In his post on conservatives and carbon taxes, David said:
First, we have to remember all the places the price signal created by an upstream tax can be diluted or stymied on the way to consumers—i.e., those who can change their behavior in response to prices. Not every industry or business will pass an increase in operating costs directly on to the next link in the chain. Information failures and split incentives abound. Price signals that begin strong, catholic, and clear become fragmented and faint downstream. For all the hype, an upstream carbon price will deliver fairly little incentive to where the carbon is used.
There are two problems with this: It is overstated, and it places blame in the wrong place, i.e., the fact that the tax is levied upstream.
Both points can be substantiated by looking at a 2004 study of gas taxes [PDF]. This study shows that federal gas taxes, the closest thing the U.S. has to a carbon tax, are borne about 50/50 by consumers and producers/distributors of gasoline. This means that 50 percent of a carbon tax does in fact reach the consumer. However there is an even more important point. You can’t levy a tax much further downstream than a gas tax. It is paid at the gas pump by the consumer. Yet it turns out that consumer pushback still ends up placing almost half the cost on the producers and distributors. That is true even though the oil industry is an oligopoly, controlled by few players.
In fact, how much of the tax is born by people other than consumers turns out to be primarily determined by long-term demand elasticity in response to price. (Elasticity is a number representing how much less consumers of a good or service consumers use as prices rise.) Elasticity determines how much of an emissions tax is borne by consumers vs. producers and distributors—not whether the tax is levied upstream or down, but to what extent consumers will tend to lower demand in response to price increases.
That makes a strong case for levying carbon taxes upstream rather than down. You have the simplicity and transparency of levying the tax at far fewer points against far fewer actors. And levying the tax downstream does not change the tax incidence. Consumers, producers, and distributors will split the cost about the same way regardless of to whom it is charged.
I will note that this is also a good argument for using public investment and standards-based regulation as the primary means to lower emissions, where practical. Where elasticity is high, so will be consumer pushback, tempering consumer response as producers and distributors bear much of the cost. Where elasticity is low, consumer pushback won’t be strong because consumers won’t be able to lower demand easily in response to higher prices. So consumers will bear the highest tax incidence when it will be least effective. Note that this applies equally to a carbon tax, an auctioned permit, or a cap-and-trade system.
Oil: enough energy to melt glaciers!
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Comments
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Sean Casten Posted 3:49 am
07 Jan 2009
An automobile owner has little choice whether or not to fuel their car with gasoline, and the carbon impacts of their use are purely a function of their fuel economy and driving habits. Thus, your "anywhere in the system is the same" logic does have a certain applicability since up and down the fuel chain, there is no real ability for anyone to shift to other products. (Note also that in the case of gasoline, almost all of the CO2 emissions occur just downstream of the consumer transaction at the pump.)
This is totally different for CO2 associated with electricity and thermal energy production.
Taking electricity first, a carbon tax placed upstream (e.g., at the mine mouth) will be passed downstream in prices only to the degree that the resulting commodity can still be competitively sold against competing power plant fuels. (Note the difference with the gasoline fuel chain, where there are no significant alternatives for the feedstock from the well-head to the pump. You can't replace the crude oil with wood chips in a refinery and can't replace the gasoline in your car with solar energy.) Thus, a higher price on coal given it's carbon content will only raise the price to coal consumers to the extent that coal is still competitively priced against same on a $/MMBtu basis. This competitive pressure doesn't exist in the crude oil --> gasoline fuel chain. Thus, the 50/50 burden between consumers and producers you note in gasoline will almost certainly be shifted more towards producers in the power sector.
This is even more pronounced when it comes to fuels burned for thermal purposes, since those consumers generally have even greater fuel flexiblity: a coal plant can blend a bit of gas, biomass or other fuels into it's operation, but major shifts require major capital investments. By contrast, it is much cheaper to retrofit / swap out boilers and furnaces to opportunistically switch fuels in response to economics. Still expensive, no doubt, but not nearly to the same degree, as anyone knows who's ever replaced their electric dryer with a gas dryer - or borne witness to the thousands of industrials who have modified boilers to fuel switch from coal to gas to biomass and back in response to various fuel environments.
