Pay Your Air Share
How to let the market solve climate change
M. Harrison, for the editors

Good News: The international scientific consensus on climate change science has recently shifted, and once contentious division has now shifted to peaceful consensus. While Nobel laureate Al Gore's ominous predictions of apocalyptic 20-foot sea level rises have been debunked, so has the opposite contention that anthropogenic climate change is still a myth. The UN's Intergovernmental Panel on Climate Change, the most comprehensive study to date by hundreds of scientists around the globe, now calls climate change "unequivocal" and specifically estimates that it will cause average temperature rises between 3°-7° F and sea level rises between 7"-23" by the year 2100 if human emissions continue apace. Results from this warming will vary from area to area, but will generally increase the incidents of severe climate events, including flooding, droughts and storm phenomena. This is the new scientific consensus, and it's changing some minds. As a result, many self-proclaimed skeptics have crossed the aisle into being converts.

Bjorn Lomborg, author of The Skeptical Environmentalist and the international icon of rational pragmatism on environmental issues, wrote recently in the Washington Post that he does not dispute that "the Earth is warming, and we're causing it." Mr. Lomborg's only concern is with economic efficiency, and so he recommends governments to invest about .05% of GDP (much less than most proposed legislation would cost) into developing low-carbon technologies and adaptation methods, rather than the aggressive "command-and-control" approaches that are currently fashionable among politicians.

But while the scientific debate has pleasantly moderated, politicians continue to respond the problem with hysterical reactions that threaten far more economic harm than the science warrants.

The future and its fortune-tellers

Nearly all of the leading policy proposals - from the now-defunct Kyoto Protocol to proposed state and federal legislation in the US - involve "capping" aggregate emissions levels in order to prevent future global warming. California's Global Warming Solutions Act of 2006, a recent cap-and-trade bill cleverly dubbed the "Global Warming Wish List of 2006" by the Cato Institute, requires us in the Golden State to somehow reduce our emissions to 1990 levels (over 20% lower than today) in the next thirteen years. Making California look like a paradigm of practicality, Bernie Sanders, a socialist senator from Vermont, sponsored a remarkable Senate bill requiring a 90% reduction in national CO2 emissions (that's 1930s levels, folks) within the next 42 years. All of these bills are conspicuously short on actual details.

Given that no credible scientific report predicts severe climate change effects before the latter half of the century, the regulatory haste seems ill-advised at the least. But the fallacy runs much deeper.

The inconvenient truth is that it's economically impossible, with current technology, to substantially reduce our greenhouse emissions in the near future. Don't believe me? According to eminent experts Robert Sokolow, and Jeffrey Greenblatt, et. al, keeping global emissions constant during the next half-century will require - got a pen? - a doubling in average fuel economy for all vehicles, doubling the global stock of nuclear power plants (that's 700 new plants - good luck getting that past Greenpeace), creation of new wind power farms the size of Wyoming, solar panels spread out over an area the size of New Jersey, new ethanol farms the size of India, a 100-fold increase in underground CO2 injection, AND a worldwide moratorium on deforestation. Sadly, the scholars didn't put a price tag on their prescriptions.

Technological advancement is clearly required if politicians' zero-carbon fantasies will ever become economic reality. But as we mentioned in our Layman's Guide to Economics, the processes that engender the evolutionary advancement of technology do not result from government decree, but rather from free-market competition. The market has already begun to develop clean energy, but the technology still isn't quite there. All the government can do is let the market do its work. BMW recently introduced a zero-emissions hydrogen version of their 7 Series luxury sedan, but not yet one that will actually go fast and sell, and so CEOs continue to be schlepped around in 14-mpg 760iLs. What's the government going to do about that?

The politicians don't say, but they nevertheless assure the public that their legislation will inspire the spontaneous glut of Edison-esque inventions necessary to lift the world to a low-carbon future. An example of this greener-than-thou hubris is the recent Senate cap-and-trade bill, articulating its own vision of technological development over the next few decades. One begins to wonder, what criteria do these politicians use to make their talismanic analyses of how to reduce greenhouse gas emissions? Was Miss Cleo appointed to the Senate Environment Committee? The answer, of course, is what you think it is - they just make it up.

