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Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

Jesse Jenkins's picture

Jesse is a researcher, consultant, and writer with ten years of experience in the energy sector and expertise in electric power systems, electricity regulation, energy and climate change policy...

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  • While a carbon price is every economists’ favorite climate plan, real-world political constraints get in the way (just ask Australia!)
  • In a new paper in Energy Policy, I examine a variety of political economy constraints that limit the environmental efficacy and economic efficiency of real-world carbon pricing policies.
  • Households in the United States appear willing to pay just $80-200 per year to combat climate change, equivalent to a carbon tax of roughly $2-8 per ton of CO2. In contrast, estimates of the full social cost of carbon — the level of carbon tax envisioned by economists — are an order of magnitude or two larger, ranging from roughly $15-150 per ton (and rising steadily over time).
  • Climate policy makers ignore political economy constraints at their peril—and part two in this series explores what can be done to seize the opportunity space for improvement in climate policy design.
  • Finally, the conclusion of this series discusses why smart use of the revenues generated by a carbon tax could be just as (if not more) important than the carbon price itself.

Full Spectrum: Energy Analysis and Commentary with Jesse Jenkins

Ask an economist how to combat climate change, and you’re likely to get a pretty simple answer: put a price on carbon. 

“If you let the economists write the [climate] legislation, it could be quite simple,” MIT business school economist Henry Jacoby told NPR last year, implying that the whole plan to curb greenhouse gas emissions could “fit on one page.” 

In short, tax fossil fuels in proportion to the amount of carbon they release. Make coal, oil and natural gas more expensive. “That’s it; that’s the whole plan,” as NPR’s David Kestenbaum put it.

Jacoby and MIT Sloan School colleague John Reilly envision a carbon tax sufficient to increase the price of gasoline by 25 cents in the first year, rising to $1.00 per gallon. In rough terms, that’s a tax of $25-100 per ton of CO2. 

While many economists admit a slightly more nuanced view (acknowledging the need for “supplemental policies” to address other market failures hampering climate solutions, including innovation spillover risks and infrastructure lock-in) or prefer emissions trading programs instead of taxes, Jacoby and Reilly’s one-page climate plan isn’t far off from the typical economist’s prescription for climate change. 

In economics-speak, climate change is “an externality” — a set of costs (e.g., climate change-related damages) that are external to current market transactions, since no one has to pay for the costs associated with their CO2 emissions. 

As such, the traditional economic prescription for climate externalities involves establishing a “Pigouvian fee” on the sources of GHG emissions that corrects for the un-priced externality, either via a tax on carbon dioxide (CO2) and other GHGs (a “carbon tax”) or via a market-based emissions cap and permit trading mechanism (“cap-and-trade”). There’s a lot of debate about which approach — tax or cap-and-trade — is better, but both rest on a common economic foundation, and I’ll refer to both collectively as “carbon pricing policies.”

If these instruments successfully establish a carbon price equal to the full climate change-related external costs associated with emissions of CO2 and other GHGs (the so-called “social cost of carbon”), they will equalize the marginal social and private costs of GHG emitting activities, restoring an economically efficient of emissions (economists call this “a Pareto optimal level”).

There’s only one hitch: people generally want their energy to be cheaper, not more expensive! 

Last week, Australia repealed it’s carbon tax, ending a brutal, decade-long fight over climate policy. The repeal is just the latest and most glaring example of the extremely up-hill political battle facing any effort to put a hefty price on carbon—i.e., a price sufficient to fully internalize the social costs of CO2 emissions and substantially reduce greenhouse gas emissions.

In a new peer-reviewed paper published in the June edition of Energy Policy (Vol 69), I dive in to these “political economy constraints on carbon pricing policies” and their impacts on the economic efficiency and environmental efficacy of climate policy. From my paper:

“[S]everal political economy factors can severely constrain the implementation of these carbon pricing policies, including opposition of industrial sectors with a concentration of assets that would lose considerable value under such policies; the collective action nature of climate mitigation efforts; principal agent failures; and a low willingness-to-pay for climate mitigation by citizens.”

What I find is that while estimates of the full social cost of carbon range from $15 to $150 per ton of CO2 in 2012 dollars (rising steadily each year), households in the United States may be willing to pay as little as $2 to $8 per ton to combat climate change, according to a range of public values and willingness-to-pay research.

In other words: that one-page climate plan sounds great in theory. In the real-world, political constraints can mean carbon pricing policies end up falling far short. That creates an opportunity for improved climate policy designs that perform much better under political economy constraints.

In a two-part series, I’ll first explain how and why political constraints frequently bind carbon pricing efforts and why that leads carbon pricing to fall short on its on terms. In a follow-up post soon, I’ll discuss the implications for climate policy design, and how to move towards more creative (and yes, complicated) policy proposals that might actually work in the real world…

Note, my Energy Policy paper is behind a paywall and can be accessed by anyone with a ScienceDirect membership. For those who can’t access it and want a copy, please email me and I’m happy to send one along.

Part 1: Why is it so hard to tax carbon?

My paper surveys both the relevant political economy theory and presents evidence of political constraints in action drawn from public opinion and willingness-to-pay (WTP) research and the very public debate over climate policy in the United States in 2009 and 2010. 

A brief disclaimer: This evidence is U.S.-specific and is not meant to be representative of other political economies. The political economy constraints posed by industrial interests and consumer WTP for climate policies will vary in each national or sub-national political economy. However, the evidence presented from the United States is highly consistent with the theoretical predictions and provides a real-world example of the potential for political economy constraints to be binding on the implementation of carbon pricing instruments. Furthermore, while political constraints differ from nation to nation, they certainly exist in all political economies. Policy makers and climate advocates ignore them at their peril…

First off, we have to understand that while social welfare can be maximized under an efficiently implemented carbon tax or cap-and-trade system and government revenues may theoretically be recycled in a manner that maximizes overall welfare, the imposition of a carbon price causes consumers and producers alike to experience both a private welfare loss and a transfer of surplus to government tax revenues. You can see this in Figure S.1 and Table S.1 below, which are a little bit of Environmental Economics 101.

Carbon pricing 101

Carbon pricing 101 - welfare analysis table
Source: Jenkins (2014). Click either image to enlarge.

The line “MPC” illustrates the hypothetical marginal private cost of activities that emit CO2 in the absence of a carbon price. Meanwhile, “MSC” is the marginal social cost, or the full cost   incurred including the climate-related damages (the “externality”) associated with CO2 emissions. This marginal external cost, “MEC,” is the difference between MSC and MPC. MB is the marginal benefit of emitting activities, and constitutes the demand curve for emissions.

Here’s where that one-page carbon tax plan comes in: Price carbon at a tax T* equal to the marginal external cost and the quantity of carbon emitted should fall from Q0 to Q*. The result: overall social welfare improves by the area of the triangle hkl, which is the portion of the externality that’s erased by the carbon tax. That’s the “magic” of the carbon price as it’s supposed to work in theory. 

But these figures also demonstrate the substantial private welfare losses incurred by both producers and consumers, who see their own welfare shrink: from the big triangle adl to the little triangle abh for consumers and from dfl to efj for producers. Overall societal welfare may go up, but individual producers and consumers will see their own private welfare fall. That’s the very nature of an externality! What was once a free ride is now “internalized” and we all have to pay up. Ouch!

