What is the equivalent value of a tonne of CO2 emissions in dollars,
pounds, rupees, yen or yuan?
The carbon price [1], or more correctly, the price of dumping carbon
dioxide into the atmosphere, will
be as much as it needs to be to reduce emissions to the required levels
during the next couple of
decades and beyond.
There are 3 main ways to ration carbon, plus variations. Most involve a
price for carbon emissions.
1. Rationing through
tradable coupons. Assuming quotas or coupons are
distributed equally to
all citizens, the quotas find their way to the smokestack industries
and fossil fuel suppliers in
parallel with the money paid for goods and services. Fossil fuel and
energy suppliers must
surrender the coupons or quotas to government and their associated
emissions must not exceed
the amount represented by these quotas. This system becomes rationing
by price because the
coupons gain a trade value according to their scarcity and demand. The
carbon price emerges
from the market price for coupons.
The government directly controls the supply of quotas and
the allocation of rations is critical for equity. Although ethically
correct, provided each person
receives their share of allowable emissions as a quota, the main
objection to this system is the
inconvenience of needing two prices for everything – one in currency
and the other in carbon
credits, quotas or whatever unit is adopted. Comparing prices at the
supermarket becomes quite
complicated and business accounting requirements are almost doubled.
There are potential
problems with hoarding, (carbon credits will become quite scarce in the
future,) exploitation and
fraud to obtain valuable carbon rations. Coupons don’t look like money.
2. Rationing by price
using a carbon tax. The carbon price is collected by
government from the
greenhouse gas emitters or fossil fuel suppliers. The carbon tax is
adjusted depending on the
strength of demand until actual emissions match targets. The tax is
passed on to customers
through prices. There is some disagreement is about what to do with the
proceeds. If the money
is handed out equally to citizens, like the tradable coupons in the
above example, a carbon tax
produces the same, or better, results than tradable coupons, but
without the disadvantages of
dual pricing. If the government retains the proceeds of the carbon
price, it is the equivalent to a
poll tax. It would be very much like the government charging the full
market price for the
carbon coupons distributed in the previous example.
3. Rationing by price
using cap and trade. The government issues tradable carbon
credits or
quotas directly to the polluters or fossil fuel suppliers, who then
ration carbon emissions by
price. Polluting industries collect the carbon price from the public
and distribute it to their
shareholders. This occurs because ownership of the remaining greenhouse
dump capacity
becomes privatised according to historic emission levels. The gift to
polluters is very profitable.
In most cases, the carbon price will be almost the same because it will
be as high as it needs to be in
order to reduce emissions to the required levels. The carbon price for
cap & trade will be slightly
less, because many customers will not be able to afford to pay. In the
other two schemes, members
of the public own a share of the allowable emissions so they already
possess the means to obtain
their allocated ration.
Under cap & trade, the citizens’ share is handed to the
polluters at the start of
the scheme. Perhaps emissions might reduce – but definitely people
become impoverished.
With both tradable coupons and cap & trade, the carbon price
emerges from competition for the
limited supply of available credits. With a carbon tax, the price is
controlled by a public authority.
Many economists want the market to set the price of carbon and they
also balk at handing out
money for nothing. Case 1 has tradeable coupons handed out for free to
all individuals. Case 2 has
a money dividend handed out in lieu of coupons (athough some oppose
this). Case 3 has valuable
carbon credits handed out to polluters. Who owns the atmosphere? People
or polluters? [1] * A technical point which
sometimes creates confusion:- 1 tonne of carbon produces 3.667 tonnes
of CO2 when combusted. The extra
mass comes from the oxygen that combines with carbon to produce carbon
dioxide. The mass ratio is 44/12.
Therefore the “carbon price” is 3.667 times the price of a tonne of
carbon dioxide emissions. The term, carbon price, is used
because it can also be applied to fossil fuels according to their
carbon content before combustion. Money for nothing
We are all shareholders in the atmosphere – as an inalienable birth
right. This may be characterised
as a theoretical position, but I maintain that it is also a practical
necessity to distribute the profits of
emissions scarcity to the shareholders – so that people can afford to
reduce their fossil energy
consumption through purchasing efficient technology and green energy.
It is also a political necessity. As suggested earlier, a carbon tax
will be regressive and as politically
unpopular as a poll tax.
By distributing every citizen’s share of the proceeds of carbon
rationing,
more than half the population will be better or no worse off than
before the introduction of the
system. It will be the ethical and functional equivalent of the
tradable coupon system but without
the inconvenience of coupons. A carbon tax without the dividend would
be political suicide.
