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When Politics Constraints Carbon Pricing, Part 2: 6 Tips for Improving Climate Change Policy

Summary:
  • Economists widely consider putting a price on carbon to be the ideal, “economically optimal” climate change policy. Unfortunately, real-world political constraints mean carbon pricing rarely lives up to this ideal (see Part 1 in this series).
  • Careful attention to several political economy constraints on carbon pricing can yield improved policy designs and better environmental and economic outcomes.
  • In particular, as discussed in the final installment of this seriessmart use of the revenues generated by a carbon tax could be just as (if not more) important than the carbon price itself.

Full Spectrum: Energy Analysis and Commentary with Jesse Jenkins

The repeal of Australia’s carbon tax last week put the political obstacles to establishing a substantial price on carbon in stark relief. Yet the news from Canberra is just the most dramatic manifestation of a set of powerful political economy forces that can fundamentally constrain efforts to put a price on carbon, as I explained in Part 1 of this series (and detailed in a new paper published in the peer-reviewed journal Energy Policy here; email me for a copy).

Economists typically envision tackling climate change by putting a price on carbon equal to the cost of climate-related damages caused by CO2 emissions — also known as the “social cost of carbon.” That’s the “optimal tax” T* in Fig. 4, from my paper, below. Typical estimates of the social cost of carbon range from roughly $15 to $150 per ton of CO2 in 2012 dollars, with economists envisioning prices rising steadily each year.

Figure 4. Politically constrained carbon price and the opportunity space for improvement. 

Politically constrained carbon pricing policies

Source: Jenkins (2014). Click image to enlarge. 

While pricing carbon sounds simple in theory, in the real world, several political economy constraints can prevent policy makers from enacting such a price, including: opposition of industrial sectors with a concentration of assets that would lose considerable value under such policies; the collective action nature of climate mitigation efforts; principal agent failures; and a low willingness-to-pay for climate mitigation by citizens (see Part 1).

Evidence on public support for climate policy in the United States indicates that political constraints might limit any carbon price to the range of just $2 to $8 per ton of CO2. That’s anywhere from 60 percent to two orders of magnitude below the full social cost of carbon!

In general then, efforts to price carbon will result in a politically constrained tax TC well below T*. This constrained carbon price can only reduce emissions to QC in the figure above. This constrained carbon price thus fails achieve the optimal equilibrium emissions level, Q*, leading to excess CO2 emissions and remaining external damages that exceed the marginal social benefits (the shaded area in Fig. 4, equal to Q* QC).

In short, these political economy constraints mean that carbon pricing proposals don’t work as planned and can’t deliver either the economic efficiency or environmental efficacy envisioned by economists.

Fortunately, that’s not the end of the story! 

While simply trying to “put a price on carbon” is likely to fall far short, alternative policies may capture the “opportunity space for improvement” labeled in Fig. 4. That is, any policy that can achieve reductions in CO2 emissions in the range QC to Q* without imposing social costs in excess of the optimal social cost of carbon (equal to MSC–MPC) will be welfare-improving relative to both the absence of policy intervention (P0, Q0) and the implementation of a politically constrained carbon price (PC, QC). (A note to economists: this relates to the “general theory of the second best,” as discussed in my paper). 

Thus, while a classic “Pigouvian” carbon price may be “economically optimal” in theory, in real-world practice, there is a significant opportunity space to improve upon the constrained implementation of carbon pricing policies.

How to improve on a politically-constrained carbon price?

How are policy makers to capitalize on this opportunity space for improvement and pursue creative climate policy instruments with superior political feasibility, economic efficiency, and environmental efficacy relative to the constrained implementation of carbon pricing policies? My Energy Policy paper outlines several key implications for climate policy making in the face of political economy constraints…

First, we have to recognize that political economy considerations present an additional key constraint on the design and implementation of climate policies. Recognizing this constraint, policy makers should therefore strive to mitigate climate-related externalities while ensuring (1) that the policy is welfare-improving (i.e., the social costs of mitigating climate-related externalities do not exceed the social benefits) and (2) that the policy does not violate one or more political economy constraints (i.e., the private costs of mitigating climate-related externalities do not exceed the various political economy constraints on policy making). These political economy constraints may take multiple forms, including: limits on welfare losses for industrial constituencies with high asset specificity; limits on initial increases in household costs or in perceived price increases in particularly salient goods or services (e.g., gasoline prices or heating or cooling bills); and/or limits in net increases in household costs after offsetting tax reforms, rebates or government expenditures. (We’d all benefit from further research exploring the operation of each of these potential constraints and the manner in which they may bind climate policy design as well).

Second, it’s time for economists, climate advocates, and policymakers to get more creative. It’s ok to compare a climate proposal to a perfect carbon tax in order to evaluate how close to the theoretical economic ideal the policy might get. But it’s time to put aside a single-minded focus on carbon pricing as the “optimal” climate policy in the real world. Policies that improve economic welfare beyond the status quo without violating relevant political constraints should not be dismissed simply because they are not “economically optimal.” Neither, in point of fact, are the politically constrained carbon pricing instruments most prevalent in the real world! In practice, there might be several policy measures that exhibit superior economic efficiency and environmental efficacy compared to both doing nothing and simply trying to implement a carbon price that will inevitably run right into binding political constraints.

Third, there’s evidence that the choice of policy measure itself can affect consumer and industry support for climate policy measures. For example, MIT’s Valarie Karplus explored how the visibility and distribution of the costs of complying with policy measures impact the way consumers and voters respond to energy policy proposals. For example, consumers pay for gas on a frequent basis and are well attuned to the fluctuations of prices at the pump, while they only infrequently purchase new vehicles and capital costs may be amortized over monthly payments. This difference in visibility helps explain the political durability of U.S. Corporate Average Fuel Economy (CAFE) standards for vehicle fuel efficiency relative to fuel taxes designed to provide market incentives to induce fuel efficiency. So while economists roundly prefer fuel taxes, which are much more economically efficient than fuel economy standards, consumers greatly favor CAFE regulations, even though they impose higher total costs for a given amount of benefit. Paying careful attention to the way voters and other constituents view the the costs of different policy measures is therefore essential. The choice of policy instrument itself may either relax or tighten political economy constraints, impacting the final economic efficiency and environmental performance of any policy proposal.

