It seems to be a fact the positive and causal relation between carbon emissions with the increase in global temperatures (figure 1). These increments in temperatures have a devastating impact in natural resources and the availability of them for the human being, also impacting in the frequency of extreme events like wild fires, floods, etc.

In this context carbon market based policies are a response of governments, to control greenhouse gas emissions. This policies use market mechanisms to lower emissions taxing the equivalent carbon outcome from the different types of fuels used in the economy.

In this article we discuss the carbon tax policy in the province of British Columbia, going from the origins and structure of the policy to the main results after 4 years of the implementation.

Figure 1. World emissions of CO₂ and global warming.

Source : Boden, T.A., G. Marland, and R.J. Andres (2010)

Origins and goals

The carbon tax policy in BC was born as a response of increasing public interest about the themes of healthcare and economy in 2007, with emphasis in the potential damages of climate change. This cultural change gave the opportunity to introduce in 2008 the carbon tax policy, becoming BC the first North America’s revenue neutral tax reform.

The policy was structured to add more carbon taxes to fossil fuels in the specifics areas of transportation, home heating and electricity, covering almost all the fossil fuels (gasoline, diesel, natural gas and coal). Also the policy was set as “revenue neutral” which is defined as having tax cuts of value equal or greater than carbon tax revenues, and therefore reducing income taxes and tax reductions for poor households and communities (Harrison, K. 2013).

The goal of the policy is in the frame of the government’s climate policy agenda which set the commitment to reduce the province’s emissions by 33% by 2020, also that at least the 90% of the electricity consumed in the province comes from renewable resources and that new and existing production within BC would have net zero emissions by 2016 (British Columbia, 2008)

Mechanics of the policy

The tax was introduced with a rate of 10 CAD per tonne of CO₂ equivalent, with an annual growth of 5 CAD per year for 4 years till reach 30 CAD in 2012. This tax applies to all greenhouse gases emitted by almost all the sources of combustion of the all fossil fuels. The tax is charged to the wholesaler, which is the responsible to pay the tax to the province, and then the tax is transmitted to the retailer and the final consumer at the point of sale (Harrison, K. 2013).

Respect to the returns of the carbon tax revenues, the initial tax cuts in 2008 included 5% reduction over 2 years in the individual income tax rate for the households earning less than about CAD 70,000 per year,  and a low income tax credit as a recognition of the regressive nature of the tax. The composition of the credit is a fixed value of CAD 100 per adult and CAD 30 per child in the form of a lump sum payment.

Related income tax reduction for corporations, the set up in 2008 was between 12 to 10% over 2 years, and small business rate was the reduction from 4.5 to 2.5% over 3 years.  Then in 2009 an industrial property tax credit and Northern and Rural Homeowner benefit were added to the budget. Finally in 2012 were included business tax credits for video game production, film production and scientific research, and individual tax credits for children’s fitness and seniors’ home renovations (Harrison, K. 2013).

Cost effectiveness and distributional effects

It’s not simple to isolate, weight, and compare the resultant effects that a policy have to get an exact number of the benefits of the policy specially when is interacting with many others, but in 2012, after the final incremental adjust in the carbon tax, are 4 main areas in which the results are very clear.

Petroleum fuel consumption per capita dropped by 15.1% since the carbon tax starts in 2008. Additionally BC’s consumption decline 16.4% more than the rest of Canada during the same period. These results are a remarkable effect of the policy which is resulting in a significant reduction in greenhouse emissions with a similar trend as the fuel consumption (British Columbia, 2012).

The Economic Growth of the province was unaffected and outpaced narrowly the rest of Canada. Although the carbon tax is only one piece of all the determinants of growth, there’s no evidence that this would have a negative effect in the province (British Columbia, 2012).

The revenue neutral nature of the policy which controls for no overall increase in taxation by the government it’s a successful impact of the policy. Since the beginning of the policy it has returned 318 million more in income tax cuts. This has derived in one of the lowest general corporate income tax rates in Canada (British Columbia, 2012).

