UK Carbon Bait and Switch

David Roberts has an excellent piece at Grist titled “Carbon tax in the U.K.: What does it mean for U.S. debate?"..

Personally I wasn’t surprised. I’ve always believed that there was a mismatch between the idea of a pure cap and trade system and a democratic system of government. Once cap and trade (or any other carbon pricing scheme) fills up the proverbial cookie jar, there’s no way that elected officials will be able to keep their hands out of it.

On the other hand, even as jaded as I am I never dreamt that the UK government would empty the jar this soon!

As David points out, this accomplishes half of the accepted benefit of a price on carbon, which is to tip the economic scales against activities with high emissions, and in favor of limiting those activities or switching to lower-carbon alternatives. What it doesn’t do is use the proceeds to help accelerate alternatives, or to provide support for individuals and companies who are more acutely impacted by the carbon price.

However, if we’re going to accept that as a “better than nothing” policy solution to carbon emissions, then we need to acknowledge our existing energy taxes and subsidies, which fit into this expanded definition. For example, the US average gas tax is $0.456, and the diesel tax is $0.508 (charts and further references are here). Assuming that we continue to support ethanol and biodiesel such that taxes on those are effectively negated (assuming the 6-year old biodiesel tax credit is extended later this year), then these are equal to a $50-$60 per ton carbon tax for a 20mpg car, and $25-$30 per ton for a 40mpg vehicle.

Of course these taxes are counterbalanced by a hodge-podge of fossil-fuel subsidies, so the amounts may be overstated. Just removing those may be, in fact, a de facto increase in the cost of carbon.

So the takeaway is that any serious effort at pricing carbon needs to clean up all of the various taxes, subsidies, incentives, credits, etc that already exist. If we want to deliver a true signal to the markets, we have to take away the existing noise.