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Taxes, Credits and Going Carbon Negative
Jamais Cascio, 9 Jun 05

Atmospheric carbon dioxide is 375 parts per million and rising, expected to push over 400 ppm even in the best-case scenarios. Avoiding ruinous warming means keeping CO2 levels at or below 440 ppm (with some small flexibility if we can get a handle on methane, too). Remaining below that limit means moving as fast as possible away from fossil fuels and towards much greater efficiency across the spectrum of human activities. Mitigation of atmospheric carbon dioxide is generally thought of in terms of large-scale government efforts -- and often carries the whiff of heavy carbon emitters trying to get away from regulation.

But that's not the only scenario.

A combination of tradable carbon credits, carbon taxes and individual carbon offsets has the potential to both drive us towards a much more energy-efficient society and lead us to a world that isn't just carbon-growth neutral, it's carbon-growth negative. Read on to find out how.

Economic inducements to reduce greenhouse gas emissions generally take two major forms:

Carbon credits (sometimes called "cap & trade regimes"), wherein participants can emit a set amount of carbon dioxide over the course of a given time period. If they manage to emit less than that, they can sell their remaining credits to those unable to get emissions down to the capped level; money for the credits goes to the participants. CO2 producers unable to meet the limits and unable to buy credits are penalized. Caps go down over time.

The downsides to carbon trading are the complexity of the schemes, the likelihood of clever traders being able to "game" the markets (c.f., Enron), and the perverse effect of carbon markets making it smart to be a hold-out -- if most others in the market are operating below the cap and trying to sell remaining credits, the price per unit will drop sufficiently that even the most egregious emitter can afford to operate unchanged.

Carbon taxes, wherein participants are charged a tax per set quantity of CO2 associated with the production and use of various products and services. The amount of CO2 a participant can emit is limited only by how much tax the participant is willing to shoulder. Those who seek out the most efficient products and services end up paying much less in tax. The money collected in carbon taxation goes to the taxing body, typically the government. Taxes may increase over time, to drive further efficiencies.

The downsides to carbon taxes (beyond the knee-jerk opposition often arising against taxes in general) include the inherent regressive quality (the poor end up paying a higher percentage of their overall income; moreover, high-efficiency goods and services are rarely marketed to poor consumers) and the likelihood of efforts to reduce the tax burden by offloading carbon emissions instead of reducing them.

Both of these systems can be seen in the real world, albeit at different levels. Carbon markets and emission trading regimes are part of the Kyoto Treaty, and international carbon emission markets have been active since early this year. Each nation gets a limited amount of carbon credits, which are then made available to individual companies; the companies are then able to sell or buy credits from each other. According to Point Carbon, a website monitoring CO2 emission trades, today's spot price for a ton-credit of carbon is €19.42 (compared to the €40 penalty per ton companies face for exceeding limits).

But despite suggestions from places like the Tyndall Centre for Climate Change Research, carbon credits for individuals (or "Domestic Tradable Quotas," as Tyndall calls them) haven't received much enthusiasm. Part of it is undoubtedly the paperwork -- identifying how much CO2 is emitted, for example -- as well as the underlying risk -- gambling on how much to sell or buy the credits for. Just as people who don't want to play the stock market can still invest in mutual funds, mechanisms would undoubtedly arise to help people spread their risk and minimize the hassle. Nonetheless, the degree of complexity such an individual carbon trade regime would require is clearly its biggest drawback.

More likely to hit individuals directly are carbon taxes. Sweden introduced a carbon tax in 1991, and other countries in the region (Finland, the Netherlands, Norway) soon followed suit. New Zealand has recently implemented a carbon tax system, and the UK is considering one. Even the notoriously tax-phobic United States may get one -- as we noted (with some surprise) back in April, none other than the CEO Duke Energy has called for the introduction of a carbon tax in the US. As they stand now, carbon tax levels vary widely, from around $5/ton to close to $100/ton.

