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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 1 to 25 out of 111:

  1. Do these analysis consider the global industry transfer- it may destroy the last bit of heavy industry in the US and send it somewhere they have no problem polluting much more- let alone other effects of that ? How about the cost the massive new bureacracy for this tax- I admit less than that for a carbon trading scheme? Even more disasterous for somewhere like Australia and no net benefit on carbon dioxide output.
  2. Not much of a problem. Massive new bureaucracy? I don't think so. Taxes are one thing modern governments have lots of experience with - income taxes, goods & services, excise, import duties - all well established, ho-hum, routine procedures. Hand over the legislation and the public servants will just do the same as they've always done. Heavy industry, light industry, any industry? All you have to do is organise import duties to match homegrown production taxes so that it won't matter where the stuff is produced, the same imposts will go on.
  3. Would Cap-and-trade be an effectual way of significantly reducing greenhouse gase emissions? Or do we need a much more aggressive bill to make large differences in greenhouse gas emmisions
  4. Cap-and-trade offers no incentives for reducing emissions beyond the set limits. To me, it looks like a shell game, CO2 emissions aren't reduced and the carbon credit brokers are the only ones to make money. I was pleased to discover some time ago that James Hansen and others had reached the conclusion before I did, that a revenue-neutral, phased-in carbon tax was the most sensible way to reduce emissions. I hope this site is on the level http://www.carbontax.org/ It appears to be, but sometimes it's hard to tell.
  5. Chris G, it looks legit, the owner of the domain is Thomas Stokes who seems to be reputable. Having just read Hansen's writings more carefully here http://www.columbia.edu/~jeh1/mailings/2010/ I agree with the tax and dividend approach. If it were proposed with a decent phase-in period (since I also believe there is no urgency), I would support it over cap and trade because cap and trade is much harder to measure and enforce.
  6. Berényi - Benefits look to outweigh costs by a factor of 2 to 8, neglecting benefits such as decreased air pollution, ocean acidification, and overall climate change. Your cost argument does not hold up.
  7. #6 KR at 06:14 AM on 19 February, 2011 Berényi - Benefits look to outweigh costs by a factor of 2 to 8, neglecting benefits such as decreased air pollution, ocean acidification, and overall climate change. Your cost argument does not hold up. Come on. Have you actually read Policy Brief No. 4 from Institute for Policy Integrity (which is not a peer reviewed paper so I wonder how is it allowed at this site at all)? Anyway, it all depends on discount rate, about which the authors say The interagency review process acknowledged that "[t]he choice of a discount rate, especially over long periods of time, raises highly contested and exceedingly difficult questions of science, economics, philosophy, and law." The benefits Holland & Schwartz are talking about are clearly not economic benefits, as they depend on such things as science, philosophy and law, but never on supply and demand, so they do not constitute a true income. Therefore they are not comparable to costs. End of story.
  8. Berényi - I looked at a number of the analyses. Cost estimates per US household were estimated at $80-160/year, or ~$20-50/person/year, not too much, with lower prices for lower income families. Economic benefits include deficit reduction, $$ for investment in renewables/energy efficiency/lower polluting tech, and a reduction in greenhouse gas accumulation, hence a reduction in warming speed and mitigation of global warming consequences and their associated costs. And that's completely without considering the "Other Side of the Coin" paper, which uses a range of societal carbon costs estimates established by fairly detailed Department of Energy estimates. If you don't like that paper, take the estimates and do the calculations yourself. Sounds like an good economic trade to me. Avoiding some of those considerable upcoming costs is income, if you can look at and plan for the future - rather than being short-sighted about immediate rewards.
  9. Berényi - As an example of climate change costs: the Central Valley (around Sacramento) in California, USA, is a major 'bread-basket' region, producing 8% of the USA agricultural output. That agriculture is fed by year-round Sierra mountain snowcap runoff, which is shrinking due to global warming and reduced snow accumulation. Rice crops will be among the first to suffer, but all agriculture needs water - 20-50% less over the next century. Walnuts, cherries, prunes and peaches, on the other hand, require lower winter temperatures to produce, and are declining as well; by 2100 about half the $9B annual fruit and nut crop will not be able to survive there. Minimizing these sorts of changes is the economically wise thing to do; I fail to see how you think otherwise.
  10. Berenyi: What is the value of preserving the land in Bangladesh? With only 2 meters of sea level rise 100,000,000 people will be refugees from that part of the world alone. Not to mention all the other major cities around the world that will be inundated. What is the benefit of maintaining those cities versus the cost of building new cities further inland? These are clear economic benefits that have not even been added to most of the analysis cited above, the recent sea level estimates were not available. The infrastructure alone is worth trillions of dollars in the USA.
  11. Energy cannot be creatd or destroyed, except in the minds of those who advocate alternative energies. If something produces less energy than something else, it's going to cost more money to use it. It's not rocket science, and rockets will not get to the moon using wind energy.
