I'm finding the carbon tax vs. cap-and-trade debate unsatisfying, for several reasons. Here I'll try to get at just one of them.
In broad terms, you want greenhouse gas policy to do two things (well, more than two, but let's focus): penalize the emission of GHGs and reward the prevention of GHG emissions. Sticks and carrots. In a market democracy, that basically means taking money from those who emit and giving money to those who prevent.
Two points about this:
First, sticks alone are not enough. Pricing carbon is not enough. Avoiding carbon charges is not sufficient incentive. Perhaps more accurately, a price on carbon alone could work, but only if it were so stratospherically high as to make it politically untenable. Sean Casten has made this point here and here. Joe Romm has made in various ways here and here.
This is what fans of fully refunded carbon taxes (or cap-and-dividend) miss -- fatally. Their proposal has a stick but no carrot. (And no, "avoiding the stick" doesn't count as a carrot.) It is, as Sean says, one hand clapping.
Second, neutrality is efficiency.
All advocates of carbon pricing, taxers or traders, seem to instinctively understand this on the stick side: every ton of GHG emissions, no matter the source, ought to cost the same. Policy should not penalize emissions from cars more than emissions from coal (or whatever). By pricing emissions equally no matter where they occur, you allow the private sector to make the most cost-effective reductions first. You don't "pick winners," in the argot.
Lots of people fail to appreciate that this applies equally to the carrot side, for the very same reasons. For maximum efficiency, you want to reward every ton of avoided GHG emissions equally, regardless of how it was avoided, by whom, with what technology (conservation, cogeneration, renewables, carbon capture, land use changes, whatever).
Now, cap-and-trade, whatever its flaws, at least attempts to address this. Not only do you have to pay if you pollute, but you can make money if you avoid polluting, by selling your permits. Anyone can sell or buy permits, so everyone's got access to both sticks and carrots, and the government is not in the middle deciding who gets which. Markets, efficiency, blah blah.
You certainly don't need to tell me about the many ways that cap-and-trade systems in the real world fall short of this Platonic ideal. I'm only making the point that some way of addressing "carrot efficiency" (as I shall dub it!) is built in to the idea.
To finally get the point I was intending to make in the first place: Carbon tax advocates almost always fail to address carrots and carrot efficiency. Either they talking about refunding the money directly to consumers (no carrots) or using it as a huge slush fund to funnel money to favored technologies and industries (rent-seeking and inefficiency).
So I end with a challenge to carbon tax advocates: You always boast about the efficiency of a tax. How would you make positive incentives -- carrots -- equally efficient?
‘Copenhagen Diagnosis’ offers a grim update to the IPCC’s climate science
Comments
View as Flat
Sean Casten Posted 8:26 am
12 Dec 2008
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TomCasten Posted 10:12 am
12 Dec 2008
Give every MWh of electricity the same allowance, initially equal to average US carbon per MWH
Do the same for every MWh of thermal energy
Require every generator of heat and/or power to turn in permits each year equal to actual CO2 emissions
Lower the allowances of CO2 for heat and for power on a schedule and correct for total production, absolutely capping and reducing CO2
The result: All 'dirty' generators face a stick and must buy permits from clean generators. The market determines the price of a permit, but the total sticks equal the total carrots.
All developers of efficiency and new clean generation of any kind add to their economics the added revenue of selling extra permits. Dirty generation owners can increase efficiency, buy permits, or generate less power, operating only in peak times.
Congress never receives any allowance purchases and thus cannot do mischief by funding knuckleheaded ideas or buying votes.
For details see http://www.recycled-energy.com/_documents/articles/dm_ele ...
Tom Casten
Tom Casten, Chair, Recycled Energy Development LLC
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hapa Posted 10:17 am
12 Dec 2008
pass.
no, wait.
i feel that this debate is stupid.
what percentage of emissions are we talking about avoiding through this method?
there is ag. big changes needed to go green.
there are buildings. big changes needed.
there is transport. revolutionary changes needed.
there is power. revolutionary changes.
then there is the rest, which is what, cement? seriously, who's left, that this debate affects?
all of this to be done in 20 years takes ridiculous coordination that has nothing to do with anybody making this "natural business cycle choice" or that one.
or is that the debate we're really having. the timeframe, masked as which lubricant is the best for greasing the wheels.
350 is giant work for everyone. fairness will require negotiation no matter what. i know that peeves some people but we got where we are by wishing away the physical world. jawing is the answer.
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hapa Posted 10:26 am
12 Dec 2008
i like carrots. i know, adam stein said we're not supposed to talk about this, but we put carrots out there for the banks, to encourage lending, we incentivized loan creation, by allowing it out into the wilder market world.
now we have nothing but carrots everywhere! yay.
you really have to be nuts or worse, not to address that hole. talk about carrots: it's a market of trillions of dollars, dangling in the face of a finance industry in desperate straits. no such market can possibly be ideal. it could even be -- shall we say -- sub-prime.