The upshot of all this demonstrated ability to fuel switch in the electric and thermal sectors - which, in aggregate, add up to more than 2/3rds of all US CO2 emissions - is that upstream prices on carbon will be disproportionately borne by producers rather than consumers, creating a wholly undesirable outcome where the net impact of carbon policy is to lower the profit margins of fossil fuel producers without actually providing any lower incentive to burn more fossil fuel (since consumers - aka, fossil fuel burners - see little increase in the actual cost at the burner tip that relates to the carbon content of their fuel.) In other words, creating a national, economy wide carbon bill based on the rather unique conditions in the transportation sector is a really bad idea. More specifically, upstream carbon pricing is a really bad idea.
But I remain confused as to why you are so adamant about upstream. Putting carbon price signals at the point where the CO2 is released absolutely ensures that the person making a decision to reduce CO2 factors the emissions into their economic calculus. Putting the carbon price anywhere else in the system places a bet that those prices will manifest themselves at the point where CO2 is released and affect behavior. If your theory is right, notwithstanding my objections, then upstream is no different from downstream. But if your theory is wrong, upstream is vastly worse than downstream. (To be semantically clear, when I say "downstream" I'm referring to pricing carbon at the point where fuel is burned, regardless of where that happens in the value chain.)
Why make such a fuss in defense of an untested economic theory? The stakes of getting this wrong are far too important to hope on the basis of economic theories and inappropriately applied lessons from other sectors that it will all be the same if we stick the price elsewhere.
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GreyFlcn Posted 4:03 am
07 Jan 2009
(Or your basic "Feebate")
http://en.wikipedia.org/wiki/Feebate
-David Ahlport
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Sean Casten Posted 4:21 am
07 Jan 2009
OK, it's hard for transportation, but as Gar points out, you can do that at the pump and get damned near the same impact in that particular sector.
Forget upstream, forget rebates, forget theories of elasticity and price transfer. Put the price at the point of CO2 release, implement an audit and verification scheme to ensure compliance, ideally with output-based standards and be done with it, knowing that you are providing a direct incentive to reduce CO2 tied to the CO2 you release. Everything else is patches and uncertainty.
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Gar Lipow Posted 5:40 am
07 Jan 2009
And the same thing will happen if the tax is levied on whoever burns the fuel. Put the tax on power generators, and to the extent that they can switch fuel, the fuel producers will lower their profit margin and absorb as much of the carbon tax as they can and still stay in business. (Or possibly they will absorb more than that and take a loss to go out of business more slowly, as I have seen some former small businesses do locally. ) If gas stations had faced competing stations selling fuel derived from Al Capp's schmoos producers would have borne even more of the cost. Levy carbon taxes upstream or levy the downstream, producers will still end up bearing as much of the cost as elasticity requires.
The same will happen even more strongly with industrial producers where consumers can choose among diverse goods. Levy the carbon tax on the consumer or at the factory level, and you will have goods switching among consumers, fuel and process switching among producers, and pressure for both goods and fuel producers and distributors to absorb some of the cost. In competitive markets it is easier, not harder for downstream players to push tax incidence up to upstream players. David's proposal is ingenious, but not necessary. Tax incidence is determined by elasticity of demand, not by where the tax is levied.
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Sean Casten Posted 12:05 pm
08 Jan 2009
This is the crux of the problem with moving the price upstream. Place the consumer ability to switch at the point where it is painful for CO2 emitters and the economic signal is precise, and socially beneficial. Place it anywhere else in the fuel chain and it ain't.
I come back to my initial question: why push for an unreliable, imprecise economic signal given the environmental stakes?
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GreyFlcn Posted 12:26 pm
08 Jan 2009
But I can agree with one aspect which you aren't bringing up.
Psychological Impact
By making it so that the party which has the most decision power, is the one who is forced to do the accounting, then they would see that Federal check as a cumulated big red line on their accounting books.
If it were upstream, then that accounting would be out of sight, and out of mind.
_
From a monetary standpoint, I don't really see the difference.
But from a Behavioral Impact standpoint, you may actually have a point.
