28 April 2010

The Carbon Price Paradox

Yesterday's column in the NYT by Thomas Friedman illustrates why efforts to put a price on carbon are not going to do much at all to stimulate energy technology innovation. Friedman writes:
After months of heroic negotiations, Senators John Kerry, Lindsey Graham and Joseph Lieberman had forged a bipartisan climate/energy/jobs bill that, while far from perfect, would have, for the first time, put a long-term fixed price on carbon — precisely the kind of price signal U.S. industry and consumers need to start really shifting the economy to clean-power innovations. . .

Without that price signal, you will never get sustained consumer demand for, or sustained private investment in, clean-power technologies. All you will get are hobbies. . .

I’d love to see the president come out, guns blazing with this message: “Yes, if we pass this energy legislation, a small price on carbon will likely show up on your gasoline or electricity bill. I’m not going to lie. But it is an investment that will pay off in so many ways. It will spur innovation in energy efficiency that will actually lower the total amount you pay for driving, heating or cooling. It will reduce carbon pollution in the air we breathe and make us healthier as a country. It will reduce the money we are sending to nations that crush democracy and promote intolerance. It will strengthen the dollar. It will make us more energy secure, environmentally secure and strategically secure. . . "
It is not clear what that "price on carbon" is in the legislation or how widely it would be applied, but for the purposes of discussion, let's just say that it starts at $15 per metric ton of carbon dioxide and is applied economy-wide.

That level of tax equates to about a $0.12 increase to the cost of gasoline (from Table 2 here). It is hard to see how a $15 carbon tax -- or even a $150 carbon tax -- is going to do much at all to change oil economics or stimulate transformational innovation. It will just make the costs of transportation more expensive.

What about electricity? A price on carbon would have its biggest effects on coal, to be sure, because of its high carbon intensity. The most common form of coal would see its price increase by about 30%. The most immediate effect would likely be to hasten a shift already underway from coal to natural gas. A $15 per ton carbon dioxide price would increase the price of natural gas by about 7%. Over the past year natural gas prices have fluctuated by more than 100%. Wind is already close to cost competitive with fossil electricity in many places. However, a 2009 report from European Wind Energy Association indicates that a 25 Euro carbon tax does not increase the costs of coal or gas above wind (Figure 0.7, here in PDF). And FYI, 25 Euro is about $33, which is a higher price than the "ceiling" in House Legislation. In any case, wind energy is already being expanded dramatically based on mandates, subsidies and through conventional energy economics.

Bottom line -- it is hard to see a carbon price leading to transformational innovation in the electricity sector. It will lead to some marginal changes and make energy a bit more expensive.

Paul Krugman understands the inevitable weakness of a low price on carbon:
For the most part, the message from these economists is a sort of climate version of St. Augustine’s famous prayer, “Give me chastity and continence, but not just now.” Thus Nordhaus’s DICE model says that the price of carbon emissions should eventually rise to more than $200 a ton, effectively more than quadrupling the cost of coal, but that most of that increase should come late this century, with a much more modest initial fee of around $30 a ton. Nordhaus calls this recommendation for a policy that builds gradually over a long period the “climate-policy ramp.”

On the other side are some more recent entrants to the field, who work with similar models but come to different conclusions. Most famously, Nicholas Stern, an economist at the London School of Economics, argued in 2006 for quick, aggressive action to limit emissions, which would most likely imply much higher carbon prices. This alternative position doesn’t appear to have a standard name, so let me call it the “climate-policy big bang.”. . .

Personally, I lean toward the big-bang view.
To put this in perspective, the "central case" of the Stern Review indicates a carbon price of $310 per ton (p. 6 in Dasgupta PDF)-- this is the "big bang" view. It is at a level more than 3 times the ceiling that has been discussed in recent legislation ($310/tonne C = $85/tonne CO2 ~ 3 times $27/tonne CO2, thanks JJ). It is not in the cards. Krugman doesn't explicitly discuss the carbon price implied by Stern.