Fourth, policy makers should pay careful attention to industrial structure and related political economy dynamics. For example, trying to minimize energy cost increases resulting from climate policies, say by subsidizing low-carbon energy adoption rather than penalizing CO2-intensive fuels, could neutralize opposition from energy-intensive manufacturers who do not directly emit CO2 during production. Likewise, opportunities to expand markets for lower-carbon natural gas could win the gas sector to the side of policy action, undermining collective action within the oil and gas industry associations. Providing technology or transition assistance (and thus reducing asset specificity or providing compensation for lost asset value) to specific sectors may also neutralize or weaken industry opposition. Again, there are economic and political feasibility tradeoffs here, as policy makers try to balance the two constraints discussed above. At the same time, the ideal policy is unlikely to be one that ignores the political constraints arising from industry structure, and thus runs into fierce political resistance. 

Fifth, policies that deliver near-term co-benefits salient to consumers and citizens could help reduce the temporal and geographic mismatch between climate mitigation costs incurred today and climate damage avoided in the future. For example, policies that can be credibly linked to public health co-benefits (which can be very large), energy security benefits, or economic development and employment benefits for key constituencies could improve public support for such policies.

Sixth, both the economic and political constraints on the optimal climate policy are not static, but rather change over time. That opens up temporal considerations for adaptive policy design. One clear opportunity is to reduce CO2 abatement costs through technological innovation. This can increase the amount of CO2 reductions at any given cost, effectively relaxing both the economic and political constraints. Another option is to try to strengthen industries that stand to benefit from climate policies (low-carbon technology sectors such as renewable or nuclear energy, energy efficient technologies, biofuels, etc.) before directly impacting incumbent industries. For example, clean energy deployment subsidies and innovation policies designed to effectively reduce the costs of low-carbon energy alternatives and build stronger political interests around clean energy sectors can potentially launch a self-reinforcing cycle: stronger industries and lower technology costs yield greater demand for low-carbon policy and lower compliance costs which in turn yields even stronger industries and lower costs, and so forth. At the same time, public campaigning that can raise support for climate policies in key constituencies can relax political constraints, although such campaigning must be pursued in a way that doesn’t simultaneously increasing opposition in other constituencies (i.e. doesn’t backfire). 

Finally, and perhaps most importantly, the use of the revenues generated by a carbon price may ultimately be just as important as the level of carbon tax itself (if not more so). How revenues are used can dramatically impact both the political support for the carbon price itself and improve the environmental efficacy and economic efficiency of the policy. However, there is much more to say on this front, which I have to save for Part 3, which will conclude this series. Stay tuned on Monday…

Content Discussion

Joris van Dorp's picture
Joris van Dorp on July 24, 2014

Thanks for this Jesse, I’m looking forward to part 3.

You’ve clearly defined several strategies/tactics which can already be seen in the way climate policies are being designed and deployed, at least in my country and others. For example, the practice of designing subsidy regimes in such a way that individual households (= voters) become owners of RE systems (rooftop solar in particular) is believed by some to increase the likelyhood that these subsidy regimes will survive political opposition going forward. In essence, rooftop solar owning voters are ‘trapped’ in a situation where it becomes their own best interest to support continued subsidies even when the cost of the subsidies is becoming a serious economic headwind for their country.

Personally, I don’t believe such strategies are going to work in the long term. Germany is the test case. While hundreds of billions of subsidy are committed to rooftop solar, only a small fraction of the German population is benefitting from that. This fraction of the population is too little to credibly keep sustaining the subsidy system politically. Indeed, it is clear that the subsidies will be reduced or eliminated well before PV deployments targets are met. Already, investment in solar PV in Germany has taken a nosedive due to the reduced subsidies.

The German strategy included another interesting tactic that can be used to influence the public in doing things that harm them financially. Officially, the tens of billions of euro’s pumped into subsidising PV each year are not called a subsidy! In a brilliant application of Orwellian double-speak, the German PV subsidies are officially called a ‘surcharge and compensation’ scheme. Because the billions needed to pay for solar PV deployment is not taken from public funds, but are removed directly from the purse of German citizens through their electric bills, technically this cannot be called a subsidy. I noticed a few months ago that even the (rather respectable) Fraunhofer Institute has embraced this Orwellian wordgame in order to proclaim that solar PV in German does not recieve subsidies, while fossil and nuclear power do recieve subsidy. You can find Fraunhofer explaining the details of this propaganda move here:

http://www.ise.fraunhofer.de/en/publications/veroeffentlichungen-pdf-dateien-en/studien-und-konzeptpapiere/recent-facts-about-photovoltaics-in-germany.pdf

(Page 22 onwards)

In my opinion, these are all brilliant tactics which have certainly helped fool millions of Germans into thinking that PV can compete without subsidies. Due to their misunderstanding, solar power deployment policy has probably been far more effective than political economists might have expected from mere political economy constraint considerations. The key ingredient at work here is the fostering of illusion in order to manipulate people into harming themselves financially, even while thinking they are helping themselves. What I wonder is how long this illusion will be believed. Not very long I think, because German people are not particularly stupid or gullible generally.

Jesse Jenkins's picture
Jesse Jenkins on July 24, 2014

Thanks for following the series Joris. 

