John Edwards has delved deep into the "Cap 'n Trade or Carbox Tax" question?
This is the sort of thing that gives economists hives.
For starters, theoretically, cap-and-trade is identical to a carbon tax. That is, if you know the elasticity of demand for carbon, and the value of carbon emissions to the economy, you can get to the desired amount either by capping the amount of carbon, or changing the price of emitting it.
In practice, of course, these things are hard to know. Carbon cappers favor the cap because they know, absolutely, how much carbon we'll end up emitting.
The carbon taxers have two objections to this, both of which are compelling. The first is that, politically, it is hard to get the carbon cap to the right level--as the EU example shows, governments often end up giving out permits. Those permits go to favored interest groups, distorting economic activity; or too many of them are issued, which doesn't distort economic activity between sectors, but rather moots the purpose of setting up the carbon trading regime. (To be fair, Europe is trying to fix this latter problem. But they're not there yet.)
The second objection to cap-and-trade is that emitting carbon has value--not just monetary value to evil, polluting corporations, but actual hedonic value to Americans who like to do things like flip a switch and have the lights come on.
Ideally, we should understand what the economic cost of carbon emissions is, and use a carbon tax to raise the price until it includes the cost of that negative externality. If, once we have raised the cost of carbon to the price of the utility + the negative utility, and people still continue consuming carbon-intensive goods, then that is telling us something important about the value of that added carbon-intensive economic activity.
This is, needless to say, not a popular view with environmentalists who place a value on (other peoples') extra carbon-intensive economic activity of zero, or less than zero.
Also not so popular with climate scientists who might consider the "economic cost of carbon emissions" above a certain point to be somewhere in the range of the worth of the survival of the human species, or at least the absence of a kilometer-thick glacier covering France, both of which are hard to put a pricetag on.
Difficult, but not impossible. One of the biggest growth areas in environmental economics is shadow pricing, or pricing in the absence of markets.
In practice how you would work these taxes is if you get too little abatement, you can raise the tax. That way the least valuable carbon activity is what gets cut.
brooksfoe,
Also not so popular with climate scientists who might consider the "economic cost of carbon emissions" above a certain point to be somewhere in the range of the worth of the survival of the human species
Do let us know when they've figured out what that point is.
Taking a step back; why do you think either of these would mitigate emissions in the first place?
China is still burning fossil fuels. Say, for the sake of argument, they sign onto an agreement. For reference, of friend of mine spent a few months teaching English in western China and came back with permanent kidney damage from heavy metal poisoning, which shows you how much they're likely to care about carbon. And if you spend a little time in that country, particularly the poorer industrial areas, that's not so surprising.
So lets say the US and Europe cap emissions. Their industries move to China, which is now burning even more fuel in their highly energy-inefficient plants to keep up with the increased demand.
The result would be more CO2, not less.
Massive investments in fission in the short term and fusion in the long term (or some other alternative energy source) seem the only reliable answers.
Also, could we please recycle some of this spent nuclear fuel rather than dumping it as 'waste.' It's capable of producing energy and helium (and the helium will run out as the oil does since we get it from wells, but that's another story.)
Do let us know when they've figured out what that point is.
Part and parcel of why putting a dollar value on the damages done by a given amount of emissions is not possible. If total emissions up to 350 ppm will cause $10 trillion in damages with a confidence interval of +/- 50 ppm, and total emissions to over (some uncertain higher concentration between 400 ppm and infinity) will cause (infinity) damages (a die-off of 98% of the human population and return of the rest to the Stone Age) with a confidence interval of (nobody knows)...with the effects to kick in over a period of 25-75 years after the emissions take place... What is the dollar value of an extra ton of CO2? The market can't calculate that in a meaningful way. It will produce a price of some kind, but that price will not be meaningfully related to the damage ultimately done.
Megan doesn't have the cap vs. tax stuff quite right. If the caps were set to actually bind, then consumers would pay an externality premium for carbon-intensive products, because producers would have to include the permit cost in setting prices.