Finally the decline of greenhouse emissions in per capita accounting is 9.9% between 2008 and 2010. In general BC’s reductions are 5% more than the rest of Canada.

These four areas represent the positive results in terms of costs and distributional effects of the policy.

Final thoughts

The results around the carbon tax policy in BC shows that the achievements in greenhouse gas reductions plus the remarkable level of redistribution of the tax makes it very beneficial for the province. Although there are some details that need to be corrected or taking into account when analyse this policy.

For example, the fact that BC have in average higher temperatures than the rest of Canada determines lower cost of heating. This fact makes easier for the province to reduce fuel consumptions compared with the rest of the country.

Also, the exceptions of the tax in some sectors like agriculture of fuel for aviation are not broadly analyzed in terms of the impact of have zero cost of abatement per unit of CO₂ emissions. This is mainly because there are not effects to measure yet because the recent date of enactment of these exceptions. Although, in the case of aviation fuel, the consumptions does not differ from the rest of Canada (Jaccard, M., 2013)

Finally, there is an important issue about the global threat of global warming, and the necessity to coordinate efforts to control globally the greenhouse emissions. For BC, this implies standards for his inter regional trade at market level, and more globally to prevent the failure of the policy if the emissions from other regions begin to affect what the carbon tax wants to prevent.

References.

British Columbia (2008). Climate action plan. Available at: http://www.gov.bc.ca/premier/attachments/climate_action_plan.pdf

British Columbia (2012). British Columbia’s carbon tax shift: the first four years. Research Report. Available at: http://www.sustainableprosperity.ca/dl872&display

British Columbia (2013). BC’s carbon tax shift after five years: results. Research Findings. Available at: http://www.sustainableprosperity.ca/dl1026&display

Boden, T.A., G. Marland, and R.J. Andres (2010). Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A. doi 10.3334/CDIAC/00001_V2010.

Harrison, K. (2013), The Political Economy of British Columbia’s Carbon Tax, OECD Environment Working Papers, No. 63, OECD Publishing. http://dx.doi.org/10.1787/5k3z04gkkhkg-en

Jaccard, M. (2013, July 30). British columbia’s carbon tax after five years. Retrieved from http://theenergycollective.com/markjaccard/253661/bc-s-carbon-tax-after-5-years

The final result of my portfolio: -27.7% of return.

Diagnostic: huge negative result because of try to hold out the bad results in the belief that long term trends would change the results.

This week I tried to make some desperate changes. I cover my wheat position which make me loss great part of my portfolio value; and buy some oat and wheat. But again, was too late to take advantage of the upward trends and quickly these two grains start on lowering prices.

I believe that the reasons of my bad result were two:

First of all, to think that long term tendencies can make you gain profit. As we know, normal backwardation cannot last in time because this could give arbitrage possibilities. And the possibilities of make profit in the market is in quick movements motivated for information asymmetries or good projection of the historical data (technical analysis)

The second reason, and the most important, was the lack of technical analysis during the chain of decisions along this period. The proper utilizations of these skills allow anticipating changes in prices, giving the necessary information to take good decisions.

On synthesis now I understand that the real probability for speculators to generate profit on this is in the systematic machinery of short term decision that make good results of any jump up or down in prices. Off course this machinery requires  the skill in technical analysis and the whole overview of markets, but even more important, the desires to have the opportunity of make profit every time that prices move.

Week Five Review

The result of my five keeps the same results seeing till now. My portfolio return reaches -25% of losses.

Now the analysis of my positions and future decisions:

Related Wheat, every week I am more convinced that prices of wheat never will be below the price I fixed at beginning of September. There are no closer resistances or patterns that suggest prices will turn around in another downward tendency as shown between Nov 2012 and the end of Aug 2013, instead of that wheat futures for delivery in December added 0.7% to $6.86 a bushel on the CBOT, snapping a two-day decline, as we can see in the last candlestick marked in the graph.