For cap & trade schemes, the public will take a while to catch
on, but their anger will approach the
incandescence of my own fury at the foolishness of the guardians of
public welfare who allow
themselves to be duped by this modern day version of The Emperor’s New
Clothes. “The finest
shade of green that has ever been seen.”
Supply and Demand
In many designs for a market mechanism to reduce carbon emissions,
there are misconceptions
which have to do with ideas about both markets and money.
The prevailing economic paradigm says government should not set the
price of carbon emissions
because that would be "an inefficient, intrusive interference into the
natural laws of supply and
demand".
Such thinking is the triumph of second hand ideology over economic
understanding.
According to economic theory, price is the feedback mechanism between
producers and consumers.
Both supply and demand, or at least one, are assumed to be functions of
price. As price rises,
consumers tend to reduce demand and suppliers are encouraged to supply
more. If drawn on a
graph with price on the horizontal axis, demand slopes down and supply
slopes upwards. Price is
supposed to adjust until supply and demand are brought into balance
where the two lines intersect –
at “equilibrium”.
The slopes of these theoretical lines represent the
elasticity of supply or demand.
If price makes little difference, we get an almost horizontal line
which means low elasticity.
In the real world, supply and demand are effected by more than just
price. In the case of carbon
emissions, the demand to emit CO2 for free continues to rise
exponentially. The supplier,
(“governments” as proxies for the collective Earth,) have historically
“sold” CO2 disposal at zero
price, but the supply is running out. The supply trajectory should be
set by science and
international negotiation, and it will be subject to change as new
information becomes available. In
market terms, the supply of atmospheric dumping capacity is inelastic.
This leaves only the demand side to determine an appropriate price. The
precise relationship
between demand and a carbon price is unknown. The “right price” of a
tonne of CO2 emissions can
only be found experimentally and will vary while the supply target
diminishes.
However, there is little elasticity of demand in the short term. A
change in price will have little
immediate effect on emissions because there are considerable time
delays between the price signal
and the response. The oil shocks of the seventies did eventually
produce a reduction in demand, but
only as people traded their gas guzzlers for more efficient vehicles –
it did not happen overnight.
The demand response is slow because it requires technological and
cultural change.
With a fixed supply and a slow demand response to price signals, we
have the irresistible force
meets the immovable object. In the collision, a free market price will
go through the roof. It will
be extreme and unstable and it is likely that such a scheme would be
abandoned as inefficient.
Economists who design cap and trade schemes do fear these extreme
prices, so they usually include
a price ceiling that puts a limit on the “cost to the economy” of
exceeding caps. Penalties set by the
government should not be too high. So called “fixed” targets do not
have to be met after all – there
is an escape clause if the market price goes too high. So much for a
fixed supply with the price set
by the free market. The free marketeers want the government to control
the price after all.
Market Dynamics
Static economists may be bamboozled when I mention time delays. The
behaviour of a carbon
market is fundamentally a problem of dynamics. Despite good intentions
a century ago, economists
never did get around to doing much dynamics. Attempts to do so almost
always undermined the
assumptions of their fundamental theories – especially the assumption
that an economy is always
close to equilibrium, but much else besides. Modelling an emissions
market involves concepts
analogous to "inertia" and other dynamic elements which usually go into
a black box that simply
says "the invisible hand of the market will work this out – in the end."
Instead of limiting the supply and watching the price signals go crazy,
the economists’ theory of
supply and demand has another solution. Control the price and watch
what happens to demand. By
observing the response to price, there is an opportunity to estimate
the elasticity of demand and
other dynamic factors to inform further adjustments to the price. The
long term response to price,
the elasticity of demand, is initially unknown. It is elusive because
it lies hidden beneath the time
delays and the cultural, psychological and systemic factors which
influence decisions and impede
action. But it is reasonable to assume this abstract concept is valid,
otherwise all of market theory
is wrong and there can be no market mechanism to influence human
behaviour.
A relatively stable, slowly moving regulated price can be adjusted to
steer the economy to approach
the supply target trajectory over time. This is a less economically
disruptive way to find the "right"
market price for CO2 emissions, because errors in actual emissions can
be compensated for and
corrected in following years. Adjusting the carbon price can steer
demand towards the supply target
trajectory. Nothing radical about that. Many manufacturers and
suppliers set an initial price then
make adjustments to achieve planned sales targets.
The Carbon Authority
The carbon price should be set by an independent government authorised
agency - analogous to the
Reserve Bank setting interest rates to meet inflation targets.
The details of the transition out of fossil fuel dependence will be a
long story over 40 years, but a
carbon charge with dividend will provide a smooth transition for
average consumers, from today’s
cheap fossil energy to tomorrow’s almost as cheap renewable energy.
