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Rethinking the Role of Carbon Prices in Climate Change Policy

Why Carbon Revenues Might Be More Important Than Carbon Prices

I recently had an interesting conversation on Twitter and via email that got to the heart of why I hold what many consider an unorthodox view on the role of a carbon price in climate policy.  

While most academic economists and conventional climate policy analysts hold that addressing climate change is first and foremost about putting “the right price” on carbon pollution via a carbon tax or emissions cap and trade program, I have long advocated a somewhat alternative view.  

Establishing a price on carbon is important and can greatly improve the economic efficiency of climate mitigation efforts. On this point, the economists are correct. 

But it is also important for climate policy makers to recognize the pervasive constraints placed on efforts to price carbon in any political economy the world over. In practice, these political economy constraints are binding long before we get close to what most economists consider “the right price” on carbon (and as we’ll show below, there is considerable debate about what that “right price” is).

These political constraints should prompt policy makers, academic researchers (including energy economists!), and climate advocates to rethink the role of carbon pricing in climate mitigation. And given the failure of climate policy to date to drive the rapid decarbonization needed to confront climate change, it is long past time for some fresh thinking.

I hope recounting this conversation will shed light on my contention and prompt continued discussion here at TheEnergyCollective.com (TEC). This is a long essay, and I hope you’ll stick with me. Feel free to start with the summary at the end of this post and then return for the full argument… 

Technological change at the heart of climate mitigation efforts

My interlocutors last week included Carleton University doctoral candidate Suzy Waldman, energy consultant and columnist Eli Hinckley, and carbon footprint and data visualization guru Lindsay Wilson.

Our conversation began when Suzy tweeted the following:

Suzy was quoting from a letter written by CU-Boulder political scientist Roger Pielke, Jr. in response to a Financial Times editorial urging China to adopt a carbon cap and trade program. Here is an excerpted version of Roger’s letter:

Carbon emissions are the product of (a) GDP growth and (b) technologies of energy consumption and production. … Thus, a “carbon cap” actually means that a government is committing to either a cessation of economic growth or to the systematic advancement of technological innovation in energy systems on a predictable schedule, such that economic growth is not constrained. Because halting economic growth is not an option, in China or anywhere else, and technological innovation does not occur via fiat, there is in practice no such thing as a “carbon cap.”

Where carbon caps have been attempted, clever legislators have used gimmicks such as carbon offsets or set caps unrealistically high so that negative effects on GDP do not result and the unpredictability of energy innovation does not become an issue.

It should thus not come as a surprise that carbon caps have not led to emissions reductions or even limitations anywhere. China will be no different. The sooner that we realize that advances in technology are what will reduce emissions, not arbitrary targets and timetables for reductions, the sooner we can focus our attention on the serious business of energy innovation.

That global climate mitigation at its core is about sparking a technological transformation in the way the world makes and uses energy should be non-controversial. 

What drives innovation?

Eli, always incisive, then cut to the core question: 

That’s when I chimed into the conversation:

I then referenced three excellent books (and one report edited by myself) that each drive home this key bit of historical evidence:

Indeed, from railroads and interchangeable parts to nuclear, solar, and wind power and from microchips and the Internet to blockbuster drugs and agricultural innovations, the “invisible hand of government” is often just as important as the invisible hand of the market in driving game-changing innovation throughout American history.

(Note: I make this case at greater length in a video and presentation here.)

While getting price signals right can be an important spur for the adoption of available and cost-competitive technologies, looking back at the history of American innovation tells us that something besides price signals has been responsible for the kind of dramatic innovation and technological transformation needed to address climate change: a proactive public sector, most-often acting as both direct investor in early-stage research and as demanding customer of emerging technologies. 

Investing in innovation in an Age of Austerity

While granting my point, Eli once again cut straight to the heart of the matter: 

Indeed, in an era of budget cuts, deficits, and declining public investments in energy innovation, it is certainly fair to ask: can a public-sector led effort to catalyze energy innovation and advanced technology adoption really succeed?

I’ll let the Twitter conversation play out for a minute here…

We’ll come back to the solution that problem in a moment…

How binding are political constraints on carbon pricing?

First, I must note that I didn’t choose 10 cents per gallon in that tweet above arbitrarily.

It would take a carbon price of about $10 per metric ton of CO2 to increase the price of gasoline at the pump by about 10 cents per gallon.

The same carbon price would increase the price of electricity produced by a coal-fired power plant by about $10 per megawatt-hour (MWh), or about 1 cent per kilowatt-hour (kWh), in round terms. The price of electricity from a natural gas-fired power plant would rise about $5 per MWh or half a cent per kWh. For comparison, average wholesale electricity prices in the United States range from about $30 to $50 per MWh and retail prices (the prices you and I pay on our monthly electricity bill) range from about 8 to 16 cents per kWh in the contiguous U.S. states.

It should be pretty clear that an increase of 10 cents per gallon of gasoline at the pump is unlikely to drive dramatic changes in consumer behavior or spur corporate investments in advanced vehicle technologies. Nor will a $5 to $10 per MWh increase in the cost of fossil fueled electricity transform the electric power sector. The value of the production tax credit (PTC) responsible for the growth of wind and geothermal energy in the United States, the most cost-competitive non-hydro renewable energy technologies available today, is now worth $23 per MWh for comparison.

Despite the modest impacts of a $10 per ton carbon price, given political opposition to raising energy prices here in the United States and indeed across the globe, a carbon price of that order of magnitude may be the best we can hope for.

Political scientists and observers of climate policy debates have long observed that while citizens of various nations express varying degrees of concern about climate change and a willingness to pay to reduce the risks of unchecked global warming, that willingness has its limits. While that limit may vary from nation to nation (and at different times within a given nation), these political economy constraints are an ever-present feature of climate policy debates the world-over. These constraints are so pervasive, Roger Pielke Jr. dubs their impact the “Iron Law of Climate Policy,” in his book The Climate Fix

So how binding is this Iron Law?

Evan Johnson and Greg Nemet of the University of Wisconsin-Madison surveyed 27 studies estimating citizens’ willingness to pay (WTP) for climate mitigation, measured as additional annual costs per household. Despite a diversity of methods in the underlying studies, after excluding outliers, Johnson and Nemet find that a majority of studies estimate a WTP that falls within the range of $51-$470 in household cost per year (in constant 2012 dollars), with a mean value of $180 and median of $145. (How much would you be willing to pay?)

In the midst of the national debate over climate change legislation in the United States in 2010, Ana Villar and John Krosnik also surveyed voters’ preferences in three politically diverse U.S. states: Florida, Maine, and Massachusetts. Their results perfectly illustrate the Iron Law in action: while majorities of voters in all three states supported mitigation policies if the policy cost less than $100 in extra taxes per household per year, support dropped by 9-10 percentage points to a slim majority in each state as this expected cost increased to $150 per household. Support fell further as the estimated cost increased to $200 per household, dropping below majority levels in Florida and Maine, while retaining a sim majority in Massachusetts (see table below).

Willingness to Pay for Climate Mitigation in Florida, Maine, and Massachusetts
(Villar and Krosnik, 2010)

Willingness to Pay for Climate Mitigation in Florida, Maine, and Massachusetts (Villar and Krosnik, 2010) 

Villar and Krosnik’s results are broadly consistent with the mean and median WTP estimates from Johnson and Nemet’s literature survey.

Both studies indicate that a majority of citizens are likely to oppose climate mitigation policies with expected annual household costs on the order of $150-200 per household.

So what does that mean for carbon pricing efforts?

Annual CO2 emissions per household vary in the United States depending on household wealth and location. For a forthcoming paper, I’ve estimated that average annual household CO2 emissions in the United States range from around 14 to 67 24 to 44 metric tons across income deciles and 26 to 39 25 to 48 metric tons for average households across each state and the District of Columbia. The mean U.S. household emits about 31 34 metric tons of CO2 per year. [Note: state-by-state household emissions figures updated July 31st to reflect revision in paper methodology to reflect varying average household sizes in each state. Related values updated throughout post with original values noted with strike-through.]

Assuming that citizens’ willingness to pay is exhausted after an additional cost of about $150-200 per household per year, this implies that the Iron Law begins to bind and political opposition from citizens will mount quickly for policies imposing carbon taxes as they move upwards in the range of $2 to $15 $3 to $8 per metric ton of CO2.

After considering the Iron Law of Climate Policy, pushing for a $10 per ton carbon price in the United States may be the best we can hope for. A modest $5 per ton price may be more realistic.

Getting the right price on carbon, or the price we can get?

If the political economy constraints bind the feasible range of carbon prices in the neighborhood of $5 to $15 below $10 per ton, what are the implications for the efficiacy and efficiency of carbon pricing efforts?

If dumping CO2 into the atmosphere is free, then when businesses and consumers buy products and services that emit CO2, they don’t have to pay any price associated with the climate-related damages caused by carbon emissions. These costs are thus said to be “external” to the market transactions, and that leads to distortions in our economic behavior. 

