Hung-Jeng Tsai / Director of Graduate Institute of Marine Affairs, and Director of the Center for Carbon Research and Solution (CCRS) at National Sun Yat-sen University

Despite the EU, national, or subnational level, mandatory carbon pricing systems are a key driver of the net-zero transition. In Taiwan, carbon fee imposition will begin in 2025, but the carbon emissions calculation will start this year.

Assuming a carbon fee is set for 10 USD per ton, TSMC would have to pay 3.2 billion NTD annually, and China Steel Corporation 6.4 billion NTD. In 2020, Formosa Petrochemical emitted 25.63 million tons of carbon, which would result in 8.2 billion NTD in fees, which is nearly 1 billion NTD more than its net profit of 7.37 billion NTD that year. Clearly, this carbon fee would have a significant impact on the listed companies and capital market in Taiwan. On the other hand, as many civil society organizations have pointed out, Taiwan’s carbon fee of 10 USD per ton is far lower than the EU’s 80 to100 EUR or the US’s 50 USD. If pricing is to effectively reduce emissions and achieve the 2050 net-zero target, the carbon fee must be increased more aggressively in the future. If Taiwan is seriously implementing net-zero measures, it will inevitably pose significant challenges for industrial transformation.

Currently, with no single party holding a majority, various policy combinations are possible. To ensure that the mandatory carbon pricing mechanism maintains policy coherence while also being flexible enough to accommodate the realities of Taiwanese industries, and being politically feasible at the same time, it is essential to first analyze the strengths and weaknesses of the two existing types of mandatory carbon pricing mechanisms.

Mandatory pricing mechanisms are considered “mandatory” because they involve the intervention of public authority to regulate carbon emissions. There are two main types of regulation: the first is direct government pricing, which can take the form of a carbon tax or a carbon fee; the second involves setting a cap on total carbon emissions, with the government issuing emission allowances that can be traded, thereby creating a market-based carbon price signal.

Although some critics claim that Taiwan’s carbon fee system is unique in the world, a carbon fee is essentially a form of earmarked taxation (a type of special levy under tax law). Aside from the requirement that collected fees be allocated to specific purposes, carbon fees function almost identically to carbon taxes in terms of carbon pricing. The first major advantage of a carbon fee system is its low administrative cost. Taiwan already has experience with the air pollution fee which can serve as a reference since this model is familiar to both government bureaucracies and the business sector. The adoption of a carbon fee in Taiwan is largely the result of institutional path dependence.

The second advantage of a carbon tax/fee is price stability and consistency, which allows corporations to estimate carbon costs more accurately and help them decide whether to pay the carbon fee or invest in emissions-reduction equipment or technologies. It also provides a stable ROI for the carbon reduction industry. The third advantage is the simplicity and clarity of carbon cost deductions between jurisdictions. Aligning different border adjustment mechanisms can be achieved directly through intergovernmental negotiations. The fourth potential advantage of the carbon fee is that, if the use of earmarked funds can be flexible based on timing and needs, its fiscal distribution and just transition effects could be close to a carbon tax and even exceed market-based cap-and-trade systems.

Since carbon taxes/fees are determined by government authority, the minimum cost of carbon reduction, policy flexibility measures (such as emission thresholds and preferential rates), incentives for low-carbon industries, as well as the regulated sectors and scope of regulation, are all under government control. As a result, the success or failure of net-zero efforts is almost entirely the responsibility of the government alone. However, a key weakness of the carbon tax/fee system is the difficulty in ensuring actual emissions reductions, especially when the carbon fee is set too low, it provides little to no motivation for manufacturers or the public to reduce carbon emissions.

Therefore, the greatest challenge of this system lies in the government’s responsibility to ensure that the carbon fee increases rapidly year by year, and the rate of increase is substantial enough to incentivize both corporations and the public to act for achieving the 2050 net-zero goals. It must also generate sufficient motivation to drive the development of decarbonization and carbon-negative industries. At the same time, the government must address the complex measures for just transition, such as closing the talent gap in emerging sectors like green energy and emission reduction, and managing unemployment caused by the phase-out of the petrochemical industry.

The second type of mandatory pricing mechanism is the cap-and-trade system, which sets a government-enforced emissions reduction target while relying more heavily on market transactions to assign a price to carbon emissions.The first advantage of this system is that the emission reduction outcome is explicitly fixed. The second advantage is that the cost of emissions is determined by the lowest market price, which in theory allows the most economically efficient way to reduce emission for both buyers and sellers. The third advantage is that the carbon price in the market, as a supply-and-demand signal, can encourage investment in decarbonization industries and carbon-negative technologies. The fourth advantage is that, in the mid to long term, Taiwan’s emissions trading market could connect with the growing international carbon markets, ultimately forming a globally harmonized carbon price. This would expand the scale of economies and help solve carbon leakage problems.

However, the administrative cost of operating an emissions trading market is quite high. First, a carbon emission trading market must be established, along with regulatory frameworks and professional management personnels who must be capable of effectively managing the market, ensuring that prices do not overly fluctuate, making it difficult for corporations to estimate carbon costs and result in losses. Also, the personnels are required to maintain a long-term increase in price to achieve the intended emission reduction effects. Second, the government must reach agreements with each major emitter to set an emission cap and establish an annual reduction rate. This process involves complex trade-offs among policy priorities, as the pace of cap reductions often determines the phase out rates of high-emission industries. Third, Taiwan’s carbon emissions sources are highly concentrated. The top 39 emitters, each producing over a million tons of GHG, account for more than 70% of total emissions in Taiwan. After implementing a cap, the number of buyers and sellers in the market may be too small, leading to low liquidity and may result in an ineffective emission trading market. Fourth, the fiscal revenue generated from the emission trading market is relatively low, making it insufficient to support the income redistribution needed for a just transition.

The current carbon fee system is administratively easy to implement, with a low and stable carbon price, and its regulatory scope is limited to enterprises emitting over 25,000 tons of GHG. This is certainly a prudent first step. However, if net-zero is the goal, carbon costs will inevitably need to rise rapidly over the next 25 years, and the scope of regulation will have to expand. If Taiwan does not take proactive actions, the pressure from foreign border adjustment mechanisms will eventually force Taiwan to comply.

In the future, both types of mandatory pricing systems will require strong and efficient state administrative capacity, fiscal extraction capability, and flexible adjustment measures in order to harness their advantages while avoiding their shortcomings. However, Taiwan’s democratization process has been accompanied by a weakening of policy tools, with no party holding a majority in the legislature and the president elected without a majority vote. The possibility of implementing high carbon taxes/fees, or even gradually increasing them year by year, will be seriously challenging politically.
 

🔗Article Source：Liberty Times Net