Last week’s Washington Post carried an interesting op-ed that argued for a carbon tax. The nut graph:
The only effective way to begin reducing greenhouse gas emissions and slow global climate change is to make it more expensive to emit carbon dioxide. Unless businesses and consumers pay a price for carbon dioxide, neither will make the investments in technology and changes in energy use needed to dramatically reduce emissions.
Well stated!
The authors—two researchers from RAND Corporation—also put forth a nifty idea about how to cushion the economic impacts of new taxes:
[A]ll the proceeds collected by the government would be returned to Americans each year when they file income taxes….
A carbon dioxide tax with refund is fair because the people responsible for the most emissions would pay the most. The tax would also be progressive. Many Americans with lower incomes would find the refund would more than defray the higher costs of gasoline and electric power.
In short, they call for a per-head rebate, kind of like the Sky Trust idea we’ve written about already (e.g., deep in the bowels of this post). I love the Sky Trust idea (and, by extension, the idea of a per-head carbon tax refund) since it focuses policymakers’ attention on one of the core challenges of climate change policy: how to make it fair, especially to low income folks.
Still, you know me: I love to quibble…
To a large extent, I agree completely with the arguments the authors make in favor of carbon taxes.
First, a tax is a lot easier to administer than a cap and trade system. With a tax, there’s no auction, no grandfathering worries, fewer wacky complications within the electricity sector. Taxes are just plain simpler—and where climate policy is concerned, simplicity is a virtue.
And second, a tax gives a better guarantee of price stability. There’s no chance of a carbon “price shock” with a tax, nor of a collapse in carbon prices (as happened in the early stages of the European emissions trading system). And businesses love predictability—without it, it’s hard to plan investments. So a cap & trade system has to be designed very carefully in order to reduce the chance of wild price swings—something that a tax does by design.
But what I don’t like about this op-ed is that it elevates the principle of price stability over effectiveness.
For example, the authors stress the difficulty of setting the initial emissions limits right—particularly, that a limit that’s too high or low may send inconsistent price signals at the outset of the program. That’s fair enough, I suppose.
But how is that any more worrisome than a system that sends consistent price signals, if it turns out later that those price signals were too low to be effective?
I’m willing to be proven wrong here. But in my view, if we use carbon taxes as the only pricing mechanism to slow global warming, we may never get the emissions reductions we need. And by the time we figure out that any particular level of carbon tax is just too low to be effective—and to generate the political will needed to adjust the tax rate upwards—North Americans may have emitted literally billions of tons of additional CO2.
I, for one, would be willing to accept a little bit of price fluctuation to prevent that from happening.
Andy Andersson
The effectiveness of a carbon-trading or carbon-taxing system depends on the carbon-pricing mechanism, as do the price fluctuations. The system performance is amenable to analysis using methods developed for stability and control in engineering once some essential parameters of the problem have been empirically determined. The system can be started without such parameters available by a simply stated goal: Make carbon usage continually decrease with time. This can be accomplished by issuing carbon-emission permits (options, tax refunds, or other instruments) to the public on a per-capita basis for a total emission at current levels. How will this reduce emissions?Since the emissions by design cannot increase, they will reduce due to the fact that some parties will find it cost-effective to reduce their emissions and there will be no incentive for any party to increase emissions. For the next time period (month, quarter, year) permits will be issued to the newly established reduced level, and so on. Data will accumulate on the parameters of the system such as carbon-energy price increases and the effect of these increases on energy use and conversion to other energy sources (or modes of transportation). A control-system engineer will recognize the importance of delays in the stability of such a system and the necessity of including these in the analysis (permits for nuclear power stations, design and manufacture of more efficient transportation, etc).There is no need to set the prices for the carbon-emission permits since their price will be established by market forces. There will not be any negative effects of the increased energy prices on the average citizen, who would be fully compensated through the revenues from permit sales. In fact, there would be an opportunity for additional savings for the individual by switching to alternative energy sources (or modes of transportation) while keeping the money from permit sales.There are many other aspects on how to organize this system and how to maximally benefit from its implementation. I’ll keep that discussion for a later date but want to refer to an earlier comment posted on Nov 9, 2007.