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Carbon Tax
- Thread starter Clprenz
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- Energy Environment Policy
There are two schools of thought on carbon policy (three, if you count "do nothing" as a policy):
A carbon tax is superior if one feels confident in the price that is appropriate to bring about the change sought. If, for example, we had clear estimates of the cost of carbon capture-and-sequestration at coal plants, or a price at which renewables and/or nuclear could displace fossil-fired electric generation (without subsidies or supports), then a carbon tax could be the right way to go.
I don't think that we have that much information, though.
A cap-and-trade system is better when you have good information about the quantity of carbon that you're targeting, but have less good information about how much it will cost to bring emissions down to that point. This is a better description of our current state of knowledge, IMO. This approach is how we currently regulate emissions of SO2 and NOx in the power sector, and it's worked very nicely for a decade.
It's possible to hybridize these systems. For example, you could have an "escape valve" to a cap-and-trade system that would auction additional carbon credits if the market price exceeded some threshold.
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There is an entirely separate debate that should be had about what to do with any revenues raised by carbon regulation. Naturally in politics the "source and uses" debate will be inextricably linked, but from a purely economic, optimal taxation policy perspective, there's no reason to answer the question of what we do with the revenue. There is overwhelming scientific evidence that our continued emissions of carbon is causing serious harm to the environment and, consequently, to the long-run health of the global economy. Under optimal taxation design, imposing a tax on carbon therefore results in a better-performing economy.
- Carbon tax: apply a charge to all fossil fuels extracted or imported based on its carbon content;
- Cap-and-trade: set a hard limit for the amount of carbon, and let the market set the resulting price for these scarce carbon credits.
A carbon tax is superior if one feels confident in the price that is appropriate to bring about the change sought. If, for example, we had clear estimates of the cost of carbon capture-and-sequestration at coal plants, or a price at which renewables and/or nuclear could displace fossil-fired electric generation (without subsidies or supports), then a carbon tax could be the right way to go.
I don't think that we have that much information, though.
A cap-and-trade system is better when you have good information about the quantity of carbon that you're targeting, but have less good information about how much it will cost to bring emissions down to that point. This is a better description of our current state of knowledge, IMO. This approach is how we currently regulate emissions of SO2 and NOx in the power sector, and it's worked very nicely for a decade.
It's possible to hybridize these systems. For example, you could have an "escape valve" to a cap-and-trade system that would auction additional carbon credits if the market price exceeded some threshold.
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There is an entirely separate debate that should be had about what to do with any revenues raised by carbon regulation. Naturally in politics the "source and uses" debate will be inextricably linked, but from a purely economic, optimal taxation policy perspective, there's no reason to answer the question of what we do with the revenue. There is overwhelming scientific evidence that our continued emissions of carbon is causing serious harm to the environment and, consequently, to the long-run health of the global economy. Under optimal taxation design, imposing a tax on carbon therefore results in a better-performing economy.
If we taxed carbon at the source, the market would quickly and efficiently adjust the prices of all goods and services to accurately reflect the amount of carbon used to produce that good or service. Each producer along the supply chain and would very quickly learn how much their costs would rise because of the tax and change their prices accordingly. Businesses would also seek out less carbon intensive ways of doing business, and consumers, looking only at prices, would seek out cheaper, an therefore less carbon intensive goods.
Trying on the other hand to tax each fuel or good separately based on a bureaucrats guess of it's carbon content would be impossibly difficult. It would also be hard to avoid double and triple taxation in such a scheme.
I like Jim Hansen's carbon tax + rebate idea. The proceeds of a carbon tax would be divided equally by every citizen, much like they do in Alaska with their natural resources tax. People could spend their rebate however they wish. The benefits of doing this are a) it is revenue neutral and b) it would be politically popular.
What I'm a little unsure about is how to treat imports and exports in this scheme. It's clear that if you don't have some kind of carbon tariff for countries that don't have a similar tax, you would end up driving manufactures to those countries and so defeat part of your purpose. Hansen's proposal to deal with this is to say that countries which also have a similar carbon tax would pay no import tax. Countries that did not have such a tax would pay an import duty on their goods in proportion to the carbon emissions used to produce the good. Domestic exporters to countries without a tax would receive a rebate on the tax they paid so their goods wouldn't be at a disadvantage. This sounds good in principle, but given the very complicated nature of the global supply chain, I'm not sure how it would work in practice.
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One advantage of a carbon tax is that, under WTO rules, the US could legally impose an import tariff on all goods based on their carbon content (unless the exporting country had a carbon tax greater than or equal to the US's). Imposing such import duties would:
- Eliminate any undue competitive edge for products produced in countries without carbon regulation, and
- Encourage other countries to adopt carbon taxes.
I didn't know that WTO rules allowed this. That's actually quite encouraging - it's one less hurdle to overcome. #2 is a good point as well.
