New York City mayor Michael Bloomberg just gave a bombshell speech here in Seattle calling for a federal carbon tax. (Full text of the speech is here, scroll down.)
First off, way to go, Bloomberg! (In fact, Sightline Institute's Anna Fahey has written about Bloomberg's awesome framing.) But now, with my researcher's hat on, I think it's worth it to clarify a few things.
While many of Bloomberg's arguments in favor of a carbon tax were spot-on, he made some very selective criticisms of cap-and-trade programs -- criticisms that seem targeted at only the worst way of doing it. As far as I can tell, Bloomberg completely ignored the right way to do cap-and-trade, which starts with auctioning the credits, not giving them away for free.
So as a service for wonky readers, here's a little primer that I whipped up this morning:
Carbon Taxes
A good first step that could be implemented soon. Taxes have two big advantages:
- They raise revenue to invest in greenhouse-gas reductions, or cushion consumer impacts, or both.
- They provide price certainty.
But they have a couple of big disadvantages:
- They can't guarantee specific levels of reduction; so to reduce GHGs by the appropriate amount, policymakers would need to continually tinker with the tax rate.
- Tax increases are thought to be radioactive.
Grandfathered Cap-and-trade
This is what Europe has done, and what Bloomberg seems to be objecting to. It's also the worst system. Grandfathering hands out free carbon credits to polluters based on their historic emissions. And because the credits are fungible -- they have a cash value -- they end up conferring a windfall profit based on past pollution. Worse, the system does nothing to cushion consumers from price increases. Just as giving Exxon free tickets to the World Series wouldn't mean that Exxon would pass out free tickets to consumers; in the very same way, giving Exxon free carbon credits doesn't mean that Exxon would pass out free carbon to consumers. Instead, Exxon would either sell the credits for their cash value or raise the consumer price of energy to cover the price of the credit they could have sold. (Hat tip for example to Peter Barnes.) The result? Consumers pay more while energy companies chalk up another windfall.
Auctioned Cap-and-trade
This is the best system, but Bloomberg's remarks seemed to ignore this possibility entirely. In this system, instead of passing out credits for free, the government would hold regularly scheduled auctions. The big advantages are:
- The cap puts a firm limit on pollution and drives emissions down over time.
- It raises revenue that can be used to invest in GHG reductions, or cushion consumer impacts, or both.
- It activates the power of the market to seek out the cheapest and most efficient reductions first, and to prioritize.
- It tips the playing field away from big historic polluters and toward leaner and cleaner competitors.
One of the potential drawbacks of this system is that it has emissions certainty, but price uncertainty. (It's the inverse problem of the carbon tax.) So there is some risk of price volatility. There are, however, a number of good ways to reduce volatility (such as banking, borrowing, trading system linkages, and so on). These tend to be treated as technical details of the auction system, but they're actually pretty fascinating. And, yes, I'll be writing about them at a later date.
Then, there's a whole separate issue about upstream and downstream regulation. Bloomberg made hash out of this too, but I'll ignore it for now. (My short version: upstream is better and simpler.)
Look, I hate to criticize Bloomberg just at the moment when he's stepped up with astonishing political courage and vision. He deserves big applause. But it's also important to get things right -- and "straw man" objections to cap-and-trade won't help solve our climate problems.
New nukes? A fair shot, not a free ride
To unlock wind power, put a price on carbon
Comments
View as Flat
BruceMcF Posted 2:55 am
03 Nov 2007
One substantial question concerns whether there is a "safety valve" in the cap-and-auction in case the price goes so high that it threatens to throw the economy into recession.
The common "safety-valve" is to cap the permit price ... which explicitly requires handing out additional permits to allow the market to clear at the maximum price.
A far better "safety-valve" would be to cap the revenue drawn out of the permit auction, with any surplus over that maximum going back to people, recycling the purchasing power that is being withdrawn ... but of course with the playing field tilted in favor of goods and services with lower carbon inputs.
I'd split the surplus into two equal funds ... one half of the surplus handed back in an equal amount per person, and the other half of the surplus handed back in proportion to payroll tax payments.
Virtually Yours, BruceMcF
Energize America 2020
Permalink
Sam Wells Posted 3:02 am
03 Nov 2007
Onward through the fog
Permalink
Charles Komanoff Posted 8:10 am
03 Nov 2007
I like Sightline Institute a lot. Really liked your July post too, "Your mileage may vary: Why bicycling is 25 percent better than you thought." What I don't get is why you're willing to settle for opaque, cumbersome carbon cap-and-trade instead of the gold standard of carbon pricing, a carbon tax, especially since (as you acknowledge), the tax provides all-important price certainty.
Two questions:
Just what is "the appropriate amount" by which GHG emissions need to be reduced?
Do you (and Sightline) support Warner-Lieberman?
Best,
Charles
http://www.komanoff.net
Permalink
Eric de Place Posted 1:53 am
05 Nov 2007
Thanks -- I'm a huge fan of yours actually. And at the risk of getting into a debate with someone much smarter than me, I'll hazard a couple of responses here.
First off, I wrote this post in about 15 minutes. If I had to do it over again I would have made it clearer that Sightline's not opposed to carbon taxes -- not all -- and, in fact, we've been promoting taxing shifting since we published our book "Tax Shift" in 1998. So I'm thrilled that heavyweights like Bloomberg are finally behind a pollution tax.
What I was objecting to in Bloomberg's speech was his straw man criticism of cap-and-trade. He correctly pointed out a number of flaws to the grandfathering (or free allocation) system, but did a disservice by essentially ignoring the many benefits of cap and auction. I just wanted to set the record straight.
In any case, the reason I support c&t is because it puts a firm cap on emissions. Price certainty isn't "all important," but reductions certainty is.
Taxes, while simpler and quicker to implement, don't provide certainty of reductions -- and they'd require a constant re-jiggering to find the correct level of reductions. Nonetheless, I believe taxes and c&t could be complimentary. And I'd love to see a carbon tax come online now, as a stop-gap measure, until we can put a hard limit in place and systematically drive emissions down under c&t.
Finally, in answer to your two questions:
I'll punt to science. As you know, everyone's arguing for 80% by 2050. That seems okay to me unless scientific understanding is leading us elsewhere.
I/we haven't taken a close enough look at Warner-Lieberman to take a position on it. We don't intend to.
Best,
Eric
Permalink