By design, pricing carbon will increase factor prices for carbon-intensive energy products and other intermediate and end-use products that involve GHG emissions during production or distribution. This increase in factor prices will cause a redistribution of economic resources as production and consumption shift (over time) to a new, less carbon-intensive equilibrium. However, while Figure S.1 above presents the transition from one market equilibrium to another (i.e. from Q0 to Q*) as costless, or “frictionless,” such transitions in reality can impose substantial additional private costs, as some assets — from power plants and factories (physical capital) to worker skills (human capital) — are simply worth much less under this new equilibrium and represent real “sunk costs.”

It doesn’t take a political scientist to see how there might be some political friction associated with the private costs imposed by carbon pricing. But just to be sure, political scientists have developed a series of theoretical frameworks that explain what’s going on here, which I survey in my paper. I’ll summarize those (intuitive) theories briefly here.

First off, several industrial sectors possess a high concentration of assets that would lose considerable value under carbon pricing policies. Think owners of those Australian coal mines, utilities with dirty power plants, or carbon or energy-intensive industries like steel or cement manufacturing. Political scientist Dale Murphy calls these firms with “high asset specificity,” and these sectors are likely to mount vociferous opposition to such policies to protect the value of their sunk investments. 

Highly motivated industries also frequently exert their influence over political processes, and Nobel Laureate George Stigler is famous for developing an “economic theory of regulation” that documents how such interests frequently “capture” regulatory processes for their own ends. Theory predicts the same behavior to be rampant when carbon pricing policies are proposed, which can effectively prevent carbon pricing in the first place or distort policy design to favor impacted industries (think carve-outs and exemptions for “trade exposed” industries, free carbon credits, and plentiful low-cost “offsets” in many real-world climate policies).

At the same time, additional political economy constraints primarily arise from a geographic and temporal mismatch between the broad societal benefits of mitigation and the private costs borne by consumers and citizens. 

The private costs of climate mitigation will be felt in the near-term and, assuming an equitable distribution of mitigation responsibilities, will be felt most severely in advanced industrialized nations such as the United States. 

In contrast, the vast majority of benefits from climate mitigation will be enjoyed by future generations and will be diffused across the entire planet. In fact, assuming poor nations are most vulnerable to weather extremes and changing climate patterns, benefits may be concentrated to a greater degree in developing economies.

Efforts to mitigate climate change must therefore confront two tricky challenges:

  • First, the main actors required to mitigate emissions face a higher share of the mitigation costs than the benefits (dubbed by political scientists and economists a “principal-agent” problem): current generations (and mostly in rich nations) pay the most, but future generations (and mostly in poor nations) benefit the most.
  • Second, the huge number of actors required to take simultaneous action to reduce emissions introduces the mother of all collective action challenges, introducing strong incentives to “free ride” and let others pick up the cost of mitigation. No nation, let alone any individual, can solve climate change alone. As a result, unless you have confidence everyone else is going to pitch in and work together, it’s hard to justify taking on any significant mitigation costs yourself.

These theories would predict that individuals and nations should be willing to pay much less for climate mitigation than is ideal. Given the principal agent and collective action challenges, it’s actually perfectly rational to be willing to pay much less than the full social cost of carbon, as worries about free ridership, lack of confidence in collective action, and the mismatch between the near term costs and the long-term and diffuse benefits shift everyone’s economic calculus. 

The result: when governments try to price carbon, we don’t end up with anything close to the ideal carbon pricing plan economists envision. Instead, these various political economy constraints become binding, restricting the level of carbon price possible and often halting carbon pricing efforts long before you get the ideal social price.

In my paper, I survey available evidence from both academic willingness-to-pay (WTP) surveys and public opinion research during the contentious U.S. debate over climate change legislation (the “Waxman-Markey bill”) during 2009 and 2010. What I found is that all available evidence indicates households in the United States are willing to pay just $80 to $200 per household per year to help combat climate change. 

In other words, while Americans broadly view climate change as a problem and want to see something done about it, they’re just not willing to pay all that much to confront the problem—just as theory would predict. One study by Yale’s Matthew Kotchen and Anthony Leiserowitz and Virginia Tech’s Kevin Boyle illustrates just how quickly support for climate policy falls when the price tag starts to rise. 

Figure 2. Willingness-to-pay for climate mitigation under different policy instruments (Kotchen et al. 2013)Willingness to pay for climate policySource: Jenkins (2014). Click image to enlarge. 

Taking into account variance in household size, consumption patterns, and carbon intensity of electricity supply, average household CO2 emissions range from approximately 25 to 48 metric tons across the 50 states and the District of Columbia. The average U.S. household emits about 34 metric tons.

Combing this estimated willingness-to-pay range with the distribution of average household emissions presented above implies that, within the United States context, political opposition from citizens is likely to mount quickly for carbon pricing policies as the imposed price moves upwards in the range of roughly $2–$8 per ton. That’s a pretty small carbon tax! (Note: Other national or sub-national political economies may exhibit varying tolerance levels for carbon pricing, reflecting both differences in WTP and average household emissions.)

In marked contrast, economic estimates of the social cost of carbon range from roughly $15 to $150 per ton in 2012 dollars, with economists envisioning prices rising steadily each year. See Figure 3 below, for a representative range of social cost of carbon estimates. (The variance in these estimates derives predominately from differing choices of social discount rates [DR] applied to account for the inter-temporal distribution of mitigation costs and benefits, although other factors are also important).

Figure 3. Selected estimates of the social cost of carbonSocial cost of carbon

Source: Jenkins (2014). Click image to enlarge.  

In short: real-world political economy constraints in the United States may bind carbon pricing policies long before they reach the ideal pricing levels envisioned by economists. Indeed, a politically feasible carbon price in the United States may be anywhere from 60 percent to roughly two orders of magnitude lower than estimates of the full social cost of carbon. 

So what happens to that one-page climate plan that started off this story? Well unfortunately, these political economy constraints mean things don’t work out quite as planned, and a politically-constrained carbon tax can’t deliver either the economic efficiency or environmental efficacy envisioned by economists.

Figure 4. Politically constrained carbon price and the opportunity space for improvement. Politically constrained carbon pricing policies

Source: Jenkins (2014). Click image to enlarge. 

As illustrated in Fig. 4 from my paper above, the economic theory behind carbon pricing policies envisions the implementation of an “optimal” carbon tax T* such that T* equals the full social cost of carbon (as in Fig. S.1 above). 

In the real-world, however, political constraints mean efforts to price carbon probably result in a tax TC well below T*. This constrained carbon price can only increase the price of the carbon-emitting good, G to PC and reduce consumption to QC. This constrained carbon price thus fails achieve the Pareto optimal equilibrium, leading to remaining external damages in excess of marginal social benefits (the shaded area in Fig. 4) and to continued excess CO2 emissions (equal to Q*–QC).

In other words: on it’s own terms, a politically-constrained carbon price is neither economically efficient nor environmentally efficacious. So much for that one-page climate plan…

In Part 2 of this series, I talk about the opportunity space this creates for creative climate policy designs that can out-perform the traditional carbon pricing prescription.

