Cap-and-Trade, Carbon Taxes, and My Neighbor’s Lovely Lawn

The recent demise of serious political consideration of an economy-wide U.S. CO2 cap-and-trade system and the even more recent resurgence in interest among policy wonks in a U.S. carbon tax should prompt reflection on where we’ve been, where we are, and where we may be going.


Almost fifteen years ago, in an article that appeared in 1998 in the Journal of Economic Perspectives, “What Can We Learn from the Grand Policy Experiment?  Lessons from SO2 Allowance Trading,” I examined the implications of what was then the very new emissions trading program set up by the Clean Air Act Amendments of 1990 to cut acid rain by half over the succeeding decade.  In that article, I attempted to offer some guidance regarding the conditions under which cap-and-trade (then known as “tradable permits”) was likely to work well, or not so well.  Here’s a brief summary of what I wrote at the time:

(1)  SO2 trading was a case where the cost of abating pollution differed widely among sources, and where a market-based system was therefore likely to have greater gains, relative to conventional, command-and-control regulations (Newell and Stavins 2003). It was clear early on that SO2 abatement cost heterogeneity was great, because of differences in ages of plants and their proximity to sources of low-sulfur coal. But where abatement costs are more uniform across sources, the political costs of enacting an allowance trading approach are less likely to be justifiable.

(2)  The greater the degree to which pollutants mix in the receiving airshed or watershed, the more attractive a cap-and-trade (or emission tax) system will be, relative to a conventional uniform standard. This is because taxes or cap-and-trade can – in principle – lead to localized “hot spots” with relatively high levels of ambient pollution. Some states (in particular, New York) tried unsuccessfully to erect barriers to trades they thought might increase deposition within their borders.  This is a significant distributional issue.  It can also be an efficiency issue if damages are nonlinearly related to pollutant concentrations.

(3)  The efficiency of a cap-and-trade system will depend on the pattern of costs and benefits. If uncertainty about marginal abatement costs is significant, and if marginal abatement costs are quite flat and marginal benefits of abatement fall relatively quickly, then a quantity instrument, such as cap-and-trade, will be more efficient than a price instrument, such as an emission tax (Weitzman 1974).  With a stock pollutant (such as CO2), this argument favors a price instrument (Newell and Pizer 2003).  However, when there is also uncertainty about marginal benefits, and marginal benefits are positively correlated with marginal costs (which, it turns out, is a relatively common occurrence for a variety of pollution problems), then there is an additional argument in favor of the relative efficiency of quantity instruments (Stavins 1996).

(4)  Cap-and-trade will work best when transaction costs are low (Stavins 1995), and the S02 experiment showed that if properly designed, private markets will tend to render transaction costs minimal.

5)  Considerations of political feasibility point to the wisdom of proposing trading instruments when they can be used to facilitate emissions reductions, as was done with SO2 allowances and lead rights trading, less so for the purpose of reallocating existing emissions abatement responsibility (Revesz and Stavins 2007).

(6)  National policy instruments that appear impeccable from the vantage point of Cambridge, Massachusetts, Berkeley, California, or Madison, Wisconsin, but consistently prove infeasible in Washington, D.C., can hardly be considered “optimal.”

Implications for CO2 Policy

In the same article, I noted that many of these issues could be illuminated by considering a concrete example:  the “current interest” in applying cap-and-trade to the task of cutting CO2 emissions to reduce the risk of global climate change.  Some of the points I made in this regard in my 1998 article were:

(a)  The number of sources of CO2 emissions are vastly greater than in the case of SO2 emissions as a precursor of acid rain, where the focus could be placed on a few hundred electric utility plants.  Feasibility considerations alone argue for market-based instruments (cap-and-trade or taxes) to achieve meaningful reductions of CO2 emissions.

(b)  The diversity of sources of CO2 in a modern economy and the consequent heterogeneity of emission reduction costs bolster the case for using cost-effective market-based instruments.

(c)  As the ultimate global-commons problem, CO2 is a truly uniformly-mixed pollutant.  With no concern for hot spots, market-based instruments present none of the problems that can arise in the case of localized environmental threats.

