Pricing Carbon Prices With Impacts on the Poor in Mind

Inequality, climate impacts on the future poor, and carbon prices

Authors:

Dennig et al

Abstract:

Integrated assessment models of climate and the economy provide estimates of the social cost of carbon and inform climate policy. We create a variant of the Regional Integrated model of Climate and the Economy (RICE)—a regionally disaggregated version of the Dynamic Integrated model of Climate and the Economy (DICE)—in which we introduce a more fine-grained representation of economic inequalities within the model’s regions. This allows us to model the common observation that climate change impacts are not evenly distributed within regions and that poorer people are more vulnerable than the rest of the population. Our results suggest that this is important to the social cost of carbon—as significant, potentially, for the optimal carbon price as the debate between Stern and Nordhaus on discounting.

China's Carbon Market Launches in 2017

China's long-awaited nationwide carbon market will cover as many as 10,000 firms and regulate nearly half of the country's total emissions once launched in 2017, a senior official said on the sidelines of the Paris climate talks on Tuesday.

Jiang Zhaoli, vice-head of the climate office of the state planning agency, the National Development and Reform Commission (NDRC), said China's carbon market would become the world's biggest, and its targets would be higher than those set by the state "in order to guarantee it had sufficient effect".

"When the market begins in 2017 it will already have almost 10,000 firms," Jiang said. "After 2020, the size will be bigger and will involve more enterprises."

The market will cover 31 provinces, six industrial sectors and 15 sub-industries, and will involve 4 billion tonnes of annual carbon emissions at its launch, amounting to almost half of the country's total, he said.

link.

Canada to Place Price on Carbon Emissions

Canada's new Liberal government vowed Friday [12/4/15] to work in 2016 toward putting a price on carbon emissions in order to curb CO2 pollution warming the planet.

Prime Minister Justin Trudeau's administration, however, has yet to say exactly how it might proceed -- possibly implementing either a carbon tax or a CO2 cap and trade scheme -- or when new regulations would come into effect.

link.

World Bank Launches $500M Carbon Market

The World Bank on Monday launched a $500 million market-based scheme designed to help developing countries pay for emission reductions and combat climate change.

Germany, Norway, Sweden and Switzerland have jointly pledged an initial $250 million to get the so-called Transformative Carbon Asset Facility (TCAF) up and running next year, while the bank hopes further contributions will take the eventual total to $500 mln.

The scheme, which will reward countries for reducing emissions by paying a fee for each ton of carbon dioxide (CO2) reduced, was launched in Paris a day after senior officials from almost 200 nations met in the French capital for two-week talks aimed at thrashing out a global deal to cut greenhouse gas emissions.

The bank said the price per ton paid would be set on a case-by-case basis and said the scheme would support energy efficiency, renewable energy and waste management projects, as well as schemes to cut emissions in cities and from the transport sector.

For many of the developing countries involved access to finance from richer nations is a major requirement of any Paris deal.

link.

The Carbon Market is a Work in Progress

It was supposed to be the way the market would cut greenhouse gases by itself: governments selling companies permits-to-pollute, which they could trade among themselves. Over time, the number of permits would be reduced, and the cost to companies of failing to cut emissions would rise.

Yet, 10 years after the EU launched the world's biggest carbon trading scheme, the effectiveness of the concept is in question and climate activists are disenchanted or hostile.

While there is still support for national or regional markets, not least in China, which plans to launch the world's biggest scheme in 2017, any hopes of creating a global carbon market at next week's U.N. climate conference in Paris look wildly optimistic.

link.

Carbon Trading in China

China has made progress in its carbon trading pilot programs but still has a long way to go, government officials and industry players believe.

China, the world's biggest emitter of greenhouse gases, is betting on carbon trading as a key measure to cut its emissions for each unit of economic output 40 to 45 percent below 2005 levels by 2020. Already, five regional carbon markets have been up and running in the Guangdong province and cities of Shenzhen, Beijing, Shanghai and Tianjin since 2013. Central China's Hubei province last month also kicked in its cap-and-trade system.

The city of Chongqing now is the last Chinese pilot region that needs to launch carbon trading.