Although not enough of itself,
the economic pressure to drive change is the carbon price.
As a starting point, I suggest that the carbon price be sufficient to
raise the retail price of fossil
derived electricity to be close to that of “green power”. Many more
customers will choose the
“green power” option and demand a large expansion of renewable energy
infrastructure.
It is important for business investment decisions, that an estimated
carbon price be known at least 5
years in advance. There may well be an important role for a futures
market to hedge bets on the
price of carbon emissions. However, I expect the mid term carbon price
to be the primary focus of
the Carbon Authority. One of it’s main jobs is to short circuit the
time delays and dynamics of the
market’s response to price by providing an indication of what the
carbon price will be in the future.
The accuracy must be sufficient for business to make investment
decisions. A probability range or
window should be given. In a sense, the Carbon Authority can
“negotiate” the mid term price
through something like the following process. (I need industry experts
to help with this part.)
The required emissions trajectory is already known, as are projections
of demand and the current
sources of emissions. It will become apparent that an amount of
renewable energy sources,
refurbishments, and supporting infrastructure will be required in 5
years time.
Fossil power stations may need modification as their role moves towards
providing backup for
renewable energy. From observation and industry knowledge, the Carbon
Authority will estimate
the carbon price required to encourage sufficient investment and
project approvals to occur within the
required time frame. An amount of demand reduction and end use
efficiency will also be needed. Public
knowledge that energy prices are going to continue to rise and be near
a particular level in 5 years time, will
influence industry to improve wasteful processes and consumers to use
their Carbon Dividend to
invest in solar hot water, insulation, thermal management and energy
efficient appliances.
International Trade and
Global Cooperation
The complex part of a national emissions policy is trade between
jurisdictions. I believe it is the
customers of products and services who must ultimately pay for the
carbon emissions incurred in
their production and delivery. With the emissions component reflected
in the price of goods and
services, customer choices will change industrial practices – however
the customers do not
necessarily reside in the same country as the smoke stack.
Trade in energy intensive products, such as aluminium, exposes the flaw
in the concept of national
emissions targets. Much of Australia’s high per capita emissions are
due to energy intensive
exports. A carbon price (or national emissions trading scheme for that
matter) imposed on
Australian citizens will do little to reduce emissions from exempt
export industries. To unilaterally
increase the price, or reduce the volume, of our energy intensive
exports will worsen our balance of
trade problems. We have to argue for a world price for carbon and we
have to argue for an
equitable distribution of the proceeds. Both are required for a global
“level playing field”.
A global carbon price would automatically account for carbon emissions
from manufacture and
transportation in the price of products and avoid bureaucratic
compliance costs. Some trade will
become less competitive due to the expense of transportation, so local
manufacturing jobs will
increase. Products which are less emissions intensive across their
whole supply chain will be more
competitive and successful in the market place.
For equity, everyone on the planet would receive the money equivalent
of their per capita share of
allowable CO2 emissions. The proceeds of a global carbon levy on fossil
fuels would be paid to the
shareholders – every person on the globe. There are some practical
implementation problems with
delivering this around the planet which I hope to address elsewhere,
but the principle is fundamental
in my view. Apart from the moral and justice aspects, it will enable
all nations to join a single
global scheme that allows developing nations to develop while also
removing market distortions.
Such a system will be difficult to deliver without a world
jurisdiction, so I have to look at
arrangements between different nation states that retain equity and the
"customer pays" principle.
Multiple Jurisdictions
The situation of having different jurisdictions with individual
“negotiated national targets” has been
an attempt to reduce emissions originating mainly from the smokestacks
located within those
countries. This concept is flawed [2] because national carbon charges
and regulations can only target
domestic consumption – and not exports. Any carbon price signal
associated with exports will have
to be applied by the importing jurisdiction. Because governments can
only modify (tax or regulate)
their own citizens’ consumption, national targets should not apply to
the smokestacks on their soil,
but rather to the emissions due to local consumption. Imports should be
included and exports
excluded from national greenhouse accounting and in the setting of
negotiated national targets.
Emissions associated with exports go on the customers’ carbon balance
sheet.
To do otherwise, will result in countries with the lowest carbon price
attracting the smokestack
industries. This would truly be “rearranging the deck chairs” – and is
one of the major flaws of the
Kyoto Protocol. A similar futile excersize would be to close down coal
fired power stations in the
first world, only to build new ones in developing nations. One
interpretation of “Contraction and
Convergence” might encourage this to happen. It would be far better if
the carbon price paid in a
rich nation effectively subsidised green energy projects in a
developing country. There would be
less wasted time, energy, resources and money for the same result. (see
appendix 1)
With separate international carbon policy regimes and targets, carbon
charges on exported items
will have to be refunded (as with Australia’s GST) and the “local” rate
imposed on imports.
