The ETS is stupid, part n

I just did agree with you! Look!

[That was quick :-). but I'm not sure I agree with you agreeing with me. And anyway I'd written my words by then -W]

http://planet3.org/2013/04/09/david-graeber-in-support-of-slack/#commen… for those just tuning in.

It's a bit off topic. Obviously we don't agree on everything. But it's not the old days. If we spend all our time disagreeing people will think we are being disagreeable. It is important nowadays to voice fundamental agreement when you have it, and on "srfmc" (semi-regulated free-market capitalism) I think it important to express that I am on board with that and like the name.

At best culpable negligence, but then again you believe Forbes? Sir Fred sends greetings:)

1) It is fairly easy to design an ETS with the features you ascribe to a carbon tax. The simplest mechanism would be to require by law that if the price of emission credits exceed a certain amount, the number of new credits issued will be reduced; and if it falls below a certain amount, more will be issued.

[I think you have "reduced" and "issued" the wrong way round -W]

Thus designed, the price will track a particular range, presumable set to bracket the externalized cost per tonne of CO2eq emissions. Likewise it is easy to design a Carbon Tax with the features you ascribe to an ETS. Just require by legislation that the tax rises if if total emissions exceed an upper bound (possibly set as a trajectory to zero net emissions); and that it falls if the emissions fall below a lower bound.

[I think you *can* do this, but all you've really done is laid out a means for converting something you want to call an ETS into a carbon tax, and vice versa. That appears quite pointless -W]

Consequently the decision as to which is better does not depend on whether you first determine a "safe concentration" or calculate the "social cost" of carbon. Rather, the decision should be based on the question as to which introduces the least inefficiencies - requiring all emitters to pay the same cost per tonne regardless of their relative ease of limiting emissions; or having a market (and hence brokers and transaction costs) for permits. I am agnostic on that point, which could only be resolved (if at all) by an expert analysis by an economist.

[I am, as you can tell, not at all agnostic. I strongly believe that the ETS approach is far more inefficient -W]

2) The "safe" level of CO2 concentrations and the social cost of carbon are not independent issues. The lower the former, the higher the later. Consequently neither is easier to determine than the other as they cannot be determined independently.

[Almost, although I put "safe" level of CO2 in quotes more because I suspect its not meaningful; there is no "safe" level. There is (if we simplify rather strongly) a cost function associated with CO2 levels. Its not linear (indeed IIRC the cost is negative for small increases, perhaps such as those we have now, and then becomes more positive for larger increases) but there is no sharp break anywhere on it, as far as we know, that would allow you to say "*this* point here is the safe level". Which is another problem for the permits approach -W]

3) A side note - I think many of the problems with the various ETSs around the world cold be limited by limiting the duration over which a permit remains valid. That would significantly limit the possibilities for manipulating the market for profit (there is no point in stockpiling permits to drive up the price if they become worthless in a couple of months); and make the price more directly reflect current emissions.

Connelley effect.

There are more than two different ways of limiting carbon, so both a) and b) could be deficient. ETS and the carbon tax are just competing faux market approaches. In the early going, ETS took the lead because, unlike the carbon tax, it was politically viable and the "market" looked so good in theory. We can see what a failure it is in practice.

Would a carbon tax fair much better? One wonders when, if ever, we'll find out. The old lack of political viability for the carbon tax remains;.

I wonder whether you identify the problem correctly: it's not so much about knowledge --- in both cases (a) and (b) figuring out the precise relationship between current emission volumes and total damages over the future time line --- as it is about pain.

Both measures cause pain, political pain, something politicians are notoriously ill equipped to deal with --- which is why there are still way more emissions permits circulating in Europe than there should be (and they are too cheap), and any curbing effect on emissions is barely even noticable if at all.

Replacing ETS by a carbon tax may just have the effect of, after spending a decade or so of finding out that ETS doesn't really work because politicians don't dare to take the painful decisions that need to be taken, we may spend another decade finding out the same painful truth about carbon taxes...

[I agree the problem of knowledge is a difficult one, and doesn't differ too much between the two scenarios (though I'd argue you need less knowledge for the tax approach. At least initially, you'd set the tax below what you're fairly sure the cost will be, so you need very little knowledge).

I agree that both cause "pain", in the sense of immeadiately visible costs, and that ETS probably disguises those costs better. Thats not the fault of the pols, BTW, thats the fault of the electorate -W]

> (though I'd argue you need less knowledge for the tax approach

Not sure. I'd put that differently: less "knobs" means less scope for gaming the system.

