In the example you give, I see no difference in the spur to innovation between a business experiencing higher fuel costs and investing in more fuel efficient products or their own renewable energy supply OR having the cap and trade system where they get to sell or have to buy permits. Facing higher variable costs is going to send that business owner looking for alternatives.

Let me give you an ancient example from Europe where fuel prices have been artificially high for decades because of taxation. In Germany where I used to live, entrepreneurs founded Mitfahrzentralen (lift centres) where people were brought together to carpool on long and medium-distance drives. It ended up undercutting the prices of the expensive state supported (and very nice) German railroads.

Furthermore the same taxes have spurred consumers and automakers to produce more efficient vehicles than we have in the US.

The main advantage that cap and trade might have is the CDM mechanism which can involve China and India in reducing carbon emissions even though they are not part of the actual agreement.

Ahhhh. You think we need to allow everyone to trade carbon permits to use the market. I think you misunderstand markets- there already is a perfectly good market that all manufacturers, farmers, everyone participates in…. It’s called, well, THE MARKET. Even you and I are a part of it.

By creating a cap on all carbon emissions, and auctioning off the permits, you would be a) capping emissions & b) actually charging polluters for carbon dumping permits.

Auctioning permits instead of giving them away creates a real cost for carbon you’ll sending the correct MARKET signal (increased carbon pollution cost) to spur innovation within all industries– and with people to. And it is economy wide– in fact we all would participate in it (we just wouldn’t be trading carbon permits– instead we’d all be trying to emit less carbon because it would cost money instead of being free)

And by using cap & auction– instead of a carbon tax– you’re tying the cost to actual scientific numbers (cap reductions) rather than continually trying to pass/increase taxes.

In short you’re changing the actual real world market– instead of creating some sort of pseudo-carbon trading market that Cap & Trade creates– and incidentally has failed miserably in Europe.

http://onthecommons.org/node/1239

Barnes says in this post that he’s talking about a plan described in a paper by Boyce and Riddle. That’s where I got the link to the original paper.

But back to your question… Cap-and-dividend only caps 2000 upstream businesses, so only these 2000 businesses can participate in the carbon market. Under this scenario, manufacturers – to give one example – could not participate in a carbon market. They would be hit with higher fuel prices, period. And higher prices alone are not effective in solving the problem. There has to be the incentive for innovation that a market brings to the picture.

If there was a carbon market that manufacturers and farmers and everybody else could participate in, downstream businesses would have other options. An innovative factory that reduced emissions below its cap could sell its permits to a factory that needed more time to reduce emissions. A carbon market builds in the flexibility that encourages innovation.

Every entity that creates significant emissions should be able to participate in the carbon market.

Also, cap-and-dividend further limits the carbon market by the time-limit on permits. One of the lessons learned from the pilot carbon market in the EU is the importance of being able to bank permits. We posted about this in our blog:

http://environmentaldefenseblogs.org/ climate411/ 2007/ 06/ 27/ eu_carbon_market/

Sheryl Canter
Environmental Defense
Climate 411 blog – http://climate411.org

Please explain more why you think an upsteam cap would not be economy-wide. Barnes claims to cover 100% of the economy– and that an upstream cap is more efficient at doing this than a downstream cap.

I don’t know that they do. The only survey I know of that asked economists if they’d favor a carbon tax (Wall Street Journal, Feb 07) had a serious flaw – it failed to include cap-and-trade as one of the alternatives. Oops. Here’s the link:

http://online.wsj.com/ public/ resources/ documents/ info-fore-0207_frameset.html

You can see the actual question if you download the spreadsheet.

Many well-respected economists favor cap-and-trade to solve this problem.

Forgetting cap and dividend for the moment, you’re saying that cap and trade or some other scheme that has tradeable permits gives both incentives and disincentives. And you dismiss carbon taxes as only offer disincentives. But we’ve established that carbon dioxide emissions are a negative and we don’t yet have a ready technological fix for them. Cap and trade in SOx and NOx incentivized the use of existing scrubber technology.

So why is it that most economists prefer the carbon tax? Does it just go against your religion?

Here are the basic ideas behind cap-and-dividend:

- Cap carbon where it enters the economy – i.e., cap only mine heads, oil refineries, natural gas pipelines, and ports where fossil fuels enter. This would be about 2000 “collection points” – not even close to an economy-wide cap.

- Limit the lifespan of permits so they can’t be banked, thus making the secondary market for permits relatively small and trivial.

- Auction off 100% of permits, and return 100% of the revenue to citizens in equal shares for every man, woman and child.

The problem with this scenario isn’t so much that it lacks efficiency standards (though efficiency standards are good), but that it lacks much of a market. The cap would apply to only a tiny sector of the economy, and the limited lifespan for permits curtails banking of permits.

Markets are powerful because they include carrots as well as sticks. With an economy-wide carbon market, conservation isn’t just about avoiding higher fuel prices. A market creates an opportunity for selling permits to others. Without an economy-wide market, the cap becomes no different from a tax in terms of motivation – it’s just a price increase.

Since manufacturers would not be capped and would not participate in whatever limited secondary market there might be, their only motivation to conserve would come from higher fuel prices. And as you say, price alone is not enough. But the big missing piece is not efficiency standards, desirable as they may be. It’s a market.

Sheryl Canter
Environmental Defense
Climate 411 blog – http://climate411.org

The problem is with getting the solution bogged down in politics when what we need is serious action now.

What WILL reduce emissions right now is rationing of gasoline and energy use. Nothing les will do. Comments?

I threw in the socialist comment to be funny but I also want people to realize the unintended consequences of legislation, especially ones that specifically deal with finances. Especially this particular proposal. I think most of the Democratic Presidential candidates understand that wealth redistribution would hit serious acceptability snags with Republicans, who still have filibuster ability in Congress. Better to use revenue generated to develop more energy efficient/ non-polluting technologies, assist poor with weatherization, and, frankly, subsidize renewable energy to level costs until economies of scale reduce prices.

I read your piece and it is not a “pan”. A “panning” something means that you locate a fatal flaw in something or give it a terrible review. Your piece doesn’t say that…it just finds some problems with carbon taxes but sees some benefits.

I’m wondering whether Mr. Barnes will distinguish his plan from a carbon tax here.