Nathan Wilson's picture
Nathan Wilson on July 25, 2014

There is one other risky strategy that Germany is using to help sell their renewable program: the nuclear phaseout.  People love blaming a scapegoat for their problems, and nuclear’s low operating cost means it has few works/voters who depend on it for a living.  It is unfortunate that they choose to phase-out nuclear before phasing-out fossil fuels, because this strategy makes it very difficult to actually lower CO2 emissions, in spite of large deployments of renewables.

Marchant Wentworth's picture
Marchant Wentworth on July 26, 2014

Mr. Jenkins:  Thank you for your insightful Part II.  While there are a number of points to take to heart in the piece, the one that rang my bell was the need to get creative.

It is now clear that there is a complete breakdown in representative government in the House — whatever the design of a tax or some version thereof there is no willingness on the part of the political leadership to act.  The nine year fight to renew the Clean Air Act was finally ended by George the senior to craft a compromise that was expanded by Reps. Dingell, Waxman and Boehlert hammered through the House and Senaite.  Similar dynamics do not now exist and may not for some time to support an effort of any kind.  Even the most mild of energy efficiency bills was caught in the political crossfire in the Senate.  Public opinion is clearly in favor of some kind of action, but because of the relatively abstract and perceived remoteness of the threat, it has not approached the level that might endanger members jobs and the traditional issue-oriented campaigns are not working in this non-representative atmosphere.    This is compounded by the difficulty of finding a clear path towards reducing emissions from China and India.  

All of this tends to lead me towards the need for new creative solutions for this unique, but maybe longlasting political girdlock.  Lacking federal legislation, the states can and have taken action.  Regulatory approaches in the Administration’s carbon rules could yield some reductions.  But this dire situation calls for innovation and change of a magnitude that is hard to grapple with.  Mr. Jenkins call for creative solutions is a mighty understatement.  

Robert Bernal's picture
Robert Bernal on July 27, 2014

About #3, it seems fuel economy would be easier to implement than increased fuel prices, however, I realize that efficiency tends to increase usage. Some combination of both, so that the large vehicle owners might eventually buy the smaller cars. I would say to offset by giving credit for electric but both the expense of the batteries and the source of the electricity still has to be dealth with in such a scientific manner as to actually lower prices for batteries and nuclear, or other clean source (needed at night for charging cars or for making clean fuels)…

Which makes me really believe that the focus on #6 is the top priority. Cheaper clean energy automatically increases opportunity space. Costs of actual capacity builds can come down via automation, etc. Non intrinsic values such as regulatory agencies “taking forever” to streamline the development of faster and cheaper production avenues (such as for nuclear) are a stumbling block in the whole concept of CO2 pricing and stopping excess CO2..

Joris van Dorp's picture
Joris van Dorp on July 28, 2014

If human co2 emissions were stopped now, co2 concentrations would in fact fall off relatively quickly at first, thus bestowing benefits in the form of reduced global warming within decades. After a while, this co2 concentration reduction would slow to a crawl as natural short-term co2 uptake mechanisms are spent and the long-term (i.e. rock weathering and erosion, etc.) co2 uptake mechanisms takes over.

You seem to be saying that you agree that the benefits of co2 reduction depend on an act of faith. Are you a denier of the veracity of mainstream climate science? If so, please state this clearly, as it would mean that we need to discuss the veracity of climate science first before meaningfull discussion of climate policy would be possible, in my opinion. In any case, it would be helpfull if you stated your opinion on the veracity of climate science.

Joris van Dorp's picture
Joris van Dorp on July 28, 2014

But this dire situation calls for innovation and change of a magnitude that is hard to grapple with.  Mr. Jenkins call for creative solutions is a mighty understatement.”

The creativity necessary here is creativity in the form of seeking to understand that nuclear energy is essential to fighting co2 emissions. Nuclear energy does not rely on subsidies, so it does not rely on politicians trying to find popular support for massive, permanent subsidy regimes. This makes all the difference.

A new nuclear power plant can supply energy for 100 years, while being amortised over 25 years. So if the nuclear option is pursued seriously, the aggregated capital cost of nuclear energy for a society would only be one-fourth of what it is during the first 25 years of a single nuclear power station. Because capital costs make up the bulk of the unsubsidized cost of nuclear power (which is currently around 10 ct/kWh in the US and EU, of which only about 2 ct/kWh is OPEX and the rest is CAPEX), the long-term cost of nuclear energy in a nuclear powered society is only 2 + 8/4 = 4 ct/kWh. Allowing for economies of scale, the average cost of nuclear power will be nearer to 3 ct/kWh. At 3 or 4 ct/kWh, nuclear power competes with all fossil fuel options and thus replaces them without the need for complex co2 taxes or permanent subsidies (as in the case of renewable energy options).

Creativity in solving the co2 emissions crisis is more than just trying to devise silver-bullit technologies which currently do not exist. It is also about reconsidering the proven technologies that we already have, but which have fallen by the wayside due to no fault of their own like nuclear energy.

Joris van Dorp's picture
Joris van Dorp on July 28, 2014

Yes it is unfortunate.

In my country, some prominent renewables advocates come out quite honesly to say that nuclear power is a competitor of renewable energy and therefore should be phased out. I think this is what is driving German anti-nuclear policy. Indeed, the most recent school textbook of my children on environmental science contains the statement: “Society must choose between renewable energy OR nuclear energy.” The statement is there because it is clear that should a society choose to become zero-carbon by using nuclear energy, then renewable energy will never be used in that society because it can never compete with nuclear energy, and because it would serve no purpose since nuclear energy is inexhaustible, clean and co2 free.