The amount of actual knowledge needed is really not a lot, it's just so hard to get at.

> Thats not the fault of the pols, BTW, thats the fault of the electorate -W]

Yep, a 'feature' of ETS... but don't forget the non-electoral constituencies...

You go with the carbon reduction scheme you can pass not the one you wish you could pass and yes, it may be less efficient in some sense, but it is. And, of course, the reason you have something less efficient is not the fault of those who want to limit emissions.

That parasitic effect .. isn't it called rent-seeking?

Should coal burners pay a health tax?

[To compensate for the particulate emissions? This is where I'm inconsistent. I think they should be regulated. Why... well..., um. Particulates are short-lived, and the costs accrue to those benefitting from the power, mostly -W]

I can't help suspecting that the ETS was never really intended to reduce emissions... It always looked like just another abstract game for the financial whizzes to rig. But then I'm a cynic in such matters.

I agree with Dunc 100%, but disagree that it's cynical. It's just the obvious reality. It probably even increases CO2 emissions.

Even if you subscribe to theory a (allocating emissions quantity), it's attractive to implement that with an adaptive tax rather than with tradeable permits, because there's no spurious short term volatility. Of course, you can also give the ETS the same properties as the tax by giving it some price elasticity (a variable auction quantity with a price schedule). Then you could have some of the theoretically-attractive distributional aspects of the ETS with the stability of a tax.

But the problem remains that the political system (at least in the US) is unqualified to design anything more complex than a flat tax. Expecting pols to design an ETS that works is like expecting Lockheed's legal department to design an advanced fighter. Thus regulatory capture rules the day.

"The European Parliament has rejected a plan to rescue the EU's ailing carbon trading scheme.

Members narrowly voted against a so-called "backloading" proposal that would have cut the huge surplus of allowances currently being traded.

Because of this excess, the price of carbon on the EU Emissions Trading Scheme (ETS) has plunged to less than 5 euros a tonne.

But opponents won the day by arguing the plan would push up energy costs.

The price of carbon once stood at 32 euros per tonne."
http://www.bbc.co.uk/news/science-environment-22167675

"Particulates are short-lived, and the costs accrue to those benefitting from the power, mostly -W]"

Tell that to the people living in central Canada. Prevailing winds are a bitch when your downwind from those wonderful coal-fired power plants in the U.S. midwest.

[I did put in a "mostly" -W]

>particulate emissions
That includes some stuff that bioaccumulates, right? So eventually someone's going to pay for it one way or another.

It is hard to reconcile the dismissal of particulates and the desire for science based policy. According to the science, short term forcings must be attacked with the same vigor as long term. A great part of particulate emissions are due to primitive living conditions not amenable to regulation or tax.

[I don't think anyone is dismissing particulates. I'm not. But the fact that they have other rather more visible effects means they don't need to be dealt with in the same way as CO2 -W]

IEA: World has stalled on clean energy
http://www.world-nuclear-news.org/EE_World_has_stalled_on_clean_energy_…
"The world's governments are failing on almost every level to clean up their energy systems and must intervene to support nuclear power, said the IEA, noting that only renewables and electric vehicles are 'on track'."

Are you proposing that such taxes get instituted at the national level in the absence of international afreement?

[Yes -W]

What prevents countries from free-riding on the progress of other countries? What prevents a rerun of the race to the bottom that killed ETS?

[The taxes are intended to be revenue-neutral within a countries own tax planning - one can envisage various ways to do this: I'd increase the personal allowance thereby de-taxing the lower paid and simplifying many peoples lives, whilst encouraging work. But that's a detail, because clearly within the budget of a given country the taxes are neutral - all they do is shift money about within the country. If you do this to excess this can become inefficient. We've wasted more than 15 years on Kyoto, lets not waste more valuable time -W]

Without an international agreement and an international cap we cannot meet any hard constraint on maximum total net emissions. Without such a constraint what prevents us from continuing our march over the cliff?

[I think we have no hope of an international agreement as it stands. Anything international that gets agreed on will be like Kyoto - too watered down to be worth anything, and even then still not acceptable to the US and China and India. But imaging if isolated countries - Australia, UK, whoever - successfully implement a national carbon tax. Their economies don't collapse. Other countries are encouraged, and decide to do it too. This has some hope of actually working -W]

"But imaging if isolated countries - Australia, UK, whoever - successfully implement a national carbon tax. Their economies don't collapse."

