Carbon Tax Pricing by Futures Contracts by OceanSolutions
Futures contract pricing for the carbon tax provides the most accurate price and would be combined with tax and investment credits.
Our purpose for using a carbon tax is for the pricing of fossil fuels to reflect their true cost while providing an approach that allows generators a window for mitigation. Our approach is to drastically lower carbon dioxide emissions, not punish utility companies. We will continue to need their electricity production. We need to learn from Australia's repeal of their carbon tax that punished carbon dioxide producers instead of reducing carbon dioxide production in a sensible manner. Solving the problem with our methodology will lower the risk of electricity proce inflation compared with unfriendly business strategies. The carbon tax will be offset by a tax credit to ease the burden of the transition. In addition capital spending for collection and sequestration will be eligible for an investment tax credit. Both tax initiatives will expire along with the futures contract in 5 years for a specific facility.
A futures contract allows a fixed price for carbon dioxide equivalent emissions to last for a specified length of time. The seller would be the US government while the intended buyer is the carbon dioxide generator who must pay the carbon tax until carbon dioxide is collected and sequestered. The futures contract would set a fixed price for the duration of 5 years.
Since the carbon collection and sequestration market is just beginning, products, processes, and infrastructure need to be developed. Implementation measures will require permitting, capital projects, and supp;ies of specialized fluids to make them work.
Category of the action
Mitigation - Helping U.S. enact carbon price legislation
What actions do you propose?
- Establish a futures contract as the trading unit for carbon tax transactions. Each contract will have a 5 year life after which it will expire, worthless. It will represent the best information available to market makers on the futures exchange about the environmental cost of producing carbon dioxide equivalents from fossil fuels. Market makers will set the price of the contract. Since the contract will trade freely in the secondary market new price information will become available continuously. Each contract will represent one million metric tons of carbon dioxide equivalents (US).
- For affected production at any given time carbon dioxide above a minimum threshold must have a futures contract(s) to cover the quantity produced. During a 5 year period that begins with the futures purchase, companies are able to take advantage of tax and investment credits to lower their costs of compliance and implementing capture and sequestration processes. If mitigation measures are not in place at the end of 5 years both tax and investment credits expire while the companies must continue to own carbon tax futures while carbon dioxide is generated at a specific facility. The EPS monitors such facilities and will report violations.
Who will take these actions?
- The US government through the Treasury will prepare the carbon tax futures contract and form a relationship with a futures exchange of their choosing to offer the futures contracts for sale. athey will also furnish an accounting of futures contract holdings by carbon dioxide producers.
- The US government through the EPA will furnish an accounting b facility of carbon dioxide generation and provide information on mitigation efforts being undertaken.
- The US government through the IRS will assemble information from the Treasury and the EPA to perform an accounting to verify that tax and investment credits are being used correctly.
- If carbon dioxide generators do not take remedial actions within the prescribed period of time they will be automatically penalized. If company response is chronically poor the EPA would be empowered to close facilities on a case by case basis.
Where will these actions be taken?
The carbon tax for this proposal applies only to US production of carbon dioxide. Most of the activity will take place at locations throughout the US. Although the US government's role is important the reduction of carbon dioxide emissions occur at industrial plans throughout the country.
The most insive activity will be in the states with the worst air quality. They will benefit the most from carbon dioxide reduction measures. We have tried to careful to provide tax and investment credits to enable the financing of mitigation measures without electricity and other price increases that would harm economic growth.
An important issue arises with cross border trading. US based global companies must obey the carbon tax laws that prevail at their manur fo a trading partner. These differences may be resolved with tariffs although this can be difficult when the carbon tax fluctuates.
A US carbon tax futures contract could become an important cross border trading in goods tool and become known as a global benchmark. Important characteristics of the futures contract are standardization, trading history, and liquidity. They are financial tools that can be used for risk reduction. The widespread use of these tools for cross border purposes depends upon the standardization and liquidity of comparable contracts throughout the world. Other countries should consider the futures contract model much as they already do for their currencies. If they did the world would become a simpler place and one where we all stand to benefit.
How much will emissions be reduced or sequestered vs. business as usual levels?
Overall carbon dioxide equivalent emissions were about 6,500 million metric tons in 2012 of which 5,500 million metric tons was carbon dioxide with the remainder being methane and nitrous oxide (3). Projecting out to 2040 the mix of source fuels for US electricity generation is projected to change, but still be dominated by coal and natural gas (2).
The US does not currently have and industrial scale (500+ MW) Clean Coal Power Plants operating. As a result we have no good way to accurately estimate the cost of carbon dioxide reduction technologies.
The Union of Concerned Scientists has recommended that the US reduce its carbon dioxide emissions by at least 80 percent by 2050. Expressed another way, 4 percent per year reduction should take place. The quantity of carbon dioxide equivalents to be reduced annually in the US is 260 million metric tons. Our solution would run for 15 years. Between 2016 and 2031 carbon dioxide could decline by 60 percent assuming financing is in place.
What are other key benefits?
- Our approach targets and will deliver carbon dioxide reduction through a revenue neutral approach that is friendly to the environment, business, government, and the economy.
- The use of futures contracts should be familiar to the US government as well as the affected companies. Futures markets, especially in the US, offer high;y liquid markets to facilitate transactions. In addition to the government and carbon dioxide generators other kinds of participants such as market makers, speculators, hedge funds, and industrial companies may be active. This kind of liquidity promotes ease of trading and effective price setting.
- With futures contracts participants can engage in trading strategies such as hedging, calendar spreads, and arbitrage to provide risk reduction.
- An easily tradable futures contract allows arbitrage trading of carbon tax contracts and could be applied to cross border trading of goods.
What are the proposal’s costs?
There are two types of costs: those those to create and administer the carbon tax futures contract which we consider to be minor and the cost of reducing carbon dioxide generation which we believe to be major and controlling.
The cost to create the futures contracts should be less than $ 5 million. An increase in government staffing to administer the program should cost less than $ 20 million annually.
Since power plants represent the core of the carbon dioxide problem we will confine our comments to this industry. In the US combined electricity produced by coal, natural gas, and petroleum was 67 percent of the total in 2013 (1). Electricity generated by renewable energy was 13 percent including 4.36 percent for solar,and wind. The carbon tax will improve the merits of renewable technologies relative to fossil fuels, but we will still need fossil fuel generation for decades to come. Within the next decade carbon dioxide production must come down through reductions in the amount generated by fossil fuels.
Carbon capture and sequestration are the technologies to remove carbon dioxide from power plants\ flue stacks. The costs for capital investment and operating expenses for these technologies will be borne by fossil fuel based power companies. These costs will likely be the controlling factor for carbon dioxide reduction over the next decade and longer. Any carbon tax proposal MUST be friendly for electric utilities to implement solutions or no meaningful improvement can be made.
The timeframe begins when a carbon price methodology is agreed upon and enacted into law. From beginning at least one year will pass before implementation of the carbon tax and incentives for carbon dioxide capture and sequestration are required.
The rate of implementation will be 10 percent per year. Each 10 percent increment will have 5 years to place into service carbon collection and sequestration systems. After that time has elapsed the tax and investment credits will no longer be available for that particular increment or facility.
The total time allowed by this proposal is 15 years. If 4 percent of carbon dioxide generation can be retires each year, the total amount amount of the reduction will be 80 percent from the starting point. The controlling factor will be the ability of US carbon dioxide generators to afford this rate of reduction.
- http://www.ucsusaorg/assets/documents/global warming/emissions-target-factsheet.pdf