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racc Posted 11:48 am
12 Dec 2008
People want choice and solutions. This is the way to do it. Just look at the support for high speed rail and transit initiatives in the last election. People do not mind paying if they have real choices provided for them.
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wesrolley Posted 12:20 pm
12 Dec 2008
Then, let me take the other half of what I get from PG&E, the gas to hear my home. We have our thermostat set at 62 most of the day in the winter... raise it a little just before going to bed... lower to 55 at night. The cost to retrofit my home for improved energy efficiency... new windows, foam insulation, etc. far exceeds the savings that I could achieve during my lifetime. Replacing three windows with highly efficient, double pane, etc. would cost my entire year's gas bill. I have 24 to do. So, how do you cap my use and how do I end up paying for it? Because, in the long run, none of these corporations will pay anything. It will all be passed on to me.
Now, how do you get the public to agree to that this year, right now, as a task to so while looking for the replacement job that they just lost and some scientists are saying that it is already too late to stop CO2 below 650 ppm?
Where is the carrot for me, the person who is going to end up paying for it all?
Wes Rolley
CoChair - EcoAction Committee
Green Party US
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Gar Lipow Posted 4:31 pm
12 Dec 2008
However these are very good examples of where neither carrots and sticks work very well if it is done through pure price signaling. Neither a kWh/BTU tax nor kWh/BTU reduction negative tax (a la RTC) is going to motivate most people weather seal homes when they are already ignoring two year paybacks. The single best way to get you to weather seal and insulate your home would be for your utility to offer to do it for free. Now that is a carrot that might get you hopping!
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Ken Johnson Posted 5:05 pm
12 Dec 2008
(2) Replace the free allocation with 100% auction, with revenue being rebated according to the same proportionate allocation formula. So a regulated entity that would have gotten a free allowance allocation having a market value of X dollars will instead get a cash distribution of X dollars from auction revenue.
(3) Replace the auction with a fixed-price sale of allowances (aka "tax"). The revenue distribution formula is unchanged. There is no upper limit on the quantity of allowance sales, but there is also no lower limit.
Cap-and-trade systems are characteristically susceptible to price erosion or collapse, whereas the tax system will be susceptible to emission erosion or collapse. Case in point: Sweden enacted a refunded tax system in 1990 to regulate NOx emissions from power plants. (Refunding was based on "useful energy" output, e.g. MWh for electricity.) The intention was to achieve a 35% reduction in emissions within 5 years, but by 1995 emissions had come down by 50%. Cap-and-trade, by contrast, would have only achieved the 35% target, but at lower-than-expected cost.
There is one missing ingredient in the above recipe. Why not combine a tax with cap-and-trade? In step (3), do not replace the auction with a fixed-price sale; instead impose a price floor. The upper limit on the quantity of allowances is maintained, but there is no lower limit. As long as the number of allowances is sufficient to meet market demand at the floor price, the system would be equivalent to a carbon tax. If it is not sufficient, the market price would rise in response to the supply constraint.
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Biodiversivist Posted 2:33 am
13 Dec 2008
We definitely need to keep the politician's hands out of the cookie jar. Our political system is in no way capable of picking winners for us.
We need to continue these debates until a consensus starts to form and then we need to convey the game plan to our "leaders." And I think a consensus is starting to form.
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Charles Komanoff Posted 4:08 am
13 Dec 2008
If you weren't a brilliant writer-editor and a huge force for good, I wouldn't be taking up your "challenge to carbon tax advocates." It's so muddled that I'm befuddled on how to respond.
You start by proclaiming that sticks are not enough. No one in the carbon tax camp disagrees. I learned this in the wake of the first (1973-74) oil price shock, and I and others of us have been battling institutional barriers to EE and RE (ranging from "split incentives" to NIMBY anti-wind forces) ever since. OTOH, a big price stick is essential. We all know that (except, perhaps, Amory Lovins), so let's proceed.
You then state, "a price on carbon alone could work, but only if it were so stratospherically high as to make it politically untenable. Dave, I'll make your argument easier for you. The price on carbon has to be really high and we need to dismantle the institutional barriers. But since a carbon price (whether delivered by a tax or a cap-and-trade regime) is going to be high, the pricing regime must be revenue-neutral, with revenues dividended or tax-shifted back to the American people. That's both an ethical imperative and a political reality.
The rest of your post, as I grasp it, sets up a distinction between sticks and carrots. I'm not sure what you're getting at. If you're talking about framing and behavioral economics -- the nitty-gritty of what really motivates people -- I'm all ears. Avoiding a dollar cost vs. pocketing a dollar gain may be the same to me, Mr. Homo Economicus, but I'm not so naive as to assume everyone else acts the same way.
But if you're talking about incentivizing people or businesses to make the lower-carbon choice, rather than simply dis-incentivizing them from continuing on their higher-carbon path, then I think you have a problem: subsidizing the (presumed) good choice is never nearly as efficient in resource terms as de-subsidizing (internalizing the costs of) the bad choice. That's back in my Econ 101 somewhere, and so far as I know nothing has come along in the intervening 43 years to undermine that.
