Rethinking the Role of Carbon Prices in Climate Change Policy

Hi Jesse

Interesting perspective as always.

The obvious flaw in your argument is that no matter who much “innovation” you chuck at clean energy, fossil fuels can quite easily remain the cheaper option. So, unless “innovation” delivers what you want you are basically in the same boat, needing to put a high price on carbon 

Also absent from your discussion is the relatively high levels of per capita energy consumption in the United States. Exactly why are policy efforts to tackle this not deserving of greater priority over “innovation” policies? There is little reason to think US per capita energy consumption cannot be reduced significantly. America is no better of than the UK, Germany and Japan, yet the average American consumes twice as much energy. Reducing per capita consumption also loosens up the constraints coming from this so called “iron law.” Exactly what is iron about that I have understood.

It’s also far from clear what innovation is needed. Do you need innovation to improve the US vehicle fleet from 22 mpg? 50 mpg cars exist, and people drive them and they are not expensive. 

I can go on, but my point should be clear. There are relatively simple and straightforward ways to significantly reduce US emissions. Is betting on “innovation” preferable, or just a form of wishful thinking?

It would also be very helpful if you could have defined what you mean by “get the climate job done” here:

“In short, the carbon revenues may be more than enough to make up for the short-fall of a politically-constrained carbon price and get the climate job done.”

An implicit assumption behind what you are writing here is that we are going to blow past 450 ppm. And quite clearly an “innovation first” approach more or less accepts emissions are going to keep rising for a long time to come. So, what you are arguing will represent a “climate job done” for a great many people. For public relations purpose maybe you adopt this language, but why not be up front in what this can and cannot achieve. Are we looking at 500, 550, 600 ppm? If you cannot define “climate job done” then I can’t help but feel you are engaging in wishful thinking. 

(by the way I’m writing “innovation” because I never really know what the word actually is supposed to mean. It’s rather like sustainablity.)

Thanks for the open mic, Jesse.

Having been a reader of TEC for a long time now, I’m not aware of any sense of cooperation, nor useful technology being offered in this area of urgency to our economy, National Security, and life on Earth. So I’ve completely changed my position on Carbon taxes.

I’ll support any and all taxes on Carbon as long as not one dime goes to existing R&D or government or corporate anything.

All monies must be given to kids trying to pay obscene college costs, while developing the critical skills to survive in a world that we might not be able to imagine. Kids who want to study economics or political science excluded.

Wouldn’t survival school be more appropriate than college if your view is right? And if that’s the case, a shift to adaptation based R&D would seem to make sense (unless there’s some deeper frustration behind the comment).

With that said this is one bleak viewpoint – hopelessness makes it difficult to get people to act – the psychology of the message remains important.

There is no reason to specifically target carbon dioxide it would be smarter to have an overall energy tax.

For instance it could be 2 cent per kwh of eletricity generated from anything and 1 cent per kwh of any other fuel (eg peteol diesel coal in steel mills natural gas etc etc)

Such a tax woul be a good idea for two reasons.  1 most of it would be offset by cheaper fuel as 2. Demand for all forms of energy would drop massively mostly due to efficency upgrades (eg switching an elereically heates home to a nat gas heated home could save 70% off primary energy)

Thanks for the response

Again, I can’t help feeling that the picture you are presenting is far more pessimistic than your piece implies. Your piece claims your policy proposals can “get the job done,” yet here you back track and say you cannot even give a loose quantificative indication of what “get the job done” means. So, it feels as if there is a strong element of false advertising here. I agree that alternative proposals will not achieve 450 ppm, however your case would be much more persuasive if you cut the public relations language, and just stated things more soberly.

On energy consumption, you seem to be assuming that per capita levels cannot go down significantly. Do you have firm reasons for this? The differences between the US and other developed countries is not trivial. Per capita energy consumption levels are double what they are almost everywhere. And where is the evidence that Americans are better off because of this? Reducing per capita consumption seems to be a much more necessary step than innovation. Historically energy transitions have occured far more slowly than what we need to see. And quite obviously a transition to low carbon energy will be even slower if US per capita consumption stays where it is. 

Also, do you have any evidence that the prospects for technological change are greater than those of political change? These political economy arguments rest on the assumption of ongoing political inertia. A look at the evolution of global energy in the last century however indicates that the production of energy is no less inertial. I can refer you to Jonathan Foley’s excellent piece on testing theories of change (http://ensia.com/voices/the-change-we-believe-in-but-never-test/). Have you tested yours?

Now, I’m not saying here that what you are proposing is not a good way to go about things, I just have the feeling that you are over selling it.

With regards to this being a drag on the economy or negative to growth why would it be if the energy tax is used to cut other taxes. 

Such a tax in America would probably boost the economy as oil imports drop massively and gas and coal experts increase hugely infrastructure permitting

The UK is more energy efficient becuase we are considerably poorer we just dont know it having lived here all our lives.