While an international agreement with teeth may appear politically impossible, political consensus can change.

But if an individual acts to protect the commons, he or she gains a very small sliver of the common benefit and the totality of the cost. That is what the tragedy of the commons is all about. Surely this isn't news to you.

[I've argued in my previous response that a unilateral carbon tax is essentially free. That isn't quite true, but its not far off. So I'm not convinced there are substantial "costs" -W]

I see no reason that this shouldn't apply to countries. Indeed it is often explicit: "even if Australia went back to the stone age it would make so little difference as to be undetectable", which is quite true, is in particular a frequently heard argument.

It is exactly this, and not the systemic problems with the in practice complex carbon trade vs the at least theoretically simple carbon tax, which appears to have killed the European carbon market.

[Sorry, you lost me there -W]

If we were in a world where externalities did not provide enough incentive to consume carbon, presumably we already wouldn't be doing that. Even if almost everywhere suddenly becomes as enlightened as British Columbia and self-imposes a tax, some mechanism for actually coordinating the level of taxation remains necessary in order for the actual emission totals to drop rapidly enough.

[You keep saying that, or similar things. I'm doubtful its true, though -W]

Your point seems to be based in an idea that a revenue neutral tax costs nothing. But that's not true.

Suppose, to simplify, that we slap a huge tax on all exports, and distribute the proceeds to everybody per capita. Are we all as wealthy as before? No, because the people buying our exports are by construction not the people collecting the rebate. Our exports become less competitive, and so our own prosperity declines as we become less able to import.

A unilateral carbon tax is not cost free.

[Well, this is what I alluded to: if you impose costs that are huge enough in one area of the economy, that area because uncompetitive. To the extent that you can kill areas by doing so. By extension, *any* taxation regime imposes some costs and so the economy will differ from its theoretical optimum under a no-tax regime. But your reductio-ad-absurdam doesn't work, because no-one is suggesting huge taxes, only modest ones -W]

There are arguments that even a universal tax and rebate scheme are not cost free but let the above suffice for now. The reason we should be doing this is because there are hidden costs, enormous hidden costs as it happens, not because there is a net benefit without accounting for those costs.

+ 1 on most of MT's comment. I think both your proposals show a remarkable lack of urgency. I don't understand the continued focus on a political remedy that you both agree appears impossible to achieve.

Now, by different methods, you both want to put a price on carbon. MT, at least, recognizes that revenue neutral does not mean payer neutral. The first part of any pricing scheme should be the cost to the individual. That there is a cost is not disqualifying. Many would welcome some additional cost if it led to actual reductions in carbon use. Many are eager to incur such a cost.

I am in fact proposing potentially very high taxes, at whatever level is equivalent to an effective proscription of net CO2 releases at the earliest achievable date. (Sequestration should be equivalently subsidized.)

[I'm certainly not proposing that *now*. Indeed, as I've said, CO2 taxes should start at a lowish level and ramp up.

How do you justify taxation at a level higher than, say, Stern's cost of $80 / tonne, or whatever it was? Why should CO2 be taxed at a higher rate than its cost? -W]

I do not think that modest measures are likely to suffice.

I think the Pigouvian tax is ill-defined because 1) the damage per unit emission is dominated by the discount rate and 2) the damage per unit emission is likely nonlinear and dependent on future emission trajectories.

[I'm not sure I know what you mean by 1. 2, I think, implies that a unit of future emissions should be taken more highly than a unit of present emissions -W]

The only lack of urgency on my part is based in a sad realization that nothing suitably urgent is likely to happen.

[Experience suggests that you are correct. That shouldn't stop us trying, of course -W]

mt, surely getting a foot in the door is more useful than forever brandishing tracts on the doorstep? If a country manages to introduce a tax that puts even a very low price on carbon (five £s, $s, €s, whatevers) then even if that price is never raised the tax will have built an acceptance of the need for mitigation into that country's economy. In your part of the world, that would be a big step forward.

And when did you last hear of a tax that stayed still?

A root cause of our environmental problems is our ever expanding consumption, which is clearly unsustainable in our finite world.
Addressing anthropogenic global warming ( AGW ) is an essential component in moving to a sustainable world.

Labor's introduction of a market solution to limit greenhouse gas ( GHG ) emissions caused by market consumerism is illogical.

ETS supporters ( the finance sector ) always use the argument that "only an ETS provides the CAP" which enforces a limit on emissions.
There is no CAP at this "pre-ets" stage and the move to "real" ETS market trading is dependent on joining the EU ETS system, which is totally disfunctional.