(d)  Any pollution-control program must face the possibility of emissions leakage from regulated to unregulated sources. This would be a severe problem for an international CO2 program, where emissions would tend to increase in nonparticipant countries. Furthermore, it raises concerns for the emission-reduction-credit (not cap-and-trade) system in the Kyoto Protocol known as the Clean Development Mechanism (CDM).  Such an offset system can lower aggregate costs by substituting low-cost for high-cost control, but may also have the unintended effect of increasing aggregate emissions beyond what they would otherwise have been, because there is an incentive for adverse selection: sources in developing countries that would reduce their emissions, opt in, and receive credit for actions they would have taken anyway.

(e)  Although any trading program could potentially serve as a model for the case of global climate change, I argued that the trading system that accomplished the U.S. phaseout of leaded gasoline in the 1980s merited particular attention. The currency of that system was not lead oxide emissions from motor vehicles, but the lead content of gasoline. So too, in the case of global climate, great savings in monitoring and enforcement costs could be had by adopting input trading linked with the carbon content of fossil fuels. This is reasonable in the climate case, since – unlike in the SO2 case – CO2 emissions are roughly proportional to the carbon content of fossil fuels and scrubbing alternatives are largely unavailable, at least at present.

(f)   Natural sequestration of CO2 from the atmosphere by expanding forested areas is available (even in the United States) at reasonable cost (Stavins 1999).  Hence, it could be valuable to combine any carbon trading (or carbon tax) program with a carbon sequestration program, although this will raise significant challenges in regard to monitoring and enforcement.

(g)  In regard to carbon permit allocation mechanisms, auctions would have the advantage that revenues could be used to finance reductions in distortionary taxes.  Free allocation could increase regulatory costs enough that the sign of the efficiency impact could conceivably be reversed from positive to negative net benefits (Parry, Williams, and Goulder 1999).  On the other hand, free allocation of carbon permits would meet with much less political resistance.

The Necessity of Market-Based Instruments:  Cap-and-Trade or Carbon Taxes

I concluded that developing a cap-and-trade system for climate change would bring forth an entirely new set of economic, political, and institutional challenges.  At the same time, I recognized that the diversity of sources of CO2 emissions and the magnitude of likely abatement costs made it equally clear that only a market-based instrument – some form of carbon rights trading or (probably revenue-neutral) carbon taxes – would be capable of achieving the domestic targets that might eventually be forthcoming.

In other words, my conclusion in 1998 strongly favored a market-based carbon policy, but was somewhat neutral between carbon taxes and cap-and-trade.  Indeed, at that time and for the subsequent eight years or so, I remained agnostic regarding what I viewed as the trade-offs between cap-and-trade and carbon taxes.  What happened to change that?  Three words:  The Hamilton Project.

The Making of an Advocate

For those of you who don’t know, the Hamilton Project is an initiative based at the Brookings Institution that – according to its web site – “offers a strategic vision and produces innovative policy proposals on how to create a growing economy that benefits more Americans.”

In 2007, the Project’s leadership asked me to write a paper proposing a U.S. CO2 cap-and-trade system.  I responded that I would prefer to write a paper proposing the use of a market-based CO2 policy, describing the two alternatives of cap-and-trade and carbon taxes.  I explained that I was by no means opposed to the notion of a carbon tax, having written about such approaches for more than twenty years.  Indeed, I noted, both cap-and-trade and carbon taxes would be good approaches to the problem; they have many similarities, some tradeoffs, and a few key differences.

The Hamilton Project leaders said no, they wanted me to make the best case I could for cap-and-trade, not a balanced investigation of the two policy instruments.  Someone else would be commissioned to write a proposal for a carbon tax.  (That turned out to be Professor Gilbert Metcalf of Tufts University – now on leave at the U.S. Department of the Treasury – who did a splendid job!)  Thus, I was made into an advocate for cap-and-trade.  It’s as simple as that.

Giving It My Best Shot

I argued in my Hamilton Project paper (which you can read here) that despite the tradeoffs between the two principal market-based instruments that could target CO2 emissions, the best (and most likely) approach for the short to medium term in the United States was a cap-and-trade system, based on three criteria:  environmental effectiveness, cost effectiveness, and distributional equity.  Although my position was not simple capitulation to politics, I argued that sound assessments of environmental effectiveness, cost effectiveness, and distributional equity should be made in a real-world political context.

