Guest Post by Tim Kelly. Tim is works as a Principal Climate Change Advisor in the Water Industry.
The Federal Government has now released its Carbon Pollution Reduction Scheme White Paper and as expected the mechanism it has chosen is that of a pollution permit and trade system (cap and trade). The cap and trade approach has been widely accepted by many businesses, green groups and Australia’s major political parties including the Australian Greens, and yet I am continuously witnessing surprise by individuals and groups when they learn more about the impact of such an approach on eliminating the economy wide benefits of voluntary behaviour.
At the outset, when State and Federal Governments were considering which approach would best deliver National emissions reductions, they should have explained the basic advantages and disadvantages of the two likely contenders, being a carbon emissions tax (carbon tax) or the cap and trade approach, in an open and transparent manner. At the end of this post I provide a ‘pros and cons’ table comparing these two alternatives. In particular, I note that in the disadvantages column of a cap and trade scheme, stakeholders should have been advised of the following critical points:
1. A cap and trade scheme, by its nature, extinguishes the impact of voluntary efforts from reducing aggregated economy wide emissions as any greenhouse reduction or avoided emission by an individual or entity, because it merely results in freeing up permits to pollute in another part of the economy (i.e., it makes no difference whether I ride my bicycle to work or buy the biggest worst performing V8 petrol vehicle — national emissions will be the same!).
2. A cap and trade system, by its nature, does not drive innovation in voluntary markets, and greatly reduces diversity in voluntary markets.
3. A cap and trade scheme that uses the voluntary surrender of permits as a greenhouse reduction mechanism, ties the cost of voluntary abatement with the cost of pollution, thereby diminishing prospects of continued voluntary action.
This is not to suggest that the cap and trade approach might not drive actions to reduce emissions by permit holders. But it leaves out vast numbers of individuals and small to medium businesses in the economy from being able to contribute to reduce national emissions in a meaningful way. A cap and trade approach largely alienates non-permit holding businesses and individuals from taking a meaningful role in reducing the nation’s emissions. So there is a question as to whether there is any value in the Department of Climate Change slogan “Think climate. Think change. We can’t afford not to”.
Anyway, below is a comparison of the two main approaches focussing on the mechanisms, their effectiveness and flexibility to reduce emissions for a given target. Naturally, this appears superficial in the table, so if you don’t agree, please consider my full discussion and reasoning (PDF document) which led to my conclusions.
[Barry Brook: This post from Tim is particularly timely, because the Federal Government has just announced an inquiry into the merits of their cap-and-trape model. For instance, a Canberra Times article says:
“The Federal Government’s plan to reduce Australia’s carbon emissions will be re-examined after Treasurer Wayne Swan referred the emissions trading scheme to the House economics committee. It will examine whether carbon trading is the best way to reduce emissions, while maintaining low economic costs, putting in place long-term incentives for clean energy and contributing to a solution for climate change“.
So we may yet have a chance to fix this deeply flawed approach before its gets locked into legislation].
| Aspect | Cap and trade | Carbon tax | Winner |
| Cost on business and community | For a given price on emissions the cost on carbon is has no influence for change in the broader economy (beyond businesses covered by the scheme), other than to become more efficient. | The cost on emissions has a wider impact than just the covered emitters as the tax drives the broader community and smaller businesses to seek alternative low emission electricity, products and services that can reduce National emissions | Tax |
| Economy wide and community wide involvement | Destroys the ability for an individual or business entity from reducing economy wide impacts.
|
Drives action directly through emitters and in secondary voluntary markets as people use their choices to avoid the cost and contribute to national emissions reduction | Tax |
| Simplicity and bureaucracy cost | Terrible, complex documents, complex schemes, complex shifting of funds and compensation for little value, legal risks | Minimal
Can be managed to charge only what is required to cause change, letting the market decide where the change would occur without the merry go round. |
Tax |
| Encouraging innovation in the market | Rules out many offset products and as proposed, destroys the integrity of voluntary purchases of renewable energy | Drives innovation and a full suite of low emissions solutions and renewable energy solutions that can be led by market choice for genuine renewable energy | Tax |
| Need for non tangible offset frameworks. | Creates perverse outcomes and the need for intangible concepts such as using permits as carbon offsets which do not directly link to low emissions solutions and may not indirectly drive low emission solutions and may not even cause economy wide reductions. | No need for weird reverse logic intangible offset concepts using permits to pollute as tangible market offset products and renewable energy choices would work to lower economy wide emissions. | Tax |
| Price certainty | Requires massive free permit allocations to indirectly manage the permit price. Falls back on a carbon tax to ensure the price stays below $40 even with many emitters paying nothing like this when grandfathered permits are factored in | Easily assigned and controlled by Government.
Easily adjusted with new science and negotiations at regular intervals at markets transition. |
Tax |
| Need for full information | Requires complex assessment of current emissions and forecasting of future emissions in five year blocks to seek to minimise over-allocation that would constrain progress or under-allocation that would cause mechanism failure and the need for review and intervention | Not required as the price becomes a constant driver in the economy throughout economic cycles | Tax |
| Certainty in achieving the greenhouse reduction objective | Unclear as to whether the CPRS could achieve certainty due to its compromises, measurement methodologies and the ability for Government to issue unlimited permits in a given year | Reduces emissions without direct control and necessarily requires reviews as the economy transitions to lower emissions and updates with science and negotiation. | Neither approach provides absolute certainty |
| Creating a difference between pollution costs and abatement for customers to decide on what products and services they would buy. | Buying and surrendering CPRS permits to reduce emissions causes Siamese twinning, locking the cost of abatement with the cost of pollution. (ultimately all other offsets form national and international sources would cease where all nations adopt cap and trade) |
Increases the cost of polluting technologies and provides a relative benefit for other technologies to compete more fairly, letting the market decide what type of electricity, offsets and efficiencies they buy, knowing that these will reduce National emissions | Tax |
| International linking | Reduces options for trading offsets and low emission products | Increases opportunities to trade in offsets and low emission products | Tax |
Brave New Climate 
68 replies on “Carbon tax or cap-and-trade? The debate we never had”
“A cap and trade scheme, by its nature, extinguishes the impact of voluntary efforts from reducing aggregated economy wide emissions as any greenhouse reduction or avoided emission by an individual or entity, because it merely results in freeing up permits to pollute in another part of the economy”
This is not true, because the national emissions trajectory is not set down for all time, but rather gets reviewed and extended every five years (White Paper, chapter 10). Choosing the emissions trajectory is a minimax exercise in maximizing mitigation while minimizing costs of mitigation. If actions by entities outside the Scheme (such as you riding your bicycle) can be shown to have altered the minimax function, so as to make deeper emissions cuts more affordable, then the argument can be made at the five-yearly review and the lower emissions trajectories chosen.
It might be worth having something in the legislation which acknowledges this process explicitly – which says that the five-year reviews will include the review of emissions trajectories in the light of new developments, economic, scientific, and other – something like that. In order to assure people that the CPRS does *not* make voluntary actions pointless.