For instance our homes are so small that once you put a bed and wardrobe in your kids bedroom there isn’t even enough space to put a desk in there let alone room ro play or have toys.

Average uk new home 70 square metres aveeage usa closer to 200sqm or three times the size! A hoise three times the size is going to use nearly three times as much energy I doubt your going to convince many amerocans ro knock down their homes and start living in their garages

Pluss distances are lower and population densiry is higher not to mention that americans produce and consume more goods than we do per capita.

So unfortunately its not as simple as it may first seem although they can of course become more efficient its unlikely they can match us due to historic and physical differences

The job should be to find a way to produce energy cheaper and cleaner than today. Both those things not just one.

That can’t be achieved by non despatch able wind oe pv

Nuclear is unlikely to deop to the sub $2/watt required to male or cheaper than existing coal and new CCGTs

However there are two big ones that can achieve energy borh cheaper and cleaner than today so it should find support from everyone.

One is computer driven cars. They will be far cleaner and far cheaper and make us far wealthier.  The huge huge huge 30.000 TWh of annual oil saving is jist a side benefit (more energy saved than is produced by all the reactora wind farks pv pabels and hydeo dam in the world)

The other is an energy tax to encourage conservation. Worldwide perhaps upto 20.000 TWh annually could be saved va an energy tax

Everything else pales in comparison to these two. Beat bit is that both would see big results very very rapidly ramping up to full savings in perhaps just one to two decades. Ramping up renewables or nuclear and ramping down coal and gas is realistically more of a 6-10 decade task

Thanks again Jesse

On solar. I find it rather questionable that the costs of solar PV have dropped by 75% in the last four years or so. The Chinese government is heavily subsidising solar and handing solar companies free land etc seems to be the main cause of it. And the US government and European Commission seems to agree with me. So, the price may be going down, but I don’t see how the costs are. Given just how distorted the market for solar is by subsidies how can anyone express confidence that the prices are going down in real terms?

And even if costs fall by a factor of two we immediately run into a big problem. We have absolutely no way to store solar PV on a large scale that is economically viable. To my mind these LCOE figures give a seriously false impression of the long term prospects of solar, and I am much more bearish on the issue than you.

I’ll leave the efficiency stuff for another time.

Technology which reduces demand is possible and may have a big impact, eg computer cars could cut lans transport energy use by over 80% and be dully implemented within ten years of first commercial introduction.  That is a huge one

Technology which produces supply.  Eg nuclear solar wind or whatever will be far far far slower as both gas and coal producroon and especially oil production marginal costs are close ro zero. Its often said tjat ot only costs a dollar a barrel to pump oil out of Saudi so tjey are nor going to stop pumping if some amazing scientists discover a way to buold nukes or wind cheaper than current coal gas or oil.  If that happens the price of coal gas an oil will jist be reduced so that they are just cheaper.

This can continue until current fields and mines are depleted which coild take over 60 years.

At ththis juncture tje computer car is more important to humanity than even self sustaining fusion or dare I say it, more important than a cure for cancer

Not “hopelessness” at all. Just personal experience.

My grad school at the U of Mn. was a remarkable experience. It started under the scientist who invented digital electronics. Then I was paid for my work in “The Laboratory for Biophysical Chemistry” to build high pressure and other instrumentation measuring hydrogen exchange kinetics in proteins. The building of instrumentation later got me in an NMR dispersion lab when MRI was being developed.

All the while I was combining advanced genetics, biochemistry, then solid state physics. None of the oldsters understood any of what we now call nanotechnology.

Understanding of biophysics and optics were then immediately applied to fiber optical networking. And nobody believed the internet had opportunity either.

We again need young scientists who have a clue what to do, and the freedom to develop it. After all, it’s their money we are spending. Let them spend it on their own survival.

And that’s the key – technology change could be material. I agree that w/o levelizing the playing field through really pricing GHG emissions (and some other things like direct health effects) it’s hard to imagine the kind of transformative change that’s necessary. However, what takes no imagination is to see a continued status quo fed by lack of political will. So while likely inadequate (as Robert points out), this approach is better than what we have, and is maybe (uncertain how viable this really is in light of current climate in DC) a real path forward.

The other point I’d raise is that there’s a lot of focus on competing with centralized generation, and where the net technological leap likely occurs is on the consumers side of the meter, likely as a coordinated suite of technologies, which dramatically increases the cost target for parity.

Yes, you are a gentleman, Jesse. Otto Schmitt’s (Schmitt trigger) brother, Francis, was a neuroscientist at MIT. Otto was on the radar team under Van Bush, there.

The scientists I’ve dealt with readily see the faster plant growth due to new CO2 levels. Elementary chemical kinetics. The solar photons either stimulate quantum excitation, or break down into heat. Please try find some scientists who might consider water is a semiconductor. They are out there.

I can’t imagine Otto’s radar team explaining how hard they try, and just need a few $billion and a decade more. It isn’t politics or economics, Jesse. It is science and survival.