The carbon price paradox is that any politically conceivable price on carbon can do little more than have a marginal effect on the modern energy economy. A price that would be high enough to induce transformational change is just not in the cards. Thus, carbon pricing alone cannot lead to a transformation of the energy economy.

So where does this leave the debate?

An increasing number of scholars have been coming to the view that a carbon tax coupled with direct investments in energy innovation offers a way past the carbon price paradox. For instance, a Brussel's based think tank intelligently laid out the essential argument late last year (PDF):
How can governments tackle climate change while maintaining reasonable growth, even in the short term? How can they turn on the green innovation machine? We find that 1. both public intervention and private initiative are indispensable: governments must initially redirect market forces towards cleaner energy before market forces can take over; 2. climate change policy should combine a carbon price with high initial clean-innovation R&D subsidies: the carbon price would need to be much higher if used alone; 3. policymakers must act now: delaying clean innovation policies results in
much higher costs; 4. developed countries must act as technological leaders in implementing new environmental policies and should smooth access to new clean technologies for less-developed countries.
Thomas Friedman seems to get this when he finishes up his hypothetical "guns blazing" speech by the president:
". . . It will make us more energy secure, environmentally secure and strategically secure. Sure, our opponents will scream ‘carbon tax!’ Well, what do you think you’re paying now to OPEC? The only difference between me and my opponents is that I want to keep any revenue we generate here to build American schools, American highways, American high-speed rail, American research labs and American economic strength. It’s just a little tick I have: I like to see our spending build our country. They don’t care. They are perfectly happy to see all the money you spend to fill your tank or heat your home go overseas, so we end up funding both sides in the war on terrorism — our military and their extremists."
The ironic thing about Friedman's impassioned speech is how little money in US climate legislation has been targeted towards energy innovation. While the Senate bill hasn't been released, I would be surprised if it had more than a small amount of investment in innovation in parallel with putting a price on carbon. (How much investment is needed to transform the energy economy? Think about US investments in innovation in health or the mititary, perhaps $30-$100 billion annually for decades.)

Many environmentalists are so desperate for action, any action, that they'll support anything that is proposed. However, the proposals that we've seen so far would do more to sustain the general form of the modern energy economy than transform it. Seeing leading environmental groups and otehrs calling for action on climate change put their energies behind such counter-productive policies may be the real carbon prcing paradox.

30 comments:

charlesahart said...

Yes, I agree direct investment in energy R&D is politically doable while an effective carbon tax is not. One could easily get a LFTR demo plant on line in 10 yrs for $1B/yr. LFTR has the best chance to compete with coal. Half the cost of current nuclear, safer with waste 100x less in volume and toxicity.

http://energyfromthorium.com/

Jesse Jenkins said...

Hey Roger, does the Stern paper report carbon prices in tons of CO2 or tons of carbon? Makes a factor of 3.67 difference as you know. I think the DICE model is tons of C not CO2.

(E.g. this line: "To put this in perspective, the "central case" of the Stern Review indicates a carbon price of $310 per ton (p. 6 in Dasgupta PDF)-- this is the "big bang" view. It is at a level more than 10 times the ceiling that has been discussed in recent legislation. It is not in the cards. Krugman doesn't explicitly discuss the carbon price implied by Stern.")

Well argued as usual,
Jesse

Roger Pielke, Jr. said...

-2-Jesse

The $310/tonne is C, equal to $85 tonne/CO2, Box 13.3 here:

http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/media/A/2/Chapter_13_Towards_a_Goal_for_Climate-Change_Policy.pdf

You are right that the 10 times needs to be 3! Will fix!

Thanks!

eric144 said...

What happened to cap and trade ?

Hopefully, this is going to be little more than a face saving exercise, because global warming is not exactly a vote winner, and the energy security stuff is fantasy, as is the tax to OPEC.

The reason why Anglo American oil companies drill in Saudi Arabia is because it is the cheapest location in the world, and it is an American client state.