I decided to cover mi position of ten contracts of wheat. This cost me at least 17000.

This decision it not only motivated for the history observed in the data. Recent news suggests that the availability of the grain could be reduced in the future because of delays harvests for weather conditions:

• “Wheat rose on concern that cold weather may harm crops in Argentina and excessive rain might delay harvesting in Brazil, boosting demand for supplies from the U.S., the world’s biggest shipper.” (Bloomberg.com)

Also because of the institutional problems in the U.S, the delay of the USDA export sales report is raising the uncertainty about future supply affecting the prices:

• “The government shutdown, which began Oct. 1, deprived investors of daily and weekly USDA export sales. The monthly reports on U.S. and world supply and demand for major crops including soybean, corn and wheat originally scheduled for Oct. 14 were canceled today, the agency said. The next update will be on Nov. 8.” (Bloomberg.com)

Now the evidence is suggesting buy wheat and soybean, although, the last patterns in the case of soybean are shown more uncertainty than a clear trend.

My strategy for now will be expect to see how soybean and corn prices will operate in the next days after take decisions and try to take long positions of wheat

As a result of my third week of trade, there’s no change in the trend seen till today. My portfolio value have losses of -1.87% and -2.46% in the bought of soybean and in the cover of wheat. Accumulating a -14.43% of return and finishing today with a portfolio value rounding 85000.

Clearly my strategy to look into the monthly trends had not paid off yet, or simply I was wrong.

Despite that in the case of soybean we have seeing increasing prices since October, they are still downward than the prices in early September. However one good sign is the change of trend. In fact, on August crop production report, the USDA, forecast smaller than expected soybean and corn crops fields (http://www.agweb.com), which can be one of the reasons in this increase of prices since October.

Now my bet is the corn. As we can see, the prices had been downwards since September 2012 and now they are slightly starting to increase. Apparently they are in the bottom of a cycle so it’s time to buy cheap and sell high (hopefully) in December. Right now, while US government has institutional problems, corn farmers had harvest just the 10% of their crops, which compared with the average 23% harvested in the past five years, is not a good sign (http://www.agweb.com). This could be one reason to anticipate price increases as a respond for the lower supply of the grain.

At my second week of trade I have two transactions made. A Short of 10 units of wheat and a Buy of 5 units of soybean. Both with actual loses of -0.06% and -1.72% respectively, Whit an overall loss of returns of -5.99%

My bought of soybean is in response to the forecast based on the short and long trade history of the grain, although daily prices are in decrease, there’s an increasingly trend at a week an monthly level.

In the case of wheat, despite of the increase in the last week prices, which are pushing up the week and monthly tendencies, this are still in decrease.

Regard energies, diesel prices as a wholesale level was in negative changes during all august but now are in increasingly positive changes in prices. Falls in the total U.S. diesel supplies and central’s bank announcements are contributed to these changes. However, these are not enough arguments to believe in a long trend tendency, which applies to grains which are followers of energy trends.

This next week of trade will be focused on explore the markets news and history than the historical trends in prices.

I did a Short hedge of 10 contracts of wheat because the entire commodity market is in downward price movement. In particular, all the grains are decreasing around -0.88% and -2% since the last price (http://www.bloomberg.com/markets/commodities/futures/agriculture/), being soybean the one who has the mayor decrease. Also in other relevant markets we can observe a downward price. For example both Gold and Oil futures have a negative change in the last period and shows a downward tendency since early September.

In terms of the trends of grains we can observe a significant decrease of wheat since November 2012 (as we can see in the chart) and more slightly for soybean and corn since this September.

(Source: http://www.cmegroup.com)

As my expectations are based in the maintenance of that negative trend in wheat, I expect to win the difference of today’s and December’s selling price of wheat.

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