Jesse, your post does a very good job of covering the issue of pricing carbon.  It also does a good job of covering some of the complexities and politically charged issues associated with this subject.  Another issue to consider is that for many years we have heard our political leaders’ state that transitioning the U.S. economy from fossil fuels to clean energy will be affordable and sustainable.  Affordability is of course dependent on the basis assumption ($200+ oil?) and sustainability is the ultimate goal of a clean energy economy or lifestyles.  While politicians and clean energy advocates want the voting populous to believe that the transition will be affordable for average citizens, we have yet to have significantly honest and adult conversations on what the true consumer costs are most likely to be.

Mr. Wilson’s comment that average per capita U.S. energy consumption (and associated carbon emissions) is much higher than found in the EU is accurate.  One could argue that the difference is significantly due to lower population density in the U.S. vs. EU, more mobile U.S. society/economy, etc., but these can easily be challenged as just rationalizations.  One of the most significant differences between the U.S. and EU is the consumer cost of fossil fuels and electric power.  On average, EU motor and heating fuels, and electric power costs are at least double the U.S.; due to various VAT/consumption taxes.  This brings us back to the subject of your post, properly pricing carbon to encourage clean energy alternatives to fossil fuels and possibly discourage fossil fuels demand (or socially compensating others).

Last year I did a number of studies to determine the actual cost to reduce U.S. carbon emissions.  One example and a second example.  What came out of these studies was that to actually reduce U.S. carbon emissions would cost on the order of $100 per metric ton (MT) carbon equivalent emissions.  As you covered in your post, most politicians and advocates normally discuss taxing carbon such as gasoline motor fuels on the order of $0.10 per gallon.  This is equivalent to about $12 per MT carbon (E-10 basis).  Not only would this relatively insignificant tax have negligible effect on consumption, but the revenues generated would only cover a small fraction of the actual costs to substantially reduce future U.S. carbon emissions.

If a carbon price, tax, etc. is to be used to fund actual reductions in future carbon emissions the discussion should be based on a minimum of $100 per MT (or $0.80 per E-10 gallon).  Yes, this cost level will be politically challenging, but more in line with reducing actual carbon emissions rather than the current carbon market schemes that have priced carbon off-sets at about $10 per MT recently.  These carbon markets have made many carbon credit traders very happy, generated significant government tax revenues that have been directed to non-carbon/-climate political priorities, and had very small-to-insignificant effect on reducing total world carbon emissions overall.

I’ve always believed that a price on carbon was the same as a carbon tax until I realized that many (or most) people think it would not go towards the tech fix, but instead, just to pay government debt. If “everybody” believes that “all” the money went for the “best” tech fix, then we’all would be happy to pay (at least a good percentage) more and we would finally innovate our way towards the low carbon economy.

We “might” need a tech fix, but we DO need a “trust the government” fix… Do we not already have the tech to rid the economy from combustion? We have all sorts of expensive ways… I believe what we need is an all out development in the advanced machine automation required to make EV batteries better (I mean cheaper). And we need to resort to the BEST kind of nuclear fission (not necessarily the commonly feared light water reactor) to replace coal, because electricity, well, we already have the infrastructure (which would only need improvements) and is delivered at the speed of light. Fission is about 1,000,000x as dense as combustion, therefore it must be the superior source, especially since it is carbon free.

I don’t believe the future wants us to wait any longer!

Edit: In light of anticipated cuts in subsidies, I believe any money MUST be dedicated towards the development of advanced machine automation needed to make EV batteries, solar, wind, and even utility scale batteries for like dirt cheap.

And let the industry do the proper nuclear thing (which is the ONLY way to save the biosphere at this time) by cutting even more on the money required to license the modularization of an inherently save (not pressurized) plan. There are MANY such reactor designs already!

So ignore the problem and hope someone in the future can solve/mitigate? 

I like to think of innovation as what the United States used to be like… tech, social and political, all together to get a job done. So the excess CO2 thing… it’s just another challenge, but the REAL challenge is getting everybody on the same track!

Wind and solar will have to see an order of magnitude drop in prices in order to afford storage, because it is that same kind of machine automation or advanced 3d printing tech that is needed to make utility scale batteries for just as cheap.

However, nuclear’s only problem is that of public acceptance and of always having to be built like a totally custom project. The fuel is “free” in comparison to the total markup because it is so much more energy dense, and it is possible to crank out modular reactors like everything else is done today. I just want to note (again) that we do not need to utilize an inherently dangerous reactor design.

It’ll only save a few more years, however, while we’re all fussing about just what IS the best policy, we need to do as you suggest CONSERVE (but will we?)!

