To date, there are more than 60 countries and regions that have implemented or passed legislation for carbon pricing, including Taiwan. It will implement a carbon tax and trading scheme in 2030 as part of its goal to reach net-zero emissions by 2050.
Both, in essence, are to reduce CO2 emissions. By introducing a carbon pricing mechanism, businesses will incur less in the long-term when they invest in cleaner options, if it is cheaper than being taxed. A CO2 emissions trading scheme, in contrast, is to create a carbon market. Companies buy and sell the 'right to pollute' from each other.
Dr. Chao-ning Liao, an economist and the director of double specialty programs of management and technology at National Tsing Hua University, Taiwan, disagrees with his peers and believes that carbon offsetting is more cost-effective than carbon pricing.
This begs a question: "Why is a carbon offset more cost efficient than carbon pricing?"
Before discussing more carbon pricing and carbon offsets, it is important to first know the definitions.
Definition of carbon pricing, offsetting, and trading | |
Term | Definition |
Carbon tax | Carbon tax is generally levied on fossil fuels. |
Carbon pricing | Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions. For instance, the costs of emissions that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise. By bidding them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted. |
Carbon offsetting | An offset project is "a specific activity or set of activities intended to reduce GHG emissions, increase the storage of carbon, or enhance GHG removals from the atmosphere." The project must be deemed additional; the resulting emissions reductions must be real, permanent, and verified; and credits (i.e, offsets) issued for verified emissions reductions must be enforceable. |
Carbon trading | Carbon trading is the process of buying and selling permits and credits that allow the permit holder to emit carbon dioxide. |
Source: World Bank and World Economic Forum. Compiled by DIGITIMES Asia, July 2022.
Setting up the 'most' optimal carbon pricing rate
"I think the most challenging part of using such a carbon tax policy is setting up the optimal carbon pricing rate," Liao said.
When considering what the pricing rate should be, people will often point to both a high and low pricing rate. If one set the pricing rate too low, the country might not be able to achieve its desired reduction target. And if one set it too high, the outcome can hurt its economy.
It may also be difficult to quantify the costs of CO2 emissions in monetary terms because that's not an easy task. This leads to many debates about how to correctly calculate the costs of CO2 emissions. The following are the phenomena:
Debates about how to correctly calculate the costs of COS emissions | |
Entity | Description |
The government | They often want to raise carbon pricing rates, but people don't always want to pay more. |
Businesses | They prefer a very low carbon pricing rate. |
The environmental group | They always want to set a very high carbon pricing rate. |
Source: Liao
"These three groups should set the carbon pricing rate together and try to reach a consensus," he emphasized. "Although they did reach an agreement eventually, it doesn't mean that the final agreement is the most optimal carbon pricing rate."
He continued, "From an economic perspective, information such as the damage cost of CO2 emissions and the cost of CO2 reduction by polluters is required for finding the optimal carbon pricing rate."
"Access to this kind of information for policymakers, however, is not always easy, as it is often unseen," he added.
Does carbon pricing hurt gross domestic product (GDP)?
One of the most frequent problems in life is nailing down short-term goals while forgetting about long-term benefits. This especially occurs when dealing with climate measures like carbon pricing.
"In the short term, undeniably, the production and consumption decline on the household and company level translates into lower GDP growth," Liao answered. "But in the long term, I think it might actually have a positive impact on our GDP."
"We will see more investment in emission-efficient technology, demand for investment goods increases and creates new jobs.," he continued.
Therefore, it is important to have continuity when it comes to people's mindsets.
Does carbon pricing hurt the semiconductor industry?
Narrowing down from the macro level to the micro level, Liao believes that there will still have certain impacts on the semiconductor industry in Taiwan.
"As you know, the semiconductor industry uses a lot of electricity. Indeed, the carbon pricing will raise the electricity price of the entire chain," he said. "But I'm not that worried about its impact on this industry."
Taiwan is one of the top lines to gain more knowledge on that same level in the semiconductor industry. A zero-sum game, meaning technology is a constant flow. The semiconductors companies can share some of the burdens of carbon pricing with their customers. In other words, the companies will raise their product prices as production costs increase.
