Cliffs Notes for a Carbon Charge

The conversation in comments at Andrew’s post indicates it might be useful to go over the workings of a climate tax charge.  I like to call it a charge rather than a tax because it is much more like what we uncontroversially pay when we take potatoes from the supermarket, than what we pay government whether or not we use the fire department or the courthouse.

The moral case for charging people when they warm the planet is pretty simple. The world has a fixed capacity to process greenhouse gases (GHG’s) while staying habitable for polar bears and people: when you let CO2 loose, you are denying some of that capacity to everyone else, exactly like the potatoes you deny to others by eating them. When you do either without paying, you are a no-good lousy goniff stealing thief taker, a species despised by all.  Much better to drive your car, or heat your house, without making your kids ashamed of you, right?

Is it right to let people pollute the planet — take GHG capacity away from everyone else if they pay for it? Well, is it right to let people take food out of the mouths of the hungry just because they are willing to pay for those potatoes?  Um, yes, it is. Poverty, hunger,  and inequality are big important problems, and public policy is needed to deal with them, but that policy is not in the climate department. If you’re worried that some people won’t be able to afford to drive when gasoline carries a carbon charge, by all means let’s do something about it, but the “it”  is not gas prices, it’s poverty, because the same people are having trouble with the rent and feeding their families.

The technical case is a little more complicated, and  recognizes that burning fossil fuels (and fertilizing food crops; N2O is a potent GHG) is useful and creates real value as well as causing damage.  The liquid fuel in a medevac helicopter has no practical substitute because (i) two thirds of the “fuel”  is oxygen from the air that the helicopter doesn’t have to carry, so it  has an energy-to-payload ratio that beats existing batteries, wound-up rubber bands, and any other current possibility (ii) the stoker and boiler equipment to burn coal, or the pressure vesssel to hold hydrogen, are very heavy, while liquid fuels can be managed with an ordinary tank and a few pipes. This use of fossil fuel is a good decision.  The same fuel burned in a car that could have used electricity from a wind farm is much less valuable; if it’s going on a half-mile trip on a nice day next to a bicycle path to pick up a quart of milk, even less.  However, all of it does the same global climate damage at current atmospheric CO2 levels.  When the latter go up more, and we are flirting with putting seaboard cities under water, the damage per pound of CO2 will be higher.

It is not the purpose of a carbon charge to make everyone stop emitting any CO2: the right level of global GHG emissions is some, not none.  The policy goal is that we only emit the GHG whose benefits exceed its costs, the Goldilocks level: not too much, but also not too little.  This is the same policy goal we seek for all sorts of pollution and other kinds of bad behavior.  We don’t want people to never practice the trumpet, we want them to do it with the windows closed, at reasonable hours.  We don’t want no crime, we want the amount that suppressing further would be too costly in other ways.cc001

OK, I need to draw on the blackboard.  I’ve graphed the marginal benefit of each additional ton of fossil fuel (MB) and the price people pay for it, marginal private cost = MPC. Some uses, like the helicopter, have great benefits relative to possible substitutes or going without; others, like sitting in traffic with the engine idling, have very little value.  In the usual way, the world has settled down at point D.  But the real cost of emitting that GHG is additional to the current price of gas; the problem is that decisionmakers don’t see the climate damage they cause, marginal social cost (MSC).

According to what we know now, this system should be operating at point B.  We can get there if we impose a carbon charge of MSC so the last gallons of gas cost more than the users benefit from it. The right charge for now is (experts tell us) about $30/t, the social cost of an additional ton of CO2 where we are now; as emissions fall, that charge should probably fall as well.  What we have to know to get it right is the MSC curve over a reasonable range, and where we are now on the emissions axis. What we don’t have to know is where point B is: lay on the carbon charge and the world will show it to us.

