The Indian government's decision to partially rescind subsidies for petroleum, diesel and kerosene, and the associated public reaction provides us with a natural policy experiment to see how the Indian public might respond to a high price on carbon (see the news report above for how that experiment turns out).
To understand this more precisely we need to convert the governments action on subsidies into an equivalent carbon price. Here is what the BBC reports on the impact of the partial removal of subsidies on fuel prices:
The fuel price rise followed the government's decision last month to scrap its subsidy of petrol prices in an effort to cut the budget deficit, which is forecast to hit 5.5% of GDP by 2010-11.There are 0.002322 tonnes of carbon dioxide per liter of gasoline, kerosene or petroleum (there are small differences, but irrelevant for present purposes, sources: EIA, Galiana and Green, 2009).
Allowing the price of petrol to be decided by the market has added about 3.5 rupees (£0.05; $0.08) to the price of a litre of petrol, a rise of 6.7%.
Diesel prices will be increased by 5% or 2 rupees a litre, although not immediately.
And kerosene, which is used for cooking by tens of millions of poor Indians, went up by 33% (3 rupees per litre) in the first such increase since 2002.
From the BBC article we can calculate the prices of petrol, kerosene and diesel at 52, 9 and 40 rupees per liter respectively. The current rupee to dollar conversion is about 47 per dollar.
Thus, the carbon-dioxide-tax-equivalent of the India government's decision to partially remove fuel subsidies is abouyt $18 per tonne for diesel, $27 for kerosene and $32 for petroleum. (That is, a 3.5 rupee increase is equivalent to ~1,500 rupee per tonne carbon dioxide tax, or about $32).
Who thinks that a high price on carbon (such as above $20 per tonne) -- implemented via whatever mechanism -- is in the cards in India (or anywhere really)? Climate policy must begin by recognizing that a fundamental boundary condition of policy design is that energy prices cannot be made much higher. In fact, public support is far more likely with policies that reduce energy costs.
I am of course fully aware of and sympathetic to academic arguments about the importance of externalities, subsidies and incentives. I am also aware of political realities. When academic arguments confront political realities, guess what wins? If we are to accelerate decarbonization, then making clean energy cheaper has to be a top priority.
This of course is why India has quietly placed a carbon tax on coal. Yes, you read that right.
“This will give 25 billion rupees ($535 million) this year alone,” Environment Minister Jairam Ramesh said in Mumbai, calling it “a carbon tax that will be used for clean energy.”Why aren't there protests in India about this carbon tax? Simple, the tax is 50 rupees (about $1) per tonne of coal, which is about equivalent to about a $0.35 per tonne carbon dioxide tax. Such a tax is not politically contentious, and that is of course the point. To sum up:
- High carbon price = public protest and opposition
- Low carbon price = money to invest in clean energy + public acceptance
14 comments:
Yes, but there was never a plan to seriously decrease India's Co2. Too many Indians would lose what makes life bearable, as we see above.
Would there be the same reaction in more placid countries ?
In Britain, Co2 is going to be cut by 80% despite clear polling that only a quarter believe in AGW. No one has complained.
Will this really happen ? If 80% is a fantasy number (no doubt it is), why are they using it ? Is it to encourage other countries to do the same now that the great Mother of Parliaments has voted to unselfishly sacrifice the poor of Great Britain to the cause of planetary rescue ?
The BBC reports today that 69 graduates (all of whom have paid for their education) are chasing every job and it will get worse (probably much worse). No protests.
http://news.bbc.co.uk/1/hi/education/10506798.stm
P.S.
That may have sounded like I was disagreeing with the principle of low increases to fund new energy projects being more viable. I wasn't. The BBC graduate report pushed my mind in that direction. It isn't a direct parallel by any means.
However, I believe the days of major public reactions / protests are probably behind us. Notwithstanding some great issue or event.
Mr. Pielke,
I would like to point the problems also inherent in a 'throw money at it' approach to alternative energy.
I do not have anything against alternative energy, but I do have a lot against trying 'buy a stairway to (CO2) heaven'.
My view is as follows (based on my personal experience in the semiconductor industry and discussions with my fellows who shifted over into solar)
1) The present average solar electricity generation plant operates at roughly 10% efficiency. This is not the efficiency of the individual solar panels - which are higher - but represents the net efficiency once the full impact of aggregation, phase transformation, etc is accomplished.
2) Solar technology is improving. 20% efficiency plants are unquestionably achievable, 30% is possible but less guaranteed.
3) Forcing large amounts of money into building solar generation plants now - as Obama has stated for two companies (with names starting AB), the net effect is to spend billions building primitive solar power plants
As the technological advances progress - what is the likelihood that these old plants will be torn down and replaced? What does this bode for the US (and Europe) which have spent billions on 10% efficiency solar plants vs. other nations which build 20% or 30% efficiency plants in 5 or 10 years?
