Articles by Sean Casten

Carbon taxes vs. carbon trading

This is the third post in a series about details we are still getting wrong in the climate policy discussion. See also part one and part two.

There is no shortage of economic analysis and policy discourse that shows that carbon tax and cap-and-trade methodologies can deliver economically equivalent outcomes. The general consensus -- at least today -- seems to be that since they're equivalent, it really comes down to politics, and it's politically difficult to do anything with the word "tax" in it, so we'll do cap-and-trade. I like the conclusion, but the rationale is pure bunkum.

To understand why, we need only go back to my simple test of any climate policy proposal: the degree to which it encourages investment in capital that lowers atmospheric greenhouse gas concentrations.

Cap-and-trade and carbon taxes do not pass the test equally.

Does additionality matter?

The first follow-up to my recent post on carbon policy details.

First, a note to non-carbon-wonks: "Additionality" is a term of art in the world of carbon policy. It describes the degree to which a given activity causes additional carbon reductions -- the idea being that we shouldn't pay for carbon reductions that were going to occur anyway. As a fantastic oversimplification, suppose your car broke down and you had to ride your bike to work. The principle of additionality says you shouldn't be paid for the carbon you didn't emit. (You would have ridden anyway -- what choice did you have?) But if there's an increment of money that would tip you over into getting rid of your car and always riding your bike, that's additional.

Theoretically, great idea. Practically? Stupid.

To understand why, go back to the test I posited in my earlier post: Does the metric increase or decrease the rate at which we invest capital to lower GHG emissions?

The answer for additionality is not what you'd expect, for rather subtle reasons.

First off, let's note a couple truths:

Carbon policy is close to getting the macro right, but plenty of smaller decisions remain

My recent exchange with Gar has made it clear that there is a wide gulf between those details of carbon policy that are theoretically optimal and those which actually impact carbon reductions. Or, to be blunt, those that come up in our weekly staff meetings as actually affecting our decision to consider potential carbon reduction projects and those which simply elicit groans around the conference room of the "great intent, why did they screw up the execution?" variety.*

From our perspective, the good news is that our policy does finally appear to be moving not only toward putting a price on CO2 emissions, but getting the really important details (like auction vs. allocation) right. The bad news is that most of the other details are still wrong.

Since when is regulation optimal?

I like Jeffrey Sachs, and I generally agree with what he has to say about poverty, health, and the obligations of the rich to look after the poor. But he gets it dead wrong in the current Scientific American:

Even with a cutback in wasteful energy spending, our current technologies cannot support both a decline in carbon dioxide emissions and an expanding global economy.

Says who? Why can't we find ways to dramatically lower our primary energy use per dollar of GDP? Not because we're already so perfectly balanced. And not because the electric industry (amounting to 40 percent of U.S. GHG emissions) has done a damn thing to increase their energy efficiency in the last 50 years.

Even if every industrial facility in the country had optimally designed their factories for energy efficiency (they didn't), we still would need to confront this reality: an optimal capital allocation when natural gas was $3/MMBtu, coal was $1/MMBtu, oil was $20/bbl, and electricity was 6 cents/kWh looks pretty suboptimal when natural gas is up to $10, coal is pushing $3, oil is north of $100, and electric is running towards 9 cents.

Yes, technology is good. But we have to get beyond the idea that regulation is optimal, all capital is optimally deployed, and there are no significant opportunities for energy efficiency.