Price on emissions: carbon tax and cap-and-trade

[dlen]

There is an old thread on carbon tax, which is interesting, but it seems to have died, and I think the topic is so important, that I start a similar one new, with a bit broader base, including cap-and-trade-systems.

The point beeing, that price-on-emissions-schemes save political energy in the moment used up in dozens of special regulations like airport taxes,  fuel taxes, car emission regulations, house thermal insulation regulations, feed-in-tariffs and the like.

My special personal hobby horse would be to try to refurbish the european cap-and-trade-scheme with the following propositions:

• include all emissions, not only 50 % like now,
• let importers buy emission certificates and allow exporters to sell them. This would enable governments to take away most of the current exemptions
• cut down on clean-development-certificates (CDMs), which have been used widely to cheat

A fourth point could be to recyle the money payed fully or partly on a per-capita-basis, like James Hansen proposed for the notoriously state-hating US of A.
This might be of lesser interest for the non-european contributors of course. And as probably few to no policy makers read this forum, the discussion is somewhat l'art pour l'art, but better than nothing.

There are a lot of both tax and cap-and-trade-schemes in the world, and this thread could kind of keep track of them. Also of upcoming legislation may be.

E.g. there are cap-and-trade schemes in regions smaller than a country, like the Canadian province Alberta, the US state of California, and preparations for one in China.

To put a price on emissions is IMHO not only the single most powerful measure (this is at the same time the r e a s o n why nobody wants it), but also it gives a basis for the societal discussion, how much we want to invest in the bottom line into the future of our planet.

The advantage of a c&t scheme is, that the carbon budget approach can directly be taken into account. That is, we can directly decide how much carbon we want to emit in which time period.

[dlen]

http://www.economist.com/blogs/analects/2013/06/carbon-emissions

About the Chinese c&t-scheme in the Shenzhen region (does anybody know how to pronounce that?):

The first step came in the period of 2006 to 2010 (the 11th five-year plan), with the introduction of a cap on coal output. From 2011 to 2015 we get the pilot ETS and a cap on total energy consumption. Then in the period from 2016 to 2020 there should be an absolute carbon cap (not just per unit of output), which would pave the way for a proper national ETS, to emerge between 2021 and 2025. In all it would take ten years.

[Lucas Durand]

To put a price on emissions is IMHO not only the single most powerful measure (this is at the same time the r e a s o n why nobody wants it), but also it gives a basis for the societal discussion, how much we want to invest in the bottom line into the future of our planet.

dlen,
While I agree with the idea of taxing carbon emissions in principal, I am skeptical that such an approach will have the dramatic downward effect on global emissions we need to see...

The problem as I see it with taxing carbon emissions is "leakage".
That is, it does not neccesarily prevent the extraction of fossil fuels for export (except that it may cost slightly more to extract fossil fuels given that the extraction process has its own emissions footprint).
Consider Alberta as an example; that province could set an example in terms of reducing their own carbon emmissions footprint by adopting a cap and trade system - but you can bet your bottom dollar that as much syncrude as can be managed will still be exported (much of it to markets where there is likely no carbon tax in place) because to shut down that enterprise would be to shut down a large segment of their (and Canada's) economy (something that would be politically very unpopular when the focus domestically is on job creation and economic growth).

I suppose that if a strict "global carbon tax" could be imposed and enforced, it would be a different matter - but the chances of that happening seem very, very remote.
I can hear the cries of "conspiracy" already...

I think more powerful than a tax on carbon emissions would be a tax specifically on the extraction of fossil fuels.

[ghoti]

Yes exactly - tax carbon at source. Places like Alberta continue to claim carbon extracted has no local CO2 impact and so don't count it as such. But every gram of carbon extracted is destined to be burned so who are they kidding?

[dlen]

Seems logical. But who should put a tax on digging fossils out? The canadian government? The government of Alberta?

If buyers and sellers don't take climate change seriously, nothing can be done.