Moreover, aside from the institutional differences (which favor the tax in my opinion--harder for companies to game politically), the framework for analyzing price regulation vs. quantity regulation was laid out in the early 1970s by Marty Weitzman. The basic conclusion is that if you have a flat marginal benefit schedule and a steeper marginal cost schedule for clean-up, then taxes are better, while if the reverse is true, then caps are better. (There are also relative uncertainties to consider, but for clarity I'm assuming these are the same for costs and benefits.)
So if you know "at x parts per million we all die" then caps are better, but if you know that "it's y amount better for every z units we remove" then a tax is best. Our situation with CO2 is much more like the latter, because 1) the models say that the temperature is a linear function of the forcing and 2) any dangers of runaways occur at unknown levels of CO2, so picking some exact number could easily be too strict or too lenient.
Personally, I'm not convinced that we should do anything more than gather more data and prepare for geoengineering approaches if need be, as these methods are likely to be orders of magnitude cheaper than CO2 emission cutbacks.
Also not so popular with climate scientists who might consider the "economic cost of carbon emissions" above a certain point to be somewhere in the range of the worth of the survival of the human species, or at least the absence of a kilometer-thick glacier covering France, both of which are hard to put a pricetag on.
I know the odd climate scientist and they still flip light switches on and off.
Some of them even own cars.
brooksfoe: Sticking infinity into one of your variables in a pretty good way to get nonsense out.
The reality is, climate modeling is not very mature, the systems being modeled are hugely complex and poorly understood, and there's no way anyone can give you some nice cost function of CO2 emissions to the human race, because nobody knows enough. (The usual mistake of the right when seeing that is to assume that the uncertainty makes their do-nothing argument for them; it doesn't!) I think we can get from the climate modeling community the idea that running an open-ended experiment to see how much CO2 we can get away with dumping into the atmosphere is a huge and terrifying mistake, but nothing like a specific level of CO2 in the atmosphere that will lead to disaster.
My concern with all the attempts to decrease CO2 emissions is that we've seen gas and oil prices go up by a huge amount in the last few years, much more than I'd expect a politically possible carbon tax could add in the same amount of time. And yet, it's not too clear that we've seen CO2 emissions, or gas/oil usage, go down all that much, even though most everyone has been feeling the pain from those price increases. This implies that it's going to be really hard to cut carbon emissions. However we do it, short term, it's probably going to be more unpleasant that going from $1.50 a gallon gas to $3.00 a gallon gas, and much less politically popular, since it will be being done by an explicit act of government.
IMO, the only way to practically address this is to find a way to decrease CO2 emissions that's not terrifically painful. Maybe that's finding ways to sequester CO2 out of the atmosphere, maybe that's switching over to nuclear power and electric or hybrid cars. But I just can't see the US political process leading us to a CO2 emissions decrease that is equivalent in pain and effectiveness to, say, putting an extra $3/gallon tax on gasoline. That's a pretty solid guarantee of one term in office.
... the absence of a kilometer-thick glacier covering France ... hard to put a pricetag on
We can ask the French, can't we?
Albatross hits the nail on the head. If someone had proposed a tax of $1.50/gallon of gas in 1999, that person would be a political pariah today. This flirting with carbon taxes and cap and trade will end long before the enactment of legislation. We will use fossil fuels until they can no longer provide the energy we need.
... the absence of a kilometer-thick glacier covering France ... hard to put a pricetag on... -- We can ask the French, can't we? - Max
What pricetag would Americans put on the ceasing to exist of the United States? How much is it worth to keep the US in existence? Just a ballpark estimate, please.
Have you ever considered the possibility that such a question has no meaning?
brooksfoe,
Part and parcel of why putting a dollar value on the damages done by a given amount of emissions is not possible.
How do you propose we decide the appropriate amount of money to spend on reducing emissions to protect ourselves against the risk of catastrophic climate change? Or the appropriate amount of money to spend on defense against any threat to our survival? Tea-leaf reading?
