Sometimes carbon credits fund clean industries that would prosper anyway.
Tuesday, April 22, 2008
By Kevin Bullis
Carbon markets set up under climate-change agreements are supposed to reduce emissions of carbon dioxide. Credits are issued that correspond in some way to the desired carbon emissions (details vary). Companies that produce a lot of greenhouse emissions can then purchase credits from companies that produce fewer. Supposedly, this will fund new clean companies and projects that lead to a decrease in carbon emissions.
Here's the problem. Some of those new companies and projects would have been undertaken anyway, without the credits. In that case, the credits won't actually lead to less emission. An article in today's Wall Street Journal describes one such case.
For a carbon-credit system to work, it seems that you've got to have a competent regulatory body that can give credits only to companies and projects that need the credits to succeed. But this requires a detailed understanding of industries and economies all over the world, as well as new technologies. According to the Journal article, it's taken years for a UN regulatory body to figure out that it was issuing credits to projects that didn't need them. Overall, this sounds like an inefficient system.
A carbon dioxide tax, which assigns a cost directly to the thing that's supposed to be regulated, would work better. Make carbon dioxide emissions expensive, and then let the market work out the best way to deal with those costs.
Massachusetts Institute of Technology
Comments
zig158 on 04/23/2008 at 12:30 AM
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deanne.upson on 04/25/2008 at 9:24 AM
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As a professional who has been involved in the economics and policy analysis relating to achieving mitigation of global warming gases and low cost adaptation to the effects of global warming, what I would ask you to contemplate a few questions:
- would a carbon tax function optimally in a global economy?
- are there other tax and subsidy issues that may conflict or complement a carbon tax?
- would there be perfect competition, little to lags in action due to pure price influences, and would there be perfect information?
- do all markets of any competitive structure function rationally or is there any irrational exuberance possible?
- would there be regressive effects on low- and mid- income people worldwide?
- would there be consensus globally for a carbon tax?
- would a carbon tax be susceptible to corruption?
- do developing countries have the ability to pay a carbon tax and if so how would a carbon tax impact their people's income, wealth, and economy?
Ah, ...there are so many assumptions in our major economic models...
Alternatively, please allow me to tickle your intellect with a few thoughts about your critique of carbon credits...
- Policy-makers have long desired to put due diligence of carbon credits in the market through third party verifiers, do you think this mitigates any concerns with gamesmanship of the integrity of the carbon credits?
- Short-term, near term reductions are important because the effects of climate change are currently being experienced at the "worst case" side of the spectrum of the impact forecasts -- how important do you think is immediate experimentation of new approaches to changing technology or behavior are versus 100% (or pick a percent) confidence in the integrity of the emission reduction?
- If the ability to reap a financial return through carbon credits is unavailable due to a dismantling of the carbon credit market, what policy or market mechanisms would effect short term results in mitigation and adaptation, accelerate technology experimentation, secure involvement of developing countries in influencing the growth of global warming gases, and mitigate the risk of unexpected price shocks due to a tax?
- Is there a trade-off between the administrative ability to induce politically acceptable reductions in emissions by sector and the degree of certainty (take your pick of a certainty level) in the integrity of the reduction?
Are carbon taxes for you really just a philosophical leap of faith in the efficient functioning of the market, and do you have certainty (take your pick of a certainty level) that institutional and administrative implementation of a global carbon tax will result in global warming gas reduction and effective social adaptation to climate change? If you are certain, what level of certainty do you have and in what time frame would you expect results?
Are you an optimist or a pessimist? Do you prefer the stick to the carrot?
Perhaps you're not jumping to conclusions, but have thought through all of these things and more...?
Food for thought,
Deanne
dmm on 04/25/2008 at 4:20 PM
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2. The revenue from this tax needn't be a global resource. Every government can spend it on whatever it wants.
3. Every gov't can decide for itself if they feel their carbon tax is too regressive, and if so, they can take appropriate measures, such as earned income credits (to give one example out of many possibilities).
4. If one country refuses to enact a carbon tax, then another country can simply impose one upon import of goods from the non-carbon-taxing country. The country imposing the carbon tax would get to decide what to do with the revenue.
The main point is, that a carbon tax requires very little additional government oversight and bureaucracy. Gov'ts tax the carbon once, at its source, and then everyone automatically passes along the cost. This carbon cost will then change behaviors on a massive scale. Goods and activities that generate a lot of carbon emissions (e.g., use a lot of energy) will be automatically discouraged. Carbon sequestration, energy conservation, car-pooling, telecommuting, recycling, green energy production, low-impact goods and activities, etc. are all automatically rewarded. And best of all, no worthless middle-men get rich off everyone else for doing nothing but trading credits.
