The carbon pricing conversation needs to move on

Time for what actually works and what is politically possible

by Andrew Leach

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Pretty well every economist you talk to will agree: If you want to reduce pollution, carbon or otherwise, the most cost-effective way to do so is with a price on the emissions of that which you seek to reduce. They’ll also tell you that, under some basic assumptions, the cost-effectiveness result holds whether you impose that price through a tax or by fixing allowable quantities of emissions, distributing the rights to emit, and making them tradeable – so-called cap-and-trade regimes.  This is taught in most first year economics classes, and you will test it under every conceivable permutation and combination of assumptions if you take an environmental economics class. It truly is economics 101.

Carbon pricing mechanisms generate cost-effective reductions because they make emissions (or emissions reductions) valuable. If you are facing a carbon tax, you can reduce your tax bill by reducing emissions either through changes in actions or changes in technology. The same is true for a cap-and-trade program, although in that case you might be earning revenue from the sale of unused permits or avoiding the need to purchase them. Regardless, the price on emissions creates a decentralized economic incentive to reduce pollution. We’ve known this since Pigou in 1924 – British economist Cecil Pigou suggested, a long time ago, that the government could impose “extraordinary restraints – most obviously taxes,” to reduce pollution.

The reason why carbon pricing is not a panacea also goes all the way back to Pigou, if not earlier: Stringency matters.  Carbon pricing is cost-effective because it provides people and firms who are affected by the price an incentive to change behaviour or implement new technology if those changes reduce emissions at a cost less than the carbon price.  That’s great, but no one is going to spend $50 to save $25. In other words, carbon pricing is cost-effective, but not necessarily effective. Effectiveness is a matter of the level of the price and how broadly it’s applied, not the fact that there is one.

If you’re worried about climate change, your first concern should be effective policy (by how much will this reduce emissions?) and not cost-effectiveness (could the same emissions reductions have been generated at lower total cost to society?).  If you believe the International Energy Agency (IEA)’s 2012 World Energy Outlook, to stabilize global GHG concentrations at or about 450ppm, we’re going to need effective policies, and quickly. By 2035, the IEA models suggest that we’ll need the equivalent of a global carbon price of $120/tonne, along with some complementary regulations. With the exception of implicit prices on carbon on some emissions in Sweden, Japan, and Germany (see this recent OECD report for details), no carbon pricing policy in place today comes close to that type of stringency.  Put another way, despite all the good things about B.C.’s carbon tax (and it got some laudatory words in the OECD report), it’s barely stringent enough to fit into the IEA’s 450ppm path and it’s not likely to be stringent enough to see BC’s emissions decrease between now and 2020 (see Table 17).

Your second order concern should likely be political feasibility, and in particular you should ask whether more stringent regulations are more feasible than a stringent price-based policy. If that’s true, then your regulation will lead to more expensive emissions reductions, but the total benefits to society of a stringent regulation could easily outweigh a weak carbon price. It’s possible, but by no means guaranteed, that more cost-effective policies will be more politically feasible. If your condition for GHG policy is that you must impose the same price on all sectors of the economy because you want to be cost-effective, that rules out higher prices on some sectors where deep emissions reductions are possible, or lower prices in more politically sensitive areas to ensure you get a policy in place at all. Policies are also most cost-effective when the costs are transparent, but when you see the NRDC campaigning against Keystone XL by telling Americans that their gas prices might go up, you know just how politically palatable a transparent price at the pump will be.  If you want a policy that will actually reduce emissions, it has to be implemented and kept in place by people who face elections every four years or less. You might not like it, but that’s a reality.

So, can we all talk a little more about stringency and political feasibility and a little less about prices vs. regulations?

This post appeared first on Andrew Leach’s Rescuing the Frog blog.




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The carbon pricing conversation needs to move on

  1. Climate change will never be seriously addressed in this country by a Liberal or Tory government. Their records speak for themselves. Political feasability is rendered moot. They simply don’t care about future generations.

  2. Glo-Bull Warming is the biggest fraud ever perpetrated in human history.

    • Billy Bob and his one trick pony is back folks!

    • You’re absolutely right Billy Bob…
      Since you don’t believe that carbon emissions causes any problems at all to our environment. Prove yourself right by going to your garage, run your car and make sure all the doors and windows are closed.
      Nothing should happen to you because according to you scientists are all wrong.
      Write us back in a couple of days.

      • nothing will happen because the carbon MONOxide levels from most current cars have been reduced to the point they won’t kill an average human under most circumstances. But the carbon DIOXide emissions produced will, according to almost all leading scientists, contribute to the fast growing problem of man-made global warming.

        • Both of them kill. crizm’s point is valid.

      • You don’t understand the difference between carbon monoxide and carbon dioxide. Are you going to start cursing the dangers of dihydrogen monoxide next?

        • You start drinking that stuff you’ll be hooked for life!

          • Indeed – 100% of heroin users had previously used it.

  3. This, in essence is Mark Jaccard’s (& your)position vs. Gordon and Moffatt (economics 101) position.

    Does this mean there’s now a split in the Economics Party?

    • If there’s anything in here with which Gordon or Moffatt would disagree, I would take their comments into account.

      • Gordon wrote a couple of blogs on Macleans on why carbon tax was preferable to regulations. Moffatt posted a video on G&M Econowatch blog saying CAFE standards (regulating energy efficiency in cars) was all wrong – carbon tax is the way to go.

        Need the links? I think you were incommunicado at the time. I certainly took exception to their claims.

        • Read my post, and read their posts. Nothing contradictory at all.

          • I did. Why I posted my original comment.

            While Gordon et al were yuck yucking about the “$35 billion tax on cars” (CAFE standards), repeated by the NDP in the HofC, which brought a “tear to his eyes” as I recall, I pointed out here it was not something that I, if I were a tenured prof, would be proud of. I seem to recall Jaccard agreed, but that may have been in an email.

          • Please post anything from either Professors Gordon or Moffatt which you feel contradicts my writing.

          • Specifics. His statement, my statement, reason they contradict.

          • His title:

            “Forget regulations, carbon tax will lower emissions”

            Your last comment:

            “So, can we all talk a little more about stringency and political feasibility and a little less about prices vs. regulations.”

            Seems pretty black and white.

          • The headline which Professor Moffatt would not have written.

          • Did you watch the video? Economics 101. Seems like a fair representation. (btw he’s not a Professor, capital P)

          • It is generally the case that Assistant and Associate Professors are entitled to the Professor honorific. With a capital P.

          • Not according to the G&M’s Public Editor. I presume the same standards apply here.

          • I would assume that Macleans would address people by the honorific appropriate to their professional status.

          • So, Professor Moffatt posted a video pitched at a level appropriate for an undergraduate university course on a media website and you feel that the headline is contradicted by my article?

          • No, assistant professor (part time) Moffatt posted a video on Economy Lab targeted to G&M ROB readers in an attempt to influence public policy. If you and others wish to show it in an introductory Economics 101 course, be my guest.

            So, the G&M headline writer was at fault? What say you to this (one of multiple) blogs by Gordon fussing about the finer points of carbon tax vs regs? Also bad work by YOUR editor:

            Econ 101: What you need to know about carbon taxes and cap-and-trade

          • See above. In what ways are specific phrases in either Professor Moffatt or Professor Gordon’s posts contradicted by my post?

          • See above. My replies.

            Gtg.

          • Thanks for reading.

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