Science and the Carbon Market

March 29th, 2009 <-- by Richard Rood -->

Science and the Carbon Market

With the change of U.S. administrations, there is renewed discussion of climate change policy. Ideas at the forefront are environmental pollutant markets and tax-based controls. The market-based approach, called cap and trade, is posed in opposition with the tax-based approaches. This polarization is not a useful or correct way to advance policy.

The advocacy of a cap and trade market follows from the success of the sulfur market, which controls acid rain. The amount of pollutant that can be tolerated is informed by scientific investigation. This leads to a “cap” on the amount.

The emissions of the pollutant are considered in concert with abatement of the emissions. A coal power plant, for example, is allowed a certain amount of sulfur emission. The polluter is given the flexibility to decide whether to cut emissions or deploy abatement techniques. If the polluters exceed their allowance, they are faced with penalties.

The “trade” of the cap and trade is as follows. If a polluter produces less than their allowance, they are given credit for their success. This credit is given valuation which can be traded to others to reduce their pollution. The cost of credits is compared with the penalty for exceeding the allowance, the cost of abatement, or the cost for reducing emissions. A basic principle of the market is that with flexibility and choices at marginal cost, the market will achieve pollutant control at least cost.

Scientists frame the pollutant problem in much the same way. Scientists use conservation laws like the well known conservation of energy. Conservation laws state that the change in amount of a substance, for example carbon dioxide, is equal to its production take away the loss. At any particular place on the planet, one also has to consider the transport of the substance in the atmosphere. Transport carries carbon dioxide from urban production regions to, for example, oceanic loss regions – from sources to sinks. Both the scientist and the market trader add up budgets. One directly represents carbon dioxide production and loss, and the other directly represents cost that is a measure of carbon dioxide production and loss.

The carbon dioxide of concern to the environmental market is a portion of both the natural and industrial carbon dioxide scrutinized by the scientist. Emission is analogous to production and abatement to loss. Market trades and atmospheric transport communicate between sources and sinks. Scientific investigation is challenged with distinguishing natural and industrial contributions to the budget.

The success of a market relies on liquidity of transactions, which requires availability of choices of emission controls and abatements. The control of the amount of pollution requires that the emission controls and abatement choices represent, quantifiably and verifiably, mass of pollutant. In the sulfur market, there are technology-based choices for abatement and a number of choices of fuel that have higher and lower sulfur content. Similar choices do not exist for carbon dioxide; therefore, the fundamental elements of the carbon dioxide market do not exist.

In the case of carbon dioxide abatement, current market strategies rely on removal by natural loss processes. These sinks of carbon dioxide may be terrestrial or oceanic. The terrestrial sink is associated primarily with the trees. The oceanic sink includes both dissolving carbon dioxide into the water and consumption of carbon dioxide by phytoplankton. With regard to the market, there are questions of ownership and valuation of these natural sinks. From a science-based perspective, the ability of the land and ocean to remove carbon dioxide is not adequately known. The behavior of these sinks as atmospheric carbon dioxide increases is unknown. Furthermore, the impact that excess carbon dioxide will have on ecosystems and the chemical characteristics of the ocean, i.e., ocean acidification, is large.

On the emission side, the cost of alternative sources of energy is high relative to the cost of energy provided by fossil fuels. Also sources of low-carbon dioxide energy are not adequate to replace the energy from fossil fuel combustion.

The development of a carbon dioxide market therefore requires research and development to provide technology to address both emissions and abatement. Cost-competitive alternative fuels and sinks that do not rely on natural ecosystems must be available. Then a balance between emissions and abatement that is represented by the cost of credits can be realized.

The development of technology requires directed, sustained government investment. This is best achieved by a tax (or fee) system that generates the needed flow of money. At the same time the tax should assign valuation to carbon dioxide emissions and encourage efficiency. Increased efficiency is the best near-term strategy to reduce carbon dioxide emissions.

Rather than taxes and technology being posed as choices in competition with a carbon dioxide market, they are part of an interrelated group that leads to a market. When considered together they provide a set of tools to address both near-term and long-term climate policy needs.

3 Responses to “Science and the Carbon Market”

  1. David B. Benson Says:

    I advocate an Excess Carbon Dioxide Removal Fee to be levied against all users of fossil fuels. The fee should be enough to do what it says, remove the results of combustion. This fee could be in addition, or replacemnt for, cap-n-trade or carbon tax or any mixture thereof.

    I suggest as one method to remove the excess CO2 capture by growing algae, converting algae to biochar and deeply burying the (compressed) biochar. I estimate that about $30–60 per tonne of carbon ought to be enough funding; that’s an Excess Caron Dioxide Removal Fee of $110–220 per tonne of carbon dioxide.

  2. Joanna Mauer Says:

    There is not necessarily any significant difference between a cap-and-trade program and a carbon tax, and there is an important advantage of the former. If what we’re really concerned about is the level of emissions, a cap-and-trade program gives us an established emissions target and lets the price vary while a tax instead establishes a price with the hope that it will result in the right level of emissions. We already have two examples of working cap-and-trade programs for greenhouse gases with the European Union Emissions Trading System (EU ETS) and the Regional Greenhouse Gas Initiative (RGGI) in the U.S.

    It’s true that there is no “scrubber” for carbon dioxide as there is for sulfur. However, there is a range of options for regulated entities to reduce emissions. In the case of electricity generators, these include improving plant efficiency, fuel switching, investment in renewable energy, and providing financial incentives to consumers to reduce electricity consumption.

    If a cap-and-trade program distributes allowances for free, there are certainly advantages to a tax since the revenue can be used to offset much of the overall cost of the program. However, we have largely moved past the idea of grandfathering allowances, and RGGI set a strong precedent for a Federal cap-and-trade program when most of the 10 participating states made the decision to auction a majority of their allowances. A cap-and-trade program with 100% auction of allowances couples the certainty of emissions reductions with a substantial revenue stream that can be used for a variety of purposes including investment in energy technology.

  3. Monica Says:

    One thing many Americans don’t realize is how important domestic energy is to our country’s economic recovery and overall security. Currently, half of our electricity comes from coal—which happens to be our most abundant fuel resource.

    In fact, we recently kicked off the America’s Power Factuality Tour—a country-wide road trip in search of the people, places and technologies involved in producing cleaner, domestic electricity from coal.

    We started in Wright, Wyo., at the Powder River Basin, which produces more coal than any other site in the U.S. Take the tour for yourself and see our most abundant domestic fuel at work.

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