How Should We Allocate CO2 Permits?

Doug Kysar and I have a piece in Slate that suggests a way forward on the vexing problem of how to allocate CO2 permits. The problem is that rich and poor countries want very different permit allocations:

Generally speaking, richer nations want permit allotments that track historic emissions rates — essentially locking in their economic advantage by awarding permits based on how much a country is already emitting. Developing countries, in contrast, want permits allocated according to population size, with every person on the planet getting equal emissions rights.

Some representatives from poorer nations also point to the fact that countries have not contributed equally to the existing problem of global warming. They argue that the countries most responsible for the current state of affairs, like the United States, should get the fewest permits, since they have already spent their share of the planet’s GHG [greenhouse gas] budget.

The allocation stalemate is currently a deal killer. Of course, one response to the dispute is to convexify between the two systems: have some of the permits allocated according to historic use and others allocated according to justice concerns. We support this approach — but an important wrinkle is that we suggest branding the two types of permits:

Rather than debate endlessly about how to carve up the spoils from just one global GHG currency, why not separate GHG permits into different brands based on how seriously they take the question of climate justice?

Imagine an annual GHG cap that is subdivided into two categories. First, each country would receive a share of “regular” permits based on historic emissions rates or whatever base-line allocation method emerges from international negotiations. Second, each country would receive “justice” permits based on some formula that takes into account factors like population size and previous contributions to climate change. The easiest approach to allocating justice permits would follow the preferred approach of developing countries — i.e., “the bigger your population, the more permits you get.”

The justice permits would produce a dual currency with two different prices:

Creating a separate market for justice permits also would offer the prospect of generating more money per permit for developing countries. Both regular and justice permits would entitle the holder to emit a ton of CO2 and both types would be fully tradable, but the justice permits would carry with them the right to advertise that goods and services were produced using the more equitably allocated emissions rights. The moral sentiments of consumers would then determine whether justice-branded products could be sold at a premium.

Instead of arguing whether a developing region should get 15 percent or 17 percent of undifferentiated permits, countries might agree to give the region 15 percent of the rights to pollute, but (because of the branded premium) 17 percent of the expected revenue.


griff

#23 is right - this isn't the place to be debating whether climate change exists again - but for those of you who do want to go into it one more time, see:

http://gristmill.grist.org/skeptics

#15 - that's an interesting perspective... at least with the EU scheme perhaps we have some people incentivized to reduce their energy use/Co2 output. Not the least of the 'pet industries' is aviation, which some governments are keen on keeping excluded.

Rob

There is still not one single piece of evidence that CO2 is the cause of global warming. There is computer modeling data, yes, but but if anything, the measured CO2 levels follow the temperature trends, not lead it. I am not even convinced there is a correlation between the two. As a medical researcher, models do not always represent the real world.

Land use issues have measurable surface temperature effects. Go grab a thermometer and stand in the middle of a huge cement heat sink like a mall or a 6 lane highway and compare that to anywhere else nearby. Urbanization and deforestation are the major human contributers of global warming.

All this talk about carbon credits, footprints, permits is complete BS and is a simple power grab. I all in favor of energy and resource conservation and moving towards a non-petroleum based future. CO2 is a decoy and is doing the environmental movement incalculable amounts of damage.

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Jonathan

The whole topic is mute.

Carbon dioxide accounts for just 0.0384% of the atmosphere - a mere drop in the bucket.

Water vapor is the largest contributor of greenhouse gases, but solar activity has a bigger effect on global warming and cooling than anything else.

The emperor really is naked........

Tom

The Europeans have been trading greenhouse gases for about ten years now. They started off with a plan that gave away permits to companies based on their reported emissions. As most companies over-reported their emissions, they had permits to sell (for windfall profits) up until everyone discovered that there were far more permits to pollute than were needed, and their value fell to 0. The EU has started up a new system now, where they claim to have fixed all the problems; we'll see. It would have been far easier and more efficient to simply put in place a carbon tax, but the EU politicians like the way they can manipulate permits and auctions to favor their pet industries and corporations.

Is this where the US really wants to be heading?

jean

@#3,4

Auctionning CO2 permits internationally would only shift the problem:

Who would you give the money raised by this auction?

DCF

Any carbon credit trading system will be redistributive to some extent. It is designed to be. However, a "justice" based allocation of permits is the least economically efficient option I can readily imagine. Currently, clean development is expensive compared to carbon intensive development (witness China). The introduction of permits without changes to technology will not effect this.