I said that the key merits of the cap-and-trade approach were, first, the program could provide cost-effectiveness, while achieving meaningful reductions in greenhouse gas emissions levels.  Second, it offered an easy means of compensating for the inevitably unequal burdens imposed by a climate policy.  Third, it provided a straightforward means to link with other countries’ climate policies.  Fourth, it avoided the political aversion in the United States to taxes.  Fifth, it was unlikely to be degraded – in terms of its environmental performance and cost effectiveness – by political forces. And sixth, this approach had a history of successful adoption and implementation in this country over the past two decades.

I recognized that there were some real differences between taxes and cap-and-trade that needed to be recognized.  First, environmental effectiveness:  a tax does not guarantee achievement of an emissions target, but it does provide greater certainty regarding costs.  This is a fundamental tradeoff.  Taxes provide automatic temporal flexibility, which needs to be built into a cap-and-trade system through provision for banking, borrowing, and possibly cost-containment mechanisms.  On the other hand, political economy forces strongly point to less severe targets if carbon taxes are used, rather than cap-and-trade – this is not a tradeoff, and is why virtually no environmental NGOs have favored the carbon-tax approach.

In principle, both carbon taxes and cap-and-trade can achieve cost-effective reductions, and – depending upon design — the distributional consequences of the two approaches can be the same.  But the key difference is that political pressures on a carbon tax system will most likely lead to exemptions of sectors and firms, which reduces environmental effectiveness and drives up costs, as some low-cost emission reduction opportunities are left off the table.  But political pressures on a cap-and-trade system lead to different allocations of the free allowances, which affect distribution, but not environmental effectiveness, and not cost-effectiveness.

I concluded that proponents of carbon taxes worried about the propensity of political processes under a cap-and-trade system to compensate sectors through free allowance allocations, but a carbon tax would be sensitive to the same political pressures, and should be expected to succumb in ways that are ultimately more harmful:  reducing environmental achievement and driving up costs.

Of course, such positive political economy arguments look much less compelling in the wake of the defeat of cap-and-trade legislation in the U.S. Congress and its successful demonization by conservatives as “cap-and-tax.”

A Political Opening for Carbon Taxes?

Does the defeat of cap-and-trade in the U.S. Congress, the obvious unwillingness of the Obama White House to utter the phrase in public, and the outspoken opposition to cap-and-trade by Republican Presidential candidate Mitt Romney indicate that there is a new opening for serious consideration of a carbon-tax approach to meaningful CO2 emissions reductions?

First of all, there surely is such an opening in the policy wonk world.  Economists and others in academia, including important Republican economists such as Harvard’s Greg Mankiw and Columbia’s Glenn Hubbard, remain enthusiastic supporters of a national carbon tax.  And a much-publicized meeting in July at the American Enterprise Institute in Washington, D.C. brought together a broad spectrum of Washington groups – ranging from Public Citizen to the R Street Institute – to talk about alternative paths forward for national climate policy.  Reportedly, much of the discussion focused on carbon taxes.

Clearly, this “opening” is being embraced with enthusiasm in the policy wonk world.  But what about in the real political world?  The good news is that a carbon tax is not “cap-and-trade.”  That presumably helps with the political messaging!  But if conservatives were able to tarnish cap-and-trade as “cap-and-tax,” it surely will be considerably easier to label a tax – as a tax!   Also, note that Romney’s stated opposition and Obama’s silence extend beyond disdain for cap-and-trade per se.  Rather, they cover all carbon-pricing regimes.

So as a possible new front in the climate policy wars, I remain very skeptical that an explicit carbon tax proposal will gain favor in Washington, no matter what the outcome of the election.  Note that the only election outcome that could lead to an aggressive and successful move to a meaningful nationwide carbon pricing regime would be:  the Democrats take back control of the House of Representatives, and the Democrats achieve a 60+ vote margin in the Senate, and the President is reelected.  A quick check at Five Thirty Eight (Nate Silver’s superb election forecast website at the New York Times) and other polling web sites makes it abundantly clear that the probability of such Democratic control of the White House and Congress is so small that it’s hardly worth discussing.

What About Fiscal Policy Reform?

A more promising possibility – though still unlikely – is that if Republicans and Democrats join to cooperate with either a Romney or Obama White House to work together constructively to address not only the short-term fiscal cliff at the end of this calendar year, but also the longer-term budgetary deficits the U.S. government faces, and if as part of this they decide to include not only cuts in government expenditures, but also some significant “revenue enhancements” (the t-word is not allowed), and if (I know, this is getting to be a lot of “if’s”) it turns out to be easier politically to eschew increases in taxes on labor and investment and therefore turn to taxes on consumption, then there could be a political opening for new energy taxes, in particular, (drum roll ….) a carbon tax.