The aim of carbon pricing policies is to force businesses and consumers to “internalize” the costs of these climate-related damages by pricing them into the cost of a gallon of fuel or a ton of coal etc. That forces economic actors to consider the full costs of climate pollution when making economic decisions, and brings the economy back to its optimal efficiency. 

With the right carbon price in place, consumers and businesses would adjust their behavior accordingly, and they would only purchase goods or services that result in CO2 emissions when the economic benefits of those goods or services exceeds their full cost including the associated climate damages. Consumers would also have new incentives to pursue behaviors that emit less CO2 yet deliver the same benefits and businesses and entrepreneurs would be rewarded for inventing and providing such alternatives.

Economists are so faithful in the power of prices that many argue that if we can fully internalize the cost of carbon emissions, that would be pretty much all we’d need to do to confront climate change. For an archtypal example of this argument, listen to the NPR Planet Money team’s recent chat with MIT economists Henry Jacoby and John Rielly as they outline their “one page plan to fix global warming.” 

Yet for this kind of carbon pricing policy to work as designed, the price imposed by the carbon tax must exactly equal the estimated economic damages imposed by a ton of CO2 emissions, or the so-called “social cost of carbon.”

Estimating this cost is notoriously tricky. It depends on estimating both the expected damages caused by climate change over time, as well as the contribution of a ton of CO2 emissions to those damages, both of which involve inherent uncertainties.

Additionally, as climate damages will occur over long periods of time — centuries even — and costs must be paid up front in the form of a carbon price, those damages must be discounted to arrive at a present value. This introduces another factor that can lead to dramatically different estimates of the cost of carbon: the social discount rate used to equate damages far off in the future with the price we should pay today. The rate we choose is essentially an answer to the question, How much should we value the welfare of future lives relative to those living today? Your choice of discount rate is thus ultimately a matter of irresolvable philosophical and ethical preference.

For my forthcoming paper, I surveyed a range of widely-cited estimates of the social cost of carbon. The graph below illustrate how the estimates differ depending on their choice of discount rate. For a mid-range value, the Obama Administration’s latest estimate of the social cost of carbon using a 3 percent discount rate is $36.54 per metric ton of CO2 in 2010, rising to $78.62 by 2050 (in 2012 real dollars). 

Estimates of the Social Cost of Carbon (from Jesse Jenkins, forthcoming)
Estimates of the Social Cost of Carbon (from Jesse Jenkins, forthcoming)
Values in 2012 US$ per ton CO2

While estimates of the social cost of carbon range by an order of magnitude, one thing is clear: it is all but certain that the external damages caused by CO2 emissions oustrip citizens’ willingness to pay for climate mitigation. 

While the Iron Law likely binds carbon prices in the U.S. to somewhere below $10 per ton CO2, estimates of the social cost of carbon range from $10-100 per ton CO2 today, and prices are supposed to rise steadily over time, to as high as $50-800 per ton by 2050.

For me, the implication is unshakeable: when policy makers try to implement a price on carbon via a carbon tax or cap and trade program, we don’t end up with “the right price” on carbon that economists model when they argue for the efficiency of carbon pricing.

Either policy makers ambitions outstrip citizens’ willingness to pay and policy proposals fail (as one could easily argue was the case for the 2009-2010 effort to enact a federal cap and trade policy in the United States), or policy makers work to make the carbon price comform with the Iron Law and the policy has a chance of succeeding. 

In short: when we try to price carbon, we don’t get the right price on carbon, we get the price we can get.

When carbon pricing policies meet political constraints: implications for economic efficiency and environmental efficacy

When it comes to the economic efficiency and environmental efficacy of carbon pricing policies, the implications of a politically-constrained carbon price are pretty clear. 

A carbon price only eliminates the external damages associated with CO2 emissions when the price exactly equals the social cost of carbon. If the carbon tax falls well below this optimal level, much of the social cost of CO2 emissions will remain “externalized” or unpriced in market transactions. As a result, market distortions will persists and the economy will continue to emit far too much CO2.

The graphic below illustrates this dynamic. The optimal carbon tax T* below is sufficient to equate the marginal private cost (MPC) of a given good or service that emits CO2 with the marginal social cost (MSC) of that good or service, including the full climate-related social costs. The marginal cost of the good or service rises to the red dashed line. Looking where that line intersects with the marginal benefit of consuming that good or service, in light blue, and we see that the optimal tax will reduce consumption of that good from Q0 to Q*, fully eliminating the climate-related social costs. This is the textbook picture of carbon pricing policies. 

Yet if what we end up with is the constrained carbon tax TC, the price of the good or service will rise only to the blue line, far short of the full marginal social cost. As such, consumption of the good or service will only fall to QC, and as a result, a considerable amount of climate-related social costs remain (the shaded red area known to economists as a “deadweight loss“).

Political Constrained Carbon Price and Remaining Climate-related Social Costs

Political Constrained Carbon Price and Remaining Climate-related Social Costs
(from Jesse Jenkins, forthcoming)


That’s a rather long-winded way of saying: a politically-constrained carbon price won’t work as advertised. If it falls short of the true social cost of carbon, it will fail to effectively reduce CO2 emissions or mitigate climate change.

Can carbon revenues succeed where carbon pricing falls short?

I hope by now you are beginning to understand why I urge climate policy makers and advocates to think creatively about the role of carbon pricing.

While it would be wonderful to snap our fingers and establish the perfect price on carbon, there’s no forseeable way that’s going to happen. If what most energy and environmental economists consider Plan A is off the table, then perhaps it’s (long past?) time to consider some possible Plan Bs.

That brings us back to my Twitter conversation. As I urged Eli and Suzy, perhaps its time to start thinking not just about the price signals we can send by taxing carbon, but also about the revenues we can raise.

As I said earlier, a $10 per ton tax on carbon is unlikely to spur anything close to the kind of deep decarbonization of the economy needed to address climate risks. At the same time, it could raise quite a bit of money! As I put it on Twitter:

The United States currently emits about 5 billion metric tons of CO2 annually. Even a modest carbon price of $5 to $15 $10 per ton would therefore raise on the order of $25 to $75 $50 billion annually in new federal revenues. That would be more than enough to fund the scale of proactive public investment responsible for the blockbuster American innovations discussed previously.

In short, the carbon revenues may be more than enough to make up for the short-fall of a politically-constrained carbon price and get the climate job done.

In fact, generating much-needed revenues to fund a well-structured and well-funded effort to catalyze advanced energy-innovation may rightly be considered the primary purpose of a carbon pricing policy. The added economic efficiency and mitigation benefits that come with internalizing some portion of the climate-related social cost of carbon is an added benefit, as I argued in the following exchange…

Keep in mind that when I talk about “innovation investment,” I am by no means referring solely to expanded R&D funding.

While a wide variety of energy and climate experts, from the President’s Council of Advisors on Science and Technology to the industry titans behind the American Energy Innovation Council all advocate roughly tripling federal energy R&D funding over time, a goal I heartily support, that is only half the historic recipe for unlocking American innovation. The government must also help create demanding markets for emerging advanced energy technologies with well-structured incentives that drive market demand and continual innovation and improvement.

(For more on my vision for a suite of interconnected advanced energy innovation policies, see my May 22, 2012 testimony before the United States Senate Energy and Natural Resources Committee.)

Rethinking the carbon pricing “double dividend” 

At the end of the day, Eli, Suzy and I all agreed that it would obviously be ideal to establish a carbon price that fully internalized the social cost of carbon. But we also all recognized that such a policy was not forthcoming.

In the face of political economy constraints on carbon pricing — the shackles of Pielke’s “Iron Law” — it is time for policy makers, academic researchers, and climate advocates to get creative about re-envisioning the role of carbon pricing in climate mitigation efforts.

Perhaps we will start viewing the revenues potentially raised by carbon pricing policies as just as important as the price signal they establish and think proactively about how best to structure the kinds of public investments that could make up for the short-falls of a constrained carbon price.

As I noted on Twitter, perhaps we may even come to view the use of carbon revenues for these purposes as an important “double dividend” in return for carbon pricing efforts.

After viewing our Twitter conversation, Lindsay Wilson extended the discussion via email. Responding to my use of the “double dividend” term to describe using carbon revenues to fund further energy innovation and climate mitigation efforts, Lindsay fairly noted that my use of the term was “pretty much completely backwards from the use of the term ‘double dividend’ in the economics literature.”

As Lindsay explains, the economist’s argument is as follows:

“By earmarking revenue for energy purposes you increase economic distortions, reducing the efficiency benefits of the environmental tax. That is the major reason most economists prefer a ‘revenue neutral’ carbon tax that recycles revenues by offsetting other distortionary taxes, like payroll or income taxes. You can then make a strong argument that such a carbon tax would be pro-growth, as the benefits of reducing income tax distortions are likely to exceed the tax interaction effect of the carbon tax.”

I replied to Lindsay by explaining that my use of the term “double dividend” in this context was a conscious effort to co-opt to conventional use of the term.

The concept of a double dividend for carbon taxation is that you want to use the revenues of the tax to offset existing economic distortions (thus earning the double dividend) rather than to introduce new distortions into the market by say subsidizing your favorite economic sectors or constituents.
 
