Wednesday, December 30, 2009

Don't Give Away Carbon Permits

© 2009 Joshua Stark

I need to be blunt with this title, so forgive the lack of imagination.

Basically, here is a short article from the authors of a report on the impacts of free allocation of carbon permits through grandfathering, in which they say it's a bad idea. Additional comments on the issue and the report from Jim Roumasset (occasional guest blogger at Environmental Economics) can be found here, and they are well worth the read.
"Grandfathering" in pollution terms is where you let older equipment pollute more for free because it's older. The ethical foundation of this concept is that the impact to such older equipment and facilities will be too difficult for them, and so they would more likely shut down than re-tool, thus causing horrible unintended consequences to these communities. The ethical scales, then, weigh more heavily on jobs and community financial security than they do on the physical health of the community and/or global warming.

Matt Kahn posted a fascinating take on durable equipment and it's damaging environmental impacts, which I unfortunately cannot link straight to, because he doesn't separate his comments into pages (dang it), but you can read his blog here, which is generally good, except for the parts about famous people (unless you like that sort of thing). His entry is on November 23rd. Basically, he said that durable equipment, because of longer lifespans, drag our move towards less pollution, because they are dirtier than newer equipment. It's an interesting notion, even though I'm not completely convinced that making things break down faster is necessarily a good idea. It is also a notion that is exacerbated by incentives, like grandfathering, that encourage people to keep the older stuff around.

However, the costs of global warming are going to be borne, and putting a price tag on carbon is a good, huge step towards lessening it, but only if it is done right! What is right? First, it can't be cheap; second, its revenue has to be redistributed in a way to alleviate the regressive nature of its impact on poor folks.

Grandfathering fails both of those tests. In fact, the purpose of grandfathering is to make the process cheap, and this creates horrible distortions. Consider the two possible scenarios: 1) Carbon pricing is made cheap for everybody, or 2) carbon pricing is made expensive, but grandfathering is included.

In the first scenario, carbon is still emitted into the atmosphere, while revenues are collected either by the government or by private companies who got free permits. Conclusion: Consumers pay companies or the government more through what is effectively a sales tax, while more carbon is emitted into the atmosphere. Presumably, we are trying to cut carbon emissions, so this is a big, fat failure.

In the second scenario, free permits are given to companies, but the emissions have a lot of value because carbon is made expensive (through cutting the total amount allowed). If it is true that the older equipment cannot be made cleaner, then the company, very soon, will have a huge incentive to cease operations and sell off their permits, effectively pocketing the carbon tax from consumers AND leaving the communities stranded. The carbon price would come from the economy, which, considering that oligopolies/monopolies account for the vast majority of our markets, means that consumers would pay a disproportionate amount, and poorer people paying a disproportionate amount of that.

In the end, if we put a price on carbon, it's a tax - it is a government-mandated price and cap. If its purpose is to cut carbon emissions into the atmosphere, then it is going to have to be expensive. The first ethical question then, is: Should companies collect tax revenue, or should your government collect it?

Now the title of my post should be clear.


Mike S. said...

What do you think about giving the permits directly to people, and having people sell them to companies, via banks or brokers? Then the money goes back to people (like with dividends), but even more directly because the govt. can't change their mind and "borrow" the revenues to plug deficits, etc. I have a website on this at Check it out and let me know what you think.

Josh said...

Yesterday, I posted an entry on carbon rebates, and I think you'll like it:

I agree with rebates, but I'm much more leery about giving individuals carbon credits because it forces them into the regulatory mechanism, where gaming is easy and information hard to come by. Brokers could/would make a killing, speculation could occur, oligopsony would be a huge hurdle to effective pricing - basically, all the problems of a market, but it's actually not a market, it's a regulation.

I'll poke around at your site ASAP.