The End of Doom (31 page)

While China declared that its carbon dioxide emissions (not greenhouse gases) will peak by 2030, the announcement said nothing about the level at which they will peak. So at what level might China's emissions peak? Assuming the recent 3 percent annual increase in China's carbon dioxide emissions continues for the next sixteen years, they would reach 16 gigatonnes by 2030.

In 2005, the United States emitted the equivalent of 7.26 gigatonnes of carbon dioxide. So cutting emissions by 28 percent by 2025 implies emissions of 5.23 gigatonnes in 2025, which is about the amount that the United States emitted in 1992. Assuming that Chinese emissions did peak in 2030, the country could by then be emitting three times more than the United States.

Looking at the previously announced energy and climate policies of both the United States and China, the new pledges appear to add little to their existing plans to reduce their emissions. The new Obama pledges basically track the reductions that would result from the administration's plan to boost automobile fuel economy standards to 54.5 miles per gallon by 2025 and the Environmental Protection Agency's new scheme to cut by 2030 the carbon dioxide emissions from electric power plants by 30 percent below their 2005 level. Xi was no doubt aware that a week earlier an analysis of demographic, urbanization, and industrial trends by the Chinese Academy of Social Sciences had predicted that China's emissions peak would occur between 2025 and 2040.

Ultimately, there is a critical mismatch between the two countries' pledges. The United States undertakes to make actual cuts in its emissions over the next decade while China promises that it will do so beginning in sixteen years. Supporters hope that the joint announcement is the prelude to a “great leap forward” to a broad and binding global climate change agreement at Paris in 2015. Perhaps, but the United States and China left themselves plenty of room to step back if their pledges become inconvenient.

The Rocky Road to the Paris Climate Talks

At the December 2015 UN climate change conference in Paris, the nations of the world are supposed to adopt some kind of legally binding agreement to comprehensively address the problem of man-made climate change. That goal may be out of reach. Why? Because the interests of the rich and poor countries just don't converge on how to handle climate change, as the latest UN conference in Lima, Peru, made very clear in December 2014. Poor countries are demanding hundreds of billions in climate aid upfront before they agree to give up cheap fossil fuels. And rich countries won't hand over the cash unless poor countries first make credible commitments to cut their greenhouse gas emissions.

In early 2015, each nation is supposed to register publicly its voluntary intended nationally determined contributions (INDCs) to how it plans to address climate change. Attached to the
Lima Call for Climate Action
is a preliminary draft document outlining various options for a Paris agreement. This is a Chinese menu of provisions that highlights just how much discord there is over global climate policy. For example, the draft offers several options with regard to setting a firm goal for greenhouse gas emissions cuts. Countries might agree to cut emissions to 40 to 70 percent below their 2010 levels by 2050; or cut them by 50 percent below their 1990s levels with a continued decline thereafter; or go for full decarbonization by 2050. Or rich countries could agree that their emissions will peak in 2015 and then aim for zero net emissions by 2050.

The section on the financial resources to be provided to poor countries to help them to adapt to climate change and to pay for losses stemming from climate change suggests an annual floor of $100 billion in aid from rich countries; or, alternately, the agreement might not specify any amount of climate aid at all. Under the proposed provisions dealing with sources of finance, one option states that climate aid should primarily come from the government budgets of the rich countries. In a second option, private funds would play a greater role. Also undecided is whether countries will have the right to assess and challenge data issued by other countries with regard to their treaty commitments. The climate negotiators in Paris will also need to figure out whether the parties will have to update their INDCs every five years or every ten years.

Carbon Market Follies

Unfortunately, as noted earlier, the current model for controlling the global emissions of greenhouse gases like carbon dioxide is a cap-and-trade scheme devised under the Kyoto Protocol. To comply with its obligations under the Kyoto Protocol, the European Union implemented its Emissions Trading Scheme (ETS) back in 2005. The ETS covers the output of about 12,000 big emitters, whose CO
2
amounts to roughly half of the European Union's total emissions.

