"System change is now inevitable. Either because we do something about it, or because we will be hit by climate change. '...

"We need to develop economic models that are fit for purpose. The current economic frameworks, the ones that dominate our governments, these frameworks... the current economic frameworks, the neoclassical, the market frameworks, can deal with small changes. It can tell you the difference, if a sock company puts up the price of socks, what the demand for socks will be. It cannot tell you about the sorts of system level changes we are talking about here. We would not use an understanding of laminar flow in fluid dynamics to understand turbulent flow. So why is it we are using marginal economics, small incremental change economics, to understand system level changes?"

Tuesday, May 24, 2011

Pricing the Externality

So, if we stop emitting at around the trillionth ton of C, I am told by no less than Jim Hansen, the ocean will absorb enough CO2 to get us back down to 350 ppmv before the system equilibrates to the peak forcing. That is, we probably won't need to scrub CO2 out of the free atmosphere, which, jobs or no, would definitely be a negative kick to well-being. Whereas if we keep going beyond that, we probably will; that's a terrible legacy to leave.

So, instead of arguing about which nation gets to emit what, and gets to trade what, I propose that we simply divide the atmospheric carbon dump evenly among those now living. So you have 65 tons of CO2 left to you, and I have 65 tons left to me, and so do Michael Dell and Sandra Bullock, to pick a couple of rich local people at random. Now Michael Dell will get through those 65 tons in a jiffy, no doubt. But being rich, he can bid for more on the open market. Some person in Baluchistan with no intent to use his 65 tons can happily sell some of them to Michael Dell. (These are NOT units of fuel. These are the rights to units of CO2 emissions.)

Conceivably, we can adjust the cap if the denial squad is right: if the sensitivity is low we can allocate more emissions. But the principle that eventually come of the carbon has to be left in the ground still stands. We cannot release all of it. So the sooner we agree to the principle of a hard cap, I think, the better.

A very low-friction electronic marketplace will be easy to set up.

Consider some of the advantages of cap and trade at the individual level. Externalities are clearly priced. People not using their allocation are directly rewarded. International negotiations are avoided. No blame accrues to past behavior; no nation gains a competitive disadvantage. The windfall goes not to the fuel producers, but to the poorest people in the world; a natural income transfer. So much for the crocodile tears for the underdeveloped. We use the emissions cap explicitly to support them in a transition to a market economy.

Most of all, it's simple and it's fair. You can explain it to people. There are advantages all around. Did I miss something?


The Evil Reductionist said...

While I think that it is an interesting conceptual framework in which to view the problem, how is CO2 use of any particular individual going to be measured?

Let us say I am sitting here with my permits. What is it that stops me from selling them and then using CO2 willy nilly?

And if there was something that stopped me doing that, are people going to be penalised for being stupid - cashing in their CO2 permits and blowing the cash without checking whether they can cut their emissions? Do we punish them by lettin them starve or freeze?

I do not think that there is a bottom-up solution of the kind that you have outlined to this problem. A bottom-up movement that forces governments to implement the necessary measures is certainly required, however.

Gareth said...

Hansen's current projections (outlined in his most recent draft paper) include 100Gt of carbon removal through reforestation - broadly speaking, planting replacements for virtually everything we've chopped down to date. I interviewed him for The Climate Show last week...

I do like the carbon budget way of looking at carbon emissions - as a stock rather than flow issue. The way MT describes it is pretty much the way David Karoly framed it in a recent talk - but it is difficult to see how personal trading can be made to work if we can't manage any other form of sensible action...

The Evil Reductionist said...


It is indeed difficult to see how personal trading can be made to work if we can't manage any other form of sensible action.

After all, it moves the problem from being a prisoner's dilemma with around 200 prisoners (with only about a dozen or so of them of them of any immediate real relavance) to a prisoner's dilemma with seven billion prisoners ...

A tad complicated, me thinks.

PaulS said...

Interesting - if impracticable to enforce, as Reductionist indicates - thought experiment.

Lets see, 65 tons of C. Now, if I remember right, average per capita American energy consumption is around 8 tons oil-equivalent or 15 tons coal-equivalent per year, and most of said consumption is fossil fuels. So the 65 tons is, oh, seven years' worth at a SWAG. Then we ... umm ... what?

(1) shut down the economy, roll over, and die, because what replacement could we even issue the permits for that fast - much less build it out?

(2) send great gouts of money overseas for emission permits on the back of an already teetering economy. Alas, the money comes back to purchase goods - since most services aren't very shippable - produced in large part by consuming the very fuel we purchased the permits for in the first place. So we end up like Robert Service's ice-worms - surviving by masticating our own tails, as it were.

Not to worry, though - politics is the art of the possible - so good luck with any such like that, or even any plan at all. Better get the heads out of the sand and get to work on adaptation strategies, I guess...

Brian said...

I like per-capita allocations, but what do you do with new people?

Enforcement against cheaters would also have to be done on a national basis, and that will not be friction free.

