Um, hello, Mr. Drum — carbon credits? Black soot? by mattsteinglass

Somehow Matthew Yglesias and Kevin Drum and Jeffrey Sachs and Andrew Sullivan and lots of other smart people have spent several days arguing about the relative merits of cap-and-trade limits on greenhouse gases versus a carbon tax without ever even mention the issue of tradable carbon emissions credits created by greenhouse gas reduction projects. Without cap and trade, projects that create tradable carbon emissions credits (CECs) certified emissions reductions (CERs) by fixing carbon or otherwise reducing greenhouse gas levels — things like preserving forests and planting new ones, trapping gases from organic waste and livestock excrement, or getting third-world villagers to use low-CO2-emitting gas stoves rather than free firewood from local forests (which also emits lots of greenhouse-causing soot) — wouldn’t exist. The carbon tax reduces carbon emissions by making it more expensive to burn fossil fuels. But it does nothing about all these other sources of greenhouse-causing emissions. Only cap and trade does.

Cap and trade systems do this by creating tradable carbon credits. Under the Kyoto Protocols’ Clean Development Mechanism (CDM), greenhouse-emissions-reducing projects like forest preservation can submit their projects for stringent review by UNFCCC-licensed assessors. If their projects pass review, they are granted certified carbon credits measured in an equivalent reduction of CO2. Ongoing projects are granted permanent credits, subject to periodic review; projects which reduce a fixed amount of CO2 are granted credits which expire after a period of time. The tradable credits are worth money on the European carbon emissions credit exchange and other trading floors, where they are purchased by coal-fired electric plants and other carbon emitters. There are currently 1431 certified CDM projects, which reduce greenhouse gas emissions by the equivalent of 220 million tons of CO2 per year — about 5% of the total annual emissions of the European Union. These projects owe their existence to the European CEC carbon emissions permit exchange; a US cap-and-trade system would create many more of them. Thus cap-and-trade encourages reduction of greenhouse emissions in all sorts of ways that wouldn’t happen with only a carbon tax.

Take cookstoves, and soot. Scientists now estimate that “black carbon”, basically soot, is responsible for 18% of global warming, while CO2 is responsible for 40%, according to this NY Times article by Elisabeth Rosenthal in April. Many of these emissions come from wood- and charcoal-fired cookstoves in India and elsewhere in Asia. There is soot from Indian cookstoves in Tibet. Soot from Indian cookstoves is melting the snow on Everest; Himalayan glaciers may lose 75% of their ice by 2020. A simple carbon tax will do nothing to reduce such soot. Sooty cookstoves used by poor Asians are generally fueled by free or informally harvested local firewood or by charcoal made and sold on the informal local market. Such transactions in third-world countries happen far below the radar of government tax authorities and would escape any attempt at sales taxes, let alone a carbon tax.

The only way to reduce soot from cookstoves, or for that matter reduce CO2 emissions by encouraging villagers to switch to solar or propane or methane from pig manure, is through active development programs. For example, writes Rosenthal:

in March, a bill was introduced in Congress that would require the Environmental Protection Agency to specifically regulate black carbon and direct aid to black carbon reduction projects abroad, including introducing cookstoves in 20 million homes. The new stoves cost about $20 and use solar power or are more efficient. Soot is reduced by more than 90 percent.The solar stoves do not use wood or dung. Other new stoves simply burn fuel more cleanly, generally by pulverizing the fuel first and adding a small fan that improves combustion.

That’s great. But development programs of this sort are vastly more powerful when they include market incentives. Biogas projects, which turn agricultural waste into methane for fuel, become much more profitable when they can also earn CECs CERs for the fossil fuel consumption they’re saving. (There are problems incorporating CDMs into household-level projects like biogas, but mainly because the CDM mechanism under Kyoto is expiring soon and nobody is sure how it will be renewed — a permanent cap-and-trade system is needed.) Basically, if you’ve got an aid program, you’re sending out lots of people to convince third-world villagers to change the way they do things. If you’ve got a market-based system, you have an automatic incentive for programs to change the way third-world villagers do things and earn money by doing it. Markets are scalable. They’re much less dependent on “monitoring and evaluation” — the monitoring takes care of itself through the profit motive.