Don’t worry! That one-page climate plan probably can’t get the job done in a world of real and often-binding political constraints. But that doesn’t mean climate policy is sunk. It’s just time to get more creative

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Jesse Jenkins's picture
Jesse Jenkins on Jul 21, 2014

Indeed! Stay tuned for part 2…

Jesse Jenkins's picture
Jesse Jenkins on Jul 21, 2014

Hi Schalk and thanks for the comment,

“Skepticism” of climate change is indeed one factor in public opposition to strong carbon pricing policies. However, I personally believe the role skeptics play in climate policy debates is a bit overblown. The more fundamental economic interests are more powerful I believe, and I think the public opinion evidence would support that interpretation, as in most nations I’ve looked at, and particularly in the United States, we see strong majorities believe that climate change represents a problem to be addressed, but fairly weak support for expenditures or costs associated with confronting that challenge. Yes, there are more skeptics among the conservative portions of the US (and other) populations. I’d recommend the “Six Americas” series of studies for more on that. But I also think that this expression of skepticism may also be a case of “motivated cognition” – that is, if the idea of confronting climate change creates cognitive dissonance with your beliefs, worldview, or personal interests, one has a strong motivation to develop a rationale and understanding of the problem that reduces or eliminates that cognitive dissonance. This can easily manifest as skepticism of the underlying science or risk. Anyway, the role of “skeptics” in climate politics is a very interesting topic, and one I’d love to hear more informed views on from those who may have spent time researching this topic. Cheers,


John Miller's picture
John Miller on Jul 21, 2014

Jesse, as you are very aware most people generally ‘poll’ green but often are not willing to pay or vote green when the actual cost could become a significant Household burden.  Over the years I have studied and evaluated many options to replacing fossil fuels with lower/zero carbon alternatives.  On average the fully amortized cost appears to be an average of close to $100/MT.  Based on average U.S. Household carbon emissions of 34 MT/yr. and incomes of $52K/yr., this added 6.5% annual expense can be fairly difficult sell or persuade the average Household Head that it is justified (in the short term).

Another factor to consider is the probability of different climate change projections actually developing and the accuracy of the published estimated social carbon costs (SCC).  The one gap I consistently observe when trying to analyze SCC studies and validate some of their assumptions/conclusions is the omission of the ‘social and economic value’ of current carbon consumption.  Can you provide any reasonably balanced analysis references that also address current social/economic values provided by carbon consumption?

Max Kennedy's picture
Max Kennedy on Jul 22, 2014

Jesse, your 1st tricky challenge to mitigate climate change ignores one key fact, the so called principle agents have benefited the most over the last hundred years and the poor nations have born an uneven share of the harm.  For them to complain they must bear the burden of fixing the damage they have profited from is arrogance in the extreme!

Schalk Cloete's picture
Schalk Cloete on Jul 22, 2014

Thanks for the link to the Six Americas study – very interesting. 

However, I think this study does support the idea of a large role of skeptics in the debate. As the study leader describes the groups in the video on this page, it appears as if the “alarmed” group (18%) really is the only group which would pay the necessary carbon price. The “concerned” group (33%) are those who (as John said above) would probably talk green, but fail to vote green.

The remaining groups (aside from the “disingaged”) (37%) are those who I classify as skeptics. Note that, as I understand it, climate skeptics do not generally believe that climate change is a hoax and that greenhouse gasses have no impact whatsoever. The more informed of them believe that greenhouse gasses have an effect, but this effect is probably a lot smaller than climate models predict (to some extent verified by the overprediction of atmospheric temperatures by most models). Most of these people would oppose a carbon tax, some of them vigorously so. And yes, new legislation is generally easier to block than to enact, especially if it would bring some degree of economic pain. 

It is because of these groups that I think McKitrick’s proposal is very interesting. It would give people at both sides of the Six America’s scale a chance to put their beliefs into action. This would make the whole climate debate a whole lot more practical since, the first thing that you would ask anyone with a strong opinion on the matter is “Do you believe in your views sufficiently to take a substantial long/short position in the CO2 futures market?”. If not, the particular person will be instantly discredited and the debate can move on. 

Adding real money into the climate debate is also an excellent way in which to break down cognitive dissonance. If people’s investments are at stake, they can become objective pretty quickly. However, if we just keep this a debate where everyone can say whatever they want with no real consequences, we will get little more than increasingly emotional flame wars which only serve to further entrench subjective viewpoints and a bunch of websites that make a foredrawn conclusion and proceed to find and every drop of evidence supporting that conclusion (both on the green and skeptic sides). This is very much unhelpful. 

Joris van Dorp's picture
Joris van Dorp on Jul 22, 2014

Schalk, I agree that putting a price on future global warming and/or future damages from global warming would bring the discussion on co2 emission reduction to a higher level.

But I don’t agree that McKitrick’s proposal would do this. Quite the contrary.

I would also remind you right off the bat that Ross McKitrick (together with Steve McIntyre) was one of the most important voices denouncing the ‘hockeystick’ visualisation of the global surface temperature history in the early 00’s, even though the ‘hockeystick’ was later proved to be correct. Neither Ross McKitrick nor Steve McIntyre ever acknowledged their mistakes. Both of them are clearly “merchants of doubt” with respect to climate science and their proposals need to be subjected to particular scrutiny, lest humanity loses even more time as a result of their antics.

So what is McKitrick proposing exactly? He wants to introduce a carbon price that is tied to global temperature. In itself this looks selfdefeating, as it would mean that the carbon price would only rise if warming takes place, even while the purpose of co2 pricing is to prevent further warming in the first place. So on the outset, it is clear that McKitrick is not trying to help prevent global warming. He is trying to prevent action, by introducing a tax system that would only reward investment in co2 reduction measures if warming is not succesfully prevented! Clearly, this will do nothing to help fight AGW.

Next, McKitrick is proposing to measure global warming by using the tropospheric temperature as an indicator. He claims this is a good indicator of global temperature response to co2 emissions. That may be, but it isn’t a practical indictator, or at least is has not been in the past. Measuring tropospheric temperature has proved to be very difficult in practice and a definite warming trend is only recently beginning to emerge. In comparison, surface temperature measurements have long shown a clear warming trend (which McKitrick continues to deny even though his ridiculous claims of no warming have been totally laid to waste scientifically for more than a decade now).

So why does McKitrick choose the notoriously difficult to measure tropospheric temperature rather than the easily measured surface temperature? Probably because his aim is not to advance sound co2 reduction policy. His aim is to confuse and kneecap good co2 policy. It always has been.

In the video, McKitrick is seen to be claiming that tropospheric temperature has fallen over the last decade. This is not a scientific claim. In fact, the tropospheric temperature record is so poor that a definite conclusion about it’s direction is only recently emerging (and it is up, not down). What is clear is that the record is not in fact robust enough to claim that no warming has taken place. If anything, the best (re)analysis of the record indicates warming, not cooling. Another dead giveaway that McKitrick’s objective is not to help reduce co2 emissions. Quite the contrary.




Joris van Dorp's picture
Joris van Dorp on Jul 22, 2014

Sorry Schalk, I posted my reply to you in the wrong field. It is up in the discussion thread.

Joris van Dorp's picture
Joris van Dorp on Jul 22, 2014

Jesse, you’ve done us all a great service. Your article helps focus out attention on the fact that the cost of co2 reduction is so high that it prevents a solution to the problem. This fact is known to experts, but not to laymen, the public and the politicians. Hopefully, you excellent article helps our understanding.

For me, your article helps redouble the importance of cost-effective co2 reduction measures. This is a point that is made by many experts including Dr. James Hansen, but also many in the climatescience ‘skeptic’ field. This is precisely why the advancement and deployment of nuclear energy is so important. Nuclear energy offers the prospect of large-scale co2 reduction without additional costs compared to fossil fuels. That is why nuclear power can help solve AGW whether the world agrees on a ‘high enough’ carbon price or not.

Anyone who believes that establishing a high enough price for carbon would be politically and/or economically unfeasible should love nuclear power, because nuclear power renders the question of how to achieve a high enough, reliable enough and international co2 price to protect future generations largely moot! All nuclear needs is political rehabilitation based on sound science. Nothing more!

