In Part II, Hansen looks at policy options required to drag us out of the Sustainability Emergency. It is self-explanatory, but I thought it worth adding some notes on a cap-and-trade versus a carbon tax. Which is better?
Cap-and-Trade. Pros: (i) Cap reductions ensure falling emissions – in theory; (ii) Reduces inefficiencies or overpricing; (iii) Creates both incentives and disincentives for abatement; (iv) Chance to profit from ‘doing the right thing’. Cons: (i) Enrich middle men / brokers; (ii) Requires army of bureaucrats / new system; (iii) Encourages rent seeking – pleading by special interest groups; (iv) Limited price certainty – requires projected ‘gateways’; (5) Easy to manipulate / distort to get perverse outcomes.
Carbon Tax. Pros: (i) Clear forward price projection = investment certainty, removes incentives for hedge funds, derivatives etc., and better allows for long-term business planning; (ii) Can use current tax system; (iii) Better handles emissions intensive trade exposed industries via carbon tariffs at the trade gate; (iv) Greater societal familiarity, understanding and acceptance. Cons: (i) Politicians or bureaucrats must set costs – can introduce inefficiencies, disincentives and pressure to adjust tax rate during tough economic times; (ii) No guarantee that emissions will fall; (iii) People may still be willing to pay more for old tech because it is familiar or because they have a large historical investment in capital infrastructure or related assests.
I need to do a post about the above and expand on these points (some time!), but at least the above is a taster to see where Hansen is coming from with his carbon tax + 100% dividend idea. Many economists favour a tax over cap-and-trade (Garnaut does not) – see, for instance, the recent comments of Jeffrey Sachs when speaking at ANU.
For a critique of Hansen’s proposal by Climate Progress’ Joe Romm, see here. Romm is of course somewhat right and at the same time totally wrong. He’s right that an honest appraisal of the current situation makes it apparent that it will be extraordinarily difficult to get back to 350 ppm CO2 for centuries or millennia. We need a truly transformational, system wide change across global society to achieve that, and plenty of new tech. But he’s also downright wrong, because the corollary argument he uses is that it is therefore better to advocate for the compromise goal of 450 ppm since is more resonable and feasible. Yet even if Romm’s solution were fully achieved, it would still end in failure, because successfuly meeting the 450 ppm goal would result in utterly unacceptable climate impacts and a transformed planet. This is a common theme – flaw – among environmental advocates – failing to recognise that the laws of physics and biology don’t compromise, and have no pity.
Tell Barack Obama the Truth – The Whole Truth (Part II of IV)
Outline of policy options. The imperative of near-term termination of coal emissions (but not necessarily coal use) requires fundamental advances in energy technologies. Such advances would be needed anyhow, as fossil fuel reserves dwindle, but the climate crisis demands that they be achieved rapidly. Fortunately, actions that solve the climate problem can be designed so as to also improve energy security and restore economic well-being. A workshop held in Washington, DC on 3 November 2008 outlined options (presentations are at http://www.mediafire.com/nov3workshop — we are writing a paper, which will be available soon). The workshop focused on electrical energy, because that is the principal use of coal. Also electricity is more and more the energy carrier of choice, because it is clean, much desired in developing countries, and a likely replacement or partial replacement for oil in transportation.
The workshop topics, in order of priority, were: (1) energy efficiency, (2) renewable energies, (3) electric grid improvements, (4) nuclear power, (5) carbon capture and sequestration. Presentations are available and a summary paper is in preparation. Energy efficiency improvements have the potential to obviate the need for additional electric power in all parts of the country during the next few decades and allow retirement of some existing coal plants. Achievement of the potential of efficiency requires a combination of regulations and a carbon tax. National building codes are needed, and higher standards for appliances, especially electronics, where standby power has become a large unnecessary drain of energy. Economic incentives for utilities must be changed so that profits increase with increased energy conservation, not in proportion to amount of energy sold.
Renewable energies are gaining in economic competition with fossil fuels, but in the absence of wise policies there is the danger that declining prices for fossil fuels, and continuation of fossil fuel subsidies, could cause a major setback. The most effective and efficient way to support renewable energy is via a carbon tax (see below). The national electric grid can be made more reliable and “smarter” in a number of ways. Priority will be needed for constructing a low-loss grid from regions with plentiful renewable energy to other parts of the nation, if renewable energies are to be a replacement for coal.