Such a carbon tax – if intended to help alleviate budget deficits – could not be the economist’s favorite, a revenue-neutral tax swap of cutting distortionary taxes in exchange for implementing a carbon tax.  Rather, as a revenue-raising mechanism – like the Obama administration’s February 2009 budget for a 100%-auction of allowances in a cap-and-trade scheme – it would be a new tax, pure and simple.  Those who recall the 1993 failure of the Clinton administration’s BTU-tax proposal – with a less polarized and more cooperative Congress than today’s – are not optimistic.

Nor is it clear that a carbon tax would enjoy more support in budget talks than a value added tax (VAT) or a Federal sales tax.  The key question is whether the phrases “climate policy” or “carbon tax” are likely to expand or narrow the coalition of support for an already tough budgetary reconciliation measure.  The key group to bring on board will presumably be conservative Tea Party Republicans, and it is difficult to picture them being more willing to break their Grover Norquist pledges because it’s for a carbon tax.


Even if the much-ballyhooed political opening for carbon taxes is largely illusory, the opening for policy wonks is real.  And here is where action is happening, and should continue to happen.  At some point the politics will change, and it’s important to be ready.  This is why economic research on carbon taxes is very much needed, particularly in the context of broader fiscal challenges, and it is why I’m pleased to see it happening at Resources for the Future, Harvard University, and elsewhere.

Bottom Line

I would personally be delighted if a carbon tax were politically feasible in the United States, or were to become politically feasible in the future.  But I’m forced to conclude that much of the current enthusiasm about carbon taxes in the academic and broader policy-wonk community in the wake of the defeat of cap-and-trade is – for the time being, at least – largely a manifestation of the grass looking greener across the street.

About Robert Stavins

Robert N. Stavins is the Albert Pratt Professor of Business and Government at the Harvard Kennedy School, Director of the Harvard Environmental Economics Program, Chairman of the Environment and Natural Resources Faculty Group at the Kennedy School, Director of Graduate Studies for the Doctoral Programs in Public Policy and Political Economy and Government, Co Chair of the Harvard Business School Kennedy School Joint Degree Programs, and Director of the Harvard Project on International Climate Agreements. He is a University Fellow of Resources for the Future, a Research Associate of the National Bureau of Economic Research, the Editor of the Review of Environmental Economics and Policy, and a Member of: the Board of Directors of Resources for the Future, the Board of Academic Advisors of the AEI Brookings Joint Center for Regulatory Studies, the Editorial Boards of Resource and Energy Economics, Environmental Economics Abstracts, B.E. Journals of Economic Analysis & Policy, and Economic Issues. He is also an editor of the Journal of Wine Economics. He was formerly a member of the Editorial Board of Land Economics, The Journal of Environmental Economics and Management, the Board of Directors of the Association of Environmental and Resource Economists, a member and Chairman of the Environmental Economics Advisory Committee of the U.S. Environmental Protection Agency's (EPA) Science Advisory Board, the Chair of the Scientific Advisory Board of the Massachusetts Executive Office of Environmental Affairs, a Lead Author of the Second and Third Assessment Reports of the Intergovernmental Panel on Climate Change, and a contributing editor of Environment. He holds a B.A. in philosophy from Northwestern University, an M.S. in agricultural economics from Cornell, and a Ph.D. in economics from Harvard. Professor Stavins' research has focused on diverse areas of environmental economics and policy, including examinations of: market based policy instruments; regulatory impact analysis; innovation and diffusion of pollution control technologies; environmental benefit valuation; policy instrument choice under uncertainty; competitiveness effects of regulation; depletion of forested wetlands; political economy of policy instrument choice; and costs of carbon sequestration. His research has appeared in the American Economic Review, Journal of Economic Perspectives, Quarterly Journal of Economics, Journal of Economic Literature, Science, Nature, Journal of Environmental Economics and Management, Ecology Law Quarterly, Journal of Regulatory Economics, Journal of Urban Economics, Journal of Risk and Uncertainty, Resource and Energy Economics, The Energy Journal, Energy Policy, Annual Review of Energy and the Environment, Explorations in Economic History, Brookings Papers on Economic Activity, other scholarly and popular periodicals, and several books. He is the co-editor of Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World (Cambridge University Press, 2007), editor of the fifth edition of Economics of the Environment (W. W. Norton, 2005), co editor of Environmental Protection and the Social Responsibility of Firms (Resources for the Future, 2005), editor of The Political Economy of Environmental Regulation (Edward Elgar, 2004), co editor of the second edition of Public Policies for Environmental Protection (Resources for the Future, 2000), and the author of Environmental Economics and Public Policy: Selected Papers of Robert N. Stavins, 1988 1999 (Edward Elgar, 2000). Professor Stavins directed Project 88, a bi partisan effort co chaired by former Senator Timothy Wirth and the late Senator John Heinz, to develop innovative approaches to environmental and resource problems. He continues to work closely with public officials on matters of national and international environmental policy. He has been a consultant to the National Academy of Sciences, several Administrations, Members of Congress, environmental advocacy groups, the World Bank, the United Nations, the U.S. Agency for International Development, state and national governments, and private foundations and firms. Prior to coming to Harvard, Stavins was a staff economist at the Environmental Defense Fund; and before that, he managed irrigation development in the middle east, and spent four years working in agricultural extension in West Africa as a Peace Corps volunteer.
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11 Responses to Cap-and-Trade, Carbon Taxes, and My Neighbor’s Lovely Lawn