Joris van Dorp's picture
Joris van Dorp on Jul 22, 2014

“Can you provide any reasonably balanced analysis references that also address current social/economic values provided by carbon consumption?”

For what it’s worth, I’ve read an analysis some years ago (cant find it anymore im afraid, but perhaps other here know it) which concluded that the utility of cheap (fossil fuel based) road transport is by itself responsible for about 40% of all wealth created on earth since the development of the internal combustion engine. In other words, take away cheap road mobility and the economy would be only 60% as large as it is today.

While the link between fossil fuel usage and cheap road transport is not 100%, it is large enough for us to have high confidence that the benefit to humanity of using fossil fuels (for this purpose at least) is extremely large. Arguably, it is far higher than the expected damage due to climate change for decades or even centuries to come. This is not a pleasant thought, because it support the conclusion that damaging the climate by continuous co2 emissions is in fact in our best interest for some time to come.

As it stands, in my opinion, the climate would have to be damaged to a very significant degree for humanity to experience so much damage that the benefit of using fossil fuels (for cheap road transport) is overshadowed. So in my opinion we should not think of the problem in terms of “fossil fuels vs climate protection”. We should protect the climate and maintain the utility currently provided by cheap fossil fuels. This can be done by switching from fossil fuels to a cost-effective alternative. That would be nuclear energy!

Schalk Cloete's picture
Schalk Cloete on Jul 22, 2014

I completely agree with what you are saying. My endorsement of the McKitrick proposal is for the principle of creating a mechanism for investment into climate change predictions, thereby giving an opportunity to people on both sides of the debate to invest in their climate views. The resulting CO2 futures price would then constitute an objective free-market consensus on future climate impacts and would be a very valuable outcome in itself.

If you look at the final part of my draft article on this topic you will see that I would like to see improvement both in terms of the objective measure of climate change being used and in the incorporation of future damages into the current price.

Joris van Dorp's picture
Joris van Dorp on Jul 22, 2014

I still not sure I understand what you are saying Schalk.

The purpose of any co2 price or tax is to prevent further global warming and its resulting economic and ecological impacts. Hence, it would be utterly pointless to base the (future) price of carbon on climate change impacts, because the price needs to be high enough to prevent such impacts in the first place.

For example, lets use the case McKitrick himself notes: a factory developer deciding whether or not to invest in low-co2 emissions technology now. The developer might trust climate science and believe that co2 emissions need to be reduced to prevent warming, so he wants to invest in co2 emission reduction. However, he has to presume that his competitors will likewise conclude that climate science is correct and will likewise invest in co2 reduction. Hence, he will need to assume that co2 emissions are succesfully reduced and that global warming does not follow the BAU scenario. However, as soon as he concludes this, his investment in low-co2 technology becomes a pointless expense. He will not benefit from a lower carbon tax since the tax will not rise if global warming is successfully stopped. So his final decision is to skip the investment. But in that case, he should presume his competitors will also not invest……..! So does McKitrick really help the business sector decide on whether or not to invest in co2 reduction? Not at all! In fact, it creates far more uncertainty than would a fixed carbon price.

What we need to do is calculate the impacts of future climate change under a BAU scenario, and then apply that price to carbon now in order for the BAU scenario to dissappear. What McKitrick is proposing is the complete opposite of this, namely, a system whereby investments in co2 reduction only pay off if impacts do in fact materialise, which is exactly what we do not want.

It all seems very clear to me. I am very puzzled as to why you and I continue to appear to be in disagreement over the (potential) merits of McKitricks proposal. In my view, McKitricks’proposal fits nicely in with his long-term crusade against climate science and -policy. I don’t see how his proposal could be made to work in any way shape or form. I believe we need a sufficient CO2 price now – not in the future – and certainly not after climate impacts have become undeniably manifest. That would be far, far too late.

Joris van Dorp's picture
Joris van Dorp on Jul 22, 2014

By the way, I don’t believe that creating a market-mechanism for investment into climate change projection is going to lead to better quality projections. The problem is that there is only one way to determine which projection is the most accurate, and that is by observing the global warming that actually occurs after the fact. Hence, recieving payment for accurate projections will need to occur in the future as well. Until that future arrives, the only way to determine which projection is most accurate is through continuous scientific method and dialogue.

We are already doing that now, through our national science institutions and arguably our confidence in the role of co2 is more than enough to warrant urgent action. All National Academies of Science have already determined years ago that urgent action is needed now. So what needs to change, exactly? Why the need to attract private investment in climate science projections?

I guess at this point I could add that McKitrick’s proposal contains another favorite denialist talking point, namely the denialist propensity to disparage publicly financed research as somehow inferior to research financed by private actors. Nice one McKitrick! Got it all rolled up again in one dispicable package, didn’t you?

John Miller's picture
John Miller on Jul 22, 2014

Today fossil fuels supply about 84% of total primary energy for the World.  IEO 2013 basis.  Also, as I am sure you are aware, nuclear provides about 5% of total World primary energy; for a overall total up to 89% for non-renewables.    The balance or 11% of World energy supply comes from renewables; primarily hydropower and cellulosic material such as wood.  Other renewables (wind, solar, biofuels, etc.) are soon expected to possibly exceed nuclear.  Fossil fuels supplies were relatively insignificant 150 years ago and have dominated required World energy supplies (and associated GDP outputs) ever since.

The combination of available supply levels, technology innovations, and relatively high energy densities have historically made fossil fuels more cost effective than all other alternatives throughout most the World.  Today, the environmental impacts (or SCC) of fossil fuels, past & current, should already be built into most economies and associated GDP outputs.  The challenge moving forward will be developing lower carbon alternatives in the future that are truly cost-effective alternatives and those that are eventually sustainable without perpetual Governments’ support outside the free markets. 

Agreed, nuclear will definitely play a very important and significant role in a lower carbon future; including a wide variety/application transportation EV’s.

Max Kennedy's picture
Max Kennedy on Jul 23, 2014

Fossil fuels are more cost effective because they download large portions of their cost onto the taxpayer thereby appearing much cheaper than they really are.  If that statement is to be honest the full cost of contaminated water, damaged ecosystems, elevated health care and all other externalised costs need to be added in.  If that is done they are no longer “cost effective”.  A convenient lie of ommission by fossil fuel proponents.

John Miller's picture
John Miller on Jul 23, 2014

If the health and environmental impacts are so bad and not continuous improving, where have the EPA, HHS, USDA, and other responsible Federal and State Agencies been all these years?  Also, how do you explain why the average life spans and general heath of Residents have continuously increased very significantly over the years?  Today, one of the largest causes of annual deaths (480,000) is due to smoking (primary & secondary exposure).  Why are people allowed to still smoke?  The top 3 causes for fatalities are heart disease, cancer and respiratory.  Smoking obviously contributes to all three of these poor health conditions.

In the somewhat distant past fossil fuels were also major contributors to health issues, but with the Clean Air and Water Acts and other Regulations (OSHA for example), these risks have been reduced substantially and most often eliminated since the 1970’s.  Today, how much do you believe negative health problems are caused by lifestyle choices such as obesity, high blood pressure, diabetes, and general poor eating/drinking habits or lack of exercise?

Yes, some fossil fuels such as coal power plant stack emissions should continue to be improved, but to imply we have made no progress in improving and preventing deterioration of our residential environments or ecosystems appears to be a convenient omission of the actual facts and progress made over the years.