Energy efficiency, renewable energies, and an improved grid deserve priority and there is a hope that they could provide all of our electric power requirements. However, the greatest threat to the planet may be the potential gap between that presumption (100% “soft” energy) and reality, with the gap filled by continued use of coal-fired power. Therefore it is important to undertake urgent focused R&D programs in both next generation nuclear power and carbon capture and sequestration. These programs could be carried out most rapidly and effectively in full cooperation with China and/or India, and other countries.
Given appropriate priority and resources, the option of secure, low-waste 4th generation nuclear power (ED: More on this in the next post, with discussion) could be available within a decade. If, by then, wind, solar, other renewables, and an improved grid prove that they are capable of handling all of our electrical energy needs, then there may be no need to construct nuclear plants in the United States. Many energy experts consider an all-renewable scenario to be implausible in the time-frame when coal emissions must be phased out, but it is not necessary to debate that matter.
However, it would be exceedingly dangerous to make the presumption today that we will soon have all-renewable electric power. Also it would be inappropriate to impose a similar presumption on China and India. Both countries project large increases in their energy needs, both countries have highly polluted atmospheres primarily due to excessive coal use, and both countries stand to suffer inordinately if global climate change continues. The entire world stands to gain if China and India have options to reduce their CO2 emissions and air pollution. Mercury emissions from their coal plants, for example, are polluting the global atmosphere and ocean and affecting the safety of foods, especially fish, on a near-global scale. And there is little hope of stabilizing climate unless China and India have low- and no-CO2 energy options.
We should also urgently pursue R&D for carbon capture and sequestration. Here too this may be done most expeditiously and effectively via cooperation with China and India. Note that, even if it is decided that coal can be left in the ground, carbon capture and sequestration with other fuels still may be needed to draw down the amount of CO2 in the air. An effective way to achieve drawdown would be to burn biofuels in power plants and capture the CO2, with the biofuels derived from agricultural or urban wastes or grown on degraded lands using little or no fossil fuel inputs.
Opponents of nuclear power and carbon capture cannot be allowed to slow these projects. No commitment for large-scale deployment of either 4th generation nuclear power or carbon capture is needed at this time. If energy efficiency and renewable energies prove sufficient for energy needs, some countries may choose to use neither nuclear power nor coal. However, we must be certain that proven options for complete phase-out of coal emissions are available within a decade.
Tax and 100% dividend. A “carbon tax with 100 percent dividend” is required for reversing the growth of atmospheric CO2. The tax, applied to oil, gas and coal at the mine or port of entry, is the fairest and most effective way to reduce emissions and transition to the post fossil fuel era. It would assure that unconventional fossil fuels, such as tar shale and tar sands, stay in the ground, unless an economic method of capturing the CO2 is developed.
The entire tax should be returned to the public, equal shares on a per capita basis (half shares for children up to a maximum of two child-shares per family), deposited monthly in bank accounts. No bureaucracy is needed.
A tax should be called a tax. The public can understand this and will accept a tax if it is clearly explained and if 100 percent of the money is returned to the public. Not one dime should go to Washington for politicians to pick winners. No lobbyists need be employed. The public will take steps to reduce their emissions because they will continually be reminded of the matter by the monthly dividend and by rising fossil fuel costs. It must be clearly explained to the public that the tax rate will continue to increase in the future. When fuel prices decline, the tax should increase, to retain the incentive for transitioning to the post-fossil-fuel-era. The effect of reduced fossil fuel demand will be lower fossil fuel prices, making the tax a larger and larger portion of energy costs (for fossil fuels only). Thus the country will stop hemorrhaging its wealth to oil-producing states.
Tax and dividend is progressive. A person with several large cars and a large house will have a tax greatly exceeding the dividend. A family reducing its carbon footprint to less than average will make money. Everyone will have an incentive to reduce their carbon footprint. The dividend will stimulate the economy, spur innovation, and provide money that allows people to purchase low carbon products.
A carbon tax is honest, clear and effective. It will increase energy prices, but low and middle income people, especially, will find ways to reduce carbon emissions so as to come out ahead. The rate of infrastructure replacement, thus economic activity, can be modulated by how fast the carbon tax rate increases. Effects will permeate society. Food requiring lots of carbon emissions to produce and transport will become more expensive and vice versa, encouraging support of nearby farms as opposed to imports from half way around the world. Beware of alternative approaches, such as ‘percent emission reduction goals’ and ‘cap and trade’. These are subterfuges designed to allow business-as-usual to continue, under a pretense of action, a greenwashing. Hordes of lobbyists will argue for these approaches, which assure their continued employment. The ineffectiveness of ‘goals’ and ‘caps’ is made blatantly obvious by the fact that the countries promoting them are planning to build more coal-fired power plants.