As for the tax vs. the cap, can't we finally dispense with your red herring that, under a cap but not a tax, "Not only do you have to pay if you pollute, but you can make money if you avoid polluting, by selling your permits. Dave, under a tax you can make the exact same money by avoiding the exact same pollution, in the sense that the avoided tax is made money.
How could it be otherwise, and still have virtually every economist who has spoken on the matter favoring a carbon tax over a carbon cap-and-trade system?
I hope I've addressed your "challenge." I think it'll be both a sign of and a spur to progress if your next one on the subject will be to green-group cap-and-trade advocates, along these lines:
When will you join the likes of Rep. John Larson, chair of the House Democratic Caucus, crusading climatologist Jim Hansen, and others who presented at the carbon tax briefing on Capitol Hill this past week, and add your political weight to the growing movement for a revenue-neutral and economically-just federal carbon tax?
Charles
http://www.komanoff.net
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liberalnun Posted 5:12 am
13 Dec 2008
British Columbia, for one, actually just started implementing the same strategy, imposing a modest carbon tax and refunding all of the revenues through a progressive tax cut. There's also an additional annual tax credit targeted toward low-income people for the purpose of helping them cope with price increases, as well as a general one-time tax credit to everyone in order to help them "transition to a greener lifestyle." I personally think the size of the tax credits is probably too small to pay for all of the improvements needed - retrofitting your home costs way more than the $100 "greener lifestyle" dividend they're giving. I think they're on the right track, though.
FWIW, a lot of jurisdictions already provide free retrofits for low-income families.
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Bob Wallace Posted 5:30 am
13 Dec 2008
Making a change requires effort. If a person/a corporation makes the "exact same money" by moving from a polluting to a non-polluting way of doing business they are not encouraged by the consequences to change. (I'm leaving warm fuzzy green feelings out of the equation.)
One has to include a "response cost"/effort differential before behavior will change.
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Ken Johnson Posted 6:14 am
13 Dec 2008
Maybe your piece could be more aptly titled "A challenge to 'gimme-the-money' advocates" :)
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GreyFlcn Posted 7:33 am
13 Dec 2008
-David Ahlport
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GreyFlcn Posted 7:37 am
13 Dec 2008
http://i-r-squared.blogspot.com/2008/08/taxes-versus-subs ...
Also, if the issue is for tipping "The marginal difference between building new power plants".
You only need to shift the marginal different.
Not subsidize the entire cost.
_
Granted, making carbon prices high enough to shut down existing, fully-amortized power plants would be much higher.
But at first, are those really the plants we want to be going after?
-David Ahlport
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vakibs Posted 8:46 am
13 Dec 2008
What a carbon tax does is simply this : discourage burning of carbon. This is what we want.
How it is achieved is a problem for which the market engineers a way out for itself. You don't need to lay carrots for the rabbit (market) to the way outside. Principally, there are several ways outside. What gets picked by the market need not align with the personal preferences of various green activists.
Another thing that we need to seriously comprehend is the distinct nature of our requirements (1) ensuring a moratorium on fossil fuels, especially coal (2) ensuring energy efficiency.
(2) DOES NOT LEAD TO (1). It is important to note this, because it is simply not acceptable that we lose the battle (1) at any cost.
So, this requires us to formulate two different policies to achieve the ends (1) and (2).
Let's think in terms of eco-dollars.
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Bob Wallace Posted 9:05 am
13 Dec 2008
But what if polluters decide that it's easier to simply pay the tax and raise their prices? After all, the taxpayer now has some extra money....
We need changes quickly. The sweeter the carrots, the more likely that folks will work to get them.
Use only sticks and folks will work at avoiding them. They will look for loopholes, fudge data, bribe inspectors, instigate FUD campaigns, ....
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Gar Lipow Posted 11:10 am
13 Dec 2008
http://i-r-squared.blogspot.com/2008/08/taxes-versus-subs ...
The above study is looking at per kWh subsidy vs. a carbon tax. That it is still relying on price signals, on in Robert's words "a market based democracy". But we don't have to stick to those narrow constraints. Again look at a different kind of subsidy, public infrastructure investment in smart grids, long distance transmission, trains, energy storage. Look at the possibility of publicly providing even certain types of private infrastructure when it is key - weather sealing, insulation,. And look at old fashioned rule based regulation (slandered as "command & control"). When elasticity is low, and the technology is clear, for example in residential and commercial office buildings, straightforward regulations about energy use per square foot, and per person can produce reductions at a lower price than either per kWh/BTU fees or subsidies.
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ce1907 Posted 12:13 pm
13 Dec 2008
his agenda is B*ngaman's; his people the same
build some grid that ensconces powerful utilities
trillions for "clean coal"
more nukes
whatever conservation that B*ngaman is forced to accept
that's it
no near term caps
no capntrade
no carbon tax
only "technology"
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