3. CO2 equivalent Emission and Carbon Tax
Green Logistics projects reviewed in 2.2, such as the solar panels installation on a warehouse considered in the study, have a positive environmental impact. They reduce the emission of CO2e in the atmosphere slowing the global warming. To further mitigate the global warming issue, a financial cost for CO2e must be set. A carbon price will reward companies doing effort to reduce their emission while punishing the ones neglecting their environmental impact. There are several ways to price carbon dioxide emissions such as carbon tax, cap and trade, carbon trade, and carbon credit. The carbon tax is simpler and more easily integrated in investment models compared to the other types of carbon pricing. Being one of the main components of the cash flow in the model being developed, the carbon tax is an important aspect to be analyzed. Its goal is to “drive emissions reduction and mitigate the risks posed by climate change” (Aldy, 2017). Implementation of carbon tax has increased a lot in the last ten years and is expected to grow in the near future. “2017 could see the largest ever increase in the share of global emissions covered by carbon pricing initiatives in a single year.” (World Bank, 2016).
Aldy (2017) proposes a model where the price of carbon tax should be alienated with its need to counter the global warming effects. If the consequences of the climate issue are worse than expected, then the carbon tax price will rise. If better than expected, then the carbon tax will reduce. Of course, evaluating consequence of such a global and massive problem can be troublesome but it would be based on scientific research. The trend of new publications and scientific discoveries will orientate the carbon tax. “Some uncertainties about climate changes will be resolved” over time, their conclusions should be included in the carbon tax (Aldy, 2017).
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However, changes in the scientific field are continuous and the price would change all the time.
And “The lack of predictability in the carbon price over time could undermine business and household planning and investment.” (Aldy 2017). The NPV model estimates investment value on project having till twenty years’ time length, sometimes more. The Carbon Tax should be predictable to be included on the model and help to the decision making. A higher certainty will need less risk compensation for a project to be validated and therefore increase its value.
The carbon price is related to three types of uncertainties regarding environment, international relations and economics. Environmental uncertainty is related to the estimation of risks due to global warming. If the risks are under evaluated than the carbon tax will be increased and if risks are overestimated, then it will be decreased. The politics uncertainty relates to the decision time length between necessary changes that can be too long compared with the need to make it.
Therefore, updates are not synchronized with environment conditions.
As the global warming issue affects all countries, it is an international problem that has to be mitigated nationally with comparable effort. Recent agreements are based on initiative over compliance. The condition for success is if first steps are taken and if there is a mutual observance between countries, bringing a virtuous circle of responses toward the global warming issue. There is a need a certain transparency between countries which is currently far to be sufficient (Aldy, 2017), a system of reviews from each country with comparable criteria.
Carbon tax and other carbon pricing methods were put into the latest and most important agreement: “The Paris Agreement lays the basis for facilitating international recognition of cross-border approaches to cooperation on emissions mitigation, including pursuing cooperation through an international carbon market.” (World Bank, 2016).
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To reach the objective of Paris agreement of limiting the increase in temperature of 2 degree Celsius the price of carbon was estimated to “be between US$80/tCO2e to US$120/tCO2e in 2030” (World Bank, 2016). More and more countries set up a carbon tax to fight against global warming. Sweden is currently pricing the highest with $131 per ton of CO2e emitted (World Bank, 2016). When a company implements solar panel installation, the energy got is almost CO2e free, except from CO2 emitted during fabrication and a transformation of components, which is not considered in the model. Solar energy use is CO2 emission free whereas grid energy (regarding the type of energy plants) or diesel generator emits lots of carbon dioxide and equivalents in the atmosphere. With a carbon tax implemented, not emitting CO2 has both environmental and economic value with less gases contributing to the global warming and incremental savings for the company.
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Figure 5: Generation by Fuel Type and CO2 (Adapted from US EPA, 2017)
The number of kg of CO2 emitted by the average energy company per kWh is a local data. It depends the country or even the region the energy grid is located. For example, the Environmental Protection Agency in the USA computed the emissions of greenhouse gases of energy production for the year 2014 for each state. As seen in the Figure 5 above CO2 emission rates strongly vary between states because of their different energy mix. However, in the USA, in 2014, the overall average non-based loaded emitted CO2e is 0.704 kg per kWh of energy (1552.5lbs CO2e/ MWh). For a matter of simplification this number will be used in the simulations to compute the Carbon Tax Avoided in section 5. “Annual non-baseload output
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self-implemented solar panels means reducing the energy consumption of the company from the grid therefore the non-baseload emission rate will be used. The baseload emissions are “the emissions from power plants that run all the time” non-baseload generation are from “power plants that are brought online as necessary to meet demand.” (US EPA, 2017)Moreover, predictability of Carbon tax is crucial, the challenge is to find the right balance between predictability and correctness. A lack of predictability has an adverse effect on investment planning. The Carbon price should be “know for many years into the future” and be corrected regarding environment and international conditions. Stating its variables and explaining them could increase the predictability of the Carbon Tax. An education program to make people sensible to the tax carbon as a measure to counter global warming would increase its acceptance an implementation.
A higher price of energy which is a consequence of Carbon tax is also an argument against it. It would reduce purchasing power of citizens and harm the whole industry. However, the impact of it can be relativized. Oil being the main world energy source with 44% in 1971 and 31% in 2014 (International Energy Agency, 2016), oil price sharp increase have a smaller impact than expected. “A 10 percent innovation in the price of oil is predicted to contract private sector output by about one-half a percent” (Rotemberg and Woodford, 1996). A tax carbon would be bearable for the economy. The tax collected could be used to help technical innovation toward reducing CO2 and equivalents emissions. “It is more important to have substantial R&D subsidies for green technology to kick - start green innovation and fight global warming.”
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(Rezai et al. 2012). Following Aldy’s logic, if innovations mitigates more than expected the risks of global warming then the carbon tax can be reduced, or show a slower increase. The better global warming risks are mitigated, the less needed a carbon tax is.
After estimating its relevance in literature, the carbon tax will be included in the model in Section 4 and its financial impact will be assessed in Section 5.