At a climate finance forum hosted by the International Finance Corp. last week in Beijing, Xu Huaqing, deputy director general of China's National Center for Climate Change Strategy and International Cooperation, said that carbon credits sold in the existing Chinese carbon markets already surpassed 100 million yuan ($16 million) as of early May.

Xu said that higher trading activities are expected to emerge in coming weeks because regulated emitters are approaching their deadline of reporting annual emissions and therefore have stronger incentives to trade carbon allowances.

Carbon trading, China's version of a U.S. national cap-and-trade scheme that Congress failed to pass in 2009, is designed to evolve into a system that puts a price on greenhouse gases. It will spur clean energy investments and more energy-efficient technologies by doing so, and right now, carbon dioxide—the main man-made greenhouse gas warming the atmosphere—is the only type of greenhouse gas capped in the Chinese program.

Policymakers here limit the amounts of carbon dioxide companies can emit with a system of allowances. Companies that emit beyond the limit are required to buy more carbon allowances to cover those emissions. Those that become more efficient can sell allowances they no longer need to help finance their improvements.

In addition to its seven regionwide carbon trading pilots, China plans to include more cities and provinces in the scheme by the end of the decade. "We are considering expanding the existing pilot programs into surrounding areas and link up those regional carbon markets; if that fails, the central government will then design a nationwide emissions trading scheme and allocate allowances to each region," said Xu, the government official involved in the national carbon market buildup.

link.

Obama Opposes a Carbon Tariff

President Barack Obama on Sunday called a House-passed climate change bill "an extraordinary first step," but spoke out against a provision that would impose trade penalties on countries that fail to cut greenhouse gas emissions.

"At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals," Obama said in an Oval Office interview reported by The New York Times, the Los Angeles Times and The Washington Post.

"I think there may be other ways of doing it than with a tariff approach," Obama said.

The Democratic-controlled House on Friday passed the climate change bill that would require large U.S. companies, including utilities and manufacturers to reduce emissions of carbon dioxide and other gases associated with global warming by 17 percent by 2020 and 83 percent by 2050, from 2005 levels.

No, no, no, and,umm, no.

This climate bill, in fact any climate bill, while necessary will end up costing US business a nontrivial amount. All you have to do is compare the energy consumption and the type of energy consumption and you will see where it'll hurt in detail. My wife did a pretty good paper on this a while back. Two years ago? I think? The only way to balance this out - because, y'know, the Chinese and others, but especially the Chinese, are not going to do a single thing about their carbon emissions - is to impose a 'carbon tariff.'

That Obama opposes it is disheartening. Sure, let's raise the costs for US businesses, but not others.

*sighs*

FWIW, I whole heartedly support a climate bill. I prefer the carbon tax rather than cap and trade, but...eh. Either way carbon emission reductions need to be done. And soon. No matter what, we are getting a climate change. Now its just a question of how drastic. We have the power to curtail and mitigate the looming desicated polar bear, but only if the whole world does this. China and India have to be on board too...or else we are fscked. Tech development is a good way: our newest green revolution, but that will take time. Time we may do not have.

Sec Chu Floats Carbon Tax

US Energy Secretary Steven Chu has floated the idea of a carbon emissions tax to fight global warming, in an interview with The New York Times Thursday.

During the US presidential campaign, the notion was kept largely on the back burner as candidates were reluctant to promote the idea of costlier energy at a time when gasoline prices were soaring.

But since President Barack Obama's administration took office in January, Congress has been working on setting up a system for swapping greenhouse gas emissions quotas similar to the one used in the European Union.

And Chu said "alternatives could emerge, including a tax on carbon emissions," the Times reported.

That's my guy!

Now, Dr Chu, about our sister labs...don't do it!

What to do with the Carbon Tax/C&P Dinero?

A debate has started up as what to do with the money we'll get from the carbon tax or cap and trade plans. Both McCain and Obama are planning on a cap and trade scheme. Obama's will have an immediate auction while McCain's will have an allocation initially without auction and then phase in an auction over time. Both have issues - big price jumps and initial lobbyist uber influence, respectively - but I am not going to discuss that in this post. For now, this post is dealing with what I'll call carbon money.

