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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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Climate Hustle

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 101 to 102 out of 102:

  1. Mal Adapted wrote: "However, the socialized external costs of fossil fuel use we're currently paying don't include things like the death of coral reefs from ocean acidification, the imminent extinction of the polar bear and the costs of weather disasters 50 years from now. These costs will be incurred even if all carbon emission ceases today. It's doubtful that a carbon tax could internalize them."

    And if we don't get carbon emissions under control then the costs of those future impacts will be even greater. Ergo, a carbon tax paid today to avoid those greater future impacts would indeed internalize some of the future cost.

    "It's about the costs that have been external to total gross global product until recently, but are now being socialized: groundwater overuse in the Great Plains; overfishing of all seafood stocks; growth of urban areas forcing agriculture onto less productive soils; the list goes on and on."

    The list goes on and on... and has nothing to do with global warming. You appear to be saying that solving every problem in the world would require vast political and economic changes... and therefor solving global warming would require vast political and economic changes. It is a non sequitur.

    Global warming can be solved without "radically reordering our economic and political systems". Read the article above for confirmation.
  2. jhnplmr said on inappropriate thread:

    "Nuclear, wind, solar and tidal?

    I agree, while it takes less energy to get it out of the ground than you can get from it they (we) will continue to use it. I'm afraid that it is very difficult to get people to stop heating their homes, using computers, electric lighting and their cars. It isn't going to happen while fossil fuel supplies are available. Any government that tried to ban their use would get voted out of office."

    Which is why there is such interest in carbon taxes, pigovian taxes, trading schemes. These effectively add the environmental cost (which isnt paid for in mining) to coal cost so that other energy sources become competitive. More acceptable to right-wingers (hey Milton Friedman thought costing externalities was acceptable), than just banning new coal fired stations.

    Bottom line though is that you will pay more for kWh of energy in the future. Beats paying the costs associated with very rapid (ie faster than glacial cycle) climate change though.

  3. PanicBusiness (from this previous thread)...

    First, you're repeating a citation of the exact same article you posted before and adding no new content. That is considered sloganeering here at SkS. The fact of the matter is that regulations positive net impact on the economy. Larry Bell is presenting only the cost side of the equation while ignoring the net benefits. You can go to google scholar and read dozens of papers on the economic impacts of environmental regulations and see that there is actually a net positive result.

    You still, also, seem completely oblivious as to what Figueres is saying relative to China. She's merely pointing out that it is far easier for China to take action on climate change. Figueres states,
    “They actually want to breathe air that they don’t have to look at,” she said. “They’re not doing this because they want to save the planet. They’re doing it because it’s in their national interest.” [From your own link here.]

    That's not a value judgement on which system she prefers. It's just a point of fact. Because of their political system the can move far faster than we can in the west. I often point out that China is run like the world's largest private corporation, and the Chinese people are their customers.

    If you want to have an open and honest conversation about this, I'm all for it. But you're definitely going to have to drop the dismissive attitude. The second thing you can do is support your claims with actual research rather than links to politically modivated people and groups like Larry Bell and the CEI.

  4. Check out how carbon emissions correlate to median income.

  5. Maybe this has been talked about in the comments: Where might I find a detailed examination of the likely performance of an ETS vs Carbon Tax/Fee and Dividend?

  6. You've used BC as an example of how carbon pricing works and linked how  lower fuel consumption was an outcome of BC's carbon pricing.

    However, in the US, they've achieved even greater results in lowering fuel consumption without a carbon tax.

    From "Explaining the US Petroleum Consumption Surprise", June 2015, Executive Office of the President of the United States:

    "U.S. petroleum consumption was lower in 2014 than it was in 1997, despite the fact that the economy grew almost 50 percent over this period. Petroleum consumption peaked in 2004 and the subsequent decline was one of the biggest surprises that has occurred in global oil markets in recent years. Actual consumption in 2014 was 6.4 million barrels per day (b/d) below the 2003 projection of 2014 consumption, which we refer to as the 25 percent consumption surprise for 2014. This consumption surprise is nearly twice as large as the 3.4 million b/d U.S. production surprise in 2014, and it frees up roughly $150 billion for spending on other purposes (2014 dollars).

    I'm all for reducing petroleum consumption not only in BC or the US but around the world.  Pumping oil out of the ground in North America, transporting it to tide line and shipping overseas to be burned there rather than in North America doesn't make sense either. Embracing carbon taxes may console one's conscience but it may do nothing to reduce GHG emissions.  The US outperformed BC without carbon pricing.  Why?

    LINK

    Response:

    [RH] Shortened link that was breaking page formatting.

  7. Try looking here. Improving fuel economy and fewer miles travelled. Now why did fuel ecomony improve? Actually, which to libertarians hate more - a pigovian carbon tax or fuel economy standards?

    I think less driving and demand for better efficiency are driven by perception (and reality) higher fuel costs. Carbon tax just plugs into that process. Want to bet on declining fuel consumption will fuel prices dropping and improving economy?

    I am curious as why you think a carbon tax will not reduce GHG emissions? Do you like paying tax?

  8. Looks like a shrinking industrial sector also markedly help with the reduction in consumption. Not sure you would want to advocate that.

  9. pwlg...  The idea of a carbon tax is to bring the external costs related to carbon emitting energy into the marketplace. Currently, we already pay a "tax" for fossil fuels in terms of the impacts of carbon emissions on the overall economy. The cost is estimated to be somewhere between, I think, $30-$200+ per ton of carbon emitted into the atmosphere. Those costs are an existing burden on the economy. In essence, those costs are currently "socialize" into our economy. We all pay that price.

    What a carbon tax does is pull those cost into the marketplace. It says, carbon emitters must bear the responsibility of that burden on the economy. That puts alternative means of energy production on a more even playing field with carbon emitters. 

    When that happens, you, as a consumer, have fully marketized choices. It's no longer an issue of choosing between carbon emitting or non-carbon emitting energy. You just make your choices based on price. You're obviously going to choose the lowest price source of energy. And overall, the cheapest energy is going to also be the lowest carbon emitting choice.

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