Marchant Wentworth's picture
Marchant Wentworth on July 28, 2014

As a card carrying climate cultist (grin), I would say that there is likely a place for existing nuclear and maybe no more that 3-4 1000 MW plants.  The problem is that a) nuclear is very very expensive and b) they take a long time to build.  Because of the risk, Wall Street is now reluctant to commit and the only way plants are being built now is with massive loan guarantees.  The fact is that existing nukes are being undercut by wind in dispatch now in the midwest.  I do not believe that this is a result of “paranoia” described by some commenters.  Rather, it is the result of some rather bad decisions by the nucleur power community that appears to me to be its own worst enemy.   Nonetheless, some of my colleagues have computed that getting carbon levels down in the near term for the electricity sector will almost certainly require some nuclear, some CCS coal, coupled with a dramatic uptick in renewables and energy efficiency.   Designing the policy options for letting this happen will require lots of creative thought and innovation.        

Robert Bernal's picture
Robert Bernal on July 28, 2014

I have to point out some mistakes I said, here.

1, I suggested that large vehicle owners should buy smaller cars. WRONG!

2, I suggested that people should use less gas which is partially WRONG because gas equates to energy and MORE people should have MORE energy, if we are to ever solve our problems.

Why do I allow myself to become temporarily brainwashed (because I fear excess CO2).

The true path to economic prosperity is in the development of whatever nuclear that can make liquid fuels, hydrogen, methane, ammonia, heat large pools of molten salts for electrical generation, load leveling, ramp up, etc. Therefore, it must be developed ASAP so as to both power the world (and power big family cars, lots of Disneylands, etc) and to be the backup for renewables (which will be the majority of the time.

The way I see it, the more renewables the better as that reveals we need clean energy (or what is the purpose of it?) and, in order to complete the transition to clean energy (that the renewables raises awareness too), we need a full scale nuclear powered clean fuels/electricity infrastructure.

I am afraid that a carbon tax would compromise this most important step UP in humanity’s energy future unless ALL anti-science is removed from the policy structure (such as nuclear fear mongering) and if it is proven, beforehand, that it will not detriment the economy in any way (as even the mere mention of more taxes can detriment an economy). Only then could a carbon tax be really helpful in ensuring that people will choose the large amounts of nuclear needed (a CO2 tax should help nuclear growth).

Robert Bernal's picture
Robert Bernal on July 29, 2014

Large scale renewables = more fossil fuels because they require backup (and because of land use restrictions).

Nuclear takes too long to build because of non standardization (of the proper design). All aspects of the nuclear process including reprocesing and fission products isolation must be standardized also. I believe the biosphere will fry unless we act soon to transition from FF’s. I know that is only possible IF done so in an economically acceptable way. Only a highly prosperous society could afford to sequester excess CO2 (by machine) and avert ocean acidification on the same scale as (a sci-fi like) terraforming process involving chemistry (if need be). I hope that a CO2 tax will be written to “allow” an advanced nuclear build up. If not, then that carbon tax will indirectly fry the biosphere (by preventing the vast amounts of energy required to achieve the economic growth needed to afford overcoming any problems).

In otherwords, we have no choice but to do nuclear “right”.

Marchant Wentworth's picture
Marchant Wentworth on July 29, 2014

I am sure that nonstandardization plays some role in the long build time for nuke plants.  Standardization could also bring the costs down of course.  But in the meantime, the horrendous cost overruns and mistakes by the industry add to Wall Streets skittishnest about financing these plants.  I believe the only new starts are self financed coupled with loan guarantees.  But I may be wrong about that.  

The need for fossil fuel back up for renewables is a persistant myth.  Experience in Texas, for example, where wind provides a substantial portion of the electricity, indicates that there was no need for fossil back up.  I seem to remember studies by the Natl Renewable Energy Lab that indicated that grid operators can integrate renewables into the dispatch regime fairly easily without turning on gas turbines.  Throughout the PJM grid, for example, wind is always blowing somewhere on the grid and with the aide of computer programs can be predicted.  Of course not all renewables are intermittant;  geothermal biomass and incremental hydro and energy efficiency all work 24/7.

I would suspect that any carbon tax would provide a partial incentive for existing nukes which is why Exelon supports it.  Finding the capital for new nukes is another matter.  

  

 

Robert Bernal's picture
Robert Bernal on July 29, 2014

I hope I’m wrong about “nuclear is the only way” (to power 10 billion at high standards). I imagine it’s possible as long as renewable integration over large areas can be realized along with cheap storage. I know that ocean wind alone could power the world (but is still expensive).

Bas Gresnigt's picture
Bas Gresnigt on July 29, 2014

Joris,
Never asked yourself why Brussels didn’t take action regarding the FiT’s for renewable such as solar, wind, biomass?
I think EU competition rules contributed highly (or forced) towards using this clever system.

The EU competition guard in Brussels did shoot off the French scheme (Hollande) to support renewable!

And Hinkley C is still scrutinized, still a no go from Brussels. But UK may succeed in changing the competition rules with the new EU commission that will come this autumn.

 

Bas Gresnigt's picture
Bas Gresnigt on July 29, 2014

“…At 3 or 4 ct/kWh, nuclear power competes with all fossil fuel options and thus replaces them…”
Not low enough to out-compete the new German lignite power plants!

Joris van Dorp's picture
Joris van Dorp on July 30, 2014

I am sure that nonstandardization plays some role in the long build time for nuke plants.  Standardization could also bring the costs down of course.  But in the meantime, the horrendous cost overruns and mistakes by the industry add to Wall Streets skittishnest about financing these plants.  I believe the only new starts are self financed coupled with loan guarantees.  But I may be wrong about that.”