For an economist who (a) assumes we know the exact right price for carbon such to perfectly equate marginal private costs and marginal social costs and (b) who thinks we will fully internalized said price via a carbon tax/cap, their favored use of the tax revenues is to offset existing taxes that introduce distortions into the economy, e.g. taxes on labor, capital, etc. 
 
That said, IF you think that political constraints prevent pretty much any political economy from fully internalizing the environmental externalities associated with carbon pollution — and I think the real world track record and evidence presented above supports that theory pretty well — THEN the constrained carbon price we can actually get will not fully internalize the climate externality (as discussed above). Substantial external costs will remain due to fossil fuel combustion and CO2 emissions. These external costs are distortionary on the economy as well (e.g. cause deadweight loss). 
 
Thus, if political economy constraints bind carbon prices well below the optimal level, there may be another double dividend out there to earn. If you want to further improve the economic efficiency of the constrained carbon price (earning a double dividend) AND you want to increase the environmental efficacy of the policy (further reducing CO2 emissions), then I’d say you have two very legitimate uses for the revenues:
  1. Subsidize low/zero-carbon energy technologies that are currently too expensive to be deployed under the politically constrained carbon price; and
  2. Fund well-structured R&D, demonstration, and deployment policies that drive down the real, unsubsidized costs of low/zero-carbon energy technologies such that they can be deployed at the politically constrained carbon price.
Both efforts help reduce the remaining climate-related externality, improving the efficiency of the economy. Note also that most economists would agree that there are remaining distortionary market failures all throughout the innovation process, so the second use of funds may even earn you a triple dividend, helping address those innovation-related market failures at the same time.
Like I said: time to think creatively about the role of carbon pricing!
 
Why carbon revenues may be more important than carbon prices

In summary:
  • The history of American innovation points to the critical role of public (e.g. government) investment in advanced technologies, working both as direct investor in cutting-edge research and as demanding early customer for emerging technologies, from interchangeable parts and railroads to microchips, jet engines, nuclear, solar and wind power, and the Internet.
  • Unlocking the kind of advanced energy innovation needed to tackle climate change will almost certainly require a similar role for the government. Yet the current Age of Austerity (and, to be fair, a resurgance of anti-government conservativism) constrains the ability of government to perform this critical role, undermining climate mitigation efforts.
  • Most economists argue that putting the right price on carbon, through either a carbon tax or cap and trade program, can succeed at reducing CO2 emissions and mitigating climate risks without any direct government intervention. To work as advertised, however, the carbon price must internalize the full social cost of carbon emissions. 
  • Citizens are willing to pay to reduce climate risks, but that willingness is limited, leading to pervasive political economy constraints on carbon pricing efforts (what Roger Pielke Jr. calls the Iron Law of Climate Policy). In the U.S., the Iron Law may bind a politically viable carbon price to as low as $5-15 at or below $10 per ton of CO2. In contrast, estimates of the social cost of carbon range from $10 to $100 per ton CO2 today rising steadily over time to as high as $50-800 per ton by 2050.
  • A politically-constrained carbon price won’t work as advertised. A $5-15 $5 to $10 per ton carbon price will fall far short of internalizing the full social cost of carbon, failing to sufficiently reduce CO2 emissions or mitigate climate change.
  • At the same time, establishing such a price could raise between $25 and $75 $50 billion annually in new carbon revenues. That would be more than enough to overcome the limits of the Age of Austery and fund the scale of proactive public investment responsible for the blockbuster American innovations discussed previously.
  • If political economy constraints bind carbon prices well below the optimal level, policy makers may be able to earn an economic and environmental “double dividend” by putting carbon revenues to use to reduce the deadweight losses associated with the remaining, un-internalized social cost of carbon. There are two very legitimate uses of these revenues: 1) Subsidizing low/zero-carbon energy technologies that are currently too expensive to be deployed under the politically constrained carbon price; and 2) Funding well-structured R&D, demonstration, and deployment policies that drive down the real, unsubsidized costs of low/zero-carbon energy technologies such that they can be deployed at the politically constrained carbon price.
  • At the end of the day, thinking creatively about how to design effective climate policies despite pervasive political economy constraints on carbon pricing may require us to view carbon revenue as just as important, if not more so, than the price signal established by a politically constrained carbon price.
Thanks for reading, and please share your thoughts in the comments below.
Jesse Jenkins's picture

Thank Jesse for the Post!

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Robert Wilson's picture
Robert Wilson on July 29, 2013

Hi Jesse

Interesting perspective as always.

The obvious flaw in your argument is that no matter who much “innovation” you chuck at clean energy, fossil fuels can quite easily remain the cheaper option. So, unless “innovation” delivers what you want you are basically in the same boat, needing to put a high price on carbon 

Also absent from your discussion is the relatively high levels of per capita energy consumption in the United States. Exactly why are policy efforts to tackle this not deserving of greater priority over “innovation” policies? There is little reason to think US per capita energy consumption cannot be reduced significantly. America is no better of than the UK, Germany and Japan, yet the average American consumes twice as much energy. Reducing per capita consumption also loosens up the constraints coming from this so called “iron law.” Exactly what is iron about that I have understood.

It’s also far from clear what innovation is needed. Do you need innovation to improve the US vehicle fleet from 22 mpg? 50 mpg cars exist, and people drive them and they are not expensive. 

I can go on, but my point should be clear. There are relatively simple and straightforward ways to significantly reduce US emissions. Is betting on “innovation” preferable, or just a form of wishful thinking?

 

It would also be very helpful if you could have defined what you mean by “get the climate job done” here:

“In short, the carbon revenues may be more than enough to make up for the short-fall of a politically-constrained carbon price and get the climate job done.”

An implicit assumption behind what you are writing here is that we are going to blow past 450 ppm. And quite clearly an “innovation first” approach more or less accepts emissions are going to keep rising for a long time to come. So, what you are arguing will represent a “climate job done” for a great many people. For public relations purpose maybe you adopt this language, but why not be up front in what this can and cannot achieve. Are we looking at 500, 550, 600 ppm? If you cannot define “climate job done” then I can’t help but feel you are engaging in wishful thinking. 

(by the way I’m writing “innovation” because I never really know what the word actually is supposed to mean. It’s rather like sustainablity.)

Rick Engebretson's picture
Rick Engebretson on July 29, 2013

Thanks for the open mic, Jesse.

Having been a reader of TEC for a long time now, I’m not aware of any sense of cooperation, nor useful technology being offered in this area of urgency to our economy, National Security, and life on Earth. So I’ve completely changed my position on Carbon taxes.

I’ll support any and all taxes on Carbon as long as not one dime goes to existing R&D or government or corporate anything.

All monies must be given to kids trying to pay obscene college costs, while developing the critical skills to survive in a world that we might not be able to imagine. Kids who want to study economics or political science excluded.

Jesse Jenkins's picture
Jesse Jenkins on July 29, 2013

Dear Robert,

First off, what do I mean by “innovation?” I mean an improvement in the price or performance of a good or service or introduction of a new and improved good or service. In the context of energy, that means an improvement (price or performance) in the provision of energy services or a new way to provide energy services that offers superior price or performance. That clear?

RE the “obvious flaw” in my proposal, I don’t think you’ve really read this fully. I’m not even close to advocating just throwing “innovation at it” let alone an “innovation-first” strategy here. What I propose is making fossil energy as expensive as is politically feasible via a carbon tax, and then making good use of the revenues to (1) subsidize remaining abatement opportunities that are more expensive than the carbon price signal alone allows for, (2) to structure most (all hopefully) of those investments to actually drive down the real cost of those abatement opportunities over time, so as to conserve limited resources/maximize long-run abatement subject to political economy constraints, and (3) devote some portion of revenues to addressing substantial innovation-related market failures to ensure we continue to drive improvements in the price and performance of abatement opportunties, further maximizing abatement. That’s a plan to specifically address the fact that fossil fuels may remain quite cheap, even over the long term.

You charge that I ignore the role of conservation or efficiency in reducing energy use and thus contributing to both abatement and increasing WTP by reducing household carbon footprint. That’s half fair. Efficiency is certainly one of the abatement opportunities this policy suite aims to unlock. Although as we all know, there are a host of other non-price related market failures to address to fully unlock efficiency opportunities. But you are absolutely correct that where cost effective, reducing energy consumption could help improve WTP for climate policy. I could have (should have) made that a clearer part of my case. Thanks for the addition. It is also fair to say that while efficiency is part of the package of abatement I have in mind, my language is biased towards the supply side. 

Finally, RE “getting the climate job done,” this is indeed deliberately vague. I personally don’t see any climate policy strategy, real or proposed, that looks like a realistic strategy to get to 450ppm at this point in time. If we hadn’t blown the last 20 years on policies that failed to recognize and plan for the fundamental political economy constraints on climate policy design, perhaps we would still have a shot. But probably not any more. 

I can’t actually predict or promise a specific outcome as far as concentrations of CO2 or temperature stabilization. No one really can. Policy makers have no direct control over those factors. What they cna try to influence is the decarbonization rate of the economy (changes in CO2/GDP). That was Roger Pielke’s point in the letter to the FT editors that sparked this exchange. 

