The Market is not Enough to end Fossil Fuel use

In recent years, proponents of clean energy have taken heart in the falling prices of solar and wind power, hoping they will drive an energy revolution. But a new study co-authored by an MIT professor suggests otherwise: Technology-driven cost reductions in fossil fuels will lead us to continue using all the oil, gas, and coal we can, unless governments pass new taxes on carbon emissions.

"If we don't adopt new policies, we're not going to be leaving fossil fuels in the ground," says Christopher Knittel, an energy economist at the MIT Sloan School of Management. "We need both a policy like a carbon tax and to put more R&D money into renewables."

While renewable energy has made promising gains in just the last few years -- the cost of solar dropped by about two-thirds from 2009 to 2014 -- new drilling and extraction techniques have made fossil fuels cheaper and markedly increased the amount of oil and gas we can tap into. In the U.S. alone, oil reserves have expanded 59 percent between 2000 and 2014, and natural gas reserves have expanded 94 percent in the same time.

"You often hear, when fossil fuel prices are going up, that if we just leave the market alone we'll wean ourselves off fossil fuels," adds Knittel. "But the message from the data is clear: That's not going to happen any time soon."

This trend -- in which cheaper renewables are outpaced by even cheaper fossil fuels -- portends drastic climate problems, since fossil fuel use has helped produce record warm temperatures worldwide.

The study concludes that burning all available fossil fuels would raise global average temperatures 10 to 15 degrees Fahrenheit by the year 2100; burning oil shale and methane hydrates, two more potential sources of copious fossil fuels, would add another 1.5 to 6.2 degrees Fahrenheit to that.

link.

A Call for a Carbon Tax

Literally putting a price on carbon pollution and other greenhouse gasses is the best approach for nurturing the rapid growth of renewable energy and reducing emissions.

While prospects for a comprehensive carbon price are dim, especially in the U.S., many other policy approaches can spur the renewables revolution, according to a new policy article published in Nature.

The current price of carbon - which is below zero, once fossil-fuel subsidies are taken into account - is far too low given the hidden environmental, health and societal costs of burning coal and oil.

link.

Australia Scraps Carbon Tax

Australia on Thursday axed a divisive carbon tax after years of vexed political debate, in a move criticised as regressive and out of step with the rest of the world.

The upper house Senate voted 39-32 to scrap the charge, which was imposed by the former Labor government on major polluters from 2012 in a bid to reduce greenhouse gas emissions.

It followed days of protracted negotiations with the minor Palmer United Party, which embarrassed the government last week by pulling its crucial support for repeal of the tax at the last minute.

Power-broker Clive Palmer backed the legislation after winning concessions for tougher measures to ensure cuts to electricity and gas prices were passed through to consumers and businesses.

Prime Minister Tony Abbott went to the polls in September with repealing the pollution levy as a central campaign platform, arguing the cost was being passed to consumers, resulting in higher utility bills.

"Scrapping the carbon tax is a foundation of the government's economic action strategy," said Abbott, who once said evidence blaming mankind for climate change was "absolute crap".

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.

China: Importing Nations Should Shoulder China's Carbon Pollution

China appealed Monday to exclude its giant export sector in the next treaty on climate change, saying rich countries buying its products should bear responsibility for emissions in manufacturing.

"It is a very important item to make a fair agreement," senior Chinese climate official Li Gao said during a visit to Washington.

Climate envoys from China, Japan and the European Union were holding talks with US President Barack Obama's administration as the clock ticks to a December conference in Copenhagen meant to draft a post-Kyoto Protocol deal.

But hopes were fading of reaching a comprehensive treaty, with the United States still working out the scope of its new commitment to fighting global warming under Obama.

Developed nations demand that growing developing countries such as China and India take action under the new treaty. They had no obligations under the Kyoto Protocol, leading Obama's predecessor George W. Bush to reject it.

Some statistics say China has now surpassed the United States as the top emitter of carbon emissions blamed for global warming. But Li said that up to 20 percent of China's emissions were from producing exports.

"We are at the low end of the production line for the global economy," Li told a forum.

"We produce products and these products are consumed by other countries, especially the developed countries. This share of emissions should be taken by the consumers but not the producers," he said.

Ok. Easily done. It's called a carbon tariff. China won't like it. Not one bit. It'd be interesting to see their reaction though. ;)

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?

Carbon Tax/Tarriff Would Spark Trade War?

Plans to force importers to pay the same greenhouse gas emission charges as domestic producers could provoke a trade war of retaliation and litigation, officials and lawyers have warned.

The plans, being considered by the US Senate and floated by the European Commission, are intended to prevent production shifting to laxer regimes abroad after countries impose carbon controls. But although supporters argue they will comply with the General Agreement on Tariffs and Trade (Gatt), the treaty that underlies the World Trade Organisation, officials and lawyers say that affected countries such as China and India are likely to resort to litigation or retaliation.

Ujal Singh Bhatia, India's ambassador to the WTO, said: "If the countries imposing such measures invoke Gatt provisions to justify them, the dispute settlement mechanism in [the] WTO would face serious challenges and create divisions along North-South lines."

Yes, it will cause something of a backlash or an attempt to evade them: probably through currency manipulation, if I had to guess. However, I really think we ought to implement a carbon tax pronto to start moving the economy away from carbon positive energy sources. You cannot implement a carbon tax without the tarriff: it knee caps your economy in a huge, huge way.

There's only one atmosphere that we all share folks and there's only one planet that humanity lives on, so we really need to act quickly on this. IMNSHO, the carbon tax is one of the best ways.

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 Taxes: A Canadian Perspective?

Call their tax

Why not tie carbon taxes to actual levels of warming? Both skeptics and alarmists should expect their wishes to be answered.

[...]

With this stalemate in mind, I would like to propose a thought experiment about a climate policy that could, in principle, get equal support from all sides.

The approach is based on two points of expert consensus. First, most economists who have written on carbon-dioxide emissions have concluded that an emissions tax is preferable to a cap-and-trade system. The reason is that, while emission-abatement costs vary a lot, based on the target, the social damages from a tonne of carbon-dioxide emissions are roughly constant. The first ton of carbon dioxide imposes the same social cost as the last ton.

In this case, it is better for policy-makers to guess the right price for emissions rather than the right cap. Most studies that have looked at that the global cost per tonne of carbon dioxide have found it is likely to be rather low, less than US$10 per tonne. We don't know what the right emissions cap is, but, if we put a low charge on each unit of emissions, the market will find the (roughly) correct emissions cap.

Second, climate models predict that, if greenhouse gases are driving climate change, there will be a unique fingerprint in the form of a strong warming trend in the tropical troposphere, the region of the atmosphere up to 15 kilometres in altitude, over the tropics, from 20? North to 20? South. The Intergovernmental Panel on Climate Change (IPCC) states that this will be an early and strong signal of anthropogenic warming. Climate changes due to solar variability or other natural factors will not yield this pattern: only sustained greenhouse warming will do it.

Pondering this one. I have a feeling that I want to play with a couple scenarios and then do a write up later this summer.

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.