Cap & Trade vs. Carbon Tax

CARBON EMISSIONS

Casey Gambuti - HPL480 – 11/28/11

The Problem

Fossil Fuels Greenhouse Gasses Global Warming

Sun (Ultimate source of energy)

Energy Absorbed by plants & animals

Remains of plants & animals decay

Earth crushes and converts into fossil fuels

Created by Robert A. Rohde for the Global Warming Art project

The Problem

Fossil Fuels Greenhouse Gasses Global Warming

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1:EPA 2011 GHG Inventory 2:http://www.windows2universe.org/earth/Water/co2_cycle.html

The Problem

Fossil Fuels Greenhouse Gasses Global Warming

Why Should We Act?

Air Quality

Agriculture

Rising Sea Levels

Economic

Health

Ocean Acidification

What Can We Do?

Make corporations incur the cost of their externalities

Incentive for Innovation

Efficiency & Renewable Energy.

How Can We Do It?

Limiting Emissions Directly Reduces pollution

Taxes/Fees on Emissions No Guarantees

Government Spending

International Cooperation Kyoto Protocol – 1997

“Almost 200 nations began global climate talks on Monday with time running out to save the Kyoto Protocol aimed at cutting the greenhouse gas emissions scientists blame for rising sea levels, intense storms, drought and crop failures.”

Tax - Economics

Pigovian tax

Implementing a fee Incentive to reduce pollution

However, there are no guarantees.

Tax-Shifting / Revenue Neutral Raise taxes on the “bad”; Decrease taxes on the “good”

Must be gradual, predictable, and broad

Tax - Politics

Relatively Simple

Lobbying

Conservatives more likely to oppose tax increases

Where will the funds be redistributed?

Cap & Trade - Economics

Coase Theorem - Harnessing free market forces Clearly defined property rights

Liquid & Accessible trading

Limit Emissions

Trade-able permits for emissions Pollute less and profit

Over-pollute and pay

Offset programs

Cap & Trade - Policy

As with Tax, corporations may not want these restrictions

However, many are willing to participate in order to prepare for imminent future policy

Corps have independence on how they will comply

Much more bureaucracy involved – (CCX)

Pros & Cons

With both methods Pro: Incentive to reduce pollution

Con: Restricting economic growth

Advantage of Taxing: Less Bureaucracy

Funds can be redistributed

No way to beat the system

Advantage of Cap & Trade: Guaranteed reduction

Independence

Working with human nature, not against it

Potential to create jobs / incentive to spend

U.S. Attempts at a Carbon Tax

1993 – Clinton Administration attempts but fails to implement a tax on all energy forms Widely opposed by oil companies

In 2008 Clinton showed support for a cap & trade program

Bush neglects to join Kyoto Protocol

Political Turmoil

Canadian Carbon Tax

2008 – British Colombia

Revenue Neutral

$20/tonne of CO2, rising at $5 annually.

Early results are showing some positive effects

However, many argue that the tax is not high enough

The Acid Rain Program

1990 Clean Air Act

Sulfur Dioxide Emissions from Electric Power Plants

“The largest quantified human health benefits of any major federal regulatory program implemented in the last 10 years, with benefits exceeding costs by more than 40:1”

- The U.S. Environmental Protection Agency

SO2 Cap & Trade Results

The EPA has acknowledged that these results have shown that market-based solutions have a very high potential.

SO2 vs. CO2

Why the Acid Rain Program was simpler: Only involved power plants

Little infrastructure & new technology needed

Regulating All GHGs will require efforts in the industrial, commercial, and residential entities.

Because of the effort needed to create a carbon cap & trade countries may be more inclined to attempt a straight tax.

Chicago Climate Exchange (CCX)

Dr. Richard Sandor received corporate and government funding to start the CCX in 2003.

Corps from all 50 states, 8 CA provinces, 16 countries VOLUNTARILY joined the program.

700 million metric tons of emissions covered

CCX main goal: establish a market-based price for reducing emissions of carbon and other GHGs.

Chicago Climate Exchange (CCX)

Offsets

Why?

An incentive for non-regulated entities to generate emission reductions

creating more opportunities for regulated entities to comply with the program

Over 15,000 Farmers participated, earning permits by conducting mitigation practices

It is very difficult to quantify the effectiveness of each offset program

Success or Failure?

In 2010, the program ended and no new phases were created.

Why it was successful: Experience – most participants found the program helped

them prepare for whatever regulation comes in the future

Why it was a failure: The offsets program eventually “crashed” the CFI market

U.S. GHG Cap & Trade

In 2007, Obama promised to put an effort into creating a cap & trade program

"Will set a hard cap on all carbon emissions at a level that scientists say is necessary to curb global warming”

Why we should avoid Carbon Tax

Although Cap & Trade requires more bureaucracy, it will find much more support on Wall Street and thus easier to pass

One a system is set up it will remain for decades The Cap & Trade system is much more flexible and transparent to

future changes

The effect of global warming could be catastrophic -We need to LIMIT emissions not make them more expensive

As seen with the Acid Rain Program, C&T has tremendous potential

Hedging Risk of the “Fat Tails”

Even if there is only a slight chance that the increase in global temperatures will drastically harm humanity, the risk is too serious to ignore.

“If it turns out that our carbon emissions are rising too far, too fast – or not falling fast enough – then the system has to be able to dynamically adjust to that, and that's something a carbon tax finds pretty much impossible to do.” - Jon Anda, Head of Environmental Markets at UBS Securites

The Future of Cap & Trade

The foundation for success has been established

Intercontinental Exchange (ICE) Acquired the CCX

ECX, CCFE

The offsets component is where major changes need to occur.

There will be much more support on Wall Street for a program like this

The complexity should be recognized by all parties involved.

How we can improve it

Direct Government Involvement & Cooperation with ICE

New Jobs: New agency for research and implementation

Divisions for Large Industrial sources vs. small commercial/residential

Committee focused solely on Offsets

Committee focused on the prevention of “gaming” the system

Extensive study on the effectiveness of offset programs

If CFI market were to begin a collapse gov’t intervention

U.S. cooperation with Europe

Kyoto Protocol