Tuesday, February 3, 2009

Carbon pricing - who, what, why

Lately, I've had the opportunity to do a lot of thinking and talking with people smarter than me about economics and the environment. Specifically, my work has taken me to the realm of carbon pricing (queue scary music). To better inform myself, I began looking into different economic perspectives on market mechanisms, taxes, and what we should do with any revenues, and I've found some interesting ideas. I've also found some interesting websites.

For the uninitiated, here is a quick breakdown of the issue:

1. Carbon and other greenhouse gasses are causing global warming;
2. In order to curb this effect, the consensus is that we must institute some kind of price for these gasses (I'll call it a carbon price);
3. The major battles now are over the type of carbon price, and the use of revenues.

Number 2, above, is what economists call, "pricing in an externality." When two parties make an economic transaction, externalities are what happen to people outside of that transaction. For example, Bob builds a pencil factory to sell wooden pencils to students. Some externalities of this transaction are: restaraunts near the factory getting more business; students possibly learning more effectively; and a forest somewhere getting its habitat rearranged. None of these things that happened as a result of the sale of the pencils were factored into the price of the pencil.

Sometimes, we decide that we must include the effect of the externality in the price of the item. In Bob's pencil plant, for example, we might decide that we want better-educated students, so we decide to buy the pencils through the school district. Or, we offer a tax break to Bob for building his plant so close to our community. Both actions will affect the price of pencils. Perhaps we believe that the forest is more important, so we make Bob protect an amount of land equal to the amount he is using to make his pencils. This will also affect the price of pencils.

Almost all of our economic activities inject greenhouse gasses into the atmosphere. We drive to work and to shop, we buy processed and packaged items, and we wrap everything in paper or plastic. All of these are carbon intensive, and right now nobody is paying for the effects of the additional carbon in the atmosphere. Yet, we are all paying the price of these economic activities, through global warming. By pricing in carbon, we create scarcity and therefore curb its emissions, and we also create revenue from the price. One big question, now, is: Who gets the revenue?

Last year, I posted about the cap-&-trade fight. The revenue fight will probably be bigger, as some big folks have weighed in, most notably the Environmental Defense Fund and the Natural Resources Defense Council have partnered with some huge carbon emitters, in developing US-CAP. Senator Boxer has developed a list of Principles for Global Warming Legislation, and Senator Corker has begun calling for all revenues to be returned to the American People.

Well, the focus of this blog is to consider Ethics and the Environment - that is, people's interactions with the environment and vice versa. In that context, I am torn. Poor people, and in particular, poor rural people, stand to be disproportionately affected by climate change, by the effects of carbon pricing, and by the use of revenues. Corker's idea mirrors those of a cap-and-dividend approach, where all money generated from a carbon tax is returned in equal shares to all Americans, and this idea is nice in its simplicity and in helping to alleviate the burden of the poor. However, it does nothing for alleviating the effects of climate change on habitat, and if this blog does anything, I hope it gets out to people that habitat includes people. It includes drought, incidences of catastrophic wildfire, and heat-related deaths.

As our region and country move forward on this issue, it is more important than ever to factor in our relationships with our environment, to accurately address our impacts, discouraging the negative and encouraging the positive effects.

No comments: