Why Carbon Prices Are Not Enough

Yves here. While this post makes some important points about carbon pricing, I disagree vehemently with the notion that carbon prices and cap and trade are similar, and therefore I also differ with the author’s assertion that the carbon price is important and not the mechanism for achieving it.

Carbon taxes provide for a fixed price for carbon (or one that is predictable, for instance, rising roughly in line with inflation). That allows businesses to plan and encourages them to make investments in carbon output reduction.

Even conservative economists like Greg Mankiw have strongly favored carbon taxes over cap and trade, going back to the 2007 IPCC reports. At that time, the Financial Times, in an editorial. also called for fixing a price on carbon via carbon taxes.

By contrast, aside from the well-established difficulty of establishing whether the offset activity actually took place (or alternatively did but was used as a offset multiple times) is that cap and trade leads to volatile prices. In fact, the traders have incentives to encourage volatility since that’s more profitable (if nothing else, more volatile markets typically have wider bid-asked spreads). There have been many reports of price manipulation by carbon traders. Note that the author bizarrely posits a process where you set quantity in a cap and trade regime, and then acts as if that is the same as fixing a price. In a market, you can set price or quantity, but not both (that was one of the big criticism of QE, that the various central banks targeted quantities when they should have set prices).

By Frank Ackerman, principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis. Originally published at Triple Crisis

We need a price on carbon emissions. This opinion, virtually unanimous among economists, is also shared by a growing number of advocates and policymakers. But unanimity disappears in the debate over how to price carbon: there is continuing controversy about the merits of taxes vs. cap-and-trade systems for pricing emissions, and about the role for complementary, non-price policies.

At the risk of spoiling the suspense, this blog post reaches two main conclusions: First, under either a carbon tax or a cap-and-trade system, the price level matters more than the mechanism used to reach that price. Second, under either approach, a reasonably high price is necessary but not sufficient for climate policy; other measures are needed to complement price incentives.

Why Taxes and Cap-and-Trade Systems Are Similar

A carbon tax raises the cost of fossil fuels directly, by taxing their carbon emissions from combustion. This is most easily done upstream, i.e. taxing the oil or gas well, coal mine, or fuel importer, who presumably passes the tax on to end users. There are only hundreds of upstream fuel producers and importers to keep track of, compared to millions of end users.

A cap-and-trade system accomplishes the same thing indirectly, by setting a cap on total allowable emissions, and issuing that many annual allowances. Companies that want to sell or use fossil fuels are required to hold allowances equal to their emissions. If the cap is low enough to make allowances a scarce resource, then the market will establish a price on allowances – in effect, a price on greenhouse gas emissions. Again, it is easier to apply allowance requirements, and thus induce carbon trading, at the upstream level rather than on millions of end users.

If the price of emissions is, for example, $50 per ton of carbon dioxide, then any firm that can reduce emissions for less than $50 a ton will do so – under either a tax or cap-and-trade system. Cutting emissions reduces tax payments, under a carbon tax; it reduces the need to buy allowances under a cap-and-trade system. The price, not the mechanism, is what matters for this incentive effect.

A review of the economics literature on carbon taxes vs. cap-and-tradesystems found a number of other points of similarity. Either system can be configured to achieve a desired distribution of the burden on households and industries, e.g. via free allocation of some allowances, or partial exemption from taxes. Money raised from either taxes or allowance auctions could be wholly or partially refunded to households.  Either approach can be manipulated to reduce effects on international competitiveness.

And problems raised with offsets – along the lines of credits given too casually for tree-planting – are not unique to cap and trade. A carbon tax could emerge from Congress riddled with obscure loopholes, which could be as damaging to the integrity of carbon pricing as any of the poorly written offset provisions of existing cap-and-trade systems. More positively speaking, either approach to carbon pricing can be carried out either with or without offsets and tax exemptions.

Why Taxes and Cap-and-Trade Systems Are Different

Compared to the numerous similarities between the two approaches, the list of differences is a shorter one. A carbon tax is easier and cheaper to administer. In theory, a carbon tax provides certainty about the price of emissions, while a cap-and-trade system provides certainty about the quantity of emissions (in practice, these certainties can be undone by too-frequent tinkering with tax rates or emissions caps).

Cap-and-trade systems have been more widely used in practice. The European Union’s Emissions Trading System (EU ETS) is the world’s largest carbon market. Others include the linked carbon market of California and several Canadian provinces, and the Regional Greenhouse Gas Initiative (RGGI) among states in the Northeast.

Numerous critics have pointed to potential flaws in cap-and-trade, such as overly generous, poorly monitored offsets. Many recent cap-and-trade systems, introduced in a conservative era, began with caps so high and prices so low that they have little effect(leaving them open to the criticism that the administrative costs are not justified by the skimpy results). The price must be high enough, and the cap must be low enough, to alter the behavior of major emitters.

The same applies, of course, to a carbon tax. Starting with a trivial level of carbon tax, in order to calm opponents of the measure, runs the risk of “proving” that a carbon price has no effect. The correct starting price under either system is the highest price that is politically acceptable; there is no hope of “getting the prices right” due to the uncertain and potentially disastrous scope of climate damages.

Perhaps the most salient difference between taxes and cap-and-trade is political rather than economic: in an era when people like to chant “no new taxes”, the prospects for any initiative seem worse if it involves a new tax. This could explain why there is so much more experience to date with cap-and-trade systems.

Beyond Price Incentives

Some carbon emitters, for instance in electricity generation, have multiple choices among alternative technologies. In such cases, price incentives alone are powerful, and producers can respond incrementally, retiring and replacing individual plants when appropriate. Other sectors face barriers that an individual firm cannot usually overcome on its own. Electric vehicles are not practical without an extensive recharging and repair infrastructure, which is just beginning to exist in a few parts of the country. In this case, no reasonable level of carbon price can, by itself, bring an adequate nationwide electric vehicle infrastructure into existence. Policies that build and promote electric vehicle infrastructure are valuable complements to a carbon price: they create a combined incentive to move away from gasoline.

Yet another reason for combining non-price climate policies with a carbon price is that purely price-based decision-making can be exhausting. People could calculate for themselves the fuel saved by buying a more fuel-efficient car and subtract that from the sticker price of the vehicle, but it is not an easy calculation. Federal and state fuel economy standards make the process simpler, by setting a floor underneath vehicle fuel efficiency.

When buying a major appliance, it is possible in theory to read the energy efficiency sticker on the carton, calculate your average annual use of the appliance, convert it to dollars saved per year, and see if that savings justifies purchase of a more efficient appliance. But who does all that arithmetic? Even I don’t want to do that calculation, and I have a PhD in economics and enjoy playing with numbers. My guess is that virtually no one does the calculation consistently and correctly. On the other hand, federal and state appliance efficiency standards have often set minimum levels of required efficiency, which increase over time. It’s much more fun to buy something off the shelf that meets those standards, instead of settling in for an extended data-crunching session any time you need a new fridge, air conditioner, washing machine…

In short, the carbon price is what matters, not the mechanism used to adopt that price. And whatever the price, non-price climate policies are needed as well – both to build things that no one company can do on its own, and to make energy-efficient choices accessible to all, without heroic feats of calculation.

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34 comments

  1. Darius

    To sum up, pricing carbon is a prerequisite to solving the climate problem, but not adequate by itself. Green New Deal type measures will be necessary as well as flat out mandates.

    A jobs guarantee and massive low end tax cuts will be necessary to avoid a yellow vests problem.

    Reply
  2. ChrisFromGeorgia

    I just assume that cap and trade will never work because it requires an honest clearing house for trades and we’ll never see that again. Instead it will be captured by the same actors that captured the machinery of government – Goldman, Citigroup, etc.

    The pigmen will live off the skim, and give special considerations to large multi-nationals in exchange for other business. We’re likely to call it “Cap and Bezzle.”

    Free markets died a long time ago. The tax is a better idea.

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  3. Ptb

    One acts on price, the other acts on volume. The goal in either case is to reduce volume.

    Carbon price instability is harmful for business. But dramatic instability has eternally been a feature of energy commodities. Insurance via futures is a fix (for a cost that can really add up for some commodities).

    Crude logic would seem to favor cap and trade. The risk with that is the regulating agency is too weak. If captured by a faction whose interests are poorly aligned with the policy goal, market gets gamed.

    Tax would also discourage carbon consumption in a simpler way.

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    1. Darius

      I think one reason for the plastics crisis is that the price signals are telling producers and consumers to go absolutely nuts with durable single use plastics. Narrowly considered, they’re stupid not to do so. The stuff is mostly free.

      Reply
  4. notabanker

    I would posit that on the production side the carbon price is not what matters. What matters is the profit made on carbon.

    These proposals will disproportionately impact people based on income. Taxing carbon and allowing drillers and electric generators to pass those costs to end users will crush low incomes, severely strain middle incomes and not have one iota of impact on upper income households. There are no legitimate alternatives for renewable energy usage for low to middle income households. Costs of renewable alternatives have ROI, but require upfront capital investments. If you want renewables, you better have cash or income and credit.

    My, probably naive, view is that you have tax the profits of carbon producers, regulate pricing and regulate debt markets to prevent capital investment going into carbon production. If you can’t make any money producing it, and can’t get anymore QE slosh funds to pilfer, all that’s left is utility infrastructure that has to be paid for.

    There are plenty of renewable technology areas that debt can be funneled into. Non-battery energy storage has a multitude of technologies that could be developed. Most of what I’ve seen so far is focused on massive scale, but what about consumer scale? And a lot of this money is coming from VC’s, whom will kill it based on market forces rather than actual viability. CAES at a household or small business level could solve a lot of problems and take massive demand off the grid. I don’t see anyone working on it.

    I think the one very effective carbon tax that can be applied across the board is crushing taxes on consumer devices that consume energy. Tax the demand side, especially on non-essential things. High consumption electric and gas appliances, hot water heaters, 208/240 high amperage devices like well pumps should be taxed out of the market. Create demand for renewable alternatives. This would also lower demands on the grid.

    There needs to be price controls on renewable energy technologies. If you take the profits out of carbon, the Buffets of the world will corner the markets on renewables and charge what they want. Solar is already priced based on carbon.

    In a way, politically, I am glad Pelosi and Co are dismissing the GND. If they were to tackle this legislation, we would really be screwed. Pass through carbon taxes would crush what’s left of the working class while Goldman and JPM pocket monster fees on cap and trade derivatives. We would be no closer to actual carbon reductions and the economy would be a bigger dishwater than it already is.

    Reply
    1. drumlin woodchuckles

      Avoiding “crushing the lower class and pressing the middle class” is why Hansen makes the “dividend” part of his “fee and dividend” concept. Charging the carbon fee at first point of sale of the carbon is inTENded to raise the price of fossil-carbon-involving goods and services at every point of the chain. The dividend, which is exactly the same size to every legal resident of America, will re-give enough money to the lower and semi-lower class that they will not be crushed. Hansen’s fond hope is that as the fossil carbon fee goes up and up, that the price of things made with “less” carbon will be lower, or at least “less higher” than things made with “more” carbon. That way more “less carbon” things will be done or sold, and less “more carbon” things will be done or sold. Hansen’s ideal carbon fee concept would end up seeing fossil carbon price-tortured all the way out of the economy altogether. The economy and society would be fossil-price tortured into abandoning fossil energy altogether.

      Without punitive and then torturous prices against fossil carbon, nothing else will happen at all. Never. Ever.

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    1. Louis Fyne

      if it makes you feel any better, the US wholesale market for electricity is a mess—if you’re objective is to lower CO2. (not if your objective is to profit from cheap nat gas).

      The downside of subsidizing wind (ie, zero marginal costs on a windy day) is that you encourage/lock in the use of fracked/methane-release/flared natural gas.

      So it’s one step forward with wind, two steps backwards with fracking/natural gas

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  5. taunger

    Mankiw supporting carbon taxes seems like a non-starter, rather than an argument in favor. IIRC, he was also central to Romneycare, and look how far that got us. In the end, I guess I don’t understand how pricing carbon is necessary, as regulatory mechanisms have supported renewable energy development, and broader support for carbon reducing policies, such as mass transit, heating and cooling efficiency, and construction codes could multiply the gains made in the renewable sector. Guess I’m just a command and control commie.

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  6. Paul Boisvert

    Hi, Notabanker,

    I’m very sympathetic to your concerns, but the Carbon Dividend feature of HR 763 and most other carbon tax proposals, rebating the entire tax to households on an egalitarian basis, render the overall tax quite progressive. While some poorer, high-carbon folks will end up worse off, I have not seen a study (if you know of one, please reference it) saying that such a regressive impact will affect many such folks, nor very much. Here is one study, saying 90% of the poorest folks will be better off, and the rest of the poor not worse off by much.

    https://citizensclimatelobby.org/wp-content/uploads/2016/05/Ummel-Impact-of-CCL-CFD-Policy-v1_4.pdf

    One should of course ameliorate it even further, say with an “Environmental Security” payment or (refundable) tax credit for say the poorest 30% or so of households. If that seems politically unfeasible, I have to say that so does imposing a vast price and regulatory control regime on dozens of different energy sectors and their varying components and products

    As a socialist, I’m in favor of lots of such fundamental restructurings of our market economy, but we are not going to eliminate (or even fairly drastically reform) capitalism in sufficient time to prevent catastrophic GW. The simple carbon dividend proposal is a way of harnessing the one thing capitalism does well (use price signals to stimulate competitive innovation).

    Most importantly, such proposals have bipartisan support and are thus much more likely to be implemented soon, which is desperately needed. They will be politically popular, as households start getting rebate checks in the mail right away. Such proposals are NOT a panacea, and more is indeed needed–but they are a critically necessary and effective first step and catalyst.

    Reply
    1. taunger

      As long as rebate checks happen RIGHT AWAY. Households in poverty cannot shift expenses to a year later when they get their carbon refund along with their tax refund. Truly poor, which is many, households will NOT find this politically popular compared to Green New Deal policies such as guaranteed employment with a living wage to meet climate goals.

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      1. Paul Boisvert

        Well, we need do to “ALL and”: carbon tax, AND Green New Deal AND Job Guarantees, and MMT, and a whole lot more. But the carbon tax is one of the most “synergetic”, in that price signals will affect every single aspect of carbon pollution–not perfectly, not uniformly, but cumulatively. It is our cumulative carbon output that must come down as fast as possible, and every step towards that is needed.

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    2. notabanker

      Thanks for the post. I think there are merit to your arguments, but I am in a different place. This problem is different from any other in the history of humans. I am all for some incremental starts, and subsequent fits, if they get momentum moving and contribute to solving the larger problem. I don’t see this as being either.

      Fundamentally, taxing carbon and giving money to people to pay the tax is a net zero game. Producers pass the costs, people pay the higher prices. Some winners and losers on both sides, net emissions don’t change.

      Bad deal structures never get better. It is massively expensive to extract your self from a poorly structured deal and most will try the path of least resistance to try and mitigate how worse it gets, kicking the can down the road and making the extraction costs even more prohibitive. To me, and this is just my personal view, this is a bad deal structure. This problem is too critical to split the baby. We are going to have to suck it up and choose a very difficult path if we truly want to have a legitimate shot at surviving this problem we have created.

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      1. Paul Boisvert

        You are certainly right that overall a carbon tax will not be a sufficient fix, but it will equally certainly be a contributory and momentum-building start. Producers can never pass on all of a tax–why do you think they oppose them so much? Some substitution will take place, as then people save money and still get the rebate. Saving money matters to a lot of people. Others want to save the planet anyway–now it will be profitable.

        The more substitution takes place, the more people now demanding that it become cheaper, and the more money that can be made by new market entrants selling non-carbon stuff. That’s already been happening without a carbon tax, the tax will simply give it much more oomph.

        Also, and crucially, every business will have a strong profit incentive to switch to non-carbon (now cheaper, since untaxed) sources, because BUSINESSES don’t get the rebate–only households. Even if they could pass on the whole tax (which they can’t), why not switch, save costs, and then not lower prices by the whole savings, just by a part. They will certainly try this. But then (imperfect, but still real) competition will create (imperfect, but still real) price wars–forcing more business demand for even cheaper non-carbon sources, etc.

        It’s important to realize that as imperfect as price signals and competition are in capitalism, they are still very real, major phenomena, always on the minds of every business owner and corporation. Thus there will be imperfect, but very real, and increasingly so, pressure for new and cheaper non-carbon stuff. Thus, as one weapon among many, this is one of the absolute best ones to get going asap.

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      2. drumlin woodchuckles

        Since the rising fossil carbon tax would raise the prices of things involving fossil carbon in proportion to the amount of fossil carbon they involved, the prices of “fossil-dense” goods would rise more than the prices of fossil-low or fossil free goods.

        For example, under a punitive fossil carbon tax, the price of a plastic chair would rise to a punitive level. But the price of a wooden chair would rise to a modest level. The price of a petrochemical feedlot burger would rise punitively. The price of a carbon-capture burger would not rise punitively.
        ( Unless the carbon-capture burger makers decide to profiteer by never permitting the petro-burger to overprice the carbon-capture burger. If they do that, they will price the nation into vegetarianism).

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  7. Grant

    I have problems, myself, with both cap and trade programs and carbon taxes. I think both could be helpful to be sure, better than doing nothing. And maybe they can be implemented in conjunction with other things. Prices are a means of transferring information to participants in the market, and because information is missing markets, we produce things that have large negative non-market impacts and too few that have non-market impacts. Everyone here probably knows this. With cap and trade programs, many of them give away permits for free, and they often give permits in rough proportion to how much a firm emitted in the past. Since those permits have a market value, that represents a subsidy to polluters. Cap and trade programs, the EU is a good example, have both issued too many permits, and they have also created too many (highly questionable) offsets. Permits in the EU cap and trade system there have often been priced far too low to really have an impact, although they have recently increased.
    In the Canadian system, they are set to tax the carbon emissions of businesses and industry, the industry is supposed to pass at least some of those costs off onto consumers. The government will then take the money it is getting and give a rebate to consumers. It seems to me that we are essentially subsidizing carbon emissions in a roundabout way. The ideal with a carbon tax would be a situation where those costs couldn’t be passed off onto consumers, since carbon emissions would harm profitability. We want profitability to be harmed if an entity creates more carbon emissions. But the capacity to pass on those costs, which is a reflection of monopoly power, allows the interests that emit carbon to maintain at least a portion of their profitability by passing those costs on. The only way around that would be outright price controls, or public ownership. Maybe the idea is that while some of the costs to those that create carbon emissions will be passed on, not all with be, and so profitability will be harmed to an extent. But, what if those rebates are given out and people use the money to buy stuff with high embodied carbon? I could see a logic of having the rebate done in a progressive way, going to poor people and people that maybe have no choice but to, say, drive to work instead of taking public transportation. I also don’t think that carbon taxes are easier to administer. We have had international negotiations and institutions that have used cap and trade programs, nothing like it has occurred with carbon taxes. Even if we were to actually capture the true impact of carbon within prices, that cost would be massive. It would be a major factor in investment decisions, and carbon is embodied in everything, so everything would cost more. What is to stop carbon leakage to places that don’t tax carbon? China has been toying with a cap and trade program, but it seems more rhetorical than anything that is set to reduce carbon emissions, given what China is doing elsewhere. Since state owned enterprises are already pretty strong in energy industries in China, and since they have price controls for private coal producers, maybe the SOEs be used to produce and provide renewable energy below or at cost, and taxes on carbon could increase the price of things like coal, which would make them far cheaper than coal? That assumes that renewable energy could be produced enough to meet productive and consumption demand in China though.

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    1. Grant

      I really appreciate Ackerman’s work. His book “Priceless” is great, goes over non-market impacts, as well as does a great critique of cost-benefit analysis. His book “Poisoned for Pennies” is recommended, as is his book, “Can We Afford the Future?”, which is about climate economics. His work shows the problems of pricing these things, and those problems are real. I don’t think it is possible to truly capture the full impact of carbon emissions within a pricing mechanism. Are we really capturing the full cost of carbon, given not only indirect impacts, but also impacts we will never fully understand and will never be aware of? Pricing carbon also has to take into account the worst case scenarios. If we emit a ton of CO2 equivalent, and if that leads to the worst case IPCC scenarios, we could regard the worst case scenario as an infinite cost. What is a fraction of infinity? I guess the argument is that while we can’t realistically price the full impact of carbon, we have to accept actual limits to markets, that we don’t need to really accurately price carbon to reflect its actual impact. What we need to do is to use markets to influence behavior as if we were accurately pricing carbon. That, in the absence of planning, seems pretty unrealistic all around.

      I think we need to look to the limits of using markets in general and the need for national planning. I realize the problems with planning in the past (more central planning than Swedish social democratic planning). I just see problems in having a decentralized market economy operating within sustainable limits, especially when we have clearly reached many of the limits to growth as is, without central coordination and planning at the national level, doubly given how inequitable our society is. If we are going to rely on renewable energy, I also think that we should push for public ownership. Fossil Capital by Andreas Malm is a great source for this debate. I could see lots of problems with a national renewable energy infrastructure that is privately owned, and I think that since profits can’t be made on the energy from the sun, profits would be centered on producing things like solar panels. If, given all of the complexities of these issues, what if we don’t produce enough solar or wind, simply because it isn’t profitable enough for private interests? Given the non-market nature of this issue, we also might need to think about publicly owned enterprises producing this stuff at cost. Not giving them monopoly power, but producing those things in large enough numbers and at low enough cost that they could be quickly dispersed and widely used. Relying only on private interests alone on this is very risky.

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    2. drumlin woodchuckles

      The Hansen fee-tax seems easy enough to administer. Every coal, gas and oil company has to pay a fee-per-carbon to be permitted to sell its coal , gas, or oil. There are thousands of such companies, not millions.
      It is easy to collect and keep track of thousands of fee-streams.

      And it is easy to divide all that money up by the number of legal residents of America. And then give each American ” one numberth” of the money raised. Since super-rich people will be spending vastly more on passed-along carbon fees than deeply poor people will be spending, they will be bearing a higher amount of fee-cost than the poor will be bearing. The exact same-sizeness of the dividend reaching every legal resident will have a progressive survival-relief impact on the poor who have to buy some fossil carbon to avoid freezing and starving to death . . . . until their bare survival necessities are produced and delivered without fossil carbon. At which point, the fossil carbon fee will no longer affect them.

      And it is the ultimate topping out of the fossil carbon fee at levels of punitive price-torture which is supposed to help torture society into sweating the fossil carbon out of its routines of existence.

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  8. lyman alpha blob

    Agree that a tax is better than cap and trade and both are better than doing nothing (although with cap and trade, not by much), however neither will be sufficient to solve the problem for reasons noted by others above.

    Banning fossil fuels or rationing them come to mind, but considering that many of us are in the middle of a huge cold snap in February right now and live in areas that depend on gas and oil for heat, that isn’t much of a solution either unless your aim is deforestation or a lot of frozen poor people.

    The only real solution I see to this is a planet with a lot fewer people on it. It would be nice if this would happen voluntarily and in time to stop the worst effects of climate change from happening, but I suspect that this will not be the case.

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    1. taunger

      This is an important piece. I got very efficient heat pumps installed, but when the temp drops below 0, the woodstove goes on, and if it stays there for a week, I reluctantly turn on the oil burner. It will take a lot of insulation to get away from that situation for me, and right now I can’t afford it.

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    2. Grumpy Engineer

      @lyman alpha blob:

      Aye, what you describe is ultimately the issue here. Cap-and-trade or explicit taxes work best when there are readily-available alternatives that aren’t much more expensive. For example, if we imposed pollution taxes on plastics, you’d see companies switching to glass and/or paper pretty quickly. They’re already available and aren’t much more expensive.

      But if you slap a $4/gallon carbon tax on my gasoline, how shall I avoid it? I suppose I could reduce the miles I drive, but 85+% of my driving is non-optional. I have to drive to work. I have to drive to the grocery store. And I have no substitute for gasoline, unless I scrap my current car and buy a really expensive fully-electric vehicle. What if I can’t afford a new car? For most people, a carbon tax on their gasoline would seem simply punitive. Carbon taxes on home heating fuels would work out the same way. It’s hard to avoid using them when it’s cold outside.

      Similar issues arise on cap-and-trade. During period of moderate electrical demand, the power companies can reduce their carbon footprint by switching from higher-carbon fuels (like coal) to lower-carbon fuels (like natural gas). Except that they’ve already been doing that anyway due to dropping natural gas prices, so there’s little room for improvement. And when demand is high, they will burn whatever fuel it takes to keep the lights on. Indeed, they are legally required to do so.

      And what substitutes can they employ? Well, they can built nuclear power stations. Or maybe giant wind & giant solar & GIANT battery farms. But those cost a lot and take years to build. And during that time, the construction and carbon tax costs will be passed on to consumers (again, seeming punitive), or they’ll have to impose rolling blackouts (if the caps are enforced strictly enough).

      Without readily-available alternatives, neither carbon taxes nor cap-and-trade work well.

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  9. John B

    The argument about whether a tax or ETS is better is abstract. Either would be better than nothing, but neither is likely to pass Congress in any form remotely sufficient for what we need — and to the extent either does pass, brilliant people will devote their careers to circumventing them.

    What is also needed is a total strategy: a full review of actual and potential regulations, taxes, tariffs, and spending programs, aimed at stopping fossil fuels, one way or another, up to a cost of hundreds of dollars per ton of CO2 eliminated. Every trade agreement should have climate provisions; every agency should consider what it can do; foreign, defense, and trade policy should target climate change. For example, cabotage restrictions on foreign airlines’ air travel between US cities makes domestic airfares higher, cutting air travel. Tariffs on drilling equipment make fracking less profitable. Deal with distributional effects through the tax system, Medicare for All, minimum wage, job guarantees, bank regulations, etc. which are all worthwhile anyway.

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    1. Grant

      “Every trade agreement should have climate provisions”

      NAFTA has an environmental side agreement, worth about as much as the paper you print it on (which doesn’t include non-market impacts :) ). The WTO undermined portions of the 1990 Clean Air Act Amendments within months of its existence, same with the Endangered Species Act. It says its dictates take precedent over all environmental agreements, it has been used to undermine renewable energy industries in multiple countries too. So, these things are desperately needed.

      I think though that this is a systems issue though, I agree with you that a comprehensive response is needed. Capitalism as we know it is unsustainable, and we cannot realistically deal with the environmental crisis until we deal with how inequitable resource consumption and pollution generation is either.

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  10. Unna

    The idea of rebates to consumers of carbon is a must for the political acceptability of any carbon tax and these should be very progressive, actually shifting money from the rich to the working and middle class in greater amounts than they likely paid because that would get people on board – we’ll see.

    A bigger problem comes in with such things as road or bridge tolls. These are worse than even regressive sales taxes (which is what a carbon tax is) because the rich, although paying the same rate of sales tax as the poor, presumably will buy more stuff and at least pay more taxes as a total amount. Not so with a toll. The rich guy and the poor guy both pay the same amount each day.

    Example: Here in BC the new NDP government proposed to eliminate the toll over a certain bridge in the Vancouver area. The Green party opposed that arguing that a toll would discourage driving and so reduce emissions. Of course the wealthy who don’t care about a toll financially might actually be in favour of one since less traffic makes their drive over the bridge more enjoyable. The BC Greens apparently weren’t aware of, or perhaps didn’t care about, BC’s working class and what the toll might represent to them. Also business owners and professionals who use tax deductible car mileage for “business use” can reduce their personal cost of carbon taxes since they can write it off. Am I right about that?

    What kind of anger will be generated with taxes on miles driven by gasoline powered vehicles, but not EV’s? Special lanes for EV’s anyone? Will they become known as the VIP lanes – de facto congestion free lanes for the wealthy? The BC carbon tax is seen as a success because it’s reduced the amount of carbon purchased by consumers in the Province. Just don’t look at the line up of BC vehicles at the US gas stations conveniently located a hundred “yards” just south of the border. But to get the low real American gas price, you’ll have to drive a bit more south to the nearest town where real Americans buy their gas and not just Canadians.

    Things need to be done about GW. But! Don’t do it a way that provokes social anger, division, and political backlash. Otherwise you’ll be living with Donald Trump type politicians well into the future.

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  11. chuck roast

    It is sad to see a good URPE guy go bad…

    Anyway, from Ackerman (with some paraphrasing)
    “A carbon tax is easier and cheaper to administer”
    – Way lower transaction costs
    “In practice, cap-and-trade has not worked”
    – Offsets are often specious and difficult to administer
    – Caps have been set too high
    – Prices have been set too low
    “Carbon taxes have really never been tried”
    – Because of the cry no new taxes
    “With the exception of electricity generation, other sectors of the economy face barriers to carbon price determination…In short carbon price is what matters, not the mechanism used to adopt the price.”

    So, to sum up…cap-and-trade is a good thing, but it has failed in practice and is no-good at price determination. But, cap-and-trade and “non-price climate policies” are better than “heroic feats of calculation” that are bound to fail.

    OK fine.

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  12. VietnamVet

    The triumph of neoliberalism was the covering up the true costs of environmental exploitation and the concentration of wealth by offshoring and indebting the middle class and poor. Jimmy Carter’s solar panels and malaise disappeared. The costs of mitigating Climate Change are less than the devastation caused by future storms and sea level rise. The simple problem is that those who have the wealth do not want to spend it to save the rest of mankind. The governments that must oversee the effort are incapable i.e. Donald Trump, Theresa May or Emmanuel Macron.

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  13. Ian Perkins

    “Second, under either approach, a reasonably high price is necessary but not sufficient for climate policy”
    – No. An unreasonably high price is absolutely essential.

    And “Carbon taxes provide for a fixed price for carbon (or one that is predictable, for instance, rising roughly in line with inflation). That allows businesses to plan and encourages them to make investments in carbon output reduction.”