The whole point about future technological developments is that they are unforeseen, and not known to Bernie Sanders any more than a person picked at random off the hill at a Vermont ski resort. Pat Michaels of the Cato Institute put it better than anyone else. "For an interesting thought experiment, consider the energy and technology world of 1900, and a vision of the future. 'Scientists will discover a new element called plutonium,' some placard-carrying crackpot on the horse-infested streets of New York might say, 'and if we compress a few pounds of it, almost all the buildings on Manhattan will be destroyed, along with their inhabitants.' What a wacko! And that's nothing, compared with his assertion that, by 1975, people would fly from New York to London in a little over three hours, 65,000 feet in the air, or that all of the information in all the libraries of the Earth could be on everyone's desktop by 2000."

Climate change policy shouldn't seek to cap emissions according to some politician's arbitrary (and ultimately worthless) idea of how technology will develop, but create incentives for zero-carbon technology to actually develop. (Chill out - we've got time.)

How to do it

The best way to encourage the market development of clean energy technology is by charging a price for carbon emissions. Unfortunately for anti-tax libertarians like myself, economists know that the only way to charge a price for carbon emissions is by implementing a carbon tax. But unlike most taxes, which are implemented solely to make the government money and/or to punish an otherwise harmless activity, a carbon tax would punish an actually harmful activity and simultaneously create a market incentive for a technological solution to develop in response. A carbon tax, properly applied, would charge all major carbon emitters a per-ton price for their CO2 emissions. Carbon offsets would be tax-deductible, so that any business that offsets one ton in CO2 emissions would be able to deduct the cost of the innovation. (Carbon offsetting is an emerging market, with companies such as TerraPass selling environmental projects to "offset" one ton of CO2 emissions, ranging in price from $2-$15 per ton.) By pricing CO2 emissions, the carbon tax would create a seamless market-based incentive for large emitters to develop low-carbon technology.

Most importantly, the carbon tax rate should be set as close as possible to the actual economic cost of carbon emissions, and not set by the whims of opportunistic and grandstanding politicians. This organization proposes that the carbon tax rate should be set as the lower of two indices - first, an average market index for carbon offsets (in essence, the market price of economically feasible mitigation) and second, an average American scientific/economic consensus index of the per-ton cost per ton of CO2 (often called the "social cost of carbon"). In this way, politicians would have no direct role in the rate setting, which would do wonders to avoid political pressures to keep the rate anywhere but where the actual facts dictate. As a result, no one would be forced to pay more than their (f)air share of climate change.

The carbon tax should then further use the proceeds to adapt to the impending impacts of climate change by building sea walls, dams, levees, and other protections as they are deemed necessary by scientists, starting in low income at-risk communities. Furthermore, as proposed by the Rand Corporation, any eventual regressive effects of the tax (unlikely, due to its low rate) should be addressed with direct energy subsidies paid back to households and small businesses to combat any substantial energy cost increases. The rest of the proceeds should be used to reduce other taxes, so as to make the carbon tax as close to revenue-neutral as possible.

Why to do it

The idea of efficiently charging for the emission of harmful pollutants is nothing new in economics. The Pigouvian tax, originally proposed by economist Arthur Pigou, proposes taxing behavior with harmful side effects on society, called negative externalities. (A Pigouvian subsidy, by contrast, is the funding of an activity that has positive externalities, thus benefiting society; public spending on education is an example of a Pigouvian subsidy.)

Ronald Coase, another great economist, is famous for his insight that property rights help encourage socially responsible behavior. Likewise, it's helpful to think of the carbon tax is a way of assigning property to one's CO2 emissions, and charging the owner for the harm they cause. Joseph Stiglitz, Nobel laureate economist, even argued that not taxing carbon, in effect, subsidizes the emission of harmful greenhouse gases.