The causes and origins of nuclear power cost escalations (in some, but not all, countries) is a fascinating subject matter. Please review the following well-respected analysis for hints and tips on how to approach this intriguing and critical (no pun intended) subject.

http://www.phyast.pitt.edu/~blc/book/chapter9.html



Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

Hi all,

Let’s please keep the conversation threads on topic. There are lots of discussions of nuclear energy costs and benefits elsewhere on this site, but this post is focused on climate policy. Thanks,

Jesse

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

The “atmospheric life” figures you cite are averages. There are a variety of processes that remove carbon from the atmosphere. Some, like ocean mixing and biosphere intake, are fast. Others like rock weathering are very slow. So unforutnately it’s a bit more complicated than just tsaying “30-90 years.” Some CO2 would be withdrawn quickly while some of it would last for centuries in the atmosphere. 

However, when I said tie climate policy to near-term benefits, I wasn’t talking about near-term climate benefits, but rather other credible co-benefits, like improved air quality and energy security (for example).

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

Let’s keep the conversation on topic. This isn’t the space to litigate the science of global climate change. Thanks.

Hops Gegangen's picture
Hops Gegangen on July 30, 2014

 

Bill Gates seems think nuclear is the only option, so he has funded research into low-cost no-proliferation reactors.

He may well be right. But I see encouraging progress in batteries and flexible solar, so I hope someday we will harvest solar energy from almost everything exposed to the light of day.

Also, I think we could live quite nicely without wasting all the energy we do. Because it is cheap, we waste it.

 

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

Hi all,

Again, can we keep the comments focused on the topic at hand (i.e. the design of effective climate policy)? I’d rather not start another nuclear vs renewables debate here! Thanks,

Jesse

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

In rough terms, I believe net CO2 sinks remove about 2 ppm of CO2 from the atmosphere annually, so if we cut global anthropogenic emissions to 0, CO2 PPM would fall by 2ppm per year. If we cut anthropogenic CO2 in half, it would fall by just 1 PPM per year. Obviously, this isn’t going to lead to substantial changes in the short-term. 

But that’s really not the case politicians will or should make. The major gains from action on climate change are in avoided damages from long-term warming that does not occur thanks to near-term actions. Again, that’s a really tough sell, as I hope my article and columns here have made clear. That’s a large part of the reason why public support for carbon pricing is so small compared to the full social cost of carbon. 

So I don’t think the political sustainability of the policy really hinges on “how those “improvements” might be quantified over say a typical political term of 2-4 years in away that a politician could point to them and say “See what my administration did.”” That’s just not the kind of problem this is. Politicians will on the one hand need to convince people that this is a long-term endeavor that is worth undertaking. And then they need to link these near-term actions to near-term co-benefits of climate mitigation as best as they can to blunt the disconnect between climate mitigation costs and benefits. Finally, they’ll need to do so in a way that doesn’t run afoul of the various political economy constraints present (as discussed in Part 1 and 2 of this series). 

Bas Gresnigt's picture
Bas Gresnigt on July 30, 2014

Your prediction resembles the big black-out predictions of Bloomberg etc, when Merkel closed nearly half her nuclear fleet permanently after Fukushima. :-). Had to laugh then too, as that would be total against the very cautious character of the capable Merkel. 
Half a year ago Merkel said no when the 4 big utilities begged for a capacity market. But she installed a capacity market study group … 

Last year Hollande in France designed a (less generous/costly) subsidy system in order to catch up a little with renewable*). But that was immediately turned down by Brussels…
While Merkel is allowed to go on with large scale dumping (I’m not against as it even brings somewhat lower electricity prices here in NL).

How is it possible that Merkel’s system is not against the EU competition rules, and that of:
– Hollande (France) to support renewable was banned immediately; and
– indications are that the UK subsidy scheme for their new NPP at Hinkley is also against the EU competition rules, so will also be banned (unless the rules are changed this autumn when the new commission starts).
???

Btw.
The new lignite plants which the big 4 German utilities installed since 2010, still make profit. While nearly all other power plants (pumped storage, NPP’s, coal, gas) make losses.
Those new lignie plants are one of the few smart decisions the P&L responsible boards of those utilities made. Those keep them out of the red figures.

——
*) Hollande (France) targets to decrease the share of nuclear from ~70% to <50% before 2025.  As he cannot replace nuclear with FF, he has to do something to raise the share of renewable with ~20%.

Bas Gresnigt's picture
Bas Gresnigt on July 30, 2014

“…credible co-benefits, like improved air quality …”
Sorry, I fail to see how e.g. 1000ppm CO2 harm people. Two of my brothers grow tomatoes & paprika in greenhouses and they rise the CO2 level in the greenhouse artificially towards substantial higher levels. 
While they and their employees work the whole day in it.
No discussion that it would hamper health or so.

But may be I missed something?

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

The air quality benefits I was speaking of are due to reductions of pollutants that are emitted along with CO2, like particular matter, SO2, NOx, mercury, benzine etc. CO2 itself is not an air pollutant (as your brothers’ greenhouse illustrates and as is well known). The harms from CO2 are associated with the greenhouse gas’s impact on global average temperatures and climate patterns, as I hope the article was also obvious about.

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

The wide range of uncertainty in climate damages is well known and I’m not disputing it at all. It’s also embodied in the wide range of social costs of carbon discussed in my article (basically $10-1000/ton CO2, so two orders of magnitude of uncertainty there), and compounded by disagreements in the social discount rate to apply to intergenerational and global impacts. That’s really not the issue of contention here. RE the rate of reduction, that was quoting from memory a presentation from Roger Pielke Jr a while back. I’d check the IPCC Working Group 1 report for a detailed discussion of net syncs, but I think that 2ppm/year figure is right +/- 20%…

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

I captured the range of existing uncertainty in climate forecasts in the range of social cost of carbon values references, which span anywhere from $10-1000 per ton of CO2. My point in this whole series is that political constraints likely bind us before we reach anywhere too far into this range. So I actually don’t see this is hinging on resolving that uncertainty. Why do you?