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Special carbon taxation makes government, and everyone financially supported by it, into a carbon profiteer. All fossil fuel carbon already brings in special tax revenues, and makes governments ludicrously insincere — you heard it here first! — in their professed wish to reduce rates of carbon emission.
So the most important thing is to divide out existing C tax revenues, as Dr. Hansen recommends, but what is more, this must be done first. Dividend first.
Dividend first. Dividend first. Dividend first.
Here’s a brain teaser for Barry Brook, or Tim Kelly, or anyone who’s up for a challenge. What two words best summarize my above message?
How fire will be domesticated
[Ed: Dividend first? Very good point!]
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1. Adelaide is almost a great city for commute cycling with a large proportion of people living within an easy cycle to a dense CBD on a flat plain. But every morning I pass lines of slow moving traffic comprising plenty of 4WDs with a single occupant and they take longer than me to get to work.
Inference? Voluntary actions aren’t worth much. About the only voluntary action that has caught on are green shopping bags! Go to any supermarket and watch how many green shopping bags you can fit into the back of 3.6 tonnes of Toyota Prado. If I see one more ABC Catalyst climate change program with a mention of shopping bags and I will throw up.
2. Despite calls from the head of the IPCC, Rajendra Pachauri, from James Hansen, Barry Brook, … (and me!), for reductions in meat consumption, livestock remain a bigger cause of warming in Australia than all our coal fired power stations with outspoken support from our largest Government research body, the CSIRO, and 2007 Australian of the Year, Tim Flannery.
Al Gore’s family famously gave up tobacco farming after the product killed his sister, but they didn’t give up those Angas cattle … I mean lets be serious about which is more important, the biggest threat to human life
on the planet, or a steak?
Inference? see above.
I’ve never been in favour of an ETS, but it quickly establised itself as the only game in town in Australia. Tim’s right that it diminishes the importance of voluntary actions, Mitchell’s right that the mechanism allows them to have some impact if they prove to be significant, contrary to my examples. GRLC is right that there are problems with a tax, but we have managed to both reduce smoking and collect buckets of tax money at the same time, so I don’t think a tax is a lost cause. But GRLC is also right that tax and dividend looks clean and sends all the right signals to everybody.
But Hansen’s clear view these days is that the critical decision is how much coal to leave in the ground rather than worry too much about when it is burned. It’s of little consequence when we burn it, because so much stays aloft for so long.
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Mitchel Porter is right in pointing out that the emissions trajectory is reviewed every five years. Whilst I consider this action as being separate from the cap-and-trade mechanism, there is such a view as outlined by Minister Penny Wong, in response to the claims by Richard Dennis that the National insulation plan would not reduce National emissions under the CPRS.
The Minister’s argument is that voluntary actions free up permits, reduce the price for permits and thereby improve Australia’s capacity to reduce emissions.
There are several difficulties in locking in recognition of voluntary actions in the five yearly review. Firstly, the Government has already set a target range considering current business needs and its political balancing act. It is unlikely that it would definitively do better to factor in additional cuts for voluntary actions when business are already lobbying for a slower start and more assistance. If the Government was going to recognise voluntary actions in the CPRS (in the first or subsequent 5 year periods), it had the opportunity to do so in the White Paper (i.e. not 5-15% but say 7-17% with voluntary actions).
For many actions such as reducing electricity use, car pooling or riding a bicycle, these are impossible for a government to track so it becomes an economy wide guess.
One further complication is that the Federal Government also proposes that voluntary reductions would be achieved by buying CPRS permits, tearing them up and throwing them in the bin. This action does not add tangible action or technology for building capacity to reduce emissions, but does increase permit scarcity, create upward pressure on the price of permits and makes future emissions cuts less affordable.
So before I could be confident that the Government could recognise voluntary actions (separate to the cap-and-trade mechanism), I would need to see the Government to abandon its idea for the voluntary surrender of CPRS permits as reductions. If one approach is to be believed the other cannot be believed.
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Straight from point 1… that is a positive for Cap and Trade… in that all carbon allocation is able to be used in a productive manner for the economy… who benefits if we reduce CO2 more than the cap requires (provided it is based on science of course)? no one. Now if I think point 1 is flawed from the get go I must admit I’ve not read the rest as thoroughly as maybe I should…
Anyway – and no offence to Tim Kelly – I want to hear this debate from leading economists.
I know many environmental types who don;t like capandtrade, there is a natural aversion to capitalism. Markets are a bad word today I guess and governments are looking at taking over lots so maybe a carbon tax could be politically preferable even.
Hmm actually I realise I’m on the same page as Mitchell in post 1.
I don;t dislike a carbon tax – sure it will likely work – but I want to see genuine economic analysis by leading economists. What gets my heckles is suggestions that cap and trade is deeply flawed… when in fact it is a good solution indeed that is a neat fit with our existing market based trading systems.
I work pretty much in “voluntary” abatement and at the end of the day it is totally futile waste of time without a cap and trade or a tax to back it up. There is no benefit acting alone other than a warm glow in the heart.
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A clarification MattB – neither Tim nor I are saying a cap-and-trade system is deeply flawed. In its ideal form, it should work fine. What is deeply flawed is the version of a cap-and-trade model proposed in the CPRS White Paper — it destroys our ability to (effectively and directly) make deeper emissions cuts via voluntary means, the target is inadequate, and the free permits to the big polluters devalues the whole system [amongst many other problems].
I totally agree that we need a system to make voluntary abatement worthwhile, not futile. The White Paper does not give us that.
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I thought I’d add in some links for pro cap-and-trade arguments:
http://gristmill.grist.org/story/2007/2/12/102851/837
http://www.pewclimate.org/press_room/opinion_editorials/oped_miamih07122007
this is a nice collection of arguments on both sides: http://www.thebulletin.org/web-edition/roundtables/carbon-tax-vs-cap-and-trade
I will add however, that whatever it was that the government is proposing, which is a half assed cap and trade that is more of a carbon tax in implementation, is a dogs breakfast:) So hopefully the review gives cap and trade advocates the chance to point out that their solution should not be judged on what we in Oz are proposing:)
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If the permits were issued to all citizens equally this would be equivalent to dividend-first.
(How fire will be domesticated)
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I think both Mitchell Porter’s point on adjusting the downward trajectory and Tim’s comment on his post are both true.
I think the thing to remember is that cap and trade is a designed system and the government is supposed to take extrinsic issues, driver etc into account when setting the number of permits issued for a time period. Its the weighting given to extrinic issues e.g. other emissions reductions methods such as complementary measures with/or voluntary measures that maybe the issue. The thinking seems to be (especially from that quasi religious body, The Productivity Commission) that you don’t need to have any other measures once an ETS is inplace and that idea may be influencing the thinking behind its design (you may remember in a report last year the Productivity Comission was dead against other activities such as MRET once an ETS was up and running without seeming to realise that a carbon market under cap and trade is entirely artificial). This perhaps goes with an expectation that, to paraphrase a jaunty BBC TV show from the 70’s and 80’s, “ETS will fix it”. Do we have any proof, apart from the very limited US power station sulphur and NOX cap and trade scheme that emissions trading actually work? Is the European ETS actually reducing emissions? I worry that once cap and trade is put in place people will think we’ve ‘fixed it’.
