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Sep 04, 2022 351 likes •574 views

Putting a Price on Carbon Emissions Putting a Price on Carbon Emissions EES 3310/5310 EES 3310/5310 Global Climate Change Global Climate Change Jonathan Gilligan Jonathan Gilligan Class #31: Class #31: Monday, March 30 Monday, March 30

SLIDE 1

Putting a Price on Carbon Emissions Putting a Price on Carbon Emissions

EES 3310/5310 EES 3310/5310 Global Climate Change Global Climate Change Jonathan Gilligan Jonathan Gilligan

Class #31: Class #31: Monday, March 30 Monday, March 30 2020 2020

SLIDE 2

Review of Costs and Benets Review of Costs and Benets

Total gross benefit = area under MB Total gross cost = area under MC Total net benefit = gross benefit − gross cost Light gray trapezoid

SLIDE 3

Total Net Benet Total Net Benet

SLIDE 4

Optimum Emissions Optimum Emissions

Optimum emissions = E* EPA regulations allow E* emissions Total net benefits are maximized.

SLIDE 5

Deadweight Losses Deadweight Losses

Optimum emissions = E* EPA regulations allow E’ emissions Deadweight Loss (dark blue triangle) = difference between actual net benefit and optimum net benefit

SLIDE 6

Deadweight Losses Deadweight Losses

Optimum emissions = E* EPA regulations allow E’ emissions Deadweight Loss (dark blue triangle) = difference between actual net benefit and optimum net benefit

SLIDE 7

Regulation Regulation

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Regulation Regulation

Command and Control Market-Based Regulation Put a price on externalities Let the market decide best balance between costs and benefits of pollution Pigovian tax: Tax equal to social cost Directly compensate people hurt by pollution Or rebate other taxes: indirect compensation Or invest in socially beneficial projects Clean energy Infrastructure to adapt to climate change Compensate out-of-work coal miners

SLIDE 9

Nordhaus on Pigovian Taxes Nordhaus on Pigovian Taxes

Taxes on something makes people do less of it We want people to work, don’t want them to pollute But we tax working and don’t tax polluting Revenue-neutral carbon tax: Raise tax on CO2, cut payroll taxes

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Details Details

People don’t like paying taxes Invisible taxes Charge tax when fossil fuels are extracted from ground or imported Fossil fuel producer pays tax, passes cost on to consumers Taxes → higher prices → less consumption Higher fuel prices: Incentive to buy energy-efficient products Incentive to invent, produce, market efficient products Clean energy becomes more competitive

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Simplicity of Carbon Prices Simplicity of Carbon Prices

Command and Control: Government has to assess emissions & costs for all kinds of technology Green consumers: To reduce carbon footprint, research and calculate emissions embedded in products & services Pricing carbon: Simple calculation: tax carbon content of fuels Consumers receive simple price signal: Shop for lowest price to reduce carbon footprint

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Difculties Difculties

Setting the correct tax rate is hard Social cost of carbon is uncertain Social cost depends on total emissions now & in the future Set tax to marginal cost based on total emissions to date Tax rises over time

SLIDE 13

Difculties Difculties

People are not always rational consumers Both as individuals and as organizations Often don’t notice small changes in price Often don’t recognize opportunities to save through efficiency & conservation Importance of calling people’s attention to places they could cut emissions and save money

SLIDE 14

Difculties Difculties

Offshoring If US sets carbon tax, India does not, companies will shift production from US to India Big problem unless carbon tax is applied to all countries

SLIDE 15

Difculties Difculties

Lack of control: Actual emissions depend on both price and consumer demand If regulators underestimate demand, emissions and warming will be greater than goal But if social cost is correct, this may mean benefits of energy consumption exceed damage from warming

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Carbon Taxes Carbon Taxes

SLIDE 17

Example tax calculations Example tax calculations

Tax necessary to stabilize at 2.5°C warming

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Impact of $25/ton tax Impact of $25/ton tax