-David Ahlport
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hapa Posted 12:48 pm
08 Jan 2009
party A originates or imports the coal and pays a fee, possibly passing less than 100% of that fee downstream (depending on local elasticity); but in
"party B end-buys the coal and pays a fee," the price that party B is willing to pony up for coal is unaffected by the oncoming fee?
how does scenario 2 not end up sending the fee upstream? i just did a bunch of reading about buying and selling coal in china, with price mandates for commodities, power, etc. this isn't china. if there's a consumer price for electricity, the division of the coal fees will be negotiated through the price paid for the fuel, wouldn't it be? in either scenario?
maybe need to talk about process heat and electricity generation separately...?
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Gar Lipow Posted 2:00 pm
08 Jan 2009
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JMG Posted 3:48 pm
08 Jan 2009
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Sean Casten Posted 11:30 pm
08 Jan 2009
The issue here is not whether or not costs get passed along, or some government pushback conspiracy. The issue is that the only goal of a carbon pricing scheme is whether or not that price sends a signal to reduce CO2 emissions. Remember, carbon in coal, oil, gas or anywhere else doesn't hurt the atmosphere until it gets released into the atmosphere as a global warming gas.
So to the extent that - in hapa's case 2 - the coal combustion facility bears the cost for that CO2 release and doesn't pass it downstream, it means that coal-derived power is the same price, but the business of burning coal just got less expensive. Ergo, there is less economic incentive to convert coal into CO2, precisely meeting the purpose of the carbon price.
Now put the same signal upstream and again assume that the coal producer doesn't pass the cost of their upstream carbon tax downstream. The business of mining coal has suddenly gotten less attractive, but the economics of turning coal into CO2 are unchanged. This serves no purpose other than perhaps creating some degree of self-righteous - but misguided - satisfaction by penalizing the Don Blankenships of the world. Maybe there is some punitive pleasure that comes from that, but ultimately this is not the purpose of CO2 pricing - the purpose of putting a price on CO2 is to lower the CO2 concentration in the atmosphere. So long as we agree on that goal, there is no scenario in which any placement of that cost at any point in the system other than the point of CO2 release provides better overall economic signals to slow & reverse the rate of release. At best, it is a break even.
I continue to come back to the original question - why push so hard for economic inefficiency? If you want someone to stop taking an action, put the penalty at the action. Doing otherwise is tantamount to trying to stop murders by taxing handguns. Might such a policy provide some additive benefit to our existing criminal justice system? Sure - but no reasonable person would argue for a handgun tax in lieu of our criminal justice system. And yet this is precisely what the argument for upstream carbon pricing is doing.
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JMG Posted 1:09 am
09 Jan 2009
Also, taking an observation that industry as a whole has tax preferences and calling that a "conspiracy theory" is beneath you, as just another example of using that term to attempt to discredit an argument by throwing around a word that the corporate-owned press uses as a code for "nutjob."
The 5% Project
Let's live on the planet as if we intend to stay.
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Sean Casten Posted 2:23 am
09 Jan 2009
I take your point that once the fuel is out, it is going to be burned. But that is a separate question from whether or not the economic signal intended to curtail that combustion - or, if you prefer, fuel extraction - is more effective if placed upstream or downstream. Going back to my murder metaphor, one can make a compelling argument that there is no good reason for civilians to own AK-47s, and that the availability of such weapons to the public raises the risk that they will be used for criminal activity - and yet still conclude preventing murder solely by increasing the tax rate on AK-47 manufacturers is a crummy way to deter drive-by shootings.
So let's now apply this to the economics of carbon pricing:
An upstream carbon price will reduce the profitability of resource extraction, but does not necessarily lower the profitability of fuel combustion. In other words, while it may dissuade people from getting into the coal mining business, it doesn't necessarily do anything to slow the demand for their product.
A downstream carbon price lowers the profitability of fuel combustion but - if I understand your concern correctly - does not directly reduce the rate of fuel extraction.