If the United States accedes to the ineffectual ‘goals’ and ‘caps’ approach, in effect continuation of the Kyoto Protocol approach, it will practically guarantee disastrous climate change. Instead it should persuasively argue that other countries also adopt tax and dividend. The countries agreeing to this approach will also agree that imports from a country that does not apply a comparable carbon tax will be taxed at the port of entry. That tax, which should be added to the public’s dividend, will be a strong incentive for all countries to participate.
A carbon tax is necessary but not sufficient. By itself a carbon tax cannot solve the energy problem and allow rapid coal phase-out. There also must be better efficiency standards in building codes, for vehicles, and in appliances and electronics. Profit incentives for utilities must be changed, so as to encourage efficiency as opposed to selling as much energy as possible. These are only examples of the many things to be done. But all of these things will be done easier and more effectively in the presence of a carbon tax. Indeed, a carbon tax is essential. It is the tool that will impact people’s decisions and lifestyle choices for the short-term, middle-term and long-term, allowing the world to move as gracefully as possible to the post-fossil-fuel-era. In this way we will leave in the ground the hardest to extract fossil fuels as we move rapidly to clean energy sources of the future.
Part III will talk about Nuclear Power – a very important topic and worth a bit of background comments by myself. So I haven’t dwelt on it in my preamble to this post.
10 replies on “Hansen to Obama Pt II – Carbon tax with 100% dividend”
I think (being no economist) that a tax is simpler. I disagree with 100% dividend because I want to use (some of) these funds to remove the unwanted, extra carbon dioxide from the atmosphere.
While I am not in a position to price ‘in situ’ enhanced mineral weathering (enhanced carbonate formation), this is, on the face of it, the most cost-effective way to permanently remove all of the yearly excess and pay down some of the backlog on the way to the 300 ppm CO2e which will eventually be required. Here are three links, in increasing order of technical content.
In situ peridotite weathering:
One of the ‘ex situ’ techniques I can roughly price. It is no more expensive than the most optimistic estimates for more usually discussed forms of CCS. The price starts there, around $(US)40 per tonne of CO2 removed, and drops with experience, relocation, etc. to possibly as low as $(US)10 per tonne. (This is at least an order of magnitude more expensive than ‘in situ’ methods, assuming those actually work.) The ex situ rock flour method can be put into immediate practice; no further reasearch is required; the result of the weathering enhances the quality of the soils used. Other than the price, I should prefer this.
Ex situ olivine weathering:
Click to access c03016.pdf
See references 7, 8 and 9 in
Finally, there is reworking mine tailings. This is probably quite inexpensive, but of only minor importance since there are not enough mine tailings to remove much CO2.
I’m still in the Cap and Trade camp. To me a Tax is a climate scientists distrust of economics… Now I can see economics is not in much of a position of trust at the moment… but you could apply all those cons to any commodity that is traded at the moment on the markets.
I note that “fat cat beurocrats get cash” not listed as a con of the tax either…
But for mine, if we expect the plans of climate scientists to be trusted, then climate scientists have to learn to trust the economists who tell us* the cheapest way to do it.
* this is a very liberal use of the word “us” as it implies I include myself:)
I agree with your critique of Joseph Romm’s comments, particularly your wider point that, “this a common theme – flaw – among environmental advocates – failing to recognise that the laws of physics and biology don’t compromise, and have no pity.”
It dismays me that major conservation groups such as WWF and ACF continue to support the 450 ppm / 2 degrees warming goal long after the science has been saying 2 degrees is too high for vulnerable ecosystems such as coral reefs. If major conservation groups don’t base their policies on the science and truly protecting the planet, rather than what is perceived to be reasonable and politically feasible, how can they expect governments to do it?
I’m with Matt B.
Garnaut’s arguments in favour of a cap and trade system are convincing.
I’m amazed that the cons listed for a cap-and trade system include the claim that it “requires army of bureaucrats”. Claims like his should be backed by estimates of numbers. Until then, this “army of bureaucrats” claims should be taken with a grain of salt.