Kevin Bullis on 04/29/2008 at 10:49 AM
Nanotechnology and Materials Science Editor
39
Interesting questions. Proper answers would require an in-depth policy report, as I'm sure you know having worked in this area. A forum like this one is more suited to a discussion of general principles. But here are brief answers to some of your questions.
As to your question about the regressive effects of a carbon-tax, there are of course ways to address these concerns with changes to income taxes and other measures. Making these changes can make carbon taxes more difficult to implement. But carbon credits systems are also very complex, almost certainly more so.
Many of your questions ultimately have to do with the details of how a carbon tax is implemented, and how it can have an impact on worldwide emissions, which is of course the ultimate goal. I acknowledge that the political challenges to making a system that brings down emissions worldwide will be enormous. It's probably best for international groups to set goals, and let nations figure out how to meet them. Where taxes are used, care must be taken to introduce them in a way that is transparent and predictable so that the markets can respond.
The goal should be to tie regulation as closely as possible to the ultimate goal--reducing emissions. Carbon taxes are more direct than carbon credits in this regard. It's possible that a third approach is more direct still--regulations that simply limit carbon emissions, without a trading scheme.
Kevin
Scottar on 04/26/2008 at 12:21 AM
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MakeSense on 04/27/2008 at 8:56 AM
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Secondly, Kevin has pointed out a worthy criticism of carbon credits. Going further, let's also keep in mind the degree to which corporations get creative with programs like this. Look at the mortgage industry and try to imagine the same gamesmanship being employed for carbon credits. It will not resemble what the pure of heart originally intended.
deanne.upson on 05/06/2008 at 7:30 PM
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Yes, indeed. However, what I see that is fruitful from the current experimentation with carbon credits in the market is the learning curve and experimentation process. Being familiar with the SRES sceanrios and the inherent ucnertainty and assumptions contained therein, don't you think that near term experimentation -- at the risk of higher uncertainty -- is more valuable than assumptions regarding the "trickle down effect" of carbon taxes?
Hillary Clinton is pointing out an interesting perspective in her campaign: cut the tax to the consumer and tax Exxon instead. Hmmm...
I gotta tell you, that sounds good to the old folks down in Florida and the commuters who travel an hour and a half each day to work...
Yes, I agree with Kevin, the US -- or any state could set its own tax policy -- but Darling Kevin, doesn't this have an impact on the WTO?
It's my understanding that the WTO is currently of the position of attempting to avoid such a carbon tax (or environmental considerations) to a large extent.
I've talked to WTO experts and this seems to be the consensus. Yet, we see recent agreements in the Americas that contain environmental aspects, yes?
Ultimately, fellas, I wonder...
Do you believe in technology solving the climate change mitigation and adaptation dilemma, or are you willing to simply put in place a price mechanism assuming perfect competition, when in fact most of the markets in the world do not operate as such?
Monopolistic competition, oligopolies, monopolies...
Political pressures...
What do you think is realistic in the next 18 to 24 months?
Regards,
Deanne
g5622engr on 06/16/2008 at 5:04 PM
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energymv@gmail.com on 05/12/2008 at 3:18 PM
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For example in the PJM electric transmission region, alternative energy credits are selling for about $45/MWh last I checked. I believe the onus is on the utilities (local energy distribution companies) to implement and manage the process. You see, electric suppliers (utilities) are ALREADY required to meet benchmarks or purchase clean energy credits under the Pennsylvania Alternative Energy Portfolio Standards (AEPS) program. Credits are sold to electric suppliers (utilities) and other local entities who are required to purchase clean energy AECs under the PA Alternative Energy Portfolio Standards (AEPS) program.
Demand response in PJM is related example where customers are aggregated by Curtailment Service Providers (CSPs) or Load Serving Entities in PJM's Economic Load Response program. CSPs and LSEs aggregate commercial and industrial customers, and participants received about $106/MWh for their curtailed loads in 2005 (i.e. on top of savings). Participants must have an electric meter that records usage in hourly increments. If you don't have a suitable meter, a CSP will arrange installation (and possibly finance the cost). Customers voluntarily reduce loads in advance of real-time operations and receive payments based on day-ahead locational market prices for the reductions (less CSP fee).
However credits for energy efficiency are based on baselines, and baselines are very difficult to accurately measure and verify and certify. It is possible, but it is administratively expensive. However it is true as that customers have other incentives to increase their efficiency (i.e. to achieve savings), and the sale of credits might just be extra money for them. It is also possible that carbon-free electricity generation would occur even without the carbon credit system. Customers WILL game the system however, so a fuel / carbon tax would be less onerous to manage and far less prone to fraud and gaming.
Fuel / carbon taxes are the best approach, but politicians simply DO NOT have the cajones to pass a fuel or carbon tax to dis-incentivize fossil.
kstauff on 05/19/2008 at 5:20 PM
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And if you tax the oil company, they're just going to pass that along to the consumer, so who's paying the tax again?