The security issues are only for those who see Putin and Chavez as enemies of international capital.

"Many environmentalists are so desparate for action, any action, that they'll support anything that is proposed"

The political weight of environmentalists (and climate scientists) should be proportionate to their numbers, not the size of their current, highly inflated profile in the corporate media. In other words, they should be irrelevant.

We can all support anti pollution measures, almost no one will support anti Co2 legislation.

jae said...

An opinion from someone who thinks Friedman, Stern, et. al. are so far out in left field that they can't even see home plate. These leftists will never "get it." The world has moved beyond their comfortable pale.

The US Department of Energy was formed precisely to DECREASE OUR DEPENDENCE ON FOREIGN SOURCES OF ENERGY. It has failed miserably, like most governmental intitiatives. Rather than decreasing our reliance on foreign sources of energy, it has helped to BLOCK the development of our natural resources. And it has even followed exactly the R&D path mentioned by the dreamers cited above, spending millions, perhaps billions over the past 40 years, studying concepts that the liberal arts majors seem to think will lead to some magic way to get energy from the sun, waves, crops, wind, etc., when anyone who has taken Physics 101 knows that this is futile (as in prohibitively expensive), since the energy density is not there. Each generation seems to have to relearn this basic fact over again. Last time was the forlorn days of Jimmy Carter.

The government needs to stop being a whore for the "environmentalists" and blocking our investment in developing our natural resources. There is BIG MONEY to be made in more efficient use of energy and new ideas, and the free market will continue to bring about innovations, IF the government gets out of the way. The last thing we need is more wasteful governmental intervention. The government needs to "help" by getting out of the way. Most people are now noticing that the gov't has already made a terrible mistake by promoting "biofuels." It will undoubtedly cause more harm than good by interfering with other aspects of energy. We have WAY more government than we need or can afford, already! Unless this message will ring loud and clear in this fall's elections, we can kiss our economic system goodbye. It is simply crazy beyond belief to even be contemplating a "carbon tax" of any color in the current economic situation!!!!

IMHO

jgdes said...

"Many environmentalists are so desperate for action, any action, that they'll support anything that is proposed"

An assumption that jars with the reality of their ritual NIMBY opposition to siting green-tech anywhere - even the desert. Maybe we'll get away with offshore turbines if nobody gets too dewy eyed about the odd blind seagull hitting them.

eric144 said...

Roger

I totally support publicly, even internationally funded research on new energy technologies. Nuclear fusion is an obvious model. However, not under the banner of a carbon tax or decarbonisation, which are both associated with global warming. A world where human technologies are seamlessly integrated with nature in a sustainable manner is inevitable, because it is better.

Air and general environment quality in this region are incomparably better than forty years ago. It didn't need environmentalists to make that happen. Smog was cured by smokeless coal, then central heating, rivers cleaned by legislation and the movement of industry to cheaper labour markets. Local authorities employ environmental scientists.

Jae

Not many leftists start their own carbon credit agencies or have their salaries paid by $100 billion investment bankers, while ostensibly producing a report for the British government, like Lord Stern.

I see Comrade Gore has recently bought a nine million dollar, nine bathroom house in California, daringly situated at sea level. That's a looong walk from Tennessee. He left the White House with two million dollars total wealth. That is one enterprising commie you got there. If Trotsky was as smart as that, we'd all be singing the Internationale before work every morning.

Commissar Obama's Assistant Secretary of Energy, Cathy Zoi is alleged to have a huge financial stake in companies likely to profit from the Obama administration’s “green” policies.

http://pajamasmedia.com/blog/more-global-warming-profiteering-by-obama-energy-official/

jgdes said...

Jae
Trouble is that argument is out of date. There was a nice discussion here about the progression of solar energy (and wind energy).
http://europe.theoildrum.com/node/5573#comments_top
I learned quirte a few new things.

