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All IPCC definitions taken from Climate Change 2007: The Physical Science Basis. Working Group I Contribution to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Annex I, Glossary, pp. 941-954. Cambridge University Press.

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The economic impacts of carbon pricing

What the science says...

Select a level... Basic Intermediate Advanced

The costs of inaction far outweigh the costs of mitigation.

Climate Myth...

CO2 limits will harm the economy

"Legally mandated measures for reducing greenhouse gas emissions are likely to have significant adverse impacts on GDP growth of developing countries [...] This in turn will have serious implications for our poverty alleviation programs." (Pradipto Ghosh)

If climate change proceeds without any efforts to reduce it, we can expect to incur serious economic costs. In fact, it's not unreasonable to expect that the effects of climate change will create greater economic instability worldwide.The solution is, of course, to reduce fossil fuel use. One way to do this is to shift away from fossil fuels towards renewable energy sources. The other way is to reduce energy demands through increased efficiency.

Both mechanisms have economic implications. In order to stimulate the private sector’s investment in renewables, governments can put a levy on fuels, which may be used to fund or subsidise new initiatives.

To reduce demand, there are a number of solutions available, but most seek to raise the cost of carbon through taxes. Such increased costs give rise to concerns that change underwritten by taxes or levies will damage economic prospects, particularly in developing countries.  However, there is a consensus among economists with expertise in climate that we should put a price on carbon emissions.

NYU Fig 9 

2015 New York University survey results of economists with climate expertise when asked under what circumstances the USA should reduce its emissions

The Representative Picture

In the Fifth IPCC Assessment Report (AR5), a new set of scenarios called Representative Concentration Pathways (RCP) will be used. The four RCPs replace the previous scenarios from the "Special Report on Emissions Scenarios" (SRES). Each RCP represents a set of initial conditions and projections to year 2100, based on a synthesis of the peer-reviewed literature.

The graphs below show the predicted RCP trajectories for economic performance:

             

GDP projections of the four scenarios underlying the RCPs (van Vuuren et.al. 2011). Grey area for income indicates the 98th and 90th percentiles (light/dark grey) of the IPCC AR4 database (Hanaoka et al. 2006). The dotted lines indicate four of the SRES marker scenarios.

The number of each RCP is the forcing (in watts per square metre) associated with a specific amount of emissions for each scenario, up to the year 2100. The graph of GDP clearly shows that the pathways that reduce emissions the most in that time frame (2.6 - green, and 4.5 - red) are those with the best long-term economic performance. In other words, the investment required to reduce emissions is repaid by increased economic performance. Business as usual strategies (high-emission scenarios RCP 6 and 8.5) are the least profitable; the money saved early on is dwarfed by the costs of damage and disruption done in the longer term.

Putting a Price on Carbon

There are a number of schemes under consideration, and a number already implemented. According to the article Pollution Economics in the New York Times, more than 20 percent of global greenhouse gas emissions are now subject to carbon pricing systems. About 60 other states, provinces or countries are considering similar approaches, according to a recent World Bank report.

It’s too early to judge long-term economic performance of the early adopters, but Canada’s province of British Columbia serves as a good example of how carbon pricing can reduce fuel use - in their case through a revenue-neutral scheme. A recent study found that since 1st July 2008, when the tax was introduced:

  • BC’s fuel consumption has fallen by 17.4% per capita (and fallen by 18.8% relative to the rest of Canada).
  • These reductions have occurred across all the fuel types covered by the tax (not just vehicle fuel)
  • BC’s GDP kept pace with the rest of Canada’s over that time
  • The tax shift has enabled BC to have Canada’s lowest income tax rates (as of 2012).
  • The tax shift has benefited taxpayers; cuts to income and other taxes have exceeded carbon tax revenues by $500 million from 2008-12.

Source: BC’s Carbon Tax Shift After Five Years: Results, Elgie & McClay 2013

In a separate report, the British Columbia Department of Finance found that in 2012, BC's taxes were among the lowest corporate tax rates in North America and the G7 nations. 

