One of the problems with carbon taxes is that they’re static. Let’s say you set a tax at $20 per ton of CO2. It’s going to stay at $20 when the economy is hot, even if the tax rate doesn’t do much to reduce emissions. Conversely, when the economy goes south, the carbon tax will persist at $20, even though emissions may be dropping fast on their own—and companies may need some breathing room.
The first scenario is bad for the climate. The second scenario is bad for the economy.
If only there were a way for carbon pricing to respond to changing economic conditions in real time without any intervention from policymakers. If only. That would be like magic.
But I have good news for you: magic exists! There is such a thing as a magical self-adjusting carbon tax. It tracks economic conditions precisely and it always ensures the right amount of reductions. It’s called "cap-and-trade."
This isn’t just a theoretical point. The New York Times recently reported that carbon prices have been tumbling during the economic downturn. For some reason, commentators keep treating this as a bad thing. But it’s not. It’s a very good thing. It’s evidence that cap-and-trade systems are responding dynamically, exactly as they are supposed to.
A carbon allowance in the European ETS system is now selling for less than 12 euros. It’s shed about half its value over the last few months, which is precisely what we would hope for. The reason the price has fallen is because the demand for carbon emissions has also fallen precipitously as manufacturers and others scale back to meet the recession-era realities of the marketplace.
Similarly, allowances in the RGGI system in the northeast U.S. are going for well under $4. RGGI hasn’t been around long enough for us to observe a long-term trend, but the low price of RGGI carbon likely owes a good deal to the reduced demand for electricity-sector carbon. Some of that demand reduction was due to generators taking early action before the cap took effect, but some is almost certainly due to the deteriorating economy.
When the economy is on the ropes, it’s wise to reduce the price of carbon—and as long as the price is tethered to a firm cap, there’s no environmental downside.
But there may be a potential downside to keeping the price fixed, as a tax would. During a recession, it might be hard for policymakers to justify continuing a carbon tax on struggling firms. It’s not hard to imagine a tax being stricken from the books. A cap-and-trade system, by contrast, is probably less vulnerable to political gaming, if only because carbon prices will mirror the economic reality.
And just for the record: There are are pros and cons to both carbon taxes and cap-and-trade. With this post, I’m just trying to point out one commonly overlooked "pro" for cap-and-trade.
In the holy war that’s raging between the two carbon pricing camps, Sightline Institute (where I work) can fairly be described as something of a Carbon Unitarian. We prefer cap-and-trade, but we also believe there are merits to carbon taxes. In fact, we’ve spilled a lot of positive cyber-ink on carbon taxes.
Top 25 reasons to give a damn about climate change
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Delay And Deny Posted 10:18 am
02 Feb 2009
http://www.greencarcongress.com/2009/01/researchers-d-1.h ...
Researchers at Penn State have developed a method for the more efficient solar conversion of carbon dioxide and water vapor to methane and other hydrocarbons using nitrogen-doped titania nanotube arrays. The arrays feature a wall thickness low enough to facilitate effective carrier transfer to the adsorbing species, and are surface-loaded with nanodimensional islands of co-catalysts platinum (Pt) and/or copper (Cu).
You know you're not a liberal when...
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Gar Lipow Posted 11:26 am
02 Feb 2009
Sorry, but there is if the cap is going to get lower. Usually the point of a phased in cap-and-trade is not only to meet the current cap, to get the investments made needed to comply when the cap tightens. If the carbon price drops too much during bad times, when they improve the infrastructure won't be there. One way to avoid this is to take action to reduce volatility, such as a minimum price. Or you could have large enough scale public investment and efficiency standards to ensure that such investment does not depend upon price, so that either cap-and-trade or a carbon tax is reinforcement not the main driver of reductions. But that would be setting priorities and apparently setting priorities is now the equivalent of declaring holy war.
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Pangolin Posted 11:50 am
02 Feb 2009
The magical self-adjusting carbon tax coming home as droughts, floods and hurricanes seems to be ramping up with a vengence. Too bad that wasn't what the OP was about.
Put the Carbon Back
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hapa Posted 11:56 am
02 Feb 2009
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hapa Posted 12:02 pm
02 Feb 2009
if you find yourself with more free time than usual in the coming few years, repeating this to yourself can help while away any surplus of leisure
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amazingdrx Posted 1:35 pm
02 Feb 2009
Oh they're getting it alright, with CnT in the EU, and the hedge funds are helping out. Yippee, burn 'em (fossil fuels) if you got 'em.
http://www.guardian.co.uk/business/2009/jan/27/industry-a ...
Britain's biggest polluting companies are abusing a European emissions trading scheme (ETS) designed to tackle global warming by cashing in their carbon credits in order to bolster ailing balance sheets.
The sell-off has helped trigger a collapse in the price of carbon, making it cheaper to burn high-carbon fossil fuels and leading to a fall in the number of clean energy projects. The moves were seized on by environmentalists and other critics who have previously criticised the European Union's ETS for delivering more windfall profits for business than climate change.
"This [ETS] was not designed as a scheme to give corporates cheap short-term funding options in the face of a credit crunch meltdown where banks are not lending, but that appears to be what's happening," said Mark Lewis, a carbon analyst at Deutsche Bank.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Pathos Posted 4:46 pm
02 Feb 2009
Well done, Eric!
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amazingdrx Posted 5:05 pm
02 Feb 2009
For those with golden parachutes it rules!
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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amazingdrx Posted 5:11 pm
02 Feb 2009
Plus it's a great way to secretly say I told you so to old flames. And have the very last word.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Pangolin Posted 5:23 pm
02 Feb 2009
This is why the economy has crashed. Too much reality intruding on economic forecasts.
Put the Carbon Back
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Russ Posted 6:02 pm
02 Feb 2009
isn't actually iambic pentameter.
(And "efficiency" is just an ugly, ugly, unpoetic word. The syllables are spineless.)
But this:
For those with golden parachutes it rules!
is superb. :)
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Pathos Posted 11:21 pm
02 Feb 2009
Besides, dude. Trust me, these days, there's about a 90% chance that any woman you'd consider a candidate for that gift, already owns a vibrator. In fact, you might as well face it... Your old flame probably had one sitting in her beside drawer the entire time you were dating--and she may have even treated herself to an upgrade as a pick-me-up after the break-up.
We might as well accept it... Procedures like "washing that man right out of one's hair" went out with World War II and the Jitterbug. These days, the whole recuperation process is a little less, um, wholesome.
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