As costs continue to drop, so more are manufactured and costs plummet even more. Simple economics old boy. The energy density is a space argument but since everyone has a roof and it's usually sunny somewhere, it really is only a distribution issue. And there are quite a lot of big spaces that are sunny all day anyway. But I don't think people quite realize the huge distribution infrastructure needed for fossil fuels either: Just think how far it comes from and the processing it needs before it's useful - not to mention the military spending involved in propping up the petrodollar.

I don't think fossil fuels will run out but we are digging and drilling ever deeper in ever more hostile (weatherwise) places and the shales and heavy oils are probably not going to be cheap either. Ergo fossil fuels are always going to go up in price while renewables are dropping in price all the time so there must be a point where they meet. Seems it needn't be that far off. I've always felt that the government money would be better spent actually buying the green tech and using it rather than subsidizing it. No point hoping they won't spend the money on something worse - like another pointless war for example.

jgdes said...

eric144
Yes it did need environmentalists for many if not all of these improvements. It wasn't industry or magic free markets or government scintists, it was pressure due to general environmental awareness among a population and government who were better informed thanks to environmentalists and the media.

eric144 said...

jgdes

I deleted a sentence (for brevity)that said environmentalists have a role increasing awareness. However, dense smog that stopped all traffic, or fishless, poisoned rivers didn't need environmental activists to make them visible. They were serious public health issues.

I have met a lot of senior Green Party members (almost all academics) and was profoundly unimpressd by their contempt for the anything to do with 'the masses', safe in their reasonably well paid, middle class security

Last night, I finished the official biography of JRR Tolkien . He has had a profound effect on the consciousness of millions of young people over the last thirty years. He was an incredibly right wing thinker who believed in strict social divisions, had total contempt for democracy and anything to do with modern civilisation, particularly the brutish industrial masses, whom he parodied as Orcs.

Blake bemoaned the dark Satanic mills. He didn't realise that God was an evolutionist, and that life would eventually become vastly better for everyone, precisely because of those mills.

Sorry for the length, it was Tolkien's fault.

markbahner said...

"One could easily get a LFTR demo plant on line in 10 yrs for $1B/yr."

Here's what should be done:

1) Give GE, Westinghouse, and Areva/Siemens $1 billion each, for each to build a 100 MW LFTR demonstration plant.

2) If they build the 100 MW plants, and get 10,000 hours of operating time on it, pay them another $1 billion each for another 100 MW plant.

3) If those plants get 10,000 hours operation on them, and the first reactors are up to 20,000+ hours of operation, then fund any plant of 600 MW or more up to $3 billion. (Any additional cost would have to come from private sources.)

Four a total cost of $3 billion + $3 billion +$15 billion = 21 billion, we've got 6 plants of 100 MW, and 3 plants of 600+ MW.

After that, the manufacturers are on their own.

ida-russkie said...

I would not give those companies the contract to build a LFTR they would be cutting their own throats. There would be many companies able to build a LFTR with that kind of budget.

jgdes said...

eric144
Point taken. There are a lot of hidden agendas in this carbon issue, as at least one BBC man noticed here :
http://www.bbc.co.uk/blogs/ethicalman/2010/01/the_problem_with_hidden_agendas.html

Snob-based, anti-consumerists maybe but they do have a point - we are in a throwaway society and it's fair to question whether there is a better way - in a cradle-to-cradle sense:
http://www.mcdonough.com/cradle_to_cradle.htm

Despite the bad impression of a few hardliners, I'm not sure it is so easy to dismiss the hard work of mainstream environmentalists or tar them all with the same brush. A lot of what is achieved is invisible because they prevented pollutions happening in the first place. As we see in this current wave of green hypocrisy, everyone likes to pretend to care but few people actually get off their backsides and do something. Sure, later we can all pretend we had something to do with it, or that it happened naturally. But it's like a football fan basking in a victory that had nothing to with him.

Richard Tol said...