I think the per-capita allocations should be distributed at national levels.

John said...

A campaign to "price the externality" cannot possibly be accepted in "the new world order" that essentially confers the status of global religion upon capitalism, the very creator of the concept of "externality."

(This in addition to the practical issues covered in above posts.)

John Puma

Steve Bloom said...

Michael, Hansen writes that the danger zone is reached at 1C above peak-Holocene temp, which as he calculates it is about .2C above present temp. That would seem to jibe poorly with the trillion-tonne approach. And he does point out that staying at or above that limit for very long amounts to (my phrase) playing chicken with the Arctic methane. This is discussed on pages 12 and 13 of his latest (the lawsuit backing paper, with co-authors):

"One important caveat must be stressed. These calculations, as with most global climate models, incorporate only the effect of the so-called 'fast feedbacks' in the climate system, such as water vapor, clouds, aerosols, and sea ice. Slow feedbacks, such as ice sheet disintegration and climate-induced changes of greenhouse gases, as may occur with the melting of tundra and warming of continental shelves, are not included.

"Exclusion of slow feedbacks is appropriate for the past century, because we know the ice sheets were stable and our climate simulations employ observed greenhouse gas amounts. The observed greenhouse gas amount includes any contribution from slow feedbacks. Exclusion of slow feedbacks in the 21st century is a dubious assumption, used in our illustrative computations only because the rate at which slow feedbacks come into play is poorly understood. However, we must bear in mind the potential for slow feedbacks to fundamentally alter the nature of future climate change, specifically the possibility of creating a situation in which continued climate change is largely out of humanity's control.

"Slow feedbacks are thus one important consideration that helps to crystallize the need to keep maximum warming from significantly exceeding 1°C. With the current global warming of ~0.8°C evidence of slow feedbacks is beginning to appear, e.g., melting of tundra with release of methane (Walter et al., 2006), submarine methane release from dissociation of sea-bed gas hydrates in association with sea water temperature increase (Westbrook et al., 2009), and increasing ice mass loss from Greenland and Antarctica (Velicogna, 2009). The fact that observed effects so far are small suggests that these feedbacks may not be a major factor if maximum global warming is only ~1°C and then recedes.

"On the other hand, if BAU CO2emissions continue for many decades there is little doubt that these slow feedbacks will come into play in major ways. Because the CO2 injected into the air stays in the surface carbon reservoirs for millennia, the slow feedbacks surely will occur. It is only a question of how fast they will come into play, and thus which generations will suffer the greatest consequences.

"There is thus strong indication that we face a dichotomy. Either we achieve a scenario with declining global CO2 emissions, thus preserving a planetary climate resembling that of the Holocene or we set in motion a dynamic transition to a very different planet.

"Can we define the level of global warming that would necessarily push us into such a dynamic transition? Given present understanding of slow feedbacks, we cannot be precise. However, consider the case in Figure 6 in which BAU emissions continue to 2030. In that case, even though CO2 emissions are phased out rapidly (5% per year emission reductions) after 2030 and 100 GtC reforestation occurs in 2031-2080, the (fast-feedback) human-caused global temperature rise reaches 1.5°C and stays above 1°C until after 2500. It is highly unlikely that the major ice sheets could remain stable at their present size with such long-lasting warmth. Even if BAU is continued only until 2020, the temperature rise exceeds 1°C for about 100 years."

ourchangingclimate said...

Q: How will the caps (all 7 billion of them) be enforced?

I can see big brother fears looming on the horizon, this time for a reason.

That question being unanswered/unanswerable, why not take the simpler route of putting a direct price on carbon emissions (carbon tax)?


Steve Bloom said...

Yes, a transition to a market economy is what the poor need above all. Like this one?

Arthur said...

I talked a bit about a regulatory-based solution along these lines here:


- basically we need to limit extraction, not consumption. Give everybody a carbon ration (e-)card, and require all extraction of fossil carbon to be paid for by the consumption of those carbon rations, and you've solved the problem, essentially.

Tom Fiddaman said...

Evil Reductionist's first point is easily handled if the point of compliance is far upstream (minemouth, wellhead). Allocate permits to individuals, and require the suppliers/emitters at point of regulation to obtain them on the market. (This was originally Malcolm Slesser's idea, as far as I know.)

Tom Fiddaman said...

Still, I don't think the personal budget approach works.

- It's hard for individuals to know how to spend it over time, so they're likely to blow it all up front, then whine later (though later the climate impacts might be more obvious)
- Equity implies huge transfers from the developed world, which is fair but not likely, and could produce rather big dislocations
- A lot of countries aren't going to let you allocate anything to their citizens.
- The market would probably be more stable than a flow cap, but it's still likely to have a lot of volatility issues. Volatility is costly and may make the price signal less credible.
- The real "safe" budget isn't known with any certainty anyway.