  1. CG Dong says:

    With cap-and-trade experiment going on in California, I don’t think carbon tax will be enacted no matter who is elected as president this time. Romney is anti-tax, while Obama is aligned with CA. Anyhow, I guess climate policy would not be the policy focus for the next couple of years unless it will help the unemployment problem.

  2. Chris Hope says:

    ‘Such a carbon tax – if intended to help alleviate budget deficits – could not be the economist’s favorite, a revenue-neutral tax swap of cutting distortionary taxes in exchange for implementing a carbon tax.’

    But it would still be exactly this, compared to the outcome without a carbon tax, which would require other distortionary taxes to rise. The economic arguments in favor of a carbon tax remain the same.

  3. Ed Reid says:

    Professor Stavins,

    “You’ve got to be careful, if you don’t know where you’re going, because you might end up somewhere else.”, Yogi Berra, American philosopher

    In the ~35 years since the end of the global cooling panic, after the expenditure of more than $100 billion by the US alone, there is still no unique, broadly accepted GOAL for ultimate percentage reduction in global annual CO2 emissions, no PLAN to achieve that goal and no TIMELINE for such an effort. Simply, with regard to global annual CO2 reductions, we don’t know where we are going. That makes discussion of potential approaches to achieving a reduction, if you’ll pardon the expression, rather academic. Many technologies which might be useful if the ultimate reduction percentage is 50% would be totally useless if 100% reduction is required, as stated by Dr. James Hansen of NASA GISS.

    Your post discusses approaches which might be used by the US to encourage or force reductions in US annual CO2 emissions. However, since CO2 is a globally well-mixed trace gas, a reduction in US emissions would have a trivial effect on global annual emissions and their impact on the atmospheric concentration of CO2. If global annual CO2 emissions were static, complete elimination of US CO2 emissions would result in a reduction of ~18% in global annual emissions. However, global annual emissions are not static, but rather are growing; and, it is highly unlikely that the US could reduce annual CO2 emissions rapidly enough to offset the increase in annual CO2 emissions currently occurring from Asia. Simply, it is not possible to begin reducing global annual emissions until you first stop increasing global annual emissions; and, those increases are occurring from Asia.

    The effects of increased atmospheric CO2 concentrations over the next ~50 years are likely net positive, based on the increased rate of growth of field plants in an enriched CO2 environment. That would suggest that global annual CO2 emissions might need to be reduced to zero by ~2060. At the same time, against a background of increasing global annual CO2 emissions and increasing atmospheric concentrations of CO2, there has been no statistically significant increase an global surface temperatures over the past ~16 years. That would suggest that the projected impact of increased atmospheric CO2 concentrations is being offset by some factor or factors which have not been identified.

    There are currently only 147 sites, all in the US Climate Research Network, at which surface temperature data is being collected which does not require adjustments. Recent studies have suggested that up to half of the temperature anomaly currently attributed primarily to increased atmospheric CO2 concentrations is the result, not of measured values, but rather of adjustments to the measured values. Simply, we do not know what the global average surface temperature is, nor even how it has changed over the period of the instrumental temperature record, with any degree of certainty.