Finally, let’s think about the internationalism issue — another point Drum, Yglesias, Sachs et al have inexplicably missed. Say the US implements a carbon tax in 2011. How soon will concern over climate change and international peer pressure induce, say, Vietnam to adopt a similar carbon tax? An optimistic guess would be 2025; a pessimistic guess would be after the Mekong Delta is underwater. Now, let’s say the US implements a cap-and-trade system in 2011. How soon will that start reducing carbon emissions in Vietnam? In 2011. As soon as the US implements cap-and-trade, carbon emissions credits CERs will start trading on US trading floors. By reducing their carbon emissions, Vietnamese power plants will be eligible to earn such credits. By implementing cap-and-trade, the US immediately creates incentives for businesses in other countries to reduce emissions even if those other countries’ governments do nothing.

This isn’t to say there are no arguments in favor of a carbon tax. Probably the best idea would be to implement both. But one certainly ought to consider the fact that cap-and-trade’s emissions credits can do at least three things a carbon tax can’t: 1. incentivize people to reduce greenhouse emissions from activities besides burning fuel; 2. incentivize greenhouse emissions reductions where tax systems don’t apply, especially the informal economies in the third world; and 3. immediately incentivize greenhouse emissions reductions projects in other countries.

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12 Comments so far
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i have a few questions.

-why can’t a carbon tax system be created with a tax credit, much like the low income housing tax credit regime, that would incentivize carbon reducing projects.

-wouldn’t such a system have the added benefit of using the tax credit to offset the other tax liabilities of the investor in the carbon reducing venture, instead of selling the carbon reduction to a polluter in the form of a license to pollute?

-wouldn’t it be very costly and difficult to determine how much carbon pollution is being prevented by a program that e.g. distributes solar stoves in india? there is the possibility that the new stoves are abandoned after a while, or that their introduction increases total usage of stoves. given that, an overly generous carbon credit given to these ventures and sold to a carbon emitter could increase the actual amount of carbon emitted, as well as waste money (and emit carbon) through stove manufacture and transport.

Comment by neil s

These are good questions. I’ll take them in reverse order:
— yes, it is costly and difficult to determine how much carbon pollution is being prevented by programs that distribute improved cookstoves, but such monitoring and evaluation is an issue in all development programs that attack this problem. Since the problem has to be attacked – soot is just too big a problem to ignore – the key is to do it in the most efficient way. What you have now is typical piecemeal development stuff: each individual cookstove program has to bring in an outside evaluator to make a separate study of the effectiveness of the program to justify its expense to donors or taxpayers. This approach is almost impossible to scale up to tens of millions of households. In contrast, when you bring such a program into a single universal system like the CDMs, you have standardized M+E systems that can incorporate: satellite monitoring of forests in areas where firewood is collected; airborne soot emissions monitoring; large-scale regional household surveys; and so on. Of course it will never be perfect and there will be slippage. But the CDM mechanism builds in the M+E in a much more efficient and scalable way. And it creates a much more reliable adversarial monitoring framework where the M+E isn’t being paid for by the NGO that wants to get a good result for its program to keep donors happy, as tends to be the case now.
– on the tax credit: first off the bat, the CMD mechanism already exists. The standards are in place in the EU and at the UNFCCC. There are obvious drawbacks to setting up a new and different system of incompatible standards for emissions reductions that won’t be tradable with the credits the rest of the world uses under Kyoto. As for your distinction between tax credits vs. emissions credits in the form of ‘a license to pollute’, I don’t actually understand what you mean by this distinction. CDM credits are quickly sold and turned into money, just like tax credits; this is all fungible and I don’t see what the difference is between the two. You seem to be implying that CO2 reductions through CDM credits would create more offsetting pollution because they’re a “license to pollute”, but that’s a confused way to think of it. The cap-and-trade system sets a hard national/regional/global limit for emissions. Emissions reductions that create CMD credits can’t allow emissions to exceed the hard total limit. The limit stays the same.

Comment by mattsteinglass

Whatever you do, don’t talk about who’s going to pay for this.

Never mind that the financial burden of Cap and Trade will fall most heavily on states that get electricity from coal and on the lowest-income households in all states, or that it will kill any possibility of economic recovery.