If I've got your concern right, (e.g., that if we're still pulling it out of the ground just as fast, it will get burned anyway), then I think it's misplaced. The guy who suddenly finds it painful to generate CO2 has a strong incentive to do any number of things to lower that pain, from switching to lower carbon fuels to enhancing the efficiency of his process (e.g., producing less CO2 per unit of production). Note that all these activities necessarily lead to less demand for the upstream resource. The only exception is if the combustor instead invests in some sort of CO2 sequestration scheme. Setting aside the lousy economics of such an approach compared to the other ways to reduce CO2, this at least is still reducing CO2. This is the benefit of downstream pricing.
Now compare this to the upstream approach. The mining company becomes less profitable, but the guy burning the fuel has no change in their incentive to burn. (Or at least less than 100% of the pain they would feel if they bore the price of compliance.) This has the very real possibility to lead to increased CO2 release and simply put a drag on economic activity (in the form of lower profits to mining industry) with no concommittant environmental gain.
But more problematically, the upstream approach removes the incentive to take those activities that are both economically and environmentally beneficial. In the downstream case, we have all sorts of incentives for fuel combustors to chase efficiency and/or renewable fuel sources that have lower variable costs but higher capital costs. That results directly from the fact that the individual who must bear the cost of compliance as an economic incentive to lower their CO2 emissions, and therefore is prodded to pursue the multitude of paths to CO2 reduction - and will inevitably favor the profitable approaches before the unprofitable ones. By contrast, the upstream model applies economic pain to entities who have no economically beneficial alternatives; while a power plant can fuel switch or increase their efficiency, a coal miner cannot suddenly decide to start mining closed loop, sustainably harvested biomass.
RGGI provides a real-time - albeit slightly imprecise - demonstration of the point. The RGGI allocation methodology is such that any central power plant > 25 MW feels the pain of compliance (to the extent that they didn't get an allocation to pollute, at least), but everyone else is outside the system, with only the most indirect way to participate. I have personally put cogen and biomass facilities together in New England both before and after RGGI came into affect - all of which were smaller than this 25 MW threshold, and thus outside of the direct compliance mechanism - and I can assure you that there is no incremental incentive to build such facilities in a post-RGGI world. This is not precisely the upstream case, but does highlight the problem with any regulatory regime that doesn't place an equal $/ton price on all CO2 sources, applied directly at the point of release... which is precisely my objection with the upstream methodology.
So when you add all together, the price signal at the point of CO2 release has huge advantages:
It places a direct price on CO2 release with no intervening, imprecise transfers through the system, directly connecting cause and effect.
It necessarily lowers the demand for carbon-intensive fuels, addressing your concern about not taking it out of the ground in the first place.
It minimizes the economic pain associated with GHG mitigation.
On all three of these metrics, upstream pricing gets it wrong, with environmentally dangerous consequences.
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JMG Posted 4:00 am
09 Jan 2009
I was responding only to the suggestion that I have some ulterior motive to advocate for downstream regulation other than reducing atmospheric CO2 concentrations as quickly, and with as little economic pain as possible.
But what I said was that INDUSTRY favors taxes at the combustion point (rather than extraction). If I meant to accuse you of having an ulterior motive, I'd do so directly and explicitly.
Meanwhile, I think you are wrong here:
If I've got your concern right, (e.g., that if we're still pulling it out of the ground just as fast, it will get burned anyway), then I think it's misplaced. The guy who suddenly finds it painful to generate CO2 has a strong incentive to do any number of things to lower that pain, from switching to lower carbon fuels to enhancing the efficiency of his process (e.g., producing less CO2 per unit of production). Note that all these activities necessarily lead to less demand for the upstream resource. The only exception is if the combustor instead invests in some sort of CO2 sequestration scheme. Setting aside the lousy economics of such an approach compared to the other ways to reduce CO2, this at least is still reducing CO2. This is the benefit of downstream pricing.
Since the 1970s, the world has become much more efficient overall. Alas, energy demand has not been reduced in any absolute way, only relative to projected demand from the prior, less-efficient use. Worse, more of the world's energy comes from coal. Pricing schemes that rely on supply-demand feedback to reduce the rate of coal extraction are simply too weak and too slow because the increased costs to the user, when fed back over the whole production chain (and, in a sense, spread over over the capital investment in that whole chain) put the burden on the least effective actors with the fewest good options (homeowners, etc.)
