Why Carbon Pricing Isn’t Working?

pembroke-and-distant-maggie Because, errm, we aren't doing it. So says an article in Foreign Affairs, though it jumps through hoops to avoid saying so explicitly. Perhaps because it would be a very short and rather boring article if it did say that.

As is usual with these things, the article is padded with pointlessness. We're told Today, according to the World Bank, 42 countries and 25 subnational jurisdictions—together representing about half of global GDP and a quarter of global greenhouse gas emissions—have imposed or are pursuing a price on carbon, through either a cap-and-trade system or a carbon tax. Which is meaningless, because you can't tell the fraction that are doing things with the fraction that are just thinking about it. More useful is But because many jurisdictions have imposed carbon prices just in certain sectors of their economies, carbon pricing covers only about 15 percent of global emissions. But that too isn't really useful, because it doesn't tell you at what level they are priced. Rather more useful, but dislocated in the article, is of the global emissions now subject to a carbon price, just one percent are priced at or above the [High-Level Commission on Carbon Prices]’s $40 floor of ecological relevance. Three-quarters are priced below $10 (the article, like so many, isn't logically structured; instead it looks to have been built around quotes taken from different reports).

Finally, there is the economic stupidity: Nor does carbon pricing work well to curb emissions from transportation, which account for about 14 percent of the global total. Studies show that drivers are usually unresponsive to modest increases in gasoline and diesel taxes. Or, put another way, people value their cars above the money they cost, so unsurprisingly they still use them if they cost more. Which is why an economy-wide carbon tax is a good idea:  people can shift their spending away from stuff they value less; we could achieve a carbon reduction with less pain.

Later down the article there's a bit about why the ETS is stupid. Nowhere though does it attempt what could be the interesting discussion: just why is it so hard to get carbon pricing through a political system? Don't reply with oh-but-evil-oil-companies-propaganda schtick; that's just an excuse. The real answer is that on carbon pricing, like a great many other things, our political systems just don't work very well. When put in that way, most people's response is to think of clever ways to change them, despite our long experience that any such jsut gets bogged down in the sand of the existing system. Personally, as long-term readers will know, my solution would be to have less of it.

My picture shows Pembroke before going down to Clare on the Reach, and a distant Maggie. See the bumps post for more. Mine is a GoPro still; there are a zillion higher quality pix, e.g. from here.


Horrible Facebook Algorithm Accident Results In Exposure To New Ideas.
* Taxing carbon emissions protects liberty, spurs innovation.


...and Then There's Physics said...

I started reading it and then (I think) drew a similar conclusion to you. Surely one reason it's not working is that we're not doing actually it. Having said that, if we do continue to delay implementing it, then it would seem to be difficult for it to work; if we actually implemented it at the "correct" level then the economic shock could potentially be large, and if we started at a level where there wouldn't be much economic shock, then it may be too low to be effective.

Phil Hays said...

Maybe it is just Too Early, or perhaps isn't needed.

If the goal is to transition to a low carbon economy, new technologies are needed. We can't get to near zero carbon by marginal improvements of gasoline cars or coal fired electric stations. New technologies don't just pop out of the ground when needed, they take investment and time, often measured in decades, to mature. The unit cost of these new technologies will decline with time... But the initial cost may be an order of magnitude or more more higher than the mature cost. And it may take many decades for the cost to become competitive. Once the technology get mature enough, it may be enough cheaper that no tax is needed.

The best way to start new technologies is with subsidies or mandates, not taxes or emissions trading. And taxes might never be necessary.

William Connolley said...

> The best way to start new technologies is with subsidies or mandates, not taxes or emissions trading


Phil Hays said...

Lunarian. Tick Tock. Old stuff.




William Connolley said...

Oh, sure. And there are more examples. But those are just examples of "someone kick starting new tech". Your claim was stronger: that it was the best way to do so; you provide no evidence for that. But I think there's just as good a case that these things were dependent on a whole pile of (mostly technical, some scientific) advances in instrument making. Even in the absence of the Board of Trade / Admiralty, this would have happened anyway.

Phil Hays said...

LED bulb. New stuff.

Replace one low margin competitive business with much lower sales volume low margin competitive business, and invest money to make this happen? Makes no sense to a firm to invest to develop the first LED bulb, unlikely to return investment to the manufacturers. A rational "hot wire" incandescent light bulb maker would try to prevent the development of the LED bulb. The LED bulb destroys their business model.

LED bulbs pay off for consumers/voters, as they get cheaper light using less energy using bulbs replaced much less often. And politically not a real problem, as the sum needed to kickstart the technology isn't huge, and the time required isn't large.

Digital camera. An example of why not.

The example of Kodak is illustrative. Plastic, glass and paper coated with chemicals is an expensive messy way to take pictures. Costly, both directly and to the environment. The digital camera is both cheaper, and mostly better. The investment needed to start the technology was fairly small. Kodak could afford it, and didn't worry about the business case for doing so. They should have worried.

Kodak invented and developed the digital camera. The digital camera destroyed Kodak. In retrospect, the development of the digital camera was a huge mistake from the point of view of the shareholders of Kodak stock. Even a few years of delay until someone else invented and developed the digital camera would have been very valuable for the Kodak shareholders. A few decades of patent lawsuits and/or buying startup camera companies to shut down would have made billions for Kodak shareholders. And the cost to consumers would have been those billions and more. Or Kodak might have survived as a much smaller company making digital cameras, if they committed to the new technology and became the leader. But they didn't.

Suppose Kodak didn't make the mistake of developing the digital camera. Alternative histories might have been the US military developing digital cameras for spy satellites. Or government funded astronomy imaging. Or maybe a startup that Kodak didn't or couldn't buy. Or a phone based camera...


Fusion. A huge maybe.