Under cap-and-trade schemes, governments set a limit on how much of a pollutant—in the case of man-made global warming, chiefly carbon dioxide—utilities and other enterprises can emit and then allocate permits to them. The permits can then be bought and sold on an open market. Manufacturers, for example, who can cheaply abate their emissions will have some permits left over. The cheap abaters can sell their extra permits to other enterprises that find it more expensive to reduce their emissions. In this way, a market in pollution permits is supposed to find the cheapest way to cut emissions.

That is the ideal, but implementing the ETS has been far from ideal. For example, in May 2006, an audit showed that several EU governments had issued permits for 66 million tons
more
CO
2
than was actually being emitted. Traders immediately realized that the supply of permits was not scarce, so the price of carbon dioxide allowances promptly collapsed to less than 9 euros per ton. By February 2007, an allowance to emit a ton of CO
2
could be had for less than a euro. European governments later tightened limits on carbon dioxide emissions and permit prices recovered in the second trading period until the advent of the financial crisis in 2008 forced a dramatic economic slowdown.

The steep decline in economic activity has lowered CO
2
emissions, producing a surplus of carbon permits among companies in the EU's emissions trading scheme. Consequently, by April 2014, the prices of carbon permits had fallen to a record low 2.46 euros per ton. Due to tinkering by European lawmakers, permit prices had risen to around 7 euros in January 2015. This is far under the price of 25 euros per ton that most analysts believe is necessary to drive energy producers to seek lower carbon sources of power.

The main point is that such price volatility means that companies have great difficulty in planning their infrastructure investments. There is very little evidence that the ETS has driven large-scale capital investments in energy production aimed at reducing the emissions of greenhouse gases among firms and facilities subject to the system. If carbon dioxide trading does not induce those kinds of investments, then it clearly has failed.

Windfall Profits for Corporations—Higher Prices for Consumers

In addition to being ineffective at encouraging investment in low-carbon energy technologies, permits have been distributed in such a way that they have provided billions of euros in windfall profits to polluters. How does this work? Beginning in 2005, the ETS cap-and-trade scheme handed out nearly all of its emissions permits gratis. Hold on, you might say: If the emitters are getting permits for free, why don't they pass along the lower costs to their customers?

Think of it in terms of an analogy put forward by left-leaning economists James Barrett and Kristen Sheeran: Tickets from scalpers for the last World Cup Soccer championship games were going for more than 200 euros, about double their face value. Would the price have been lower if a scalper had found them on the ground? No. “The supply and demand for tickets is the same no matter how much the scalper paid for them, and so the price he charges you will also be the same no matter how he got them,” note Sheeran and Barrett. Or think of it this way, if someone gave you a bundle of cash worth a thousand euros, you would not be inclined to sell them to another person for less than a thousand, would you? The same thing is true of carbon dioxide emissions permits.

Giving away permits for free to industry is largely equivalent to a carbon tax in which the tax revenues are given to energy company stockholders, not spent on behalf of consumers and taxpayers. Before the carbon market's initial collapse in April 2006, the consultancy IPA Energy estimated that permits granted to British and German utilities fattened their bottom lines by 1 billion euros and 6 to 8 billion euros, respectively. And British and German consumers paid more for their electricity on top of that.

One way to correct the most egregious flaws in current cap-and-trade schemes would be to adopt cap-and-auction instead. Auctioning permits is very much like imposing a carbon tax. In this case, the government sets an overall emissions limit and emitters have to buy allowances from the government every year. The chief difference between a cap-and-auction scheme and a carbon tax is that the price of the allowances will vary from year to year. Once again, this variability in permit prices introduces uncertainty in the infrastructure planning of firms.

