Putting a price on carbon is probably an unavoidable part of phasing out fossil fuels to fight global warming and air pollution. For years, Peter Barnes has advocated a brilliant means of mitigating many of the harmful economic side effects: take the revenue from carbon taxes or auctions and rebate it back to the people, dividing it equally among each citizen.
Barnes advocates doing this via an auctioned permit system. However,the same thing could be done with a carbon tax. Instead of auctioning permits, simply tax those same embedded emissions and rebate that revenue to consumers. Raise the tax periodically to lower emissions.
Inevitably, with either a tax or auctioned permits, the price charged for carbon will be passed down the supply chain to consumers. By rebating the revenue back to consumers, you minimize the impact of those price increases. They have to pay more, but they have more money to pay with. You get the price signals to affect behavior, without lowering consumer net income.
What are the policy differences between a tax and a permit system? The usual claim is that with a tax system you get price certainty, but can't know for sure what level of carbon reduction you will achieve. With a 100 percent auctioned permit system, you have certainty in reductions, but don't know what the price will be. (This argument assumes no loopholes and good enforcement in both cases. To keep the length of this post manageable, we won't question the assumption today, but let's note that the assumption is there, and not necessarily correct.)
But there is a way a carbon tax can meet an emissions target. The taxing agency could start with a year-by-year target and set a schedule of carbon tax increases it believes will meet the target. Included in that schedule would be automatic adjustments upwards if emissions don't fall as fast as desired.
How fast demand for carbon falls in response to price increases is unknown. But we do know that response is slower in the long run than the short run. Some worry that a system of automatic price adjustments could cause overshoot. As long-term response kicked in, we might see use fall faster than targeted. Given the seriousness of the emergency, I don't see this as a bug, but as a feature.
Peter Barnes recently praised a study of permit auctioning systems that suggested putting a minimum price on permits when auctioning them. This was done for a number of reasons, including avoiding price fixing conspiracies. But it also brings permit auctioning closer to a carbon tax, including allowing the possibility of reducing carbon use faster than whatever minimum is set.
From a pure policy standpoint, auctioned permits and a carbon tax are so close to one another that it is hard to understand why there would be a strong preference between them. Auctioned permits with a minimum price do have a belt-and-suspenders advantage. You get both a (theoretically) fixed cap, and a minimum price that could reduce emissions by more than that cap. However, in practice, implementation will much more important than these minimums. Avoiding loopholes, exemptions, permit giveaways, offsets, poor enforcement, and selective enforcement will take priority over getting the theoretically best system.
The two proposals do have different politics. In the U.S. one obvious point is that "permit fee" has obvious advantages over the word "tax." In addition, Barnes remarks that once a cap-and-rebate system is agreed to, the main political argument becomes how far to cut emissions. He prefers that to a carbon tax, where the argument will be over carbon price.
But in passing a cap-and-rebate system, you face arguments over permit giveaways. A carbon tax avoids that fight.
With a cap-and-rebate system, it is critical to avoid creation of a large carbon market. This means not only avoiding giving permits away, but keeping secondary markets (where people resell permits they bought at auction) as small as possible.
The reason for minimizing any secondary market is political, but critical. A carbon market produces carbon traders, and carbon traders as a whole tend to oppose reductions in total numbers of permits, whatever honorable individual exceptions might exist. In Europe, carbon traders are lobbying to expand the fraud-ridden Clean Development Mechanism (CDM), weakening additionality requirements, and weakening enforcement of all CDM. Carbon traders are among those lobbying to continue permit giveaways, and oppose auctioning increases.
If we take people like James Hansen seriously and decide we need to phase out 90-percent-plus of fossil fuel use over twenty years, and the remainder over the course of another decade, then avoiding a secondary carbon market becomes even more important. Brokers who buy and sell carbon for a living, holders of big portfolios, offset consultants, certifiers, and providers will all try to find ways to delay such a phaseout. We have enough problems with the existing carbon lobby. There is no reason for global warming opponents to grow our own mini carbon lobby.
In the abstract, I lean towards cap-and-auction over a carbon tax. I like the belt-and-suspenders approach of having a minimum price and maximum emissions. I like the fact that it may be easier to sell. But the possibility of permit giveaways, along with other ways it could help build a secondary market, worry me. Part of the politics of supporting a proposal is what its proponents are and are not willing to fight for. I'd like to know that cap-and-rebate proponents will not only oppose permit giveaways, but will stand firm against them. Equally important, I'd like some assurance that they understand the more general question of avoiding a significant secondary carbon market.
