Carbon Trading and Carbon Taxes - article on MaxSpeak

[Gar Lipow <gar.lipow@xxxxxxxxx>]

http://maxspeak.org/mt/archives/002600.html

October 11, 2006
EMISSIONS TRADING AND CARBON TAXES - By Gar W. Lipow

In a previous post I touched lightly on problems with carbon trading ,
and aside from the current disaster, suggested that any system that
relying heavily on emissions trading for carbon was unworkable.
Reasons to oppose carbon trading include:

1) We need to ultimately reduce fossil fuel use by somewhere between
80% to 100%, not per capita, but in absolute numbers. And we need do
so fairly quickly, by 2040 or 2050. That means we need a large
emissions drop each and every year. No nation, and not very many
individuals or firms will easily meet these targets. Simple arithmetic
suggests that if our efforts are serious, there just won't be that
many "excess reductions" to trade. Yes, there are billions of
extremely poor people who consume no or almost no fossil fuel. But
they don't constitute some magic carbon sink that will let rich
Americans continue to drive nine MPG Hummers.
2) Emissions trading discourages innovation, and investment in carbon
reduction. Time and money that should be spent on reducing emissions
are directed towards seeking out other people's emissions to buy all
over the world, or using lawyers and lobbyists to win new government
issued credits rather than earning them from carbon reductions. It
also creates a situation where both buyers and sellers of credits have
no reason to care about whether they respresent actual savings, so
long as they satisfy regulators. This encourages generating Enron
style credits via creative accounting, and dishonest consultants -
again at the expense of both innovation and implementation.
3) Emissions trading, to the extent it has worked at all, operated in
environments with strong, well-enforced regulations, where emissions
were easily detectable on a source by source basis. Sulfur trading,
usually pointed to as a poster child for pollution trading, took place
among fewer than 100 factories. More to the point, emissions trading
has show success where little major revamping of infrastructure was
required. For example, sulfur trading mostly relied on substitution of
low-sulfur coal for dirtier varieties, and end of pipe technologies.
Carbon reductions require an almost complete transformation of
everything. We need to drastically change how we produce new
buildings, and radically modify existing ones. We need to change how
we grow food, how we produce goods, how transport people and freight.
We need to rebuild the electric grid, and replace most of our existing
electric generating plants with carbon neutral ones. Emissions trading
has no record in dealing with problems of this scale - other than the
recent collapse of the carbon market.
4) That emissions trading is taken as the default, and people ask what
the alternatives our shows how successful ideological warfare has been
in blinding people to history and evidence. Emissions trading is the
new kid on the block; regulation and public works have a long
honorable history of successfully achieving environmental goals.
Emission trading has been tested in much more limited circumstances,
by most measures with inferior results to regulation.
5) Emissions trading in things like sulfur and lead have been much
less successful than the current conventional wisdom suggests. The
Clean Air Act produced major reductions BEFORE any emission trading
program was tried. It can be documented that at least some emissions
trading programs produced slower reductions than the regulatory
programs they replaced. And every successful emissions program can be
compared to a regulatory program elsewhere that reduced the same
emissions faster.

As mentioned in my last post, the Dag Hammarskjöld Foundation has
published an impressive and beautifully written analysis of Carbon
Trading. The full text is available in PDF form at no charge.

So I'm going to move on to another subject - Carbon Taxes. As I
pointed out in my previous post, non-tradable (or almost non-tradable)
permits could be used as a combination carbon tax and rationing
system. Or you could simply institute a carbon tax, adding so much to
the price of a barrel of oil, so much to a ton of coal, so much to a
thousand cubic feet of gas.

Unlike emissions trading, this market approach would have an effect.
But Pigovian taxes as the primary means of promoting infrastructural
change is still flawed.

It has a high chance of failing to reach the goal of decarbonization
in a timely fashion, though it does not guarantee failure the way
carbon trading would.

One symptom of the inefficiency of a Carbon Tax is (as I said back in
May-2006) that energy demand has a high inelasticity in response to
price increases[1]. What this jargon means is that a large increase in
the price of energy tends to produce very small increases in
efficiency. So very large increases in the price of heating fuel tend
to produce very small improvements in insulation levels. Note that
according to the cited source, it is specifically demand reduction
that suffers this problem. Substitution of one fuel for another has a
fairly high elasticity; there is some sluggishness in response, but
not a lot. Most studies which report high elasticity, use fuel
reduction as a proxy for demand reduction. (The exceptions are from
the oil crisis of the seventies, when price increases coincided with
recession.)

There are all sorts of micro explanations for this - split incentives,
unequal access to capital markets, unequal access to information, high
transaction costs, drowning of energy price changes in the "noise" of
other costs. But I think the fundamental reason is that
decarbonization requires infrastructure changes and infrastructure
changes are always dependent on large scale public works and
subsidies.

Think of transportation - railroads (subsidized with huge grants of
land stolen from American Indians), canals, public highways. Think of
the U.S. highway system. Think of the airlines dependent on publicly
financed airports.

Consider our existing power infrastructure. The electrical grid is
spread over public rights of way, and mostly government built. Early
power plants were mostly government built, later ones constructed by
heavily regulated monopolies required to act in the public interest as
quasi-governmental bodies. (Note that the U.S. experiment with power
deregulation resulted in disasters in some states, or in not much
change at all in others - with, as far as I can determine, zero
improvements in service, reliability, or environmental soundness. Note
also that municipal power companies throughout both the regulated and
unregulated periods have continued to provide lower priced service
than investor owned utilities.)

Consider water and sewage. Consider the Internet, originally developed
with public funds. As happens with many public goods it was turned
over to private companies once proven successful - with infrastructure
in place.

Consider broadband Internet service which has been largely left to
private monopolies to develop, without strict regulation or
requirements. Today 10 MPS is the fastest broadband ordinary USAians
can buy, and you have to be located within an area served by cable for
this to be a reasonable choice; for a lot of people, DSL of 2 MPS or
less is the fastest broadband alternative to dial-up modems. Meanwhile
100 MPS is the standard in many parts of the world where it is taken
for granted that this kind infrastructure is a public responsibility.

Given this record, do you really want to trust the most important
infrastructure change in hundreds of years, decarbonization of our
society, to private developers, guided only by price signals?

Public works, regulation and subsidies are often derided as "command
and control". But again and again, such "command and control" has
proven the most efficient means, and often the only means to make
fundamental infrastructure changes.

Carbon taxes will have their place - after infrastructure is in place,
and people have real alternatives available. They are supplement to
public works, regulation and subsidies - not a substitute.


[1] Dermot Gately and Hillard G. Huntington
RR#: 2001-01:The Asymmetric Effects of Changes in Price and Income on
Energy and Oil Demand Economic Research Reports; January 2001 p23.
Tables 6 & 7.