Conclusions

There is a consensus among expert climate economists that carbon pollution limits are needed to prevent climate change from badly damaging the global economy.  

A number of economic incentives are being tried with varying degrees of success. Regional schemes are already proving effective, flexible and popular. An important ingredient seems to be an accompanying tax reduction that makes the carbon tax revenue-neutral.

In the long term, unless we drastically reduce the rate at which we are still emitting greenhouse gases, we are very likely to incur huge costs as a result of climate change. Part of these costs will be in adaptation, and the inevitable disruption. In part costs will escalate due to turmoil and uncertainty throughout the economic world. There will also be costs that cannot be quantified, particularly when we try to value a human life and its loss.

We have to reduce our emissions. If we are to avoid draconian government intervention, carbon pricing schemes are a viable method of encouraging us to reduce fossil fuel use. Coupled with other measures to stimulate renewable energy development, putting a price on carbon may help us make the transition away from fossil fuels. And from our experience to date, it seems likely  that carbon taxes, instead of bringing an economy to its knees, may well help transform an outdated system into one fitting for a sustainable century.

Basic Rebuttal written by GPWayne and dana1981

Further Reading: The Intermediate and Advanced rebuttals contain detailed information about carbon pricing and tax schemes. Skeptical Science contributor Andy Skuce has also written an article about British Columbia’s experience here, with an update here describing the findings of the Elgie & McClay paper.

Last updated on 2 January 2016 by dana1981. View Archives

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Further reading

Only tangentially relevant but a nifty java animation at the Quaker Economist projects the world's future energy production and when it's expected to peak.

Comments

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Comments 26 to 50 out of 97:

