Cap and Trade that Might Work

James Hansen, as followers of our pet subjects will probably already be aware, has been arrested in a protest against mountaintop mining. Perhaps almost as well known is the fact that Hansen opposes Waxman-Markey so strongly that he hopes for its failure, believing that writing an inadequate bureaucracy into place is worse than doing nothing at all and waiting for a stronger political consensus to emerge. All pretty strong stuff for an AGU keynoter.

He's advocating for a simple carbon tax. Opponents, despite the evidence of British Columbia, believe that such a thing is not sellable to the public. Others, like David Roberts, (link?) have argued that in practice a tax is a complicated beast. And everybody's proposal defers to national sovereignty, letting every nation work out its own path to its own sustainable share of emissions. See the problem with that one? It gives every nation's politicians plenty of leeway to blame the politicians elsewhere. "If they won't do it, why should we bother?" From a game theory perspective it pays to bail out.

Here's a solution of the sort that I am stuck with dreaming up. It's technically practicable and politically impossible. Few politicans will consider the dilution of their power attractive, and it will be easy to stir up the xenophobes (the ones who think NAFTA is a conspiracy between Mexico and Canada to take over the US for instance) into a paranoid frenzy, but it has some very nice features.

Rations. Yes, you heard me. Rations. Not by country. By head. Per capita carbon rations, controlled by smartcards.

One day, you get in the mail a smartcard giving you exactly the same share of the world's atmosphere over the next year as anyone else. You can spend it on emissions or you can specify a price. If the price of emissions exceeds your price, your carbon share goes down and your card contains the equivalent in money. If you want more than your share, you have to bid on the energy you want. If you sequester carbon, you get credit.

The only political decision to be made after that point is the annual share. How many tons can you emit?

This looks like a direct transfer of wealth to poorer countries, but if you believe the atmosphere is a commons, it is not. It is a correction: a direct way of pricing the carbon effects so that the correction flows directly from the high-intensity user to the low-intensity user. In other words, it is the reverse of the stealing from the poor that is happening now. In a sense, it is exact rather than approximate.

The details, admittedly, are as complicated as anything else. What constitutes an emission? (I think it should be modeled on a value-added tax, though in this case it is value-subtracted!) What constitutes a sequestration? How should the near-frictionless transactions be set up? In what currency? Lots of other stuff I haven't thought of, probably, too.

As I said, I really doubt this is politically saleable in the short run. But it removes a lot of arbitrary decisions, and manages the international equity question with remarkable clarity, destabilizing tinpot dictators while transferring wealth without stigma to their population.

One trouble is that those of us in energy intensive cultures will have to bid on a finite pool of energy rights in addition to production costs. Energy prices will rise. Energy companies will compulsively hate this because Africans and Asians get some of their profits. Americans will understand very quickly what an 80% reduction means.

Another advantage, though, is that this approach is very market-flavored. There's no shame in wanting a Hummer. You just have to pay a bunch of other people not to do so.

Also, nonlinear pricing can be applied. At the cost of more decisions, this can penalize frivolous uses against socially responsible ones. Your first 100 kg. C per year, for instance, might not be transferable at any price, so people won't be tempted to sell their cooking fuel. On the other hand, your excess above some threshhold could have increasing purchase prices (Austin does this with water.) So all the energy would be discouraged from going to people with money to burn.

Yes, an international agency is required to issue the cards. And enforcement mechanisms have to exist. My intuition, though, is that it's technically workable. And if a carbon tax is regressive, a carbon license is surely progressive.

Hat tip to MR who came up with most of this idea over coffee at Sodade and can claim credit if he wants. I suspect he won't like the international angle, but he's hard to predict sometimes.