What I can tell you is that a policy suite that is designed around the multiple constraints on climate policy design, not just around economic efficiency, will succeed at accelerating decarbonization much faster than those that do not. And I can certainly say that if political economy constraints are binding, preventing the carbon price from reaching the social cost of carbon, then making good use of revenues is absolutely essential to maximizing the rate of decarbonization. 

I don’t see this as wishful thinking. I see it as our best hope. Do you have another alternative in mind?

Cheers,

Jesse

p.s. I know I promised you a longer direct exchange on this topic a while back. I hope we can return to that soon. My apologies for getting sucked up in this and other work. 

Elias Hinckley's picture
Elias Hinckley on July 29, 2013

Wouldn’t survival school be more appropriate than college if your view is right? And if that’s the case, a shift to adaptation based R&D would seem to make sense (unless there’s some deeper frustration behind the comment).

With that said this is one bleak viewpoint – hopelessness makes it difficult to get people to act – the psychology of the message remains important.

 

I K's picture
I K on July 29, 2013

There is no reason to specifically target carbon dioxide it would be smarter to have an overall energy tax.

For instance it could be 2 cent per kwh of eletricity generated from anything and 1 cent per kwh of any other fuel (eg peteol diesel coal in steel mills natural gas etc etc)

Such a tax woul be a good idea for two reasons.  1 most of it would be offset by cheaper fuel as 2. Demand for all forms of energy would drop massively mostly due to efficency upgrades (eg switching an elereically heates home to a nat gas heated home could save 70% off primary energy)

Robert Wilson's picture
Robert Wilson on July 29, 2013

Thanks for the response

Again, I can’t help feeling that the picture you are presenting is far more pessimistic than your piece implies. Your piece claims your policy proposals can “get the job done,” yet here you back track and say you cannot even give a loose quantificative indication of what “get the job done” means. So, it feels as if there is a strong element of false advertising here. I agree that alternative proposals will not achieve 450 ppm, however your case would be much more persuasive if you cut the public relations language, and just stated things more soberly.

On energy consumption, you seem to be assuming that per capita levels cannot go down significantly. Do you have firm reasons for this? The differences between the US and other developed countries is not trivial. Per capita energy consumption levels are double what they are almost everywhere. And where is the evidence that Americans are better off because of this? Reducing per capita consumption seems to be a much more necessary step than innovation. Historically energy transitions have occured far more slowly than what we need to see. And quite obviously a transition to low carbon energy will be even slower if US per capita consumption stays where it is. 

Also, do you have any evidence that the prospects for technological change are greater than those of political change? These political economy arguments rest on the assumption of ongoing political inertia. A look at the evolution of global energy in the last century however indicates that the production of energy is no less inertial. I can refer you to Jonathan Foley’s excellent piece on testing theories of change (http://ensia.com/voices/the-change-we-believe-in-but-never-test/). Have you tested yours?

Now, I’m not saying here that what you are proposing is not a good way to go about things, I just have the feeling that you are over selling it.

 

 

I K's picture
I K on July 29, 2013

With regards to this being a drag on the economy or negative to growth why would it be if the energy tax is used to cut other taxes. 

Such a tax in America would probably boost the economy as oil imports drop massively and gas and coal experts increase hugely infrastructure permitting

Jesse Jenkins's picture
Jesse Jenkins on July 29, 2013

Hi Robert,

Great questions/prodding as always.

So, it feels as if there is a strong element of false advertising here. I agree that alternative proposals will not achieve 450 ppm, however your case would be much more persuasive if you cut the public relations language, and just stated things more soberly.”

By “get the climate job done” I mean achieve climate stabilization short of civilization-destabilizing impacts. I think my proposal can do that. I’m pretty confident actually. But there’s more than enough moving parts in the human-climate system to make it foolish for anyone to pronounce a guaranteed end-point. Direction of travel is far more important, and that’s what this is all about. So I’m sorry if using “get the climate job done” in a conversational tone doesn’t pass muster with you. I don’t think it’s misleading at all however. Only if you think “getting the job done” is implictly linked to some oft-stated and never guaranteed specific target or timetable (80% by 2050 of 450 ppm or whatnot). I’d say those who promise such outcomes are the ones engaged in the false advertising, not me.

On energy consumption, its fine to say it would be great to reduce per capita energy consumption, but clearly that is not a cost-less activity. There is condirable debate whether or not truly “below-cost” or net-positive-cost efficiency opportunities await — the so-called “efficiency gap” is much debated, see this recent paper for example. Those that do exist will trigger rebound effects, eroding a substantial share of the climate benefits as well (see my article in Ensia here). Plenty of efficiency and conservation can indeed be  captured at a net economic cost as well. But how are you going to force that? Anything that comes with an economic cost necessarily means a reduction in welfare. You can say “there’s no evidence we are better off” in the US versus other nations with lower per capita energy consumption. But revealed economic preference would indicate millions of economic actors believe they are better off. So any effort to force them to behave otherwise surely meets plenty of political economy constraints as well. My point isn’t that reducing energy use is a bad idea in the developed world. It is. Even you frugal Brits can cut back I’m sure. But it’s no magic bullet and certainly not exempt from the kinds of political economy constraints this post is all about.

Finally, you ask a very good question, “do you have any evidence that the prospects for technological change are greater than those of political change?” I’d say my case is pretty strong here. Technological change has already dropped the cost of solar PV by a factor of 100! They’ve dropped by 75% in the last four years or so, and most analysts believe solar costs can be further reduced by at least a factor of 2. Cost curves for other energy technologies are not quite as drammatic, but plenty strong as well. It is pretty hard to imagine the political tolerance for higher energy prices to increase by a factor of even 2-4, let alone 100. 

BTW, Matthew Stepp and I made many similar arguments a year and a half ago in a 5-part series on the Future of Global Climate Policy. Part 3 specifically talks about the ability to move the political window versus the technological window, and why we put more stock in the latter than the former (not to discount the former entirely). Parts 1 and 2 are also brutally honest about the fact that we’re not promising 450ppm or 2 degrees C or anything like that. No false advertising here.

Jesse

I K's picture
I K on July 29, 2013

The UK is more energy efficient becuase we are considerably poorer we just dont know it having lived here all our lives.

For instance our homes are so small that once you put a bed and wardrobe in your kids bedroom there isn’t even enough space to put a desk in there let alone room ro play or have toys.

Average uk new home 70 square metres aveeage usa closer to 200sqm or three times the size! A hoise three times the size is going to use nearly three times as much energy I doubt your going to convince many amerocans ro knock down their homes and start living in their garages

Pluss distances are lower and population densiry is higher not to mention that americans produce and consume more goods than we do per capita.

 

 

So unfortunately its not as simple as it may first seem although they can of course become more efficient its unlikely they can match us due to historic and physical differences

I K's picture
I K on July 29, 2013

The job should be to find a way to produce energy cheaper and cleaner than today. Both those things not just one.

That can’t be achieved by non despatch able wind oe pv

Nuclear is unlikely to deop to the sub $2/watt required to male or cheaper than existing coal and new CCGTs

However there are two big ones that can achieve energy borh cheaper and cleaner than today so it should find support from everyone.

One is computer driven cars. They will be far cleaner and far cheaper and make us far wealthier.  The huge huge huge 30.000 TWh of annual oil saving is jist a side benefit (more energy saved than is produced by all the reactora wind farks pv pabels and hydeo dam in the world)

 

 

The other is an energy tax to encourage conservation. Worldwide perhaps upto 20.000 TWh annually could be saved va an energy tax

 

 

Everything else pales in comparison to these two. Beat bit is that both would see big results very very rapidly ramping up to full savings in perhaps just one to two decades. Ramping up renewables or nuclear and ramping down coal and gas is realistically more of a 6-10 decade task

Robert Wilson's picture
Robert Wilson on July 29, 2013

Thanks again Jesse

On solar. I find it rather questionable that the costs of solar PV have dropped by 75% in the last four years or so. The Chinese government is heavily subsidising solar and handing solar companies free land etc seems to be the main cause of it. And the US government and European Commission seems to agree with me. So, the price may be going down, but I don’t see how the costs are. Given just how distorted the market for solar is by subsidies how can anyone express confidence that the prices are going down in real terms?

And even if costs fall by a factor of two we immediately run into a big problem. We have absolutely no way to store solar PV on a large scale that is economically viable. To my mind these LCOE figures give a seriously false impression of the long term prospects of solar, and I am much more bearish on the issue than you.

I’ll leave the efficiency stuff for another time.

 

Jesse Jenkins's picture
Jesse Jenkins on July 29, 2013

We can certainly quibble over recent cost trends and the role of China. While acknowledging the recent role played by subsidies in China, analysts like GTM Research nevertheless project further declines in module costs over the next three years, and regardless, the largest cost gains can be made in non-module costs at this point, which make up about 75% of installed costs now. More to the point, the short-term abberations say nothing to change the drammatic 100x cost decline seen overall. That should speak to the power of technology innovation writ large.