Spend for decades, with constant improvement in the log of temperature pressure time product, before reaching energy break even. Then spend for decades more before electric power is generated. Then perhaps spend more decades before the cost of the generated electric power is finally cheap enough to compete. Maybe.

The technology at the end of the process might be valuable. Energy available 24 hours a day 235 days a year. Power for torchships for fast trips to Mars and perhaps beyond. Or perhaps just a reasonably safe neutron source for nuclear medicine.

Or not. Might hit some fundamental physical limit in compressing plasma. Might never be practical for any use what so ever.

Rational companies usually should not invest in technologies that will destroy their business model.

William Connolley said...

> A rational "hot wire" incandescent light bulb maker would try to prevent the development of the LED bulb.

I think that's how a lot of govt-not-business folk think, esp on the left. It explains a lot of their fears of business. But, I think it's wrong. Business just isn't like that.

> Rational companies usually should not invest in...

And yet your https://mashable.com/2012/01/20/kodak-digital-missteps/ says "The most immediate takeaway from the fall of Kodak is clear: Don't be afraid to cannibalize your own business in the name of progress".

Phil Hays said...

One of us has spent zero time working for the government, so one of us can't comment on govt thinking.

Let us continue to consider the issue of the hot wire bulb makers. They have machines to stuff wires in glass bulbs, remove most of the air and seal off the glass bulb. And people trained to run and maintain those machines. And management and quality people that understand how to make it all work correctly. Fire them. Lay them all off. Make them redundant, every one. Show them all the door. Scrap all the machines. Ok, not quite all, perhaps 1% of demand is for bulbs that LEDs can't replace, like in ovens and a few other specialty uses.

To make LED bulbs, need new machines to make circuit boards and plastic cases. New people that understand electronic components and assembly. New machines to stuff circuit board into plastic round cases. Lots of new competition from companies that already make circuit boards, understand electronic components and stuff circuit boards into plastic cases. A new business with almost nothing in common with the old business, might as well switch to making marshmallows or rockets.

The surviving old business will be similar in size to the new business. And the total new business will be a tiny fraction of the old business. Once the LED bulb is out, of course, there is little choice remaining. Do this, or become a specialty incandescent bulb maker.

If the hot wire makers can delay the introduction of LED bulbs by a year, the hot wire bulb maker will make more that year than the new business will make for decades.

"Don't be afraid to cannibalize your own business in the name of progress".

A nice platitude. Applies to an extent in Kodak's case.

Those people getting cannibalized should be justly afraid, of course. And cut their redundancy benefits.

William Connolley said...

> One of us has spent zero time working for the government

I spent years working for NERC, which is effectively govt. But perhaps the "one of us" you're referring t is you? I really can't tell.

> A nice platitude

I wondered if you'd duck it like that, and you have. The point is, that's from your link, that you presented with approval to buttress your claims. Now it says something you don't like you're disclaiming it. Or, perhaps only some of it. Maybe all the rest of it is non-platitudinous. I can't tell. You can't claim it's a minor part of the piece; to the contrary, it is introduced as "The most immediate takeaway from the fall of Kodak is clear". But you don't like it, so you discount it. How do you justify doing that? Are you saying that, in retrospect, the piece you offered as evidence isn't credible?

Anonymous said...

" Nor does carbon pricing work well to curb emissions from transportation, which account for about 14 percent of the global total. Studies show that drivers are usually unresponsive to modest increases in gasoline and diesel taxes."

I agree that the usual way this is phrased is, well, dumb. There is another way to phrase it which may not be as dumb, but is harder to analyze. If the second sentence was more along the lines of,

"Studies show that due to externalities/irrationality/other-market-imperfection the transportation sector is insufficiently responsive to price signals, and therefore..."

The question of rationality in the auto market is actually a challenging one for regulatory impact analysis: some analyses indicate that people will buy the cheaper, less fuel efficient car, even when the improvement in fuel efficiency will save more per month than the increase in price for the monthly car payments. So, if the government mandates more efficient cars, thus saving people money... is this a benefit? Or should a regulatory impact analysis assume that people are rational, and that therefore this benefit can't exist?


William Connolley said...

> if the government mandates more efficient cars, thus saving people money... is this a benefit?

I don't think the question of whether it is a benefit or not is the important part. There are, potentially, many ways that the populace could "benefit" from doing things differently. But they should not be coerced into doing so, without exceptionally good reasons, simply because to assume that the govt in general knows better than you how you should choose is TRTS.

Anonymous said...

Absent any externalities, I would think the government role would be limited to perhaps requiring posted information (e.g., the new and improved mileage stickers). No coercion. Of course, we are talking about this because of the climate externalities. So I posit a two stage thought experiments:

Stage 1: For whatever reason, taxes are not an option. So the government decides to set mileage standards for cars, and some kind of power plant standards for electricity. The government decides to set those standards using cost-benefit analysis, and decides to take into account money saved due to better fuel mileage in setting the transportation standard.

Stage 2: In year 10 of this policy, carbon taxes become an option. The government wants a smooth transition from stage 1 to stage 2, so attempts to set the taxes at the level which will achieve the same outcomes as in stage 1... at which point, the government realizes that the $/ton CO2 price to achieve the power plant standard is less than the $/ton CO2 price necessary to achieve the transportation standard.

Does this indicate that the government should not have taken account of fuel savings in Stage 1? If not, should the government set different C prices for electricity and transportation in stage 2, or should it decide that a single global C price is more efficient?

I will note that if it were presented to me as an option, I would take a single economy wide carbon price over a patchwork of command-and-control options, but I do wonder if there exist hybrids that could outperform either end. And if such better-performing hybrids exist, that would probably be a result of other market-imperfections, such as consumer irrationality.