marketable pollution permits. The producers, whose industry is emitting CO2 or other environmentally dangerous gas is obliged to pay a pollution permit. It has to buy proportional amount of those emission allowences in order to legally produce. Emission allowances for any plant operator subject to the EU ETS are given out for a sequence of several years at once. Each such sequence of years is called a Trading Period.

The second phase is planned change in the policy, which is going to expand the scope of the plan significantly. It will be introduced between 2008 ad 2012. The pollution permit program will include aviation industry which is the most polluting industry, and the most quickly growing industry. The inclusion of aviation is estimated to lead to an increase in demand of allowances about 10-12 million tonnes of CO2 per year in phase two.

Three non-EU countries are going to be included, Lichtenstein, Norway and Iceland.

CDM (Clean Development Mechanism) and JI credits are expected to be introduced in second phase through the EU's 'Linking Directive', although it has been agreed that schemes can be started in advance during Phase.

9. Using a supply and demand diagram illustrate how the price of carbon permits is determined and how it might change over time?

The market forces determine the price of carbon permits. Given that there is a limited supply of the pollution permits, and the European commission is not likely to increase their amount and the demand is going to rise, the diagram representing the price of carbon permitis is going to look like that:



10. How will a reduction in the number of tradable permits under the ETS ‘stimulate the investment into low carbon energy’?

It will provide an incentive to reduce the amount of emitted CO2 for two reasons.

It will firstly force to reduce the emission so the producer wont have to buy pollution permits. If he reduces emission enough, he will be able to sell remaining pollution permits, which another incentive to reduce the amount of emitted CO2.

Jan Beaupre