I. Why has the world started carbon pricing?

The 2015 Paris Agreement called on the world to prevent global temperatures from rising more than 1.5 to 2.0°C above pre-industrial levels. This is because such an increase would carry a high risk of triggering a vicious spiral, such as global warming causing the thawing of Siberian permafrost, which in turn would release massive amounts of methane into the atmosphere, further accelerating the pace of warming. This would mark the tipping point for a global catastrophe. By far, Earth’s temperature has already risen by about 1.1°C, leaving only a 0.4°C margin before reaching 1.5°C. Since every 10 ppm increase in atmospheric carbon dioxide would lead to a rise of 0.1°C in temperature, we are only 40 ppm away from that tipping point.

What does 40 ppm imply in terms of the time we have left? Considering the technology level nowadays, every production of 1,000 USD of GDP requires burning energy equivalent to 180 kilograms of oil, and each metric ton of oil produces 2.4 metric tons of carbon dioxide. Every 7.8 billion metric tons of carbon dioxide increases atmospheric concentration by 1 ppm. To calculate based on the 2021 global GDP of 96.5 trillion USD, we emitted roughly 41.7 billion metric tons of carbon dioxide, which corresponds to an increase of about 5 ppm. Therefore, we will likely enter the high risk range of 1.5 to 2.0°C in about eight years.

This simple calculation reveals the three most important characteristics of global net-zero emissions efforts. First, while net-zero actions to reduce carbon emissions may experience short-term fluctuations, the overall trend is inevitably global. It is not based on moral awakening or ideological commitment, but on the urgent need to mitigate and adapt to impending disasters. Second, the pace and scale of net-zero actions must be sufficient to avoid crossing an irreversible tipping point. This means in the long term, carbon prices in both mandatory and voluntary markets will continue to rise. Third, preventing carbon leakage must be a global effort, which means various carbon border adjustment mechanisms will inevitably continue to be established.
 

II. Global carbon pricing systems

Since the Kyoto Protocol was adopted, the development of global carbon pricing mechanisms can generally be categorized into three types: carbon taxes/fees, cap-and-trade systems, and the voluntary carbon market. The first two operate under mandatory government regulation and carry legal enforceability, hence, they are referred to as compliance markets. The most well known example is the EU Emissions Trading System (EU ETS). In contrast, the voluntary carbon market operates outside government mandates, where carbon credits are traded based on the voluntary emission reduction projects developed by companies or individuals. Because the EU Carbon Border Adjustment Mechanism (CBAM) is part of the compliance market, it does not accept carbon credits from the voluntary market for offsetting purposes, it only accepts legally binding carbon cost offsets, such as carbon taxes/fees or the purchase costs of allowances under cap-and-trade systems. The Climate Change Response Act in Taiwan still remains with some ambiguity on this point, making it a critical issue to be resolved for the future mid- to long-term carbon pricing system.

III. The mid- to long-term direction of carbon pricing in Taiwan

There are two major objectives for carbon pricing. First, to establish a price for carbon emissions and enable price discovery, in order to encourage everyone to internalize external environmental costs. Second, by putting a price on carbon, to allow carbon-reduction (or carbon-negative) technologies to emerge as a new industry, thereby meeting the three characteristics of the global carbon governance framework mentioned earlier. At the current level of technology, the cost of capturing one metric ton of carbon dioxide from the atmosphere is about 55 USD, while the EU ETS price fluctuates between 80 and 100 EUR. According to the estimation by the World Bank, carbon prices must be at least 100 USD to grasp the chance of keeping the temperature increase within 2.0°C. As a result, carbon-free electricity and carbon-negative technologies will become the defining standards for future industries. Taiwan must be sure to master these two technological domains.

Carbon taxes/fees offer price stability, which provides enterprises with the major advantage of predictable accounting costs. In addition, revenues collected from carbon taxes can be used for a wide range of purposes, including transfer payments for social welfare. However, the drawback of carbon taxes/fees is that they cannot guarantee a specific amount of emission reduction. If companies are able to pay or pass on the costs, their emissions would not decrease. Cap-and-trade systems have the opposite strengths and weaknesses. Because the total emissions cap is fixed, the advantage is that the amount of carbon reduction is determined in advance. However, cap-and-trade prices are prone to sharp fluctuations due to economic conditions and adjustments in government-issued allowances.

Taiwan’s adoption of the carbon fee system also faces key challenges regarding the use of carbon fee revenues and the uncertainty of the actual amount of emission reduction. The total carbon emissions in Taiwan is about 290 million metric tons, with 60% to 70% of them subject to regulation, which is roughly 200 million metric tons. At a carbon fee rate of 10 USD per ton, this measure would generate about 60 billion NTD of carbon fee revenue. If these funds are not invested in the research and development of carbon-negative industries (under the Ministry of Economic Affairs) or in green finance (under the Financial Supervisory Commission), they may ultimately be diverted into subsidies for legislators, local governments, or even corporate emission-reduction projects. The result could be that companies pay a low carbon fee to escape their carbon reduction obligations, while the government collects the fees but fails to reduce emissions on schedule. Civic groups would then confirm that the carbon fee system is essentially a backdoor for capitalists, making the system a rigged game.

The second shortcoming of Taiwan’s carbon fee system is that the Climate Change Response Act allows domestic and international carbon credits to be used to offset the carbon fee. This provision undermines the stand of the carbon fee that shares the similar compliance with carbon tax, which both are originally mandatory carbon costs. This situation has led to the EU’s concerns about whether Taiwan’s carbon fee can be fully deductible upon the CBAM imposition. As a result, Taiwanese companies must pay both the carbon fee and the international carbon tariffs under the border adjustment mechanism, while Taiwan is unable to develop its own carbon-negative industry.

Taiwan is highly dependent on international trade, with the rate exceeding 100% (exports and imports divided by GDP). Low-carbon products and carbon-negative technologies will define the next generation of Taiwan’s industrial development. As the presidential election heats up, the three main candidates should put forward substantive policy directions on the critical issue of carbon pricing.
 

🔗Article Source：Liberty Times Net