Market Failure in Everything: The Carbon Emissions Edition

What's the best approach to limiting carbon emissions, cap and trade or a carbon tax? Many economists will tell you a carbon tax is best. Political consultants, for the most part, will tell you something else:

Getting on a low-carbon diet, by Ronald Brownstein, Commentary, LA Times: ...Scientists, economists and political leaders who support action against global warming all construct their proposals on a simple foundation: attaching a cost to carbon emissions. Since the U.S. ... does not regulate greenhouse gas emissions, factories and power plants and cars can pump carbon into the atmosphere for free; to the polluter, carbon today has no cost. ...

Since none of those costs are internalized..., the effect is to artificially lower their price. That distortion encourages overuse of fossil fuels and discourages investment in clean energy alternatives... "The biggest market failure we have in the world is the fact that [carbon emissions], which are potentially threatening our ability even to survive on this planet, has no price," says environmental consultant Roger Ballentine, the chairman of the White House climate change task force under President Clinton. ...

To the extent American politicians in recent years have talked about controlling carbon emissions, they have almost entirely focused on a system known as "cap and trade"... But now a group of skeptics is questioning whether that approach by itself will achieve the reductions in emissions necessary... Their alternative has a sharper edge: a tax directly on the carbon emissions of fossil fuels. ...

Sen. Christopher Dodd (D-Conn.) is promoting a carbon tax in his campaign for the 2008 Democratic presidential race. ... But Dodd is the only prominent presidential candidate talking about a carbon tax. And he's not surprised to be ... alone. "Why I suspect the other candidates are not talking about this, is all their pollsters and handlers have said 'you are looking for trouble here,'" Dodd says. "I think…there is a larger constituency for [this] than people believe today."

Both a carbon tax and a cap-and-trade system are designed to place a cost on carbon emissions. A carbon tax does so directly: It would tax each fossil fuel based on the amount of carbon it emits when burned. Under that system, coal would be taxed the most, oil less and natural gas least. ...

A cap-and-trade system operates very differently. The cap part works like this: The government would set an overall limit on the amount of carbon the country will emit each year, and then allocate "credits" that establish emission limits for individual companies. At that point, the trade component would kick in. ...[F]irms that can reduce their emissions more efficiently could sell some of their credits to other companies ... that find it more expensive to control carbon. A trading system would develop that establishes a market price for carbon pollution.

There are some other fine points under debate, particularly whether the credits should be provided free to polluters or auctioned off (by all indications, a better option.) ... The cap-and-trade system Congress approved in 1990 to fight acid rain has produced greater reductions in sulfur dioxide pollution at less cost than initially expected and minimal economic disruption...

Skeptics, though, point to the troubles of the cap-and-trade system the European Union has used since 2005... Under pressure from industry, European governments gave away too many credits to polluters; the result was that the price of the credits collapsed, undermining the incentive to cut emissions or use cleaner fuels. ... A second round ... scheduled for next year could ameliorate the problem, but at the least, the European experience suggests that designing a successful cap and trade is an enormously complex undertaking which may require some trial and error before it works.

That prospect is at the heart of Dodd's argument for a carbon tax. A cap-and-trade system, he says, "is confusing, it's complicated and it takes forever." Enforcement could also be a challenge... By contrast, he argues, a carbon tax sends an instant, unambiguous signal discouraging the use of the fuels that contribute the most to global warming. ...

[T]he two policies have complementary strengths. ... Al Gore, in his Congressional testimony, ... testif[ied] that he believed "the most effective approach is to do both."

This discussion may seem wildly premature. ... At the moment there's no sign Congress is ready to approve even a cap-and-trade system... And a carbon tax proposal—because it includes that three letter word—is a much more incendiary proposition than a cap-and-trade proposal (which would also raise electricity and gasoline prices, though in a more muffled and indirect way).

But the political climate on these issues could change as abruptly... More leaders from different segments of American society—from utility and auto executives to the retired military officials who testified before the Senate this week—are endorsing meaningful, mandatory action...

