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Thursday, April 28, 2011

Esty and Porter Recommend Imposing a Price on Carbon Emission in the U. S.

Summary:  Carbon dioxide is a major greenhouse gas produced by burning fossil fuels.  It leads to increased average global temperature, which is thought to be causing a variety of climate-related harms to life across the planet.  Carbon dioxide may be considered to be a waste product of our energy economy that has not yet been properly accounted for in the energy cost structure.

As a first step in developing a national energy policy in the U. S., Dan Esty and Michael E. Porter, writing in the New York Times, propose an economy-wide price on carbon.  It would start initially at a low rate and increase over time to a more significant value.  They point out that other nations and regions of the world already put a price on fossil fuel-derived carbon dioxide.  This would be an important initiative for the U. S., changing consumer behaviors and promoting innovation in a new energy economy.

Introduction. The world relies heavily on burning fossil fuels (coal, oil products and natural gas) to provide its energy needs.  These fuels all contain carbon that, when burned, emits carbon dioxide gas (CO2) into the atmosphere.  Carbon dioxide is a major greenhouse gas which has been accumulating in the earth’s atmosphere faster than it can be removed by other processes.  With the industrial revolution, mankind began to be dependent on energy from fossil fuels as opposed to using renewable surface fuels such as wood.  Since its start the atmospheric concentration of CO2 has increased from about 280 parts per million (ppm; i.e., 280 volumes of CO2 in a total of 1,000,000 volumes of air) to about 390 ppm presently.  Today the atmospheric concentration of CO2 is increasing at about 2 ppm per year. 

CO2 is a greenhouse gas, acting to retain a portion of the sun’s energy reaching the earth, resulting in a warming of the long-term global average atmospheric temperature, to date, of about 0.7°C (1. 3°F) above the level prior to the start of the industrial revolution.  Humanity is on track to continue burning fossil fuels at an ever increasing rate, barring interventions to reverse the trend, which would lead to even higher global average temperature levels.  The increased temperature has serious climatic consequences worldwide which are detrimental to the wellbeing of humans across the face of the earth.

CO2 as Waste. Another way of considering the use of fossil fuels, described in the previous post on this blog, is that CO2 is a waste product of our industrialized life style, but one whose costs have not been built in to the fuel and energy industry.  Some human activities have factored in the costs of generating and disposing of our waste; household and retail waste, and treatment of waste water are some examples that come to mind.  The services that dispose of these wastes are already charged to consumers, for example through local taxes or direct billings to the users.  In contrast, there is no cost structure built into the pricing of energy from fossil fuels that accounts for the harmful results to man’s welfare arising from higher global temperatures.  Adding a waste charge to our use of fossil fuel energy makes sense in order properly to account for such harms.

The U. S. Has No Energy Policy. The United States is the only major consumer of fossil fuel-derived energy without a national energy policy.  The recent sharp increase in the price for crude petroleum, dating at least from the outbreak of the revolutionary movement in Libya in the spring of 2011, has resulted in correspondingly sharp increases in the price of gasoline and diesel used for personal and commercial transport.  The reaction from the public and politicians has been a clamor to “do something” to lower the prices.  “Something” might include drawing oil from the U. S. strategic petroleum reserve, or encouraging foreign suppliers to pump more oil from the ground for delivery to the U. S., to increase the supply and thereby lower the price “tomorrow”, i.e. in the near term.  This shows how the U. S. is highly dependent on, if not addicted to, imported oil for its transportation fuel.

Imposing a Price on Carbon.  Instead of such a short-term response acknowledging our dependence, strategically the appropriate response would be to adopt a rigorous, substantive energy policy that would reduce our dependence on fossil fuels, including imported crude oil.  In the New York Times of April 28, 2011,  Dan Esty, the Commissioner of the Department of Environmental Protection of the American state of Connecticut, and Michael E. Porter, a professor at Harvard University’s Business School, propose an economy-wide price on carbon, starting initially at a low rate but increasing over time to a more significant value.  In 2012 the price is proposed to be $5/ton of greenhouse gases emitted, reaching $100/ton by 2032.  By way of reference, for gasoline this would correspond to an increase of $0.043 per gallon in 2012, becoming an increase of $0.87 per gallon by 2032 (based on calculations that appeared in an early post on this blog).  Comm. Esty and Prof. Porter point out that the initial burden on consumers and businesses as shown here would be almost negligible. 

As noted, the carbon price is envisioned to apply on all forms of fossil fuels, being assessed, for example, on the basis of flue discharges of greenhouse gases at large scale generating plants, and on the basis of gallons of fuel delivered for motor vehicle fuels; likewise natural gas delivery would also be assessed.  As the charge increases, it would promote behaviors that lead to increased competitiveness and innovation.

Carbon Pricing in Other Regions of the World. The authors note that a carbon tax on fossil fuels already figures prominently in other areas of the world.  Europe has had a cap-and-trade regime governing fossil fuel use, first imposed as the nations of Europe joined the Kyoto Protocol of 1997.  In 2011 the European Union issued a long-term energy policy, according to which the member states pledge to reduce greenhouse gas emissions by 80% to 95% below 1990 levels by 2050.  Second, although China, being a developing country, is excluded from coverage under the Kyoto Protocol, in its 12th Five Year Plan for the years 2011-2015 it is closing its most inefficient coal-fired electricity plants.  It is also drastically increasing its use of renewable or alternative energy sources.  Additionally China is putting a small number of local cap-and-trade markets in place as pilot projects.

Regional Greenhouse Gas Accords in North America.  Energy policy is highly politicized in the United States.  Since the U. S. has failed to develop a single nation-wide policy, three regional greenhouse gas agreements have been adopted among various American states and Canadian provinces—the Western Climate Initiative, the Midwest Greenhouse Gas Reduction Accord, and the New England and mid-Atlantic Regional Greenhouse Gas Initiative.  These programs have levels of coverage and differing terms duration.  Being agreements between sovereign states and provinces, actual implementation requires that each participating state or province pass its own legislation in order to put the terms of the agreement in force.  These factors obviously render compliance complicated and regionally inconsistent.  Commercial and industrial activity is impeded by not having a single national policy covering the countries in question.

Conclusion.  Commissioner Esty and Professor Porter recommend that the U. S. put in place a price on carbon, starting in 2012 at a very low level, and ramping up to a more significant price over 20 years.  They point out that this would affect consumer behavior in a way that would lead to greater energy efficiency and development of alternative energy sources.  The U. S. currently has no national energy policy.  This proposal would be a good start to putting one in place. 

© 2011 Henry Auer

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