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Pricing Carbon and Taxing Energy A Guide for the Perplexed

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. 29 th September 2009. Contents. Definitions What does a carbon price do?

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Pricing Carbon and Taxing Energy A Guide for the Perplexed

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  1. Pricing Carbon and Taxing EnergyA Guide for the Perplexed Stephen Stretton Research Associate, Cambridge Centre for Climate Change Mitigation Research (4CMR) http://www.4cmr.org 29th September 2009

  2. 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

  3. 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

  4. 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.

  5. ‘Upstream’ or ‘Downstream’? Fossil Fuels CO2 Emissions It is administratively simpler to cover all sectors with an ‘upstream’ carbon price £ € $ £ € $ ‘Downstream’ ‘Upstream’

  6. 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

  7. What does a Carbon Price Do? • Reduce Demand • Encourage Alternatives • Raise Revenue £

  8. 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

  9. Economics? • One goal of economics is: to study different methods to attain some goal (e.g. ‘preference satiation’) under scarcity (or constraints).

  10. Prices and Constraints • 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. Price Demand Quantity

  11. Prices and Constraints Two types of constraint: • ‘Hard’ physical / resource constraints • ‘Soft’ environmental constraints 1. Hard constraints: price rises to choke off demand 1. Price Supply Quantity 2. 2. Soft constraints: no price Price Quantity Supply

  12. Why Aren’t Environmental Constraints Automatically Priced? • Environmental damage is an effect on parties not represented in an economic transaction (‘Externality’) • Environmental sinks are not owned. The lack of an owner means that they are treated badly (‘Lack of property rights’). • Overall, those affected by environmental damage are often numerous and diffuse, and distant in time andspace. (‘Tragedy of the commons’)

  13. 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

  14. Fiscal Reform Strategy • Tax ‘bads’ • Remove tax on ‘goods’ • Tax ‘rent’ Fossil fuels are both a ‘bad’ and a ‘rent’ “Change VAT to CAT”

  15. How Sensitive are Emissions to Price?

  16. 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.

  17. 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

  18. Oil Price Fluctuations Equivalent to $200/tCO2

  19. 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?

  20. CarbonTaxEffectsofDifferentRates $200/tCO2

  21. 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

  22. 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

  23. 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

  24. 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

  25. Taxes and Cap-and-trade(cap constraining)

  26. Taxes and Cap-and-trade(tax constraining)

  27. 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

  28. Taxes versus Cap-and-trade • Administrative Burden (Upstream v Downstream?) • Volatility – Investment? • Immediacy? • Do we know our budget? • Ability to overachieve? • Incentives for Countries to Participate Globally?

  29. 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

  30. A Critical Path • 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

  31. 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’).

  32. Thanks for your attention! Contact me: Stephen Stretton sjs53@cam.ac.uk 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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