Putting 100% of the carbon levy on the first extractor --- the company that commits the world to suffering the consequence of introducing the fossil carbon into the biosphere --- puts the cost instantly right where it belongs, and makes the actors with the resources (the capital) to make significant system changes face the question of whether to continue down that line or to use their capital to provide energy in a way that avoids the levy.
I'm afraid we don't have time to wait for the feedback to reach the mine mouths; in fact, it may already be too late. But we have to stop burning coal as rapidly as possible; striking at the root of the problem (coal extraction) is much preferable to hacking at the millions of branches.
The 5% Project
Let's live on the planet as if we intend to stay.
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Gar Lipow Posted 4:06 am
09 Jan 2009
Incidentally the simplicity of levying taxes upstream is more important than you suggest, since it involves monitoring and billing thousands of times fewer actors:
Downstream taxes will have to involve allocations, and probably require offering multiple ways to calculate such taxes based on fuel or electricity purchases. As with depreciation businesses will calculate based on tax minimization strategies. In addition, there is straight out evasion, something there is a lot more opportunity for downstream than upstream.
Incidentally one good comparison of upstream and downstream taxation is VAT vs. Sales Tax. VAT is essentially a sales tax where as much of the collection is done upstream as possible. Because, you don't have giant concentrated sources where most value is added (unlike carbon) it s more rather than less complex than a sales tax. It is not studied a great deal, because it there is no reason to expect a significant difference in incidence, and so not a very interesting study. However there was a study of the Canadian experience with a shift from sales to VAT.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=127378 ...
The result was that there was very little difference. But that difference was that VAT has a HIGHER consumer tax incidence than a sales tax. Incidentally if you look at studies of VAT in studies of developing nations that switch from sales tax to VAT you will see the same results. Less evasion, so slightly higher consumer tax incidence. (At a guess,sales tax evasion is a game for small marginal players, risking criminal penalties for very small profit. It may be a way of competing with larger players with larger profit margins who can afford to take more of a hit by absorbing costs. So making evasion harder may indeed increase tax incidence by an extremely tiny perecent.)
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Sean Casten Posted 5:15 am
09 Jan 2009
put the cost instantly right where it belongs, and makes the actors with the resources (the capital) to make significant system changes face the question of whether to continue down that line or to use their capital to provide energy in a way that avoids the levy
Which is exactly my point. Except that the party with the capital and the ability to make significant system changes isn't the coal mine; it's the coal burner. (Note my earlier caveat that when I say "downstream" I'm referring to the point at which the fuel is burned.) Our power plants and boilers/furnaces are owned by big, profitable companies with massive resources, access to capital and the broadest possible slate of alternatives. (Indeed, just check the earnings per share of utilities and industrials as compared to mining companies and this becomes quite obvious.)
Now I will grant that this is not the case for transportation - but as I've said many times before, transportation really needs a whole separate model, as any CO2 mechanism that really works for heat/power production isn't going to have a price high enough to affect transportation systems. But since 2/3rds of the CO2 emissions come from heat and power, that's the place we ought to focus on first.
Perchance we are saying the same thing but misunderstanding intent?
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JMG Posted 5:27 am
09 Jan 2009
The burden should be applied directly and most heavily to the actors who are initiating the problem -- the coal extractors. Some share of costs will then flow forward towards power users, helping provide them with an incentive to reduce their use.
Compared to power plants and power users, there are very few points where coal is extracted. There are zero games that can be played to avoid a tax at minemouth or railhead. The carbon tax on a railcar of coal can be calibrated precisely (perhaps with adders according to the BTU and sulfur content of the coal) and collected with ease.
If this doesn't work to reduce extraction, then there's no way that a weaker signal (fed back to extractors from a tax levied on consumers -- which would necessarily invite a lot of game-playing and expensive calculations to figure out what percentage of purchased power was derived from coal) will work any better.
The 5% Project
Let's live on the planet as if we intend to stay.