It is ironic in the extreme that a Labor government is pushing a discredited market solution.
If we genuinely believe "this is the biggest moral challenge" of our age, and that Greenhouse Gas ( GHG ) emissions need to be significantly reduced, we cannot legitimise and minimise that challenge by turning GHG emissions into a tradeable commodity.

[That sounds suspiciously like the "we can't have the private sector involved in running prisons, because then they'd be benefiting from illegal activity". And anyway, if GHG emissions are in this moral category, surely the govt can't "legitimise" them by taxing them -W]

In times past responsible governments actually taxed "bad" things like pollution, we should be doing so now.

[I'm dubious about that. If you're thinking about, say, tobacco taxes I think those were mostly revenue-raising, not "sin" taxes -W]

In that case the only workable GHG tax would be a "consumer" tax levied similarly to the GST.

I do see a place for Australian Carbon Credit trading, and that should be combined with the state's EPAs imposing uniform GHG emissions limits on emitters.
With a "consumer" GHG tax ( GGT ), there is no avenue for the special pleadings, permit giveaways and inevitable market corruption.
The revenue from the GGT is guaranteed and some CAN be used to offset impacts for lower income households.
The rest should be used to promote sustainable renewable energy alternatives.
The GGT is also the best way for the Australian public to feel that they are actively helping solve the problem by seeing the GGT amount on their bills and being able to select alternatives ( Eg. electricity sources ) which carry lower GGT costs.
By having the state's EPAs imposing GHG emissions limits, we have a real "CAP" which WILL guarantee emissions

Why does Eli have to keep reminding everybunny of the best way to do this:

Nations wishing to make major progress on decreasing greenhouse gas emissions should introduce emission taxes on all products. These taxes should be levied on imports as well as domestic goods at the point of sale, and should displace other taxes, such as VAT, sales taxes, and payroll (e.g. social security, health care) in such a way that tax revenues are constant, and distributed equitably.

These should be introduced as an Emissions Added Levy (avoiding the bad jokes). EAL would be imposed on sale for emissions added in the preceding step and inherent to the consumption of the product, as would be the case for heating oil and gasoline. Manufacturers would pay the EAL on electricity they bought, and incorporate this and the levy on emissions they created into the price of the product they sell.

Imports from countries that do not have an EAL would have the full EAL imposed at the time of import. The base rate would be generic EALs based on worst previous practices in the countries that do have EALs, which would be reduced on presenting proof that the actual emissions were lower.

All countries with EAL systems would reserve a portion (say 5%) for assisting developing countries with adaptations (why not use acclimations?) and mitigating programs.

By basing the levy on emissions rather than carbon all greenhouse gases stand on a common level, sequestration is strongly encouraged as well as such simple things as capturing methane from oil wells and garbage dumps (that gets built into the cost of disposal). The multipliers would come from CO2 equivalents on a 10 year basis.

[Possible. More complex than I'd like, though. I dislike import / export taxes -W]

Eli, I think you are a fundamentally correct bunny. I agree with every word of #28.

It still doesn't solve the international allocation problem, though.

William, I meant nothing about discount rates that you haven't heard many times.

As for "unit of future emissions should be taken more highly than a unit of present emissions" that seems agreeable in principle.

Suppose, though, that the impact cost were so high that nobody would ever pay it. (I think this is likely, unless a practical sequestration strategy emerges.)

I do not know how to estimate the impact cost. Because of economists insistence on discounting the future, I would say we are looking at gross underestimates of cost. Your Stern eventually seems to have figured this out but was unable to come up with a sensible alternative calculation either.

As James has long said, if everybody is expected to be ten years poorer in 2100, to see ten years' less "growth" than in a BAU scenario, why should we care? I should not.

My conclusion is not that everything is hunky-dunky. Rather I conclude that economists do not know how to capture the actual loss of utility of the BAU world in his economic models, which in some sense is truly enormous.

Arguably it can be parsed (since you like category boundaries) into economic damage (modest per conventional analysis) and moral or ethical harm (enormous). Under BAU harm accrues to future generations who will never see the beautiful natural world of the Holocene nor have access to any of its material bounties (including stable climates, complex ecosystems, and small farms).

This ethical phrasing seems less threatening to economists, but they then proceed to ignore it. "Not my job," they say, we must (in that grating Clintonian phrase that has now stuck in the American vernacular "grow the economy" as if it were a rhododendron.