Anyway, why would a tax require fewer bureacrats? With a cap-and-trade, there’s no tax to be collected every time there’s a transaction, just an auction for licenses every year and inspectors to make sure no-one’s cheating.
As for cap and trade enriching “middle men / brokers”. I have one word for you: tax accountant. OK that was two words. Soory. Anyway, with a cap-and-trade, you’d never have to deal with the ATO or the IRS or othe tsax agency. How could this not be a good thing?
Similarly, a cap-and trade is said to “encourages rent seeking” and is “easy to manipulate / distort to get perverse outcomes”, but why more so that a tax? Tax avodiance is a multi-billion dollar industry. Why would anywone think it would not gut a carbon tax in quick time?
At elast with cap and trade, if someone gets an exemption, we’d know exactly how much extra GHGs will be produced as a result, but if someone successfully lobbies for a lower tax rate, you won’t know for years, probably, how much damage it’s caused.
The real clincher for me is that a tax might do no more than increase the price of energy without generating the shift to non-greenouse alternatives. It depends on assumptions about behaviour of economic agents in response to price rises.
Without historical precedent, these will involve a lot of guesswork, but there is no reason to be optimistic. Have the big rises in coal and oil prices caused a significant change in energy production patterns, enough to give anyone confidence that price changes caused by a tax would have the desired effect? I don’t think so.
And would the tax be set according to what is needed, or according to political expediency?
No, just limit the amount of GHGs that can be produced, by law, and let the market (maybe with some help from the government to overcome inertia) sort out the best alternatives.
GUEST COLUMN by Steven Earl Salmony
November 26, 2008
Billions end up paying for excesses of the wealthy on Wall St.
Our lexicon of business activities is being expanded daily, thanks to the “wonder boys” on Wall Street. We are learning about derivatives, collateralized debt obligations, credit default swaps, recapitalization, puts, short selling and so on. We are gaining a new vocabulary from the recent meltdown of the financial system and expected slowdown of the real economy worldwide.
Where did this debacle begin? Well, it began in the center of the human community’s banking and investment houses in the financial district of NYC. Supposedly, the “brightest and best” among us go to Wall Street, know what they are doing and do the right thing. Unfortunately, such assumptions turn out to be colossal mistakes.
How did this calamity occur and why is the human family in such dire economic straits? It appears that grotesque greed and a culture of corruption have come to dominate significant operating systems of the global political economy.
Powerful people in high offices within huge business institutions with access to great wealth are recklessly and deleteriously manipulating the unbridled expansion of the global economy in the small, finite planetary home God blesses us to inhabit.
Self-proclaimed Masters of the Universe have surreptitiously “manufactured” a subprime “asset bubble” and perversely fostered its uneconomic growth within the world economy. Not unexpectedly, this asset bubble did what bubbles do. The subprime bubble burst and made a mess. Global credit markets have frozen, stock prices are tumbling and the value of the dollar is gyrating.
Evidently organizers, managers and whiz kids overseeing the global economy, and the unraveling (i.e., deleveraging) of the worldwide subprime swindle are running the artificially designed financial system of the global economy as a pyramid scheme. This is to say that the international financial system is being operated so that most of the wealth funneled pyramidally into the hands of a small minority of people at the top of the world economy where this wealth is accumulated and consolidated. Note that 30 percent of annual corporate profits end up in the accounts of a tiny number of people. At the same time, the vast majority of people on Earth, near the bottom of the global economic pyramid, are left with very little wealth. Does the economy of the family of humanity exist primarily to provide wealth to the already stupendously wealthy? The “bankstas” among us evidently think so.
In the 1980s, this extremely inequitable method of distributing wealth and arranging business activities was called a “trickle-down” economy. We have been repeatedly told how this ‘rational’ economic scheme is good because it “raises all ships.” And yet, from my limited scope of observation, the billion people living on resources valued at less than one dollar per day and the additional 2.7 billion people being sustained on two dollars per day of resources now appear to be stuck in squalid conditions. The ‘ships’ carrying these billions of less fortunate people (i.e., more people than lived on Earth in the year of my birth) do not appear to be lifting them out of poverty.