Max Kennedy's picture
Max Kennedy on Jul 23, 2014

Health has improved through better understanding of nutrition, medicine, exercise and science.  Though fossil fuels have an impact on these that does not negate their negative effects which fossil fuels have not paid for.  And no, regarding the environment fossil fuels have not cleaned up their act.  They are still extremely destructive, deepwater horizon and the poisoning of waterways aroung the Tar Sands in Alberta,are prime though not unique examples.  The organisations that are supposed to do something about them are hamstrung by corporate lobbying and the excessive corporate influence at all levels of government.  Finally, since CO2 spewed into the atmosphere has residency of several hundreds to a thousand years the worst of the effects are not immediate but delayed a fact that all the progress to date ignores entirely.  Talk about an lie of omission.  When the external costs get factored in fossil fuels are NOT now and haven’t been for a long time a cost effective energy source.  Ubtil these are factored in the price of fossil fuels is a lie. plain and simple!

Nathan Wilson's picture
Nathan Wilson on Jul 23, 2014

“… the utility of cheap (fossil fuel based) road transport …”

More generally, cheap road transportation comes from cheap liquid fuel.  As we all know, gasoline and diesel are the “best” energy carriers, but second tier carriers like ammonia and methanol are close enough that secondary consideration (such as the desired primary energy source) dictate whether/when they will be used.  The third tier energy carriers hydrogen and batteries are significantly worse (with today’s technology), and are currently confined to niche applications.

The petroleum derived gasoline and diesel are among the cheapest fuels in Western nations, but it’s hard for me to believe that a somewhat more expensive fuel would really harm the economy (in spite of what TEC’s Gail T. says), because we Americans generally buy vehicles which are much larger and less fuel efficient than people in other nations (i.e. the cost of fuel doesn’t seem to effect our vehicle choices).

In any case, ammonia is made today from fossil fuel, using CC&S in some cases, for cost similar to that of gasoline (but like diesel and methanol, ammonia can be burned with about 15% higher energy efficiency than gasoline).  In developing countries such as China and India, nuclear and renewable power costs less than half of what it does in the US, so these countries should be able to make ammonia from sustainable energy for a cost that is similar to imported gasoline.  So there is apparently very little or even negative benefit to using gasoline instead of ammonia.

See nh3fuelassociation 

Bob Meinetz's picture
Bob Meinetz on Jul 23, 2014

Jesse, not a word about a revenue-neutral carbon tax, or better: the fee-and dividend system proposed by James Hansen, which addresses every political and economic constraint you cite above.

The basic proposed structure is:

  1. A fee is charged at the point of origin or point of import on greenhouse gas emitting energy (oil, natural gas and coal).
  2. The fee is progressively increased.
  3. The fee is returned to households equitably and in full.

A revenue-neutral tax (tax credit variant of fee-and-dividend) has reduced gasoline consumption in British Columbia by 17% in under five years. Maddeningly simple but effective, it’s like aspirin for our globe-ache.

Joris van Dorp's picture
Joris van Dorp on Jul 23, 2014

“When the external costs get factored in fossil fuels are NOT now and haven’t been for a long time a cost effective energy source.”

How high is the external cost per kWh for fossil fuels that you are using? In the literature, fossil fuel external costs (social costs) vary by almost two orders of magnitude, also depending on the particular type of fossil fuel.

Cost effective as compared to what?

Schalk Cloete's picture
Schalk Cloete on Jul 23, 2014

Two points:

1. The CO2 prices necessary for the 450 ppm trajectory are a matter of complete political impossibility at the moment. Pushing for this CO2 price to be implemented as a tax is not going to lead to much more than continued stalemate. Jesse’s research shows that this is mostly due to economic interests. My feeling is that it is primarily because climate change is not yet perceived as a real and tangible threat by the majority of the electorate. Regardless of the fundamental reason, it is fairly safe to say that pushing for sufficiently high CO2 prices to be implemented by all major polluting countries is going to be a long and frustrating process. We don’t have that kind of time. 

2. The purpose of a CO2 price is not to “prevent further global warming”. The purpose is to ensure that the marginal costs of climate change don’t exceed the marginal benefits of cheap fossil fuel combustion. This makes the estimation of the correct CO2 price incredibly difficult. Not only must models predict future climate damages under different CO2 pricing trajectories decades into the future, but they must also predict future economic growth under these CO2 pricing trajectories. Lower CO2 prices will likely result in higher growth which allows us to discount further damages at a higher rate. The complexity of this modelling challenge is the reason why estimates of the social cost of carbon vary over an order of magnitude or more. We cannot expect of our political systems to deliver a reliable CO2 price if the magnitude of this price is so tremendously uncertain. 

The McKitrick proposal essentially addresses these two concerns. Firstly, it is a CO2 pricing scheme that can also win support from the skeptic (or luke-warm) community. Secondly, if structured correctly (where the price is not linked to the observed temepature rise, but to the future expectations of the market), it will deliver a single value of the CO2 price at any given time which can be viewed as the free market consensus, i.e. the price is set by the free market. People generally have more faith in the free market to price things than the goverment, thereby making this pricing scheme much more feasible to implement. 

The shortcomings you outlined above can potentialy be addressed while preserving these positive attributes. It just requires some willingness to actually build a business case for CO2 pricing (i.e. that there is real and direct money to be made in correctly predicting the trajectory). With every year of much talk and little action, I grow more convinced that trying to enforce a fixed CO2 tax (or CO2 emissions trajectory) on society is not going to work until we see much clearer and directly attributable negative effects of climate change 1-2 decades into the future. This delay can be very costly. 

Jesse Jenkins's picture
Jesse Jenkins on Jul 23, 2014

Bob, stay tuned for part 2…

Jesse Jenkins's picture
Jesse Jenkins on Jul 24, 2014

Actually, part 2 got quite long, so I split it up into two more. Part 2 goes up Thursday AM, but it only touches on the revenue neutral proposal briefly. Part 3 will deal with it — and alternative uses for revenue that appear to perform even better politically, economically, and environmentally — in much more detail. Stay tuned for Part 3 on Monday!

Marchant Wentworth's picture
Marchant Wentworth on Jul 24, 2014

These economic graphs are helpful.  But in my mind, certainly one primary reasons for no serious poltical iis nterest in a carbon tax has to do with not only the lack of needed support in House Ways and Means and the leadership, but lack of a clear pathway to get the numbers needed to report a bill.  There are presently 39 members on the committee which means, assuming it gets out of subcommittee, 20 would need to support it.  This might mean all 16 Democrats — which in itself would be a challenge — and then gaining through some mysterious process 4 additional Republicans.  This would be a tall order, assuming the House leadership would even allow it to continue.  What needs to happen long term is to put together a coalition that can sell this as the “least bad” of the legislative climate solutions out there.  In the interim, the Obama administration should continue to vigorous regulatory proposals that would demonstrate it is possible to craft solutions incentiving renewables and energy efficiency that need not cause the catastrophies touted by opponents of taking any action and may also save consumers money and create jobs.

Bob Bingham's picture
Bob Bingham on Jul 24, 2014

Dressing the article up with graphs and calcuations is misleading as this subject is simply a brutal struggle of power and money. A climate tax is designed to reduce coal to almost nothing and oil by 50%. Unsurprisingly this is not popular with those industries who just happen to be loaded with money and freinds in high places. We are at 400 parts per million and have locked the climate into changes that are going to destroy our way of life but we will have to wait untill a lot of powerfull people are feeling the pressure before we take any notice.