Robert Bernal's picture
Robert Bernal on July 30, 2014

The basis of detailed climate models stems from the fact that CO2 is an infrared absorber and is chemically interacting with the biosphere (such as ocean acidification). Therefore, the mere thought of excess CO2 in itself should be cause for alarm, and thus, action to transition to clean energy no matter which model turns out to be correct. I am not educated to the degree of understanding the advanced math, physics, geology, climatology, astronomics, chemistry, etc, involved in creating realistic computer climate models, however, I do know one thing, excess CO2 has to be dealt with in such a manner that we succeed in not allowing most of the models to come true! Actual clean energy development for less costs is the number 1 requirement, followed by law which causes nations that practice de-forestation to STOP.

Bas Gresnigt's picture
Bas Gresnigt on July 30, 2014

“… excess CO2 in itself should be cause for alarm,…”

Market gardeners inject massive amounts of CO2 into their greenhouses, as plants (tomatoes, flowers, etc) then grow better.
While the people working in those greenhouses with up to 1,500ppm CO2 do not notice any difference, nor experience any health effects.

So I do not see why e.g. 800ppm CO2 in itself should be a cause of alarm

 

Bas Gresnigt's picture
Bas Gresnigt on July 31, 2014

Agree.
That is one of the reasons that the new circulating fluidized bed process burns the fuel at low temperature in an oxygen rich environment. That generates far less of those noxious gasses.
So the filters in these power plants need to take out less volumes of noxious gasses and particulate matter.

Bas Gresnigt's picture
Bas Gresnigt on July 31, 2014

Whole sale electricity price is <15% of the price the consumer pays.

As in NL (Netherlands), the Germans introduced many energy related taxes. The idea behind those energy taxes is quite valid. Government needs money, so better to gather it in a way that helps society into the right direction (regarding health & climate).

These taxes make car fuel, electricity, etc. more expensive. So people do try to use less of that. Hence far more economy cars here, etc.

Bas Gresnigt's picture
Bas Gresnigt on July 31, 2014

Car fuel taxes do work!
Just compare the difference in cars between US and NL (fuel price here is ~€1.80/liter).
Our parliament would agree with higher fuel taxes, but then even more people fill up over the border in Belgium & Germany.

I like to see a tax of ~€10/liter (~$40/gallon) while other taxes are lowered so government income stays the same.
It would save many lives as people will:
– use more economy cars hence less particulate matter which now cost ~2yrs of people’s live if they live in busy city centers or along busy highways;
– use more electric cars
– drive more slowly;
– more often share cars (car pooling, facilitiated by car pooling apps);
– use more telecom and safer public transport.

Bas Gresnigt's picture
Bas Gresnigt on July 31, 2014

The figures show that coal burning decreased too. As renewable share increase ~1.5% each year (this year ~30%), further decline of coal is inevitable.
But this all leaves the main question unanswered.

How come that Merkel’s “subsidy” scheme is not against EU competition rules, and those of:
– Hollande (France) to support renewable;
– UK to support their new NPP;
are against the EU competition rules??

Peter Lang's picture
Peter Lang on July 31, 2014

Jesse,

It seems your interest is in advocating for policies that cannot succeed in delivering the benefits.  Why haven’t you considered the alternatives to the interventionist policies?  I suggested three broad policy alternatives on the previous thread.  You asked for more explanation.  I provided it.  You didn’t respond or acknowledge it.  You’ve ignored it in this follow up article and continue to advocate for carbon pricing.  You continue to ignore the key fact that prevents such policies from succeeding – i.e. they cannot deliever benefits unless the whole world particpates, and continues to particpate and act in unision for a century or so – an unrealistic proposition.

Lewis Perelman's picture
Lewis Perelman on July 31, 2014

Jesse, I think there is some relevance to both sides of this argument. I sympathize with your sense that resolving the uncertainty is not going to happen, and thus should not be an obstacle to getting on with forming some useful policy. (I haven’t read your Part III yet, but from past exposure to arguments from you and others, I think I can anticipate where it’s heading. I’m likely to agree.)

But as I commented on your Part I, the case for pricing carbon via tax or otherwise hinges on internalizing externalities — a.k.a. the “social cost of carbon.” And determining what those costs are depends on models and other estimating techniques that are fraught with not only uncertainty but subjectivity. 

In addition to those you listed, I pointed out some other flaws with the idea of using a carbon tax to modify behavior that I won’t repeat here. The simple conclusion was and is that it won’t work.

Once one embraces the idea that carbon taxes won’t work to modify behavior, one can proceed to consider what purpose the tool might serve that would be both useful and poltically acceptable. For instance, a very small tax might provide a funding stream to help support technology innovation needed to make clean energy cheap and reliable. Getting to that point does not, as you say, require relitigating the matter of uncertainties in the theory and projected effects of AGW. It should be sufficient to stipulate that they exist.

Peter Lang's picture
Peter Lang on July 31, 2014

Jesse, 

>” That is, any policy that can achieve reductions in CO2 emissions in the range QC to Q* without imposing social costs in excess of the optimal social cost of carbon (equal to MSC–MPC) will be welfare-improving relative to both the absence of policy intervention (P, Q) and the implementation of a politically constrained carbon price (PC, QC).” 

You are ignoring the fact that it has to be implemented globally, not just in individual countries.  If it is not implemented globally, the benefits cannot be realised, so it is all cost and no benefit. 

I don’t understand why you are ignoring the key issues that will prevent carbon pricing succeeding.  I explained it here: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Environment_and_Communications/Clean_Energy_Legislation/Submissions See Submission 2

In short: individual nation states or regions will not implement carbon pricing and if they do it will not survive.  The reason is that whoever implements it disadvantages itself internationally.  The cost to the participants in a scheme to achieve a given reduction climate damages is prohibitive.  Figure 1 in the link above shows how the cost increases as the participation rate reduces from 100% to 50%.  But even 50% is practicably unachievable.  Even the EU’s ETS only includes 45% of EU’s GHG emissions.  If this is all the EU can achieve, what chance for the whole world to achieve 45%, let alone 80% or more.  As shown in Figure1, at 80% participation, the cost penalty for the participants is 50%, and is 250% at 50% participation.

