Is China’s Climate Position Softening? (TNR – The Vine)
Another question directed to the Carbon Tax Center: Would a carbon emissions cap become an emissions minimum as well as maximum, in effect precluding reductions below the cap level?
A “cap” of the type embedded in the House-passed Waxman-Markey bill (ACESA) is a legislated number of allowances, or permits, corresponding to tons of CO2 to be emitted. If the number of allowances is less than total expected CO2 emissions for that year, the shortfall will create an allowance price sufficient to drive demand down to the cap level. A too-loose cap (where allowances exceed emissions) will cause the carbon permit price to approach zero, as has occurred in the EU’s Emissions Trading Scheme.
Now, what happens if some people “virtuously” reduce emissions for altruistic reasons? Would they simply be making room under the cap for more emissions by someone else? Prof. James Kahn at Washington & Lee University examined a similar issue: the ramifications of hypothetical new low-carbon energy technology under a cap. Using standard tools of economic analysis such as demand curves, Kahn found that the reduction in allowance prices due to the new technology would stimulate new demand that would exactly cancel out the reduction in emissions. Extrapolating from Kahn, it appears reasonable to expect that altruistic reductions under a carbon cap would similarly reduce allowance prices and create a price signal to consume more, thus canceling out those reductions.
This perverse consequence of a carbon cap makes perfect sense, unfortunately. Consider a commuter who, independent of any price signal or federal legislation, resolves to give up solo car commuting for a carpool. Under a cap system, this “exogenous” reduction in demand for carbon emitting will lead to a slightly lower emission permit price — thus stimulating some additional use of fossil fuels elsewhere. The incremental usage might be a reciprocal departure from a carpool, or cranking up the heat, or a return to buying bottled water rather than refilling at the tap … or any of a thousand other ways to burn carbon. The result, in the end, will be the same: virtue in one arena will be offset elsewhere, due to the price-equilibrium-seeking mechanism of the cap.
It gets worse: ACESA includes both a cap and a “renewable electricity standard” (RES) which mandates that electric utilities buy a gradually-increasing fraction of their energy from renewable sources. Resources for the Future studied this same policy combination in Germany. Its finding: Germany’s combination of an RES with a cap caused an increase in the use of coal to generate electricity, as the growth in renewable-energy output created room under the cap for more coal-fired generation elsewhere. In effect, the renewables displaced natural gas-generated electricity instead of coal because gas was more costly, even with coal’s much (roughly 80%) higher carbon content and allowance cost. (This perverse incentive would disappear if allowance prices rose to a level making electricity generation from coal more costly than natural gas.)
To summarize, a carbon cap would tend to cancel out emissions reductions resulting from personal choices and from new technologies. Virtuous conservation and new technologies would reduce allowance prices, stimulating more consumption by others. And, by combining renewable electricity standards with a cap, ACESA would create another perverse incentive because shifting electricity generation to renewables tends to make more room under a cap for coal emissions.
A carbon tax, in contrast, would be free of such “canceling out” mechanisms. Indeed, if anything, “my” tax-induced conservation would tend to encourage “yours” by helping move societal norms away from consumption. And a gradually increasing carbon tax would obviate the need for renewable electricity standards by increasing the cost of high-carbon fuels and stimulating demand for low-carbon alternatives.
Finally, a carbon tax would sidestep what is likely to be cap-and-trade’s biggest “toxic” side effect: a volatile new carbon market that would benefit only speculators and could crash world financial markets again.
Photo: Flickr / megabooboo.
A visitor to this site asked, “Do you have analysis saying at what price on carbon the economic dispatch charge for coal will equal and exceed that of other electricity- generation sources such as wind?” Here’s our reply, co-written with our Washington, DC rep, James Handley.
The carbon price level for breakeven isn’t one number, but a continuum.
Start with the demand side: with just a modest carbon emissions price, many steps to improve energy efficiency become more attractive. But the more costly ones obviously require a higher expected price.
Consider driving. There are an almost infinite number of ways for individuals to burn less gasoline. They range from buying a less-gas-guzzling car (which itself occupies a continuum: miles-per-gallon varies across the spectrum of available autos, and drivers can accelerate scrapping their current car for a more-efficient one), to driving less consumptively, driving less (by taking transit, walking, cycling or carpooling), and simply traveling less (by taking fewer and/or shorter trips).
Gasoline use for driving is socially determined as well. Actual and expected gasoline prices strongly affect the choices available to us as individuals and how we relate to them. Decisions to forego discretionary trips — to the faraway mall, soccer game or social occasion — that can appear selfish or bizarre when gas costs a buck-fifty, become more socially acceptable when the pump price hits three dollars. Similarly, rising fuel prices help shift car manufacturers’ engineering and marketing decisions toward fuel conservation. Ditto for voters’ support of local and national governments’ funding of transit and so-called liveable streets.
There is no magic fuel or carbon price threshold at which these changes kick in (and below which, they don’t). This isn’t to deny tipping points. Indeed, we hinted at them just above. But fuel use is so varied and diffuse that there’s a spectrum for tipping points as well as for individual decisions. The carbon price that leads one car manufacturer to push fuel-efficiency to the fore will be different for its competitor, and similarly for transit providers, not to mention the cultural forces that bear so heavily on driving and other energy uses.
The same applies to the supply side, as illustrated by wind power. Wind farms at the choicest sites kick in at a fairly low carbon price. Indeed, the rapid rise of wind-powered generation — it accounted for 1.8% of U.S. electricity output in the first quarter of 2009 — attests to wind power’s steadily improving economics, although the federal Production Tax Credit, now 2.1 cents per kWh of wind output, obviously plays a critical role. According to the American Wind Energy Association, wind farms at high-wind sites are generating at 5 cents per kWh, just a bit above the average “all-in” cost of coal-fired power. On the other hand, falling prices of natural gas recently prompted T. Boone Pickens to delay his highly touted plan to build giant wind farms in Texas.
The point is that wind farms’ generation costs traverse a very broad range. Equally important, so do the costs of the existing coal-fired generators that the wind plants are intended to displace. Rather than operating at a single average cost, the U.S. coal plant fleet generates at a wide range of costs depending on plant efficiency, age, fuel supply and even the hour-to-hour loading level on the individual plant.
Accordingly, we should visualize wind’s capacity (and, solar plants’ as well) to displace coal- and gas-fired generation, not as one “bar” on a graph straining to inch out another, but as a series of curves that will cross and re-cross at thousands of points. The higher the carbon price, the more points at which the renewable sources will undercut the traditional fossil-fuel sources.
Finally, the same will also apply to carbon capture and sequestration. Should it ever prove technically feasible on the large scale required, the costs of CCS will not be one number but a range, due to the influence of site- and process-specific costs.
The takeaway: there’s no market-clearing carbon emissions price to usher in some “breakthrough” and kick fossil fuels into history’s dustbin. A steadily— and predictably — rising price on carbon will do the trick. (To see how far and fast, download our Carbon Tax Impact Model and plug in your own carbon price.)
Photo: Flickr / Sockeyed.
The Cap-and-Trade Corruption (Fox News – Bill O’Reilly Talking Points)
Senate Can Strengthen Climate Legislation By Reducing Corporate Welfare and Boosting True Consumer Relief (Center on Budget and Policy Priorities)
The Climate Gap — Poor, Minorities Hardest Hit by Climate Change (New America Media)
Krugman: China’s Empire of Carbon (NYT)
Warming Denier Plays UN Card (Fox Forum)
A Fair Bargain: Return Carbon Revenues to Taxpayers (Grist)
The Just Framework for Climate (Down to Earth [India])