Likewise, national emissions targets should be calculated to include
emissions due to imports and
[2] There is another
flaw with “negotiated national targets” which is the potential for bias
according to the relative strength of the
negotiating teams and their nation’s global influence. An enforceable
global target is what matters.
exclude those due to exports. Accurate carbon accounting information
will have to follow all traded
products including the emissions due to transport. If reliable
information is not available,
associated carbon emissions will be deemed at a greater amount than any
similar product.
When customers are required to pay a carbon price for aluminium made
from coal fired electricity,
much of the current Australian product will become less competitive
with aluminium made with
hydro electricity. However, I suggest that before long, both the demand
for aluminium and the
price of hydro power will make even solar powered smelters competitive.
I look forward to
Comalco and Alcoa going solar. Australia is the best place in the world
to do this.
International travel provides some strong arguments for a global
system. Rather than applying
carbon taxes according to the citizenship of each passenger, or
splitting them between origin and
destination countries, the UN should manage the International Zone as a
separate world jurisdiction.
Questions and loose ends
Must pastoral and agricultural exports, such as sheep and wheat, carry
the cost of carbon
emissions due to land clearing as well as farm machinery and the
homestead generator?
No. I regret that emissions due to land clearing will not be part of
the World Carbon Price or Fossil
Fuels Tax. Because of difficulties with quantification and monitoring
of the carbon released or
stored through land use, as well as biological methane emissions, among
other things, a completely
separate framework is required for agricultural and ecological
stewardship. While I hope that oral
inoculation of ruminants will reduce the effects of digestive
methanogens, I don’t (yet?) have a
clear concept of how to link carbon ecology with regulations and
economic incentives.
Where there is guesswork connected to money, there are opportunities
for error, fraud and corruption.
I can say, however, that if we are going to pay people to plant trees,
we should also charge people
who chop them down. The goal is obviously to remove CO2 from the
atmosphere – to increase the
total stock of carbon stored as biomass and in soils. The issue of
getting rid of the atmospheric CO2
from a century of burning fossil fuels and land clearing, is not
addressed by this policy. The
purpose is to phase out the burning of fossil fuels and manage the
transition to an ecologically
sustainable, renewable energy supply. Fixing the atmosphere is a longer
term project.
For the above reasons, the global carbon price should apply
specifically to fossil fuels. Fossil fuels
are the source of new carbon entering the biosphere and it is not too
difficult to locate the sources
and monitor their extraction. The other non biological greenhouse
gasses (SF6, HFC, NOx) would
be banned or regulated almost out of existence, while “fugitive
emissions” or methane leakage from
coal mines and the venting of CO2 and other gasses from gas wells,
would be added, according to
their global warming potential, to the carbon levy on the fossil fuels
extracted. Successful reduction
of these emissions will reduce these expenses. Otherwise the carbon
levy should be applied on the
basis that all the carbon content will eventually become CO2.
Refunds will apply to fossil fuels which do not end up as greenhouse
gas emissions. Plastics manufacturers
and other chemical industries do not have all their feedstock
eventually converted to CO2. Bitumen is not
usually combusted and geosequestration will theoretically attract a
refund (less risk management charges
and unobtainable insurance). There will be no need for “offset schemes”
with a carbon levy, but the
full carbon price may be offered for permanent removal of carbon from
the biosphere.
Transport fuels are
already expensive and peak oil will see higher oil prices. Won’t carbon charges make this even
worse?
Very little. A global carbon charge will mainly reduce the profits of
oil producers, because supply is
limited by geology rather than price – but producers say that lower
profits mean less spending on
exploration. If Australia implemented a carbon levy alone, the world
price of oil would not fall, but
the carbon dividend would neutralise price rises for average consumers.
Removal of the fuel excise
may be considered, however a Road Transport Tax should remain on fuel
to pay for infrastructure
and associated costs of road transport – maintenance, police,
pollution, health and lighting.
(I would also like to see standing expenses like insurance made
proportional to fuel consumption.)
Comparing 2 examples with
identical results for carbon emissions. A WORLDWIDE BAN ON NEW
COAL FIRED POWER STATIONS!
The cheapest way to get rid of fossil power stations is to subsidise
developing countries.
Price of new coal fired power plant $200m
Price of equivalent green power plant $400m
