Cap and Trade: Right Debate, Wrong Solution

"As we have seen in just the past few years, fossil fuel prices can vary dramatically over very short periods of time. Creating greater certainty regarding steady increases in fossil fuel prices over the coming decade would have an enormous impact on private sector investments in both alternative energy and energy efficiency. Cap and trade is the right debate to be having because it focuses the discussion on how to change the fundamental economics of fossil-based energy. But ultimately cap and trade is the wrong solution; superior means exist to achieve the results we need not only for the environment but also for national security and our economy. A better solution is a strategically targeted “ceiling” tax on carbon combined with a tax dividend."

http://www.greengoldblog.com/

Hammering cap-and-trade, and offering a new flavor of "fee and dividend". Below, how coal is screwing our planet - a picture worth one kW (kiloword):

http://3.bp.blogspot.com/_XLmoWsAyN9c/S7PDjExF23I/AAAAAAAAACo/9xzReOX_FSI/s320/CO2+emissionsbytype.jpg.png

politicians can get anything even half right:shrug:

It doesn't "tax" anything. Like it or not, that word/deed is a poison pill.

Cap and trade can accomplish the same goal.

...in Canada.

The incentives for middle and lower class in our society far outweigh the disadvantages. It can get passed.

Cap and trade is as bad as offsets.

Surely not?

I didn't think anything could be quite as bad as the old
"pay your neighbour to diet so you can carry on being a glutton"
scam.

:shrug:

Stated another way - if we used electric transportation powered by nuclear electricity we'd cut our CO2 output by 80%.

Cap & Trade would cap all carbon emissions.

The cap will slowly decline. It doesn't matter where the savings come from or how companies achieve it. If the cap declines 20% then CO2 emissions will have to be 20% lower. If companies make poor progress than like any scare commodity the price of carbon will go up. This creates incentives to push carbon emissions down.

C&T would work like this.

Current Carbon emissions in US are 5.7 billion tons. A pool of 5.7 billion credits is created. Each credit allows a compnay to emit 1 tons of CO2. Don't have a credit? You can't emit.

Then reductions are put in place.

Say 2 years from now pool shrinks by 5% = 5.4 billion credits. 300 million credit reduction. The govt doesn't know/care where those 300 million in reductions come from but they will happen.

5 years from now pool shirnks again by say 10% = 5.1 billion credits. 600 million credit reduction. Once again we don't know where that reduction will come from. Maybe it comes from CCS. Maybe it comes from wind power replacing coal. Maybe it comes from new nuclear reactor. Maybe it comes from 1 million new EV. Still the emissions are reduced.

C&T can work. It worked for Acid Rain. It actually worked better than anyone expected it to:
http://www.edf.org/page.cfm?tagID=1085

Personally if I had a choice I would go with carbon tax. It is simpler system. However I wouldn't vote against C&T holding out for some carbon tax that may never come.

The only concern with C&T are:
* Caps needs to have a meaningful reduction over time. If the cap decline 1% over next 20 years then it is useless.
* Some credits should be provided "free" but some should be sold by govt. Every year not only does cap decline but the "free" % also declines
* Enforcement. Sufficient money (paid by selling credits) to enforce caps needs to be allocated. Violations need to be expensive enough to be punitive.

My only issue with C&T is that it is more complex than necessary. A carbon tax is simple. You can emit as much carbon as you want but it will cost you. There are issues with carbon tax too. You don't know how much reduction will happen. Companies may simply absorb the cost of carbon tax and operate business as usual. You also need enforcement. Lastly it is possible the carbon tax will be too low (if carbon tax is cheaper than CCS what do you think companies will do) or too hig (punitive, bills skyrocket, consumers pissed off, votes to repeal tax).

there is a floor beneath which carbon output can't go - for industrialized countries credits will always be somewhat valuable, and they will get used.

Adopting a fee and dividend approach, in which the fee scale is gradually increased, creates an incentive to use absolutely no carbon at all.

Also carbon tax isn't immune to issues.
While C&T has a floor it also has a ceiling. Carbon tax has no ceiling.

If the fee is less than the cost of alternative it will do nothing but raise prices.