  1. Sphaerica @25, I doubt that this is really on topic here, or anywhere else on Skeptical Science, so I will make a few short observations and leave it at that. First, while there is a hidden subsidy of private transport, the subsidy is one in which all, or almost all members of society are substantial beneficiaries. In the simplest terms we know the standard of living of people dependant primarily on local distribution networks, and it is not high. Indeed, it struggles to match that of even pensioners in our society. Typical examples can be found in any Indian or African village. With modern technology, that standard can be lifted to a very comfortable level, but the ready availability of that modern technology depends on the existence of mass markets and cheap transport. Consequently a modern village life style can only be a utopian dream for a wealthy (at least in world terms) few. Further, such a life style cannot sustain anything like our current world population. You probably did not have in mind anything like the level of localisation I am describing, but the point is a general one. Consequently I am certainly not opposed to the hidden subsidy on private transport. I just do not think the need to subsidise public transport is not a reason to invest in it. What is at issue is which is the most efficient subsidy, and that will depend on the particular situation. In general, public transport will yield greater efficiency, but only because as a result of the very visible nature of the subsidy, investment in public transport tends to lag investment in private transport.
  2. 26, Tom, Pretty much agreed. My position was probably presented in too extreme a fashion. Certainly, everyone benefits hugely from the vast transportation infrastructure that has grown in the last 150 years, and you are right, modern societies and populations would not be sustainable without it. But, I would also argue that while all benefit from it, the wealthy benefit disproportionately more, and pay disproportionately less. A transportation tax of any sort (on roads, or on fuels/energy) will ultimately be passed on to the consumer, making all products more expensive. But this will ultimately result in a new, more appropriate balance between more-expensive-to-produce-but-cheaper-to-transport local goods, versus the opposite (which is almost all we have in today's society). It moves some of the easy ability to accumulate wealth out of the hands of a national and international very few, and into more, more local hands. Not a lot, just some. It would also result in the development of cheaper and more sustainable energy sources and transportation systems. So, in the end, my argument is that future fossil fuel taxes and their effect on the economy are really simply righting an injustice that is already inherent in the current system, i.e. that large corporations and a wealthy few benefit disproportionately from a massive, fossil-fuel based infrastructure that is not, in and of itself, as currently fashioned, in the best interests of either society or most people in society. It is already a redistribution of wealth, from the poor and average person to the wealthy. Will prices go up some? Yes. Would a wholesale destruction of the current system badly damage society, and individual wealth at all levels? Obviously, and absolutely. Are either of these valid arguments for leaving the current system in place? Not remotely close.
  3. Sphaerica @27, a case can certainly be made that the rich benefit more in absolute monetary terms. I, however, would argue that the correct terms of analysis are in terms of utility gains (where "utility" is the technical term used in economics and ethical theory). As absolute income increases, utility gain per dollar increase in income declines, and quite sharply above a certain point. Just one example, in 2000 dollar terms, the difference between an annual income of $5000 and $10000 is the difference between a life expectancy of about 50 and about 75 (from memory). The difference between an annual income of $10000 and $50000 in contrast is only a difference of a life expectancy of around 75 to less than 85. So, in utility terms the gains of the poorer members of society from the transport system are massive. So also are those of the wealthier members of society. But it would take very careful analysis to decide who gained most in relative utility terms.
  4. Sphaerica,Tom Curtis @ 25 26 27 other thread 212 Public transportation is inefficient regardless of the subsidy. The US light rail inefficiency arise from the constant power consumption. Whether it running full speed, half speed, idling or breaking, nearly the same power is consumed. The large cages, usually atop a the trains, contain a huge resistor grids. The grids act a giant rheostat to offset actual use to mitigate dynamic loading of catenary and/or third rail. Worse yet, being a government entity they operate on the 'use it or loose it" budgeting criteria. Budgeted money not spent is retracted and counts negatively (less funds) the following cycle...thus system manager leave surplus trains idling to burn electricity. Why you ask, well being a wholesale consumer of electricity, overages in negotiated electrical rates cost little, and show a need for bigger budget (tax money), and if overages are substantial enough a better negotiated rate. Under use will do just the opposite. Whats' the result, the CO2 ton/rider ratio is abysmal, while the cost/rider is exorbitant. As I said inefficient. Inefficiency to a level unheard of within the private sector. If I had my druthers all roads would fall to big oil for construction and maintenance. Who has more interest keeping the roads operating at top performance. Maybe OT but private schools out preform public. Private schools out preform at a lower cost/pupil. You need only look at the charter schools in the major cities as evidence. Yes this is a hybrid, public money private schools. However, these school cost less and perform better and highly sought by those trapped in fail, expensive public schools.