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Sean Casten Posted 5:28 am
09 Jan 2009
Incidentally the simplicity of levying taxes upstream is more important than you suggest, since it involves monitoring and billing thousands of times fewer actors
Suggests to me that you may be thinking in terms of transportation and inadvertently - per my comment to JMG - crafting a methodology appropriate for the minority of sources that is problematic for the majority.
On transportation, I agree with you. Lots of tailpipes, lots of actors, really hard compliance. I agree with you in that sector that there is no easy way to do regulate CO2 anywhere further downstream than the fuel pump. But every single passenger car on the road in the US only amounts to 19% of our national CO2 emissions. Nothing to sneeze at, to be sure, but far from the majority of the problem.
By contrast, 2/3rds of our CO2 comes from heat and power generation. (The remaining ~14% is non-passenger car transport: rail, air, long-haul trucking, etc.) And for that 2/3rds, the monitoring is actually quite simple. Virtually all of those sources - and certainly all the big ones - are subject to existing air regulations that already force them to monitor what goes out of their stack and report to EPA. The cost associated with adding one more pollutant to that which they already monitor is trivial. Moreover, all of those plants have compelling economic reasons to maintain very accurate fuel meters on site, which makes it actually far easier to do the M&V for CO2 as compared to other regulated species, since you simply multiple fuel purchase x carbon factor - e.g., rather than install new monitors, you need only agree on the math. (I will grant you that the carbon content of fuels will change a bit from batch to batch, but this is a second order impact, and no less difficult if you go upstream.)
By contrast, the upstream producers are not currently subject to any regulatory regime of the type you describe. Yes, they may have water run off issues, and air permit issues associated with onsite flares, but there is no existing protocol for them to calculate air emissions impacts from the beyond-battery-limits impacts of the CO2 entrained in their product. Indeed, if you ever want to really confuse an air regulator, try to get them to craft a rule for beyond-battery-limits impacts, like giving you an emissions credit for reducing electricity purchase - since such action reduces emissions at an upstream power plant.
That's not to say that beyond-battery-limits calculations cannot be done (and indeed, in many cases, our environmental regs would be better if they were). But the case for regulatory simplicity - with the exception of passenger cars - argues much more strongly for point-of-combustion regulation.
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David Roberts Posted 5:43 am
09 Jan 2009
But what? The only thing a coal-mining company can do in the face of increased costs for coal mining is a) eat the cost, or b) pass it down the line. What else could they do? A coal mining company is either in business, mining coal, or out of business, because its business model has been rendered unviable. What I can't see is how it could "change" in a way that involves less coal.
grist.org
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Sean Casten Posted 5:45 am
09 Jan 2009
As I noted here, at least one regulated utility (Duke) thinks that GHG regs won't allow them to pass the specific costs of GHG compliance along to their customers. (Indeed, there is ample precedent for utilities not being allowed to pass certain costs along in their rate base. Never as many as there should be, but utility regulators are not completely blind to the problem this creates - and plenty of environmentalists are arguing quite reasonably that utilities must not be allowed to pass along these costs.)
But frankly, even if that's not the case, the exceptions still overwhelm your argument. After all, in much of the country today, restructuring regulation has separated the generation arm from the transmission and distribution, such that only the latter pieces are still subject to cost-plus rate-making. And of course, you still have the ~1/3rd of our CO2 emissions that are associated with the production of thermal energy (dominated by the industrial sector: steel mills, cement kilns, etc.). So if you add all that up, you're probably looking at something like 50% of our total CO2 emissions that are outside of the potential regulatory boondoggle you describe, but which Jim Rogers appears to doubt.
And as a final point: call me naively optimistic if you like, but when much of the problem we face is caused by 100 years of lousy utility regulation, I would hope that any GHG bill would seek to address the underlying problem rather than trying to craft a perfectly shaped wrong to offset the first wrong and add up to a cobbled-together right.