My final point (and sorry to be longwinded) is, what do people expect is the main focus or outcome of an ETS? Is it to to reduce emissions or lessen the impact on certain parts of the economy of reducing emissions? I wonder if these get confused in priority when designing an ETS.
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I want an Excess Carbon Dioxide Removal Fee on all fossil fuels. To be used, obviously, to permanently remove the excess carbon dioxide.
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Keith Orchison on the House of Reps inquiry: http://www.businessspectator.com.au/bs.nsf/Article/A-curious-line-of-inquiry-$pd20090213-P873Q?OpenDocument&src=sph
I am aware Keith is not exactly a staunch believer in AGW… but he is kinda right in that economis Garnaut has looked at this already…
“In asking the Member for Dobell, Craig Thomson, the chairman, and nine other MPs to think the policy through again, Swan and the Cabinet surely cannot expect to receive any new information about the core issues.
Garnaut has this information. Treasury has it. Climate Change Department has it. And the Resources & Energy Department has it.”
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” it destroys our ability to (effectively and directly) make deeper emissions cuts via voluntary means….”
This argument depends on assumptions about the magnitude of voluntary (ie not price-driven) cuts.
If voluntary cuts would make only a trivial difference then the CPRS is only trivially flawed.
My gut feeling is that this is likely.
By the time the ETS pushes carbon energy prices up, how people will there be saying “Gee I’d like to reduce my carbon footprint even more, but someone else will just increases theirs.”?
In any case, how would you overcome this potential flaw? A voucher system? Carbon stamps? This would be no small administrative problem.
Another gut feeling I have is that the big emmitters would probably prefer a tax rather than an ETS. There is a huge tax-avoidance industry raring to get its teeth into a carbon tax and rip it to shreds.
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How do you explain the huge tax-avoidance industry’s restraint in not, as presumably it could if it turned away from more urgent matters for two uninterrupted minutes, ripping this to shreds?
(How fire can be domesticated)
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A number of comments relate to what to do with revenue. This applies to either revenue from a carbon tax or the revenue from the auctioning of CPRS permits (capped at $40 per tonne).
The Federal Government has proposed that every cent of CPRS revenue (starting at around $11B per year) will be used to help households and businesses adjust to the scheme via:
* Household assistance packages.
* Cent for cent return on fuels such as diesel, petrol and LPG for three years.
* A Climate Change Action Fund
* Assistance to Energy Intensive Trade Exposed Industries
* Assistance to strongly affected industries with considerable free permits in the first five years.
Hansen on the other hand suggests returning revenue to individuals. G.R.L Cowen advocates allocating the Dividend first from a Hansen type tax. David B Benson would like to see a carbon removal fee on fossil fuels spent on removing the carbon dioxide. I would like to see revenue spent on transitioning our economy with low emissions infrastructure.
My point is that these ideas are secondary to the mechanism and not unique to either a cap and trade approach or a carbon tax approach.
Similarly, I think that there is a huge emissions cost avoidance pressure that has already ripped the integrity of the CPRS to shreds, and we could expect similar lobbying to lower the costs of a carbon tax. The vulnerability of both systems is very similar being based on The National Greenhouse and Energy Reporting System, its methodologies, thresholds and the deals that can be struck for exemptions and financial assistance.
I share MattB’s frustration that it should be our leading economists that have this debate in detail, in an open and transparent manner, particularly on the interactions with voluntary behaviour. There is a need to quantify the lost voluntary opportunities under cap and trade approach and quantify the stimulation of voluntary action that would be driven by a tax so that we know for a given value of revenue taken from businesses which approach would reduce emissions more effectively.
So lets hope that Warwick McKibbin, Peter Wilcoxen, Nicholas Stern, Ross Garnaut, Roger Wilkins or even Martin Parkinson read bravenewclimate and start to discuss why it might be good to embrace a cap and trade approach that is so compromised and one that that largely eliminates the ability of individuals to reduce national emissions.
Thanks for all your comments
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Comparing a tax with a cap-and-trade can be a bit like apples and oranges. A simple carbon tax would be far preferable to the CPRS. What would be superior to both is a hybrid cap-and-trade approach where there is a price floor, with the price floor set at the same level as a tax would be set at. This provides enough certainty to meet a particular target, which could aid climate negotiations, but also provides enough certainty about the price to drive investment in low emission technologies. When the price floor is in effect, voluntary actions will count. Most of the transaction costs associated with carbon pricing are associated with measurement, introducing aprice floor will barely affect transaction costs.
On the issue of the table above, the ‘cap-and-trade’ part seems to describe the CPRS, rather than something that is actually “cap-and-trade”. The CPRS is not cap and trade because of the $40 price cap. I don’t see offsets as an advantage, at least for non-voluntary offsets. Offsets are just a way to turn an emission reduction into something that is not an emissions reduction. One policy that needs to be done right involves land use. IN order to stabilise the earths climate at non dangerous levels, we will need to reduce fossil fuel emissions and reverse emissions from land use. There is no point reducing emissions from land use if it just leads to more emissions from fossil fuels.
The CPRS is likely to have a very low carbon price. This may be a reason why the House economics committee is looking into it.
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“How do you explain the huge tax-avoidance industry’s restraint in not, as presumably it could if it turned away from more urgent matters for two uninterrupted minutes, ripping this ( http://www.opec.org/library/Special%20Publications/pdf/WGW2008.pdf ) to shreds?”
Good point. ETS has potential to be badly corrupted and if it gets too bad I’d agree with Garnaut that it would bring a carbon tax back into the picture. A carbon tax would of course be more complex than a simply petrol excise and there would be potential for rebates, refunds, subsideies etc for special interests.
And with a carbon tax there would still be the problem of predicting what level of taxation would result in the desired reduction in GHG emissions.
Not that I’m wedded to the cap-and-trade idea, but it just seems to get straight to the heart of the matter – we need to restrict GHG emissions by a set amount, why not just do it instead of trying to manipulate the price?
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And with a carbon tax there would still be the problem of predicting what level of taxation would result in the desired reduction in GHG emissions.
I don’t think this will ever be possible, or necessary. The tax merely has to make zero-carbon energy sources (when delivering, e.g., nuclear, renewables) or energy efficiency and conservation, more attractive than fossil-fuel based energy sources. The degree of relative attractiveness will obviously expedite the GHG reduction, but the tax really has only to achieve the former to be effective.
An announced, steadily increasing tax (coupled with a diminishing supply of oil and gas, and coal in some local places) is also helpful, as it makes forward projections and long-term investments in non-carbon energy sources all that more attractive — even early on, when the relative difference might be small.
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Nice post, Tim.