In essence, then, a "justice" standard subsidizes developing nations so that they can develop to the point of emitting more carbon, however the marginal product of a ton of carbon emitted in the developing world will likely be less than that of a ton of carbon emitted in the already developed world. This will mean that developing nations will, ironically, be priced out of the new resource market for carbon in which they have such a significant endowment. As a result, a justice based standard would probably have little effect, turning net recipient nations into international "Welfare Moms", reliant on subsidies while incapable of developing endogenous economic activity. I hope I am missing something here, because I am certain that more intelligent people than I have considered the "justice" standard, and I don't believe that this is a popular critique.

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griff

Meanwhile a European Union wide carbon trading system is already up and running in Europe - from their website:

"The EU Emissions Trading Scheme (EU ETS) is a Europe wide scheme which aims to reduce emissions of carbon dioxide and combat the serious threat of climate change. EU ETS puts a price on carbon that businesses use and creates a market for carbon. It has been in place since 2005 and is the first scheme of its kind in the world."

#12 - Every single European government is actively working on the basis of climate change as a reality. When will the US get with the programme? We'll have the last laugh from our non-oil dependent, energy efficient economies...

Tony

Global warming is only liberal hysteria.

Chris

Doesn't the Coase Theorem imply that we should be less worried about how they're distributed, and more concerned with minimizing transaction costs?

PedroCMS

Woah, this is turning into more of a discussion of the existance of global warming than what was originally posted.

Despite the existence or non-existance of global warming, I think that CO2 emmission credits are a good way of rewarding people who polute less. And for all you who don't believe global warming is a real issue, CO2 emmissions still make up a huge part of the air pollution. And air pollution is killing many people yearly in cities like Mexico City. CO2 credits will probably not reduce the externality, but it will still provide an incentive for those who are already polluting less.

Tom

The point to the exercise of allocating the right to emit CO2 is to give the most efficient producers the greatest ability to produce. Any other allocation of resources will produce a less productive, less wealthy society. I assure you that the only hope for maintaining momentum behind a green agenda is to keep society rich and happy.

Furthermore, it is important that those purchasing carbon permits are essentially spending money on themselves. That is to say, carbon taxes (or the proceeds from an auction) should go towards a national welfare system, or national infrastructure building, which supports the carbon tax payer. Otherwise, we are taking capital away from the most efficient producers and giving it to the less efficient -- a dire consequence in our capitalist world.

The point to carbon taxes must be to encourage more efficient use of energy. If it is instead a social welfare mechanism for income redistribution based on some self-righteous Green sense of 'justice', the system will promote inefficiency, loss of productivity, and failure of our economic system.

Do not take this issue lightly. Greenery is possible without command and control, socialist politics, but many of the Greens are command and control socialists seeking victory by other means. If we allow them to ruin our economy, the future will be grim indeed, and we won't be able to afford the greenery we all claim to want.

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T-Bone

#26 Feck, there's no need to tax consumers rather than producers. A cap and trade or a carbon tax that are levied on industries that pollute would pass the costs to the consumers already. Those CO2 permits cost money, and is incentive to the business to find ways to release less CO2. If they can't, they will have to pass the cost onto the consumer and then consumers will see a price difference between "green" clean products and CO2-heavy products. Even just shipping items from far away will be more expensive, essentially giving home-grown products an advantage.

Rob

Is it really advisable to implement a program that actually lowers citizens' standard of living at a time when the world economy is under significant stress due to a global asset repricing? The problem with any GHG or CO2 reduction scheme is that even though the underlying science is under considerable question, the lack of economic benefits (and in fact economic liabilities) are without question. All of the philosophical discussion about "how" and "how much" these permits are allocated is meaningless when you consider the outcomes of the actual policy.

jean

Pigovian taxes are an alternative to cap-and-trade system. The level of the carbon tax would be fixed internationally.

It would advantage today industrial countries but not in the long run. On the other side, it would provide a simple rule to share the burden of carbon emission reduction.

http://gregmankiw.blogspot.com/2008/09/pigou-club-manifesto-directors-cut.html

http://www.aei.org/publications/pubID.26286,filter.all/pub_detail.asp

Thames

Considering the fact that a country is just the sum of its population I'm not sure who would benefit from the "overpopulation" of a country.

Steve

One problem with this approach is that it rewards countries for being overpopulated. Maybe there should be permits based on area (size of the country)?

Jake

If the per-capita permits are 'justice' permits, aren't you admitting that the idea of allocating permits based on historical pollution is fundamentally 'unjust'? You fail to make any argument at all to support your suggestion that there should be two categories of permits - but take it as a given. We will not address the problem of climate change unless the solution is a just one.