Estimates for CCS put it at $100 per ton. So if tomorrow we had a $50 per ton carbon tax guess what would happen to coal....
Nothing. Coal companies would simply burn exactly the same amount of coal, pay the tax and raise their prices.

Now indirectly that helps wind, solar, nuclear hwoever coal (especially existing plants already paid for) is so cheap that it just becomes slightly more expensive. Now slightly more expensive "may" reduction consumption but what if economy/jobs/wages recover. Power being 5% more expensive but family is making 10% more money may not reduce consumption at all.

So neither system is perfect. The advantage of C&T is that is the cap is reduced 20% you absolutely know that CO2 will go down 20%. It is impossible for it to not. The only exception would be cheating (which is why proper funding for eforcement is criticial).

Either system is vastly better than status quo. Personally if it was my choice I would go with carbon tax however I if I was President I wouldn't veto a well designed C&T system just because I prefer carbon tax.

or the price of energy will go up.

The fact that a carbon tax has no ceiling is a plus. It allows government to take control of carbon output away from the private sector. It's worked before - mandating catalytic converters was a resounding success.

onedit: the cheating factor IMO will make cap-and-trade a wash. Invisible, odorless...is there any real way to verify compliance with CO2 output caps?

Much easier to put a tax on carbon when it comes out of the ground or into a country, than when it goes into the air.

The equivalent would be allowing no converter and companies just pay more. If the "more" is less than cost of catalytic converter then they won't adopt them. We could do that too by simply prohibiting high carbon output. I.e by 2015 coal is illegal without CCS. A mandate isn't same thing as a carbon tax. With catalytic converters companies had no tax and they also had no choice. They were simply forced to adopt change.


The lack of a ceiling "can" be a good thing however you can also end up with very little reduction in carbon.

A 20% reduction in cap guarantees that carbon output goes down. A $50 per ton carbon tax results in what drop? Say you estimate it will be 20% but it ends up only being 12%. Was it better than a C&T with 20% drop in cap?

Still personally I like carbon tax. The danger comes from watering down.

If you water down a C&T you know exactly how water down it is. Say Democrats are pushing for 20% reduction in cap by 2012. If Republican water than down to 10% by 2014 it is very obvious.

Watering down carbon tax is sneakier. Say carbon tax is watered down from $50 to $25 and subsidies to fossil fuel companies increased by 50%. How much carbon reduction will you get. It gets very hard to predict where what kind of emission reduction you will get. 10% by 2014 while not good still guarantees that in 2014 emissions will be 10% less.

copying from my post above: the cheating factor IMO will make cap-and-trade a wash. Invisible, odorless...is there any real way to verify compliance with CO2 output caps?

Much easier to put a tax on carbon when it comes out of the ground or into a country, than when it goes into the air.

Enforcement was successful for reducing acid rain. Enforcement will be more difficult (but not impossible) for C&T compared to Carbon Tax.

There will be cheating on a carbon tax. Also the accounting isn't as simple as just taxing it when it comes out of the ground.

The goal is to avoid carbon release. So if you tax it when it comes out of the ground you need to provide an offset. That starts getting complicated. Also what about stuff like landfills. What if landfill taps methane and burns it instead (CO2 has lower global warming effect than methane). Even in say a coal plant not all carbon gets released into atmosphere. Some of it remains in fly ash. Are you going to go measure all the fly ash output, weigh it, and provide a deduction for amount of carbon "not released"?

So "taxing at the ground" sounds simply until you get into the complexities of our carbon based world.

based on an average of amount of CO2 that the source releases. If a utility is able to find coal which delivers more power/lb, that's not a bad thing either.

Fee and dividend isn't really a carbon tax - everyone is making money on the other end too. If you use less carbon that the average citizen, you actually make money (not sure how the corporate end of that would work).

Taking a coal plant for example:

Say 3 coal plants all use 10 million tons of coal (thus pay $x million in carbon tax).

Coal plant A has efficient burners (high ratio of CO2 gas vs carbon left in fly ash) releases 20 million tons of CO2.
Coal plant B only releases 18 million tons of CO2 (more carbon left in coal ash).
Coal plant C uses partial CCS and releases 5 million tons of CO2.