“Technological change has already dropped the cost of solar PV by a factor of 100! …Cost curves for other energy technologies are not quite as drammatic…“

The cost of solar PV is commonly plotted versus time, to emphasize the drop.  When plotted against production volume, I think it would look pretty similar to other technologies.  For example, plotting a modern nuclear plant like an AP-1000 on the same graph as the early units (ignoring Fermi’s first pile in Chicago in favor of those actually making electricity), the roughly 200 kWatt EBR-1 of 1951, then the  Shippingport 60 MWatt from 1957, would also produce impressive cost reduction.  In fact, the “learning effect”, which claims that most technologies will drop in price by 10-20% with every doubling of volume, is the basis for most future prediction of renewable energy cost.

The unique things about solar PV is that it has been and continues to be promoted extremely vigorously by its promoters, and early pricing (based on much less than “utility scale” deployment) is reported as part of its track record, where normally these datapoints are discarded.

It seems like the political people want a technical solution, and the technical people want a political solution.  I’m on the side that believes the laws of physics are the tough ones.

——

On deep reductions in per capita energy use, I agree that this might be difficult to achieve.  We don’t use energy out of mere stupidity; it really does enrich our lives for a relatively low cost.  Even if energy costs are higher in the future (e.g. due to more expensive non-fossil technology or carbon taxes), it will take many decades for the market to respond (smaller houses and walkable communities).

Jesse, no large cost gain will be done in non-module cost, that is not event remotely realistic. Which means that the hope for further cost reduction are very strongly constrained, because even a very large gain on the modules only affects 25% of the price.

Those non-module costs consist of two parts, one is the non-module component, like the inverter wich rely on mature technology for which no big gain is expected, and the other is the manpower needed to both install and maintain the modules. There can be some gain in efficiency, allowing to reduce the manpower cost, as has been seen in Germany, but mechanically it can not go very far.

The module cost themself can not go down to zero. At some point, the material in the panel will be most of the cost, and if you want the panel to be durable and resist 20 years of outdoors, you can not make that too cheap either.

But actually if we look carefully, that prediction from GTM Research is for a 6.8% yearly reduction (28% in 5 years) on what is only 25% of the price, so only 1.7% yearly price reduction. So if they’re correct, the days of strong price reduction are gone now.

Interesting read, but, as is the norm with these kinds of debates, the complexity of the matter will probably bring much more political stalemate than actual useful implementation. For example, the two major points that I would oppose here are the great faith in technology and the great faith in central planners. 

Firstly, the bet on technological innnovation really is a very serious gamble. Fundamentally speaking, I am very skeptical about whether we will ever get something that is simpler and more cost effective than fossil fuels. When looking at wind and solar for example, it would be necessary to build and deploy solar panels and wind turbines at a lower cost than the cost of digging fossil fuels out of the ground. Due to the diffuse nature of renewables, we are currently about 1 order of magnitude from this goal. It is also necessary to deploy all the storage, distribution and energy conversion technologies necessary to counter the intermittency issue at a lower cost than the power plants and refineries necessary to refine fossil energy to usable fuels and electricity. Currently the cheapest storage option (a pumped hydro facility) is about twice as expensive as the most expensive fossil fuel “refinery” (a coal power plant). 

Secondly, I find the notion that a few wise central planners can collect $50 billion in carbon revenues and direct it very efficiently towards climate change mitigation very hard to believe. The task of distributing this pot will simply be so complex and wrought with bureaucracy/corruption that very little fo this money will ultimately end up serving the intended purpose. It will also be very hard to protect this money against other black holes such as the enormous debts and unfunded liabilities accrued through excessive central planning and government intervention.

Personally, I advocate a free-market approach with the role of government being limited to properly adjusting the price signals seen by the free market. Ideally, I would like to see a sufficiently high carbon price (at least the $40/ton necessary to make current first generation CCS cost effective) where the revenues are directly subtracted from income taxes. In this way, consumers will not pay anything before any more expensive alternative energy sources are deployed (everthing paid in carbon taxes is given back in income taxes). As more low carbon energy technologies are deployed very efficiently by the free market, however, carbon revenues will reduce and income taxes will steadily rise, thereby drawing the necessary linvestment capital from society in a gradual, efficient and equitable manner. 

Whether something like this will actually happen is another question though. Currently, I cannot help but think that we will keep on kicking the can down the road until the point where climate change actually has a direct and clearly attributable effect on a large portion of the electorate. At that point, the willingness to pay will rise significantly and a much higher carbon price will become politically feasible. This scenario will require rapid CO2 cuts at the lowest possible cost. It is in preparation for this scenario that I work on developing second generation CO2 capture technologies. 

The analysis is admirable, but rests on the assumption that a properly priced carbon tax is politically impossible, because taxpayers will refuse to pay more in taxes. But that rests on the flawed assumption that a carbon tax would increase revenues, rather than be revenue neutral as many have proposed.