There's a tussle online over what to do with the dinero. It's going to be a LOT of money. The permits could be worth $7 trillion by 2050. If you ponder that, even if you spread that over 40 years, that's something like $175 billion dollars per year. That's a nontrivial chunk of change there. What are we going to do with it?

Before we tackle that, you have to keep some things in mind. First, this is not a long term, guaranteed revenue stream. The whole point is that this is to make up for the 'market failure' of failing to get rid of carbon dioxide emitting industries. Or in the very least get the resources to offset or mitigate the damages from those industries that emit but are irreplaceable. This does mean the revenue stream, even if the auctioned price each year rises should and is intended to fall: we don't want the industries to keep emitting!

Therefore, anything that we want to spend this money on must be short term funding items. The most popular idea is to fund the development of technology to replace the fossil fuels with renewables and other alternate technologies. that's the thrust of the Lieberman bill that McCain backs. Another suggestion might be to set up an insurance fund that would cover the problems that may stem from the large scale implementation of nuclear power plants. Environmental clean up is another suggestion I've come across. Space projects could be yet another. Education reform yet another. There are plenty of suggestions and at an average of $187 billion there's a nontrivial amount of money to be had. There's one suggestion that I came across, I am not so sure is a good idea.

Robert Reich suggested, here and above, to give it all back, to send out dividend checks to the people each year.

I am less than enthused with this option. Each American would get about $625. My family would get about $1,875. While I'd appreciate that amount (!), I have to say that I think someone needs to sit down and do the math associated with moving the money around in the economy like this. I may have time for this but I doubt it.

It also seems to be terrible short sighted. Rather than investing in something, it's merely a redistribution of wealth. Perhaps an unwise method for one at that.

Small Update: Climate Feedback has more.

More on the Economics of Carbon Taxes & Cap and Trade

The article that I linked to yesterday seems to have stirred quite a stinky storm. It seems that there are - *gasp*shock* - quite a few people with conflicting opinions. A divisive topic on the Internet?! Say it ain't so! Some of the posts responding were a bit disingenuous at best though.

My favorite was when the poster stated that the carbon tax or cap and trade would only work if the technology to replace or upgrade the carbon emitting industries were developed. Umm. Y'know. That's the point. It's to shift investment into either mitigation - *grumble* - or nuevo tech development for replacement of the offending $TECH.

If they don't materialize, yeah, we have problems, but based on what I've been following, it will not be an issue. We were and are on the cusp of many exciting bits of tech development that are going to shift our society in good ways. It's just a question of making that shift and the carbon tax/cap & trade plans are the economic way of making it happen faster than the pure market can.

Economics Explanation of Carbon Tax vs Cap and Trade

ECON 101: Carbon Tax vs. Cap-and-Trade

The purpose of this page is to describe the differences between a carbon tax and carbon cap-and-trade policies using the most basic of all environmental economic models.

[...]

Conclusions

In terms of the market failure, the negative carbon externality, both a carbon tax and carbon cap-and-trade will achieve the same level of increased efficiency by achieving the optimal abatement level at the minimum cost. The only difference is the distributional implications. The cost to the firm is lower for carbon cap-and-trade. The government receives tax revenue with a carbon tax. Both policies are preferred over techological or output standards (i.e., command and control regulation).

Note the following extensions:

* Dynamic efficiency: firms have an incentive to adopt new technology to reduce their marginal abatement costs with both a carbon tax and carbon tax-and-trade.

* Double dividend: Carbon taxes and auctioned permits will generate revenue for government that can be used to reduce a budget deficit or reduce in distortionary taxes on labor and/or capital.

* Auctions, giveaways or both: The results of carbon cap-and-trade approach the results for a carbon tax as the extent to which permits are auctioned instead of given away to polluting firms increases. Auctions substitute for trading as high abatement cost firms have an incentive to bid higher.

One of the reasons that I have supported the carbon tax over the cap and trade is that the CAT does not provide revenue for the government. That revenue could make all the difference in the world for research into alternate energy sources, mitigation of global warming, reduction of the national debt, paying for the military supplementals or even provide for a big boost in paying for some of the measures that would provide cost savings for the health care industry (ie things that have an immediate 'hump' expensive, but would greatly reduce daily operations). Auctioning off permits though would work just as well.

