From the archive, originally posted by: [ spectre ]

The Case for a Global Carbon Tax

The only way to slow climate change is to make coal more expensive and
alternatives cheaper.

By Fareed Zakaria / Newsweek

April 16, 2007 issue – The Bush administration made two notable
statements on energy policy early in its tenure. They were both highly
controversial. The first was that the Kyoto accords, as negotiated,
were “dead.” The second was Dick Cheney’s declaration in a 2001 speech
that “conservation may be a sign of personal virtue, but it is not a
sufficient basis for a sound, comprehensive energy policy.” As it
happens, both are accurate and should be at the heart of any new,
ambitious policy to tackle global warming and energy use. If you
haven’t fainted yet, let me explain what I mean.

The administration had several narrow-minded and callous reasons for
rejecting Kyoto, but among its main arguments was that the accords did
not include developing countries and thus were ineffective. To
understand why that is correct, consider one simple statistic. During
the Kyoto time frame (that is, by 2012), China and India will build
almost 800 new coal-fired power plants. The combined CO2 emissions
from those plants will be five times the total reductions in CO2
mandated by the accords.

Here’s the math. These 800 new plants will burn about 900 million
extra tons of coal every year. By 2012 they will have emitted about
2.5 billion tons of CO2 into the atmosphere. During that period, if
the countries that have signed the Kyoto accords implement them fully-
a big “if”-they will cut their CO2 emissions by 483 million tons.

Understanding the causes and cures of global warming is actually very
simple. One word: coal. Coal is the cheapest and dirtiest source of
energy around and is being used in the world’s fastest-growing
countries. If we cannot get a handle on the coal problem, nothing else

Kyoto represents old thinking: if the West comes together and settles
on a solution, the Third World will have to adhere to that template.
It’s the way things have been done in international affairs for
decades, perhaps centuries. But today power is shifting to the
emerging markets. China, India and Brazil will have a greater impact
on the globe in coming years than Europe will-for better or worse. A
new Kyoto would start the other way around. The United States should
work out an agreement with these three countries. That would become
the new template, defining what further actions are necessary and

Getting China and India to stop burning coal will not be easy. It’s
the cheapest way to fuel their growth. While officials in China are
more attentive to environmental issues these days-in part because
China now has the dirtiest air and water in the world-they are highly
unlikely to do anything that will significantly undercut economic

Nandan Nilekani, CEO of the Indian technology giant Infosys and one of
the few Asian executives genuinely concerned about environmental
issues, says that ultimately the industrialized world will have to
provide subsidies to developing countries to build “clean coal”
plants. “Right now in India, and I assume in China, plants are built
through competitive bidding. The lowest bid usually wins. You will
have to create a subsidy for clean coal to make it the lowest bid.
Otherwise, the dirtiest will win.”

There’s an obvious problem with this model-where will the money for
subsidies come from?-but there’s another glitch as well. The
technology for clean coal doesn’t really exist yet in a form that can
be widely used. There are various pilot projects and experiments but
nothing that is, as yet, economically viable. Both problems can be
solved by the same simple idea-a tax on spewing carbon into the
atmosphere. Once you tax carbon, you make it cheaper to produce clean
energy. If burning coal and petrol in current ways becomes more
expensive because of the damage they do to the environment, people
will find ways to get energy out of alternative fuels or methods.
Along the way, industrial societies will earn tax revenues that they
can use, in part, to subsidize clean energy for the developing world.
It is the only way to solve the problem at a global level, which is
the only level at which the solution is meaningful.

Congress is currently considering a variety of proposals that address
this issue. Most are a smorgasbord of caps, credits and regulations.
Instead of imposing a simple carbon tax that would send a clear signal
to the markets, Congress wants to create a set of hidden taxes through
a “cap and trade” system. The Europeans have adopted a similar system,
which is unwieldy and prone to gaming and cheating. (It is also
unsustainable if Brazil, China and India don’t come onboard soon.)

A carbon tax would also send the market a clear and powerful signal to
develop alternative energies. Daniel Esty, a Yale environmental expert
whose new book, “Green to Gold,” is a blueprint for new thinking about
the environment, argues that the only way forward is a
“transformational approach that creates incentives for innovation and
alternative energy. The way we think about these issues is old-
fashioned. We’re still trying to limit, regulate, control and inspect.
We need to become much more market-friendly. Put in place a few simple
rules, and let the market come up with hundreds of solutions. We’re
not even 10 percent of the way down such a path.”

In the end, everyone realizes that innovation is the only real
solution to the global-warming problem. And that’s where Cheney is
right. Conservation and energy efficiency are smart policies, but not
enough. In America over the last three decades, almost all machines
and appliances we use to power our lives have become significantly
more efficient (with the exception of cars). And yet we consume three
times as much energy as we did 30 years ago. Why? Because rising
living standards mean rising energy use. We can slow down the growth,
but some increase is inevitable. We have more efficient air
conditioners. But now we air-condition our whole houses. Our bed lamps
conserve power. But we also plug in two phones, a BlackBerry and three

And yet the Bush administration’s record on energy and the environment
is shameful. While they may have the right critique of Kyoto, they
have used it as an excuse to do nothing, surrendered energy policy to
special interests, subsidized polluters and killed or watered down
every measure that would spur innovation or create a new energy
framework for the future. They have been weak leaders, bad
policymakers and poor stewards of the world we live in. That’s not a
sign of “personal virtue,” it is personal and public vice.

Global Warming Solutions

Markets, taxes, or nothing at all?