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Gar Lipow Posted 5:51 am
09 Jan 2009
However the bottom line is that the only reason for levying downstream instead of up is supposed incidence of taxes or permit fees. That is your sole argument is that upstream payers of carbon or permit fees ability to pass fees or permits down, or that downstream payers ability to pass fees up differ significantly. Economic theory suggests you are wrong. Empirical studies suggest no significant difference. At this point I think if you want to continue to argue that there is a significant difference you need to provide evidence rather than just-so stories.
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JMG Posted 6:09 am
09 Jan 2009
@Sean: Nobody escapes a carbon tax levied on the carbon at the point of extraction, and it doesn't require a revolution in ratemaking or trust that power companies -- who have captured the regulatory bodies in most states -- won't be able to game the transformation of the system to their advantage (Can you say nuclear stranded costs? I knew you could.)
The 5% Project
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Sean Casten Posted 6:28 am
09 Jan 2009
My assertion that point-of-release regulation is superior is no just-so story, and far from something that needs complicated economic analysis to assess. Either we connect cause and effect (CO2 release = you pay a fine per ton of release) or we don't. The onus of proof is on those who argue that disconnecting cause from effect will yield more rapid, more cost-effective CO2 reduction.
Two more specific responses. You write that:
your sole argument is that upstream payers of carbon or permit fees ability to pass fees or permits down, or that downstream payers ability to pass fees up differ significantly
No, I don't. As I wrote in response to JMG, the arguments for pricing at the point of release are threefold:
1. It places a direct price on CO2 release with no intervening, imprecise transfers through the system, directly connecting cause and effect.
It necessarily lowers the demand for carbon-intensive fuels, addressing your concern about not taking it out of the ground in the first place.
It minimizes the economic pain associated with GHG mitigation.
And as I noted to JMG, my objection to putting the price upstream is that it does none of the above - again, for simple reasons of cause and effect.
Finally, re: manufacturing, I would again point out that those sources are - to a significant degree - all already subject to emissions regulations by virtue of the fact that they burn fuel. The compliance, measurement and enforcement provisions already exist for those facilities, while they are fully absent for upstream fuel production processes, at least to the degree required for the regulation of beyond-battery-limits CO2 release.
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Sean Casten Posted 6:40 am
09 Jan 2009
Don't confuse revenue with cash. Coal mining companies historically - like most mining operations - are fairly low margin affairs, and generally lousy businesses, requiring huge amounts of capital to sell an undifferentiable product. Which is why they get bought and sold so often (and today find themselves particularly hurt from the financial crisis, as many of them got highly leveraged.) In other words, capital is precisely the thing that mining operations are usually short on.
Broadly speaking, there are only two ways to get around this in resource extraction businesses: (1) gain access to innately low-cost resources, so that when you sell into commodity markets you've got more headroom. By definition, the majority of the industry cannot have access to such resources. However, this is most definitely the game in the oil & gas industry, and explains why oil majors spend so much time in otherwise unpleasant parts of the world. (2) Buy up the market and abuse your monopoly position. DeBeers did this in diamonds for a while. Regulators have generally kept others from doing so.
The proof of both is in the pudding - look at Rio Tinto or the other big mining conglomerates and look at their returns on invested capital. They're lousy. In other words, they really don't have scads of capital lying around to deploy into other businesses - it's all tied up in their mines! So I'd not presume that a tax on them does much more than squeeze their business.
Nobody escapes a carbon tax levied on the carbon at the point of extraction
Oh yes they do. Every time the shareholders of the company that mined the carbon assume the tax by lowering their profit margins, every single downstream entity escapes the cost. This is the point of my initial post in this thread: for gasoline, where each downstream point has no choice but to buy the petroleum derived product, there is the potential for the upstream producer to raise prices and pass the costs down the value chain. But in power and thermal sectors where there is the opportunity for fuel switching at multiple points, the upstream entities face consistent price pressure that will drive their shareholders to disproportionately absorb many of these costs - and therefore to provide little or no economic incentive for downstream players not to burn the fuel.
