The Looming Price on Carbon: Market vs. the Social Costs


This article was first published by the CleanTech Alliance Washington, on January 11, 2016

There is a great deal of momentum in Washington and around the globe to put a price on carbon. The basic precept is that by monetizing carbon pollution, the market will adjust, moving operations away from a costly source of energy to one that is more affordable. Yet, fossil fuels are entrenched in our society, and the resistance to pry ourselves away from fossil fuels is huge. So much of our infrastructure and way of life has been built around the combustion of these polluting energy sources. The largest suppliers have even stooped to lying and manipulating public opinion to continue fossil fuel’s stranglehold on our way of life.[1] So finally, if society does set a price, what should that price be? Certainly, a price that will quickly move the markets away from fossil fuel sources in a substantive way is most desirable. Yet, a balanced approached is called for, in order not to upset business processes too abruptly.

What then would that price be in order to move the market, and are there other considerations? Will the market reflect the real cost of mitigating the damage done by the unbridled dumping of greenhouse gases (GHGs) into the atmosphere? Such damage includes compromised human health, decreased agricultural productivity, property loss from increased risk of floods and storms, and in the value of ecosystem services[2] lost due to climate change. This is the Social Cost of Carbon (SCC).

The Environmental Protection Agency (EPA) uses different models and discount rates to estimate the SCC[3]. The values that the EPA provide are wide-ranging. For 2015, the modMissouri floodingels set the SCC from $11 to $105[4]. The $105 value comes from the worst-case scenarios; the $11 figure is where minimal damage will be realized. Because of the inherent uncertainties in predicting outcomes from global climate change, the other values published along this bell curve of potential outcomes may turn out to be more realistic. These values are $36 and $56 for 2015[5]. In 2020, these middle-outcome estimates rise to $42 and $62. In 2030, they rise to $50 and $73. The worst-case scenario sets the SCC at $123 and $152, respectively for 2020 and 2030. If you live in Missouri this winter, you are living through an example of a worst-case scenario. Thus, we can see the Social Cost of Carbon on our society can be very high, indeed.

Is or should the market price be the same or similar to the actual SCC? And perhaps a bigger question is: how should we allocate the revenues from the price we put on carbon pollution? The proposed revenue-neutral Carbon Tax, I-732[6], here in Washington, sets a price at $25, to increase by 3.5% per year up to $100, after an initial first-year $15 price. The funds raised through this tax will lower our sales tax by 1%, eliminate the B&O tax for WA manufacturers, and fund the Working Families Rebate, benefiting 400,000 households.

In California, under the Cap and Trade, the next allowance auction price for February 2016 will be $12.73. The price is slowly rising from the initial $10. In this system, funds raised flow into the Greenhouse Gas Reduction Fund (GGRF). This fund is allocated to various state needs through legislative action. California ensures that a significant portion (25%) of these revenues go to projects that support disadvantaged communities. Québec, which shares an allowance auction with California, uses the proceeds for a “Green Fund” that finances various initiatives outlined in the province’s 2013-2020 Climate Change Action Plan. These initiatives include public transit, research and innovation, green energy, and dealing with municipal solid waste.

Another effort to put a price on carbon in Washington comes from an Executive Order by Governor Inslee. This sets a Cap, enforcing a 5% reduction in emissions every three years, affecting facilities emitting over 100,000 metric tons annually. This Clean Air rule also provides for alternative mechanisms to meet compliance. Companies can purchase allowances from another Cap and Trade system, such as the California/Québec allowance auction. Other mechanisms for compliance will include specific types of verified carbon offsets. The rule is still incomplete, but right now, the state collects no revenue from compliance, except the filing fee that funds the program. The final rule is due to be published this summer.

Finally, the Alliance for Clean Jobs and Energy intends to pursue an alternative carbon pricing mechanism as a 2016 ballot initiative. The Alliance is looking to support a fund that would be akin to the CA GGRF or the Québec Green Fund. It will soon release the draft text.

So, the question remains: will the funds raised from putting a price on carbon be enough to address the SCC? With the current carbon pricing, the answer is not yet. Hang on folks, we’re in for a wild ride, but unlike the Dorothy who got caught in a tornado, we can’t click our heals together to find our way home. We’re already home – and we can’t start taking significant action soon enough. Oh Auntie Em, where are you now when we need you the most?

 

[1] http://www.thenation.com/article/exxon-knew-everything-there-was-to-know-about-climate-change-by-the-mid-1980s-and-denied-it/

[2] https://en.wikipedia.org/wiki/Ecosystem_services

[3] http://www3.epa.gov/climatechange/EPAactivities/economics/scc.html

[4] Price per metric ton of CO2 emissions (MtCO2)

[5] These values are for only CO2 and separate studies have been made on methane – a 25X more potent GHG than CO2.

[6] http://carbonwa.org/policy/