I of course fully acknowledge the system-wide challenges to large-scale solar PV integration. I only chose the solar example to illustrate why I see the technological change lever as likely to move much further than efforts to directly increase consumer willingness to pay for mitigation. I don’t see how any of this responds to my larger point here: technology change can clearly be drammatic, while political change is likely to be incremental. Knowing the relative strength of each lever at out disposal is important to prioritize limited political and financial capital…

I K's picture
I K on July 29, 2013

Technology which reduces demand is possible and may have a big impact, eg computer cars could cut lans transport energy use by over 80% and be dully implemented within ten years of first commercial introduction.  That is a huge one

Technology which produces supply.  Eg nuclear solar wind or whatever will be far far far slower as both gas and coal producroon and especially oil production marginal costs are close ro zero. Its often said tjat ot only costs a dollar a barrel to pump oil out of Saudi so tjey are nor going to stop pumping if some amazing scientists discover a way to buold nukes or wind cheaper than current coal gas or oil.  If that happens the price of coal gas an oil will jist be reduced so that they are just cheaper.

 

 

This can continue until current fields and mines are depleted which coild take over 60 years.

 

 

At ththis juncture tje computer car is more important to humanity than even self sustaining fusion or dare I say it, more important than a cure for cancer

Rick Engebretson's picture
Rick Engebretson on July 29, 2013

Not “hopelessness” at all. Just personal experience.

My grad school at the U of Mn. was a remarkable experience. It started under the scientist who invented digital electronics. Then I was paid for my work in “The Laboratory for Biophysical Chemistry” to build high pressure and other instrumentation measuring hydrogen exchange kinetics in proteins. The building of instrumentation later got me in an NMR dispersion lab when MRI was being developed.

All the while I was combining advanced genetics, biochemistry, then solid state physics. None of the oldsters understood any of what we now call nanotechnology.

Understanding of biophysics and optics were then immediately applied to fiber optical networking. And nobody believed the internet had opportunity either.

We again need young scientists who have a clue what to do, and the freedom to develop it. After all, it’s their money we are spending. Let them spend it on their own survival.

Jesse Jenkins's picture
Jesse Jenkins on July 29, 2013

We certainly need young scientists. But the energy-climate-human system is the perfect example of a socio-scientific-technical system. It’s going to require engineers, scientists, social scientists, policy researchers and all kinds of other types to unravel this challenge. As a current graduate student in technology & policy and socio-technical systems, I hope you don’t narrowly exclude those approaching this challenge from a social science or regulatory/policy end of things as well. We need “policy engineers” who “have a clue” as much as we need scientists and technology engineers!

Elias Hinckley's picture
Elias Hinckley on July 29, 2013

And that’s the key – technology change could be material. I agree that w/o levelizing the playing field through really pricing GHG emissions (and some other things like direct health effects) it’s hard to imagine the kind of transformative change that’s necessary. However, what takes no imagination is to see a continued status quo fed by lack of political will. So while likely inadequate (as Robert points out), this approach is better than what we have, and is maybe (uncertain how viable this really is in light of current climate in DC) a real path forward.

The other point I’d raise is that there’s a lot of focus on competing with centralized generation, and where the net technological leap likely occurs is on the consumers side of the meter, likely as a coordinated suite of technologies, which dramatically increases the cost target for parity.

Rick Engebretson's picture
Rick Engebretson on July 29, 2013

Yes, you are a gentleman, Jesse. Otto Schmitt’s (Schmitt trigger) brother, Francis, was a neuroscientist at MIT. Otto was on the radar team under Van Bush, there.

The scientists I’ve dealt with readily see the faster plant growth due to new CO2 levels. Elementary chemical kinetics. The solar photons either stimulate quantum excitation, or break down into heat. Please try find some scientists who might consider water is a semiconductor. They are out there.

I can’t imagine Otto’s radar team explaining how hard they try, and just need a few $billion and a decade more. It isn’t politics or economics, Jesse. It is science and survival.

John Miller's picture
John Miller on July 29, 2013

Jesse, your post does a very good job of covering the issue of pricing carbon.  It also does a good job of covering some of the complexities and politically charged issues associated with this subject.  Another issue to consider is that for many years we have heard our political leaders’ state that transitioning the U.S. economy from fossil fuels to clean energy will be affordable and sustainable.  Affordability is of course dependent on the basis assumption ($200+ oil?) and sustainability is the ultimate goal of a clean energy economy or lifestyles.  While politicians and clean energy advocates want the voting populous to believe that the transition will be affordable for average citizens, we have yet to have significantly honest and adult conversations on what the true consumer costs are most likely to be.

Mr. Wilson’s comment that average per capita U.S. energy consumption (and associated carbon emissions) is much higher than found in the EU is accurate.  One could argue that the difference is significantly due to lower population density in the U.S. vs. EU, more mobile U.S. society/economy, etc., but these can easily be challenged as just rationalizations.  One of the most significant differences between the U.S. and EU is the consumer cost of fossil fuels and electric power.  On average, EU motor and heating fuels, and electric power costs are at least double the U.S.; due to various VAT/consumption taxes.  This brings us back to the subject of your post, properly pricing carbon to encourage clean energy alternatives to fossil fuels and possibly discourage fossil fuels demand (or socially compensating others).

Last year I did a number of studies to determine the actual cost to reduce U.S. carbon emissions.  One example and a second example.  What came out of these studies was that to actually reduce U.S. carbon emissions would cost on the order of $100 per metric ton (MT) carbon equivalent emissions.  As you covered in your post, most politicians and advocates normally discuss taxing carbon such as gasoline motor fuels on the order of $0.10 per gallon.  This is equivalent to about $12 per MT carbon (E-10 basis).  Not only would this relatively insignificant tax have negligible effect on consumption, but the revenues generated would only cover a small fraction of the actual costs to substantially reduce future U.S. carbon emissions.

If a carbon price, tax, etc. is to be used to fund actual reductions in future carbon emissions the discussion should be based on a minimum of $100 per MT (or $0.80 per E-10 gallon).  Yes, this cost level will be politically challenging, but more in line with reducing actual carbon emissions rather than the current carbon market schemes that have priced carbon off-sets at about $10 per MT recently.  These carbon markets have made many carbon credit traders very happy, generated significant government tax revenues that have been directed to non-carbon/-climate political priorities, and had very small-to-insignificant effect on reducing total world carbon emissions overall.

Robert Bernal's picture
Robert Bernal on July 29, 2013

I’ve always believed that a price on carbon was the same as a carbon tax until I realized that many (or most) people think it would not go towards the tech fix, but instead, just to pay government debt. If “everybody” believes that “all” the money went for the “best” tech fix, then we’all would be happy to pay (at least a good percentage) more and we would finally innovate our way towards the low carbon economy.

We “might” need a tech fix, but we DO need a “trust the government” fix… Do we not already have the tech to rid the economy from combustion? We have all sorts of expensive ways… I believe what we need is an all out development in the advanced machine automation required to make EV batteries better (I mean cheaper). And we need to resort to the BEST kind of nuclear fission (not necessarily the commonly feared light water reactor) to replace coal, because electricity, well, we already have the infrastructure (which would only need improvements) and is delivered at the speed of light. Fission is about 1,000,000x as dense as combustion, therefore it must be the superior source, especially since it is carbon free.

I don’t believe the future wants us to wait any longer!

Edit: In light of anticipated cuts in subsidies, I believe any money MUST be dedicated towards the development of advanced machine automation needed to make EV batteries, solar, wind, and even utility scale batteries for like dirt cheap.

And let the industry do the proper nuclear thing (which is the ONLY way to save the biosphere at this time) by cutting even more on the money required to license the modularization of an inherently save (not pressurized) plan. There are MANY such reactor designs already!

Elias Hinckley's picture
Elias Hinckley on July 29, 2013

So ignore the problem and hope someone in the future can solve/mitigate? 

Robert Bernal's picture
Robert Bernal on July 29, 2013

I like to think of innovation as what the United States used to be like… tech, social and political, all together to get a job done. So the excess CO2 thing… it’s just another challenge, but the REAL challenge is getting everybody on the same track!

Robert Bernal's picture
Robert Bernal on July 29, 2013

Wind and solar will have to see an order of magnitude drop in prices in order to afford storage, because it is that same kind of machine automation or advanced 3d printing tech that is needed to make utility scale batteries for just as cheap.

However, nuclear’s only problem is that of public acceptance and of always having to be built like a totally custom project. The fuel is “free” in comparison to the total markup because it is so much more energy dense, and it is possible to crank out modular reactors like everything else is done today. I just want to note (again) that we do not need to utilize an inherently dangerous reactor design.

It’ll only save a few more years, however, while we’re all fussing about just what IS the best policy, we need to do as you suggest CONSERVE (but will we?)!