If you can get your head around this issue you will realise why carbon pricing – or any other scheme that raises the cost of energy – will not succeed.

 

You asked four question of me on the previous thread.  I answered them.  You did not respond, not even acknowledge them.

 

It suggests a case of avoiding the unpalatable.  You are advocating a policy that is highly unlikely to succeed – i.e. unlikely to deliver the claimed benefits so unlikely to be implemented and even if it is implemented in a few countries, it is unlikely to survive. 

 

Peter Lang's picture
Peter Lang on July 31, 2014

Jesse,

>”policy makers should therefore strive to mitigate climate-related externalities while ensuring (1) that the policy is welfare-improving (i.e., the social costs of mitigating climate-related externalities do not exceed the social benefits) “

Your articles have not recognised the key point.  The policy cannot be welfare improving if it is all cost but no benefits.  And it cannot deliver the benefits unless it is global, and that wont happen for the reasons explained in Submission 2 here: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Environment_and_Communications/Clean_Energy_Legislation/Submissions

I suggest you are making a mistake advocating for carbon pricing.  See the alternative to carbon pricing I suggested on the previous thread.

Jesse Jenkins's picture
Jesse Jenkins on July 31, 2014

Lew, you’ll enjoy part three…

Robert Bernal's picture
Robert Bernal on August 1, 2014

A “work” environment is nowhere close to the scientific degree of measurement obtained by scientific anylisis – because it does not monitor that which is the key concepts of excess CO2. We already know what amounts is an asphyxiant. We already know what amounts decrease pH levels in water and we already know that it is an infrared absorber.

Coyboy’n it doesn’t cut it. If you can prove to me that the observed lowing of the ocean’s pH levels, and that the finding that CO2 is, indeed a GHG mere conspiracy theories, then I might reconsider my views on the subject.

Meanwhile, we need to figure out how to make ALL the sources cheaper and safer (including ocean wind to synfuels?), just incase we “climate cultists” have not worried in vain, and incase we really do run into a peak oil scenario. We can mine/recycle all the things we need (even to remedy “peak phosphorous”) but ONLY if we have a reliable source of energy (and backup for solar) for the long term.

Bas Gresnigt's picture
Bas Gresnigt on August 1, 2014

Robert,
I only wanted to show that even 4times higher CO2 level in itself does not harm human health; and
that it is used in order to allow vegetables to grow faster.

Jesse Jenkins's picture
Jesse Jenkins on August 1, 2014

No one has asserted that increased levels of atmospheric CO2 causes any direct respiratory harm to humans. Please stop making this point (here or on other articles). It is a complete red herring. 

Jesse Jenkins's picture
Jesse Jenkins on August 1, 2014

Dear Peter,

You make a fair point that global climate change is of course a global phenomenon and that it must be tackled by at least a fairly substantial portion of global emitters, if not the whole world. That does raise very important challenges for coordination of policy, and yes, if any single nation acts independently, it will fail to deliver much in the way of measurable climate benefits. 

However, I have addressed this issue in my paper, and discuss it my series when considering the political economy constraints on carbon pricing in Part 1. These constraints already internalize this dynamic. That is, since nations and individuals are concerned about the “collective action” nature of climate change (see Part 1), they will discount their willingness to pay for mitigation relative to the societally optimal. That concept is a central premise of my series, and your comments have not raised any additional points that I felt needed addressed on that matter. 

Instead, I have focused on proposing a policy strategy that can succeed within the political economy constraints of each relevant national or subnational actor. If the policy framework as a whole can succeed in each nation, then it can succeed globally. In my view, climate solutions will emerge bottoms-up, nation-by-nation, not via a global top-down treaty, so I focus on the national-level policies here. You can disagree and prefer a global solution — or a liassez-faire “free market” solution — but that doesn’t mean I need to change the entire focus of my series to accomodate your comments.

Regarding your “free market” alternative, it makes no sense to me. You talk about “removing barriers” to the free market functioning, but there is no clear evidence that the obstacle to tackling climate change is a lack of free markets. Rather, you must understand that “free markets” do nothing to consider externalities, of which climate change is the most complicated and challenging externality of modern times. You argue that regulatory barriers have prevented nuclear from scaling sufficiently by adding to its cost and regulatory risk. That may be so, but removing those barriers and shifting to a “free market” absent any regulation seems like a rather foolhardy way to handle a technology with as much inherent risk as nuclear energy (and I say that as a strong proponent of nuclear power), just as it would make little sense to have no regulations for airline safety, vehicle crash tests, or any of a wide set of regulations necessary to check the tendency of “free markets” to ignore externalized risks. Neither to a believe that “free markets” acting on their own will deliver the level and pace of technology innovation needed to develop clean energy technologies cheaper than fossil fuels. The history of government involvement in just about every substantial innovation of the last 100 years (and more) would bely that point as well. So when I stopped engaging, it was because I have no idea how your proposal would help much of anything. 

Jesse

Peter Lang's picture
Peter Lang on August 1, 2014

Hi Jessee,

 

Thank you for your reply.  Your first two paragraphs suggest that you do not grasp the magnitude of the issue.  I my opinion it means that no policy that will raise the cost of energy can succeed.  Therefore, we should be advocating for policies that will reduce, not increase, the cost of energy.  This can be done.  But we must remove the ideological blinkers that have forced governments to implement bad policies – examples are: Kyoto, carbon pricing, support for renewable energy and impediments to nuclear energy.

