Gar,

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.  

Why not simply put the carbon signal at the point of CO2 release?  What is possibly gained by all that complexity?  The idea that downstream is hard is nonsense.  We regulate downstream sources all the time, increasingly with continuous emissions monitoring.  And CO2 is way easier to monitor than NOx/SOx, since it can be calculated with a high degree of precision from existing fuel meters which have all sorts of other reasons to demand high accuracy.

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.

I think you are missing a critical point.  What happens downstream of the point of CO2 release isn't relevant.  If the power plant doesn't pass their costs of CO2 compliance downsteam but does bear them personally, it means that their profits are lower.  Which means that there is a huge incentive for them to release less CO2 into the atmosphere.  It is the only point in the system that matters.

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?

Still not seeing your argument Sean

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

scenarios:

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...?

You are not confused. You are refusing to let bad arguments confuse you.

All:

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.

Apologies if I got your blood up on conspiracy theory.  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.

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.

I'm a bit confused when we seem to say the same thing and come to different conclusions.  You write that we need to:

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?

Your comment that:

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.

You keep asserting that coal-mining companies have the resources to change ... something.

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

When it comes to upstread vs. downstream and simplicity I'm  mainly thinking of manufacturing.  A lot players in manufacturing, vs. a very few players providing fuel. But still even with power companies it is simpler to levy on fuel than at the generating plant. And the big thing about levying upstream is you have one system instead of many.

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.

Although I am baffled as to why this conversation seems to make you angry.  I believe we share a common goal to lower CO2 as quickly and as cheaply as possible; we simply disagree over the optimal way to accomplish.

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.

coal-mining companies -- big lumps of capital -- can deploy that capital elsewhere

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.

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.

Sean, don't know why you are accusing people all over the place, first JMG of personal attacks, and now me of being angry. Really don't think guessing people motives or emotional state adds to the conversation. But whatever you think contributes to a civil conversation. I'm not pretending to read your mind and know what your goals are, just point out that the means you advocate don't contribute to them. As to the following on downstream levying of fees and permits.

> 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.