This discussion takes as a given that the AGW (the-sky-is-falling-or-maybe-not-but-if-it-did-we-would-all-be-killed-so-we-should-do-something-anything)argument is valid.
Sorry folks, but it's BS. The entire case depends on computer models that have yet to show ANY accurate predictive quality, and measurements whose error bands are larger than the purported readings.
http://sciencepolicy.colorado.edu/prometheus/archives/climate_change/001317verification_of_1990.html
I've been dealing with computer models for a quarter century, and I *know* just how misleading they can be, and how how they can be manipulated.
There are more "fudge factors" than physical science in these models, and that makes them an exercise in explaining a conclusion, not a tool for prediction.
AGW has been taken up by the watermelons of the world as their tool to punish western capitalist states, and you're all being useful idiots.
Carbon caps or carbon taxes? Neither, thank you.
What pricetag would Americans put on the ceasing to exist of the United States?
Americans have answered this question a time or two, IIRC. So can the French, I imagine, if it really comes to that. I won't try to predict an answer going by their WWII record :-). For the moment, I haven't heard of France applying pressure to China to reduce their carbon emissions.
My point is that neither the cost of [hypothetical] global warming nor the cost of [no less hypothetical at this point] preventive measures will be borne equally by all nations. This has to be taken into account.
brooksfoe's position just doesn't make any sense. His argument, if I am understanding it correctly, is "Carbon emissions may wipe us out; you can't put a price on that; therefore, applying economic analysis to carbon emissions is useless or meaningless." But the same could be said of anything else that may wipe us out--such as an asteroid impact or a deadly new infectious disease. How do we decide how much to spend defending ourselves against any of these risks, if not economic analysis?
My concern with all the attempts to decrease CO2 emissions is that we've seen gas and oil prices go up by a huge amount in the last few years, much more than I'd expect a politically possible carbon tax could add in the same amount of time. And yet, it's not too clear that we've seen CO2 emissions, or gas/oil usage, go down all that much, even though most everyone has been feeling the pain from those price increases.
This is probably for at least two reasons:
1. The bulk of US energy usage is not in oil, but coal. Cars are an easy and visible target to shoot at, but the bulk of US carbon emissions is driven by the use of coal to produce electricity (roughly 80% of generation last time I looked it up). The US has very large native coal reserves which have only limited alternative uses.
2. Even in oil itself, there is a fundamental disconnect between the price of oil and the cost to most end-users. Some of this occurs because a barrel of crude is not poured directly into an oil furnace or a car gas tank, so the complex logistics of the refining and distribution steps can alter the price in either direction. Some of this occurs because most oil-derived consumer goods are being processed in China, which is keeping export prices thereof artificially deflated through a mixture of currency policies and ongoing expansion into untapped pools of low-income labor.
It makes absolutely no sense for the US to do anything about carbon emissions in the absence of a universal commitment by all of the world's governments to do the same. If carbon emissions are an issue, they are a global issue; and, therefore, they are subject only to a global solution. Anything less is doomed to failure.
China and India are currently increasing their carbon emissions faster than the US and EU could reasonably reduce theirs. Therefore, no matter what the US and EU do, carbon emissions will continue to rise; and, the ambient CO2 concentration will also continue to rise. If the increase in global average temperature is CO2 driven, then it would be expected to continue to increase as well.
The real issue is that carbon emissions must CEASE totally if ambient concentrations are to be stabilized. Therefore, the required global cap (zero) and the required global tax (infinite) are easy to determine; however, that does not make them any easier to achieve.
I wonder what brooksfoe thinks of the Nano, the new ultra-cheap car from Indian automaker Tata, which is expected to sell in huge numbers, greatly improving the quality of life for millions of impoverished people in the developing world, but also emitting massive quantities of greenhouse gases.
China and India are currently increasing their carbon emissions faster than the US and EU could reasonably reduce theirs. Therefore, no matter what the US and EU do, carbon emissions will continue to rise;[snip]
That would only be true if the current emissions of carbon were equal. I doubt the carbon emissions of the first two are anywhere near the latter two. Moving from 10 to 20 is a larger percentage increase than 100 to 110, but it is the same total of 10. Also, a 100% increase from 10 to 20 could be offset by a 10% reduction of 100 to 90.
