Carbon taxes, trading and auctions

This oped by Daniel Sperling in the LA Times appears to bridge, via California, my and Andrew’s positions on the impact of the Green’s proposed carbon tax:

The one sector where carbon taxes will work well is electricity generation, which accounts for 20% of California emissions (and 40% of U.S. emissions). The carbon tax works because electricity producers can choose among a wide variety of commercial energy sources — from carbon-intense coal to lower-emitting natural gas to zero-emission nuclear or renewable energy. A modest tax of $25 per ton of carbon dioxide would increase the retail price of electricity made from coal by 17%. Given the many choices, this would motivate electricity producers to seek out lower-carbon alternatives. The result would be innovation, change and decarbonization.

Transportation is a different story. Neither producers nor consumers would respond to a $25-a-ton tax. Fuel producers would not respond because they have become almost completely dependent on petroleum, which supplies 96% of all transportation fuels. They cannot easily find low-carbon alternatives. Even corn ethanol is only slightly better than gasoline.

Drivers also would be unmotivated by a carbon tax. A CO2 tax of $25 a ton would raise the price of gasoline only about 20 cents a gallon. This would not induce drivers to switch to low-carbon alternative fuels because virtually none are available. In fact, it would barely reduce their consumption. A recent study at the UC Davis Institute of Transportation Studies found that the “price elasticity” of demand for gasoline has shrunk; a price increase of 10% induces less than a 1% reduction in gasoline consumption. Thus, that 20-cent increase would be barely noticeable. In the transport sector, a carbon tax would have to be huge to induce change.

Then the punchline: a “carbon standard” for fuel:

Cutting carbon emissions from transportation fuels with mandates and taxes won’t work. But a new approach using a low-carbon fuel standard will. This new standard will require oil companies and other fuel providers to reduce carbon and other greenhouse gas emissions of transportation fuels by at least 10% by 2020. It will be up to the providers to choose how to do that, including blending low-carbon biofuels into conventional gasoline, selling low-carbon fuels, such as hydrogen, and buying credits from providers of other low-carbon fuels, such as low-carbon electricity or natural gas. This allows businesses to identify new technologies and strategies that work.

The low-carbon fuel standard picks neither winners nor losers. Instead, it sends a fuels-neutral signal that alternatives are welcome in California’s $50-billion-a-year transportation fuels marketplace.

Elsewhere in the blog-o-sphere, Robert Reich says we should auction the rights to emit CO2:

The best idea I’ve heard so far to deal with global warming is not a carbon tax. I can’t imagine any politician calling for higher taxes affecting the middle class, or for that matter the middle class – already squeezed by high energy prices and stagnant wages – putting up with it.

The winning idea isn’t a cap-and-trade system, either. That system would allow companies to continue polluting, just require them to buy the right to pollute more from companies that keep their dirtying to a minimum. Today’s biggest polluters – those who’ve done least to reduce their emissions – would be the biggest winners because they’d get the highest caps.

The best idea I’ve heard is described as a carbon auction. Companies would have to bid for the right to pollute. And, most ingeniously, the money raised in the auction would be shared equally by all citizens in the form of yearly dividend checks – just like the residents of Alaska now get yearly dividends for their share of the state’s oil revenues.

… In a carbon auction, companies would have to bid against other companies for a portion of the atmosphere they intend to use – within overall limits that reduce pollution levels.

Get it? It’s a win-win. The auction market itself determines who can pollute and by how much. And since companies will inevitably want to reduce their bidding costs, they’ll search for new technologies that cut their emissions.

And even if companies pass on increased costs to their customers, we’ll still be better off because we’ll get dividend checks and cleaner air.

My recap: carbon taxes affect the price and let the market determine the quantity of emissions; cap-and-trade sets the quantity of emissions and lets the market determine the price. Both have their pros and cons. A carbon tax would be the easiest to administer, though it raises equity considerations (that can be alleviated on the spending side, unless you do what the Greens propose, and give the revenue away in the form of tax cuts).

Cap-and-trade also has distributional issues but it depends on how the initial rights are distributed: in a Monbiot scheme, equal per capita emissions are give to everyone; in the European trading system, the worst polluters were given the most credits. Cap-and-trade is also more susceptible to cheating.

Reich’s carbon auction is just an alternative way of distributing the rights to emit CO2, like cap-and-trade, but one that also puts a price on CO2, like a carbon tax. I like it, though I’d be inclined to pump most or all of the proceeds into investments like public transit and basic public domain research on alternative technologies.

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