The whole concept of carbon credits and taxation seems silly when no firm connection has been made between emissions and GW. I'm all for alternative and renewable fuels, but choking economies for taxes for something that so far seems like so much smoke and little fire just seems like the truly wasteful and inefficient policy.
energymv on 05/21/2008 at 12:53 PM
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But whether you like it or not, the reality is that the U.S. will probably pass legislation by 2011 to tax carbon or (less preferably but more likely) implement some kind of cap and trade system.
FYI the real price of gas is about as cheap as it has ever been when adjusted for inflation of the US$. However you and I can easily be more efficient and find alternatives. We just need to stop complaining about the price of gas, especially when the proceeds of gas go to unstable countries around the world that don't exactly have our best interests at heart.
kstauff on 05/21/2008 at 1:40 PM
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Oil prices are currently very near record highs after adjustment for inflation. However, I do think median incomes are also greater (also adjusted for inflation) than they were in 1980 when we had gas rationing, so I don't think most people are feeling the pain as acutely now as they did then; that is unless you have a lower income, in which case you're definitely feeling the pinch.
Raising taxes on fuel will push the price of all products higher as their production and transport costs must be included in their sales price. So not only will Americans spend more to fuel their vehicles, they'll pay more for nearly all consumer goods. Ultimately, they'll buy fewer of these goods and the economy will stagnate. This is of course dependent on how much you tax fuel.
Instead of punishing the consumer with taxes, I believe it would be far better to provide serious incentives (tax and otherwise) to businesses and consumers to produce and use vehicles which can run on renewable and/or domestic energy sources; and the federal government should do considerably more to move America off of fossil fuels. While I do not believe the GW community has proven anthropogenic GW, I don't believe the anti-GW community has proven the converse.
It makes good sense to ween our economy off of foreign energy supplies for the very reason you stated, and if the result is cleaner and the money stays here, that's all the better for the country as a whole.
As such, I believe research should continue into renewable forms of energy (cellulosic, algae, etc., but NOT corn, along with more provisioning of wind and solar). I further believe that nuclear should be given much greater advantage. It's a proven technology that can deliver the kind of power needed now and in the future. Combined with plug-in vehicles (electric or hybrid), you can solve most of the issues, real or otherwise, that are the focus of these carbon taxing and trading schemes.
energymv on 05/21/2008 at 6:10 PM
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U.S. farm lobby is the "lucky" recipient of a 100% tariff imposed on South American sugar cane ethanol, most of which would probably come from Brazil, a relatively stable neighbor. Why can't we impose a similar but smaller tariff on OPEC's oil (start at 2% and gradually increase it to 20% over 12 or 15 years)? Lower the tariff as needed to attenuate temporary price spikes. And return it when the price spike ends.
The goal would be to stabilize the price of oil (in addition to taxing it as a pollutant rather than a cap and trade system) and thus stabilize the long-term incentive for practical development of alternative fuels, advanced plug-in hyrbid technology, and alternative infrastructures, including the electric T&D capacity and technology needed to charge millions of plug-in hybrids.
kstauff on 05/22/2008 at 12:23 PM
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It should all be interesting to watch, but long term, I think the market can and will find better sources of energy. If there's one thing that's good about high fuel prices, it's that it provides strong market incentives to find alternatives to oil.
energymv on 05/22/2008 at 1:51 PM
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However we will be more conscious of fuel economy and operating costs when we make our next vehicle purchase, opting for a more fuel-efficient vehicles. Life-cycle costs...what a novel concept!!!!
You mentioned that the price of oil affects the price of everything....Well we could partially offset the economic penalty of any gas tax or oil import tariff, by cutting corporate taxes to relieve businesses. There is always a solution, but our politicians don't have the cajones to address this issue. They would rather spend trillions in the middle east to continue subsidizing our addiction to oil while satisfying their generous lobbyist friends.
kstauff on 05/23/2008 at 1:51 PM
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That said, I'd like to see oil replaced entirely with biofuels and grid power from nuclear and renewable sources. That solves all of the problems at once, and *that* is a novel concept.
energymv on 05/22/2008 at 1:35 PM
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However, 90th percentile income nearly doubled.
Larry McFarland on 06/02/2008 at 5:14 PM
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The best solution is to protect your 2nd amendment rights, buy some ammo every year and don't forget to vote the incumbents out of office.
advil on 06/14/2008 at 6:03 PM
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The same approach to global warming was used to CC, as with global warming US gvmnt will change after the Bush goverment, and then we will see, CC is a useful tool that needs further refinement, but impreoving this kind of systems is a matter of the english...not the americans, they are far behind of what is happening in Europe.
g5622engr on 06/16/2008 at 5:13 PM
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