This is an incredibly important argument and I wish it would be understood by many more. The United States is by far the largest consumer market by a long shot, so we have a tremendous influence by our buying decisions. The carbon fee on imported goods would no doubt hurt China, and do so in a big way. I could easily see it causing a trade war, which would be politically toxic for U.S. politicians. I think we could possibly balance that out by helping China lower it's carbon emissions. How can we do that? I don't really know.
mknox
Well-Known Member
Wouldn't it also "hurt" the domestic market when those costs are simply passed through to the consumer?
"..hurt the consumer?...."
Not if appropriately crafted and implemented. To paraphrase what Rob't Boston inter alia wrote, this is an attempt to internalize externalities. That is, it is an attempt to address the fact that certain actions - in this situation, introduction into the atmosphere some oxides of carbon above those created by biologic processes - have deleterious effects to humankind and, by extension, to the rest of the earth.
The creators of the tax make an assessment of the cost of those effects and charge the creators of those costs with a bill for same. Thereby, to put it into concrete but fictitious terms, if an activity causes $X of "pollution" (ie, harms human health and welfare and the biosphere by that amount), then the creator of such action is charged that amount. Naturally, the creator passes on that cost...or the increased cost of avoiding paying that by producing its products in such a fashion not to create this externality, to the purchaser of its goods...but...inasmuch as those externalities are not created, the overall welfare has been maintained.
The devil, as always, is in the details.
Not if appropriately crafted and implemented. To paraphrase what Rob't Boston inter alia wrote, this is an attempt to internalize externalities. That is, it is an attempt to address the fact that certain actions - in this situation, introduction into the atmosphere some oxides of carbon above those created by biologic processes - have deleterious effects to humankind and, by extension, to the rest of the earth.
The creators of the tax make an assessment of the cost of those effects and charge the creators of those costs with a bill for same. Thereby, to put it into concrete but fictitious terms, if an activity causes $X of "pollution" (ie, harms human health and welfare and the biosphere by that amount), then the creator of such action is charged that amount. Naturally, the creator passes on that cost...or the increased cost of avoiding paying that by producing its products in such a fashion not to create this externality, to the purchaser of its goods...but...inasmuch as those externalities are not created, the overall welfare has been maintained.
The devil, as always, is in the details.
mknox
Well-Known Member
I meant in the same context as @tigerade's original comment that it would "hurt" China (where a lot of manufacturing occurs) in a "big way" (i.e. financially).
I accept that a carbon tax would raise prices on gasoline, electricity and consumer goods. However I am making the assumption here that the carbon tax would come under the "fee and dividend" style, or there would be some kind of tax cut to low and middle-income people. I think there are good options to make the harm from the tax negligible to the consumer.
If the carbon tax were revenue neutral, as some have proposed (or pretended to propose), then the carbon tax would change prices but not change your buying power, provided you were willing to shift to buying lower-carbon-intensity products. Or, if the tax were not revenue neutral, citizens would (supposedly) receive better/more government services.
How the funds are used is a separate debate; the key is to raise the relative price of carbon-intensive goods and therefore lower the relative price of lower-carbon goods. If we did this right, we could end all the programs that subsidize renewable energy, electric vehicles, energy efficiency, rebates on energy-efficient appliances, and a whole host of other programs. People would buy the "right" product because the cost of buying and operating it would reflect the full societal costs.
How the funds are used is a separate debate; the key is to raise the relative price of carbon-intensive goods and therefore lower the relative price of lower-carbon goods. If we did this right, we could end all the programs that subsidize renewable energy, electric vehicles, energy efficiency, rebates on energy-efficient appliances, and a whole host of other programs. People would buy the "right" product because the cost of buying and operating it would reflect the full societal costs.
I don't see this at all. Take the cleanest case, Hansen's tax + dividend proposal in which the tax proceeds are paid out as cash payments in equal amounts to each citizen. Since this proposal is strictly revenue neutral, the extra amount people pay for things because the tax raises prices is exactly equal to the amount they receive in aggregate in dividends. So the average citizen will be no better or worse off from this, regardless of the size of the tax. If the tax is higher, they pay more, but they also get higher dividends, and the amounts on average are strictly equal. Now there obviously a wide variation around the average in terms of how much carbon one implicitly emits. However the rich are typically responsible for far more emissions than the poor. One international plane trip is equal to about a year of driving; the rich go on many plane trips relative to the poor. The rich live in bigger houses. Sometimes they have more than one house. They buy more stuff. They tend to drive rather than take public transport. And so forth. So one average the amount of tax paid by people who live extravagantly will far exceed the amount of their dividend and the opposite will be the case for those who live more frugally than average. In this proposal, the poor should on average actually make money.
rich will get richer and the poor will get screwed.
Two major market-based options exist, and politicians around the world have largely settled on carbon trading. Understanding the reality of a "great" idea is the first step.
Carbon emission trading - Wikipedia, the free encyclopedia
HowStuffWorks
Bottom line, rich will get richer and the poor will be left behind.