William Hughes-Games's picture
William Hughes-Games on Jul 24, 2014

As long as companies and individuals are allowed to contribute to political parties, this, and a whole raft of other problems, will not go away.  It sounds expensive at first glance to provide politicians with a set amount of money for their election campaigns from the public purse,  but it would be far cheaper than the true costs of the present system.  Jim Hansen has proposed the best system of Carbon Tax that I know of called Tax and Dividend but despite it being an election winner for any party that proposes it (who could resist getting a dividend in their bank account every month from ‘the man’), no party would dare anger their financial masters by proposing it. Foundation by Azimove had a grain of truth amongst the science fiction.  Namely small actions at a critical juncture can have huge consequenses and here the action needed is to make it illegal for anyone to contribute to a political party.  The system is corrupt and may even be compromising our survival.

Jesse Jenkins's picture
Jesse Jenkins on Jul 24, 2014

The influence of money in politics is clearly another manifestation of the political obstancles arising from entrenched commercial interests. However, you write: “Jim Hansen has proposed the best system of Carbon Tax that I know of called Tax and Dividend but despite it being an election winner for any party that proposes it (who could resist getting a dividend in their bank account every month from ‘the man’), no party would dare anger their financial masters by proposing it.” I will discuss this proposal in more detail in Part 3, but I just wanted to clarify, there not great evidence that this is such a political winner. The dividends do soften public opposition (from voters) to carbon pricing (relative to using revenues for general budget purposes) but two things to keep in mind: 1) it’s not a dividend “from the man,” it’s a refund from taxes we would each pay ourselves. As a per capita dividend, it would be a progressive redistribution of carbon revenues, but it’s still something we all have to pay, and the initial hit to our pockets is where the public opposition arises. 2) the dividends do nothing to blunt industrial opposition to the proposal, as they don’t get any money back. This is a key difference between the cap and dividend proposals (100% of revenues go back to citizens via equal per person dividends) and other “tax shift” propoposals which would use revenues to reduce income and usually corporate taxes as well (as in BC and Australia). Anyway, stay tuned for Part 3. How the revenues from a carbon pricing policy are used can be more important than the price itself, but I’m not convinced rebates, dividends, or tax shifts are the best use for such funds. See part 3 on what I see as a much superior proposal, politically, environmentally, and economically…

Jesse Jenkins's picture
Jesse Jenkins on Jul 24, 2014

Hi Marchant,

The inside-baseball dynamics on the Hill clearly play in here too. I’ve seen enough legislative efforts to know how that works and I don’t mean to neglect those factors. In my view, however, they are the secondary constraints. If the primary political economy constraints are not attended it, the chances of having any requisite support on the Hill will be slim. In contrast, if the primary political constraints are attended to and not violated, the inside baseball can progress and a viable  Hill strategy, as you discuss here, can be developed.


Lewis Perelman's picture
Lewis Perelman on Jul 26, 2014

Nice survey of the conundrum, Jesse.

Let me point out for all that Resources for the Future and the Petersen Institute for International Economics have hosted interesting workshops/seminars where multiple analysts have chewed over the carbon pricing problems.

A summary of a workshop “Fiscal Reform and Climate Protection: Considering a U.S. Carbon Tax”sponsored by RFF and PIIE (no recordings unfortunately) is here:

This page has access to a report by RFF on The Role of a Carbon Tax in Tax Reform and Deficit Reduction as well as audio and video (link was broken today but may be restored) of a seminar discussing it:

What I take away from these protracted discussions, along with Jesse’s present assessment, is that pricing carbon via tax or otherwise is one of those academic nostrums that seems to make eminent sense in theory but that has little to no feasibility in the real, contemporary world.

I confess, BTW, that I have not been immune to propounding such idealized fixes myself. In the 1970s, my paper proposing a renewable resources trust fund, financed via a tax on fossil fuels as well as other nonrenewable resources, was a finalist for the Mitchell Prize. (Lost out to John Holdren.) It was later published in a book:

My young brain was still partly saturated in those days with the welfare economics I had studied extensively in graduate school. Live and learn, as they say.

One thing I learned, particularly from subsequent experience working in/for government, is that internalizing externalities is far easier said than done.

In this particular instance, the case for pricing carbon stands on shaky legs, even before considering dynamic political resistance.

For one thing, it presumes that the “social cost of carbon” — on climate — can be known and measured. Without getting into an exhaustive deconstruction of the substantial, inherent uncertainties in climate science and models, the fact is that measuring the tangible impacts of carbon — that is, GHG and other industrial effluents, some which are not even carbon — is extemely difficult and unreliable. Projecting climate trends and therefore impacts into the future is even more unreliable, and effectively impossible at the granular regional or local levels at which tangible effects would have to be assessed.

Related to those uncertainties is the dilemma of iatrogrenic illness. That is the treatment that winds up doing more harm than the disease it aimed to cure.

A carbon tax by itself solves nothing, nor is it intended to. Its rationale is to skew markets so that alternative, “carbon-free” energy sources achieve price parity or superiority to conventional fossil fuel options. Those alternatives are in effect medications that proponents think the body politic needs to take to “cure” the disease of AGW. The carbon tax is sort of a sugar coating aimed to make the medicine more palatable — by making the candy, food, etc. people now are ingesting taste worse.

But there is, in reality, little clinical experience to “prove” that those recommended medications are both safe and effective. Indeed, as Miller, Cloete, and others have demonstrated repeatedly in this forum, the efficacy of many of those prescribed treatments is not so clear, while they come with their own negative side effects, or “externalities.”

Related to that is the possibility that the cure for one malady may actually increase the patient’s vulnerability to another, equally or more debilitating one. In economic terms, this might be construed as opportunity costs. This is not merely a hypothetical problem.

Consider, by analogy, the chemotherapy treatment that effectively destroys cancer tumors, but so damages the immune system that the patient is crippled or killed by infectious disease. That the consequences may be unintended does not make them more tolerable.

Actually, the Copenhagen Consensus Centre has sponsored multiple analyses by leading economists to remind the public and politicians that budget priorities come with opportunity costs — a fiscal version of iatrogenic illness. Starting with the reality that governments/economies have only limited discretionary funds to invest in solving a multiplicity of problems, the CCC analyses have assessed what the relative benefits and costs would be of a fixed amount of money — say, $70 billion — allocated among several alternative programs aimed at improving social welfare.

Among other things, these analyses have shown that “climate protection” schemes aimed at inducing lower GHG emissions have much higher costs and yield much lower benefits than do several other ways of making the world better off. In particular, they show it is (or would be) more cost-effective to invest in solving problems associated with AGW “externalities” directly — e.g., by reducing the incidence of malaria by providing mosquito nets and also investing in vaccine development in the near term — than by curtailing global warming decades in the future, thereby marginally curbing the conjectured spread of malaria or other “social costs” much later rather than ameliorating such problems now.

Putting all that aside, we come to the imposing problems of implementing the proposed internalization scheme. In Jesse’s assessment (among others) the supposed “willingness to pay” already seems far too small compared to the behavior-changing prices required. I suggest that the survey data used to gauge such willingness likely overstate it considerably. The simple reason, as sages through the ages have noted, is that “talk is cheap.” Social scientists know, actually, that survey respondents will commonly say things they think are socially/politically acceptable that they don’t really mean. New Year resolutions, not to mention marital vows, are among the many intentions people express that more or less exceed subsequent behavioral implementation.

Some hope to finesse that barrier by proposing a revenue-neutral tax that would either be refunded or reallocated to yield no increase in the overall tax burden. But the political palatability of that scheme hinges on the public’s trust that that promise would be kept, that it’s not a bait-and-switch finagle or other kind of manipulative deception, and moreover that the initiative will yield the promised benefits.

