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Carbon taxes or a carbon ration?

by David Spratt

Dissent Magazine, number 23,   Autumn/Winter 2007

The global mean temperature has risen 0.8°C since the late 1880s, but due to "thermal imbalance" there is a latent temperature rise still to come of about 0.6°C , which will result in a rise of 1.4°C for the present level of atmospheric greenhouse gases.

It is widely considered that warming should be kept well below 2°C to avoid triggering irreversible, dangerous climate change. NASA's James Hansen says   that "global warming of more than ~1°C, (above the 2000 temperature of 0.7°C to 1.7°C) will constitute "dangerous" climate change as judged from likely effects on sea level and extermination of species" (Hansen et al, 2006). Taking thermal inertia into consideration, we are now effectively just 0.3°C from 1.7°C. Time is very short.  

Today global atmospheric carbon emissions average around 1.27 tonnes per person; in Australia the rate is 5.63 tonnes. In comparison, the earth's current capacity to absorb carbon is 0.62 tonnes per capita, estimated to decrease to 0.32 tonnes   by 2030. That is, Australia's present per capita emissions are eighteen times the earth's carbon sink capacity of 2030!  

Modelling in the recently released "High Stakes" report (Baer and Mastrandrea 2006) provides a "2ºC crash program" scenario which shows carbon emissions "peaking in 2010 and dropping off at a resolute 4% per year, thus keeping atmospheric carbon concentrations below 420ppm. Yet, even with this almost inconceivable effort, we would still be exposed to an alarming 9-26% risk of exceeding 2ºC"   (see Figure 1).

The current greenhouse gas levels pose an unacceptably high risk of damage to nature and of triggering runaway heating and must be reduced from their current level. This requires carbon emissions to be substantially less that the earth's carbon sink capacity, so that atmospheric carbon dioxide levels can be drawn down substantially. Thus Australia needs to:
• immediately stabilize emissions at their current level;
• set a target of reducing total emissions by over 90% by 2030-40; and
• set an annual and enforceable reduction target of at least 4%.

For a strategy to be effective, in must deal with reducing total demand for carbon emissions, either by placing a price (tax) on carbon emissions sufficient to drive down demand, or setting a total emissions target or budget that decreases over time and is enforced by a system of carbon rationing that sets a   price by balancing supply and demand.  

For a price or tax on carbon to be effective, it is essential that the tax apply to all carbon emissions. Any sector with a capacity to escape carbon pricing can derail the outcome. Carbon   trading schemes that deal with emissions from only some sectors cannot, by definition, produce the emissions outcome that the science dictates.

For example, for air travel, the fastest growing sector of global carbon emissions, there are few available low-carbon substitutes. The federal transport department   projects air travel emissions for domestic and international (fuel uplifted in Australia) flights to increase to 21849 Gg CO2 or 5.98 million tonnes carbon by 2020. At that time the estimated population will be 24 million, so that average air travel emissions for fuel uplifted in Australia will be around 0.25 tonnes carbon per capita. Aircraft emissions have a radiative forcing effect of 2.7 (that is the total warming effect of aircraft emissions is 2.7 times as great as the effect of the carbon dioxide alone emitted at ground level) so effective total air travel emissions by 2020 will be 0.67 tonnes carbon per person (compared to a carbon sink capacity in 2030 of around 0.32 tonnes carbon per capita).   So, air emissions alone in Australia would exceed our total carbon budget well before   2030

Put simply, a carbon tax increases the price of goods with carbon content to the point where:
* there is technological substitution because the no/low-carbon good has a lower end-price: for example, renewable for carbon-generated electricity, different transport choices as the relative costs of transport modes change.  
* more energy efficient technologies in the house, office and industry become a rational economic choice as the cost of stationery energy rises (solar hot water, natural ventilation for air conditioning, etc). The Energy Efficiency and Greenhouse Working Group noted in 2003 that "Significant potential for energy efficiency to improve further... improvements of 15-35% are achievable under conservative assumptions of only existing technology being available, and that the change must pay for itself within four years."  

The incidence and social impact of a carbon tax is a key issue in considering how the socially regressive impact of a carbon tax might be alleviated by social policies or tax changes that re-distribute some or all of the revenue from a   carbon tax.

The 2006 CSIRO report on energy, "The heat is on", provided a number of scenarios aimed at stabilizing CO2 at 575 ppm by 2100 "through the introduction of a globally harmonised carbon tax from 2030". This is aimed at producing a reduction of 35% in emissions compared to the "business as usual" emission scenario. Whilst the targets are ludicrously high, the results are instructive. Scenarios 2a which assume carbon capture and storage (CCS) technology is available produces a a carbon price by 2050 of 2005A$99/tCO2 or $361 per tonne of carbon. Scenarios 2b which assumes no CCS is available produces a a carbon price by 2050 of   2005A$157/tCO2 or $573 per tonne of carbon.  