    The concern regarding catastrophic anthropogenic global warming is based entirely on the outputs of climate models which have questionable skill at reconstructing the instrumented past, no less projecting the future. Current warming, based on the adjusted data, is less than Hansen of NASA GISS projected based on total elimination of global annual CO2 emissions, despite rapid growth in global annual CO2 emissions.

    Finally, I no longer believe in Santa Claus, The Easter Bunny, the Tooth Fairy or even the Great Pumpkin; and, I do not believe in the possibility, no less the likelihood, of a totally refundable tax. I believe our congresscritters are too rapacious to collect taxes and then refund them in total. Also, I believe they are too invested in redistribution to return the taxes collected to those who paid them, when there is an opportunity to buy votes instead.

    There is one approach which would directly and predictably drive the reduction of US (and global) annual CO2 emissions. That approach combines an initial emissions cap, a predetermined annual reduction in that cap until the required global annual CO2 emissions level is reached and the ability for the emitters to trade allowances among themselves to minimize both control costs and economic disruption. The independence property, which you have discussed previously, would suggest that the emissions allowances should be distributed at no cost to the emitters.

    Actually reducing global annual CO2 emissions would require the investment of $trillions. A reduction to zero global annual emissions, as suggested by Hansen, would require the investment of ~$150 trillion globally. It would help to have a GOAL, a PLAN and a TIMELINE before we begin throwing that kind of investment at the “problem”.

  4. jouris says:

    You provide quotes from your predictions regarding the SO2 trading scheme. But why do you ignore the opportunity to reflect on how well the scheme actually did at its aim of reducing SO2 pollution? And whether your predictions were all spot on, or need so adjusting in the light of experience. It seems an odd opportunity to have let go by.

  5. David Flint says:

    Unhappily, Mr Reid, we do know where we are going. We are heading for a much warmer world. If you doubt this I suggest you look at the Arctic ice.

    How much warmer is debatable. About 1.5 degrees of warming is already certain and each year’s emissions adds to that. Somewhere above that level, perhaps at 2 degrees but possibly at 1.5, we can expect additional positive feedback effects. Since the scientists can’t (yet) model these effects their impact is a matter of speculation. But, and it’s a big but, they will certainly add to warming. Three degrees? Five? No-one seems to know how bad it might get.

    So each year’s delay makes it that much more likely that we will step over this particular cliff.

  6. Dear Professor Stavins, This is a great article for students to understand the policy choices between cap and trade and carbon taxes. Is there any chance you’d let us translate it and publish it in Spanish? We have a very wide audience in Latin America at our blog, which is supported by FLACSO University, and could publish and disseminate the article in the region in Spanish, with all due citations and hyperlinks to Harvard of course, Thanks!

  7. Scott says:

    I would be interested to know the author’s thoughts on the differences between the terms “carbon tax” and “carbon pricing”. At times the terms seem to be used interchangeably. In Australia, the federal government has introduced a pricing scheme with a fixed-price introduction period. This has led to it being called a tax by everyone except the government. The government is at least technically correct: the taxation authority has nothing to do with its implementation and collection, and the bill introducing the scheme was not a revenue bill.

  8. Ed Reid says:

    Professor Stavins,

    It did not take our newly-reelected President long to end his silence regarding a potential carbon tax. However, his suggestion was made in the context of reduction of what would be the annual US budget deficit, if the US had a budget. There was no suggestion of such a tax being “refundable”. Arguably, the redistribution is already occurring, with borrowed funds, some of which might be displaced by the anticipated revenue from the carbon tax; or, not.

  9. Ed Reid says:

    Mr. Flint,

    I would agree that many “believe” we are heading for a much warmer world. I am not prepared to agree that we KNOW that is the case. Certainly, the globe has warmed since the trough of the Little Ice Age. I suspect most of us should be glad that is the case. The globe also cooled after the peak of the Medieval Warm Period, leading to the Little Ice Age. To the best of my knowledge, anthropogenic CO2 emissions played no discernible role in causing either the MWP or the LIA.

    I am not convinced that a global average temperature rise of 1.5C is already certain. That is a projection based on our uncertain understanding of climate, which is the result of the interplay of multiple, exceedingly complex phenomena. However, these projections appear to have limited predictive skill. ( “Predictions are very hard, especially about the future.”, Yogi Berra, American philosopher

    Certainly, none of the existing climate models predicted, or can satisfactorily explain, the current ~16 year hiatus in the rise of the global average surface temperature anomaly, in the face of rapidly rising global annual CO2 emissions.