    – No. Not rising in line with inflation; rising exponentially so as to be effectively infinite within a decade. That allows businesses to plan, and far more importantly may allow us and our planet to survive.

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  14. Frank Ackerman

    Thanks to Yves Smith for reposting my blog piece. I’d like to respond to two points raised in her critical comments.

    1. Some cap and trade systems have done a terrible job with offsets, allowing bogus or multiple credits. This is not intrinsic to cap and trade systems; it is easy to imagine creating a cap and trade system with no offsets, or rigorously measured offsets. It is equally easy to imagine that the legislative process enacting a carbon tax could include last-minute loopholes exempting certain emissions or crediting offsets against the tax. That is, either approach can be screwed up by being soft on offsets/exemptions – or not, if we take a more rigorous approach. There have been more bad outcomes to date with cap and trade, partly because there is simply more experience with cap and trade than with carbon taxes. Going forward, we can do good, or bad, with either.

    2. Yes, I totally agree that a carbon tax sets a price, while a cap and trade system sets a quantity (the cap) of emissions. Either one, if maintained free of interference, can create certainty about the future treatment of carbon emissions in the market; alternatively, either one can be tinkered with often enough to undercut that certainty, if the political process continues to meddle. In theory, fixing the quantity of emissions is more urgent, nature cares about the quantity, not the price. See Weitzman’s 1974 classic on prices vs. quantities in cases of environmental uncertainty. In the short run, however, fixing a quantity leads to fixing a price; and fixing a price leads to fixing a quantity. Again, it is harder than you think to distinguish between these two approaches in practice.

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  15. chuck roast

    I don’t know what it takes to discredit this cap-and-trade nonsense. How can you go to Harvard and not thoroughly digest Polanyi. There are cases where markets simply do not work or are dysfunctional in the extreme. Ancient empires had centralized grain storage for a reason – to protect the population from exploitation by the merchants.

    Right after Obama got in, “have a cuppa Joe Lieberman” and another less discredited fellow whose name I no longer recall, tried to push a cap-and-trade bill through congress. The Democrat majority got cold-feet and the Repubs didn’t fully grasp the enormous opportunities for grift, so the bill failed. But Goldman-Sachs, ever the grim reaper saw a golden opportunity and developed an emissions trading desk.

    I have always considered the failure of that bill to be a rare bit of environmental and institutional good luck. I say institutional because unlike the 10% ethanol requirement, we are not stuck with a huge piece of managed market dreck that does no one any good but the traders. Here is a primer…

    How Goldman Sachs invented cap-and-trade.

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  16. Frank Ackerman

    To the comment from “chuck roast” following mine:

    Let’s turn down the temperature a little. Your first sentence suggests you have already made a final judgment, and don’t want to hear from others. Is that really the case?

    It is true, I went to Harvard and I’ve read Polanyi. These facts are less related than you might think (Polanyi wasn’t heavily featured in the curriculum).

    Either a carbon tax or a cap and trade system relies on the workings of the market, extended to include new price signals whenever prices or quantities change. This artificial extension of the market has to beintroduced very slowly and carefully (see flagpole story)

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    1. Frank Ackerman

      Sorry about accidental typos from who knows where in my first (1:38 pm) try at response (which could happily be deleted). Trying again:

      To “chuck roast’ – Let’s turn down the temperature a little. Your first sentence suggests you have already made a final judgment, and don’t want to hear from others. Is that really the case?

      It is true, I went to Harvard and I’ve read Polanyi. These facts are less related than you might think (Polanyi wasn’t heavily featured in the curriculum).

      Either a carbon tax or a cap and trade system relies on the workings of the market, extended to include new price signals whenever prices or quantities change. Polanyi doesn’t disprove any of this, emphasizing social embedding of the market, and related themes.

      A 10-year-old article excerpt from Rolling Stone, which is what you’ve linked to, doesn’t prove that Goldman Sachs invented cap and trade (it existed well before that time, in the acid rain / sulfur allowance program, for instance). In that article, the author refers to private control of the revenues from cap and trade, but also refers to government auctioning of the allowances. If the government auctions allowances (as recommended in many recent proposals), the revenues remain in public hands.

      Cap and trade has been done badly, no question about that. This does not prove either a) that it must always be done equally badly, or b) that if I was in charge of climate policy, we would end up with something as messy and troubled as the Waxman-Markey bill (which I believe you were referring to). It’s totally possible to do better than that, either with a carbon tax or with a well-designed cap and trade.

      Reply

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