We can get to B by a regulatory cap set right below it.  But to do that we have to know both the MSC curve and the MB curve, and the latter is even harder to see than MSC.  When we set out to put a stop to automobile smog emissions, the industry experts swore up and down, and probably believed, that a clean car would cost a fortune and be undrivable — that is, that the benefits of a dirty car relative to a clean one were very large. But they were wrong.  A cap also has to be allocated across emitters somehow; we could do it administratively by some sort of rationing, but most people come to see that letting emitters trade the rights to release GHG will lead to a much more efficient system.  It’s possible to show that a charge and a cap-and-trade system will get to the same sweet spot, at least in theory.  But what if we’re wrong about what the right cap level is, for example if the MB curve in fact is much lower than we think?  We’re already seeing it fall, as wind, solar, and conservation get cheaper so the advantages of fossil fuel (for lots of things) become less.  A carbon charge makes the whole world look for ways not only to pass up the fuel that’s not actually worth what it costs, but also to move that MB curve down by finding good substitute energy sources, so B moves to the left.

Actually implementing either a carbon charge or a cap-and-trade system is not a simple matter, what with making it work internationally (tariff?) and playing whack-a-mole with new schemes to cheat.  But the carbon charge is the way to go, all things considered. It’s easier for us to lay a charge on Chinese steel to account for the coal used to make it than to impose a cap on Chinese steel plants, but its big advantage is not having to pay attention to the fossil fuel industry’s bleating about how uniquely essential their products are to prosperity, freedom and the American way.  Just impose the charge, as well as we can calculate it, and the MB curve and point B will reveal themselves.


Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

4 thoughts on “Cliffs Notes for a Carbon Charge”

  1. "The policy goal is that we only emit the GHG whose benefits exceed its costs, the Goldilocks level: not too much, but also not too little." If Hansen is right, this number for CO2 is negative, because the current atmospheric level (400 ppm) is already too high and should be reduced to 350 ppm. Who should we we believe, a great climate scientist who's been right so far, or a bunch of politicians trading numbers in a smoke-free room in Copenhagen?

    This does not change the formal analysis. Nor does it mean grounding the medevac chopper; you can burn fuel if you hyper-offset it. It does imply a higher carbon price than $30-tonne.

  2. Although the experts tell us that the marginal social cost of emitting carbon is roughly $30/ton, that number is based on a huge pile of assumptions and fudging. (There is always going to be fudging about prices when part of the expected cost distribution includes "WE'RE ALL GONNA DIE!") Elasticities in response to price changes are also a weird thing — sometimes people aren't willing to pay a cost as high as the real marginal benefit because they're cash-flow constrained; sometimes people are willing to pay a higher cost than that because they're locked in by existing investments or suffer from winner's curse.

    That's why the cap folks argue that we should just set a limit of emission at a level that is unlikely to seriously damage our civilization and let the prices sort themselves out, as opposed to setting prices and hoping they lead to a safe result.

    Of course, since the current generation of big capital is playing IBG,YBG with the planet, caps don't seem to be plausible. So some level of tax at least has the potential to extract funds for mitigation on the way down.

  3. Well, strictly speaking, there are batteries and fuel cells where you don't have to carry the oxidant with you. Zinc-air comes to mind. But, as far as I know, there is still no practical all-electric helicopter, and none on the horizon. Probably more practical is to use biofuels and, as James points out above, offsets.

    But, yeah, I agree that the term "carbon tax" doomed the concept from the start. Framing matters.

  4. PS: I used to favour cap-and trade over a carbon tax on the grounds that we had a reasonable number for the total allowable emissions,,set by the agreed 450 ppm "safe" target. I've changed my mind, because that number is almost certainly wrong. The best scientific estimate is the median of an quite wide range of professional models, first of climate, and second of impacts and mitigation costs. (The two-step widens the overall distribution). The chances of the best estimate being close to the outcome are quite low. Then you have the fact that actual caps would not be based on the best science but on political horse-trading. The chances of being right shrink to tiny. The fate of the European ETS was not down to learning mistakes but inherent features of the scheme. Any cap-and-trade scheme locks in a wrong target; it gives too much policy certainty. At least if you set a carbon tax wrong, and you will, it can be adjusted when you find this out.

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