Ronald Bailey | December 15, 2006

Assume man-made global warming is a big, bad problem. Let’s try some
thought experiments concerning what, if anything, should be done about

One “solution” might be recognizing, at least, that there is nothing
to be done about it. One might argue that for the sake of lifting
billions of poor people out of abject poverty humanity must continue
to burn cheap oil and coal to fuel economic growth in this century.
One unavoidable side effect is that this will increase the amount of
heat-trapping carbon dioxide in the atmosphere and thus boost global
average temperatures by between 1.5 and 4.5 degrees Celsius by the end
of the century. People three generations hence will just have to adapt
to this increase. Fortunately because of the wealth produced by
burning fossil fuels, average incomes will have increased about
sevenfold and so they will have the resources to do so. In addition,
wealth may enable them to develop new low pollution energy

But let’s further assume that that it turns out that most people
prudentially prefer to leave a cooler planet to their posterity. What
to do then? In that case, one proposed “solution” is a global carbon
market. This is the idea behind the European Union’s Emissions Trading
Scheme (ETS) established to meet its commitment to reduce greenhouse
gas emissions under the Kyoto Protocol. Countries set a limit on how
much carbon dioxide they will emit and then allocate permits to
emitters. The permits can be bought and sold among emitters. Those
that can cheaply abate their emissions will do so and have some
permits leftover. The cheap abaters can then sell their extra permits
to other emitters who have a harder time reducing their emissions.
Thus a market in pollution permits finds the cheapest way to cut
emissions. The advantage of creating a carbon market is that it allows
for the setting an overall specific limit on carbon emissions. For
example, some scientists argue that it will be necessary to cut
humanity’s carbon emissions by 70 percent in order to stabilize the
concentration of carbon dioxide in the atmosphere. Once carbon has a
price, it boosts the prices that people pay for electricity and

The best example of a market in pollution is the market in sulfur
dioxide (SO2) permits in the United States. SO2 is emitted by power
producers when they burn coal contaminated with sulfur and SO2 is
noxious to breath and contributes to acid rain. In 1990, Congress
enacted legislation that mandated that SO2 emissions from electric
utilities be reduced from 17.5 million tons in 1980 to a level of 8.95
million tons by the year 2010. Each year, the Environmental Protection
Agency issues a declining number of permits and so far SO2 emissions
are 7 million tons lower than they were in 1980. Taking into account
the bureaucratic tendency to exaggerate an agency’s success, one
estimate suggests that by 2010, the annual cost of the SO2 reductions
will be about $3 billion while the annual benefits will exceed $100
billion. In the case of SO2 market in the U.S. the permits are
allocated to a limited number of emitters and enforced within one

However, establishing the nascent carbon market in Europe is proving
to be problematic. In October, all of the European Union countries
forwarded their proposed National Allocation Plans for carbon dioxide
emissions to the European Commission. It turns out that they allocated
permits allowing emissions 15 percent higher than current emissions.
As EC Environment commissioner Stavros Dimas warned, “If member states
put more allowances into the market than are needed to cover real
emissions, the scheme will become pointless and it will be difficult
to meet our Kyoto targets.” When Dimas tried to scale back the
excessive number of emissions permits issued by Germany, the German
government refused to go along. If Germany won’t go along, don’t
expect France, Britain, Poland, and so forth to do so. The problems
with the ETS highlights the fact that governments have every incentive
to cheat by issuing enough permits to keep energy costs low for
domestic businesses and thus advantage them over their foreign
competitors. Again, assuming that global warming is a big problem, a
global trading scheme would need to be created. If it is difficult for
European countries to fairly allocate and police permits among
themselves think how much harder it will be to do among all the
countries in the world.

One other possible “solution” to the problem of the emissions of
excessive carbon dioxide might be carbon taxes. The idea here is that
tax would increase the price of fossil fuels which would encourage
people to burn less of them. Consequently they would put less carbon
dioxide into the atmosphere. An example is the tax that the U.S.
imposed on ozone depleting chemicals in the 1980s. The tax boosted the
price of refrigerants so that manufacturers and consumers were
encouraged to buy air conditioners and refrigerators that used more
expensive but less damaging compounds.

Yale economist William Nordhaus argues that harmonized carbon taxes
are more easily administered and monitored on a global basis than are
cap and trade systems like the ETS. Also, a harmonized tax offers
relative price stability; the tax on carbon emissions can be raised
gradually and predictably over time so that governments, industries
and consumers all see what the price of carbon based fuels will be
over future decades and make investment and purchase decisions
accordingly. Prices in pollution markets can be very volatile-the
price for SO2 emissions permits has ranged between $70 to $1550 per
ton. Nordhaus argues that a harmonized carbon tax can be far more
transparently administered across the globe than trying to set
emissions limits among countries. There is less of a temptation and
opportunity to try to cheat. If a county chooses not to impose
pollution taxes on emitters, other countries can boost their tariffs
on exports from that country as a way to encourage it to join the
harmonized climate tax regime.

One major objection to a pollution tax is that, unlike a cap and trade
system, imposing such a tax does not explicitly set a limit on
emissions. However, if it turns out that people believe that it is
really necessary to cut greenhouse gas emissions by 70 percent, it
will be possible to keep increasing the tax until the price of energy
produced by burning fossil fuels rises sufficiently that people will
cut back that level by conserving and switching to alternative sources
of energy. And finally, poor countries could be made exempt from the
tax until the average incomes of their citizens reach some agreed upon
level, say, $10,000 per year.

My best bet is that there is no one “solution” to any problems posed
by man-made global warming. Instead, partisans will accuse one another
of bad faith. And ultimately we’ll muddle through using some
combination of all three strategies.

Ronald Bailey is Reason’s science correspondent. His book Liberation
Biology: The Scientific and Moral Case for the Biotech Revolution is
now available from Prometheus Books.