Let me add that:
– a carbon tax sends a much more consistent signal to industry and the rest of the market than does a very volatile cap and trade price;
– both obviously raise prices for consumers, but cap and trade allows too many giveaways and shenanigans, is not easy to enforce at home and if trading abroad is allowed makes compliance subject to lax oversight abroad – in short, there are too many ways to game the system, so consumers never know with certainty what their actual burden will be or the benefits gained;
– a tax that is dividended to citizens, besides being more transparent and easier to implement (upstream at the first place that fossil fuels enter the economy), elicits long-term citizen support, since although incentives are provided to shift away from high-carbo/GHG activties the net burden is greatly blunted in a progressive manner (that disadvantages poor and middle classes least);
– tax/dividend is intuitively more morally acceptable, as it recognizes that it is citizens who own the rights to the common atmosphere whose use is being taxed, rather than the businesses that are granted or purchase permits (or the politicians/bureaucrats administering them);
– yet cap and trade remains preferable among politicians and enviro groups precisely for the cynical reasons that it is more opaque and makes it easier for politicians to make secret deals with industry – which of course undercuts not only effectiveness, but long-term consumer support; and
– one issue that should be addressed under either system is a method of allowing offsets, so that markets can develop that reduce the required permits or fuels to be taxed, via demonstrated GHG reductions elsewhere.
There is a growing agreement among conservatives in the US that carbon taxes are much more preferable, as I note here:
http://mises.org/Community/blogs/tokyotom/archive/2009/01/10/neocons-conservatives-libertarians-and-exxon-join-jim-hansen-in-calling-for-rebated-carbon-taxes-in-lieu-of-massive-cap-trade-rent-seeking-and-industrial-planning.aspx
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Tokyo Tom… look I’m less an economics expert than a climate expert, and I’m not the latter…
But a Cap and trade is only volatile in the way that any other commodity or stock is volatile… and the world markets deal with that ok. If there is low demand then great the price drops… compared to a tax that would be constant so not reflecting supply and demand. And of course what if the consistent price signal is wrong… even in a volatile period at least the price signal sent by C&T is the actual market price.
Have you ever filled in a tax return… while talking about giveaways and shenanigans…
I think you overestimate citizen support… no one likes a new tax – it is probably the main thing that has made the politicians like a C&T is they don’t have to use the word “tax”. Notice opponents always call the C&T a tax, even though it is not one, because they KNOW people hate taxes.
I think the moral argument is weak… The govt (citizens) get the $$$ from selling permits just as much as they do the tax. And I think citizens understand the concept of selling for a market rate rather than a fixed price.
Cap and trade remains preferable first and foremost because in terms of basic economic theory it is the lowest cost approach to the issue. This gets hammered out in universities across the globe. It can’t get more transparent than cap and trade… you pay for the right to emit what the marklet dictates. Taxes can easily be opaque… that is why we have massively paid tax accountants.
That said – I think that you are either a free-market kind of guy then you like C&T, or you are a government interventionist type then you like the tax. I think blind freddy can see that the free market ideals have lost a lot of public confidence in recent times, and a lot of people are looking to government intervention to solve many things as markets have lost a whole lot of love.
Far from being preferred by enviro groups, I think that reality is that generally left wing environmentalists have stepped right out of their traditional comfort zone in supporting cap and trade – a real leap of faith… and that support may well have been cut down by the recent financial crisis and everyone is heading back to big government.
Rudd has been bagging extreme capitalism… and maybe he realises that in many ways an ETS is “extreme capitalism” compared to a tax, so it could well be that a tax wins out, and so be it.
Point is that I think your points are the result of your politics, rather than economic assessment.
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Just to add… re the the neo-cons and other conservatives etc getting behind the tax option… well when I see a whole heap of people who have done all they can to resist action on climate change, suddenly start commenting that there should be a tax not cap and trade, well I must admist that it raises my “stalling tactics” 6th sense… so I can’t claim I’m a dispassionate observer either.
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Matt:
Actually, I’m familiar with the successful US cap and trade program for SO2, so started off in favor of that, and further liked the idea of “property rights” being held by someone over taxes. But the more I’ve looked at it, I’ve changed my mind.
By the way, here are a few posts that delve into all of the economists etc. who prefer carbon taxes over C&T:
http://mises.org/Community/blogs/tokyotom/archive/2008/06/19/gao-releases-report-summarizing-views-of-leading-economists-on-climate-change-policy.aspx
http://mises.org/Community/blogs/tokyotom/archive/2008/06/27/top-demagogues-jim-hansen-florida-power-exxon-aei-margo-thoring-major-economists-george-will-prefer-rebated-carbon-taxes.aspx
To respond briefly to your points:
– here, where GHGs have a long life and climate change is a long-term problem, short-term volatility creates unnecessary business uncertainty and paralyzes planning rather than incentivizing investment.
– while permits CAN be auctioned off, it is very likely that many will be given away to favored industries and existing firms. Thus citizens are taxed but neither they nor government see all the revenues, and existing firms are given a leg up on smaller and more nimble newcomers.
– as noted in my thread above, actually economists far prefer taxes, because they are actually the least cost approach. They require very little new bureaucracy and are easy to collect, particularly if you start where the fossil fuels enter the economy (first sale), and are easily monitored. Permits are much more complex, and require monitoring of actual emissions somewhere.
Finally, while I certainly share your cynicism about the movement of some conservatives and libertarians on this issue, I both welcome the movement and agree with them that taxes are by far the preferred (least costly to the economy) alternative. I also believe that they are the most policy option that is actually most sustainable – politicians may not like to be honest, but honesty is certainly the best approach.
Softening the blow by rebating the proceeds, particularly if the rebate checks come first, should win people over.
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Rudd, Wong and Swan have blinked – all the above is wasted speculation.
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‘Gaz’ said
The voucher system would involve equal deliveries of carbon stamps, aka CO2 emission permits, to each citizen.
What would the citizen do with them? Convert them to cash by selling them to one of the many brokers who would pop up overnight in hopes of selling them on to those special emission interests for slightly more than the citizen would ask. (Many citizens are extremely eager for a little less money, right now. They are habitual eaters, and habitual indoor sleepers, to a much greater degree than the special CO2 emission interests some have mentioned above.)
But money is itself a voucher system, and much of the CO2 emission already is by people who are paying money to the government for the privilege.
The best course, therefore, is to use the existing voucher system, divide out these existing revenues, establish a precedent.
When this precedent shall have been established, additional CO2 emission tax will seem, to the half of the population whose CO2 emissions are less than average, like a way of increasing their dividends.
Many of those who emit more than the average per-person amount of CO2 will also favour this because they know nuclear energy can easily provide whatever fuels fuel users want, even carbon-based ones, without net CO2 emissions. And renewable power can make fuel too.
Best of all, governments will no longer be doing all they deniably can to protect increase their fossil fuel income. (I believe the preference for renewable energy over nuclear energy expressed by the governments of Ontario and the USA is part of this deniable fossil-favouring.)
