Transcript Slide 1

Pricing Carbon and Taxing Energy
A Guide for the Perplexed
Stephen Stretton
Research Associate, Cambridge Centre for Climate Change
Mitigation Research (4CMR) http://www.4cmr.org
29th September 2009
Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How high?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How high?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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Definitions?
•
•
•
An energy tax is a monetary amount
charged by the government on the
extraction, importation; or use of fossil
fuels;
A carbon tax is an energy tax levied
according to the fossil fuel’s carbon
content;
A carbon price is a carbon tax or
equivalent price for marketable permits
on fossil fuels or their greenhouse gas
emissions.
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‘Upstream’ or ‘Downstream’?
Fossil Fuels
CO2 Emissions
O
C
C
O
C
C
C
C
C
O
O
O
O
C
O
O
£€$
£€$
‘Upstream’
‘Downstream’
It is administratively simpler to cover all
sectors with an ‘upstream’ carbon price
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Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How high?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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What does a Carbon Price
Do?
1. Reduce Demand
2. Encourage Alternatives
3. Raise Revenue
£
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Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How high?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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Economics?
• One goal of economics is: to
study different methods to attain
some goal (e.g. ‘preference
satiation’) under scarcity (or
constraints).
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Prices and Constraints
•
Price
The price of a good
affects the amount
that we can buy. If
the price is high, the
amount that we can
buy is reduced.
Demand
Quantity
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Prices and Constraints
Two types of constraint:
1. ‘Hard’ physical /
resource constraints
1.
1. Hard constraints:
price rises to choke
off demand
Price
Supply
Quantity
2. ‘Soft’ environmental
constraints
2.
Price
2. Soft constraints:
no price
Supply
Quantity
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Why Aren’t Environmental
Constraints Automatically Priced?
a) Environmental damage is an effect on
parties not represented in an economic
transaction (‘Externality’)
b) Environmental sinks are not owned. The
lack of an owner means that they are
treated badly (‘Lack of property rights’).
c) Overall, those affected by environmental
damage are often numerous and diffuse,
and distant in time and space. (‘Tragedy
of the commons’)
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Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How High?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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Fiscal Reform Strategy
1. Tax ‘bads’
2. Remove tax on ‘goods’
3. Tax ‘rent’
Fossil fuels are both a ‘bad’ and a ‘rent’
“Change VAT to CAT”
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How Sensitive are Emissions to
Price?
Emissions less
Emissions more
sensitive to Price sensitive to Price
(Price Inelastic’) (Price Elastic)
Effectiveness of
Carbon tax as
climate policy
Low
High
Effectiveness of
Carbon tax as a
tax
High
Low
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Political Constraints
• Carbon taxes raise revenue;
• That revenue can be rebated such that
demographic groups (e.g. the poor) are on
average no worse off.
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Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How high?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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Oil Price Fluctuations
Equivalent to
$200/tCO2
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How High Does The Carbon Price Need To
Be To Support Low Carbon Technology?
• Coal with Carbon Capture and Storage
– $85-130/tCO2 for new demonstration plants
– $40-60/tCO2 in 2030 for commercialized plants
(Naucler et al. 2008; €1=$1.4)
• Concentrated Solar Power
– Carbon price needed: $115/tCO2 (Staley et al., 2009)
• Air Capture
– Capture and Storage of Carbon Dioxide from Thin Air
– Carbon price needed: at least $140/tCO2 (Keith et al., 2006)
• $200/tCO2?
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Carbon
Tax
Effects
of
Different
Rates
$200/tCO2
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Effects of $200/tCO2
• Add $80 to a barrel of oil
• 8c/kWh on gas electricity
• 20c/kWh on coal electricity
• 46c/litre on petrol
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UK Money:
Effects of £100/tCO2
• 4p/kWh on gas electricity
• 10p/kWh on coal electricity
• 23p/litre on petrol
• Raise £60bn/yr initially*
• £1000 citizens income or replace VAT*
*revenue will fall as the policy works to reduce
emissions
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UK Money:
Effects of £200/tCO2
• 8p/kWh on gas electricity
• 20p/kWh on coal electricity
• 46p/litre on petrol
• Raise £120bn/yr initially*
• £2000 citizens income or 2xVAT*
*revenue will fall as the policy works to reduce
emissions
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Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How high?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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Taxes and Cap-and-trade
(cap constraining)
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Taxes and Cap-and-trade
(tax constraining)
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Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How high?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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Taxes versus Cap-and-trade
1. Administrative Burden (Upstream v
Downstream?)
2. Volatility – Investment?
3. Immediacy?
4. Do we know our budget?
5. Ability to overachieve?
6. Incentives for Countries to
Participate Globally?
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Contents
• Definitions
• What does a carbon price do?
• Economics of environmental
constraints
• Carbon taxes as fiscal instruments
• How high?
• Taxes and Cap-and-trade
• Taxes versus Cap-and-trade
• Conclusions
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A Critical Path
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Public Understanding and Proposed Policy
Skills and Capacity Building
Govt Guarantee Carbon & Electricity Prices
Secure Finance e.g. with ‘Climate Bonds’ + PubFi?
Start Energy Efficiency Rollout
Build Energy Infrastructure
Fiscal Reform: ‘VAT to CAT’
Strategy transfer around the world
Switch Transportation
Complete Decarbonization of Britain and other countries
Reforest the world
Permanently avoid fossil fuel extraction
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Conclusions
• Carbon taxes can work immediately!
• Carbon taxes are best imposed ‘upstream’,
with carbon dioxide being counted in terms
of carbon at extraction or importation.
• They should cover all sectors with
greenhouse gas emissions, including
imports (‘embodied carbon’).
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Thanks for your attention!
Contact me:
Stephen Stretton
[email protected]
Links:
http://www.4cmr.org
http://www.withouthotair.com
http://www.zerocarbonnow.org
http://www.stephenstretton.org.uk
http://www.systemicfiscalreform.org
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