But those assumptions don’t conform to the harsh political context that exists today. Consider that we recently observed the 50th anniversary of the passing of the landmark Civil Rights Act during Lyndon Johnson’s administration. At that time, surveys showed that some 70% of the American public trusted government to do the right thing most of the time. In the course of the subsequent Vietnam War, that degree of public trust eroded down to around 30%. Today, expressed public trust not only in government but many other institutions is at historic lows. And not just in the US but most of the world as well.

The endemic cynicism resonates with the old joke about the three biggest lies: (1) That was my wife. (2) The check is in the mail. (3) I’m from the government and I’m here to help you.

Moreover, recent Pew Trust survey research shows that the political polarization that has calcified government into gridlock is intensifying in the US: Voters are migrating toward more rigid, intransigent Left and Right ideological positions. This ominously recalls Yeats: “Things fall apart, the center cannot hold.”

Finally, while I am sincerely looking forward to the next parts of Jesse’s essay, and his proposals, we need to consider whether it is realistic to expect the US federal government to do anything about much of anything for the foreseeable future. It really seems not.

Nor is that just personal pessimism. It is the view that seems to have taken hold among the most passionate, committed political activists. Tuesday’s Washington Post reported this:

Code Pink activists have gone through the cost-benefit analysis and determined that making a scene outside of the Capitol isn’t worth it. Congress, it seems, has gotten so pathetic that even the protesters aren’t bothering to show up.

There is more here:



Peter Lang's picture
Peter Lang on Jul 25, 2014

Comment removed by Peter Lang because of many typos.  Reposted above.

Peter Lang's picture
Peter Lang on Jul 25, 2014


It’s not politics that gets in the way of carbon pricing.  It’s rational analysis.  Rational analysis shows the ‘Expected Value’ of carbon pricing policy is low or perhaps even negative.  The reason is that the probability of success of carbon pricing policy is low.  What those who quote the work of economists who argue for carbon pricing are missing is that the assumptions that underpin the carbon price modelling are unlikely to be achieved in the real world.

William Nordhaus and Richard Tol, two of the leading economists in the field, have shown that unless there is a high participation rate, the cost to the participant would be very high (e.g. 250% cost increase for participants if participation rate is 50%) (See Figure 1 in Submisison 2 here: ).  But even 50% participation across the world is effectively impossible in the next half century.  Participation in the EU ETS is only 46% (i.e. the proportion of EU’s GHG emissions included in the ETS).  If that’s all the EU ETS can achieve now, how long before they could achieve an 80% participation rate.  And how long before the whole world, including countries like Eritrea, Ethiopia, Mogadishu and Somalia, could achieve 80% participation rate in their countries – i.e. the emissions from every cow, sheep and goat are included in the carbon pricing scheme?

Richard Tol’s article here explains how game theory shows why there is very low probability of carbon pricing succeeding under such conditions: .  

As mentioned above, the flaw in the argument of those advocating carbon pricing is they don’t seem recognise or they ignore the fact that the assumptions used in the carbon pricing models are highly unlikely to be achieved.  

“Some of the key assumptions that underpin the economic analyses are:

• There will be negligible leakage (of emissions between countries, between industries and between emissions sources)

• All GHG emission sources are included (all countries and all GHG emissions in each country)

• There will be negligible compliance cost and negligible fraud

• There will be an optimal carbon price and the whole world implements it in unison

• The whole world acts in unison to increase the optimal carbon price periodically and will continue to maintain the carbon price at the optimal level for all of this century (and thereafter).

If these assumptions are not met, the estimated benefits of carbon pricing would not be achieved.”

Source: Submission 2:  

It is clear that carbon pricing is highly unlikely to succeed.  Any country or region attempting it will be damaged economically and receive no benefits (in terms of climate damages avoided).  Therefore, it seems to me, carbon pricing cannot be justified on rational grounds.

Peter Lang's picture
Peter Lang on Jul 25, 2014

As far as I am aware, there has been little if any analysis of a third policy alternative:

“This is the decision to be made in this decision analysis.  The choice is between three alternative policy options: ‘No GHG Emissions Controls’, ‘International Treaty’ or ‘Free Market’. 

  1. ‘No Controls’ – adaptation but no policies to mitigate global GHG emissions.  This is the baseline policy against which the other policies are compared; 
  1. ‘Treaty – Legally binding international agreement(s) to global GHG emissions reductions; 


  1. ‘Free Market’ policies – No legally binding international agreement. Each country acts in its own best interest. Global emissions reductions are achieved by removing the impediments that are preventing the world from having low emissions energy cheaper than fossil fuel energy.Developed countries develop the technologies and sell them to developing countries in commercial transactions.  The process could be facilitated by freer trade and removal of restrictive regulations that thwart the development of better technologies.”

Why hasn’t the third alternative been thoroughly investigated?


Policy alternative #1 is what William Nordhaus calls “No Controls”  It is the baseline against which other policies are compared;  See for example, Nordhaus (2008) “A Question of Balance” Table 5.1 and 5.3.

Policy alternative “2 include carbon pricing (of all types), Kyoto type agreements, etc.

Policy alternative #3 seems to have not been considered.  This is the free market alternative.  The one that dmonstratable will survive if we remove the blocks.  It’s worked for as long as humans have been able to communicate.

William Hughes-Games's picture
William Hughes-Games on Jul 25, 2014

There is a danger, that if the government gets their hands on the revenue from a carbon tax, that they will get used to this added stream of income and be reluctant to forego it.  As Parkinson says, expenditures increase to use up any increases in income.  In addition, by giving an equal share of the tax collected, to every citizen (I would suggest rather to every registered tax payer as the data base already exists) the poorest amongst us gets money in pocket which we immediately spend just to keep our heads above water.  This is a great economic stimulus and comes back to the government in taxes after three or four financial transactions.  It is a little like leagizing Pot and then taxing it.  If you ring fence all the tax to educate people on the dangers of Pot as is done with tobacco, this is fine.  If, however the government gets to put this revenue wherever they want it, there is an incentive to keep selling Pot for the revenue stream.  There is a lot of psychology involved in changing people’s behaviour.    Another advantage of Hansen’s system is that you can start with an insignificant rate of tax – let’s say for the sake of the argument 0.1% and it will still be effective while not making a blind bit of actual difference to the price of goods.  Since part of the system is to make the tax increase a little each year – say a jump of 0.1% each year – people with fossil fuel shares will want to divest from them and get into renewables before fossil fuel shares start to lose value.  Their very divestment will start the slides and likely lead to more divestment.  A further advantage is the simplicity of the system and hence the greater difficulty of scaming the system.  Hansen’s system can be expressed on half of one side of a piece of A4 paper.  The American proposal for Cap and Trade goes to something like a thousand pages.  This is an invitation to big corporations to find ways to circumvent the system.

William Hughes-Games's picture
William Hughes-Games on Jul 25, 2014

Short, pithy and very much hitting the nail on the head. 

Peter Lang's picture
Peter Lang on Jul 26, 2014

A suggestion:  wherever units are used it needs to be made clear what they are: e.g tonnes C or tonnes CO2. $/t C or $/t CO2, t or t/a.  

Bob Bingham's picture
Bob Bingham on Jul 26, 2014

[This thread has been deleted by the moderators as it has consistently generated off-topic discussion.]

Alistair Newbould's picture
Alistair Newbould on Jul 26, 2014

Your point 2 emphasises the problem. In theory it is individuals who elect government not industries. So only when industries influence (financially support aka bribe) politicians dose this point have any influence on the ease of implementing such a tax.