Ultimately this is unsatisfactory. We should be actively dividing our efforts and allocating our rights between our own interests and those of our progeny, even our distant progeny.

Which means that it is possible (and I believe true) that the tax needs to be as high as it can get as quickly as it can get there until net CO2 emissions go to zero (and other radiative forcings should settle down as well). So there is no need to figure out what the unit damage is. I find the number $80 a ludicrously small number. If that's enough to change the carbon trajectory, fine, though I doubt it. If not, not.

The point is that Pigou is irrelevant, and Stern's estimate is irrelevant. This is a sin tax, something we must impose on ourselves to avoid being complete *******s to our descendants, as quickly as possible.

[Hmm. An arguement that begins by throwing out all of conventional economics (as you do, by discounting discount rates) is fine amongst friends but won't wash in the real world. Or the Pol / Econ world, if you'd rather not let me get away with stealing "real" to mean "power / control". Do you agree that you're doing this, by throwing out discount rates? And that it follows that you can't win your argumements in the pol / econ sphere without dragging eeryone along to your understanding - which is at best unlikely and slow.

Suppose, though, that the impact cost were so high that nobody would ever pay it... I do not know how to estimate the impact cost. Again, this language won't work except amongst friends.

By dividing the damage into "economic" and "moral" and (as far as I can see) assigning the vast bulk of the cost to the "moral" side, you're again pulling things out of the econ sphere over to the subjective one. I think it probably is possible to try to run with the "non-commensurable" argumenent. But I doubt it will work. This is a sin tax, something we must impose on ourselves - same thing again. I just don't think this will work. Nor do I think its justified - I don't see the evidence for your assertions of vast damage -W]

Vast damage to come:
http://en.wikipedia.org/wiki/Anoxic_event

William, sorry to see you capitulating to the imperial fantasies of the economists. Just because something happens outside the time scales of economics (and this is optimistic in the present case) doesn't mean it's outside the ethical responsibilities of society or the due considerations of government.

WIldlife protection establishes this principle.

[And I'm sorry to see you putting yourself outside meaningful debate :-( I feel another post coming on -W]

I appreciate the arguments above, and basically agree with anyone who says "Lets implement something, knowing that it isn't perfect, and fix it later".

In Australia, we have a carbon tax, and when it was introduced, it was combined with income tax cuts for low income earners. In a year or two we will move to an ETS, and our price will be linked to European permits.

This is where it gets tricky for our government. The income they get from permits is variable, but the loss of revenue from income tax cuts is not as variable. So the collapse in price of European permits will lead to a budget loss of billions of dollars. Of course conversely, an increase in the price of permits would be a budget windfall.

So I think they made a mistake with the tax cuts. Rather, I think that a certain fraction (80%?) of the money collected from permits be distributed as an annual carbon bonus. Clearly the size of the bonus depends on the total value of permits, so a fair chunk of the population would have an interest in a *higher* carbon price. Very useful for giving politicians a constituency that will reward them for good policy.

Got anything like this in the UK?
http://www.davidbrin.com/taxsimplification.html

[Its a bit of a cruddy article. Brin is a fine sci-fi author but as you'd expect, that's his major skill. Writing sanely about the tax code isn't a skill of his. Your tax code is notoriously bad; ours is crap too but not as crap as yours.

If you want to simplify it - you should - but if you want to actually push in practice for doing so, you have to understand the special interests and pork barrel politics that have made it what it is. If you don't understand that, you can forget about having any hope of improving it -W]

While I'm generally a fan of taxes over cap and trade, and also a fan of complementary command-and-control, behavorial "nudge" policies, and research activities in addition to my main course market mechanism, I did note in another blog one benefit of cap-and-trade which is that it is automatically counter-cyclical - e.g., in a recession the price drops compared to a non-recession, and in a boom, the price goes up, which is generally good for the macroeconomy. So that's a not insignificant plus. You could potentially duplicated it with the tax (eg, the tax might default to increasing by 5% a year, but will be pegged to GDP growth or unemployment or median income or something so that it will stop growing in recession and grow faster in booms)

This was something I was always concerned about regarding the briefly popular in some esoteric circles "carbon intensity target" - because for carbon intensity targets, if your GDP drops (because of, say, a recession), then because your target is emissions/GDP, your target is harder to meet. Which is like kicking the economy while it is down. Though, because as noted above emissions naturally drop during a recessionary period, it might not be a very hard kick...