While I'm attracted to the budget conceptually, a more practical approach seems to me to be an adaptive tax, adjusted until it drives down emissions, harmonized globally. Countries that don't participate get taxed anyway via border adjustments. Then people keep their own money, at least at the country level, which is realpolitik if not fair. Equity issues can be addressed within countries, and transfers among countries permitted as practical. The poor are still probably better off, as long as the initial price trajectory is not too steep.

Aaron said...

It should have been proposed 50 years ago and implemented 30 years ago. The fact that it was not shows that people are not rational planners on the topic.

OK! Now it has been proposed. My guess is that Mother Nature will take steps to curtail our use of fossil fuel (e.g., abrupt sea level rise) before we can get it usefully implemented.

Michael Tobis said...

Yes, the nonspeculative buyers of the license will be primarily those removing fossil carbon from the ground or those with carbon-negative land uses. The sellers of the license will be individuals.

The point of having the rights assigned to human beings rather than sovereignties or corporations is threefold. First: it is actually ethically defensible. Second: it is easy enough to understand that one might hope to get a worldwide constituency for it and a uniform worldwide enforcement mechanism; Third: it has advantages both for the rich and the poor.

The disadvantage is a rapid rise in energy prices, of course. But that doesn't go straight to the pockets of the people responsible for the mess, so that mitigates that problem. And it goes directly to the issues that people raise about development in less advanced countries.

But you as an individual would simply add some fraction of your resources to a pool. Those introducing the carbon into the system would pay into that pool. You'd end up with a debit/credit card with a dollar balance and a carbon balance on it.

I am not saying this could be implemented without government support. It requires a global agreement. But since it empowers individuals rather than corporations or governments, it might be possible to get a bottom-up movement that wasn't attached to a particular country or subculture.

manuel "moe" g said...

I apologize for a zero-info "me too" post, but the post of Tom Fiddaman May 25, 2011 6:56 AM hits the nail on the head.

> a more practical approach seems to me to be an adaptive tax, adjusted until it drives down emissions, harmonized globally. Countries that don't participate get taxed anyway via border adjustments.

Luckily, the decision makers in the first world cannot guarantee *any* sort of quality of life for their grandchildren without dealing with this, and the denialists are being steadily revealed as below par compared to the Papal proponents of Thomas Aquinas's Geocentric model.

William T said...

Although phrasing the carbon cap in terms of a total balance that can be used, for ever, is appealing, there are a few problems, in addition to what others have already said.
- since this is the total emissions to be allowed from now onwards, you can't just divide by the current world population, because the people who will be born in the next few decades also need some allocation. Assuming that the hope is the economy would be totally decarbonised by the end of the century, you at least need to allocate per-capita for all people who will live this century.
- Also, some of you "old geezers" don't have that that many years left, compared to someone just born today. So you need to allocate the carbon in proportion to how many years each person has left.
- You can't just credit the carbon accounts with 450 billion tons of credits - simple economics says the price would crash.

In other words, the 450GTC of credits that the world has to play with need to be released slowly over the next 90 years (or whatever) and allocated to the people actually living at that time. The way these credits are released over time is important - but the obvious approach is to have a steadily decreasing ramp-down - linear or exponential, starting from an amount close to current emissions - eg 9GTC the first year, then every year decreasing until the 450GTC is used up.

ScruffyDan said...

@Tom Fiddaman Re: "a more practical approach seems to me to be an adaptive tax, adjusted until it drives down emissions, harmonized globally. Countries that don't participate get taxed anyway via border adjustments."

Actually it doesn't even have to be a tax. Just an agreed upon price trajectory that leads us soon enough to a uniform global price. Each country can chose how to implement the price (cap and trade or a straight up carbon tax or something else) and can chose how to spend the revenue collected (I like the idea of giving it back to us by reducing other taxes making the whole thing revenue neutral for the government).

This bypasses the hurdle of how much the rich should pay the poor countries (which can be dealt with separately) and preserves as much sovereignty as possible.

This has been my thinking as the best way forward for a few years now since reading this article in Forbes

GRLCowan said...

I see I said what I think about this two years ago. An excerpt:

... money is itself a voucher system, and much of the CO2 emission already is by people who are paying money to the government for the privilege.

The best course, therefore, is to use the existing voucher system, divide out these existing revenues, establish a precedent.

When this precedent shall have been established, additional CO2 emission tax will seem, to the half of the population whose CO2 emissions are less than average, like a way of increasing their dividends.

Many of those who emit
more than the average per-person amount of CO2 will also favour this because they know nuclear energy can easily provide whatever fuels fuel users want, even carbon-based ones, without net CO2 emissions. And renewable power can make fuel too.

Best of all, governments will no longer be doing all they deniably can to protect increase their fossil fuel income. (I believe the preference for renewable energy over nuclear energy expressed by the governments of Ontario and the USA is part of this deniable fossil-favouring.) ...

Around that time I named this idea "dividend first", in the hope that having a name would help it to propagate.