Item Price increase Coal 134.0% Electricity 31.0% Natural gas 30.0% Gasoline & petroleum products 11.0%

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Impact of $25/ton tax Impact of $25/ton tax

n Household Spending
n Household Spending

Item Tons CO2 Cost of tax Spending increase Annual electricity for one home 9.34 $230.00 19.00% Economy-class international flight 4.68 $120.00 8.00% Annual phone & internet 0.01 $0.36 0.04% Annual total consumption for one household 30.00 $740.00 0.90%

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Impact of $25/ton tax Impact of $25/ton tax

n National Economy
n National Economy

Year Tax rate ($/ton) Emissions (billion ton) Revenue ($ billion) Revenue (% GDP) 2010 $0 6.30 $0 0.000% 2015 $25 5.90 $147 0.960% 2020 $30 5.50 $168 0.970% 2025 $42 5.40 $225 1.140% 2030 $53 5.20 $277 1.250%

Tax starts in 2015 at $25 per ton Rise steadily so emissions stabilize at 2000 levels by 2030 Carbon tax can be used to reduce deficit or cut other taxes However, this tax seems very inadequate to limit warming to 2°C. The longer we wait, the higher the tax must be to achieve a policy goal.

SLIDE 21

Putting a Price on Carbon Emissions Putting a Price on Carbon Emissions

EES 3310/5310 EES 3310/5310 Global Climate Change Global Climate Change Jonathan Gilligan Jonathan Gilligan

Review of Costs and Benets Review of Costs and Benets

Total gross benefit = area under MB Total gross cost = area under MC Total net benefit = gross benefit − gross cost Light gray trapezoid

Total Net Benet Total Net Benet

Optimum Emissions Optimum Emissions

Optimum emissions = E* EPA regulations allow E* emissions Total net benefits are maximized.

Deadweight Losses Deadweight Losses

Optimum emissions = E* EPA regulations allow E’ emissions Deadweight Loss (dark blue triangle) = difference between actual net benefit and optimum net benefit

Deadweight Losses Deadweight Losses

Optimum emissions = E* EPA regulations allow E’ emissions Deadweight Loss (dark blue triangle) = difference between actual net benefit and optimum net benefit

Regulation Regulation

Regulation Regulation

Nordhaus on Pigovian Taxes Nordhaus on Pigovian Taxes

Taxes on something makes people do less of it We want people to work, don’t want them to pollute But we tax working and don’t tax polluting Revenue-neutral carbon tax: Raise tax on CO2, cut payroll taxes

Details Details

Simplicity of Carbon Prices Simplicity of Carbon Prices

Difculties Difculties

Setting the correct tax rate is hard Social cost of carbon is uncertain Social cost depends on total emissions now & in the future Set tax to marginal cost based on total emissions to date Tax rises over time

Difculties Difculties

People are not always rational consumers Both as individuals and as organizations Often don’t notice small changes in price Often don’t recognize opportunities to save through efficiency & conservation Importance of calling people’s attention to places they could cut emissions and save money

Difculties Difculties

Offshoring If US sets carbon tax, India does not, companies will shift production from US to India Big problem unless carbon tax is applied to all countries

Difculties Difculties

Lack of control: Actual emissions depend on both price and consumer demand If regulators underestimate demand, emissions and warming will be greater than goal But if social cost is correct, this may mean benefits of energy consumption exceed damage from warming

Carbon Taxes Carbon Taxes

Example tax calculations Example tax calculations

Tax necessary to stabilize at 2.5°C warming

Impact of $25/ton tax Impact of $25/ton tax

Impact of $25/ton tax Impact of $25/ton tax

Impact of $25/ton tax Impact of $25/ton tax

Tax starts in 2015 at $25 per ton Rise steadily so emissions stabilize at 2000 levels by 2030 Carbon tax can be used to reduce deficit or cut other taxes However, this tax seems very inadequate to limit warming to 2°C. The longer we wait, the higher the tax must be to achieve a policy goal.

Discuss Discuss