  12. Thingadonta, far more solar energy reaches the earth every year than can be used by our civilization. Therefore talking about conservation of energy is irrelevant. The cost of energy is important, and the direct cost of alternative energy is currently greater than the direct cost energy from fossil fuels. However, the indirect costs of fossil fuels are very large. Our society does not seem to care, because those costs will be paid for primarily by future generations rather than by us. Ignoring those direct costs will not cause future generations to thank us.
  13. BP #7 - as discussed in Monckton Myth #11, we have examined studies using discount rates ranging from 1.4% to 5%. In every case the benefits of carbon pricing exceed the costs several times over.
  14. I have a question. Some developed countries like Iceland or Japan are almost devoid of fossil resources (mainly volcanic countries whose ground is too young to contain sedimentary rocks). Obviously, barring any CO2 effect, this would be very interesting for them to develop without using FF. there is no interest in using them if they can make it without them, they're expensive to import : and actually they did it when they could ! Iceland has a lot of renewable electricity (hydraulic and geothermal) and is also mainly heated by geothermal sources. BUT..but... they still use plenty of FF for the rest and they produce as much (or more ) CO2 per capita than comparable countries. So if it were so easy to suppress the use of FF, why didn't they do it a long time ago ? maybe the brilliant engineers of MIT should explain them how dumb they are and give them access to their marvelous solutions ?
  15. Everyone of those taxes produced a massive bucreacracy- Government would have to assess every single carbon dioxide emitter- Your IRS will need employ new people to assess a whole group of tax payers in a totally different way than they have ever done before. Every tax written is a mess of exceptions, special rules. Put in a transfer tax (involves only few extra line of code on financial institions' computing) and abolish all your other taxes. Either fire the IRS or set them to analyse the mass of new information to catch terrorists, organised crime, and general fraud.
  16. cloa513 - good points. But please suggest a better way to reduce carbon emissions that is compatible with your political philosophy. "Skepticism" about climate science because you don't like proposed solutions is illogical.
  17. Gilles has argued that it cannot be both easy and difficult to give up fossil fuels at the same time. As dana has pointed out, that is a strawman argument. It has not been argued that it is easy to give up fossil fuels, but rather that it is technically feasible, and beneficial to do so. By technically feasible, we mean that there is no impediment from physics to doing so - so I guess at a stretch, we could say it is "physically easy", so in this sense, and understood only in this way, it is "easy" to give up fossil fuels. But, this does not even mean that it is technically easy. Going from physics to a usable technology is not always a straight forward path. In the case of fossil fuels as fuels, their use in transport is particularly difficult to find a technically equivalent alternative to using fossil fuels, although there are already many technically adequate alternatives. Transport ships, for example, could use a combination of wind power (sail) and solar power with battery storage to make any trip they currently make - but would take significantly longer to do so (though not more than three times longer). That is a technically adequate solution. Our civilization could operate on that basis, and probably at an advantage economically when the additional shipping cost implied is defrayed against the reduced cost of not needing to ship a torrent of fossil fuels. Business and political communication needs can be adequately substituted for by a combination of high speed internet connections for very fast virtual meetings using Skype equivalents, and solar powered Zeppelins for air transport. Again the transport times will significantly increase, but economic and political costs need not do so in tandem if we adjust behaviour to match what is now technically feasible. Of course, what is not technically feasible at the moment is eliminating fossil fuels while retaining our SUV driving, one person per car, traffic jam loving culture. A switch away from fossil fuels in the short term is going to require significant cultural changes. Not changes in those core parts of western culture that has made our civilization great, of course, but in some of those aspects of our culture which have grown up since the 1950's based on the assumption of an endless supply of cheap fossil fuels. So, this means that while fossil fuels are physically easy (in the strict sense defined above) to replace, they are culturally difficult to replace in the short term. You can easily extend the pairing of easy/difficult juxtapositions: It is physically easy, but psychologically difficult; It is physically easy, but institutionally difficult; It is physically easy, but economically difficult (in one of several possible meanings of that term). In fact, this easy/difficult juxtaposition is very easy to extend, but while rhetorically gratifying in showing that Giles knows so little about what he talks - that he is big on factoids but low on wisdom - it is not profitable. Now, I am perfectly happy to get into the nitty-gritty of this subject with Giles - but only on the condition that he restrict the discussion exclusively to this appropriate thread. If he discusses it anywhere else, except by a simple link back to this thread in other partially appropriate threads (and only in such partially appropriate threads), then I will withdraw from the discussion here as well. I will adopt the principle of not feeding the troll, unless he shows he is not a troll by not trolling other threads. I strongly recommend that other commentators follow the same strategy. I also strongly recommend that the moderators cease telling us to not feed the troll. If you need to tell us that, the troll is trolling and their trolling comments (and any replies) should simply be snipped with a link the appropriate thread for discussion provided. The current moderation policy is simply asking for denier talking points to remain continually unanswered on every thread that is generated - which is unacceptable. So, now it is over to Gilles (and the moderators). I look forward to the discussion.