The Brueghel piece is easily misunderstood. In general, it is a bad idea to earmark tax revenue for any purpose (think California). It is worse to earmark the revenue of a carbon tax for climate policy. This is double regulation, and so violates the conditions for public policy laid out by Pigou (1927) and Tinbergen (1952). In popular parlance, a carbon tax levels the playing field for carbon and carbon-neutral energy. If you then use the carbon tax revenue to further stimulate carbon-neutral energy, the playing field is no longer level. You should level the playing field, and then stop digging.

The Brueghel paper argues as follows. There is an externality in emissions, a public good in research, and an interaction between the two. This implies that you should correct your carbon tax for the interaction effect -- for example by a subsidy on research on carbon-neutral energy. This subsidy should be funded from general tax revenue; and the size of the subsidy may be bigger or smaller than the revenue of the carbon tax.

kmye said...

Dr. Pielke: "While the Senate bill hasn't been released, I would be surprised if it had more than a small amount of investment in innovation in parallel with putting a price on carbon."

I'm think I'm terrified to ask this, but, if the majority of whatever revenues a lower carbon price raises don't go to energy R&D, or subsidies, or efficiency, where do you see them going? The general fund?

At least in my view, agreeing with you that a low carbon price by itself, or a $.15/gallon gas tax, or anything similar probably won't be enough to significantly alter behavior by itself (or have any meaningful impact on climate, thus), if the lion's share of the revenues from that low carbon pricing are just going to some slush fund, I think the line between inept, inefficient legislation and outright money-grubbing corruption begins to blur.

Roger Pielke, Jr. said...

-14-Richard

On hypothecation I suspect that you'll get different views from political scientists than economists.

To legitimize a price on carbon in the political process will likely require earmarking the funds raised to causes. This could be done in a crass political payoff sort of way (witness Waxman Markey in the US) or in a way that suggests short-term common interest benefits (witness US gasoline tax and the interstate highway system).

The exact details are not so important, however the money invested in clean energy should be proportional to the taxes raised.

So I have no problem justifying a carbon tax in terms of raising funds to invest in clean energy. In fact, I think it is probably politically necessary.

Raven said...

Reading the news about Greece this morning makes me think this discussion about a 'carbon tax' or and other government spending on CO2 is a waste of time.

All major industrial countries face massive deficits that will require tax increases and program cuts over the next 10-20 years. It is pretty safe to assume that CO2 will be on the bottom of the priority list when the crunch comes.

Fred said...

"Wind is already close to cost competitive with fossil electricity in many places."

Say what?

Is there any place in the world that wind power survives on its own, without a Feed-In Tariff Structure?

Richard Tol said...

-16- Roger

I appreciate the political reality. However, I would prefer to convince the relevant people that hypothecation adds real costs but fake benefits.

Roger Pielke, Jr. said...

-19-Richard

I'd much rather convince people that the taxes they are asked to pay are being invested proportionately into energy technology innovation that will result in great access, security, diversification and lower costs.

Harrywr2 said...

Roger,

Not to nitpick, but mine mouth prices of coal are extremely misleading to any discussion over energy policy.

A ton of 8,500 BTU/lb Gillette Wyoming Coal sells for $12/ton. 70 cents/Million BTU's.

A ton of 12,5000 BTU/lb Central Appalachian Coal sells for $70. $2.80/Million BTU's.

The difference in price is due to proximity to market. Coal is expensive to ship. Roughly 2 cents per mile overland.

So one needs to look at the 'delivered' price of coal to make rational energy choices.

One also has to look at the steady decline in productivity of the Central Appalachian mines.

Hence, the electric utilities of Georgia, Florida and South Carolina already see a 'price signal' in the coal markets and have their hands out for nuclear loan guarantees.

Page 17 of this report is interesting. US-China coal fired build rate.
http://www.netl.doe.gov/coal/refshelf/ncp.pdf

China's build rate has slowed dramatically since 2006, when they became a net importer of coal.

Roger Pielke, Jr. said...

-21-Harrywr2

No worries, nitpicks are welcomed ;-)

But it seems that a higher price for coal only strengthens the arguments in this post, no?

markbahner said...