Nathan Wilson's picture
Nathan Wilson on July 29, 2013

Technological change has already dropped the cost of solar PV by a factor of 100! …Cost curves for other energy technologies are not quite as drammatic

The cost of solar PV is commonly plotted versus time, to emphasize the drop.  When plotted against production volume, I think it would look pretty similar to other technologies.  For example, plotting a modern nuclear plant like an AP-1000 on the same graph as the early units (ignoring Fermi’s first pile in Chicago in favor of those actually making electricity), the roughly 200 kWatt EBR-1 of 1951, then the  Shippingport 60 MWatt from 1957, would also produce impressive cost reduction.  In fact, the “learning effect”, which claims that most technologies will drop in price by 10-20% with every doubling of volume, is the basis for most future prediction of renewable energy cost.

The unique things about solar PV is that it has been and continues to be promoted extremely vigorously by its promoters, and early pricing (based on much less than “utility scale” deployment) is reported as part of its track record, where normally these datapoints are discarded.

It seems like the political people want a technical solution, and the technical people want a political solution.  I’m on the side that believes the laws of physics are the tough ones.

——

On deep reductions in per capita energy use, I agree that this might be difficult to achieve.  We don’t use energy out of mere stupidity; it really does enrich our lives for a relatively low cost.  Even if energy costs are higher in the future (e.g. due to more expensive non-fossil technology or carbon taxes), it will take many decades for the market to respond (smaller houses and walkable communities).

Jean-Marc D's picture
Jean-Marc D on July 30, 2013

Jesse, no large cost gain will be done in non-module cost, that is not event remotely realistic. Which means that the hope for further cost reduction are very strongly constrained, because even a very large gain on the modules only affects 25% of the price.

Those non-module costs consist of two parts, one is the non-module component, like the inverter wich rely on mature technology for which no big gain is expected, and the other is the manpower needed to both install and maintain the modules. There can be some gain in efficiency, allowing to reduce the manpower cost, as has been seen in Germany, but mechanically it can not go very far.

The module cost themself can not go down to zero. At some point, the material in the panel will be most of the cost, and if you want the panel to be durable and resist 20 years of outdoors, you can not make that too cheap either.

But actually if we look carefully, that prediction from GTM Research is for a 6.8% yearly reduction (28% in 5 years) on what is only 25% of the price, so only 1.7% yearly price reduction. So if they’re correct, the days of strong price reduction are gone now.

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2013

The idea that declines in non-module costs are impossible is a highly contested claim! Just as the DOE SunShot program. 

Schalk Cloete's picture
Schalk Cloete on July 31, 2013

Interesting read, but, as is the norm with these kinds of debates, the complexity of the matter will probably bring much more political stalemate than actual useful implementation. For example, the two major points that I would oppose here are the great faith in technology and the great faith in central planners. 

Firstly, the bet on technological innnovation really is a very serious gamble. Fundamentally speaking, I am very skeptical about whether we will ever get something that is simpler and more cost effective than fossil fuels. When looking at wind and solar for example, it would be necessary to build and deploy solar panels and wind turbines at a lower cost than the cost of digging fossil fuels out of the ground. Due to the diffuse nature of renewables, we are currently about 1 order of magnitude from this goal. It is also necessary to deploy all the storage, distribution and energy conversion technologies necessary to counter the intermittency issue at a lower cost than the power plants and refineries necessary to refine fossil energy to usable fuels and electricity. Currently the cheapest storage option (a pumped hydro facility) is about twice as expensive as the most expensive fossil fuel “refinery” (a coal power plant). 

Secondly, I find the notion that a few wise central planners can collect $50 billion in carbon revenues and direct it very efficiently towards climate change mitigation very hard to believe. The task of distributing this pot will simply be so complex and wrought with bureaucracy/corruption that very little fo this money will ultimately end up serving the intended purpose. It will also be very hard to protect this money against other black holes such as the enormous debts and unfunded liabilities accrued through excessive central planning and government intervention.

Personally, I advocate a free-market approach with the role of government being limited to properly adjusting the price signals seen by the free market. Ideally, I would like to see a sufficiently high carbon price (at least the $40/ton necessary to make current first generation CCS cost effective) where the revenues are directly subtracted from income taxes. In this way, consumers will not pay anything before any more expensive alternative energy sources are deployed (everthing paid in carbon taxes is given back in income taxes). As more low carbon energy technologies are deployed very efficiently by the free market, however, carbon revenues will reduce and income taxes will steadily rise, thereby drawing the necessary linvestment capital from society in a gradual, efficient and equitable manner. 

Whether something like this will actually happen is another question though. Currently, I cannot help but think that we will keep on kicking the can down the road until the point where climate change actually has a direct and clearly attributable effect on a large portion of the electorate. At that point, the willingness to pay will rise significantly and a much higher carbon price will become politically feasible. This scenario will require rapid CO2 cuts at the lowest possible cost. It is in preparation for this scenario that I work on developing second generation CO2 capture technologies. 

William Eacho's picture
William Eacho on July 31, 2013

The analysis is admirable, but rests on the assumption that a properly priced carbon tax is politically impossible, because taxpayers will refuse to pay more in taxes. But that rests on the flawed assumption that a carbon tax would increase revenues, rather than be revenue neutral as many have proposed.

The other objection to a carbon tax is an economic one, that it will reduce economic growth, but this also rests on the assumption that the tax would be unilateral, or country specific, rather than multilateral or global in scope. An international agreement to impose a uniform tax on carbon extraction would allow a stronger price signal without reducing economic growth significantly, because it would affect all competitors equally, thus having no effect on the economic competitiveness of any one country’s goods, other than the extent to which said country is dependent on coal energy. And that, of course, is the goal: to move those countries away from coal dependence by properly pricing the externalities into the fuel source. So behavior would promptly move economic activity in a greener direction, and economic growth could continue unabated.

 

Max Kennedy's picture
Max Kennedy on July 31, 2013

The following comment is patently false, “Because halting economic growth is not an option”.  It implies that infinite growth in a finite world is possible.  This is the ultimate root of the evil we are doing to the planet.  It is the falshood that drives the corporate plague.  As long as this is a basic assumption we are inevitably going to succumb to our success just as viruses that grow unrestrained kill their host.

Jesse Jenkins's picture
Jesse Jenkins on July 31, 2013

In the long-run Max, sure. Point well taken. But that’s a little bit like saying, “In the long run, we’re all dead.”

In the short-run, I challenge you to find a government anywhere committed to the idea of ceasing economic growth. And how soon physical limits are relevant to the path of economic growth is itself a function of what kind of growth we pursue and how we pursue it. I encourage you to watch this interview with Ramez Naam on a similar topic.

Max Kennedy's picture
Max Kennedy on July 31, 2013

Your analogy “In the long run we are all dead” is an inappropriate one.  Whether governments are committed to halting unrestricted growth or not there are natural limits we are fast approaching.  All the technological improvements over the last 100 years have not resulted in decreased use of power or decreased carbon emissions, the opposite in fact, why would anyone believe it will now.  The analogy that is appropriate is we have been walking along a railway track watching a train approach.  We haven’t gotten off because we believe we have time to jump and the train has approached quite close.  We see a pretty rock, growth, and bend down to collect it.  The question is do we look up in time or get hit by the train!  The environment is a train, it doesn’t care about political will, technological innovation or anything else.  We pass it’s limits we are FUBAR.

Alistair Newbould's picture
Alistair Newbould on August 1, 2013

Interesting reading on the capitalist / democratic way to reduce CO2 emissions. Further education of politicians and more importantly the public may increase the iron law price limit thus increasing the pot of gold available to find a technological solution. According to Roger Pielke’s article today China is adding emissions so fast that any impression the capitalist / democratic reduction on emissions can make are insignificant. What is truly needed is to convince the Chinese government to curb emissions. That’s going to take nuclear power in impressive quantities or effective and cheap CCS clip ons to existing emission producing smoke stacks. Can this be done by economic pressure or education? I really hope so.

Jean-Marc D's picture
Jean-Marc D on August 1, 2013

I K, why would the tax on electricity be twice the tax for fossil fuels ?

Do you realize who would directly profit of that ? Do you realize who loves to consider the use of electricity twice dirtier than burning fossil fuel ?

And wants a tax that locks in burning fossil fuel instead of replacing it by electricity that you then can find a way of making cleaner ?

 

Robert Bernal's picture
Robert Bernal on August 1, 2013

Halting economic growth does NOT imply exponential numbers of humans. Therefore your premise is totally absurd. Without economic growth, we will not have the physical and chemical means to prevent the biosphere from frying. I say “go nuclear” as in what Weinberg said many decades ago.

Edit: I meant to say NOT halting economic growth…

Are you of the type that say “too much energy in the hands of the people is a bad thing”? I’m not because I KNOW that the more CLEAN energy, the better (as long as it isn’t so expensive that it require more dirty energy).

Roy Wagner's picture
Roy Wagner on August 1, 2013

Is there another way such as Licence fees or Duties that could easily by law be implimented in such a way that they are not allowed to be passed on to consumers or deducted from taxes.

This would put the owners of CO2 producing powerplants and Industries in the position of having to reduce CO2 emmisions to maintain their profit margins.

Another way is not to tax the Carbon but increase the cost of Water used by the Industries Fossil fuel power plants cannot operate without water.