Steven Earl Salmony
AWAREness Campaign on the Human Population,
[…] on the real truth about stabilizing at 350 ppm Brooks has some discussion of the proposals here, here and […]
As well as arguing that 450 ppm is better to aim for, Joe Romm also argues that a 100% dividend isn’t appropriate because there would be a huge amount of government intervention required to reduce emissions to 350 ppm or 450 ppm. I disagree with Joe on the target and think we should be aiming for 350 ppm for reasons I have listed in about 3 comments on Joe’s post. I think Joe is right that government intervention is required. I think that some money raised from taxation or auctioning permits should be used to address market failures, this includes investment in technology and RD&D. One thing that Garnaut does well is discuss the issue of market failures and suggests some policy responses. This is done in Chapters 16-21 of his book. I suspect that I see carbon pricing playing a greater role than Joe does.
I agree with Hansen that we should avoid having politicans pick winners. I have concerns that there is the risk of this with Joe’s approach. I also have concerns that there is a risk of this if resources are overly directed to nuclear or CCS. I am more optimistic about enhanced geothermal systems, but I am not betting on this with other peoples money (only with my own). An approach that funds technology but avoids picking winners would be to have a body similar to the Australian Research Council that devotes resources to research on climate change and its mitigation.
Hansen is correct that a carbon tax is necessary but not sufficient. It is not sufficient because of the market failures mentioned before. Addressing many of these market failures will require the deployment of infrastructure, such as a better transmission network, public transport infrastructure, and retrofitting buildings. This will require funding. If funding is not available from auctioning permits or raising the tax (because of the dividend), then it will need to be raised from somewhere else.
On tax vs cap-and-trade, there are theoretical economic questions related to the economics of uncertainty; there are climate change specific issues; there are implementation practicalities and issues to do with rent-seeking; there are international issues; there are also macroeconomic issues. Ultimately, the level of the tax or cap is more important than whether a tax or a cap is used. There are also hybrid approaches, such as having cap-and-trade with a price cap, a price floor, or both. My favoured approach is to have cap-and-trade with a price floor. The price floor should be set to be equal to the social cost of carbon (so that it plays as much of a role as the cap). The cap should be consistent with 350 ppm. A floor could be maintained by have a reserve price for auctioning permits. Alternatively, firms could pay an extra fee when they exercise their permits, so that the carbon price becomes equal to the sum of the permit price and the extra fee.
I doubt that a hybrid approach would be significantly more complex or expensive than a tax, or cap-and-trade. The main transaction costs with carbon pricing are associated with measurement of emissions, rather than the price mechanism.
[…] also apply pressure to the breaks to make you stop faster (produce large volumes of biochar or enhanced weathering to geoengineer a rapid CO2 […]
Romm’s argument that it is not possible to achieve 350 ppm therefore it should not be the target will be swept away even in his mind, as it makes no sense. We will never get to where we need to go unless we aim for getting there.
I think part of the difficulty campaigners are having with changing from 550 ppm to 450 ppm and now to 325 – 350 ppm is the profound mental shift that is necessary to go from a position of “saving” the Earth and civilization from “dangerous” climate change, which is the way people seemed to buy into the 450 ppm target, to its too late already. Some people will have so much difficulty with this we can expect them to disappear for a while as they come to terms with it. There is too much greenhouse gas in the atmosphere now, the danger people were trying to avoid is “in the pipeline” already on its way, and the best that can be done now is to try to limit how dangerous things get, and we have no certainty anything meaningful can be done.
I was calling for returning the atmosphere to the preindustrial 280 ppm back in 1988 when I first discovered there was a concern over climate – so I had to face whatever was there for me in this respect, back then. I went through a profound depression lasting many months.
But, now, I have no problem with 325 – 350 ppm. Reversing what has happened to the atmosphere is the only target that ever made sense to me. I was the only delegate speaking at the historic Changing Atmosphere conference held in Toronto in 1988 who told them they should remove a phrase they were thinking of putting in their final statement which said the changes happening to the atmosphere could not be reversed. They took the words out. No one spoke in support of my position, but Canada’s Ambassador to the UN interrupted the final plenary to ask me to stand and be recognized for my contribution. What I wanted was on many minds.
I had stopped my activity on climate change for a number of years until I heard a note in Hansen’s voice during a radio interview that convinced me something had happened that was different. As I researched, I discovered he had announced a change in what he was willing to sign off on as of December 2007, i.e. the 325 – 350 ppm target, and I was reawakened. At last, people are talking some sense.
[…] Hansen to Obama Pt II – Carbon tax with 100% dividend […]