For example, one proposal is to auction permits quarterly, and let carbon-brokers server demand between auctions. I'd much rather see a large portion of permits auctioned quarterly, with the rest auctioned daily or weekly (possibly online), so that most users of permits bought them directly at auction. I'd like to see restrictions on resale. Let someone who finds they can't use a permit have the option of returning their permit for a refund (so long as there is a reasonable expiration period -- six months or more) left on it. Allow some permit resale for the sake of flexibility, but limit the percent of total permits that can be sold on the secondary market, and put other restrictions on as well.
This may seem wonkish, and technical, but the consequences are huge. Avoiding permit giveaways under a cap-and-rebate system is only part of the larger fight to avoid the creation of a European style carbon broker lobby. Are cap-and-auction proponents part of this fight as well?
Climate-news poem: Breath-catching edition
Comments View as Flat
Charles Barton Posted 5:49 am
19 Feb 2008
Distribution of permits
Carbon taxes will fall disproportionately on the poor, and congress will be unable to leave the revenue from those taxes alone. A better plan would be to distribute carbon use permits to citizens equally, and let them buy and sell them. Carbon use permits would be required for the purchase of any carbon based fuel. This would produce a redistribution of income, without the money stream passing through governmental hands. If only citizens of the United States could receive carbon use permits, businesses would have to purchase permits from private individuals. The carbon value of the permits could be lowered annually.
Charles Barton
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LPS Posted 7:00 am
19 Feb 2008
Ain't gunna happen
In the end, I suspect that no real (measurable) change will occur in carbon emissions no matter what plan is bandied about. I agree with Robert Rapier's new post over on The Oil Drum. This is all whistling Dixie.
"How I learned to stop worrying and love global warming." --Stanley Kubrik
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scatter Posted 9:25 am
19 Feb 2008
Not sure I agree with giving it all back
Some very heavy duty investment is going to be needed in making grids more robust and able to cope with more distributed supply and demand as well as bringing new technologies online. Where's that money going to come from? Or is that covered by the redistribution of subsidy from fossil fuels to renewables?
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ce1907 Posted 10:27 am
19 Feb 2008
draft the bill
get Obama or Clinton to introduce it (snark)
see how many co-sponsors you get
I don't know why I bother to comment about the Utopian reveries.
will
not
happen
now, are you interested in doing anything about climate change?
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bookerly Posted 11:13 am
19 Feb 2008
Rebates
The big problem with a rebate system has always been one of timing. It is fine to make people in the upper 20% of income pay more now, and get it back later (which is where probably almost all Grist writers and posters belong). But it is not fine to do the same for people in the lower 80% of income.
They can't afford to wait for the money to someday come back. And people are correct when they say that Congress is unlikely to give it all back. And that furthermore it becomes this huge pool of money available to fund pet projects....
Why not just cap the damn emissions. Give businesses tax deductions for investments needed to meet their caps. Offer training and unemployment benefits for workers who lose jobs when polluting industries close down. Require American companies doing business abroad to meet either American environmental and labor standards or local (whichever is stronger).
patrick in Beijing
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Gar Lipow Posted 3:22 pm
19 Feb 2008
Rebates
Don't really need to wait. Barne's proposal is to rebate the permit fees monthly, which means they are in the hands of consumers by the time the costs are passed up the supply chain into retail prices.
ce1907
I love how political realism is limited to what current presidential candidates will accept now. The demands of every successful movement start out by being called impossible, and since the invention of the word, utopian. Who would have predicted a year ago that the person most likely to be elected president would be called for 100% auctioning of carbon permits in a cap & auction system.
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amazingdrx Posted 4:12 pm
19 Feb 2008
More direct route needed
I agree Gar,if you run the funds through hedge fund traders it won't get to the people who need to pay off their solar panels and hybrid plugin cars.
Traders will squirrel most of the cash away in Swiss banks. Just don't do it. Simple subsidies to real investors in renewables and conservation is the best way.
Barack's big corporate supporters favor cap and trade, that's why he picked up on it. It's the buzz. The mindless mass delusional media trend. Think Chris Mathews. Does anything worthwhile ever come out of minds like this?
