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Jan. 21, 2016

Green Supply Chain News: Programs to Put a Price of Carbon have been Growing in North America, but What will Happen After Paris Accord?


Canadian Provinces Looking to Join California Exchange, as Systems Function Technically, but are They Really Effective? Impact on Supply Chains Still Low

By The Green Supply Chain Editorial Staff

As we reported in December, there was much self-congratulation among participants in the 2015 UN Climate Summit in Paris, after nearly 200 countries agreed to reduce their future CO2 emissions by varying amounts. The total pledges for CO2 reduction will lead to rising temperatures of 2.7 degrees Celsius, according to UN climate models, which is above the stated goal of no more than a 2-degree increase but still much less than the 4-5 degree rise some predict if CO2 emissions are not reduced substantially.

But critically for the practice of supply chain, the UN agreement did not bind participating countries to any program that would put a price on carbon, either through a direct tax on CO2 sources or through a cap and trade type of scheme.

The Green Supply Chain Says:
While some US companies are said to consider potential CO2 costs in their analysis today, this is termed a "shadow cost" because it is not yet real, only used to sort of illustrate a "what if" scenario

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The Kyoto agreement of 1997, for example, did commit participating countries - which included Japan, Canada and European Union members - to join a global cap and trade program. The United States signed the agreement, but it was never brought forward for approval by the Senate as a treaty, and thus the US was never part of the exchange.

So, while the US submitted ambitious goals to the UN, promising to reduce CO2 emissions 26-28% by 2030, how it will achieve those targets is still very unclear. And whatever methods are used - and indeed the targets themselves - are subjected to change based on who sits in the White House and who controls the Congress.

As has emphasized many times, whether there is in fact a real enforced cost on carbon emissions or not will have a fundamental impact on supply chain decisions and priorities. Without a real externally imposed cost, then how and if a company wants to pursue CO2 emissions remains under its own control. With a legally imposed cost, there arises a real financial impact for emitting CO2, which now has to be formally included in supply chain decision-making, as would any other supply chain cost element.

In fact, a true cost for carbon would actually improve the ROI for most Green supply chain initiatives.

While some US companies are said to consider potential CO2 costs in their analysis today, this is termed a "shadow cost" because it is not yet real, only used to sort of illustrate a "what if" scenario for what costs could look like in the future if the US does impose a real cost on emissions. Since it is a made-up number and simply an estimate of what those costs might be, not surprisingly the costs companies use as the shadow price vary widely across different companies. (See Growing Number Using Internal Carbon Pricing, but Details Vary Widely.)

Nevertheless, slowly but surely local or regional governments in the US and Canada are imposing carbon costs using one of two methods. The simplest and what many argue is the most efficient is to use a direct tax on CO2 sources, such as oil or refined products such as gasoline and diesel, as well as natural gas and coal. Producers are required to pay that tax based on the tons of CO2 emissions their products will create.

Those taxes are in general then passed on to customers, and the higher prices should act to reduce usage of each CO2 source. In addition, a carbon tax should push users to fuels that create less CO2 - such as natural gas instead of coal at a power plant - as the cost of the higher CO2 fuel rises more rapidly due to the tax.

The other alternative is a cap and trade scheme, where a government issues a fixed amount of permits for CO2 emissions, which are then traded on an exchange. Buying those permits adds to the cost of producing CO2 in any sort of operations, whether it is a utility, a manufacturing plant or a refinery, discouraging consumption, though some very CO2 efficient companies may actually be able to make big money permits from selling permits they don't need as a result of carbon efficiency.

Over time, the government decreases the number of permits available, and in theory thus reduce total CO2 emissions. How well these "cap and trade" programs work though is subject to some debate, with European countries, for example, reluctant to reduce permits in ways that would make their companies less competitive, and reports of rampant "carbon fraud" in which some entities created fake or dubious carbon offsets that were then sold on the exchange for huge profits.

In fact, in mid-2016 the Stockholm Environment Institute issued a reporting saying that as many as 80%of emission reduction units, or ERUs, created under the Kyoto Protocol that had "questionable or low environmental integrity."

Programs in the US and Canada

In the US Northeast region, a program called the Regional Greenhouse Gas Initiative was implemented in 2008 and deals with emissions from power plants in nine states that include Connecticut, New York and Massachusetts. It uses a cap and trade system, but only for power plants. In the December, auction, permits sold for about $7.50 per ton.

How successful has the program been? There are mixed reviews. CO2 emissions from power plants have dropped substantially among member states, but that is primarily due to utilities switching from coal to cheaper natural gas as fuel, rather than the program itself.

California launched a more expansive cap and trade program in 2012 that at first impacted utilities and several hundred large manufacturing sites, and then also fuel distributors starting in 2015. Emission permits in California have recently been trading at about $13 per ton.

Has the California program worked? It seems to be functioning efficiently, from a technical perspective. But the impact is limited, because most if the permits are given away by the state for free. A report by the state said the program had reduced CO2 emissions by a modest 2% by 2014. Business groups continue legal action against the program, saying it makes California uncompetitive versus other states, while other groups say the program will add as much as 50 cents to the cost of a gallon of gasoline by 2020, though others say the extra cost will be much lower.


The province of British Columbia has placed the highest price on emissions in North America, taxing a ton of carbon emitted at 30 Canadian dollars, or about $21. The program there started in 2008, and is estimated to have increased the price of gasoline about 17 cents per gallon. A nice feature of this program is that it is revenue neutral, meaning the increase costs, collected as taxes, that consumers and business face is offset by reductions in other taxes. Many experts have long argued this revenue neutrality should be a key pillar of any programs that put a price on carbon.

Most governments, however, would rather use the new revenue for other purposes, such mass transit, energy efficiency, renewable energy and other strategies that have some connection to reducing carbon emissions.

Meanwhile, Quebec has actually joined the California program. In recent months, leaders Ontario and Manitoba have said they will also join the California-Quebec system. Government leaders in Alberta, Canada's biggest oil and gas producer, announced in November that the province would impose a tax of 30 Canadian dollars on most greenhouse gas emissions by the start of 2018.

Will other states and regions jump in as well? That remains unclear, and of course depends hugely on whether any sort of national scheme gets off the ground. That in turn depends quite hugely on election results in both the short and long term.


Oninteresting question is how funds generated from a national program of either a direct tax or cap and trade program would be disbursed? Right now, for example, California keep control of its own CO2 revenues, and may not have much interest in a federal program getting in the way of that.

As always, follow the money.

Our take: most of these programs are functioning fairly well - but have not yet placed a real burden on companies and consumers that would inflict heavy added costs that those in other states don't share, and thus have not yet had a material impact on reducing CO2. If it gets to that point, the pushback by voters may be a lot more substantial.

Do you think we will wind up with a national cost for CO2 at some point? What will happen if the cost actually do become painful for business and consumers? Let us know your thoughts at the Feedback button below.

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