The floor on the carbon price

Has a flaw. There shouldn\’t be a floor on the carbon price.

Yet another disturbing instance of this was the announcement tucked away in George Osborne’s Budget that he will impose a “£16 a ton floor price for carbon”, a measure seemingly so arcane that no one has really bothered to spell out its implications. What it means is that for every ton of CO2 emitted by British industry, and by our electricity companies in particular, we shall all indirectly have to pay what is in effect a hidden tax of £16, rising over the next nine years to £30.

Start from where the Government is: yes, climate change is a problem, something we should do something about.

But what?

Either a carbon tax or a cap and trade system. Each has benefits.

A carbon tax replaces other taxation for example: taxing bads rather than taxing goods is, umm, a good idea. The price can/should be set at the damage done by the emissions thus ensuring that we get the \”correct\” amount of emissions and thus climate change. Where emissions, and thus climate change, are cheaper than not emissions then we get change. Where reducing emissions is cheaper than the damage done, we get reduced emissions. Hurrah! we\’re maximising human utility over time.

Cap and trade doesn\’t target the price, rather it targets the volume of emissions. If squiddley tonnes is all we can emit without disastrous climate change then the cap is at squiddley tonnes. It\’sthe price that then varies as people strugle to change methods of doing things to get below that number and buy and sell permits. Things where it\’s easy and cheap to reduce emissions do so and things where it\’s expensive/impossible buy thoe permits being sold by those who have reduced.

Either will, in theory, work.

However, the role of price in each of these options is entirely different.

In a tax it\’s the price itself that does the work. So this should indeed be set centrally, at what the damage is.

In cap and trade the price is information coming from the market in hte permits: we don\’t want to set that, we want to be able to see the information. And the information the market will tell us is not what is the cost of emitting a tonne: but what is the cost of changing the way we work so as to not emit a tonne.

For if your cap is correct, then we\’ve already dealt with the climate change bit, now we\’re just trying to find out how much it\’s going to cost us to meet it. At which point, of course, the lower the price the better. We\’d actually rather like the carbon price,  brought to us by the market, to be 0.01 £ for that will be telling us that dealing with this climate change thing is rather cheaper than we had at first thought.

Note also where the money goes. A tax goes to government of course: and whatever we might think about levels of taxation, we all agree there\’s got to be some for there are indeed things that have to be done and which only government can do. But permit money goes to those who innovate and reduce their emissions. Great, for that increases the incentives to innovate and reduce emissions.

Except when we put a floor on the price. That just provides a subsidy from the public to certain favoured insiders who get allocations of permits.

A floor on the carbon price is therefore entirely a cock-up. It destroys the very information we\’re looking for (how much is all this shit going to cost us?) and is a massive transfer of resources from the hoi polloi to the insiders. It\’s actually the worst mistake you could make within the confines of either the cap and trade system we have or of the carbon tax which would be an alternative.

And what are the politicians doing? Yup, that worst.

Which brings us to a common theme around here. The politicians who run the State just aren\’t very bright which is why we\’d always like to have the State, guided by such dunderheads, doing less rather than more.

The argument in favour of minarchism is not what the State could do, it\’s what the State already does.

6 thoughts on “The floor on the carbon price”

  1. Good points however if the cost to us of not emitting carbon is going down, then we should probably be decreasing the caps on carbon emissions. This policy is a crude way of doing this and although it might be better to task the people in charge of the cap and trade system to reduce the cap when the price is too low this will nevertheless reduce carbon emissions more when it is cheaper to do so than when it is expensive to. Which is good I think…

  2. Aren’t you starting from a false premise? Namely that “climate change is a problem and something we should do something about”?

    It is becoming increasingly obvious that we really don’t know if the climate is changing in any significant way more than natural variation – wouldn’t it be a good idea to do some proper, honest science to attempt to ascertain if there really is a problem before launching half-baked attempts to “do something about it”?

  3. The complication is not all AGW discussion is about AGW. A rather taboo subject for politicians/media to discuss is fossil fuel depletion. More than one politician has said there is no difference between AGW & peak oil.

    The current government has suddenly taken great leaps in AGW policies, but what is that driver? Is East Anglia suddenly under water? The price of oil has got them running scared, and they use AGW as an excuse for policy changes which, in the end, do nothing for a real problem in the UK – high transportation costs.

  4. The confusion between “peak oil” and “needing to deal with climate change” is a particular bugbear of mine. Not only are these DIFFERENT problems, but to a first approximation, only one of them can be true.

    If peak oil is a real problem (ie, there just aren’t that many fossil fuels in the ground) then AGW is solved. Contrariwise, If AGW is a real problem, then the key issue facing us is “how do convince everyone to leave the fossil fuels in the ground, unburned?”

    But you can’t have it both ways. Either we’re screwed because there ISN’T enough oil in the ground to run the world, or we’re screwed because there’s so MUCH oil in the ground the climate is going to implode.

  5. Cody – Yes, we can have it both ways. We’re screwed when we run out of Oil (because agriculture depends on oil), and we’re screwed when we keep burning the Coal, because there is enough of it to tip the climate system out of balance (and agriculture depends on stable local/regional climates).

    And Pogo, your ignorance is a disgrace to your “name”. May the ghost of Walt Kelly smite you mightily upside the haidbone with a three-string Banjo whilst whistlin’ “Deck the Halls with Boston Charlie”! You-Know-Who is the enemy…

    For the record, I think a Carbon Tax would be way simpler & therefore way better than Cap & Fiddle. But before that, lets drop all subsidies for the Petro sector, starting wtih Cornohol.

  6. Pingback: Tim Worstall, why did you impose the carbon tax? “I assumed that …” « Shub Niggurath Climate

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