(How fire will be domesticated)
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I notice the Australian government comes very close to candour, with regard to its financial interest in continued fossil fuel use, with the words Barry Brook quoted earlier:
Change “Think” to “Do”, and you’re there.
How fire will be domesticated
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Standout features of a stringently administered cap-and-trade scheme are that it hits the physical target every time and the carbon price backs off in a recession. Moreover some of the suspiciously cheap ‘clean development’ offsets that undermine the European scheme are likely to re-emerge as carbon tax deductions. Firms like Rio Tinto will almost certainly lobby for their WA tree planting offsets to be deductions in any Federal carbon tax scheme. The argument about the rising cost of voluntary permit purchases seems odd given that the focus must be on the biggest coal users. When gas and electricity bills go up under cap and trade then private individuals will change their behaviour.
In any case the proposal for staged auctions of CO2 permits at fixed prices will resemble a stepped carbon tax. Thus if so many tonnes are sold at $20 the next round might be $25 then $30. Early buyers could pay too much (‘winners curse’) but delayers could miss out altogether. The government should then shut down their operation for lack of permits. Like I said the administration needs to be tough.
Don’t judge cap and trade by the inept European scheme. The US sulphur oxide (SOx) scheme appears to work well though a much smaller market than CO2.
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PeterW: “Rudd, Wong and Swan have blinked – all the above is wasted speculation.”
The Dept of Climate Change continues to issue policy documents according to schedule. There is no evidence of a change of direction.
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Looks like someone was listening:
Economists speak out against flawed Carbon Trading Scheme:
http://blogs.crikey.com.au/rooted/2009/02/18/economists-speak-out-against-flawed-carbon-trading-scheme/
This cadre of Aussie economists conclude:
“The CPRS is based on neither sound economics nor sound science. We call on the Government, or the Senate, to make major improvements to the proposed ’solution’ to Australia’s rapidly rising greenhouse gas emissions.
These improvements should include:
* Lifting the targets to 25-40% by 2020 based on the latest scientific evidence
* Abolishing the free permits granted to the biggest polluters
* Ensuring that individual action results in lower emissions, not lower carbon prices
Unless these major flaws in the CPRS can be fixed the government should introduce a carbon tax as a matter of urgency.”
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Something else which bugs me, in criticism of the CPRS, is the claim that “Households [will] foot the big polluters’ carbon bill”, as the ACF puts it. They go on to say: “Australian taxpayers will be giving away $3.5 billion in 2010 to some of the country’s worst polluting companies under the Federal Government’s carbon pollution reduction scheme.”
But in fact all of that money comes from the sale of the carbon pollution permits. So it’s not as if there’s a preexisting pot of money, already taken from the taxpayer, which will be doled out to polluters. As I understand it, these giveaways are purely formal; what’s really happening is that the big polluters get lots of free permits, via “administrative allocation”, and these multi-billion sums are what the permits would have fetched if they had been auctioned off instead. In which case it’s actually a matter of the big polluters getting to keep their own money for a while. At best it’s a sort of tax break; and the emissions-reduction argument for the tax break is that if these industries become uncompetitive, they will just go out of business and be replaced by competitors in jurisdictions which don’t care about carbon costs at all. So they are to be given an exemption which will be gradually reduced.
Or have I misunderstood how it all works?
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Spot on Michael – the CPRS collects revenue with one hand and gives it back with the other. One of the main advantages of going for a carbon tax rather than the CPRS is that it is much harder to explain to the public why you have exempted the polluters from a pollution tax than it is to explain why we had to give away lots of permits to the big pollutersso that the ‘evil foreign competitors’ dont have an unfair advantage.
The debate above is interesting but a few things need to be clarified.
1) The CPRS does not really resemble the emissions trading schemes found an economics textbook. The targets are not based on science, the permits are auctioned, the price is capped and, the real kicker, it is not even a ‘cap and trade scheme’ as if the price hits $40 the government wil print up extra permits to keep the price stable.
2) People seem to think it is hard to measure voluntary action and reduce the cap accordingly. While it is hard to measure ALL voluntary action, it is easy to measure most. For example, Kevin Rudd said his $4billion insualtion package would reduce emissions by 44 million tonnes. If so, great, then simply reduce the 2020 targets in the white paper accordingly
3) People seem to think ‘voluntary’ means dinky when all it really refers to is any attempt by someone other than the Rudd government to reduce emissions. Sadly this includes the states. For example, the ACT government has said it wants to set more ambitious targets for the ACT than those set by Rudd – great idea, but unless the scheme is modified the lower emissions from the ACT will just fre up emissions for other states. Similarly, the Victorian black baloons campaign, the SA government renewable targets…the list goes on. Non trivial, relatively easy to measure, and currently being ignored by the Rudd government.
4) A carbon tax is a much more flexible instrument. The climate science is changing very rapidly yet we are setting targets until 2020. Not only can you change a carbon tax without paying any compensation but you can pile on as many ‘additional complememtary ‘measures as you want. that is, while spending more money on insulation under the proposed CPRS wont reduce emissions, spending it on top of a carbon tax will.
The main trick is to avoid conflating the benefits of a textbook emissions trading scheme with the CPRS – a martian economist listening to a description of the CPRS would not recognise it as an ETS for one simple reason – its not.
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Richard, yes, it’s the same deal with the states trying to build ‘carbon-neutral’ desalination plants. The CPRS makes it impossible for anything to be carbon neutral and makes it impossible for a regional government to build a desal plant and run it off anything other than the mostly coal-fired grid [unless they kept it off the grid and hooked something like a wind farm directly to it and only ran the desal when the wind was blowing – hardly likely and why force such an absurdity?].
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Mitchell Porter: “The Dept of Climate Change continues to issue policy documents according to schedule. There is no evidence of a change of direction.”
The minister/member/leader/policy has my full support… cue sleazy smile from politician…
The department is staffed with drones, sorry I mean public servants and will continue to ‘issue policy documents’ until its told to stop.
It reminds me of a Russian city featured on 60 Minutes many years ago.
During the Soviet era the city was designated as the single central location for the manufacture of coffins.
When the Soviet Union collapsed no one thought to tell the good burghers of coffin central to stop work so they kept on banging together slabs of plywood and imitation brass handles until every square centimeter of storage space in the entire region was chock a block with the glorious product of Soviet Socialist production schedules.
As is the case with the Department of Climate Change – it’ll keep pumping out its irrelevant crap until Swan’s review gives Rudderless an excuse to slip away from his unnecessary economy crippling and farcical carbon tax.
Pity about all the wasted energy and paper…
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There is some good documentation of failure of the European trading scheme here: http://www.thecornerhouse.org.uk/subject/climate/
I guess if we are going down the cap and trade track we should at least make sure we don’t replicate mistakes already made. We have the benefit of others’ hindsight.
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If the power grid is already working to an agreed cap on emissions, then a desal plant would pay for the carbon it emits through the energy it purchases to operate… so while cap and trade would make creating a carbon neutral desal plant (or anything else) “impossible” – well I see that as a good thing. A cap and trade removes the ability of people to do things that make no economic sense… when what we want is least cost reductions of CO2 emissions.