A 2011 report by the Swiss bank UBS concluded that the Emissions Trading Scheme will cost European consumers $277 billion for “almost zero impact.” If the European Union, which has a relatively robust governmental institutions and the rule of law, couldn't effectively implement a cap-and-trade carbon market, there is no chance that the entire world encompassing China, Russia, India, Nigeria, Brazil, Iran, Mexico, Indonesia, and Saudi Arabia can do so.

Why Not a Carbon Tax?

Many economists think that a better option for rationing carbon would be a gradually rising tax on fuels that emit carbon dioxide. As the tax increases, industries and consumers would cut back on their use of more expensive fossil fuel energy and switch to using energy produced by low-carbon and no-carbon technologies. This process would lead to lower carbon dioxide emissions over time.

For instance, economists such as Harvard University's Gregory Mankiw and Yale University's William Nordhaus advocate imposing a tax on all kinds of carbon-based fuels at the wholesale stage, at the point where they emerge from under the ground. Thus, utilities and refiners who take raw coal, oil, and natural gas as inputs would pay a tax on these fuels. The extra cost would get passed downstream to all subsequent consumers. Thus carbon taxes would encourage conservation and low-carbon energy innovation. Since the tax is levied on how much carbon a fuel contains, it would make fuels like coal less attractive compared with low-carbon fuels like natural gas or even renewable energy like solar and wind power. Ideally, carbon tax revenues would be used to cut domestic taxes such as the payroll tax or the individual income tax, thus offsetting some of the pain of higher energy prices.

Internationally, one of the big advantages of a carbon tax is that it avoids the baseline quandary that bedevils carbon markets. For example, signatories to the Kyoto Protocol are supposed to cut their emissions of greenhouse gases by 5 percent below what they emitted in 1990. Why? That goal has no relationship to any specific environmental policy objective. In fact, achieving the cuts specified by the Kyoto Protocol goals would reduce projected average global temperatures by only a minuscule 0.07°C by 2050.

As the now-moribund international negotiations about what to do after the Kyoto Protocol show, it is very difficult to get many countries to agree to new global emissions baselines. Also, where should baselines be established for rapidly growing economies like China, India, and Brazil, whose energy use and emissions are expected to more than double by 2030? Under the Kyoto Protocol, the natural baseline is what emissions would be without any restraints. However, calculating or predicting what a country's emissions will be twenty to thirty years in the future is impossible to do with accuracy.

Under a pollution tax scheme, argues Yale economist William Nordhaus, “The natural baseline is a zero-carbon-tax level of emissions, which is a straightforward calculation for old and new countries. Countries' efforts are then judged relative to that baseline.”

Another advantage is that the tax could be phased in as the average incomes of poor countries reach a certain threshold. For example, carbon taxes might start to kick in when national income reaches $10,000 per capita, which is slightly higher than China's current level. More generally, having a defined tax rate makes it easy for firms in developed and developing economies alike to predict the future impact of climate policy on their bottom line—something that is considerably harder to do when the government is handing out permits every year.

A tax avoids the messy and contentious process of allocating allowances to countries internationally and among companies domestically. For example, nations could negotiate a much more transparent treaty than the Kyoto Protocol and establish a system of globally harmonized domestic carbon taxes. Harmonized taxes offer relative price stability, and taxes on carbon emissions can be raised gradually and predictably over time so that governments, industries, and consumers can all see what the price of carbon-based fuels will be over future decades and can make investment and purchase decisions accordingly.

Nordhaus further argues that carbon markets are “much more susceptible to corruption” than are tax schemes. “An emissions-trading system creates valuable tradable assets in the form of tradable emissions permits and allocates these to different countries,” writes Nordhaus. “Limiting emissions creates a scarcity where none previously existed and in essence prints money for those in control of the permits.”

So a carbon tax offers less opportunity for corruption because it does not create artificial scarcities and monopolies. Of course, governments can engage in chicanery by dispensing tax breaks and subsidies to favored companies and industries. But Nordhaus analogizes carbon allowances to quotas in international trade and carbon taxes to tariffs: overall, it's been a lot easier to manage tariffs than quotas.