We’re continuing to make improvements to the Climate Pricing 101 page. So if you found it confusing earlier, take another look. It’s getting better all the time!
I’ve also been asked to provide a shorter summary here. So, if you want climate pricing boiled down—and want to see where Sightline’s research is pointing us—here are a couple of takeaway points:
- Economists generally tend to favor carbon taxes on the grounds that taxes are the most economically efficient way to discourage carbon emissions. There are two big downsides, however: taxes guarantee a price for carbon emissions but not a limit, and it’s limiting emissions that’s really the goal. The second big problem is that it’s a tax; and taxes are politically tough, to say the least.
- Industry—particularly big historical emitters—like grandfathered cap and trade because it doesn’t cost them anything to obtain allowances to continue emitting carbon. But passing out credits for free confers fungible commodities (the credits) to polluters—the more pollution, the bigger the payout.
- Sightline’s current preference is for cap and auction. Auctioning the permits gives an advantage to clean industries and utilities, and it helps to ensure that the lowest-cost cuts in emissions are made first.
- One of the biggest questions about any carbon limit is fairness. How do we protect consumers and low-income folks from rising prices? How do we smooth the economic transition away from polluting? A source of revenue—from either taxes or auctioning—can go a long way toward helping out.
That’s a start anyway. As I said yesterday, this stuff gets complicated quickly. But take a look at what we’ve got and chime in.
phil
1. The standard line (as you say) is that cap-and-auction gives emissions certainty, and carbon taxes give price certainty. But with leakage from a cap isn’t this much less certain? And if we set tax levels correctly, isn’t this a non-issue?2. There’s been a lot of blogging against adding safety valves to cap systems. My understanding is that safety valves simply convert a cap into a tax. Do you agree?Thanks!
rogers_weed
I’m not sure I see how grandfathering provides a “windfall” to industries currently polluting. Assuming those industries are competitive, the companies in them are probably not making above average profits currently. Grandfathering just helps them avoid going out of business immediately (b/c their cost structure overnight became significantly higher) unless I’m misunderstanding something. I also assume these companies don’t continue to get credits indefinitely, but rather get them for some introductory period as the new system is phased in. That seems like the fair to do to me.
Eric de Place
phil & rogers,good questions, both of yhou. i’ll be addressing these issues soon, probably here on the blog. my short answer for now is: it’s complicated. longer answers…if there’s significant leakage from the cap then, yes, that would be a big problem. the cap should be economy-wide and contain no (or very few) loopholes. setting a tax level correctly (and sustaining it) is an extremely difficult proposition.i generally oppose “safety valves” (which are actually just price controls that undermine the carbon caps) but there may be ways of constructing these features such that they’re not harmful. details later.grandfathering permits can be done in a variety of ways. historic emitters envision never having to participate in an auction. i envision nearly all credits being auctioned from day one. there are hybrid models too. here’s the problem: any permit that the public awards for free to a company is worth money. if the credits are awarded on the basis of historic emissions, we would actually end up giving the most money to those who polluted the most. that’s messed up. it gets weirder: whether the permits are auctioned or given for free, consumers will still get dinged the same way. in an auction, the polluter passes on the cost. in a free allocaton, the polluter will either sell the permit for its value or charge consumers a premium worth at least the value of the permit. okay, this gets complicated quickly and i promise i’ll spell it out more at greater length later.