The other way to look at it is if there is a cap on emissions, and that cap is agreed as part of the scientifically based reductions scheme, then everything is “carbon neutral”, as there is nothing wrong with carbon emissions when the sum total of said carbon emissions is within the acceptable range. I know the “scientifically based” is a big ask… but so is setting a high enough tax rate.
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I foresee that taking governments’ fossil fuel incomes and dividing them among the citizens will be — to many — astonishingly effective in catalysing fossil fuel conservation and substitution.
Now-a-days, those who make rules that affect whether the public has palatable alternatives to fossil fuel use do so largely on an oil-and-gas-money stipend.
To speak of getting the tax on the C in these fuels high enough to ease society off them, in this circumstance, is something like giving one’s pet tiger a large enough share of one’s fish dinner to stop it asking for more.
(How fire will be domesticated)
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Barry:
1) “Economists speak out against flawed Carbon Trading Scheme”
Note that they spoke out against the flawed CTS in favour of one that isn’t flawed.
Only failing that do they advocate a carbon tax.
Presumably they are assuming a carbon tax would be, unlike the CPRS, devoid of flaws.
This is a brave assumption on the part of the economists, bless their utopian hearts.
2) “I don’t think this (predicting what level of taxation would result in the desired reduction in GHG emissions) will ever be possible, or necessary. The tax merely has to make zero-carbon energy sources … or energy efficiency and conservation, more attractive than fossil-fuel based energy sources….”
Well, no. It also has to be set not so high that it crushes the economy. The switch to alternatives can’t be done instantly.
There is the option of raising a tax gradually year by year, but the problem would still exist – too fast or too slow are both possibilities.
Maybe after two or three years it would be clear how the market is responding, but maybe it would take much longer. You can’t really do much with econometrics with only two or three years of data.
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Matt:
I respect most of your viewpoints but struggle with the concept that a cap makes everything carbon neutral. I think of the River Murray as a fine example of a capped system. Does this make the Murray water users ‘water neutral’? how do you reason that no additional emissions above the cap makes individuals or entities ‘carbon neutral’?
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Tim I see it a bit like Jenny Craig. You count your points…. you don’t feel guilty about a slice of cake as long as your points are below the limit.
If every one agrees that the problem can be sorted by only emitting 100 units of carbon a year say, and that will cause some economic pain in the short term… then you actually want to discourage someone going it alone and slashing another 5 units… as an economy we are ALL better off if someone else is then allowed to emit those 5 units. of course on the condition that the 100 units is a meaningful cap in terms of addressing the AGW problem.
now the Murray river, like the white paper… well the cap is too high. But if a govt is prone to set the cap too high, then they are equally likely to set a tax too low.
lastly – people talk about voluntary emissions under a tax… well the tax rate is set to achieve an emissions level, so if there are lots of “voluntary” reductions that make the emissions level lower than the target… then the national carbon accounts will show we are under the desired level and business and industry will cry poor and place HUGE pressure on the govt to lower the tax rate… so at the end of the day the tax will be tweaked to achieve the desired emissions level… not the desired level MINUS some extras that people choose to throw in there for good measure.
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Anyway – regardless of tax or cap and trade (I’d rather we got the CO2 result and accepted that we may well choose a method that in the end was not the cheapest way after all)… of more interest to me is the answer to “What if the heck are they doing with this on again off again parliamentary investigation?” shamozzle!
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in the heck… sorry:)
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Matt @ 37
As a pedant I have to let you know that the “Weight Watchers” plan counts points not “Jenny Craig” – however the point(excuse the pun) is still valid. It is the total calories (points) consumed that matter not whether you eat chocolate cake or chicken. Good analogy :)
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Matt,
I understand what you are saying, but you have not answered the question “how do you reason that no additional emissions above the cap makes individuals or entities ‘carbon neutral’”?
You are not alone in pushing this viewpoint as the DCC is asserting the same line but it is mathematically not correct.
If I drive within the 60 km/h speed limit at 58 km/hr my speed is not zero, it is 58 km/h. If I use water within an allocation my water consumption is not zero. If I cause greenhouse emissions within a capped system, my greenhouse emissions are worked out in accordance with the NGA factors Accounts (2008)and NGERS Determination (2008)and other life cycle data that I can access, but these emissions are not zero.
If my emissions were zero I would have no cause to seek additional personal action.
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Perps – you are off course correct! ANd if I can;t be relied upon to recall the names of weight loss programs then what value my other thoughts;) My excuse is that as a devout cycle commuter I tend to keep the weight off naturally;)
Tim – of course actual carbon emissions cannot pretend to be zero… I guess I would argue strongly that carbon neutrality should not become confused with having zero carbon emissions. Carbon neutrality should correctly be viewed as emitting in amounts that do not result in catastrophic climate change. The company that decides it makes economic sense to reduce emissions and not buy carbon permits is no more entitled to a green image than the company that decides it makes economic sense to buy more carbon permits… so long as the cap is set at the right level.
A dictionary definition: Neutral: not causing or reflecting a change in something.
Hmm but looking up the dictionary for “carbon neutral” does suggest that zero carbon emissions seem to have stolen that phrase… pity that. SO yes I’ll concede my examples are not carbon neutral… but we just need a new phrase to adequately capture ecologically appropriate carbon emissions.
I certainly don;t want to live in a carbon neutral world for quite a few decades.
As my old professor said to me in my honours presentation “planting trees is not a valid solution, as there is not enough surface on the planet to plant enough trees.” (which I poorly explained as a view that ignored the economics of supply and demand of tree planting space.)
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http://www.treehugger.com/files/2007/08/should_a_coalfi_1.php
“…work recently done by Carnegie Mellon Electricity Industry Center researchers gives us a framework to begin to answer these questions.
…
Bottom line for us: If the US Congress sets a “Cap” at much under $50/tonne, they’re deluding us with a delay and defer move. So, lets watch closely. And big Kudos to the CM crew for framing the issue in an understandable way.
With advance permission, the full paper may be downloaded from CMU….”
(Link for that at the treehugger page)
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Hansen also said more recently on cap-and-trade vs tax:
Feb. 26, 2009: Carbon Tax & 100% Dividend vs. Tax & Trade, Testimony to House Ways & Means Committee
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Am I the only one who is greatly disappointed by Hansen’s argument in favour of a tax rather than a cap and trade system?
Right on the front page he says: “‘Tax and Trade’ is pseudonymously and sometimes disingenuously termed ‘Cap & Trade’”
What does he mean “sometimes disingenuously”? On what basis does he say this?
Later he says “A ‘cap’ increases the price of energy, as a tax does. It is wrong and
disingenuous to try to hide the fact that Cap is a tax.”
What a pathetic non-sequitur. Just because it is designed to have the same effect as a tax doesn’t mean it is one. It is not disingenuous to describe a cap as a cap, it is merely accurate, because a cap IS a cap.