The other objection to a carbon tax is an economic one, that it will reduce economic growth, but this also rests on the assumption that the tax would be unilateral, or country specific, rather than multilateral or global in scope. An international agreement to impose a uniform tax on carbon extraction would allow a stronger price signal without reducing economic growth significantly, because it would affect all competitors equally, thus having no effect on the economic competitiveness of any one country’s goods, other than the extent to which said country is dependent on coal energy. And that, of course, is the goal: to move those countries away from coal dependence by properly pricing the externalities into the fuel source. So behavior would promptly move economic activity in a greener direction, and economic growth could continue unabated.

The following comment is patently false, “Because halting economic growth is not an option”.  It implies that infinite growth in a finite world is possible.  This is the ultimate root of the evil we are doing to the planet.  It is the falshood that drives the corporate plague.  As long as this is a basic assumption we are inevitably going to succumb to our success just as viruses that grow unrestrained kill their host.

Your analogy “In the long run we are all dead” is an inappropriate one.  Whether governments are committed to halting unrestricted growth or not there are natural limits we are fast approaching.  All the technological improvements over the last 100 years have not resulted in decreased use of power or decreased carbon emissions, the opposite in fact, why would anyone believe it will now.  The analogy that is appropriate is we have been walking along a railway track watching a train approach.  We haven’t gotten off because we believe we have time to jump and the train has approached quite close.  We see a pretty rock, growth, and bend down to collect it.  The question is do we look up in time or get hit by the train!  The environment is a train, it doesn’t care about political will, technological innovation or anything else.  We pass it’s limits we are FUBAR.

Interesting reading on the capitalist / democratic way to reduce CO2 emissions. Further education of politicians and more importantly the public may increase the iron law price limit thus increasing the pot of gold available to find a technological solution. According to Roger Pielke’s article today China is adding emissions so fast that any impression the capitalist / democratic reduction on emissions can make are insignificant. What is truly needed is to convince the Chinese government to curb emissions. That’s going to take nuclear power in impressive quantities or effective and cheap CCS clip ons to existing emission producing smoke stacks. Can this be done by economic pressure or education? I really hope so.

I K, why would the tax on electricity be twice the tax for fossil fuels ?

Do you realize who would directly profit of that ? Do you realize who loves to consider the use of electricity twice dirtier than burning fossil fuel ?

And wants a tax that locks in burning fossil fuel instead of replacing it by electricity that you then can find a way of making cleaner ?

Halting economic growth does NOT imply exponential numbers of humans. Therefore your premise is totally absurd. Without economic growth, we will not have the physical and chemical means to prevent the biosphere from frying. I say “go nuclear” as in what Weinberg said many decades ago.

Edit: I meant to say NOT halting economic growth…

Are you of the type that say “too much energy in the hands of the people is a bad thing”? I’m not because I KNOW that the more CLEAN energy, the better (as long as it isn’t so expensive that it require more dirty energy).

Is there another way such as Licence fees or Duties that could easily by law be implimented in such a way that they are not allowed to be passed on to consumers or deducted from taxes.

This would put the owners of CO2 producing powerplants and Industries in the position of having to reduce CO2 emmisions to maintain their profit margins.

Another way is not to tax the Carbon but increase the cost of Water used by the Industries Fossil fuel power plants cannot operate without water.

This again should be done in such a way they are not allowed to pass on the cost to the consumer or deducted from taxes.

This would only affect the producers not the economy as a whole.

I’m sure we would be amazed at how quickly and inniovative they became at saving water and reducing CO2 emmisions.

Why should it not be passed on to consumers? It’s being produced for us why should we not pay for it?

Most of the arguments in the above posts state that increasing the cost of energy with a carbon tax.

Will result in the increased cost of energy for the consumers and as a result will directly and negatively affect the economy.

We should be rewarding energy efficiency improvements and encouraging renewables.

The Fossil Fuel Generation Industry has no incentive not to keep doing things in the business as usual way.

The passing of the Clean air act and more recent EPA regulations regarding CO2 did make a difference in emmisions they have been making serious lobbying efforts to change these laws that protect us.

If the money from these Licences Fees Duties whatever their called,

Was ultimately returned to them for investing in cleaner methods that reduced CO2 or renewable energy generation the transition would happen much faster.

As long as they can pass on costs for a carbon tax to the consumers or avoid paying for the environmental and health issues they cause, We the Consumers end up paying anyway.

While they continue to make huge profits with little or no incentive too change their actions.

Heres a good article on whats happening in British Columbia apparently the economy did not collapse?

Life continued pretty much as normal except for less CO2 emmisions.

http://grist.org/climate-energy/the-positive-economic-impact-of-a-carbon-tax-in-uh-hang-on-10-charts/?goback=%2Egde_3803394_member_262254029

I repeat why are we proposing taxing everybody?

Why are we making everyone pay for what relatively few benefit financially from?

Directly tax those who create the CO2 yes if you build a IC engine powered vehicle that means You.

If you own Fossil fuel power plants that means You. 

Oil refiners Shipping companies who use bunker fuel You too.

Same with any large CO2 producers do not allow these taxes to be passed on to consumers if making CO2 becomes less profitable it will stop.