From the perspective of the individual citizen and consumer, carbon taxes are more readily understood and implemented than individual trading quotas, and can provide a strong inducement to seek out the most efficient products and services. But since the individual goal would be to reduce the tax, not necessarily reduce the carbon, carbon taxes lead to the possibility of taxpayers looking for goods and services which fall outside the taxable realm, regardless of whether they result in greenhouse gas emissions. Most obvious are goods and services provided from other countries, and attempts to charge a "carbon tariff" on imported products or services would likely run afoul of international trade laws. In short, carbon taxes could end up driving more "offshoring" of organizational activities.

A more subtle problem for both carbon credits and carbon taxes is that, although they may lead to slower growth of atmospheric greenhouse gases, they have no real incentives for reduction. The best one could hope for is carbon neutrality: putting out no net carbon dioxide. Accomplishing this solely by reduction of emissions -- whether motivated by the profit of selling credits or the a desire to reduce taxation costs -- is sufficiently difficult as to be effectively impossible for society as a whole. A more plausible result of taxes and credits is that individuals and organizations work to bring their emissions down to an economically comfortable level, but not much more. As useful as they are for pushing efficiency, in the end, emission credits and taxes can only at best be a partial driver for reducing the effects of greenhouse gases.

But this wouldn't be a WorldChanging post if we didn't point out that a neat solution was already at hand.

There exists today a growing number of groups offering "carbon offset" services. Examples include Climate Care, Carbon Fund, Sustainable Travel International, CO2Balance, Future Forests and a variety of smaller, ad hoc efforts. Individuals can pay the organizations to undertake a carbon dioxide mitigation effort -- typically, planting trees -- in an amount sufficient to offset the CO2 produced by a given activity. The prices one pays vary considerably: Future Forests wants £30 (about $60) for the three trees required to offset a recent flight from SF to London and back; Sustainable Travel International wants $60, as well; CO2Balance wants £24 (~$48); and Climate Care -- although it gave the highest estimate for amount of CO2 produced -- only asks for £15.67 (~$31). [Yes, most of these sites are in the UK (even STI); that's not all that surprising, given the broad enthusiasm in Britain for carbon offset programs.]

If carbon offset programs were integrated into a carbon credit or carbon tax regime, individual citizens and consumers would have both incentive and means to go beyond simply lowering the amount of CO2 put into the atmosphere and actually start reducing the CO2 that's there.

In such a combination, each tree -- or, as has been done in India, field of biodiesel-producing biomass -- would have a calculated and standard offset value in terms of both CO2 mitigated and tax refunded/credit increased. The more offsets an individual provides -- typically through working with an offset provider like the ones mentioned above -- the greater the refund or credit. Critically, it must be possible to receive more in refund or credit than is spent; the regime must hold out the possibility of profit.

Clearly, the number of offset tons one could amass in a given year would itself need to be capped to avoid gaming the system. The trees planted would need to be protected so that they can achieve the full measure of lifetime CO2 absorption, as well, and the various offset service providers planting the trees (etc.) would have to be closely watched. Nonetheless, the goal is clear: to move people towards a carbon negative lifestyle, not simply a carbon neutral one. The more one improves efficiency, the more the offset tons become sources of profit -- and the more atmospheric greenhouse gases could be mitigated.

As the India example suggests, this could have a development value as well: regions undergoing deforestation for economic survival could instead be the recipients of great amounts of cash specifically for reforestation. It might even be possible to have the offset credit value vary by tree planting location, so that the regions in the greatest ecological danger can receive the greatest attention. The development value can be more local, too -- the regressive nature of carbon taxation can itself be mitigated by subsidized or underwritten individual offsets.

Carbon offsets, as they exist now, are interesting but receive insufficient support to make a real difference. Carbon taxes, as they exist now, can lead to a real reduction in emissions but provide no incentive to do better than lower emissions, and can have perverse effects. Together, however, they could provide a double-strength push to reduce greenhouse gas emissions to below net neutral -- to start to make a real dent in the existing carbon load. Hybrids, wind farms and walkable cities can do a great job at bringing emissions down, but we can do even better if we try.