The Stern report introduces a cost/benefit analysis that compares the marginal cost of abatement with the social cost of carbon. That is, at what rate should a carbon tax be set so that the cost of the tax is lower than the future cost of abatement. It's on odd approach if you are talking about catastrophic climate change for which no abatement is possible, but Stern derives a figure of US$85/tCO2, or approx A$397 per tonne of carbon (Stern 2006b: xvi).

At present electricity from wind power is 40-50% more expensive than conventional power. Averaging   the emissions factors between existing and new capital stock for electricity generation, and assuming that the relative capital costs of conventional and renewable generation technologies stay at current levels, it can be demonstrated that the following rates are necessary to make green energy an equally rational economic choice to carbon-fired electricity: black coal $183 per tonne of carbon; brown coal $247 per tonne of carbon; natural gas $421 per tonne of carbon.

All of which suggests that for a carbon tax to have a significant impact on emissions, it would need to be multiples higher than the figures being talked about in Australia today for emissions trading: around $300-$400 per tonne of carbon, not the $20-35 being mooted. And in the end it seems very unlikely that such a tax could force down emissions by the   90% plus that is necessary.  

The alternative is carbon rationing with 21st century technology. The British environment minister David Milliband   says "the challenge we face is not about the science or the economic ... it is about politics". Carbon rationing, he says, "limit the carbon emissions by end users based on the science, and then use financial incentives to drive efficiency and innovation" and are necessary because "essentially, by 2050 we need all activities outside agriculture to be near zero carbon emitting if we are to stop carbon dioxide levels in the atmosphere growing" (Miliband 2006). Currently reports are being prepared for the British government on how carbon credits might be implemented.

Carbon rationing works as follows:
* An authority independent of government, like the Reserve Bank, sets a total carbon emissions budget for the country each year, which is decreased by thee or four percent each year in a series of downward steps; in a decade emissions have been cut by 30 or 40 per cent.
* Because households are responsible for about 34 per cent of emissions, 34 per cent of the carbon budget is made available free of charge as an equal "carbon credit" (or ration) for each citizen on an electronic swipe "carbon card" which would be used to draw on an individual carbon credit balance each time household gas and electricity, petrol and air tickets are paid for. Unused credits can be sold.
* For minor amounts of energy embedded in commodities purchased such as food and personal services, the carbon ration will already have been paid by the manufacturer, and its cost built into the end price for the consumer.
* If a person lacks the carbon credits to cover a purchase or is an overseas visitor without a carbon credit, he or she could buy on the "spot" market at the point of sale.
* The balance of 66 per cent would be auctioned to business and government in a market where the price would rise and falls such that the business and government demand for carbon emissions would not exceed the budget target for business carbon emissions.
The change would be rapid and effective: suddenly renewable electricity would be cheaper than coal-fired power, everyone would want solar hot water and better insulated houses, the madness of excessive use of private cars would be rationalised, stores and offices would be lit by natural light and skylights rather than floods of lights. We might even slow down a little and reduce our madly stressed lives, planning our movements for the day before we leave home. We would be more likely to consume what we need, rather than what we want.  
Because both individuals and businesses can trade their carbon credit within the overall national carbon emission target, there is a financial incentive to switch rapidly to low-carbon technologies and for low-carbon innovation. If a new technology needs less of your ration, it will become more attractive, and business has an incentive to make long-term, low-carbon investment decisions.

Sources
Baer, P. with M. Mastrandrea, (2006) "High Stakes: Designing emissions pathways to reduce the risk of dangerous climate change", Institute for Public Policy Research, www.ippr.org
CSIRO (2006), "The heat is on: the future on energy in Australia", A report by the Energy Futures forum, www.csiro.au/csiro/content/file/pfnd.html
Hansen, J, M. Sato, R. Ruedy, K. Lo, D. W. Lea, and M. Medina-Elizade (2006), “Global Temperature Change,” Proceedings of the National Academy of Sciences of the United States of America, published online before print September 25, 2006, 10.1073/pnas.0606291103
Miliband, D. (2006) "The great stink: towards an environmental contract", Speech by the Rt Hon David Miliband MP at the Audit Commission annual lecture, 19 July 2006, www.defra.gov.uk/corporate/ministers/speeches/david-miliband/dm060719.htm