  5. Sphaerica @ 206 other tread You are completely and utterly wrong about SS. It was never intended to be a retirement program. It was intended to be a insurance program for those living in excess of life expectancy. SS is constructed as a ponzi scheme, current retires are dependent on the still working. The "Lock Box" Gore talked about is filled with IOUs. With true unemployment approaching 20% there will soon not be enough coming in to secure the increasing elderly population. So to the contrary, SS and all entitlements will be this countries undoing. BTW, I agree defense needs to be drastically cut but consider two things. National defense is a Constitutional mandate, though wars must be declared by congress, not presidential decree. Entitlement account for the largest portion of the national budget.
  6. Tom Curtis @ 210 other thread I did not say taxation was theft, I said "Redistributive taxes (money) is most certainly theft." It's the taking of ones property and GIVING that property (money) to others; be it individual, corporation, organization or country. Altruism is not a government function it is an individual choice.
  7. Ganesha @ 215 Your (See Page F-59) link is broken.
  8. jigoro kano @29, public transport is inefficient where it is inefficient, only because of a lack of passengers relative to the service. If there is an over investment in private transport, the consequence will be apparently inefficient public transport because potential passengers will be drawn away by the hidden subsidy.
  9. Jigaro, as a matter of interest what do you think is the most effective way to limit CO2 emissions within your political values?
  10. jigoro kano @31, thoroughly of topic, but property can only exist because of "redistributive taxation". In the absence of assigned property rights, any person can make use of any space or resource as they feel fit. In declaring that some piece of land is the property of a particular person, the government (as agent of society) takes away the rights all other people had with regard to that piece of land, and assigns those rights exclusively to the new land holder. That is a redistribution. So, if there is a blanket ban on redistribution, the government cannot sell land to any person, nor can it defend the "rights" of any person to any particular property they may claim. Further, when assigning rights to land, the government (as agent of society) retains certain rights over the land and requires compliance with certain conditions for the land holder to retain the land. Those conditions include the paying of taxes. The obligation of the landholder includes paying the taxes but that obligation does not carry with it any right to restrain the governments use of the taxes. Suggesting that it does is as absurd as suggesting that because you bought something of me, that gives you the right to limit who I can give my money to. (As a side note, taxes are a condition of certain services provided for us by society, primarily through its agent, the government. Any person should be entitled to refuse to pay those taxes, but only on condition that they no longer accept the services. Those services include citizenship and residence rights. So while it is probably wrong to jail anybody for tax evasion, it is doubtful anyone would prefer the truly just punishment for tax evasion of being stripped of their citizenship, and exiled.) Finally, I have yet to meet a person consistent enough to argue both against redistributive taxes and against other legislative methods of redistributing wealth, in particular, the existence of corporations, the existence of limited liability, and the existence of a constant slightly inflationary economy. Can you be the exception? Can there really be just one person on Earth for whom right wing economic theory is a principled position rather than just another self serving ideology? I doubt it.
  11. Jigaro - sorry I missed you post on tax - however, this would effect emissions how?
  12. Tom Curtis @ 33 Sorry Tom, you need only look at MTA to prove you demonstrably wrong. High population density, high ridership, yet high inefficiencies. If NY can't make work no area of the country can overcome this problem. Mass transit is costly, dirty, non-green, a non-solution dream of the left.
  13. 'Mass transit is costly, dirty, non-green, a non-solution dream of the left.'?? So how do you explain Europe?
  14. Oh boy Jiguro...the MTA is more a necessity than anything else. In NYC it is taken for granted -- few in Manhattan own a car because of it. I wouldn't visit the city a quarter as much if it didn't exist. It's really really hard to imagine how NYC would be better off without it. I never used to fly through before they built a train to it. Too expensive otherwise. How are you calculating it's "inefficiencies." Inefficient with respect to what? And if you think it is easy to run mass transit system in NYC with its molding infrastructure, you're crazy.