12-idarusskie

"I would not give those companies the contract to build a LFTR they would be cutting their own throats. There would be many companies able to build a LFTR with that kind of budget."

Yes, I guess I'm assuming that the senior management at Westinghouse, GE and Arreva/Siemens understand that uranium-based fission reactors are a dead end. But that might be giving them too much credit.

Certainly the money could be offered as an open offer, available to any entity. Of course, the federal government might get very little for the $1 billion that they offer for each of the 100 MW plants. But it's not like the federal government hasn't sunk big money into technologies that didn't pan out or will never pan out. For example, the cost of ITER fusion device is estimated at more than $10 billion:

http://en.wikipedia.org/wiki/ITER

So simply shifting that money to fund the 100 MW LFTRs would entail little or no net increase. And the ITER is a joke, as a practical electrical energy source, whereas the 100 MW LFTRs would be legitimate (if small) electrical power plants.

Saint said...

Roger: You're right that the price of carbon would have to reach a politically unacceptable level to have an appreciable impact on emissions, especially in the transportation sector. We already have real world experience of this.

From 2004 to 2008, gasoline prices rose about $2.00 per gallon, which translates into a carbon price of roughly $225 per ton of CO2. How did that affect gasoline demand? Not much. It was about 6% lower in 2008 than in 2005. And surely you remember how politicians at the time howled and promised not to stand there but to do something. So a carbon tax that would return gasoline prices to these levels is politically suicidal.

But I think you overlook the way around this: mandates. For all the talk of Waxman-Markey being an economy-wide cap & trade bill, the truth is that the trading system would be layered on top of a national renewable portfolio standard, renewable fuel standards, lighting and equipment efficiency standards, low-carbon fuel standards . . . you get the idea. This is done for a reason: to hide the costs (and also to pay off certain constituencies, such as the renewable lobby).

The result is that the true costs of meeting the Waxman-Markey targets would not be reflected in the price of a ton of CO2 in the carbon market, but consumers nonetheless would be paying these costs through higher prices for cars, appliances, energy services, and so on. And to the extent the mandates distort the carbon market and make it less efficient, paying more than they would otherwise.

eric144 said...

Selected passages only, not promoting or recommending.


April 26 - 2010

Five myths about green energy


1. Solar and wind power are the greenest of them all.


Denmark, the poster child for wind energy boosters, more than doubled its production of wind energy between 1999 and 2007. Yet data from Energinet.dk, the operator of Denmark's natural gas and electricity grids, show that carbon dioxide emissions from electricity generation in 2007 were at about the same level as they were back in 1990, before the country began its frenzied construction of turbines. Denmark has done a good job of keeping its overall carbon dioxide emissions flat, but that is in large part because of near-zero population growth and exorbitant energy taxes, not wind energy. And through 2017, the Danes foresee no decrease in carbon dioxide emissions from electricity generation.


2. Going green will reduce our dependence on imports from unsavory regimes.


In the new green economy, batteries are not included. Neither are many of the "rare earth" elements that are essential ingredients in most alternative energy technologies. Instead of relying on the diversity of the global oil market -- about 20 countries each produce at least 1 million barrels of crude per day -- the United States will be increasingly reliant on just one supplier, China, for elements known as lanthanides. Lanthanum, neodymium, dysprosium and other rare earth elements are used in products from high-capacity batteries and hybrid-electric vehicles to wind turbines and oil refinery catalysts.

China controls between 95 and 100 percent of the global market in these elements. And the Chinese government is reducing its exports of lanthanides to ensure an adequate supply for its domestic manufacturers. Politicians love to demonize oil-exporting countries such as Saudi Arabia and Iran, but adopting the technologies needed to drastically cut U.S. oil consumption will dramatically increase America's dependence on China.


3. A green American economy will create green American jobs.


In a global market, American wind turbine manufacturers face the same problem as American shoe manufacturers: high domestic labor costs. If U.S. companies want to make turbines, they will have to compete with China, which not only controls the market for neodymium, a critical ingredient in turbine magnets, but has access to very cheap employees.