When Washington is ready to act, the real lesson ... from this ... debate ... is that there is no best way. Progress against a challenge as vast as global warming will require us to use all the tools available to us: direct regulation (tougher fuel economy standards for cars, requirements on utilities to generate more of their electricity from renewable sources); economic carrots and sticks (a carbon tax that helps fund tax breaks for investment in greater energy efficiency and alternative energy sources); a cap-and-trade system that sets a hard limit on emissions; federal procurement that nurtures clean new technologies; and steps beyond all of these that we can't yet imagine. ...

Does anyone know any more about this? Is it generally accepted that "Australia's farmers have been responsible for virtually the entire share of the nation's greenhouse gas emissions reductions" due to "government laws banning land clearing"?:

There's little gold in them climate-saving trees, by Michael Duffy, Commentary, Sydney Morning Herald: This week's copy of The Land newspaper contains one of the more unusual items the state's august rural newspaper has published. It's a two-page ad presenting an invoice for $10.5 billion from some farmers to the governments of Australia. The farmers want to be paid for carbon dioxide their farms have absorbed because of state government laws banning land clearing. After all, the more trees left standing, the more carbon gets sucked out of the air.

The farmers argue that laws to protect native vegetation have enabled the Federal Government to claim it is meeting its Kyoto emissions target without penalising other industries. Therefore those industries, via the government, owe the farmers a lot of money. ...

The farmers say they will launch court action if their invoice is not paid. Their chances of success are probably zero, but the ad ... is also a useful reminder of how farmers have been shamelessly used by the Federal Government in relation to the Kyoto Protocol.

Not only have they suffered harshly from state native vegetation laws, which have effectively nationalised large parts of many farms without compensation, their suffering has been used as an excuse to allow other businesses to continue to belch out carbon and profit from it.

Australia managed to get a special clause inserted in the Kyoto deal allowing reductions in land clearing after 1990 to be part of the calculation of its net carbon emissions. Fortuitously, an unusually large amount of land had been cleared in 1990. As a result, the Federal Government has been able to claim that Australia was meeting its targets without any economic activity being penalised.

Apart, that is, from farming. Last October a think tank called The Climate Institute published a report claiming that, thanks to bans on land clearing, "Australia's farmers have been responsible for virtually the entire share of the nation's greenhouse gas emissions reductions … Over the same period, emissions from energy and transport have and continue to skyrocket..."

The climate institute also claimed that, because Australia refused to ratify the Kyoto Protocol, farmers have been unable to access those international emissions trading schemes that do exist. Our farmers "are unable to convert the emissions reductions they have achieved into financial value and benefit from the growing global carbon market". ...

Some farmers have seized on this with joy... My prediction is there will be lots of talk and no meaningful action.

The farmers' problem is that they are acting as though our leaders mean what they say on global warming. In truth they don't. Almost all government action on climate change is driven by the need to pretend to be doing something significant, while actually doing as little as possible. This is because any meaningful action would harm the economy. This is the situation in most countries, not just Australia. Most apparent action on climate change falls into four categories.

1. The commissioning of more research, including the setting up of high-profile study centres and inquiries. This allows leaders to say they're taking the problem seriously while postponing the need to do anything significant. ...

2. Commitments to action that would harm the economies of other nations while affecting one's own hardly at all. The Europeans are masters at this.

3. The portrayal of action that would have occurred anyway as part of a government's brave fight against climate change. Examples include steps to fight air pollution in developing nations, and land clearing bans in Australia.

4. Commitments to action that sound wonderful but never occur, or do occur but with little effect on carbon emissions. Perhaps the best example of this is the European Union's Emission Trading Scheme, whereby nations set caps on carbon emissions. Sounds splendid. But for 2005 the caps set by most nations were higher than actual emissions.

In light of the above, one might propose the following. To the extent that anyone will actually suffer from action to reduce carbon emissions, it will be the weak rather than the strong. ...