There is a definite role for government to assist alternative energy development - but an incoherent and goal-less plan consisting of throwing billions of dollars around today is not an optimal role.
Roger,
From the last two bullet points of your post, I infer your implicit support for the second bullet as a viable public policy alternative. I understand that as an honest broker you do not get into the mud with policy advocates, secular or scientific, but still there seems to be a hint that you believe a certain approach may be more viable and more effective than another approach. Say a low carbon price to produce revenues for clean energy research, efficiency programs, and public education programs.
In your own backyard, such a movement raised its head and was passed by (sorry for no hyperlink, the blog does not support those):
http://www.cleanenergyprogress.org/Clean_Energy_Progress/Statute_files/Clean%20Energy%20Progress%20statute%20-%20not%20formatted.pdf
Any thoughts?
Although this is an interesting calibration point, most people respond to rapid changes in the price, not to the price alone.
Roger,
"a) High carbon price = public protest and opposition
b) Low carbon price = money to invest in clean energy + public acceptance"
Do you know anyone who disputes this hypothesis/observation/fact?
Or is it the case that "warmers" don't believe that b will actually work to decarbonize the planet?
Or is it that some simply want all the money from a?
Money is fungible.
Remember the "Gore Tax" in 1996 that was going to bring the internet to rural areas? Now, we learn Washington needs more money (part of a new stimulus bill) to bring the internet to rural America. See: http://content.usatoday.com/communities/theoval/post/2010/07/obama-announces-rural-internet-expansion/1
I oppose ANY new taxes because, like the Gore Tax, they are rarely used for the stated purpose.
What you're saying is that *reductions* in fuel subsidies have the same dimensions and impact as carbon taxes, but also tend to reduce market distortions.
The issue appears to be that the scope of the change was too rapid, not allowing for adjustments in the market.
Given the issues with complex gov't interventions in market (and the difficulties in keeping artificial market like carbon offsets honest) -- it sounds like a multiyear phase out of fuel subsidies would have the same impact without the "central planning" and corruption issues.
Thoughts?
All; Nigeria would have riots over a difference of few kobo in the subsidy. A kobo is worth 0.01 cents.
From personal experience there, the Nigerian government would have been better off doing it all at once and having one riot.
Staging it over several price raises only generated several riots; one for each price rise.
And they still only have the price of fuel at about $2 per gallon, which is the cost to buy it on the world market.
Roger could you clarify what you mean by 'low' and 'high' wrt to a carbon price?
As you may know both British Columbia and Alberta have a carbon price of 15$/tCO2e in place and the sky hasn't fallen; and the B.C. Liberals won an election after it was enacted.
Isn't there a third option:
medium carbon price + public investment in clean energy and efficiency = public acceptance?
Sorry for the delay in responding on this thread ...
-4-Don Monroe
Yes. The lesson is of course start small.
-7-zoo
Yes, the policy implications are very different. Phasing out subsidies makes good sense.
-9-Marlowe Johnson
"high" and "low" are very contextual. A $1.00 gas tax in Europe might be low, whereas in the US it might be astronomical. The factor that matters in political acceptability.
I argue for the highest price on carbon that politics allows. In India it seems that it will be considerably lower than $20/tonne.
-3-Sam
You don't have the concept of "honest broker" right.
I do indeed get down in the mud and am a passionate policy advocate ;-)
Roger,
we're in fierce agreement on the political acceptability trumping theoretical arguments As James Buchanan noted in his Nobel acceptance speech 25 years ago:
"Economists should cease proffering policy advice as if they were employed by a benevolent despot, and they should look to the structure within which political decisions are made."
The question then is what is politically acceptable in the U.S. at the moment. As I've suggested before, it is misleading to talk about simple majorities believing in climate change when what really matters is how much bipartisan support is their for action. As you well know, belief in climate change and support for more progressive energy policies is heavily skewed towards democrats and independents. For whatever reason Republicans have chosen to hang both issues around the necks of Jimmy Carter (think energy efficiency and what Reagan did to the solar panels at the White House upon taking office) and Al Gore.
Why do you think that is, especially considering that this pattern is far less pronounced in other western democracies?
Roger --
I disagree that the lesson is 'big price' vs. 'small price'. Instead, I think the lesson is in the transparency of the price. As you said "India has quietly placed a carbon tax on coal". I would say the key phrase here is 'quietly'. Unlike petrol, where taxes are directly and transparently related to consumer prices, a tax on coal is not as closely related to consumer prices on electricity.
In the US, enviro groups jumped to cap and trade because they thought it was a way to disguise price rises - as opposed to a straight carbon tax. But, Republican messaging (ie 'cap and tax') has been successful in convincing the public that a cap and trade will increase prices. So what has become the preferred choice for clean energy policy? Old-style command and control. This will inevitably raise prices, but those price rises won't have the same fingerprints as a cap and trade. It is a good show of how economics and politics don't mix.
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