You can return the taxes only to those companies who deserve it based on improvements/reductions in CO2 emmisions or improvements in efficiency.

For example

Investing in renewable energy infrastructure or by improving fuel economy or selling more NG electric or hybrid vehicles.

Building ships with gas turbines instead of oil burning boilers.

Who is making the Money making CO2 ?

Should society be foolish enough to continue on with FF’s, I would hope that the tax be directed to JUST the FF companies in proportion to the carbon content of the fuel, i.e coal gets taxed more than NG. I know that would be passed on to us but we need to stop excess CO2… But we CAN do better. Just initiate the tech fix.

It would be economically productive to read up on the founding fathers of nuclear… and make modular, a fleet of molten fuels fission reactors the world over. This would save A LOT of time and expense (by preventing excess gov’t meddling, also).

Should society deny this awesome nuclear way out, then we will have to FAST TRACK concentrated solar power on literally hundreds of thousands of square miles of desert, globally OR fast track the mining and extraction necessary for all the elements needed to make vast utility scale batteries via machine… for like dirt cheap (along with the panels and the turbines).

And should the minimalists get their way by declaring “oh no, we can’t do that either“, then we shall all make an amendment to the constitution declaring that any minimalist agenda can not be used to deny the right of the people to mine, extract and make possible, the abundant capacity of clean energy generation. 

Sorry to be ignorant Schalk, but what do you mean by second generation CO2 capture? Is this more advanced than trying to push the CO2 back underground as a gas? Which has always sounded like pushing a jack in the box back in to me (or for anyone who has tried it, returning a prolapsed cows womb to where it belongs) – possible but not easy.

This whole discussuion has been about how  difficult it is to adequetly Tax Carbon.

What I propose is taxing the producing entities this tax can be refunded for reductions in emissions or infrastructure that avoids future emmisions.

Taxing everybody so some people can continue to make a profit from causing harm is foolish. 

Inheritence tax or  Capital gains are examples of taxes that cannot be passed on to others or deducted. 

I am sure there are better examples of special taxes ( Income Tax only legal if we are in a state of war)

The price increases of the Utilities are regulated by PSCs they would have to approve or deny a rate increase based on this tax.

Gasoline already has duty and taxes on it one businesses can claim as an expense the other they cannot.

I am not saying tax them out of existence just a levy to encourage the speed of change.

CCS typically consists of three steps: capture, transport and storage. For power plants, the CO2 capture is by far the most expensive part because a lot of energy is needed to concentrate the CO2 stream (post-combustion capture), produce pure hydrogen (pre-combustion capture) or generate pure oxygen (oxy-fuel) and then compress the resulting pure CO2 stream for cost-effective transport and storage. A typical cost breakdown would be 70% for the capture, 10% for the transport and 20% for the storage. 

Storing CO2 is not technically very difficult and there are a wide range of options for making this happen, some of which can even be profitable (e.g. enhanced oil recovery). The only issue is economics. Pumping oil and gas out of the ground brings in huge profits, but pumping CO2 back into the ground for no purpose other than to keep it out of the atmosphere of course brings in no profits and needs to be financed in some way. 

Second generation CO2 capture aims to reduce the large energy penalty that makes CO2 capture so expensive. Current first generation CO2 capture technologies can capture CO2 for about $30/ton from a coal plant, but second generation technology currently in the demonstration phase promises costs of $10/ton for new plants and $20/ton for retrofits. This is important because it can make CCS profitable at a lower carbon price, thereby leading to earlier deployment. 

Great post as always Jesse. Looking forward to hearing more.
Several thoughts:

– WTP seems like it would be very difficult to survey properly e.g. if you ask $100, $150, $200 on a survey, you may be finding a general reluctance to pay more as you increase this extra cost to pay for the environment? I think if you asked $50, $75, $100, or $100, $200, $300, you would get different conclusions from the survey…

– The “correct” price on carbon is a global one, so if some countries are not expected to participate, does that increase the “correct” carbon price for the participating parties in order to make up for non-participation?

– There are massive amounts of fossil fuel R&D going on, public and private. carbon revenues could be used to drive public R&D but will private RDDD require an appropriately high carbon price? would this shift private fossil R&D $ to clean R&D $?

I agree with Jesse and others that the political prospects are effectively nil for imposing a carbon price representing some idealized ‘social cost’ or attaining effective behavior-altering impact.*

But re his case for a more modest carbon tax to fund innovation:

“At the same time, establishing such a price could raise between $25 and $75 $50 billion annually in new carbon revenues. That would be more than enough to overcome the limits of the Age of Austery and fund the scale of proactive public investment responsible for the blockbuster American innovations discussed previously.” 

…. as Eli Hinckley suggested, the prospects seem poor in the current or prospective political-economic environment that a persistent public funding commitment on that scale could be enacted. In his Twitter response to Eli, Jesse seems to feel that the alternative is failure:

“Perhaps innovation doesn’t happen at pace we need in ‘an age of austerity’ then.”