Two major market-based options exist, and politicians around the world have largely settled on carbon trading. Understanding the reality of a "great" idea is the first step.
Carbon emission trading
Carbon emission trading - Wikipedia, the free encyclopedia
How Carbon Trading Works
HowStuffWorks
Carbon Trade Exchange is a Global Electronic Carbon Credit Exchange Platform
http://carbontradexchange.com/Bottom line, rich will get richer and the poor will be left behind.
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@montgom626: first, be clear that the Kyoto Protocol "carbon trading" is not the same as a carbon tax; it's a cap-and-trade system, and a flawed one at that. Second, I didn't find any support in your links for the premise that the carbon trading system will cause the rich to get richer and the poor to get poorer (possibly with the exception that the carbon credits are handed out based on historical emissions). That conclusion appears to be premised entirely on your own deep mistrust of market-based economies. Or am I missing something?
If you haven't been following the debate surrounding capping and trading emissions, you're missing out. Not only does it have implications for how our nation — and the world — produces energy; it has the potential to offer a myriad of opportunities for well-informed investors. According to a recent New York Times article, carbon trading is one of the "fastest-growing specialties in financial services." And companies are scrambling to get a slice of a market now worth well over 100 billion and that could grow to $1 trillion within a decade.
How Tesla Makes Millions Selling Carbon Credits
http://beta.fool.com/dcawrey/2013/08/06/how-tesla-makes-millions-selling-carbon-credits/42576/
Carbon Trading: The World's Next Biggest Market
Carbon Trading: The World's Next Biggest Market
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Yes, you are missing something.
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Very presumptuous statement. You don't know me at all.
montgom626,
Your information is slightly dated.
The "recent" NYTimes article you refer to was written in 2007:
In Londons Financial World, Carbon Trading Is the New Big Thing - New York Times
Ten years ago, there was some hope that genuine carbon emissions trading regime could be implemented in the US, but it never was. The European version was implemented but that market is the opposite of the World's Next Biggest Market. It never amounted to much and is now in fact moribund. From the FT:
November 18, 2013 7:24 pm
At least 10 London banks have scaled back or closed their carbon trading desks amid turmoil in the European emissions trading scheme.
The fledgling market was once seen as a promising growth area, with the City of London Corporation predicting in 2006 that London would become the leading provider of services to the “mushrooming” sector.
The workforce had fallen from close to a thousand to just a couple of hundred, Mr Hobley estimated, as carbon prices have plummeted.
But the number of City workers employed on carbon desks has fallen by 70 per cent in the past four years, according to Anthony Hobley, president of the Climate Markets & Investors Association.
This market's failure aside, I fail to see the mechanism by which a robust market in carbon emissions would transfer money from the poor and give to the rich as you seem to believe it inevitably would.
I am also genuinely curious about your thoughts on Hansen's carbon tax + rebate idea. Do you agree that those who consume the least - the poor - would on average make money, while those who consume the most would lose money, so that in addition to reducing carbon emissions, this scheme would also be a direct transfer from the rich to the poor - the exact opposite of what you fear?
Your information is slightly dated.
The "recent" NYTimes article you refer to was written in 2007:
In Londons Financial World, Carbon Trading Is the New Big Thing - New York Times
Ten years ago, there was some hope that genuine carbon emissions trading regime could be implemented in the US, but it never was. The European version was implemented but that market is the opposite of the World's Next Biggest Market. It never amounted to much and is now in fact moribund. From the FT:
November 18, 2013 7:24 pm
London banks quit carbon trading
By Jim Pickard and Ajay MakanAt least 10 London banks have scaled back or closed their carbon trading desks amid turmoil in the European emissions trading scheme.
The fledgling market was once seen as a promising growth area, with the City of London Corporation predicting in 2006 that London would become the leading provider of services to the “mushrooming” sector.
The workforce had fallen from close to a thousand to just a couple of hundred, Mr Hobley estimated, as carbon prices have plummeted.
But the number of City workers employed on carbon desks has fallen by 70 per cent in the past four years, according to Anthony Hobley, president of the Climate Markets & Investors Association.
This market's failure aside, I fail to see the mechanism by which a robust market in carbon emissions would transfer money from the poor and give to the rich as you seem to believe it inevitably would.
I am also genuinely curious about your thoughts on Hansen's carbon tax + rebate idea. Do you agree that those who consume the least - the poor - would on average make money, while those who consume the most would lose money, so that in addition to reducing carbon emissions, this scheme would also be a direct transfer from the rich to the poor - the exact opposite of what you fear?
Only the rich have the money to "trade". The poor never will. The rich get richer and the poor stay poor. Also, I would never suggest that money would be transferred from the poor to the rich. The poor have no money to be transfered, that is why they are poor.
So are you proposing that the best carbon policy is no carbon policy? I would disagree, if that's your argument. The challenges you've raised are all about how carbon policies are implemented, not whether carbon emissions should carry zero cost for the polluter.
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