However, whatever we spend it on, it must be for short term expenses. We cannot count on this revenue stream into the future. The whole point of a cap and trade or carbon tax would be to draw down emissions considerably and eliminate them as much as possible. That means the money eventually goes away. That's one reason why Al Gore's idea of swapping carbon taxes for payroll taxes isn't such a good idea: eliminate the payroll tax and then you lose that revenue stream. Reimplementing them after the carbon tax revenue has gone poof is going to be as popular as a skunk at a cocktail party.

Items that I'd aim to pay for would include our commitment to ITER that the Democratic Congress has hacked (idiots), a crash project on the renewal sources of energy (such as biohydrogen or cellulosic ethanol from switch grass), space related projects (of course!), etc.

At any rate, definitely do read the above article. It's interesting and a good, basic explanation.

$1 trillion Carbon Trading Market in 2020?

The United States will be home to a $1 trillion carbon emission market by 2020 if federal and state policymakers continue on their current path towards a comprehensive "cap-and-trade" program that is confined to domestic trading only. In an analysis of bills today before the U.S. Congress, New Carbon Finance research economists based in New York, Washington D.C. and London, U.K. predict that in 12 years a carbon-constrained U.S. economy that includes a cap-and-trade system allowing only domestic trades will produce:

* A $1 trillion carbon trading market -- more than twice the size of the European Union's Emissions Trading Scheme;

* A carbon price of $40 per tonne as soon as 2015, which will result in a rise in consumer energy prices in real terms of roughly 20% for electricity, 12% for gasoline and 10% for natural gas -- as well as impacts on other prices as higher energy and transportation costs filter through the economy; and

* Major U.S. investments in renewable energy, energy efficiency, and greenhouse gas mitigation projects and technologies.

The analysis was released Feb. 14 by Michael Liebreich, CEO of New Energy Finance, parent of New Carbon Finance, attending climate change roundtable discussions at U.N. headquarters, New York.

That market is HUGE relative to the economy of that time. I really wish I had been able to entice the economically more competent than I (*cough*Noel*cough*Carlos*cough*) to do a compare and contrast about the carbon tax/tariff vs the cap & trade schemes.

How much revenue will go to the government under this I wonder?

U.S. launches program to offset carbon with trees

Consumers who see planting trees as a way to fight global warming can now sprout them without getting out the garden tools.

The U.S. Forest Service and non-profit group the National Forest Foundation launched a Web site on Wednesday where consumers can pay a $6 to offset one metric ton of carbon dioxide, the main gas scientists link to global warming. Their donations will pay for projects like the planting of ponderosa pines in a Montana forest wiped out by a fire, or Douglas firs in an Idaho forest damaged by a tornado.

"I think people are looking for something they can actually do besides reducing their carbon footprint," Bill Possiel, NFF's president said in an interview.

The world's largest emitter of greenhouse emissions, the United States, does not regulate output of the gases. That has helped spawn a voluntary, unregulated carbon market where consumers and companies pay someone else to cut emissions elsewhere at projects, such as wind power and tree farms.

Global voluntary market trade last year hit nearly 24 million tonnes of carbon dioxide credits worth more than $90 million, according to industry watchers.

oh kewl! I wish they'd do that for redwoods in California! Here's a link to the website with a carbon footprint calculator before the link to donating. We came out to $84/year to offset our family's habits. That might be a little low. I'll talk to my wife about this tonight and see what she thinks.

Even so, I think we'll get ready to go buy land in Greenland and start our forest there. ;)

Economist's View: A Low-Carbon Fuel Standard?

Over at the the Economist's View they have a small discussion whether or not a a tax, emission standard or market is best. I think that an emissions standard for the fuel is not a bad idea. Yet, I have to say that I think that a tax would work best overall and they note some areas where the tax would be great - power generation - but would have minimal impact on gasoline consumption.

What do you all think?

Anyone?

BTW, I do think that $25/ton is too low. However, you would have to incrementally introduce that tax no matter what.