As far as raising taxes, forget it. Any green politician proposing it will be swiftboated out of office in the next election.
And rather than auctioning off carbon permits to raise money for subsidies, just eliminate subsidies for big oil, coal , nukes, and agribizz.
Of course that will be passed on to consumers as a "new tax" by the corporatistas. The poorest will have to have more help because of it, so go through the regular tax code to do that.
http://amazngdrx.blogharbor.com/blog
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bookerly Posted 5:57 pm
19 Feb 2008
Rebates Redux
Hi Garth,
I still have a couple of nits to pick (the devil is always in the details). One, I don't see anywhere that it says anything about monthly payments. That part is a little bit vague in most places, perhaps it is left up to the trustees?
1) Not everyone has a bank account.
2) How would the list of recipients be compiled and maintained?
3) Is the trust a bank of its own, or will it use commercial banks (and how much will they charge, I hear the drooling)?
4) The idea seems to exclude carbon emitters like those who burn wood fires (or someone who drags a lump of coal home and puts it in a furnace). Is this intentional?
5) Who would identify and maintain the list of carbon emitters? (Upstreaming is a good idea for large corporate bodies, but for others?)
6) Would the Pentagon have to bid for permits? Other government bodies?
7) The idea of taxing "low carbon pricing countries" sounds lovely, but who collects the information and determines the tax? The WTO would probably say no. Will we quit the WTO?
The plan sounds good if every single part of it is passed as is, what is the liklihood of that happening, or do we propose Boxer-Sanders and end up with Lieberman-Warner-lite?
It sound simple to talk about, but I do worry about those details.
patrick in Beijing
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Tatrus Posted 6:54 pm
19 Feb 2008
CDM
I would just like to comment on your assessment of the CDM. Projects seeking registration by the Executive Board of the CDM go through a strict process of approval, first by credited organizations such as DNV and then by the Executive Board itself, with the possibility of review and subsequent rejection if they are not deemed registration-worthy. Furthermore, the validity of the credits are assessed annually before they are granted. The fact is that a fraudulent CDM is a common misconception, projects go through a rigid approval process and therefore very few if any are fraudulent.
It has also been argued that the majority of the projects generated by the CDM have been high value gases with high Global Warming Potentials such as HFCs. Although this was a trend during the initial stages of the CDM this has now changed with the number of renewable energy and energy efficiency projects rapidly rising. (go to cd4cdm.org it has a database of all of the projects in the pipeline)
CDM has a number of significant advantages as it enables an international treaty to include the developing world even if they are not required to set actual targets. The problem with an auction scheme and the lack of a trading system is that it is only based domestically and thus does not take advantage of gains in efficiency through the trade of permits with developing nations where it is cheaper to make reductions.
One possible way to include developing nations in setting targets is to allow them to set voluntary targets. If they go beyond these goals they can sell the extra credits on the market. They are compelled to set aggressive targets in order to attract foreign investment. This is known as the sector approach as voluntary targets are set for each sector - a comprehensive review is available from the center for clean air policy by Schmidt.
Furthermore the sheer number of companies in the US would make a bidding scheme very difficult as many of the smaller companies would be unable to compete for credits with the larger players, this would force them to pay significant fines.
I would personally rather have money in the hands of a few thousand carbon traders that are providing a service than one government.
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ce1907 Posted 10:04 pm
19 Feb 2008
Gar, women now have the vote
It took about a hundred years, and the issue was more straight-forward than climate change.
We don't have time.
I wish we did. I love a good Utopia as much as the next guy. But we don't have time.
The L-W bill is an emergency stop-gap.
The puspose of the bill is simply to nudge a capitalist economy in a different direction, and make it reasonable for people to invest in Green energy and to choose to consume/conserve Green energy. The bill tries to be a harsh enough nudge to slow carbon emissions.
Likely, it is not enough. But it is a first step. And it hopes to show the public that carbon control is important and possible. As the crisis gets worse, presumably the public will demand further action.
Could we devise a more ideal bill? You bet!
Can you pass one? No. Not clear that L-W will pass.
You want a fight that matters? Fight to pass L-W without watering it down. That is the highest possible hope.
I voted for Obama. But he is not the Great Green Hope. Sorry, guys.