Since the U.S. uses 25% of the world's energy, I would think we could probably unilaterally make a dent in carbon emissions. Not saying that is the most desirable thing. But waiting for Guyana and St. Kitts to get on board would be sort of silly.
Plus, since the U.S. overwhelmingly uses so much of the world's energy, wouldn't a U.S. based carbon tax effect energy prices, and supposedly usage, everywhere at least somewhat?
That's not really what I'm saying, Mixner. I'm reacting to Megan's claim that what we first need to do is to estimate the likely dollar value of the harm caused by global warming, then estimate the cost of efforts to remediate that dollar value of harm, and only then begin to pass measures like cap-and-trade or a carbon tax. The problem in my view is that while the general magnitude of the harm caused by global warming is blatantly obvious, the dollar value is extremely difficult to estimate, beyond saying "huge". Adding this low-confidence-interval number onto the low-confidence-interval calculation of how much it would cost to achieve a given level of reduction in C02 emissions makes the ultimate numbers not more, but less, useful.
There are a lot of things the US does without a good sense of the cost-benefits ratio. The most obvious low-hanging fruit is the defense budget. How much extra economic benefit in terms of defending the US from foreign attack or defending US economic interests is provided by an extra $100 billion per year in defense spending? No one even bothers to investigate this question in a serious way. What is the dollar value of making the Hudson clean? What is the dollar value of rearranging the water system in southern Florida to preserve the Everglades? One way to determine the answer to such a question might be this: given the best scientific explanation of the harm caused by not doing these things, how much are voters willing to pay to do them? The dollar value of preserving the Alaskan wilderness is simply how much voters are willing to spend to preserve it. Which renders the exercise tautological.
As for cars in low-income countries: you're talking to someone who lives in Hanoi. 200 new car owners hit the streets here every day. The medieval road infrastructure, which barely coped with motorbike traffic, is completely seizing up; my commuting time to downtown seems to have increased by 1/3 in the last 2 months. The negative externalities of this increase in "quality of life" for those who can afford cars are staggering.
I doubt the carbon emissions of the first two are anywhere near the latter two.
Actually, China is now probably the world's largest emitter of greenhouse gases.
The problem is that people who make the "China will never cut CO2" argument have no concept of diplomacy or international relations. China will no more ignore the global consensus on reducing greenhouse gases than Japan ignores the global consensus on whaling. With the entire developed world -- its customers -- lined up to demand CO2 emissions reductions, China will negotiate a deal, and comply.
Stephen Postrel's comparison of taxes vs. permits.
brooksfoe,
It's not a matter of calculating precise dollar numbers, but of making reasonable estimates so that a rational cost-benefit evaluation is possible, and that requires economic analysis. The obvious danger in spending large amounts of money to reduce carbon emissions without any reasonable estimate of the benefit is that the money will be wasted. Maybe we should be spending it on other forms of climate change mitigation instead, or on adaptation, or on an asteroid deflection system.
There are a lot of things the US does without a good sense of the cost-benefits ratio.
This statement just misses the point. If there are other areas where we already spend large amounts of money without having any clear idea of what we're getting for it, that's a reason to scrutinize that spending more closely, not a reason to repeat the error in another area of spending.
What is the dollar value of rearranging the water system in southern Florida to preserve the Everglades?
Good question. The point is, we do have to attach an economic value to it to make a decision about how much we should spend. And the same applies to spending on reducing carbon emissions. You can't just throw up your hands and say, "But there's a chance it'll wipe us out, so let's just spend indiscriminately and worry about whether it was worth it later."
The hubris of discussing either policy flabbergasts me. No such attempt will save the planet, and not making any such attempt will not doom it; it's so much larger than our activity that it will do as it will. The only foreseeable results will be a poorer humanity and more tyrannical governments.