Carbon Tax vs Carbon Market & What to do With The Money

A friend of mine sent me an article he saw from The NY Times blog article about what works better: a carbon market or a carbon tax to contain and curtail greenhoues gas emissions? That article deeper links to another one at Reason Magazine. It's an interesting little study. Here's something of my take on the subject.

The difficulties with the Carbon Market in the EU happens to be the lack of a central authority issuing the carbon 'credits'. If every State here in the US were to do that, it'd fall apart too. No single state would want to draw down their economy because their energy cost were higher. The centralized EPA in the US helps with this a lot, especially with the example of how well it's worked for the SO2 emissions market. However, as we are seeing from the fact that asian pollution is now drifting across from Pacific Ocean to effect the US - something the SO2 emissions market cannot deal with - we will still have nontrivial issues with other nations not curtailing their own emissions of greehouse gases.

That's one way that the carbon tax is useful - if you extend it to a tariff. My wife did a paper on the carbon tax that Gore proposed for her business class last semester. However, as our critique on the blog states, you need to use a carbon tariff as well as a carbon tax. You could really, and thoroughly screw the US industry by knee capping them with the carbon taxes while letting China get worse and worse. It would be a form of off-shoring yet again. However, if you were to impose a carbon tariff on the goods from China to the US, it would have some pretty profound effects and even encourage the Chinese to invest in other power sources than carbon emitting ones....even if they play monetary games.

I have to say that I prefer the carbon tax/tariff combo, but I have been looking at this from the point of view from how to cut emissions. This will be inflationary to some extent. Goods from other countries would go up in price because of the carbon tariff and energy costs here in the States would go up, especially for those that are dependent on coal based energy. It would also cause the market to divest itself of coal mining over time: that would have profound effects on certain states economies. The question is with all this revenue coming in, and I assume that it'd be pretty large, you'd want to use it for something or help offset the inflation that the average American might face.

I do like the idea of removing some of the payroll taxes. Nuke income tax below a certain point and reduce it for the rest. Additionally some revenue for health care payments and other major projects that are insanely priced but worthwhile to do.

However, it should be noted that this money will be temporary, even if we have a robust intake from the carbon tariff via China, India and the developing world. The whole point of the carbon tax/tariff is to shift investment from emitting technologies and industries to ones that do not. This means the money is going to be temporary as the market responds - and respond it will with some of the hefty taxes and tariffs that could/would be imposed! The issue is then that over 20-30 years that money will dry up and we will not be able to collect it anymore. Therefore, it's best not to count on it being there for, say, social security except as a temporary measure. I am sure though that my readers will have some ideas on what we could use it on for thirty years that would be self contained in that time frame.

Some of my thoughts are for educational reform. One idea that I have grown fond of was proposed by Carlos Yu of New York whereby we would add a step to the educational process: this would require that everyone get a 3 year, premed degree as a step between high school and college. This could help immensely with education in the ever more important biotech arena and also help significantly with the undereducation of the American public here. it would also help with getting enough people trained to deal with the aging population. Getting it into place initially is damned expensive, and so the question comes to where the money would come from...*beams*points finger above* That seems like a good, but temporary kick-off source of funding to me.

Of course, there's that perenial space exploration bit too. I'd vote for it, but it'd have to be for a smaller percentage than the rest. $5 billion per year could be added to the agency's budget with it earmarked for robotic exploration and another $2 billion for aeronautics research as well. However, since I am guessing that this intake would be somewhere around $100 billion, I doubt that 7% taken off it would cause too many howls. Then again, with the relative pittance that NASA getts now percentage-wise and the still howling fools that are out there, I am probably wrong.

Finally, as part of a grab bag of ideas, I'd also say that I think that a good chunk of this ought to be used to service the national debt. Knock that sucker down a lot. It'd help Americans in a nontrivial way. However, on the lower end of the pay scale, we ought to have a nontrivial payroll tax relief as well.

In wrapping up, the tax vs market debate rages on. The US seems to be headed to a market, even with the issues with the EU's version. The tax/tariff combo seems like a better route to me, and there are some very good places to spend that money. However, that's just my opinion.