  15. Jigoro, You've made a lot of assertions without providing a single concrete number backed with references. I'll help you out, and will even use a CATO Institute report as reference. Take a close look at Table 1. Light rail on average accounts for 0.36 pounds of CO2 emissions per passenger mile, while automobiles account for 0.61. This is of course dependent on the local methods of electricity production as the report points out. Combined with a move towards greener energy production, that number can come down further. Also note that the energy intensity in BTU's for light rail is entirely comparable to automobiles. Now of course, light rail is no silver bullet and there are other factors to consider. However, your claims that "the CO2 ton/rider ratio is abysmal" and "Inefficiency to a level unheard of within the private sector", are completely without merit, even when using sources subscribing to your point of view. This leaves your analysis unimpressive to say the least.
  16. I meant "fly through JFK airport..." Having been to Europe, I echo adelady's point.
  17. Jigoro Kano @37: 1) The average cost per passenger mile on the Subway in New York is 33 cents. That cost is inclusive of the cost of rolling stock, energy, and maintenance of tracks (calculated from figures in this report; 2) The cheapest urban driving cost per passenger mile in the US is estimated by the AAA as being 35 cents per mile. That cost does not include costs for building or maintaining roads; 3) So, even excluding the hidden subsidies, road passenger transport is more expensive than subway transport. If you include the subsidies that is very obviously so. This is true despite the (as you point out) massive organizational inefficiencies of some public transport operators, which if eliminated would improve the comparison; 4) This also does not include other costs, such as air pollution from the massive fleet of cars that would be needed if private transport was substituted for public transport; the relative mortality rates, with fatalities per mile being 6.5 times higher for car transport than for subway transport, or the very large cost of parking, a necessary addendum for private transport (in Brisbane, daily parking fees exceed daily rail transport fees for even the longest commutes, ie, from adjacent cities); and finally 5) It does not consider the real cost of replacing public transport with private transport in New York, with the shut down of the subway likely to result in 6.5 million additional car journeys (if not taken up by other public transport) on already notoriously congested roads. All of this uses New York as your chosen comparison. I will pass over the jingoism present in the automatic assumption that the way it is done in the US automatically represents worlds best practise.
  18. Tom Curtis @ 42 Nice work finding this gem. After reading it, I need to make a non-pertinent correction to my 29. The NYC subway and others listed within CBC are considered Heavy Rail not Light Rail as I posted. I should say it makes a small difference when readings e @ 40 post. If not publicly owned, not publicly subsidized the NYC system would be much more efficient and profitable. Being public makes it's a bastion of corruption, but that story is more OT then we are now. I do not object to mass transit, I do object being forced to pay for it. Taken at face value, you'll notice NYC has more riders then all other municipalities combined. With the highest US population density, obviously the best suited for a mass transit system. The calculation as listed CBC-NYC however, are a bit curious. 1)For example, look at the Daily Passenger Trips: 6,461,133. For a population of 8.3 million the ridership seems a bit unrealistic. Assuming this count includes a rider from A to B and also that same rider from B to A so although it is two trips but one rider. So halving the ridership for comparison to overall population yields a ~40% ridership, still unlikely. But lets work with it. 2)By dividing Daily Passenger Miles by Daily Passenger Trips a 4.23 mile average trip per rider is calculated. Completely feasible. 3)Accepting the given $.33/per passenger mile and multiplying the 2) results (4.23 miles) a $1.40/trip average is found. Confirmed table 3. 4)Multiplying 3) by the Daily Passenger Trips; MTA spends nearly $9.02 million a day...or $3.39 billion a year in expenses. Not far off from that given. 5)The fee per subway ride, according to MTA is $2.50, so MTA receipts are $16.1 million/day or $5.8 billion/year...WOW! 6) Are you suggesting MTA nets $2.58 billion/year? Or could it be the given stats are...curious? I never suggest NYC was the world capital for mass transit efficiency. In fact quite the contrary. The US transit system are wrought with bad practices and outdated designs. Europe, Shanghai, Taipei...etc have all modernized their trains. The US, however will never take such steps do to the intrenched interest. Tom there is a lot of money to be made in these government approved entities; unlikely to change. Tom, I still owe you a response to 35. There is much in that post I need to consider.