It’s as ridiculous as saying a tax is a really a cap, because a tax is designed to raise the price, just as a cap does.
Further, he makes his argument in favour of a tax on the basis that the tax revenue would be fully returned to the taxpayers, whereas – for some arbitrary reason – he assumes that the revenue from auctioning emissions permits would not. What an absurd assumption! You’d think someone in his position would be a bit wary of using the sort of straw man argument that’s been ranged against his views on global warming.
And it IS just an assumption. The Australian cap and trade system, for example, proposes returning all the revenue to the public, though not on a per capita basis. (Note that the per capita return of revenue is entirely arbitrary. There are a thousand ways of handing the money back, eg a blanket tax cut, public works, higher welfare payments, subsidies to low-carbon energy research etc etc. Each has its own claim to be fair.)
Perhaps the most ludicrous passage in Hansen’s submission to Congress is this: “The abject failure of Cap & Trade was illuminated for all to see by the Kyoto Protocol, the granddaddy of all Cap & Trade schemes.”
Really? I thought the main reason it failed was that the US (along with faithful puppy Australia) didn’t sign it. Would a carbon tax shunned by the world’s biggest emitter have done any better? I don’t bloody think so.
Hansen repeatedly asserts that a cap and trade system just will not work. You’d think such a claim would be backed up with some serious arguments, but what do we get? When you see what he says, it’s just a mish-mash which could be summarised as “It will make some people rich, others will try to manipulate it and when people realise it will make energy cost more they will reject it. Oh and by the way, it won’t work.”
His critique of cap and trade ends with “The worst thing about cap-and-trade, from a climate standpoint, is that it will surely be inadequate to achieve the sharp reduction of emissions that is needed.” No explanation of why, just an assertion.
You could say exactly the same things about a tax, if you wanted to, and it would still be a bunch of assertions.
Now don’t get me wrong. There are good arguments in favour of a tax vs a cap.
For example, especially for small countires like Australia, McKibbin’s argument about the interaction between international economic shocks and international trade in permits (“Expecting the Unexpected: Macroeconomic Volatility and Climate Policy”, Lowy Institute Working Paper in International Economics 4.08) warrants consideration.
There could also come a point where the cap and trade becomes so compromised by special interests that a tax is a clear winner. (And vice versa, I’d say.)
There are also price volatility arguments (overstated I think but worth considering), potential market instability issues and cost arguments that could be used in favour of a tax.
But I have to say I was rather deflated by Hansen’s testimony. It just seemed like a lot of hand-waving to me.
As an economist, he makes a good climate scientist.
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Thanks Gaz, I must agree with many of your points. Another opinion of carbon tax vs cap-and-trade has been published on ABC Unleashed:
http://www.abc.net.au/unleashed/stories/s2501420.htm
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what makes anyone here think a carbon tax would not be volatile?
It would be subject to the government of day trying to decide what tax level corresponds to future emissions cuts.
Industry could not hedge or plan their investment with any certainty. and the BIGGEST problem is that what ever carbon tax you choose would not guarantee you would get anywhere near the cuts you need.
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Some discussion:
http://taxprof.typepad.com/taxprof_blog/2009/03/bartlett-a-carbon-tax-is-better-than-capandtrade.html
Bartlett: A Carbon Tax Is Better Than Cap-And-Trade
pointing to:
http://www.forbes.com/2009/03/05/obama-carbon-tax-cap-and-trade-opinions-columnists_republicans.html
With an excerpt that begins:
Forbes: A Carbon Tax Is Better Than Cap-And-Trade, by Bruce Bartlett:
I think a straightforward carbon tax would be preferable to a cap-and-trade system. It would be much quicker and easier to implement, provide greater transparency and certainty of the cost to businesses and be less prone to political manipulation. (See this new paper
http://taxprof.typepad.com/taxprof_blog/2009/02/avi-yonah-uhlmann-why-a-carbon-tax-is-a-better-response-to-global-warming-than-cap-and-trade.html
by Reuven Avi-Yonah and David Uhlmann of the University of Michigan Law School, and this article
Click to access nordhaus_carbontax_reep.pdf
by Yale economist William Nordhaus.) The question of whether anything needs to be done about global warming is another matter altogether. I’m just saying that if something is going to be done, then a carbon tax is better than cap-and-trade….
——end excerpt—–
Nordhaus is a familiar name mostly because I’ve seen his work debunked in climate science threads.
http://www.google.com/search?q=nordhaus+climate
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Notice how, with a dividend-first fully refunded C tax, the transfer of a little money from those who emit more than the average amount of CO2 to those who emit less than the average amount does not back off.
Since the first group have a high-90s-percent overlap with those who have more than average income, and the second group is virtually coterminous with the relatively skint, the dividend-first fully refunded C tax, in its early years, slightly blunts a recession, and never contributes to one.
(How fire can be domesticated)
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Today’s Wall St. Journal, re the US, pitching any carbon cap as a tax that mostly hurts poor people, argues that it will hurt unevenly.
It’s a good guide to places where GenIV heat sources could go:
“… Coal provides more than half of U.S. electricity, and 25 states get more than 50% of their electricity from conventional coal-fired generation. In Ohio, it totals 86%, according to the Energy Information Administration. Ratepayers in Indiana (94%), Missouri (85%), New Mexico (80%), Pennsylvania (56%), West Virginia (98%) and Wyoming (95%) ….
“… in terms of per capita greenhouse-gas emissions…. the average Californian only had a carbon footprint of about 12 tons of CO2-equivalent in 2005, according to the World Resource Institute’s Climate Analysis Indicators, which integrates all government data….”
http://www.wri.org/
http://www.sourcewatch.org/index.php?title=World_Resources_Institute
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Re the comment by Jeremy C on Feb. 16 ….
The main reason why SO2 emissions were reduced in the USA is not because of the Cap and Trade mechanism that was introduced. It was because, coincidentally at about the same time, large low-cost supplies of low-sulphur coal became available. So this cannot be used as an argument to support C&T.
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[…] Carbon tax or cap-and-trade? The debate we never had […]
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The solution I personally prefer is the introduction of a straight forward Tax on greenhouse gas emissions. This be would levied on all consumer goods in proportion to the amount of greenhouse gas produced during its manufacture and transport to the point of final sale. A rebate would also be introduced at a similar rate for those who could demonstrate that they had removed greenhouse gas from the atmosphere, and for those who replaced greenhouse emitting processes with non polluting ones. In Australia we have a proud tradition of going to any lengths to avoid paying tax. The scheme would operate in similar way GST.
In order to avoid the problem that other countries might seek to take a trading advantage, or local companies might relocate offshore, it might be better not to apply the tax to exports, but on the other hand one could apply it to all imports at double the normal rate unless the exporting country agreed to use a some form of impost on greenhouse gas emissions.
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Pat,
I see to problems with a greenhouse gas tax, like the GST it doesn’t assure a reduction in sales, in fact sales and GST revenue have increased since introduction, so we may still be left with a rise in GHG. A cap assures an upper limit.
