I should have been more clear -- I didn't mean "consumer" in the sense of Joe Sixpack at the tail end of the supply chain. I meant it in a much broader sense -- everyone who purchases carbon-containing products and services, including businesses in the supply chain.

Take coal. You tax coal where it's mined -- that is, you tax coal mines. Starting from there, you have "consumers" in the broad (and infelicitous) sense I meant: utility buys coal from mine company; business buys power from utility; consumer buys product from business.

Coal mine owners cannot change their behavior to reduce their carbon footprint without going into another business. So to get behavior change you need them to pass along the price signal to the next link in the chain. But what if, for any of a dozen reasons, they just eat the increase in opex? Make marginally less money for their shareholders? Cut costs elsewhere? There goes your signal. Similarly for every link down the chain.

Perhaps coal mines will become a slightly worse investment if the profits take a hit, but will that signal be decisive in a world where commodity and labor prices are fluctuating all over the place?

The notion that you drop a price signal in at the top of the economy and it cascades frictionlessly down to every part below is only plausible on an economist's white board. Is all I'm saying.

Again, for the gillionth time: I'm not opposed to a price on carbon by any stretch of the imagination. But I do think proponents of upstream taxes pretty consistently overstate their probable effects. (Remember: Inglis and Laffer want to stop here. This isn't one part of a broader effort for them.)

grist.org

You write, "So to get behavior change you need them [coal mines] to pass along the price signal to the next link in the chain. But what if, for any of a dozen reasons, they just eat the increase in opex? Make marginally less money for their shareholders? Cut costs elsewhere? There goes your signal"

If they "eat" the price increase, they are decreasing profits, which decreases future investment (i.e. discourages others to grab a shovel and start digging for coal). I've made this point on a few different threads and never had it addressed. David, do you dispute that profits spur further investment? I thought that was pretty noncontroversial econ101. If they send less to their shareholders in dividends it works the same way, because buying stock is investing in that company.

So what if they "eat it" by cutting OPEX without cutting revenue/profits? Well, that's called productivity. Carbon abatement will never, and should never, be the sole aim of the economy. If the right to emit carbon is a limited resource, as it should be, so is the available labor supply and capital stock at any time. Increasing (or maintaining) output while cutting any one of those factors creates/increases national wealth.

If you (like me) believe that how the economy values the tradeoff between labor, capital, and carbon productivity must include an absolute assurance that carbon emissions stay below a certain point, than you should prefer cap/trade over a carbon tax. But on the margin for any particular firm, their job is still to maximize output subject to macroeconomic constraints (which translates into microeconomic prices) on capital, labor, and carbon. That is what is efficient for the economy as a whole.

If the firm chooses to do that by more efficiently utilizing labor or capital instead of carbon, that is up to them. If that route is taken by "too many" firms, the resulting shift in the relative availability of the macroeconomic constraints (labor, capital, carbon) will translate into shifts in their relative prices/costs, and adjust firm behavior accordingly.

Max Epstein

Guy's gotta make a living ...

Adam, I'll just say that price signals do not want for defenders. My worry -- and the reason I've been writing posts raising questions about them -- is that there seems to me a large and growing faction arguing that a modest price signal is all we need, and that it can unite people across partisan lines, and this problem really isn't so tough after all, and etc.

I'm pro price signal, but I don't think it serves us well to allow conservatives to frame them as sufficient.

grist.org

But first this short one.  When they describe the impact of a carbon price as:

Nuclear power plants would then compete with coal-fired plants. Wind and solar power would have a shot against natural gas.

it belies a complete misunderstanding of energy markets that ought to be sufficient to disqualify this from any further discussion.  CO2 pricing of any flavor would increase the variable cost of power production, not the fixed costs of capital recovery.  The economic advantage that gas has over solar is because of capital costs, not variable costs.  And the reason no one is building nuclear isn't because they are expensive to operate.  

To see the problem, let's assume that their issue wasn't global warming, but auto safety, which they proposed to fix by putting a tax on auto insurance so that less safe car owners paid higher premia.  Under such a scheme, poor people would finally be able to stop riding motorcycles and start driving volvos.  Clearly, if anyone actually made that argument, they'd be laughed (laffed?) out of any freshman economics class.  And yet that's precisely the case they make here.  

(This is entirely separate from David's larger point that not all carbon pricing schemes are equal, which I quite agree with.  But when a so-called expert makes such a fundamental error about the thing they're supposed to be an expert about - in this case, how carbon pricing would affect the fuel mix in our power sector - we ought to call their expertise into question long before we start debating the merits of their specific recommendations.)

All organized wholesale markets for electricity have uniform price auctions where all suppliers receive the price paid for the marginal fuel source. Every market and region of the country's marginal fuel is fossil-based (except sometimes NW-hydro I think), and in some markets quite frequently its coal.

So the carbon price, while not significantly affecting cost of building solar or wind or nuclear, does significantly increase its revenues by raising marginal fuel costs, and so marginal supplier prices. This accelerates/improves capital recovery.

Max Epstein

You know I understand that.  But saying that a carbon price of $25/ton will encourage nuke construction is only true if that implies an annuity that is a sufficient fraction of the long-term capital to materially change plant construction plans.  Thus my insurance metaphor.  Run the math on a modern nuke plant at current US grid carbon intensities, and you're looking at another ~1 - 2 cents/kWh.  That will definitely take a really shi&*y investment and make it a mildly shi&*y investment, but it's not sufficient to remove the fundamental problem with $6500/kW capex.

I never said a $25 carbon price would make nuclear economic. But then again I don't believe a $25 carbon price would significantly reduce US emissions. Sorry for accusing you of putting forth a strawman argument, I know you know that so I was admittedly a bit confused. But yea I do believe that, even with smarter regulation, the price on carbon necessary to reduce emissions 80% below 1990 levels by 2050 will encourage new nuclear construction. I'd be happy to wager a lunch, to be redeemed in 2051 by the winner if you'd like.

Max Epstein