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The argument for a carbon price

See IPCC (2014) – Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergover

  • See IPCC (2014) – Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.

    • Box 2.2: “It is very likely that heat waves will occur more often and last longer, and that extreme precipitation events will become more intense and frequent in many regions. The ocean will continue to warm and acidify, and global mean sea level to rise.”
    • Box 2.3: “Risks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development.”

    On the risk to biodiversity see Urban, Mark C. (2015). “Accelerating extinction risk from climate change”. In Science. 348 (6234): 571–573.

    For a larger overview see Wikipedia’s pages on the Effects of Climate Change and the relevant section on their page on climate change.

  • In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels. 

    Lelieveld, J., Klingmüller, K., Pozzer, A., Burnett, R. T., Haines, A., & Ramanathan, V. (2019). Effects of fossil fuel and total anthropogenic emission removal on public health and climate. Proceedings of the National Academy of Sciences, 116(15), 7192-7197

    The death toll of the three counts of violence for 2017 according to the IHME is 561,511.
    • Homicides: 405,346 deaths
    • War battles: 129,720 deaths
    • Terrorism: 26,445 deaths

    The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study – Vohra et al (2021) –  estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels.
    Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., & Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. Environmental Research, 195, 110754. https://doi.org/10.1016/j.envres.2021.110754.

  • The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) – How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. https://doi.org/10.1016/j.worlddev.2016.10.004

    In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) – Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates. Published as an IMF Working Paper. 

    In my text I am citing the latest figures of the authors.

    By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent).
    Coal: $5,200 billion * 0.44 = $2,288 billion
    Oil: $5,200 billion * 0.41 = $2,132 billion
    Natural gas: $5,200 billion * 0.1 = $520 billion

    Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that  “the subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.”, This data is according to the International Renewable Energy Agency (2020) – Energy subsidies Unfortunately this source does not break down the subsidies to renewables by source of energy.

    The energy production from these sources in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455).

    This means the subsidy per TWh of energy is:
    Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh
    Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh
    Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh
    Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh
    Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh

    These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies.

    What I am calling explicit subsidies is called “pre-tax subsidies” by these authors. What I am calling implicit subsidies is called “post-tax subsidies” by these authors.

  • One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost.

    An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.

  • The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it’s undeniable that the costs are very large.

  • The free online textbook CORE ECON provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.

  • Some alternatives to carbon taxes and cap and trade – such as clean energy standards or regulations – can be viewed as implicit prices on carbon emissions.

    It’s a core result in resource economics  that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON here.

  • Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – Making Carbon Pricing Work for Citizens. In Nature Climate Change 8, 669–677.

  • That they pay the most is a statement about absolute spending. As explained below, the relative spending on energy is often highest for poorer households.

  • Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1–12. https://doi.org/10.1017/sus.2020.12.

  • On the relation between future warming and growth see:
    Pretis, F., Schwarz, M., Tang, K., Haustein, K., & Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5°C or 2°C warming. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 376(2119), 20160460. https://doi.org/10.1098/rsta.2016.0460

    Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. Nature, 527(7577), 235–239. https://doi.org/10.1038/nature15725

  • In a guest post for Our World in Data Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this:
    “Ironically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed “degrowth”). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.”

  • World Economic Outlook, October 2020: A Long and Difficult Ascent. In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.

  • Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2°C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, relative to a baseline growth of 1.6% to 3%

    In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today’s economy. With measures in place to limit warming to 2°C, growth would be 0.06% smaller – i.e. 1.54% per year. The world economy would then ‘only’ be 461% of the size of today.

    In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today’s economy. With measures to limit warming to 2°C, growth would be 0.06% smaller – i.e. 2.94% per year. The economy would then ‘only’ be 1813% the size of today.

    This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2°C.

    The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions.

    See:
    Edenhofer et al. (2014). IPCC, 2014: Summary for Policymakers. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.

    See also: IPCC (2014) – Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.

    https://www.sciencedirect.com/science/article/pii/S0095069617308707

  • The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly asked them about their opinion on a carbon tax and invariably finds large support for such a tax.

    See also the survey of 365 economists who have published papers related to climate change “in a highly ranked, peer-reviewed economics or environmental economics journal” conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published here. (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now – see Figure 2a.)

    In a 2006 survey of the American Economic Association, 65% agreed that “the US should increase energy taxes”.
    Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists’ Voice, 3(9).

    The Wall Street Journal asked business economists in 2007, ‘‘What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?’’ 54 percent advocated for ‘‘taxes that raise the cost of purchasing fossil fuels’’.
    Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007.

    Keohane, M. N. O., & Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington.
    Last year over 3,500 economists, including twenty-seven Nobel laureates, signed this letter supporting carbon pricing.

  • All data points and references here refer to the 2020 issue: World Bank (2020) – State and Trends of Carbon Pricing 2020. Washington, DC: World Bank. © World Bank. License: CC BY 3.0 IGO.

  • See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). https://doi.org/10.1007/s10640-017-0133-8

    Baranzini A, Carattini S (2017) – Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197–227

    and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – Making Carbon Pricing Work for Citizens. In Nature Climate Change 8, 669–677.

  • Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – Making Carbon Pricing Work for Citizens. In Nature Climate Change 8, 669–677.

  • Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). https://doi.org/10.1007/s10640-017-0133-8

  • The transport sector is of significant importance for Sweden’s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden’s total annual CO2 emissions.

  • Julius J. Andersson (2019) – Carbon Taxes and CO2 Emissions: Sweden as a Case Study. American Economic Journal: Economic Policy. 11 (4): 1–30. doi:10.1257/pol.20170144. ISSN 1945-7731.

  • In this scatterplot of CO2 emissions vs GDP per capita you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.

  • In the interactive version of this chart you can view this data for many more countries.

  • The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because “existing carbon taxes (and prices) are too low to be effective in the time frame since their introduction.”

    Felix Pretis (2020) – Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria & Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.

  • Best, R., Burke, P.J. & Jotzo, F. (2020) – Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69–94. https://doi.org/10.1007/s10640-020-00436-x

  • Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912}

  • Bayer, Patrick; Aklin, Michaël (2020) – The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117

  • G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) – The value of international electricity trading. UCL and University of Cambridge.

  • These days it is common that the UK runs for months without any coal electricity at all, and like many countries that have a carbon price the UK has also achieved an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.

  • On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) – Carbon Pricing and the Elasticity of CO2 Emissions. INET Working Paper.

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