    I would be hard pressed to try to justify a total restructuring of the US, no less the global, energy economy based on the poor quality temperature data we currently have available and the multiple and questionable climate models currently at our disposal.

    I have estimated that Hansen’s zero global annual CO2 emissions scenario would require the investment of ~$30 trillion in the US alone; and, perhaps ~$150 trillion globally. That would be an extremely expensive precaution against a poorly understood potential catastrophe. I believe we would be far better served to get the technologies we might need “ready for prime time”, rather than investing trillions in the proliferation of technologies which are not “ready for prime time”.

  10. I agree with the conclusion that carbon taxes won’t work well. And I agree that studying each energy market to determine the most effective policy is necessary.

    I have been studying each energy market, evaluating and looking for the key drivers that will cause each market to transition to either green energy, substitute to different products or services, and substantially improve energy efficiency and total costs. Each energy market currently exhibits dysfunctional non-optimal behavior inconsistent with properly functioning markets. We need markets where customer needs are not only met by the products and services provided by suppliers, but where delighted customers derive high levels of satisfaction from the energy solutions.

    Clearly, our current energy markets fail to do this.

    Let me start with the most dysfunctional market, the vehicle market tied intrinsically to the crude oil market. The marginal cost of demand for an incremental barrel of oil by global oil consumers currently falls into the range of $1000 to $2500 per barrel, due to the pricing pressure exerted on global oil sales. This incremental cost translates into a valuation of $100k to $140k for each green vehicle that replaces a gasoline or diesel vehicle in the fleet, and this in turn should drive green vehicle and biofuel substitution. Currently the vehicle manufacturers and biofuel producers are unable to share in the cost savings that oil consumers receive due to substitution. Clearly, a crude oil tax tied to falling oil prices, with the proceeds going to vehicle manufacturers and biofuel producers, would create an enormous incentive for substitution. And the market would begins shifting rapidly to the green energy sources. The solution lies in using a predominantly private sector group, with public sector policies to capture a portion of oil cost savings (about 30%) and transfer these monies to the private sector group.

    The key drivers in the electricity market involve use of public financing (at 4%) for green power projects versus higher cost private financing (weighted average cost of capital at 10%), coupled with a subsidy for these public projects similar to subsidies given to private sector projects (roughly 30% of capital). Essentially primarily public sector owners, with private sector partners, should drive green power substitution for fossil fuel power sources. Since the cost of green power involves primarily capital cost recovery and cost of debt, with relatively low operating costs, the public financed projects have a huge competitive advantage over private financed projects.

    The key drivers in the natural gas market, involves the use of acreage development restrictions to manage natural gas prices into a consistent steady price range of $4-5 per million BTU, versus the glut price range of $2-2.50 currently. A cooperative effort between industry participants, government regulatory control, would keep us from blowing through this valuable resource (needed for stopgap power generation and key industrial use) at rock bottom prices. A win-win-win solution exists that benefits green energy industry, natural gas industry, and leaseholders, if severance taxes tied to natural gas at the higher price levels provides some compensation to leaseholders on properties where development has been delayed.

    A carbon tax doesn’t accomplish any of these desired outcomes directly. Each energy market needs a very different set of solutions.

    I have discussed this at my website:
    The largest engineering economics mistake ever made?

    ‘Customers First’ Green Energy Policy Proposal

  11. Bill Tubbs says:

    Prof Stavins

    Your assessment of carbon tax vs cap-and-trade is excellent and insightful.

    I’m interested in your assessment that a carbon tax is more vulnerable to exemptions for certain sectors/firms. There is some evidence of that here in BC where the energy-intensive trade-exposed agricultural sector (greenhouse growers specifically) got a break on the provincial carbon tax. But once word got out that this had been granted it became quite politically damaging and now the government is adamant that “everybody pays” the carbon tax and there will be no (more) exemptions to other industry sectors. Since taxes are an existing system and levied by a long-standing Ministry of Finance with internal procedures and established accountabilities, is there not an argument that there is less likelihood of special treatment or so-called “pork-barreling” with a tax system compared to a newly established cap-and-trade system most probably set up and administered by nascent and less scrutinized agency within a Ministry of Environment say?

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