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Comments

I think carbon taxes have some really big advantages in terms of simplicity. All you really need to tax is fossil fuels; coal, oil and gas. The tough part is how do you sell the tax. I think a gradual implementation and tax deductions could do the trick. If you coupled a tax on fossil fuels that increased the cost of the fuel by ~10% per year with a tax deduction. I was thinking of a system in which your taxable income is reduced by 4,000-5,000 per year. After 7 years the cost of fossil fuels is double and the first 28,000-35,000 dollars you earn is not subject to income tax.


Posted by: jim moore on 9 Jun 05

The problem with taxing fossil fuels at source is that it removes any incentive to burn them cleanly - clean coal-burning, for example. Though it is by far the simplest option!


Posted by: Daniel Johnston on 10 Jun 05

Daniel,
I think that is an easy one to solve, any power plant that captures and sequesters the CO2 it generates would get a tax rebate or not be subject to the carbon tax.


Posted by: jim moore on 10 Jun 05

Of all the non-sequiturs I've ever seen....

The problem with taxing fossil fuels at source is that it removes any incentive to burn them cleanly
Is that so?  Is there some repeal of pollution laws that is inherent in a carbon tax?  However did I miss this one?  </sarcasm>
clean coal-burning, for example.
Powdered-coal combustion steam cycles are about 33% efficient; in contrast, the first-generation oxygen-blown IGCC systems break 40% while nearly eliminating sulfur and particulate emissions.  The IGCC plant would pay about 17% less in carbon taxes right off the bat.  It could separate (and thus sequester) about half its total carbon in the fuel-gas cleanup at very low cost, increasing that advantage to 58%.

And that's with coal, the dirtiest fuel we have.

Tell me again how carbon taxes mean dirty energy?


Posted by: Engineer-Poet on 11 Jun 05

A Canadian urban policy advocacy group is lobbying for "auditable, performance-driven transfers from federal and provincial funds and agencies whose goals are achieved by the programs, e.g. climate change, improved emergency response, reduced health care due to lower smog and accidents due to reduced commuting and congestion".

It further "recommends a flexible instrument whose basic value would be established with reference to climate change so that the right to audit efficiencies would be based on the right to verify performance. However, the same information would facilitate other performance audits to verify goals correlated to, but not directly caused by or causal of, energy and greenhouse gas efficiency (including all of those listed above). Where municipal governmetns can reasonably undertake to reduce anticipated expenditures from other levels of government, direct transfers from federal and provincial funds and agencies whose goals are achieved by the programs are justified. This would result in a premium over the climate change value, repaying the federal and provincial funds or agencies in reduced expenditures. The right to conduct performance audits would be based on the contractual obligations associated with the climate change instrument, on which the other performance audits would "piggyback".". This has apparently received some strong interest from the Canadian Minister of State for Communities and Infrastructure, John Godfrey. Could be a model not only for G7 countries seeking to deal with this problem, and seeking also to avoid explicit carbon taxes, but, if it sets a new climate-change-driven standard of deferred payment, it could even lead to global monetary reform. Now THAT is worldchanging.


Posted by: urbanist on 11 Jun 05

As one of the organizations listed in the article above, we wish they'd pointed out the cost of reducing a ton of CO2 from Carbonfund.org is just $5.50, vs. close to $60 for many companies. As an all-volunteer nonprofit we can charge less and we are committed to charging as little as possible because we want to make carbon offsets popular to the broader population, not just environmentalists.

And our one warning about carbon taxes is that they do not necessarily reduce CO2 usage, which is the goal. If consumers are willing to pay more for fuel then the government may increase revenues but we do not inherently reduce consumption. Placing a cap on CO2 output is the only sure way to reduce CO2. A cap-and-trade system ensures we meet the climate goals of reduced CO2 and let's the market figure out the best way to reduce the carbon.


Posted by: Eric Carlson on 21 Jun 05



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