Global warming creates the worst global free-rider problem ever. Any country that abates too little damages all others, but harms itself much less. It keeps all its cost-savings, while most of its harm is external. The cost of its pollution is mainly paid for by others.
The proposed “remedy” has been for countries to cap their emission and trade permits. Caps recreate the climate externality problem and monetize it. A country that caps itself too weakly can sell permits to other countries and be paid handsomely for shirking.
A global carbon price commitment fixes this externality. If country A insists on a lower global price, every country will have a lower global price. Every country will emit more, and every country will harm country A. Country A can no longer profit by harming others.
Experiments, including the Kyoto experiment, show that voluntary individual caps, or worse yet, vague individual commitments always lead to disaster in the fact of such negative externalities. This disaster is still the plan for the 2015 Paris conference.
Nordhaus describes a flexible “carbon price regime” that would be based on an international treaty:
1. “Countries would agree on a [minimum] carbon price.”
2. “Implementation [of the price] would be under the control of individual countries.”
3. “Mechanisms for encouraging the participation of low-income countries … a combination of financial and technological assistance.
This will be left entirely up to the individual countries, except that the revenues cannot be used to subsidize carbon (or returned in proportion to the amount paid).
Revenues could, for example, be used to reduce other taxes, subsidize renewables, or refunded to all on a per-capita basis.
No. The Kyoto negotiations attempted a semi-top-down approach, but it was not implemented. They attempted to find a consensus agreement on a capping formula. But they could not even muster a majority agreement because caps are too contentious. Instead they took the same “hybrid approach” being proposed for the 2015 Paris conference, and everyone selected their own cap.
CCS may become essential. Since it is a negative emission, is should be paid the carbon price. A power plant that stores its CO2, can be thought of as emitting it and then capturing it. So it is paid the same amount it pays; there is no net charge and no net emissions. This approach will provide the correct incentive.
In the case of a plant that captures CO2 directly from air, the host country might view paying for this global benefit as an unfair burden. In this case, the CCS facility might be allowed to sell emission permits that were valid globally for counting against actual emissions.
Yes. This is indisputable because a cap only changes behavior (works) by creating a carbon price. If a certain cap causes the price to average $30/t, and a tax sets the carbon price at $30/t, the two policies will have the same effect. No consumer or businessman takes action because a cap is set at X million tonnes, but only because that cap makes it costly to emit carbon.
In fact, the EU is so upset with the price uncertainty caused by its ETS cap that it is now (22 Jan 2015) trying (unsuccessfully) to implement a “market stability reserve” which would periodically adjust the cap to produce a reasonably stable price. In other words it would almost turn the cap into a tax. (Financial Times, Guardian)
Both caps and prices will need to be adjusted if they are to hit a 2° temperature-increase target. Caps will error because (1) they won’t cover some major emitters for decades, (2) they won’t cover land-use changes, (3) the best scientific estimate of climate sensitivity is uncertain by hundreds of billions of tonnes, (4) the earth’s CO2 uptake by 2° target date is highly uncertain.
The required price suffers from these same enormous uncertainties, and one more smaller one—the amount abated at a given price. Both approaches will require many adjustments. In fact course corrections are the way hit a distant targets successfully. No airplane sets its controls only once at hopes to land at its destination. Given wind variability, it could easily miss by a hundred miles.
Thinking we can set the right cap today and run on autopilot forever after is perhaps the greatest misconception in all of climate policy.
Yes. The negative externality of emissions is not the only market failure. Two other major failures are the under-rewarding of basic research and the externalities of land-use change. Consequently, we need a major increase in energy research funding and special policies for land use. There is no conflict between these and carbon pricing.
According to Weitzman, a global price embodies “a ‘countervailing force’ against narrow self interest by automatically incentivizing all negotiating parties to internalize the externality.” Someone who votes for a lower global price (to increase their emissions) knows that a lower price will cause all others to do the same. That knowledge is the “countervailing force.”
Conversely “it is very difficult to resolve the global warming externality problem by assigning quantity targets.” Each party profits from obtaining a lower target.
Before Copenhagen, the US tried hard to persuade India to commit to a cap. That cap might have been a little lower, or possibly even a little higher than it’s current emissions level. Either way, it would have been lower than the per-capita emission of the US in 1880 (not 1980). India had been rejecting this insensitive request for years.
After Copenhagen it offered and “intensity cap.” that limited its emissions-per-GDP growth through 2020 to exactly twice what the US Dept. of Energy had predicted they would be without such a commitment.
Accepting a carbon price would not limit India to any lower emission rate or intensity rate than the US. An equal price for the US and India, is fair on its face.
Had China accepted the caps proposed for it in 2000, ten years later it would have found itself paying $100 billion / year to foreign countries — the EU, the US or perhaps Russia. No one inside or outside of China predicted its emissions growth.
But with an equivalent carbon tax, it would have had to collect an extra $100 billion/year in tax, but it would have kept all of it. Caps are much riskier. It is better to give China flexibility to choose its pricing method.
No, because countries keep their carbon revenue. Consider India. Emissions are about 1.5t/capita. Assume a $30/t tax reduces that 20% to 1.2t/capita. India keeps all the tax revenue and can refund $36/person it per cap. The poor will come out ahead. There is no cost from the revenue. But there is a cost to the 0.3t/capita abatement. That cost average $30/2 = $15/t, or $0.45/person per year. With 1 billion people, that’s $0.45 billion. A Green-Fund transfer of that size would make the policy free to india. Currently the Green Fund is billed as $100 billion per year.
Those who agree to the price regime set the Green Fund generosity level. One proposal is to vote first on the Green-Fund generosity, G, then reach consensus on the carbon price, P. The trick is to link the G-F payments to both. Pay = a×G×P. To maximize the consensus P, countries will choose a moderate value of G that will offend neither rich nor poor countries.
Economics suggest leaving this up to the receiving country — green subsidies are less efficient than a carbon price. So if a stronger policy is needed, raise the price. But politics may dictate that green strings should be attached. Technology transfers should likely be part of the transfer as well according to Weitzman and Nordhaus.
It can’t. But the rule can easily allow flexibility. But first note, that the EU’s cap-and-trade scheme (ETS) frequently discusses adjusting the number of permits to keep the carbon price up to a reasonable level. If there were a prior agreement to do this, it would be easy to have a mechanical rule. Second, note that ETS only covers about half of emissions, and much of the rest (e.g., transportation) is covered by fossil fuel (carbon) taxes. Combination systems and hybrid schemes such as California’s cap with a floor price can do the job. In fact there need not even be any long-run bias towards a higher average price when using a cap.
Yes. In fact it would be possible to all countries to join in a globally linked cap-and-trade system and still meet their price commitment. It would simple be necessary for them to adjust the permit supply so that after a spell of low prices (say in a recession) there would be a compensating spell of high prices.