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setb Posted 12:54 am
20 Feb 2008
L-W will not pass as is
L-W is a system devised a decade ago under a republican controlled congress. They're not in charge anymore- it's time to actually propose a system that ACTUALLY SOLVES CLIMATE CHANGE.
L-W-- is based on the failed EU system that did not reduce emissions, yet did increase energy costs & make billions for the energy industry. It's essentially a case of enviros trying to buy off the coal industries.
The time for first steps was a decade ago (and a fine goal then), but now we need actual solutions.
The brilliance of the Barnes Cap & Dividend idea is that it actually answers the major political argument agaianst action-- that it will cost too much.
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mlappe Posted 2:10 am
20 Feb 2008
Political Feasibility
Gar paints a clear outline of an effective cap and dividend policy. While we can debate the differences between a carbon tax and a cap, the key distinction will be political feasibility. We are seeing strong momentum towards implementing a cap system in the U.S. and effort should be made to ensure the cap is done right.
We have to keep in mind that the race to beat climate change will be a marathon, not a sprint. A policy must be in place for at least forty years, or ten presidential terms. One main advantage of a cap and dividend system is that once the policy infrastructure is established, it has a strong chance of enduring any political changes. It also keeps the poor and middle class from being shafted by increased energy prices, which will help maintain popular support.
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mlappe Posted 2:29 am
20 Feb 2008
Offsets are not Permits
Gar is exactly right that the roll of offsets in a U.S. cap policy needs to be more widely discussed. There is a misunderstanding that any cap policy must include offsets. This doesn't have to be the case. As we learned from phase I of the EU ETS, a secondary carbon market could undermine the effectiveness of a cap. Passing an offset-free policy, however, will be politically challenging, as private industry will fight hard for the inclusion of a CDM-type program.
A possible solution is to make offsets additional to a cap. Upstream emitters will be required to hold carbon permits for all of their emissions, and any emitter larger than a certain size will have to purchase offsets to become "carbon neutral" by a certain date. This system would include an offset market, but not at the expense of an effective cap. The system would also create two sources of revenue. The money from permit sales would be returned to citizens, and the money from the offset market would effectively go towards transferring technology to developing countries, developing projects that prevent emissions, and protecting pristine ecosystems that act as carbon sinks.
Under this policy, large emitters will have to pay twice: once for the permits to emit, and again to offset their total emissions. This will be a tough pill to swallow, but it will also provide a doubly strong incentive to reduce emissions. The policy will provide the strong, predictable price signal that will spur investment in clean energy technology. If we pair this system with a rapid phase-out of government subsidies to the fossil fuel industry, the playing field could finally be level enough for clean energy to compete.
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ce1907 Posted 2:59 pm
20 Feb 2008
setb
I suppose you are talking about the McCain bill
It was never a Repub bill; got virtually no Repub support. I think it might have gotten 30 votes once.
L-W is more progressive in several respects. Still, I wonder if the current version will get 40 votes.
Your bill may be brilliant, but I doubt it could get 5 votes.
Prove me wrong. I would love to be wrong. Get Sen Sanders to introduce it. Let's count the votes.
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Gar Lipow Posted 3:01 am
21 Feb 2008
CDM fraud
In spite of all these wonderful procedures, huge numbers of CDM on the market are fraudulent. At least 20%, and probably much more, of the CDM from f5 ont he market are fraudulent. A large percentage of the approved hydro CDM on the market are fraudulent. Worse, there is a movement afoot to weakend offset standards, to lower additionality requirements.
Maybe I'll post on that later, though I'm sick of discussing offsets, and want to move away from attacking false solutions to promoting solutions that will work.
CE1907 - two years ago we did not have votes for any kind of bill on climate change. No bill that would actually accomplish anything will pass before 2009, and probably 2010. So it is up to us to make sure we have a different mindset by then.
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Tom Athanasiou Posted 2:26 pm
25 Feb 2008
The international dimension
Gar, nice post!
One wrinkle that people seem to be missing, but which is key to understanding the global emergency reduction trajectories that we need, is that the obligations of the wealthy countries have to be seen as going far beyond emissions reductions within their own borders.
This has implications. One of them is that wealthy countries will have to pay for offshore reductions, as well as reductions within their own borders.
-- toma
Tom Athanasiou toma@ecoequity.org
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