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Setting a Price on Carbon

This article was written by Alex Steffen in February 2008. We're republishing it here as part of our month-long editorial retrospective.

Climate change is obviously an issue we pay a lot of attention to. But there are so many interesting things to track and write about -- and so much work going on here on our next round of projects -- that sometimes we don't get to some important items.

Carbon pricing is one of those. A lot of the leaders in the green braintrust are focusing their attention on U.S. climate policy, for obvious reasons, and, in particular, on what kind of climate regulations the U.S. ought to adopt under a new Administration with a sympathetic Congress.

All the clear-headed folks seem to be converging on some form of carbon pricing regime. The advantages of setting a price on carbon are real. Pricing carbon at the rates being discussed doesn't even begin to account for all the externalities involved in burning carbon -- the loss of valuable ecosystem services, the ways in which the world is becoming uninsurable, the climate tragedies expected to befall millions of people in coming decades -- but it does start to send price signals which can leverage change all through the system. It's one of those necessary-but-not-sufficient tools.

If you want to understand this stuff, the best place to start is Sightline's Carbon Pricing 101. Then go read Peter Barnes as he explains the options in this brilliant short pamphlet.

Peter argues for a sky trust, a form of "auction-and-rebate" carbon pricing:

The problem is this: If the principle of cap-and-trade is to regulate carbon emissions through the market, giving permits away distorts that market almost as badly as doing nothing toward regulation at all. Permits have value, even if the government doesn’t charge for them. Barnes uses the following analogy in his PowerPoint presentation “A Citizen’s Guide To Carbon Capping”: If the government gave all the World Series tickets to Exxon free, would Exxon let people into the stadium at no charge, or sell tickets at the market price? Give emissions permits to companies, and they’ll either sell them or raise their prices—which is what happened in Europe. “Even if you adopt a pure, liberal, free-market perspective, giving away permits for free is not a good idea,” says Haas.

The alternative—and a fundamental tenet of Barnes’ Sky Trust—is to auction the permits to the highest bidder. As fewer permits are issued each year, the price of permits will rise steeply. Within a few years, the auctions could generate as much as $500 billion annually, says Dorman. That cost will get passed along, of course, and ultimately the consumer will end up paying more for just about everything. Voters don’t like to pay higher prices, which makes legislation like this a hard sell.

But the Sky Trust solves the problem by taking the proceeds from the auction and, basically, cutting everyone a check. And not a small check either. In Barnes’ model, every American would receive a monthly dividend as large as $150—or more than $7,000 a year for a family of four.

For more, go check out Gar Lipow as he compares tax-and-rebate against auction-and-rebate:

With a cap-and-rebate system, it is critical to avoid creation of a large carbon market. This means not only avoiding giving permits away, but keeping secondary markets (where people resell permits they bought at auction) as small as possible.

The reason for minimizing any secondary market is political, but critical. A carbon market produces carbon traders, and carbon traders as a whole tend to oppose reductions in total numbers of permits, whatever honorable individual exceptions might exist. In Europe, carbon traders are lobbying to expand the fraud-ridden Clean Development Mechanism (CDM), weakening additionality requirements, and weakening enforcement of all CDM. Carbon traders are among those lobbying to continue permit giveaways, and oppose auctioning increases.

If we take people like James Hansen seriously and decide we need to phase out 90-percent-plus of fossil fuel use over twenty years, and the remainder over the course of another decade, then avoiding a secondary carbon market becomes even more important. Brokers who buy and sell carbon for a living, holders of big portfolios, offset consultants, certifiers, and providers will all try to find ways to delay such a phaseout. We have enough problems with the existing carbon lobby. There is no reason for global warming opponents to grow our own mini carbon lobby.

Sightline chimes in with an outstanding series of blog posts on climate equity.

One of the things most lacking in this discussion is the global perspective of the U.S. involvement in the emissions and choices of others. But overall, the debate is moving at lightening speed -- and none too quickly.

Cap, Trade, Auction, Rebate: How to Set a Price on Carbon is part of our month long retrospective leading up to our anniversary on October 1. For the next four weeks, we'll celebrate five years of solutions-based, forward-thinking and innovative journalism by publishing the best of the Worldchanging archives.

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You're right, most clear thinking people have agreed that pricing carbon is critical to building a clean energy economy and solving the climate crisis.

Next, the core decision is: How do you set the price?

I would argue that you want to set hard limits on carbon emissions through a cap and let the market set the price--rather than rely on politicians to figure out a high enough tax.

FYI--The "Skytrust" is now going by the name "Cap & Dividend" and gaining momentum with decision makers.

Posted by: Sam on 30 Sep 08



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