So for the time beeing, it is Canadas turn to renounce some of its income from fossil fuel export by increasing its the price considerably. But will she do that? Is there enough feeling of urgency? Of the necessity, to do something even if there is non general, comprehensive treaty? It's the task of the Canadians to spread the word in their country - and that of the USians to do the same in theirs.

A global cap-and-trade-system is an utopia - for now. But it makes the most sense.

[JimD]

Europe, Facing Economic Pain, May Ease Climate Rules

http://www.nytimes.com/2014/01/23/business/international/european-union-lowers-ambitions-on-renewable-energy.html?hp&_r=0

LONDON — For years, Europe has tried to set the global standard for climate-change regulation, creating tough rules on emissions, mandating more use of renewable energy sources and arguably sacrificing some economic growth in the name of saving the planet.

But now even Europe seems to be hitting its environmentalist limits.

High energy costs, declining industrial competitiveness and a recognition that the economy is unlikely to rebound strongly any time soon are leading policy makers to begin easing up in their drive for more aggressive climate regulation.

On Wednesday, the European Union proposed an end to binding national targets for renewable energy production after 2020. Instead, it substituted an overall European goal that is likely to be much harder to enforce.

It also decided against proposing laws on environmental damage and safety during the extraction of shale gas by a controversial drilling process known as fracking. It opted instead for a series of minimum principles it said it would monitor.
.....

This mornings Wall Street Journal had an editorial decrying fuel efficiency standards for vehicles and the harm they cause the auto industry.  The article prominently mentioned that the climate has not warmed in 15 years.

If, as much of the business press seems to be indicating, the overall glob al economy starts to struggle a bit more than it is now later in the year we can expect a drumbeat of similar reports I expect.

[JimD]

Here is a report on a paper which claims to have created a formula for calculating an optimal carbon tax.

Opinions on this research?

There now is widespread consensus that the key driver of climate change is the emission of carbon dioxide from burning fossil fuels (Metz et al. 2007). Since climate change affects the global economy, this is a textbook example of what economists label a ‘pure externality’. There is substantial uncertainty about how large this externality is. Yet, available knowledge can be used to provide an estimate of the externality that is surprisingly robust. In this note we argue that this provides a strong case for using a carbon tax rather than emission caps.

Standard economic principles imply that the climate change externality of emitting carbon is determined by the following factors:

1. The damages caused by a marginal unit of carbon in the atmosphere.
 2. How long a unit of carbon stays in the atmosphere.
 3. How we evaluate future damages.

In recent work (Golosov et al. 2013), we show that this decomposition allows us to derive a simple formula for the optimal carbon tax. Importantly, we show that this formula is robust across a large range of climate models that differ in their assumptions on technical advances, population growth, and many other features of the global economy – including most existing climate models. The robustness came as a major surprise to us and is, we believe, an important finding.....

http://www.voxeu.org/article/simple-formula-climate-linked-economic-damage

[SATire]

Europe, Facing Economic Pain, May Ease Climate Rules

JimD - your "May" should be bold. Several governments are now sending their poeple to Brussels with an explicit message. The governments will decide - EU has no government. Furthermore, it is not only economic pain but also frustration - it does not help to export production and thus emission. We need a new framework - a global one would be best.

[dlen]

JimD: A carbon tax seems to me much easier to implement.

I am not an economist, so i can say nothing particular to the relation of Nordhaus (2.5%/Tt_co2equ).

It's an old argument for the carbon tax, that it is better capable of finding an economic optimum, because the alledged damage is somehow aproximately proportional to the emission - as the tax is, too.

I am a bit more skeptical concerning large unlinearities. I could imagine, that large swaths of land might become utterly uninhabitable and thus costs might spike.

Also there may be not only an economic, but also a humanitarian price to pay. (Additional hunger victims because of food price spikes, catastrophe victims, water wars, you name it. There are voices who call the Syrian civil war the first climate war, because a long draught made so many farmers leave their land and go to the big cities.)