  18. Now for the *real* impacts of carbon pricing : http://www.foxbusiness.com/markets/2011/04/11/oil-prices-inflation-pose-risk-global-economy-imf/ http://www.nytimes.com/2011/04/19/business/global/19euro.html http://blogs.reuters.com/james-pethokoukis/2011/04/18/the-politics-of-sps-u-s-debt-warning/ = recession, unbearable debts, economic crisis. That's the real world.
    Response: [DB] Please demonstrate the relevance of a link by providing some context showing why its relevant to the thread at hand. Otherwise, you're merely vomiting forth newspaper links (in this case) with no demonstration that you've actually read the post you're commenting on. Future posts lacking such context will receive moderation. FYI: as in the real world of astrophysics, peer-reviewed science publications carry the most weight, don't they?
  19. I think Gilles should try reading the post he's commenting on here, as it refutes every claim he made. Just as one example, try reading the Impact on Gasoline Prices section.
  20. "... a GDP reduction of less than 1%..." Can I presume that GDP is conventionally calculated? In that case electricity, petrol, diesel, coal not sold because of reduced sales (through reduced demand by negawatts or distributed generation investments) will indicate a reduction or "loss" of production - which is exactly what we want in the first place. This would be a bit like saying the country's families are starving - because they started buying packets of seed to grow their own instead of buying fruit and vegetables grown by others.
  21. Giles @18: From his first link: "Oil prices, which surged above $126 a barrel on Friday -- their highest level in 32 months -- retreated on Monday as the African Union signaled progress in Libyan peace talks." Reality check: Each barrel of oil used as fuel releases 0.45 tonnes of CO2 into the atmosphere (highest of three estimates found on the web). Introductory carbon prices are expected to be around thirty dollars per barrel, so that represents a price increase of 13.5 dollars, or just over 10%. Given the volatility of oil prices, that is not an earth shattering rise and would certainly not be, by itself, enough to drive a nation into recession. Indeed, with crude oil representing just 0.04%, the direct inflationary impact of such a carbon price driven price rise would only by a 0.004% blip in inflation. The second link discusses the EU bailout of Greece, and so far as I can tell contains no relevant discussion to this topic. The third link is a discussion of Standard & Poor's downgrading of the outlook on the US financial position. Ironically, that downgrade is likely to have a greater direct adverse impact on the US economy than a carbon tax would, but as it is, it is irrelevant to the topic of this thread. So Gilles's apparent argument to date is that: 1) The real world contains inflationary risks that can potentially lead to recessions; and 2) A carbon tax's contribution of an estimated 0.004% to inflation is so large that it significantly raises those risks. Oddly, I am not convinced by his logic.
  22. Tom, I don't know how it might work in other countries, but Australia's proposal for carbon tax on petrol should have no, nil, zilch effect on retail prices. All they're proposing is that any carbon tax will be offset by matching reductions in excise. No change in the amount going to the government, but it will be paid from the oil companies' pockets instead of the user's.
  23. Gilles#18: "That's the real world. " Here's the rest of the so-called real world, in which the so-called free market is left to itself: Crude Oil Advances as Speculation on ECB Rate Increase Weakens Dollar Oil increased for the fourth time in five days as speculation that the European Central Bank will further raise interest rates strengthened the euro against the dollar, boosting commodities’ appeal as an alternate investment.
  24. I am new to this site and am yet to get my head around a lot of what I am reading. I do want to protect the environment, I would love to see more effort being put into renewable resources. Taxing carbon might be the best way on paper. The part that makes it so scary for me is the ongoing greed of big business. I fear that the cost of living will increase dramatically due to their greed, not based on the logically put predictions made by those proposing the solution.
  25. 212, Tom Curtis, (from another thread here),
    I also find it utterly risible that people claim that public transport is inefficient because it requires subsidies to operate, while completely ignoring that users of private transport never pay the full cost of the roads they use.
    That's an excellent point, even as it relates to the redistribution of wealth issue. The beneficiaries of publicly funded interstate highway and rail systems are inevitably the very wealthy. While we may not enjoy the selection as much, people could very, very easily live a good life style using more locally produced goods, which require less roads and rail infrastructure. Certainly, our current society depends on those two, but by far, the beneficiaries are the extremely wealthy who then accumulate more wealth than they otherwise could. So a "fair" tax on roads and rail really should be on a per-use basis (in which case the small, local businessman would be far more competitive, and the consumers would have a better choice, and free market forces would include that hidden expense of long-distance-transportation infrastructure... but the wealthy would never stand for such a thing).

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