Transcript 2011.03.24 Bill Nordhaus Presentation

Perspectives on Carbon Taxes
William D. Nordhaus
Yale University
Center for Global Development
March 2011
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The Current International Approach
Began with Framework Convention on Climate Change (1992), a
voluntary agreement to “prevent dangerous” climate change.
First steps were Kyoto Protocol
Kyoto Protocol negotiated in 1997
- Limiting emissions to fraction of 1990 rates
- Limited to high-income countries
- Only agreed for 2008-2012 period
China and other developing countries have no emissions targets.
Allows trading of emissions permits among countries
Protocol went into effect in Feb 2005 after Russian ratification.
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The Copenhagen Meeting
Successor to Kyoto Protocol took place in December 2009 in
Copenhagen.
There was an agreement on a goal (2 °C temperature limit).
There was no binding agreement on emissions.
Countries agreed to aspirational targets.
Unresolved problems:
- What are targets of rich countries?
- Will the US participate?
- Will middle income countries take on commitments?
- What mechanism will be in place to encourage reductions in
poor countries?
- Who will pay for efforts in poor countries, and through what
mechanism?
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US Policy on Climate Change
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US played central role in Kyoto negotiations in 1997.
However, Clinton administration did not submit for
ratification .
Bush administration withdrew US from Protocol in 2001.
Obama administration endorsed joining and supports
climate-change bills.
House passed a bill in 2009, but it did not pass Senate.
All US bills have firmed endorsed cap and trade, with heavy
regulatory burdens and trade sanctions.
Generally viewed that legislation cannot be passed for
indefinite future.
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Kyoto Protocol is Not Living Up to Its Aspirations
• Severe attrition in international coverage of emissions.
• Price of carbon is extremely volatile.
• Many of emissions reductions come through Clean
Development Mechanism (CDM), which are likely to be
illusory.
• Kyoto model is poorly designed to bring new countries on
board.
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Two Inconvenient Economic Truths
1. To be effective, firms and consumers must face a market
price of carbon emissions that reflects the social costs.
2. Moreover, to be efficient, the price must be universal and
harmonized in every sector and country.
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How should we implement policies?
• Internationally harmonized carbon tax
• Universal cap and trade
____________________________________________
• Regulatory substitutes (CAFE standards, ban on light
bulbs, …) – very inefficient approaches
• Voluntary measures (carbon offsets) are difficult to
calculate and verify and probably a useless diversion.
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An Alternative: Harmonized Carbon Taxes
What are “harmonized carbon taxes”?
• Raise prices of GHGs proportional to carbon content
• All countries would levy a comparable tax
• Level of tax set to meet environmental target
• Countries would retain all revenues (this is not an
international transfer program)
• Carbon tax can be used to replace existing taxes or reduce
fiscal deficits
Open issues:
• How to treat trade for non-participants?
• Should low-income countries receive transfers to reduce
economic impacts?
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Carbon tax estimates from models
Carbon price (2010$ per ton carbon)
200
180
Cost-benefit optimum
160
2 degree limit
140
120
100
80
60
40
20
0
2010
2015
2020
2025
Source: Nordhaus, “Economics of Copenhagen Accord,” PNAS (US), 2010.
2030
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Cap and trade v. Carbon taxes
Some problems with cap and trade:
1. Cap and trade is a new and untested system at the
international level. Setting country targets is contentious and
difficult.
Taxes have natural units and are more easily harmonized across
countries.
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2. Kyoto Protocol has suffered from extreme attrition …
Fraction of Global Emissions Covered by Kyoto
100%
Enthusiasts
Annex I less US
80%
Annex I
60%
40%
20%
0%
1990
2010
Source: Nordhaus, “Economics of Copenhagen Accord,” PNAS (US), 2010.
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… and global emissions reductions are likely to be very small
50%
Emission Reduction (% of baseline)
45%
40%
< 2 degrees C
35%
Current Kyoto
Protocol
30%
25%
20%
15%
10%
5%
0%
2005
2015
2025
2035
2045
2055
2065
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3. Quantity-type regulations show extremely volatile prices for
the trading prices of carbon emissions
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4. Some technical economic issues:
- Taxes increase efficiency of fiscal system relative to
allocation
- Weitzman P v Q issues: structure of costs and benefits
indicates that limiting emissions by price is more efficient
than quantities in face of uncertainties.
- With uncertainty and thresholds: If there is no reset possible
and there is an established threshold for CO2 level, quantity
limits may have an advantage.
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5. Corruption and alternative mechanisms
A final question concerns the administration of programs in a world of where
governments vary in terms of honesty, transparency, and effective
administration.
Quantity-type systems are much more susceptible to corruption than are pricetype regimes. Why? An emissions-trading system creates valuable tradable
assets in the form of tradable emissions permits and allocates these to
different countries. Limiting emissions creates a scarcity where none
previously existed and in essence prints money for those in control of the
permits. Such wealth creation is dangerous because the value of the permits
can be used by the country's leaders for non-environmental purposes rather
than to reduce emissions. If oil ministers in corrupt countries pocket oil
export revenues, why would permit ministers not pocket permit revenues?
A price approach gives less room for corruption because it does not create
artificial scarcities. There are no permits handed over, so they cannot be
sold abroad for wine or guns. Any revenues would need to be raised by
taxation on domestic consumption of fuels. In fact, a carbon tax would add
absolutely nothing to the instruments that countries have today.
The dangers of quantity as compared to price approaches have been shown
frequently when quotas are compared to tariffs in international trade
interventions.
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Hybrid: Cap plus tax
• Hybrids may be superior to either extreme, although
more difficult to understand and persuade
• Cap-plus-tax: Quantitative limits are buttressed by a
carbon tax along with a safety valve
• Example:
– Auction permits corresponding to economic or
environmental target
– Backstop with a $20-per-ton carbon tax
– Provide ability to purchase additional permits at a penalty
price of $40 per ton of carbon.
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The conundrum of trade linkages
As countries introduce ANY climate-change policies in a nonharmonized manner, this will raise trade issues:
- Carbon prices and embodied goods and services will rise
in high-carbon-price regions
- E.g., if US acts, between the US and Mexico
- Sarkozy: urged Europe to “examine the option of taxing
products imported from countries that do not respect the Kyoto
Protocol.” (October 2007)
- Senate bill had countervailing duty for divergent policies
Countries and international organizations will have to deal with
the question of border-tax adjustments
- This will be particularly important for more stringent
regimes and energy-intensive industries (electricity, steel,
petrochemicals and chemicals, …)
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Why is global warming so hard to solve?
1.
2.
3.
4.
5.
The free riding problem among countries
The long payoff period (> 50 years to get net benefits)
Unrepresentative democracy
The merchants of doubt
The ideological anti-tax and anti-big-government
movements
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