But in my recent book, Energy Innovation: Fixing the Technical Fix, I laid out an alternative “Plan B” strategy for accelerating technology innovation while taking austerity conditions as given. I won’t repeat the extensive argument in that book here, but the key is to focus on structural changes in how the processes of R&D and innovation work, not just on fiscal inputs.

* NB: Even the rather limited “willingness to pay” internalized social costs of carbon indicated in various surveys Jesse summarizes probably is overstated. I have never seen any of those surveys ask repondents what they are willing to give up — that is, in specific amenities not just a dollar figure — to pay the extra cost in taxes or utility, gas, etc. bills. Even then, as the saying goes, “talk is cheap.” Experience and history suggest that when presented with the actual bill, respondents often rebel and seek reductions or shifting of costs to others they presume more able to pay. St. Augustine’s youthful prayer is probably a better guide to actual human behavior than survey research: “Lord, grant me chastity and continence, but not yet.”

Thanks for this, Jesse. There’s much to like in your post, but I’ll focus on some points of concern.

 One of your central arguments is about market-based mechanisms (cap and trade or a carbon tax): “Yet for this kind of carbon pricing policy to work as designed, the price imposed by the carbon tax must exactly equal the estimated economic damages imposed by a ton of CO2 emissions, or the so-called ‘social cost of carbon.’” Elsewhere you conclude, “when we try to price carbon, we don’t get the right price on carbon, we get the price we can get.”

 I guess my snide response is, “So?” One designs a cap and trade system to keep emissions at or below a certain quantity (the cap). One designs an emissions tax (say on CO2) to impose a uniform price upon emissions that do occur. There are a number of design considerations—especially for a trading system—but if these are addressed, the system will “work as designed.” And, it will do so at lower cost than “traditional” (“command and control”) regulatory approaches, through (approximately) equalizing the marginal abatement cost for covered facilities. “Lower cost,” all else being equal, means that there will be looser political constraints.

 I’m not sure why you’re insisting that the price correspond to the calculated social cost. No one who has designed a real-world system (EU ETS, California) has tried to do this. As you note, the social cost is uncertain (especially for climate-change damages), and political constraints would keep you from imposing that high a price at the start. (There are economic reasons for gradually tightening the cap or increasing the tax, as well—e.g., avoiding premature retirement of power plants and other capital assets).  Of course (as you imply), the price may be too low to achieve a specified GHG concentration or (though the relationship is more uncertain) global average temperature, but at least you’re moving in the right direction.

 To move on, Suzy Waldman asked, to which you responded positively: “So then the innovations driven by the revenue from the carbon tax are as important as the emissions control?” I disagree, because the supply of funds will never drive innovation as effectively as the demand generated by an elevated (and hopefully rising) price for competing technologies. Again, the innovation generated by a carbon price may not be sufficient to meet certain climate goals, and the relationship between the price and the innovation level may not be linear (I don’t know), but innovation will occur.

 Having said all this, I certainly agree that a government, with tax or auction revenues in hand, can leverage the innovation effects of a carbon price. And it can also stimulate demand through direct or indirect purchases. These are core points in your essay that are well taken. But government action in this regard will not be effective in the longer run without market support.

 As you and some respondents noted, the political constraint in the U.S. is, in any case, fully binding; there will be no market-based mechanism (or any type of legislated climate policy) at the federal level in the medium term. And “traditional” regulation (which President Obama is pursuing instead) brings in very little income to use for innovation. However, I thought it important to respond to the (apparently) all-or-nothing view of market mechanisms, as these are being adopted or considered in many countries (or sub-national jurisdictions) around the world.

Robert, 

As Jesse writes in this essay, textbook economic theory argues that for the externality caused by carbon-generating activities to be fully internalized, the marginal benefit of emissions should equal the marginal social cost. I don’t think Jesse is suggesting that we need to “get the right price” nor that precisely estimating that price is even possible, only that this is how most economists view the issue. Indeed, both your comment and Jesse’s post express the fact that any carbon price is both socially constructed and politically constrained, so that any acceptable price is bound to be much lower than the theoretical optimim.

Second, you write “the supply of funds will never drive innovation as effectively as the demand generated by an elevated (and hopefully rising) price for competing technologies.” I’m interested to see what evidence you have to support this proposition. There is considerable historical evidence that clearly demonstrates that public funding for research, development and demonstration of new technologies, as well as public procurement of new technologies, has been responsible many of the key technological advancements throughout history in areas like energy, information technology, biotechnology, aeronautics, space and others. For a review of this extensive evidence, see the studies that Jesse cites above (Breakthrough Institute, Mazzucato, Block, and Ruttan). In very few if any of these instances has an elevated price for competing technologies been a key driver of technological innovation. For more on this see this report by the Information Technology and Innovation Foundation: http://www.itif.org/files/2011-inducing-innovation.pdf

Certainly, a politically constrained carbon price will tend to reduce emissions at the margin, such as by accelerating a shift in electricity generation from coal to natural gas, or incentivizing greater investment in energy efficiency, but there is simply no evidence that the politically constrained carbon price (or even the optimal carbon price), will call forth the kind of breakthrough innovation necessary to rapidly decarbonize the economy, nor the kind that has been stimulated by public funding in the past. 