This again should be done in such a way they are not allowed to pass on the cost to the consumer or deducted from taxes.

This would only affect the producers not the economy as a whole.

I’m sure we would be amazed at how quickly and inniovative they became at saving water and reducing CO2 emmisions.

 

Max Kennedy's picture
Max Kennedy on August 1, 2013

Why should it not be passed on to consumers? It’s being produced for us why should we not pay for it?

Roy Wagner's picture
Roy Wagner on August 1, 2013

Most of the arguments in the above posts state that increasing the cost of energy with a carbon tax.

Will result in the increased cost of energy for the consumers and as a result will directly and negatively affect the economy.

We should be rewarding energy efficiency improvements and encouraging renewables.

The Fossil Fuel Generation Industry has no incentive not to keep doing things in the business as usual way.

The passing of the Clean air act and more recent EPA regulations regarding CO2 did make a difference in emmisions they have been making serious lobbying efforts to change these laws that protect us.

If the money from these Licences Fees Duties whatever their called,

Was ultimately returned to them for investing in cleaner methods that reduced CO2 or renewable energy generation the transition would happen much faster.

As long as they can pass on costs for a carbon tax to the consumers or avoid paying for the environmental and health issues they cause, We the Consumers end up paying anyway.

While they continue to make huge profits with little or no incentive too change their actions.

 

 

Roy Wagner's picture
Roy Wagner on August 1, 2013

Heres a good article on whats happening in British Columbia apparently the economy did not collapse?

Life continued pretty much as normal except for less CO2 emmisions.

 

http://grist.org/climate-energy/the-positive-economic-impact-of-a-carbon-tax-in-uh-hang-on-10-charts/?goback=%2Egde_3803394_member_262254029

Roy Wagner's picture
Roy Wagner on August 2, 2013

I repeat why are we proposing taxing everybody?

Why are we making everyone pay for what relatively few benefit financially from?

Directly tax those who create the CO2 yes if you build a IC engine powered vehicle that means You.

If you own Fossil fuel power plants that means You. 

Oil refiners Shipping companies who use bunker fuel You too.

Same with any large CO2 producers do not allow these taxes to be passed on to consumers if making CO2 becomes less profitable it will stop.

You can return the taxes only to those companies who deserve it based on improvements/reductions in CO2 emmisions or improvements in efficiency.

For example

Investing in renewable energy infrastructure or by improving fuel economy or selling more NG electric or hybrid vehicles.

Building ships with gas turbines instead of oil burning boilers.

Who is making the Money making CO2 ?

 

Robert Bernal's picture
Robert Bernal on August 2, 2013

Should society be foolish enough to continue on with FF’s, I would hope that the tax be directed to JUST the FF companies in proportion to the carbon content of the fuel, i.e coal gets taxed more than NG. I know that would be passed on to us but we need to stop excess CO2… But we CAN do better. Just initiate the tech fix.

It would be economically productive to read up on the founding fathers of nuclear… and make modular, a fleet of molten fuels fission reactors the world over. This would save A LOT of time and expense (by preventing excess gov’t meddling, also).

Should society deny this awesome nuclear way out, then we will have to FAST TRACK concentrated solar power on literally hundreds of thousands of square miles of desert, globally OR fast track the mining and extraction necessary for all the elements needed to make vast utility scale batteries via machine… for like dirt cheap (along with the panels and the turbines).

And should the minimalists get their way by declaring “oh no, we can’t do that either“, then we shall all make an amendment to the constitution declaring that any minimalist agenda can not be used to deny the right of the people to mine, extract and make possible, the abundant capacity of clean energy generation. 

Jesse Jenkins's picture
Jesse Jenkins on August 2, 2013

The whole idea behind a carbon tax is to shift relative incentives for purchasing decisions by all economic actors. That means that the price signal created by the tax necessarily has to be passed along to all purchasers. So even if you could somehow force producers of fossil fuels to pay the tax and not pass along the resulting increase in their costs of business to their customers (and I’m not sure how you would do that), you wouldn’t want to. It would defeat the whole purpose of the carbon pricing measure. 

Alistair Newbould's picture
Alistair Newbould on August 3, 2013

Sorry to be ignorant Schalk, but what do you mean by second generation CO2 capture? Is this more advanced than trying to push the CO2 back underground as a gas? Which has always sounded like pushing a jack in the box back in to me (or for anyone who has tried it, returning a prolapsed cows womb to where it belongs) – possible but not easy.

Roy Wagner's picture
Roy Wagner on August 3, 2013

This whole discussuion has been about how  difficult it is to adequetly Tax Carbon.

What I propose is taxing the producing entities this tax can be refunded for reductions in emissions or infrastructure that avoids future emmisions.

Taxing everybody so some people can continue to make a profit from causing harm is foolish. 

Inheritence tax or  Capital gains are examples of taxes that cannot be passed on to others or deducted. 

I am sure there are better examples of special taxes ( Income Tax only legal if we are in a state of war)

 

The price increases of the Utilities are regulated by PSCs they would have to approve or deny a rate increase based on this tax.

Gasoline already has duty and taxes on it one businesses can claim as an expense the other they cannot.

I am not saying tax them out of existence just a levy to encourage the speed of change.

 

 

 

Schalk Cloete's picture
Schalk Cloete on August 3, 2013

CCS typically consists of three steps: capture, transport and storage. For power plants, the CO2 capture is by far the most expensive part because a lot of energy is needed to concentrate the CO2 stream (post-combustion capture), produce pure hydrogen (pre-combustion capture) or generate pure oxygen (oxy-fuel) and then compress the resulting pure CO2 stream for cost-effective transport and storage. A typical cost breakdown would be 70% for the capture, 10% for the transport and 20% for the storage. 

Storing CO2 is not technically very difficult and there are a wide range of options for making this happen, some of which can even be profitable (e.g. enhanced oil recovery). The only issue is economics. Pumping oil and gas out of the ground brings in huge profits, but pumping CO2 back into the ground for no purpose other than to keep it out of the atmosphere of course brings in no profits and needs to be financed in some way. 

Second generation CO2 capture aims to reduce the large energy penalty that makes CO2 capture so expensive. Current first generation CO2 capture technologies can capture CO2 for about $30/ton from a coal plant, but second generation technology currently in the demonstration phase promises costs of $10/ton for new plants and $20/ton for retrofits. This is important because it can make CCS profitable at a lower carbon price, thereby leading to earlier deployment. 

Arthur Yip's picture
Arthur Yip on August 3, 2013

Great post as always Jesse. Looking forward to hearing more.
Several thoughts:

– WTP seems like it would be very difficult to survey properly e.g. if you ask $100, $150, $200 on a survey, you may be finding a general reluctance to pay more as you increase this extra cost to pay for the environment? I think if you asked $50, $75, $100, or $100, $200, $300, you would get different conclusions from the survey…

– The “correct” price on carbon is a global one, so if some countries are not expected to participate, does that increase the “correct” carbon price for the participating parties in order to make up for non-participation?

– There are massive amounts of fossil fuel R&D going on, public and private. carbon revenues could be used to drive public R&D but will private RDDD require an appropriately high carbon price? would this shift private fossil R&D $ to clean R&D $?

Lewis Perelman's picture
Lewis Perelman on August 3, 2013

I agree with Jesse and others that the political prospects are effectively nil for imposing a carbon price representing some idealized ‘social cost’ or attaining effective behavior-altering impact.*

But re his case for a more modest carbon tax to fund innovation:

“At the same time, establishing such a price could raise between $25 and $75 $50 billion annually in new carbon revenues. That would be more than enough to overcome the limits of the Age of Austery and fund the scale of proactive public investment responsible for the blockbuster American innovations discussed previously.” 

…. as Eli Hinckley suggested, the prospects seem poor in the current or prospective political-economic environment that a persistent public funding commitment on that scale could be enacted. In his Twitter response to Eli, Jesse seems to feel that the alternative is failure:

“Perhaps innovation doesn’t happen at pace we need in ‘an age of austerity’ then.”

But in my recent book, Energy Innovation: Fixing the Technical Fix, I laid out an alternative “Plan B” strategy for accelerating technology innovation while taking austerity conditions as given. I won’t repeat the extensive argument in that book here, but the key is to focus on structural changes in how the processes of R&D and innovation work, not just on fiscal inputs.

* NB: Even the rather limited “willingness to pay” internalized social costs of carbon indicated in various surveys Jesse summarizes probably is overstated. I have never seen any of those surveys ask repondents what they are willing to give up — that is, in specific amenities not just a dollar figure — to pay the extra cost in taxes or utility, gas, etc. bills. Even then, as the saying goes, “talk is cheap.” Experience and history suggest that when presented with the actual bill, respondents often rebel and seek reductions or shifting of costs to others they presume more able to pay. St. Augustine’s youthful prayer is probably a better guide to actual human behavior than survey research: “Lord, grant me chastity and continence, but not yet.”

Robert Stowe's picture
Robert Stowe on August 5, 2013

Thanks for this, Jesse. There’s much to like in your post, but I’ll focus on some points of concern.

