// lecture 38 Flashcards
Tragedy of the Commons
When individuals acting in their own self-interest harm a shared resource, and consequently everyone, including themselves, are harmed.
The Atmosphere Commons
The atmosphere is like the village common field in
the Tragedy of the Commons example.
- We all need it for Oxygen, water, etc.
- We all use it by putting stuff into it that damages its
utility – various pollutants
- It can absorb and dispose of a fair amount of
pollutants and clean itself
- But pollution limits exist beyond which we start to
reduce its utility for human and natural uses, and thereby soil our own nest.
Why a Price on CO2 Equivalent is Necessary
- Avoidance of the worst consequences of Global Warming
requires rapid and sustained reductions in Greenhouse gas emissions. - A price on CO2e will assure that all segments of the economy
participate in reducing emissions - It will gain the attention of each emitter from corporations to
individuals – anyone who pays the price of carbon. - It promotes the most cost-effective solutions – most CO2e
reduction for the minimal cost. - It promotes an efficient marketplace, since the full costs of
CO2e emissions can be included – no hidden costs or subsidies.
- It would stimulate technological advancement that actually reduces CO2e emissions. (e.g. fuel efficiency standards reduce carbon per mile, but people are not discouraged from driving more miles – the “rebound effect”).
Cap and Trade
- A cap (or limit) is set on the amount of a pollutant
- Polluters are given or auctioned permits that
allows a certain number of pollution allowances - The total allowances cannot exceed the cap
- Polluters may trade allowances
- Buyers pay to pollute, and sellers get a reward for reducing emissions more than they were required to - Monitoring, assessment and accountability are
key to program success
Monitoring, Assessment and Accountability of cap and trade
- Monitoring: Well you need to know if caps are
being observed by every participant. You have to monitor the emissions of every participant. - Assessment: Is it working? Are we getting to
reduced carbon emissions in the most effective way? How do we tweak the system to improve results? - Accountability: Serious consequences must result
if emitters cheat.
Carbon Tax
- Emitting carbon (or equivalent greenhouse gas)
incurs a price charged as a tax - Could use global warming potential to tax or credit
all greenhouse gases according to the climate benefit of reducing them (or climate damage of increasing
them) – Global Warming Potential useful here. - Monitoring, assessment and accountability are key to
program success (again)
Is there really a difference between cap & trade and carbon tax?
- Some have argued that cap and trade doesn’t
generate revenue while taxing doesn’t cap… - But permits in a cap and trade can be auctioned
- And levying a tax will raise prices, which limits
demand
Cap & Trade (with Auctioning)
The government sets a firm cap on total annual CO2 emissions, and–instead of handing out carbon credits for free–it holds regularly scheduled auctions where major emitters, such as utilities or refineries, can purchase credits for their emissions. Emitters with low-cost reduction options have an incentive to reduce their emissions and sell any excess credits they may have purchased. On the other hand, emitters with higher-cost emissions reduction choices will buy additional credits rather than reducing their emissions.
Cap and trade pros
- Real reductions: The cap, which will shrink over time, guarantees
that specific emissions reductions targets will be met. - Brings in revenues: Auctioned cap and trade brings in revenues
that can be used to ease the burden on those with lower incomes (thereby reducing or eliminating the program’s
regressivity), reduce the program’s compliance costs, or finance more rapid emissions reductions. - Promotes best buys first: Auctioned cap and trade activates the
power of the market to seek out the cheapest and most efficient reductions first: In this system, when reducing emissions is cheaper than the cost of the permits, emitters will choose to make reductions
in their emissions. - It tips the playing field away from big historic polluters and toward leaner and cleaner companies.
Cap and trade cons
- Price volatility: Some market-based emissions
trading systems have experienced large price swings, though there are ways to reduce volatility. - Complexity and delay: Complex new rules could
foster delay, political wrangling among special interests, and difficulties with enforcement. - Geographic scope – The program’s market
efficiencies are probably better realized at a regional or national level, such as the Western Climate Initiative
carbon tax description and effect
- Description: Government levies a fee on
greenhouse gas emissions, based on the amount of CO2, or equivalent, that is emitted. The fee can be
phased in, ratcheted up to improve effectiveness, or reduced as needed. - Effect: Tax can represent the external costs of fossil
fuel use (health and global warming) and thus lead to a free market solution with better total outcome.
carbon tax pros
- Predictable costs: Relatively stable price signal can help
businesses and consumers plan energy spending and provide greater certainty for those efficiency investments that have large up-front costs. - Fast implementation: Rules are fairly straightforward, and
can be implemented using existing tax collection and enforcement infrastructure. - Full coverage: An “upstream tax” – one that’s levied where fuels enter the economy at the mine, wellhead, tanker or pipeline — could cover 90 percent of CO2 emissions from fossil fuels.
- Revenue source: As with cap and auction, the program
revenue (the tax receipts) could be used to ease burdens on the poor and middle class, offset unpopular taxes, reduce compliance costs, finance rapid reductions, or aid industry.
carbon tax cons
- No guarantees: Emissions may not fall if people are
willing to pay higher costs, as has been the case with gasoline and diesel. Note, however, that even a modest tax on CO2 is likely to discourage coal-fired power. - Prescriptive: The taxing agency has to be smart
enough to guess the taxing level that will produce the best cost-benefit outcome. - The “T Word”: Taxes are thought to be toxic to voters,
and it could be difficult to maintain taxes or to ratchet them upward if further emissions reductions are needed.
Differences in Practice
- Cap and trade involves “complex new rules,
political wrangling among special interests, and difficulties with enforcement.” (from the Climate Pricing Fact Sheet by Sightline) - The world has no experience with international cap
and trade policies, except for Acid Rain, maybe. - In contrast, governments are pretty familiar with
taxing.
differences in practice part 2
People, on the other hand, Libertarians and Tea Party people in the USA especially, abhor taxes and government regulations, so Cap and Trade, which looks more like a market-driven system, is just politically more possible here (although still unlikely on national level any time soon).