MaxiCms

I do not see exactly why some of the carbon emission permits should be allocated by historic uses. For instance, the United State is notorious for its waste of the environment’s limited resources. Hence, although in the past they have produced more than the average amount of emissions, then does not call for the government to know justify such pollution by rewarding them with a legal Co2 permit. Instead, I find it to be wiser to allocate permits according to population as well as the area of a nation. Perhaps, we should not be praising nations for their overpopulation but denying them an equal carbon emission right per individual doesn’t exactly sound like the solution either. Countries can’t help it if they’re already overly crowded, restraining them from the permit will not reduce their population numbers. Thus, nations should be granted what can be consider a sufficient amount of carbon emissions and all additional ones should be taxed individually to discourage increasing population and encourage more energy efficient products. Now doesn’t that have more of justice ring to it all?

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Brian

Agree with #4 that there should just be a global auction.

As for how to allocate the funds, couldn't they be allocated to the country in which the emitter is located?

There is also the issue of what to do with those countries that opt not to particpiate. It seems like this could be aided by having an import tariff roughly equal to the expected amount of CO2 emissions emitted in the prodouction of the good or service, which would be used to purchase CO2

CO2 permits. As the underlying funds would then flow into the importing country (as opposed to the exporting country as would have occured had they participated in the system), it would create an incentive for the exporting country to participate - especially if all of the major importing countries implimented such a tarriff.

Feck

The underlying rationale of all these schemes is to impose incentives and penalties on the production side. This approach is and always will be manifestly flawed and lead to maximum unintended consequences. Any real solution will need to apply the incentives and penalties to the consumption side.

Idea one: Carbon credits will become another abstract Raw Material. Developing countries role will be relegated to extraction of this raw material for the developed world’s exclusive use. There is a fundamental differential utility in the credits—The developed world will always derive more value from them, and will always come out of the marketplace with all the credits. The price will never rise to more than what we are willing to pay (or even come close), because what we would be willing to pay (based on the value we could derive from their use) will always be 20 times what a truly poor nation would be willing to sell them for (based on the value they could derive from retaining them). If I am a leader in a underdeveloped country, and I am given a resource of assigned carbon credits, my best strategy is to send goons to lock the doors of any local factories, convert the credits to cash on the international market, and either build a luxurious palace for myself while my population suffers, or use the money to buy tanks and try to invade or control my neighbor, in hopes of grabbing control of their share of the allocated credits, too. This inequity in the marginal value of the CREDIT”S CONSUMPTION will always scuttle this scenario.

Idea Two: We exempt poor nations entirely from the tax. First of all this would require pure altruism from the wealthy participants, so it’s not going to happen. Bear with me as a thought experiment. All this accomplishes is moving the production of the C02 away from its consumption. Jobs go overseas en masse; we do our work in area with inefficient factories, in areas with poor human rights and no environmental regulation, and incur global transportation costs (Dollars and carbon) to boot. Look at how cargo ship or computers are dismantled in third world countries now for an example. Again, applying economic pressure to the production side just moves the production, leaving the (downstream) consumption of C02 intact.

If I have to pay a “footprint tax” when I purchase an item, I will consider reducing my demand, regardless of where it is produced. In this case we could differentially lower or even absolve developing countries use tax, while keeping the incentives of the program intact. If a supplier can produce their item using less energy, or by purchasing energy produced more efficiently, or by purchasing energy from a company that has received offset credits for carbon sequestration*, or by shipping it’s products and materials less distance, or by reducing the footprint of the packaging, this producer could receive extra profit, or offer their product at a reduced overall price to consumers.

Most importantly the playing field for innovation is totally level and non localized— If we can place a value on innovative reductions in C02, we want the marketplace for this value to be the most free and efficient marketplace, to maximize this value.

*Two ideas about sequestration

• In Europe, machinery on Natural Gas platforms is collecting C02 from the atmosphere, and it is being pumped right back into the seabed cavities that have securely trapped the Natural Gas for Millennia. This solution is technically viable now. We need to add an economic incentive to spread its use here.

• Wind farms are moderately viable here, but often produce power at off peak times, when its value is low or zero. They are also limited by power transport issues. Basically a wind farm is only profitable some of the time. If the technology could be advanced to allow the off peak energy generating capacity to be utilized on-site to advance an equilibrium reaction to remove C02 from the air, into a more bound form, and they could be compensated for this work, They could capture value from their total potential energy supply, rather then from the limited peak hour demand. The economies of scale enabled by widening the market for this combined wind application would benefit the production costs and research required to increase wind capacity overall. Moreover the by-product, a energy-added, bound form of carbon is potentially likely have a secondary value—basic chemistry suggests any likely reaction candidates would produce either a sugar, a fuel, a polymer, a petrochemical, a cement, epoxy or glue.

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