Secondly without “trade” there will be no incentives for parts of the economy to reduce GHG where it is the easiest to do so. Replacing incandescent lights with fluorescent lights is very cost effective but a GHG tax is not going to be translated into more efficient lighting or insulation. If a coal generating power station pays for energy saving measures that result in less electricity consumption, its a win-win, less electricity is used so consumers pay less, electricity is not taxed so consumers share in the savings of lower cost electricity.
A carbon tax may only result in higher electricity prices. This will only indirectly favor low GHG solar and wind.
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Neil,
The way I understand an ETS, the way a cap will work in practice will actually cap the emissions reductions. All further reductions (beyond the cap) will be disincentivised, and saved for later. Markets are manipulated all the time.
I think a cap and tax, together with separate incentives for carbon sequestration (bio sequestration, and preservation) will be far more robust.
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There are important differences between what I am suggesting and a simple carbon tax. The point is that as my idea applies to all goods, and adds a penalty according to the amount of CO2 produced during manufacture. This leads to the situation where a low carbon product is cheaper than a high one. This would be further enhanced as
Quote:
A rebate would also be introduced at a similar rate for those who could demonstrate that they had removed greenhouse gas from the atmosphere, and for those who replaced greenhouse emitting processes with non polluting ones.
End Quote.
My faith in markets is not that great but I do think in this case it would work.
The problem I see with cap and trade is that there is no real incentive to do better than the cap. In Europe due to the downturn in the economy the emissions have fallen but the cap remains the same so there is no incentive to move further towards a low carbon economy.
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Pat,
True, about incentives to reduce below cap, that’s why the cap is decreased over time, from 20%(2020) to 80%(2050 or more?).
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I accept that a cap and trade system could be made to work in theory but in the case of carbon emissions I don’t know of one yet, which has actually lead to a decrease in emissions, on the other hand there are plenty of examples of where a carbon tax has made a difference. You only have to look at the price of fuel in a country and you can tell how big the cars are that they drive. The taxes on fuel where not imposed with the purpose of reducing emissions but rather to reduce imports so I believe a well designed carbon tax would be very effective.
The next problem is that just about every thing we make involves the creation of CO2 in its manufacture even if all electricity in Australia from now on was produced with renewables we would not have solved the problem.
We now export 100 million tons of coal. This will create as much CO2 as the whole Australia does domestically. The cap and trade system just hands this emissions problem on to some else, on the other hand a carbon tax on the goods produced by this coal will have some impact.
I am of view that is nearly impossible to design an effective cap and trade system as everybody and his uncle will demand exceptions and the politicians will give in.
The site below argues that cap and trade will not work but it also has comments in favour by others.
http://www.newscientist.com/article/mg20227046.200-carbon-trading-wont-stop-climate-change.html
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A global waste trading scheme is an idea whose time should never come. Call it emissions trading or garbage trading or nuclear waste trading. If we don’t want it, what sense is there in paying for it and making it valuable.
A tax of some form sounds like a sensible approach for waste. Thanks Tim for the detailed dissertation.
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“If we don’t want it, what sense is there in paying for it and making it EXPENSIVE”?
There, fixed that for you, cheongi.
Environmentalists bought into cap and trade because it has worked out great for sulfates, and knew that in order to sell climate change policy to industry worldwide they`d need to craft a market-friendly and hopefully most efficient policy.
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Waste should be both expensive (to make or get rid of) and of little inherent value (to sell) for market to try to minimise production. Presently, waste is cheap and of little value so nobody cares about generating it even though we don’t really want it. When it is cheap to make and valuable (to sell under ETS), it will flourish. A tax can make waste more expensive to make but retains the inherently low value.
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cheongi, what is valuable under ETS is not the waste, but the right to emit limited amounts of waste. This incentivizes waste reduction, so reductions below permitted amiunts can be sold to others. IOW, what was once free to emit is now a cost; this incentivizes costr-reduction efforts aim at the waste.
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130 million to 390 million permits to be given to coal fired generators is worth 3.6 to 10 billion dollars. Well if I had an interest in that money, I’d be pushing for the ETS.
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In my opinion, the best option for Australia would be to implement a Greenhouse Gas Tax ( GGT ) levied similarly to the GST.
In fact the GST could be reduced to offset a GGT in its first years.
Until recently, I despaired that the media and public had bought the line that an ETS is the ONLY way to limit greenhouse gas ( GHG ) emissions.
This obviously suited the proponents of an ETS ( mostly people associated with trading entities and politicians ).
I have noticed in the media recently that these proponents have had to modify their stance from an ETS as a fait accompli and are having to argue for an ETS – this is a good thing.
The main argument now for the ETS system is that it imposes set limits ( the cap ) on greenhouse gas emissions whereas a GGT does not.
However, the US EPA has just showed the world that there is another way, by its release earlier this week of its “endangerment finding,” a declaration that carbon dioxide and other greenhouse gases pose a threat to public health and welfare.
This authorises it to impose regulations to set limits on GHG emissions.
My proposition is that the Australian Environment Protection agencies should produce a simliar ruling on GHG emissions and set limits for those emissions.
In this scenario, the benefits of a GGT in concert with regulated greenhouse gas limits would constitute the ideal framework for Australia.
Obviously, the fines for exceeding the limits could have a soft start, similar in principle to the cost of permits to emit.
For me, one of the outstanding merits of this model is flexibility.
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I think it is naive to think that the problems that plague cap and trade schemes, namely free permits and generous offsets, won’t apply to a carbon tax after the lobbyists get to it. Free permits will become exemptions (c.f. income tax for churches) and offsets will become deductions or expenses. I suggest the successful example of a carbon tax cited by Hansen wasn’t big enough to be emasculated this way. Companies that have been paying for voluntary offsets will sure as hell will want major CO2 tonnages deducted from any carbon tax assessment.
The standout out features of cap and trade are that it hits the target every time and the spot CO2 price can reduce according to demand. Neither is true of carbon tax. However free permits and offsets must be kept to an absolute minimum. Watching Penny Wong from Copenhagen tonight on TV she waffles on about increased offsets for land use. Ye gods no wonder we’re going backwards. Stop making excuses and cut coal burning for chrissakes! And cap coal exports (232 Mt in 2007 if I recall) to help the Danes etc practice what they preach.
Whatever form carbon charging takes the referee must be tough and not allow frivolous appeals and wimping out. It must be simple and there must be some pain to force change .
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If all CO2 is bad, then there is no good reason for not taxing it equitably. Simple rules minimise bureaucratic administrative overhead which is of no value. Coal is not the only problem. Aiming for targets will never fly politically when the punters have to pay and the target seems unaffordable. That’s where the dog’s breakfast comes from. How much are we prepared to pay to reduce our CO2 emissions?
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[…] In reference to past discussions on BNC about the form a carbon price might take, read about cap-and-trade vs carbon tax and fee-and-dividend. An argument NOT to impose a carbon price is given here. An argument FOR a […]
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[…] Carbon tax or cap-and-trade? The debate we never had « BraveNewClim […]
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