The Chinese have also signaled their willingness to lose money on solar panels in order to gain market share. China's share of the world's solar module business has grown from about 7 percent in 2005 to about 25 percent in 2009.



4. Electric cars will substantially reduce demand for oil.


Those who believe that Detroit unplugged the electric car are mistaken. Electric cars haven't been sidelined by a cabal to sell internal combustion engines or a lack of political will, but by physics and math. Gasoline contains about 80 times as much energy, by weight, as the best lithium-ion battery. Sure, the electric motor is more efficient than the internal combustion engine, but can we depend on batteries that are notoriously finicky, short-lived and take hours to recharge? Speaking of recharging, last June, the Government Accountability Office reported that about 40 percent of consumers do not have access to an outlet near their vehicle at home. The electric car is the next big thing -- and it always will be.

5. The United States lags behind other rich countries in going green.


Over the past three decades, the United States has improved its energy efficiency as much as or more than other developed countries.


http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042302220.html

W.E. Heasley said...

“Without that price signal, you will never get sustained consumer demand for, or sustained private investment in, clean-power technologies. All you will get are hobbies. .

I’d love to see the president come out, guns blazing with this message: “Yes, if we pass this energy legislation, a small price on carbon will likely show up on your gasoline or electricity bill.” -Thomas Friedman.

First of all, Thomas Friedman is no Milton Friedman.

The “price signal” is coercive behavior pricing. Tommy apparently left that part out. “Price signal” to Tommy is regulation and tax to remove a negative externality through, not currently and not readily available technology, nor economically available technology. Tommy’s “price signal” doesn’t exist in hard science nor social science. Tommy’s “price signal” is merely a notion.

Where does Tommy’s tax go and what about the players in CCX? Are we merely removing disposable income from households and enriching government revenue and/or certain CCX players?

In neoclassical economics all positive and negative externalities accrue to or diminish all households that own or use private property. Those households that own or use private property = you. This neoclassical economic statement is generally examining the root ownership of externalities.

This is where Pielke is exactly correct: “…..is going to do much at all to change oil economics or stimulate transformational innovation. It will just make the costs of transportation more expensive.”

What it appears Pielke is eluding to is: why not make the collection of households, which all externalities accrue to or diminish, those households that own or use private property (you)…..why not concentrate on us/you rather than diverting disposable income from you through tax and regulation, and enriching other exogenous entities, why not create incentives for the household (you).

When the household and its associated income has incentives rather than disincentives, the household is much more accommodating.

Harrywr2 said...

Roger Pielke, Jr. said... 22

-21-Harrywr2

"But it seems that a higher price for coal only strengthens the arguments in this post, no?"

I'm of the opinion that 'free markets' may accomplish the IPCC 'B1' emissions scenarios, current global coal consumption isn't sustainable as evidenced by skyrocketing coal prices regardless of how one feels about the environment. There may be a short term rise in consumption due to lack of nuclear manufacturing infrastructure.

Richard Tol said...

-20- Roger
That's what seems to be right thing to do. Scratch the surface, however, and you will find that there are much better ways to spend this money.

Hypothecation is a fancy form of populism, really.

Roger Pielke, Jr. said...

-28-Richard

Perhaps. But here in the US hypothecation abounds, and I assume that is the case pretty much everywhere taxes are collected by governments.

On my paycheck I have taxes for social security for medical insurance (Medicare), and when I buy gas I pay for federal highway upkeep, and when I pay my local property taxes they support my local schools, and the sales tax in Boulder has earmarks for open space, and all sorts of things.

So hypothecation is here to stay, the question is how to make best use of it.

markbahner said...

"In popular parlance, a carbon tax levels the playing field for carbon and carbon-neutral energy."

But as Roger points out, no politically acceptable carbon tax will "level the playing field for carbon and carbon-neutral energy," because fossil fuels are so much less costly than carbon-neutral energy.

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