Vision is everything
Carbon offsetting, unlike carbon pricing, a government-level initiative, is voluntary. This means firms are more likely to be more specific about their targets and how they're striving for a greener future.
More specifically, carbon offsetting allows the firms within an economy to buy and sell CO2 emission allowances, giving them flexibility in how they meet their emission reduction obligations.
"The government, in turn, could use this carbon trading data to plan for net zero emission and make informed decisions on how to combat it in the future," Liao said. "But, without this advantage, carbon pricing is not a cost-effective policy."
This raises another question, "Is carbon offsetting unethical?"
A carbon offset is ethical
British Airways, for example, partnered with non-profit organization Pure Leapfrog so their customers can calculate and offset their carbon emissions if traveling outside of the UK, making the company's flight carbon neutral.
However, who is using offsets, and how many, is often unclear. There is no requirement for buyers to disclose this information.
Many people criticized offsets as "a license to pollute" and they represent "a bad use of money" that would be better spent on efforts to cut emissions.
Several private sector initiatives have been established hoping to transform the offsets market from a fragmented and mistrusted system into something that traders at a bank would recognize.
"The Taiwanese government should consider introducing the Voluntary Carbon Markets Integrity Initiative (VCMI) to companies. VCMI, for instance, has set three tiers of claims: Gold, Silver, and Bronze. This will help prepare Taiwan for achieving Net Zero by 2050."
What is the Provisional Claims Code of Practice by VCMI?
Developed by the Voluntary Carbon Markets Integrity Initiative (VCMI), the Provisional Claims Code of Practice was launched last July in response to the carbon offsetting debate.
The objective of the Claims Code is to standardize definitions and reduce greenwashing in the voluntary carbon market.
More specifically, the Claims Code is a four-step process in companies must follow to make credible claims. The steps are as follows:
Claims Code of Practice by VCMI | |
Step | Description |
1 | Meet the pre-requisite - Make a public commitment to achieve science-aligned long-term net zero emissions no later than 2050, covering Scopes 1, 2, and 3 - Set and make public interim emission reduction targets - Provide detailed information on the plans and strategies adopted to achieve their targets - Maintain a publicly available greenhouse gas emissions inventory - Make a public statement declaring that the company's advocacy activities — either individually or through trade bodies of which it is a member — are consistent with the goals of the Paris Agreement and do not represent a barrier to ambitious climate regulation. |
2 | Identify claim to make - Enterprise-Wide Claims - Brand-, Product-, and Service-Level Claims |
3 | Purchase high quality credits - Associated with a recognized and credibly governed standard-setting body - High environmental quality. - From activities that, where relevant, are compatible with human rights; promote equity, apply social safeguards, demonstrate positive socioeconomic impacts; and contribute to the protection and enhancement of environmental quality. |
4 | Report transparently on the use of carbon credits - To substantiate a claim, transparent reporting of information is essential. |
Source: VCMI. Compiled by DIGITIMES Asia, July 2022.
Conclusion
"If I plant just one tree in my backyard and it is not healthy, can I use the CO2 from this unhealthy tree to offset someone else's?" Liao asked.
"This will create another problem," he answered.
In different words, if a country utilizes more lenient rules or easier regulation, it will reduce the burden on its businesses. This means that the businesses won't be directly affected by any changes in regulation.
"I believe this kind of VCMI scheme will be beneficial. The incentives presented to us by the government and our businesses will help us reduce CO2 emissions while not hurting our net zero targets," he added.
About Chao-Ning Liao
Chao-Ning Liao, Ph.D., is currently director of the Double Specialty Program of Management and Technology at National Tsing Hua University, Taiwan. He has written many scholarly papers on topics including permit trading and groundwater use control. His most recent net zero project is "how different trading rules might affect potential cost-saving of implementing a permit regulation policy."
Editor's Note:
Many countries have set a goal to achieve their net zero targets by 2050. DIGITIMES Asia Net Zero Series interviewed major companies, economists, and solution providers to provide companies with complete guidelines to implement their net zero plans.