Thus the core question, which it appears you agree with, is how do we impose a politically constrained carbon price to raise revenues for investment in clean energy innovation, and how do we structure those investments to best catalyze the type of innovation required to decarbonize the economy?  

Devon, I agree, at least in part, with your counter to Robert’s claim about what drives innovation.

In addition to the sources you noted, historian Charles Berg’s 1978 article, “Process Innovation and Changes in Industrial Energy Use,” is instructive. Looking at the progressive replacement of firewood by coal in the last quarter or so of the 19th century, Berg found that the replacement could not be explained simply by price: through much of the period, and in many places, wood was actually cheaper than coal. Yet the triumph of coal, Berg concluded, was “no contest,” because coal attracted the best intellectual talent of the day to the challenge of creating what we lately call The Next Big Thing.

OTOH, there is nothing in Berg’s account to indicate that government subsidies or targeting of coal development was necessary or particularly influential in the transformative innovations that established the modern coal industry.

Berg’s report makes it clear that such major innovations entail a complex web of interacting economic and technical interests, and therefore a multiplicity of motives, many of which may seem unrelated to the ultimate industrial transformation. Public policies and political culture may be pertinent to the extent they create an ambience that is conducive to discovery, communication, innovation, and entrepreneurship.

The development of refrigeration technology demonstrates a similar pattern. In their book, “Turning Oil Into Salt,” Korin and Luft observe that through much of the history of civilization, salt was so precious that wars were fought for it — because salt was the major one of limited options for preserving food. The invention of refrigeration changed salt from a precious mineral into a mundane commodity. But the development of artificial means to refrigerate and thus preserve food was not driven mainly by the cost of salt. Rather, refrigeration presented an intriguing intellectual challenge to powerful minds as well as a natural application of advancing scientific discoveries: e.g., Boyle’s Law. 

Scientists and inventors were not intrigued by coal simply as a replacement for wood, as Berg emphasizes, but because it opened an array of new possibilities for discovery and innovation that existing materials and technologies could not match. The development of refrigeration similarly was driven by a variety of interests and potential applications beyond simply replacing salt or other means of food preservation.

So price signals are not evidently necessary or effective at driving innovation. But government interventions, other than those broadly favorable like IP protection and perhaps some investment in basic research, also are not essential and often may not be effective.

Thanks for the clarification, Devon. I understand the points about Pigouvian taxation, etc. (to a reasonable approximation; I’m not an economist), but seem to have misread Jesse’s intent with regard to theory vs. practice. And thanks for noting that “…a politically constrained carbon price will tend to reduce emissions at the margin”–though I would quibble with the word “tend”!

Regarding your second point, my choice of words (“supply” and “demand”) was unfortunate, as I was not making an economics argument. I intended to say merely that the availability of funds, even if they are earmarked in law, is no guarantee that they will be used–or used wisely–for innovation-related purposes. Whereas, demand driven by rising carbon prices *will* ensure *some* innovation (with higher prices driving more innovation). I don’t dispute (as I note above) that government investment in the innovation cycle has produced some dramatic results (though I would note the economics argument that investment in more basic research, with less appropriability due to attendant knowledge spillovers, produces greater social benefit).

On further reflection, I believe that Jesse’s core point deals with the double dividend. Not being familiar with the original economics argument, I can’t say much on this, but I am sympathetic with his argument. I would note that Fullerton and Metcalf (apparently not in the bibliography to which Jesse links) conclude that one can’t make any general statement about the double dividend (i.e., using proceeds to reduce distortionary taxes versus using them to invest in something that produces a social good); rather, one must looks at the specifics of each case. (Fullerton, Don, and Gilbert E. Metcalf. “Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing.” Chicago-Kent Law Review 73 (1998 1997): 221.)

On breakthroughs: We need some, for sure, and I fully agree that nothing we’re doing now will produce any. However, I’m a big believer in the law of small beginnings. The various policies–market and non–that countries and other jurisdictions are putting in place–at an increasing pace, I might add, the U.S. notwithstanding–along with the innovation that *is* occurring, makes breakthroughs more likely in the future. I offer no references from either economics or political science for this opinion!

Still, I’m not sure I *do* agree with your last point. Innovation must be financed, certainly. But the purpose of emissions trading or a carbon tax is to raise the relative prices of carbon-intensive fuels and raw materials. I believe that choices about investment should be made separately, with due attention to technical financial considerations (whether public or private finance). If it turns out that the “best” source of funds is revenue from a carbon tax, fine.