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hapa Posted 7:19 am
09 Jan 2009
local power generation
local space heat
local process heat
central power
some of those are combined but the combination to me comes off as an efficiency gain which determines how much the fuel is worth to the buyer, not how much they spew per coal brick.
there's still a timeframe problem in this discussion, right? sean is still thinking of 40-year period and others of 20 years or less? which means, loggerheads, because 40 years is time for carbon pricing and regulations to be strong drivers, where 20 years requires a lot of public intervention. i don't think it's unreasonable to expect that the curve of reduction will end up -- in less than 5 years -- being so steep that nobody can afford incremental upgrades. you'll either be well and truly plugged in to the public effort or you'll be diving for offshore pollution havens or you'll be bankrupt. grandfathering will set records for short-lived-ness. yes this is way long before CCS is practical for non-TNCs.
i'm most sensitive to the worries of process heat users and not-very-capitalized local space heat and power users about paying for carbon they don't spew or can't mitigate without help. that will be complicated. assuming there is a long time to solve their problems is not the kind of help they need.
"coal miners will lose jobs" doesn't impress me. like others say, coal mining labor has been shrinking forever. logical conclusion: zero labor input. benefits of planned acceleration with friendly soft landing assistance: enormous. there might even be island countries who would switch their defense budgets to paying US coal miners to kick back and enjoy life, 40 hours a week, with benefits and free beer. worth exploring. why buy an acre of forest? buy a miner. you could wear a little hat, like the adopt-a-highway signs. "carbon mitigated by KoC chapter 18!" or maybe one of those one-kid-at-a-time foreign aid charities. "mel is near retirement in a deadly industry and he needs your help."
i would agree that focusing on emissions is more fair than focusing on extraction IF and only IF i thought the safety of coal burning (and natural gas burning) could rise before ten years are out such that elimination -- not reduction, not redirection, not offsetting -- of emissions from burning those fuels would happen at meaningful scale.
i think that's highly unlikely. if, also, that is truly the only condition under which major fossil user corporations will agree to eliminate emissions -- and stop financing candidates who refuse to eliminate emissions -- we can stop; it's over.
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GreyFlcn Posted 8:06 am
09 Jan 2009
Lets say you have a coal mine, and by issuing this tax, they aren't able to raise their prices, and they just cease production.
Well, by taking that production off the market, you would increase the scarcity of coal.
Increased scarcity = Increased cost
____
That said, one problem which would need to be addressed.
What about Coal exports?
http://www.reuters.com/article/GlobalEnvironment08/idUSTR ...
An upstream "mine mouth" tax would be pretty easy.
A downstream tax, most likely wouldn't catch it.
And would allow for US coal mines to continue operation (albeit as an export industry).
-David Ahlport
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JMG Posted 8:11 am
09 Jan 2009
Putting coal mining companies out of business is the whole idea, remember? If they're willing to eat the tax and work for less and less profit then no form of taxation, whether allowances or direct carbon taxing will affect them, and we'll have to use standards-based regulation rather than economic incentives.
Besides, energy prices will be rising to consumers plenty as supply shifts to non-carbon sources, so it's not like consumers will not have the incentive to reduce consumption; all we're doing is clearing the bad actor out of the market.
The 5% Project
Let's live on the planet as if we intend to stay.
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Gar Lipow Posted 8:24 am
09 Jan 2009
> 1. It places a direct price on CO2 release with no intervening, imprecise transfers through the system, directly connecting cause and effect.
And if downstream users can pass prices back up then their share of that price is exactly the same. As for people making the connection, you are talking mostly about manufacturers and power producers. Are you really worried that business people won't make the connected between increased fuel prices and an emissions tax? Or that fuel producers won't go out of their way to make sure their customer know they are passing along the cost of a tax or permit? Do you think distributors of home heating fuel won't break out any emissions fees or tax on their bills?
> 2. It necessarily lowers the demand for carbon-intensive fuels, addressing your concern about not taking it out of the ground in the first place.
And again, so long as those costs are passed along to those burning the fuel at the same rate they would end up paying if they paid it directly, upstream has the exact same effect.
> 3. It minimizes the economic pain associated with GHG mitigation.
Say what? The pain is exactly the same - whatever portion of the carbon tax you can't avoid. Part of the avoidance is pushing some of the cost up or downstream. That share ends up exactly the same. Charging fees downstream does not change anyone's economic pain.
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