Similarly, the common law tort of nuisance, governing non-physical invasions of other people's property, regularly assesses damages for harmful pollution without issuing an injunction to stop the emissions - a charge-but-don't-ban approach that gains much praise from the Law and Economics community, and is similar to the carbon tax in its impact.

It also happens that the carbon tax is about the only policy that will ever be adopted by China, India, and other developing nations, a major concern of America. The carbon tax raises government revenue, helps prepare developing nations for the impacts of climate change (which they will suffer most), and is easily implemented without much administrative regulation. Furthermore, because developing nations vary greatly in their emissions output, from elite jet-setting government officials and a power-hungry middle class to virtually-emissionless peasants and farmers, the carbon tax allows emissions charges to be applied more equitably than the one-size-fits-all aggregate national limits of cap-and-trade.

There is much still to be learned about climate change. But despite the remaining uncertainties, a market-friendly effort to address it will have social and economic benefits that reverberate far beyond the issue of greenhouse gas emissions. Clean alternative energy technology will eliminate our politically dangerous dependence on foreign oil, allow developing nations to achieve economic growth in a sustainable, clean fashion, improve public health, lower energy costs, and address many other fundamental environmental and economic concerns.

Forget the hysteria and apocalyptic predictions. American climate change policy needs a rational, market-friendly consensus. In the spirit of the Peace Prize, I say give the carbon tax a chance.

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written by andrew, January 19, 2008

What about other sources of greenhouse gases? Don't forget about livestock gas. http://www.latimes.com/news/op...n-leftrail

And while a good plan for the USA is always a good idea, I don't see China being an early adoptor of this type of legislation. Look at all the controversy we have seen recently with Chinese products. All of the toy recalls, and where I am, (Japan) people are always suspicious of Chinese products and foods. And rightfully so, there is a scandal every now and then about some Chinese food. Do you really think the worlds leader in ripping off other products for the cheapest price possible is going to agree to anything that might stand in its way?

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written by Greg, February 19, 2008

Why a carbon tax? Why not just quit subsidizing items that cause the problem? For example, gasoline is problematic. It's unbelievably cheap when compared to something like a gallon of milk. Part of the reason for the low cost is that that the true cost associated with all the impacts of gasoline are not included in the cost. We have a pretty good idea of the damage that gasoline does to the environment so why not make the producer that responsibility for the product and pay all those costs up front. If it takes planting a tree to offset the damage, then oil companies should have to plant one tree for each gallon of gas they sell and this cost should be included in the cost of gas up front. In this way, there would be no taxes involved (the government's job could be limited to education: one gallon of gasoline does X amount of damage, etc.) -- only producers taking responsibility for their products. If the true cost of gasoline became too high (once the cost for all the problems gasoline creates are included in the price, in might very well be too expensive...), we'd find something else.

Finally, we'd have the beginnings of a true free market system.

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written by Carl Milsted, February 19, 2008

Why limit a carbon tax to some calculated social cost? Why not use a set of carbon taxes to replace a more complicated tax? For example, carbon taxes could replace payroll taxes, or if we couple the shift with aggressive spending cuts, carbon taxes could replace the income tax.

According to my calculations, a carbon tax could momentarily replace the income tax at a rate that results in roughly $2/gallon extra for gasoline and $.11/kw*hr for electricity. I say momentarily, as people would rather quickly cut their carbon consumption at those rates.

In practice we might have a higher carbon tax rate for imported oil, in order to reduce our dependence on hostile regimes. This might allow military cuts as we would care less whether the Persian Gulf stays open.

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written by Carl Milsted, February 19, 2008

My calculations can be found at http://www.holisticpolitics.or...ations.php

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written by Danny Shahar, March 12, 2008

You might be interested in reading an article I wrote for Strike-the-Root.com about Lomborg's argument:

http://www.strike-the-root.com/72/shahar/shahar4.html

Hope it's helpful.
-Me

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written by David in AK, March 24, 2008

I agree: a carbon tax is the best way to go. But so many libertarians seem unable to accept the reality of climate change that I will not hold my breath waiting for them to jump on board this proposal. In libertarian-land, the government *never* need have a role to play in environmental problems.

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