Excerpt from your first two paragraphs:

“That does raise very important challenges for coordination of policy, and yes, if any single nation acts independently, it will fail to deliver much in the way of measurable climate benefits. 

However, I have addressed this issue in my paper, and discuss it my series when considering the political economy constraints on carbon pricing in Part 1. These constraints already internalize this dynamic.”

The issue is not that a single nation acting alone will not have any impact.  It is that unless virtually all nations capture around 80% of all human caused GHG emissions carbon pricing will not succeed.  All the nations of the world would have to

act in unison and maintain the carbon price uniformly and do so for a century or so for the policy to succeed.  It is way beyond credible to believe this can be achieved.

Figure 1 in Submission 2 here: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Environment_and_Communications/Clean_Energy_Legislation/Submissions  shows why this is so.  It is a replot of information presented in William Nordhaus “A Question of Balance” Chapter V1, p116: http://www.econ.yale.edu/~nordhaus/homepage/Balance_2nd_proofs.pdf . Figure 1 in my submissions to the Senate inquiry into repeal of the carbon tax shows that if 80% of the global human cause GHG emissions are included in the carbon pricing scheme, the cost penalty to the participants (for participation being less than 100%) is 50%.  If participation is just 50% the cost penalty for the participants is 250%.

Clearly, no rational person would invest in such a scheme.   

It should be noted that the EU ETS is designed to achieve just 36%.  If that is the best participation rate the most advanced countries in the world can achieve, it strains credulity that the world can achieve 80% participation (i.e. 80% of all human caused GHG emissions included).

 

I suggest you are advocating for bad polices.  I suggest you are continuing the advocacy of policies that have been advocated and failed to gain traction for over 20 years – for perfectly rational reasons.

Peter Lang's picture
Peter Lang on August 1, 2014

 If the policy framework as a whole can succeed in each nation, then it can succeed globally. In my view, climate solutions will emerge bottoms-up, nation-by-nation, not via a global top-down treaty, so I focus on the national-level policies here. You can disagree and prefer a global solution — or a liassez-faire “free market” solution”

Jesse,  This seems to suggest you are being a bit cynical and derisive.  More importantly, it suggests you did not read my reply to the four questions you asked me on the Part article.  or if you did, you ahven’t really attempted to understand or consider it.  If you have reasons why Option 3 won’t succeed, than I’d expect a much mpre persuasive answer than you have given.  Your answer boils down to a statement of your beliefs.

Peter Lang's picture
Peter Lang on August 1, 2014

Jessee,

>“Regarding your “free market” alternative, it makes no sense to me. You talk about “removing barriers” to the free market functioning, but there is no clear evidence that the obstacle to tackling climate change is a lack of free markets.”

I disagree.  If not for the regulatory ratcheting that has caused nuclear power to be about 8 times higher cost now that it would have been if it had been regulated, objectively, on the basis of public health and safety risk.  This has meant that the accelerating rate of rollout that was occurring in the 1970’s was thwarted and nearly stopped.  Had it continued, global GHG emissions would be around 20% to 20% lower now than they are and we’d be on a trajectory to have global emissions reduced by around 50% (perhaps more) by around mid-century (with lower cost electricity substituting for some fossil fuels for heating and transport too).  That’s the effect that the regulatory ratcheting has had on global emissions.  If not for the regulatory ratcheting, we’d have more advanced, safer and lower cost nuclear energy by now and we’d be on a path for nuclear power to be half the cost of fossil fuel generated electricity before 2050.

I’d add, there is clear evidence over millennia that free-ish markets are the best way to deliver improvements to human well-being, better security, higher standard of living efficient use of resources, timely move from diminishing resources to replacements, and innovation.  Environmental activists, environmental NGOs, bureaucrats, and politicians don’t make better decisions about allocation of markets.  And imposing carbon taxes is an intervention dreamed up by climate activists, environmental NGOs bureaucrats, etc.  Importantly, they are all missing the key underlying assumptions that underpin the economic analyses that are used to try to justify carbon pricing.  This assumptions cannot be achieved (explained in several previous comments and links).

>”You argue that regulatory barriers have prevented nuclear from scaling sufficiently by adding to its cost and regulatory risk. “

Yes.  That is not disputed by anyone familiar with the regulatory ratcheting that has occurred over the past 50 years, and the rate of learning (cost reduction per doubling of capacity) for other electricity generation technologies, and the fact that nuclear is potentially the least cost alternative because of its high energy density, and the fact nuclear energy is already the safest way to generate electricity.

>”That may be so, but removing those barriers and shifting to a “free market” absent any regulation seems like a rather foolhardy way to handle a technology with as much inherent risk as nuclear energy (and I say that as a strong proponent of nuclear power), just as it would make little sense to have no regulations for airline safety, vehicle crash tests, or any of a wide set of regulations necessary to check the tendency of “free markets” to ignore externalized risks. “

I didn’t say “absent any regulations’.  That’s a strawman argument.  It suggests you are not being entirely honest in your responses and not entirely objective.  In response to you comment about ‘fool hardy’ I’d suggest it is fool hardy to be advocating policies that have failed to gain traction for the past 20 years despite the massive UN, IPCC and climate activists’ advocacy for them.  I’d further suggest that, as a researcher in the field, you and others should be properly considering all alternatives to more regulatory approaches and other interventions by government (such as carbon pricing).  Why aren’t you?  Why do you dismiss it without even looking into it?

 

What learning rate (cost reduction per doubling of capacity/generation) could be achieved going forward if the impediments to nuclear power, which cannot be justified on an objective basis (e.g. on the basis of public health and safety risk), were removed?  If this cost reduction rate was achieved, what rate would global capacity double?  (e.g. for small modular nuclear power plants).

Lewis Perelman's picture
Lewis Perelman on August 1, 2014

Jesse, I looked at it. Will comment soon. It’s pretty much what I expected.

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