  19. Jigoro Kano @43, the fares for the New York Subway are actually 2.25 per trip or 2.50 if you buy a traditional ticket. Further, children accompanying an adult ride free, and the elderly and disabled can ride for $1.10 per trip. I do not have the information to turn that into an overall revenue for the Subway. I do know the MTA has an estimated fair revenue across all services of 4.5 billion dollars for 2010. That indicates that free and discount trips (possibly along with fare evasion) eats substantially into their revenue. I will say that NY public transport fees are absurdly cheap when compared to those of, for example, Brisbane. As to the direct issue of public or private ownership, it makes no difference to the train driver of conductor whether their salary comes from a corporation of a government. Therefore it is not the case that public enterprises are inefficient, while private ones are efficient. In fact, having worked for large public and private enterprises, the most inefficient, bureaucratic and corrupt enterprise was the private corporation. What is very important is the system of management, and public enterprises often fall into bad systems of management. That is not an argument against public enterprise, but for efficiency driven, accountable management in public enterprises.
  20. Jigoro - is few % drop in CO2 from engine efficiency (which also requires worldwide car ownership to be static) the best you can do for emission control consistent with your polical values? Come on please, I asked for effective emission reduction. My issue here is that if you can't come up with an effective scheme within your values, then I can only conclude that your "skepticism" is rationalization for doing nothing.
  21. Just a note on NYC trips per day - I lived in Brooklyn and owned a car. And I drove the car every day (it was required as the rules mandated leaving opposite sides of the street car free each day). Other than moving it to meet the requirements - I used the subway for everything. It was a 2 block walk to the subway. So I could make 2 or 3 trips per day (4-6 "rides"). If you have never lived in NYC it seems a little strange. But the subway takes you where you want to go. No parking, no traffic. Clever New Yorkers don't even own a car. Rent as needed. The societal savings of the NYC subway are jaw dropping (time, pollution, wasted capital in vehicles, fuel, land dedicated to parking, CO2 emissions). Any one of which would justify the expense. I wish all private industry was as "inefficient" as the NYC subway! "stan clee doe" - the NYC subway driver's version of "please stand clear of the closing doors" - I will never forget it, and it still brings a smile.
  22. e @ 40 Your link, concluding statement: Conclusion: There may be places in the world where rail transit works. There may be reasons to build it somewhere in the United States. But saving energy and reducing greenhouse gas emissions are not among those reasons. Regions and states that want to be green should find cost-effective alternatives such as the ones described here.
  23. actually thoughtfull @ 46 You said; "I wish all private industry was as "inefficient" as the NYC subway!" In case you missed it: US public transportation is inefficient regardless of the subsidy. The US light rail rail transit inefficiency arise from the constant power consumption. Whether it running full speed, half speed, idling or breaking, nearly the same power is consumed. The large cages, usually atop a the trains, contain a huge resistor grids. The grids act a giant rheostat to offset actual use to mitigate dynamic loading of catenary and/or third rail. Worse yet, being a government entity they operate on the 'use it or loose it" budgeting criteria. Budgeted money not spent is retracted and counts negatively (less funds) the following cycle...thus system manager leave surplus trains idling to burn electricity. Why you ask, well being a wholesale consumer of electricity, overages in negotiated electrical rates cost little, and show a need for bigger budget (tax money), and if overages are substantial enough a better negotiated rate. Under use will do just the opposite. Whats' the result, the CO2 ton/rider ratio is abysmal, while the cost/rider is exorbitant. As I said inefficient. Inefficiency to a level unheard of within the private sector. US rail transit is horribly inefficient Bolstered by e link, I stand by my position. And as I also said, NYC is the only area in the US which could possibly make the numbers work. Don't deny the facts.
  24. I have a question about the economy-energy link. If this story http://blogs.forbes.com/gordonchang/2011/05/29/who-turned-out-the-lights-in-china/ then essentially China is reducing their fossil fuel use by capping the price of electricity while fossil fuel prices rise. One of the effects is shortages of electricity but presumably that will result in shortages in China's supply chain and eventually higher prices for U.S. and other consumers.

    Is this an acceptable way to pass the cost of limiting fossil fuel use along to U.S. consumers? If not, would a tariff on our end work better and why? Another question (presuming the story is accurate), does China have the option to make up for the economic loss with a green economy and if they do, why aren't they doing it?

  25. Jigoro @ 48 >"CO2 ton/rider ratio is abysmal, while the cost/rider is exorbitant. As I said inefficient. Inefficiency to a level unheard of within the private sector. US rail transit is horribly inefficient" Again with this claim, are you serious? According to the CATO report I already provided, heavy rail generates 0.25 pounds of CO2 per passenger mile, commuter rail 0.29, and light rail 0.36. Meanwhile automobiles generate 0.61. Your claims are therefore demonstrably and inescapably false. Or are you seriously trying to argue that the 0.25 is greater than 0.61? If so, you have reached a level of denial so stunning that it is unheard of even on this website.

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