Monday, June 12, 2017

A step forward for Paris and carbon caps

Despite all the hullabaloo about the US leaving the Paris Accord (and joining the new Triple Entente with Syria and Nicaragua), work to advance the (almost) worldwide climate change effort goes forward.  Many of these initiatives have been covered in the media.  One important step forward – with miniscule media attention – is publication of a new report on carbon pricing.
The Report of the High-Level Commission on Carbon Prices, written by a blue-ribbon group of economists, sets out a global strategy for putting an extra price on carbon dioxide emissions (report available here).  Their argument:  “A well-designed carbon price is an indispensable part of a strategy for reducing emissions in an effective and cost-efficient way… Carbon prices encourage producers to decrease the carbon intensity of the energy sector and manufactured products, and consumers to choose less carbon-intensive goods.”
The report goes on to discuss the two main policy alternatives for putting a price on carbon (a carbon tax and a cap-and-trade system) and how these alternatives might be applied in a variety of settings throughout the world.  There is a good account of how the revenue raised from carbon pricing can be used to pursue an array of policy choices: cutting other taxes (the revenue-neutral option), assisting the poor and vulnerable, easing the transition for the hardest-hit economic sectors, investing in infrastructure, fostering technological change to support the transition, and – my favorite – investing in public transportation infrastructure and supportive urban planning.
None of this analysis is particularly new, although it is crisply and clearly presented.  The big takeaway is probably the price that the authors recommend for carbon.  The bottom line recommendation is pricing of $40 to $80 per metric ton of carbon dioxide emitted by 2020 and $50 to $100 by 2030.  Applying these costs through carbon taxes, cap and trade, or some combination should incentivize market forces to “decarbonize” the economy enough to keep us within the magic 2°C ceiling that scientists have established.
What would those rather esoteric numbers mean in the real world?  Those of us who are old transportation hands like to think in terms of cents per gallon of motor fuel.  In the surface transportation sector, CBO has estimated that a tax of $20 per ton of emissions would raise the price of gasoline about 20 cents.  By this measure, the $40 to $80 range of pricing recommended for 2020 would be equivalent to about 40 to 80 cents per gallon.  Of course this is just a rule of thumb for one sector in one country, but I think it gives a sense of what we are talking about.  Imposition of a federal gas tax (or equivalent) increase certainly isn’t politically viable at the present time in the present Congress.  But it’s not crazy either.

Thanks to Joe Stiglitz, Nicholas Stern, and their colleagues for giving us another step forward for Paris (and Paris is never a bad idea).

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