Gets even more complicated for industrial uses of coal. In steel most of the carbon ends up IN THE STEEL and less in the atmosphere so the hypothetical CO2 release for steel plant using 10 million tons of coal might be 8 million tons of CO2.

Also in metalworking coal (ground) is used as wash for molds. There is no CO2 release from this application fo coal.

So 5 inputs: all the same 10 million tons of coal and taxed exactly the same.
5 outputs, 20, 18, 5, 8, 0 tons of CO2.

If you charge at the source you create all kinds of problems because the goal isn't to avoid removing carbon from the earth it is to prevent carbon from being released into atmosphere.

The goal is to reduce the amount of carbon released into atmosphere so the tax has to be on that metric.

If you charge at the source you then need to allow some "deduction" for those people who emit less CO2 and that starts to get complicated too. In above example all 5 companies are taxed the same amount for the coal based on a projection of 20 million tons. The guy who did emit 20 million tons is done. The other 4 are being "overtaxed" because while their input was 10 million tons of coal their outputs were 18, 5, 8 and 0 tons of CO2.

Companies that have them should be rewarded - that also means fewer mountaintops removed.

Of course the goal is to prevent carbon from being released into the atmosphere, but attempting to monitor output would never, ever work. CCS is a non-starter for the same reason - impossible to enforce. Would your company spend $millions to pump that gas into the Earth, or just "leak" it into the night sky when no one is looking?

I don't see "all kinds of problems". I see some deductions made for industrial uses of coal, but realistically the proportion of coal that ends up inside of steel is insignificant. And I'm sure that if the titans of industry put their heads together they could come up with an alternative for washing molds.

I mean nobody is monitoring carbon taken out of the ground they are monitoring carbon put into atmosphere.

Would your company spend $millions to pump that gas into the Earth, or just "leak" it into the night sky when no one is looking?
Would a company dump oil down the drain or would they pay to have it recycled?

Make the fine punitive enough and you reduce the economic incentive to cheat.

If I tamper the electric meter connected to my house I could get charged for 8 kwh for every 10kwh I actually consume. Why don't more people tamper with their meters?

However if we are going to tax fossil fuels then lets be honest and call it a fossil fuel tax. Calling it a carbon tax is bogus. You aren't taxing carbon put into the atmosphere you are taxing carbon in fossil fuels (regardless of how it is used or how much CO2 is avoided).

It actually increased atmospheric carbon output in participating countries (except for Japan).

Dumping oil down the drain is still a problem, but it's far easier to enforce, as is tampering with an electric meter. The risk/reward ratio is not even in the same league.

We can call it a carbon tax, but most of the public assumes a tax goes to politicians and special interests. So call it a fee, take out a very modest percentage to pay for administration, then give it back to the people in the form of a check every year. James Hansen estimates for the average family a dividend might amount to $2,000/year to start. It won't take long to win unanimous support after that first check goes out.

Call it a fossil fuel extraction tax/fee/dividend.

I don't think Hansen proposal was to charge at source regardless of atomspheric emissions.

No emissions, some emissions, 100% emissions = all taxes/feed/fined at the same rate.

Maybe I am wrong though.

This paper from June 2009 would seem to confirm what you're saying:

"Requirements of phasing out coal emissions, averting emissions and/or use of unconventional fossil fuels, and avoiding the need to extract final drops of oil from the
most extreme places on the planet, together have strong policy implications. Although policy details are beyond the scope of this paper, the core requirement is for governments
to make fossil fuels more expensive than clean energy alternatives, i.e., to stop allowing cost externalization of major damage to the environment, human health, etc. A first step
is to remove fossil fuel subsidies. In addition, there needs to be a substantial rising fee on carbon emissions, so as to generate innovations in alternative energy and energy efficiency technologies."

http://www.columbia.edu/~jeh1/2009/UScoalphaseout_draft.pdf

In his book I remember him being very insistent that the fee must be applied "at the port, the mineshaft, or the wellhead". But I don't have the specifics - that's what I get for lending books.