 

 One of your central arguments is about market-based mechanisms (cap and trade or a carbon tax): “Yet for this kind of carbon pricing policy to work as designed, the price imposed by the carbon tax must exactly equal the estimated economic damages imposed by a ton of CO2 emissions, or the so-called ‘social cost of carbon.’” Elsewhere you conclude, “when we try to price carbon, we don’t get the right price on carbon, we get the price we can get.”

 

 I guess my snide response is, “So?” One designs a cap and trade system to keep emissions at or below a certain quantity (the cap). One designs an emissions tax (say on CO2) to impose a uniform price upon emissions that do occur. There are a number of design considerations—especially for a trading system—but if these are addressed, the system will “work as designed.” And, it will do so at lower cost than “traditional” (“command and control”) regulatory approaches, through (approximately) equalizing the marginal abatement cost for covered facilities. “Lower cost,” all else being equal, means that there will be looser political constraints.

 

 I’m not sure why you’re insisting that the price correspond to the calculated social cost. No one who has designed a real-world system (EU ETS, California) has tried to do this. As you note, the social cost is uncertain (especially for climate-change damages), and political constraints would keep you from imposing that high a price at the start. (There are economic reasons for gradually tightening the cap or increasing the tax, as well—e.g., avoiding premature retirement of power plants and other capital assets).  Of course (as you imply), the price may be too low to achieve a specified GHG concentration or (though the relationship is more uncertain) global average temperature, but at least you’re moving in the right direction.

 

 To move on, Suzy Waldman asked, to which you responded positively: “So then the innovations driven by the revenue from the carbon tax are as important as the emissions control?” I disagree, because the supply of funds will never drive innovation as effectively as the demand generated by an elevated (and hopefully rising) price for competing technologies. Again, the innovation generated by a carbon price may not be sufficient to meet certain climate goals, and the relationship between the price and the innovation level may not be linear (I don’t know), but innovation will occur.

 

 Having said all this, I certainly agree that a government, with tax or auction revenues in hand, can leverage the innovation effects of a carbon price. And it can also stimulate demand through direct or indirect purchases. These are core points in your essay that are well taken. But government action in this regard will not be effective in the longer run without market support.

 

 As you and some respondents noted, the political constraint in the U.S. is, in any case, fully binding; there will be no market-based mechanism (or any type of legislated climate policy) at the federal level in the medium term. And “traditional” regulation (which President Obama is pursuing instead) brings in very little income to use for innovation. However, I thought it important to respond to the (apparently) all-or-nothing view of market mechanisms, as these are being adopted or considered in many countries (or sub-national jurisdictions) around the world.

Devon Swezey's picture
Devon Swezey on August 5, 2013

Robert, 

As Jesse writes in this essay, textbook economic theory argues that for the externality caused by carbon-generating activities to be fully internalized, the marginal benefit of emissions should equal the marginal social cost. I don’t think Jesse is suggesting that we need to “get the right price” nor that precisely estimating that price is even possible, only that this is how most economists view the issue. Indeed, both your comment and Jesse’s post express the fact that any carbon price is both socially constructed and politically constrained, so that any acceptable price is bound to be much lower than the theoretical optimim.

Second, you write “the supply of funds will never drive innovation as effectively as the demand generated by an elevated (and hopefully rising) price for competing technologies.” I’m interested to see what evidence you have to support this proposition. There is considerable historical evidence that clearly demonstrates that public funding for research, development and demonstration of new technologies, as well as public procurement of new technologies, has been responsible many of the key technological advancements throughout history in areas like energy, information technology, biotechnology, aeronautics, space and others. For a review of this extensive evidence, see the studies that Jesse cites above (Breakthrough Institute, Mazzucato, Block, and Ruttan). In very few if any of these instances has an elevated price for competing technologies been a key driver of technological innovation. For more on this see this report by the Information Technology and Innovation Foundation: http://www.itif.org/files/2011-inducing-innovation.pdf

Certainly, a politically constrained carbon price will tend to reduce emissions at the margin, such as by accelerating a shift in electricity generation from coal to natural gas, or incentivizing greater investment in energy efficiency, but there is simply no evidence that the politically constrained carbon price (or even the optimal carbon price), will call forth the kind of breakthrough innovation necessary to rapidly decarbonize the economy, nor the kind that has been stimulated by public funding in the past. 

Thus the core question, which it appears you agree with, is how do we impose a politically constrained carbon price to raise revenues for investment in clean energy innovation, and how do we structure those investments to best catalyze the type of innovation required to decarbonize the economy?  

 

Lewis Perelman's picture
Lewis Perelman on August 6, 2013

Devon, I agree, at least in part, with your counter to Robert’s claim about what drives innovation.

In addition to the sources you noted, historian Charles Berg’s 1978 article, “Process Innovation and Changes in Industrial Energy Use,” is instructive. Looking at the progressive replacement of firewood by coal in the last quarter or so of the 19th century, Berg found that the replacement could not be explained simply by price: through much of the period, and in many places, wood was actually cheaper than coal. Yet the triumph of coal, Berg concluded, was “no contest,” because coal attracted the best intellectual talent of the day to the challenge of creating what we lately call The Next Big Thing.

OTOH, there is nothing in Berg’s account to indicate that government subsidies or targeting of coal development was necessary or particularly influential in the transformative innovations that established the modern coal industry.

Berg’s report makes it clear that such major innovations entail a complex web of interacting economic and technical interests, and therefore a multiplicity of motives, many of which may seem unrelated to the ultimate industrial transformation. Public policies and political culture may be pertinent to the extent they create an ambience that is conducive to discovery, communication, innovation, and entrepreneurship.

The development of refrigeration technology demonstrates a similar pattern. In their book, “Turning Oil Into Salt,” Korin and Luft observe that through much of the history of civilization, salt was so precious that wars were fought for it — because salt was the major one of limited options for preserving food. The invention of refrigeration changed salt from a precious mineral into a mundane commodity. But the development of artificial means to refrigerate and thus preserve food was not driven mainly by the cost of salt. Rather, refrigeration presented an intriguing intellectual challenge to powerful minds as well as a natural application of advancing scientific discoveries: e.g., Boyle’s Law. 

Scientists and inventors were not intrigued by coal simply as a replacement for wood, as Berg emphasizes, but because it opened an array of new possibilities for discovery and innovation that existing materials and technologies could not match. The development of refrigeration similarly was driven by a variety of interests and potential applications beyond simply replacing salt or other means of food preservation.

So price signals are not evidently necessary or effective at driving innovation. But government interventions, other than those broadly favorable like IP protection and perhaps some investment in basic research, also are not essential and often may not be effective.

Robert Stowe's picture
Robert Stowe on August 6, 2013

Thanks for the clarification, Devon. I understand the points about Pigouvian taxation, etc. (to a reasonable approximation; I’m not an economist), but seem to have misread Jesse’s intent with regard to theory vs. practice. And thanks for noting that “…a politically constrained carbon price will tend to reduce emissions at the margin”–though I would quibble with the word “tend”!

Regarding your second point, my choice of words (“supply” and “demand”) was unfortunate, as I was not making an economics argument. I intended to say merely that the availability of funds, even if they are earmarked in law, is no guarantee that they will be used–or used wisely–for innovation-related purposes. Whereas, demand driven by rising carbon prices *will* ensure *some* innovation (with higher prices driving more innovation). I don’t dispute (as I note above) that government investment in the innovation cycle has produced some dramatic results (though I would note the economics argument that investment in more basic research, with less appropriability due to attendant knowledge spillovers, produces greater social benefit).

On further reflection, I believe that Jesse’s core point deals with the double dividend. Not being familiar with the original economics argument, I can’t say much on this, but I am sympathetic with his argument. I would note that Fullerton and Metcalf (apparently not in the bibliography to which Jesse links) conclude that one can’t make any general statement about the double dividend (i.e., using proceeds to reduce distortionary taxes versus using them to invest in something that produces a social good); rather, one must looks at the specifics of each case. (Fullerton, Don, and Gilbert E. Metcalf. “Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing.” Chicago-Kent Law Review 73 (1998 1997): 221.)

On breakthroughs: We need some, for sure, and I fully agree that nothing we’re doing now will produce any. However, I’m a big believer in the law of small beginnings. The various policies–market and non–that countries and other jurisdictions are putting in place–at an increasing pace, I might add, the U.S. notwithstanding–along with the innovation that *is* occurring, makes breakthroughs more likely in the future. I offer no references from either economics or political science for this opinion!

Still, I’m not sure I *do* agree with your last point. Innovation must be financed, certainly. But the purpose of emissions trading or a carbon tax is to raise the relative prices of carbon-intensive fuels and raw materials. I believe that choices about investment should be made separately, with due attention to technical financial considerations (whether public or private finance). If it turns out that the “best” source of funds is revenue from a carbon tax, fine.


 

Jesse Jenkins's picture
Jesse Jenkins on September 6, 2013

Thanks for the comment Janne. Sounds like our thinking is along the same lines. If you’d like to, email me some of your research. I’d love to take a look. Cheers,

Jesse

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