Never mind that Cap and Trade will bankrupt the coal industry, just like Obama promised, and utterly devastate the economy in at least ten states. What’s another few bailouts in the scheme of things? The national deficit is already as big as the entire proposed federal budget for FY2001. Too bad that doesn’t ever come into the conversation.

Never mind that half a million coal-mining jobs in 27 states on are the line, or that -unlike windmills and solar panels- every coal miner creates five other jobs on average. Who needs jobs anyway, when soon everyone will be living off Government, because it will be the only act in town?

Comment by Yael

Boker tov, Yael. I’m sure the Iranians and Saudis appreciate your help in keeping the fossil fuel money coming their way. Good luck with it!

Comment by mattsteinglass

Cap and trade will happen instead of a carbon tax for one reason only: It allows for political favoritism. It is a certainty that 75% of credits will be given away to big lobbyists. In all respects (except non-market economies) a carbon tax is sufficient as it is not really a “carbon” tax, but a greenhouse tax and should include methane and other gases.

Comment by Scott

A carbon tax in the US provides no incentive for me, living in Vietnam, to set up a program to get people to trade in their gas-powered two-stroke motorbikes for electric ones. With a cap-and-trade system in the US compliant with the Kyoto system, I could set up such a program, get it certified by the UNFCCC, and earn money selling my CDM emissions credits. Furthermore, a carbon tax provides no incentive for me to reduce greenhouse emissions from processes other than burning fuel, such as organic wastes. It would in principle be possible to tax pig farmers on a CO2 equivalent basis for the methane coming out of their waste ponds, but getting that to happen is exactly the same kind of complex political process full of clauses and loopholes that you’d have with cap-and-trade, and it’s just as likely that livestock farmers will benefit from favoritism and receive a “giveaway” in the form of not having to pay for the methane they generate.

Comment by mattsteinglass

[...] carbon credits a scam? May 17, 2009, 9:13 pm Filed under: Environment Responding to my point that if we implemented a carbon tax rather than cap-and-trade, there would be no third-world [...]

Pingback by Are third-world carbon credits a scam? « ACCUMULATING PERIPHERALS

Carbon tax has several advantages over the cap and trade which as Sachs rightly mentions sounds good on paper much more that it is in the reality. Carbon tax factors into the price of carbon fuels their geopolitical costs, something that the current taxation system does not. It can be easily implemented as a tax swap, making it revenue neutral which is difficult to do with the volatile cap and trade revenues which obscures who is paying and what. The main advantage of the cap and trade over carbon tax is that it creates an illusion that consumers pay nothing and costs are safely concentrated on producers. Once American electorate starts growing suspicious, the mess will be total.

But I would agree on one thing. Carbon tax can be implemented by the side of the cap and trade. The carbon tax objective in this case would be to restructure taxation burden so that the geopolitical costs of carbon fuels consumption would be shouldered by those who consume them and not by the whole economy.

Comment by Nobody

I think you paint an overly-rosy picture of what cap and trade can do. As you rightly point out, it is hard to incoporate projects like cookstoves into the CDM, this is not because of uncertainty over the future of the CDM, but rather, the difficulties of ‘scaling-down’ projects like the CDM, which have onerous monitoring and reporting requirements (at least for small, dispersed projects like this). This is one reason why there has only been one approved CDM forestry CER. The costs and logistics of implementing and monitoring a forestry project under the CDM are quite difficult, and in many cases, logically impossible (something to be explained for another time). You are correct to say that the U.S adopting a cap and trade would create incentives, but it also opens the door to massive abuse, which is what has happened under the CDM. Its largest source of emissions reductions have come from reducing HCFs in Chinese factories, reductions that could have been done much cheaper simply through regulation. The CDM ended up being a huge subsidy for these businesses! Imagine such abuse occuring at a much larger scale if the U.S ever gets in on these markets!

Comment by musa

[...] would be transcended. Sullivan links to that and to Felix Salmon, asking what is feasible. Matt Steinglass posts on the whole debate. Megan McArdle comments on Steinglass, Jim Manzi agrees with McArdle. [...]

Pingback by Tax, Cap and Roll « Around The Sphere

Пора переименовать блог, присвоив название связанное с доменами :) может хватит про них?

Comment by Marinkina

The carbon tax should be worldwide, i really think it would help raise wareness as well as cause more efficiencies in the political climate, which right now sucks.

Comment by drummer boy

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