Wednesday, October 03, 2007

Nobel Conference: Putting a Price on Carbon

I've been most excited to hear Paul L. Joskow, an MIT economist who talked about putting a price on carbon and how a U.S. carbon market could be structured. He delivered the goods!

He first emphasized that the cost of global warming solutions will be far less than the costs of the global warming consequences, as also determined by the United Nations and the Stern Review, a major global warming economics report commissioned by the British government.

Frustration steps in when he hears skeptics say "Prove how bad global warming is going to be." The point, he says, is that there's never an absolute certainty until it's happening and then it's too late. We need insurance policies in case the effects of global warming turn out to be our worst predictions.

The largest economic challenge to slowing climate change is getting people to pay for something now that will have benefits in more than 100 years - so they're children or grandchildren will get the benefits. This generational equity question is a major stumbling block when developing policy to present to voters.

Joskow then moved onto a discussion of cap-and-trade versus carbon tax models. Although many economists prefer the carbon tax model, he thinks it would be impossible to get through Congress. Although it would be great to tax carbon and use the tax revenue to lower taxes in other areas (like lowering income tax), that's a pie-in-the-sky scenario. We can't make perfect the enemy of good, and in this case, a cap and trade policy is good policy that is politically feasible that can get our emissions down to where they need to be.

Besides being more politically appealing, the U.S. has experience with a very successful cap-and-trade system (using it to cut SO2 emissions that were putting a hole in the ozone layer), and it would create a better economic linkage with the rest of the world. The EU has a cap-and-trade system (which he thinks does need improvement) and other states like California and some NE states are implementing this system. Cap-and-trade is the most practical way to create a market for CO2, to cut emissions and create a global solution to a global problem.

Joskow also emphasized that putting a price on carbon dioxide will cost us something, "and anyone who tells you otherwise is lying." If the cost of carbon were $50 a ton - which he thinks is reasonable and doesn't believe the folks who say it'd be $10 a ton - it would hit consumers hardest who use mostly coal for their electricity (like in the Midwest). Utility bills could go up 40-50%. But this would not happen over night.

Utilities, industries, and investors would receive several years' warning that carbon will be taxed in X number of years, so that they have time to move towards efficiency measures before they get hit.

A cap-and-trade policy, combined with more renewable energy sources and carbon sequestration, will get us towards the emission cuts we need to stop the worst of global warming.

1 comment:

Tim Hurst said...

I enjoyed your posts from the Nobel conference. I found your synopsis of the economist's talks most valuable (surprising to me b/c talk of economics usually either puts me to sleep or somehow such talk can have an effect on my central nervous system and my eyes will roll without any knowledge of it - crazy!). Good work.