Alistair Newbould's picture
Alistair Newbould on Jul 26, 2014

“My feeling is that it is primarily because climate change is not yet perceived as a real and tangible threat by the majority of the electorate.”

Agreed. and whilst we can all try to understand the intricacies of carbon taxation (I have to confess to getting lost fairly early in the article) our main job is to engage anyone and everyone in the discussion and convince them of the impending danger. Become “climate bores”.

Alistair Newbould's picture
Alistair Newbould on Jul 26, 2014

Perfect William! and thanks for the link Bob.

If we can educate enough people we can bypass carbon tax and vested interest and capital tied up in the carbon economy. We simply have to define a carbon budget for ourselves and live within that budget. Take the $ out of the equation completely. Then the day to day decisions change – I am going to cycle to the shops today, not because petrol is $2.20 a litre and my truck uses 12 litres per 100 km, but because I can’t afford the carbon expense.


So what is needed is a carbon budget and a way to accurately define the carbon cost of day to day activities. Surely not so difficult.

Peter Lang's picture
Peter Lang on Jul 26, 2014

[This thread has been deleted by the moderators as it was off-topic and certain comments did not abide by our conduct guidelines for comments. ]

Jesse Jenkins's picture
Jesse Jenkins on Jul 26, 2014

Good suggestion. Ill edit accordingly. All figures in the article are dollars per metric ton of co2.

Jesse Jenkins's picture
Jesse Jenkins on Jul 26, 2014

Hi Peter,

How would this option 3 differ from the status quo? What measures would you suggest to make it a reality? And why are you confident it will lead to substantial emissions reductions? 

I’m not totally clear what you are suggesting so it is hard to respond. Thanks. 


Lewis Perelman's picture
Lewis Perelman on Jul 26, 2014

Good observation, Peter. Complements what I said earlier.

Of course the reason the analysis you present shows that carbon pricing is unlikely to work is because it is politically unrealistic. As you note, it presumes a degree of political conformity that has proven effectively impossible to achieve, and that is no more likely to be attained in the foreseeable future.

Robert Bernal's picture
Robert Bernal on Jul 26, 2014

If properly developed, the world will stop overpopulation at about 10 or 11 billion (just as the developed nations today control their growth to some reasonable degree). This, of course requires huge energy resources (also, so we don’t destroy ourselves via resource wars). Such power source will have to be a step UP from fossil fuels (and from renewable sources and their huge amounts of storage, if affordable). With unlimited energy, we can create the necessary resources for human needs (whatever they may be) as long as there are seeds and crustal material. This is a BIG planet, we were given everything we need to colonize the solar system! Whatever threats we pose to the biosphere can be isolated. Instead of devouring all the fauna, and dying from “overpopulation”, we simply develop more resources. Theoritically, we could grow all the food, desalinate all the water and provide the physical necessities for hundreds of billions of people, even at very high standards simply by doing such outside of the natural biosphere.

Of course, we won’t (and therefore, I agree with your concern!). The carbon cycle is unbalanced because the ppm CO2 in the very air of an entire planet is increasing on an accelerating pace. It must cause some degree of warming and chemical alterations within the biosphere unless we seek to capture the fossil fueled wastes and isolate it from the biosphere, just as we must isolate any nuclear wastes from the biosphere. Guess which is easier to do? The one that is on the order of a million times less in volume!

Robert Bernal's picture
Robert Bernal on Jul 26, 2014

It needs to be set up so that it is revenue neutral. I would prefer it to go into the actual development of a source, a step UP from fossil fuels, but others will prefer that it goes into the development of renewables (which is seen as a step down from a land size and availability/storage POV), hence disagreements. Still, others believe that we can “do it all” with just efficiency (which isn’t good enough). However, the revenue neutral approach simply taxes the carbon rich and gives it to the energy poor which is supposed to create a market condition more favorable to both renewables and large scale nuclear, and possibly, even a source that can provide more power than the renewables yet which could integrate much better than flat baseload nuclear.

Bob Bingham's picture
Bob Bingham on Jul 26, 2014

with the priorities on your list but I do agree that the outlook is dire. I think that a lot of problems will stem from the shortage and price of food.

Peter Lang's picture
Peter Lang on Jul 27, 2014

I should have mentioned: especially in chart captions, titles / axes / legend.

Bob Meinetz's picture
Bob Meinetz on Jul 27, 2014

Peter, you raise good points about nuclear, the failure of climate policy of the last twenty years, and synthetic fuels.


Because free markets virtually always succeed.

Notable exceptions include solutions to problems which address a greater social good – the environment, safety, etc – at which their record has been abysmal. Free markets actively opposed automotive safety glass, seat belts, shoulder harnesses, labeling of packaged food, catalytic converters, and countless other innovations which have saved millions of lives, and would have been stillborn without government regulation.

What’s the free market incentive for power generators to switch to clean nuclear, when they can just burn coal? How would that boardroom discussion go?

Lewis Perelman's picture
Lewis Perelman on Jul 27, 2014

Peter, per Jesse’s comment, #3 seems to resemble the status quo.

Except, a truly “free” energy market does not exist. OPEC skews global oil prices. Governments own, regulate, and subsidize various components of the energy system.

The attempt to create an ideally free global energy market would be just about as utopian as efforts to impose a global carbon tax.

My recent book, Energy Innovation, starts from the recognition that energy policy is a “mess” or “wicked problem” in the terms used by system scientists. In such a tangle of coupled, interactive problems, a simple attempt to solve any one tends to compound others. There are no analytical solutions to a mess, but there may be practical measures to manage the mess and achieve better results.

Related to that, you are right that there is a need to accelerate innovation to create new technologies that can make clean energy cheap enough to compete with fossil fuels without subsidies, and attractive enough for poorer countries and regions to adopt.

But your suggestion that the rich countries should develop such technology and sell it to the poor is flawed for several reasons. First, the poor need to be able to afford what the rich want to sell; a mercantilist approach such as what you suggest would work against that and in any case be unacceptable to developing countries. Second, you presume that the rich have a monopoly on knowledge and talent; actually developing countries have much to contribute. Third, there is the need for effective technology to fit local social, economic, and ecological conditions. A simple but relevant example: There are obvious reasons why McDonalds cannot sell hamburgers in India. To take advantage of that large market, it needed indigenous partners to help develop products and marketing strategies that fit local requirements.

So creating alternative energy systems that can work globally requires an open science and open innovation process that engages collaboration of people in developed and developing regions.

My “Plan B” in the book takes such an approach. For details, see:

Bob Meinetz's picture
Bob Meinetz on Jul 27, 2014

Eric, obviously if everyone were as aware of our climate situation and of similar conscience, we would have a much smaller problem on our hands.

The only 100%-guaranteed solution to reducing gasoline consumption (or any consumption, for that matter) is to make it more expensive. It quite literally always works – and I’m not convinced that the role cheap fossil fuels play in our lives is as essential as some would lead us to believe.

Lewis Perelman's picture
Lewis Perelman on Jul 27, 2014

Durwood, many of your observations are sound — other than your utopian (dystopian?) proposal to somehow exterminate a majority of the human population.

First, contrary to you conclusion (5), anticipating scarcity and developing alternatives is far more technically feasible than your population control idea. Indeed both those things are happening; they just may need some boosting.

Second, there is no “we” to make some collective choice, assuming people would even agree to what you propose, which is unlikely. 

Third, as economies develop, the well-known “demographic transition” is taking place. Fertility rates are falling in most countries, and in most of the richer countries are below replacement level. So populations are on track to decline over the next century or so without any draconian intervention.



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