Monday, May 4, 2009

Lord Stern's Approach

The influential Lord Stern believes that use of carbon tariffs on imported goods is just "covert protectionism". He seems to be more in favor of cap and trade, and part of the reasoning seems to be that it will lower cost of compliance.

However, I think this is not universal. Let us consider a case where offsets are freely tradeable across international boundaries, and where each country has a specific target to meet. If a major carbon producer finds itself short, then the demand for carbon in that market rises, increasing the price of the offsets. This would lead to migration of the offsets from other countries into this country. Since offsets play a significant role in meeting emissions targets in most markets, this would lead to an increase in compliance costs for all the other producers as well.

So, while the overall cost of compliance may come down, all the different entities may not see a reduction in the price. In fact, if USA came online and started demanding CDM credits similar to Europe, the likely scenario is that the cost of compliance will go up for the Europeans. So, this might be a good time to buy the guaranteed CERs or the CER futures.

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