Carbon trade or tax?

Britain’s faith in carbon trading as a way of reducing greenhouse gases could be dangerously misplaced, according to an independent academic working with the Department of Energy and Climate Change.

Dr Chris Hope of the University of Cambridge’s Judge Business School has been commissioned by the government to calculate how much environmental polluters would have to be charged for emitting CO2 to make it worthwhile for them to cut back. However, his research, due to be delivered to the government later this year, has led him to a far wider conclusion: that the current European Emissions Trading Scheme (ETS) is deeply flawed and should be replaced – or at least augmented – with a green tax.

Under the ETS, companies or countries are given quotas for their annual carbon emissions. If they exceed the quota, they have to buy extra from others who have undershot their limit. However, if they become more efficient, and so generate less CO2 than their quota, they can sell the surplus and make a profit. This raises a vital question: how much should energy users be charged for each tonne of CO2 they emit? For the ETS to work, the price has to be set at a level that makes it worthwhile for consumers to cut their energy use.

According to Hope’s research, the minimum price needed is about £85 per tonne, rising at roughly 2 to 3 per cent a year. What’s more, this price needs to show long-term stability. After all, the whole point of putting a price on carbon emissions is to place a financial burden on heavy environmental polluters. If carbon prices fell, then that burden would shrink and there would be little incentive to improve efficiency.

So far, so simple – but Hope has reached a second, personaland, for the government, far more embarrassing conclusion. He believes a market-based trading system such as the ETS is very unlikely to generate consistent high prices, and this instability could undermine the whole point of the scheme. The heart of the issue is a problem we are all sadly familiar with: financial markets are highly variable, with prices liable to surge and collapse. Hope says that the first two phases of the ETS have illustrated the problem: the prices of CO2 emissions quotas fell so low as to be almost worthless. Prices now stand at roughly £9.50 per tonne of CO2 – less than 12 per cent of what Hope’s calculations show is needed.

The alternative, he says, is to put a price directly on carbon. Hope means that Britain and Europe must consider a system of carbon taxes, by which a surcharge would be placed on gas, oil and coal according to how much CO2 they generate. Such a carbon tax on fossil fuels would lead to sharp rises in prices for electricity and heating – perhaps by up to 50 per cent. This sounds politically unacceptable but not, Hope believes, if the money were used to cut other taxes such as VAT or income tax. He calculates that the UK government could gain about £50bn in annual revenues – equivalent to roughly 10 per cent of the current total tax take. “With this new source of revenue, they could then reduce other taxes such as VAT and income tax,” he says.

Ed Miliband, Britain’s Energy and Climate Change Secretary, defends the carbon cap-and-trade system. “The current low carbon price is a market response to the global economic crisis and is not a good guide to the future carbon price,” he said recently. “Cap-and-trade is still the right way to go.”

Hope, who worked with Lord Stern on the 2006 Stern Review on the economics of climate change, is in good company, however. At this month’s climate science summit in Copenhagen, William Nordhaus, Sterling Professor of Economics at Yale University, attacked cap-and-trade as unworkable, arguing that today’s low carbon price is an “inconvenient economic truth” that politicians are unwilling to face. “The world is making a huge wager that the cap-and-trade system will eventually do the job of slowing global warming,” he said. “To bet the climate on a model with such clear structural flaws is a reckless gamble.”

Jonathan Leake is the science and environment editor of the Sunday Times

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Issued by:  New Statesman

Author: Tricia Holly Davis and Jonathan Leake

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Issue date: March 26, 2009

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GRIST Magazine - May 08, 2009:

Cap-and-trade vs. carbon tax: a bird in hand is worth two on Alpha Centauri

I find it really hard to believe, but the perennial “carbon tax vs. cap-and-trade” debate is still going on. It goes on and on and on and it never changes. It’s like everyone’s following a script now.

I’ve been over this territory so many times that I hardly know what to say any more. So here’s what some other people are saying:

Joe Romm started this off by asking James Hansen to drop his quixotic and politically toxic campaign against the Waxman-Markey climate/energy bill. Kevin Drum chimed in, supporting Romm.

Michael O’Hare responded with a heated defense of carbon taxes (or as he calls them, carbon charges), premised mainly on a basic misunderstanding of Romm’s post. (Joe wasn’t defending cap-and-trade as such against the carbon tax alternative—he was defending Waxman-Markey, including all its complementary policies, against the tax alternative.)

Ryan Avent says taxes and caps are not that different in effect and only one has a chance of passing, so carbon taxers should STFU. Andrew Sullivan responds that he thinks the tax will work better, and so no, he won’t STFU. Kevin and Ryan both respond to Sullivan, pointing out that he seems to be suffering from some serious misunderstandings about cap-and-trade systems. (In this he has, to put it mildly, plenty of company).

Meanwhile, Yale 360 has rounded up a group of “experts” to weigh in on the issue, though several of the purported experts seem to understand very little about the policies and/or the politics at hand. The submissions from Jeffrey Sachs and Roger Pielke Jr., in particular, are so poorly argued as to defy explanation. Michael Tobis says that Jeffrey Sachs’ argument for a tax “makes sense” to him, but Kevin points out that Sachs’ argument is somewhat hampered by the fact that virtually every single sentence is head-slappingly false.

Is that it? I think that’s it. For now, anyway. I’m sure the entire roundelay will repeat itself soon enough.

Rather than tread all this ground yet again, here are what I take to be the three key points:

• The policies are, or can be made, roughly equivalent. With a tax you get certainty about prices but uncertainty about emission reductions; with a cap you get the inverse. You can tweak a tax to shift the balance; you can do the same to cap-and-trade. Both can be weakened with loopholes and favors for special interests. Political reality being what it is, either is likely to impose a fairly low price on carbon for the first decade or so. Which means ...

• In the short-term,  complementary policies will spur the most action. The never-ending, chin-stroking carbon pricing debate perpetually overlooks this basic fact. (See: “Cap and Trade is Not Enough: Improving US Climate Policy” [PDF] from Carnegie Mellon.) What’s going to knock us off the status quo path in the next decade is, above all, new targets and standards for energy efficiency. Also: a renewable energy standard, a low-carbon fuel standard, smart-grid standards and funding, government procurement policies, direct government investment, etc. etc. These are the policies that could get things rolling immediately. And guess what?

• The Waxman-Markey bill contains those complementary policies. Also, it exists. Both these characteristics set it apart from the Alternative Universe Carbon Tax Pony Bill. Carbon taxers seem blinded by a misguided obsession with the specific mechanics of carbon pricing. By bashing Waxman-Markey, they are aligning themselves with people who want to block the best opportunity for climate/energy action in a generation. They’re aligning themselves with people who want to block it not in favor of a pony alternative, but in favor of doing nothing, to protect corporate donors. In many cases, they are adopting the exact same rhetoric as conservative obstructionists.

If taxers want to engage productively, they should advocate for tax-like features in the cap-and-trade provision of the Waxman-Markey bill—price floors and/or ceilings, fully auctioned permits, expanded banking and borrowing, etc. Bashing the whole bill in order to argue endlessly and fruitlessly in favor of a hopeless alternative, the advantages of which exist entirely in the whiteboard fantasies of economists, is politically daft.

The focus should be twofold: a) get complementary policies up and running quickly, and b) get some kind of carbon pricing scheme in place, which in future years—as the depredations of climate change become clearer to the public—can be tweaked and improved. Passing the Waxman-Markey bill would achieve both.

If you want to read further, have a look here...