Taxing Carbon - Part 3

Both carbon tax and cap-and-trade will be hard to pass. Why not concentrate on tax deductions for use of non-carbon energy. After all, usage is determined by relative cost. If renewables cost less than carbon fuels people will use renewables.

I have to agree that the arguments from an ecomomist that a tax is more desirable than a market-based system are quite odd. From my understanding of markets, taxes and economics, the arguments from Mr Sachs are nicely refuted by Mr Drum. However the discussions I have read so far have missed, or not addressed, some somewhat fundamental points: what price for CO2-e? First off, CO2 makes up only half of the GHGs, so concentrating on energy production/consumption is only half effective. This is why calling it a carbon tax is misleading, as it would in reality be a CO2-e (equivalent) tax... but that is too wordy. In any case, as others have pointed out, it is the emissions that are the problems. Having a price on emissions that is automatically set by a market means that the govt only has the job of setting how many permits to issue (ie: how much GHG can be emitted per year) and administer the compliance of those permits. It is the interested parties that gain economic benefit that set the price. In this way, there is an incentive to try to reduce emissions without having a govt department dictate how those emissions are reduced, or how much it will cost to reduce those emissions.

aren't you forgetting that you honestly have NO IDEA if warming will be a big deal or not?

At the fossil fuel source actually works pretty well. Presumably, some sort of tax credit (hopefully tradeable) would be needed for places that actually sequester the stuff. Today there is hardly any capture and sequestration taking place. For geologic sequestration, you give credit at the wellhead. For some other schemes, planting forests say, -or spreading crushed silicate rocks (which will absorb atmospheric CO2 to form carbonates), accounting for the carbon absorbed is trickier. But, I doubt we will have very many enterprises doing such things. A messier part would be taxing embedded CO2 in nonfuel imports. Tariffs would be problematic for global trade treaties. The problem is CO2e (equivalence) is that the constant of proportionality depends upon the time period the equivalence is calculated over. The oft quoted figure for methane being 23times as bad as CO2, assumes we only care about warming for exactly 100years, pick a longer time period and methane becomes much less important (it doesn't last as long in the atmosphere), pick a shorter period and it is much more than 23times worse. Of course any economically rational policy, will put significant effort into reducing the other greenhouse gases, as this would be more cost effective than targeting CO2 alone. The reason climate activist have concentrated on CO2, is that it is the make or break GHG, the others are easier to deal with, but still important.

I guess I don't understand how you can cap emissions at the front end when there actually no emissions? I drill a well and pump the oil and send it around the world to the next link in the chain. What am I going to cap? I'm going to cap at the end? Well what about the intermediate points in the processing of oil, coal or other carbon base energy sources? Using oil prices as a rough proxy of a carbon tax we can see a direct response to a 'carbon tax'. How is this so difficult for all of you to see? Each source used for carbon based energy has a fixed amount of carbon contained in the fuel. Bang we know how much co2 will be produced by combustion. What about burning tires for producing cement. How would your system handle that? Yep there are plenty of things to be worked out but starting up front at the source of the carbon being placed into the atmosphere is the most efficient method. What else are you going to use oil or coal for?

What he's trying to say wrt revenues from carbon permits is this: 100% carbon permit auctions will not possibly pass. You're going to have to assign some credits to current users if you want to avoid things like, er, massive disruption in the supply chain for electricity. (You think the policy is unpopular now, wait until the electric company tells NYC that the federal government won't permit it to turn the power on!) Remember, there will not be enough carbon permits to go around; that's the bloody idea, after all. Someone gets left out. In some scenarios, a LOT of people get left out; a speculative attack on carbon permits would probably make a lot of money as it shot permit prices through the roof, but the induced shortages would be a company-wrecker. For all the problems of a carbon tax, at least it's mostly predictable - we can sit down and see where it's going to cause problems in advance. Finally, even if you'd like to say "the debate is over and anyone who disagrees is an ideological tool of the multinational corporations", there's still a lot of questions up in the air about climate modeling. Get this straight - a climate model is not the climate. Like a model of a volcano, it exhibits some of the same behavior, but the internal workings are significantly different. Climate models are a best-guess approximation of many climatic phenomena that we do not fully understand. Sure, they might be the best we've got, but putting perfect faith in a climate model is equivalent to putting perfect faith in a bank's financial modeling in 2006.

Kevin Drum is certainly right that a cap-and-trade system potentially can look a lot more like a carbon tax than actual cap-and-trade systems have done in the past. My worries are about the reality of such systems, not the theory. Both the Waxman-Markey draft bill and the actual experience of the European Union Emissions Trading System (EU ETS) give me concern for the reasons that I mentioned. While a tax can be levied at a few upstream points, the EU ETS involves around 12,000 enterprises and the draft Waxman-Markey bill would apparently involve several thousand US sites as well (essentially all industrial units which emit more than 25,000 tons of carbon dioxide equivalent greenhouse gases). We would create for essentially no reason a highly expensive, Wall-Street-based system of permit trading and enterprise compliance that could be substituted by an easy-to-implement upstream tax. Mr. Drum correctly notes that the Waxman-Markey proposal is both upstream and downstream. I do indeed like the upstream part. The fact, however, that it is also a downstream system, which is the administratively cumbersome part that would be avoided by an upstream carbon tax. As for the lack of price predictability, the price fluctuations of the EU ETS are notorious. Emissions prices actually collapsed for Phase I permits at the end of that phase (2007), and recently emission permit prices have declined from more than 30 euros per ton in 2008 to less than 15 euros this year. Some European economists are arguing for a floor price in the EU ETS, which indeed would make it much more like a tax. I disagree with Mr. Drum that we should see the trading system as a helpful macro stabilizer and therefore like the fact that the price on carbon emissions has collapsed. We need a stable carbon price into the future to give the right incentives for a new generation of low-emissions technology development and adoption, and should use other economic instruments for cyclical policies. I agree with Mr. Drum that an emissions system can cover most of the economy like an upstream tax, but in practice the EU ETS covers only around 50 percent of the economy. The Waxman-Markey bill aims for much more, so perhaps I'm too pessimistic on that count and Mr. Drum is correct, but we'll see once the negotiations proceed further. As for revenues and for revenue transparency, I still believe that a tax is the right way to go. I am not very confident about the fairness of backroom haggling over emissions rights now underway in Washington, or which has characterized the EU ETS. I think that the tax approach can be more direct and visible, and less vulnerable to unfair insider dealing. Finally, I would like to remind Mr. Drum and his readers that I stated clearly in my brief Yale article cited by Mr. Drum that either a tax or a cap-and-trade system is far superior to the status quo. We are arguing about matters that are less than essential. If Congress actually adopts a cap-and-trade system, that would be a huge advance. In fact, putting a market price on carbon emissions (through either a tax or permit system) is just one modest part of a truly comprehensive and effective carbon mitigation strategy, that must involve standards, R&D, demonstration projects, and many other kinds of incentives and public policies.