Global Warming Solutions

Markets, taxes, or nothing at all?

Assume man-made global warming is a big, bad problem. Let's try some thought experiments concerning what, if anything, should be done about it.

One "solution" might be recognizing, at least, that there is nothing to be done about it. One might argue that for the sake of lifting billions of poor people out of abject poverty humanity must continue to burn cheap oil and coal to fuel economic growth in this century. One unavoidable side effect is that this will increase the amount of heat-trapping carbon dioxide in the atmosphere and thus boost global average temperatures by between 1.5 and 4.5 degrees Celsius by the end of the century. People three generations hence will just have to adapt to this increase. Fortunately because of the wealth produced by burning fossil fuels, average incomes will have increased about sevenfold and so they will have the resources to do so. In addition, wealth may enable them to develop new low pollution energy technologies.

 

But let's further assume that that it turns out that most people prudentially prefer to leave a cooler planet to their posterity. What to do then? In that case, one proposed "solution" is a global carbon market. This is the idea behind the European Union's Emissions Trading Scheme (ETS) established to meet its commitment to reduce greenhouse gas emissions under the Kyoto Protocol. Countries set a limit on how much carbon dioxide they will emit and then allocate permits to emitters. The permits can be bought and sold among emitters. Those that can cheaply abate their emissions will do so and have some permits leftover. The cheap abaters can then sell their extra permits to other emitters who have a harder time reducing their emissions. Thus a market in pollution permits finds the cheapest way to cut emissions. The advantage of creating a carbon market is that it allows for the setting an overall specific limit on carbon emissions. For example, some scientists argue that it will be necessary to cut humanity's carbon emissions by 70 percent in order to stabilize the concentration of carbon dioxide in the atmosphere. Once carbon has a price, it boosts the prices that people pay for electricity and gasoline.

The best example of a market in pollution is the market in sulfur dioxide (SO2) permits in the United States. SO2 is emitted by power producers when they burn coal contaminated with sulfur and SO2 is noxious to breath and contributes to acid rain. In 1990, Congress enacted legislation that mandated that SO2 emissions from electric utilities be reduced from 17.5 million tons in 1980 to a level of 8.95 million tons by the year 2010. Each year, the Environmental Protection Agency issues a declining number of permits and so far SO2 emissions are 7 million tons lower than they were in 1980. Taking into account the bureaucratic tendency to exaggerate an agency's success, one estimate suggests that by 2010, the annual cost of the SO2 reductions will be about $3 billion while the annual benefits will exceed $100 billion. In the case of SO2 market in the U.S. the permits are allocated to a limited number of emitters and enforced within one country.

However, establishing the nascent carbon market in Europe is proving to be problematic. In October, all of the European Union countries forwarded their proposed National Allocation Plans for carbon dioxide emissions to the European Commission. It turns out that they allocated permits allowing emissions 15 percent higher than current emissions. As EC Environment commissioner Stavros Dimas warned, "If member states put more allowances into the market than are needed to cover real emissions, the scheme will become pointless and it will be difficult to meet our Kyoto targets." When Dimas tried to scale back the excessive number of emissions permits issued by Germany, the German government refused to go along. If Germany won't go along, don't expect France, Britain, Poland, and so forth to do so. The problems with the ETS highlights the fact that governments have every incentive to cheat by issuing enough permits to keep energy costs low for domestic businesses and thus advantage them over their foreign competitors. Again, assuming that global warming is a big problem, a global trading scheme would need to be created. If it is difficult for European countries to fairly allocate and police permits among themselves think how much harder it will be to do among all the countries in the world.

One other possible "solution" to the problem of the emissions of excessive carbon dioxide might be carbon taxes. The idea here is that tax would increase the price of fossil fuels which would encourage people to burn less of them. Consequently they would put less carbon dioxide into the atmosphere. An example is the tax that the U.S. imposed on ozone depleting chemicals in the 1980s. The tax boosted the price of refrigerants so that manufacturers and consumers were encouraged to buy air conditioners and refrigerators that used more expensive but less damaging compounds.

Yale economist William Nordhaus argues that harmonized carbon taxes are more easily administered and monitored on a global basis than are cap and trade systems like the ETS. Also, a harmonized tax offers relative price stability; the tax on carbon emissions can be raised gradually and predictably over time so that governments, industries and consumers all see what the price of carbon based fuels will be over future decades and make investment and purchase decisions accordingly. Prices in pollution markets can be very volatile-the price for SO2 emissions permits has ranged between $70 to $1550 per ton. Nordhaus argues that a harmonized carbon tax can be far more transparently administered across the globe than trying to set emissions limits among countries. There is less of a temptation and opportunity to try to cheat. If a county chooses not to impose pollution taxes on emitters, other countries can boost their tariffs on exports from that country as a way to encourage it to join the harmonized climate tax regime.

One major objection to a pollution tax is that, unlike a cap and trade system, imposing such a tax does not explicitly set a limit on emissions. However, if it turns out that people believe that it is really necessary to cut greenhouse gas emissions by 70 percent, it will be possible to keep increasing the tax until the price of energy produced by burning fossil fuels rises sufficiently that people will cut back that level by conserving and switching to alternative sources of energy. And finally, poor countries could be made exempt from the tax until the average incomes of their citizens reach some agreed upon level, say, $10,000 per year.

My best bet is that there is no one "solution" to any problems posed by man-made global warming. Instead, partisans will accuse one another of bad faith. And ultimately we'll muddle through using some combination of all three strategies.

Ronald Bailey
is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

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