Can Carbon Taxes be Progressive?

by Makari Krause

Dissou et al. (2014) provide a new assessment of the incidence of carbon taxes and their impacts on inequality. Past studies on the impacts of carbon taxes have generally focused on the effects to commodity prices. This channel usually leads to the finding that carbon taxes are regressive because a carbon tax increases the price of energy-intensive goods and these goods make up the largest portion of the total goods bought by poorer households. Using only this one channel, however, overlooks a critical aspect of the tax; factor income, income generated from selling factors of production such as labor, is also affected by carbon taxes. Dissou et al. combine both the commodity price channel and the factor price channel to get a more comprehensive picture of the effects of a carbon tax on inequality and find that carbon taxes are not as regressive as previously thought. Continue reading

Carbon Price Analysis Using Empirical Mode Decomposition

by Makari Krause

Zhu et al. (2014) aim to enhance the science on properly setting and forecasting carbon prices. To do so they examine the European Union Emissions Trading Scheme (EU ETS) through empirical mode decomposition to better understand the formation mechanism of carbon prices. The EU ETS is the largest carbon market in the world, covering 12,000 installations and 25 countries. Over the past few years there have been a number of studies analyzing carbon prices in the EU ETS, that have generally fallen into one of two categories; structured models and data-driven models. Structured models analyze carbon price movement through the perspective of supply and demand and can help with understanding the generation of carbon prices. However, because of the unstable nature of the market, these models have been difficult to implement. Data-driven models, such as linear regressions, work well for short-term forecasting but fail to explain the driving forces behind carbon price changes. Continue reading

Regulating Greenhouse Gas Pollution from Existing Power Plants

by Makari Krause

One of the most ambitious components of President Obama’s Climate Action Plan is the EPA’s Clean Power Plan (CPP). The CPP combines regulations on new and existing power plants and will drastically reduce power plant emissions once implemented. Authority for the CPP is granted by Section 111(d) of the Clean Air Act and requires that the EPA issue a set of emissions guidelines. Once they have done this the states then need to come up with their own way of meeting those emissions guidelines but have discretion in deciding what instruments to use as long as the resulting abatement is either the same or superior to that mandated by the EPA. Continue reading

Approaches for Inclusion of Forest Carbon Cycle in Life Cycle Assessment—A Review

by Makari Krause

Terrestrial biomass is a huge carbon sink for our planet, functioning at a similar magnitude to our oceans. Deforestation and forest degradation not only remove this valuable carbon sink but also release all of the stored carbon back into the atmosphere. Long-rotation harvesting of forest biomass has always been thought to be a carbon-and-climate-neutral process because as carbon is released during combustion or decay of harvested biomass it is sequestered into the growing biomass. The issue may be more complex than originally thought and there are a number of different factors that play a part. Timing is very important in the rotation process and any timing difference between carbon release and sequestration can lead to a situation where carbon is left in the atmosphere and will lead to warming even if it is eventually sequestered. While harvesting forest biomass may be carbon-neutral over the long run, it can still have implications for climate change. Helin et al. (2013) carry out a literature review to analyze some different life cycle assessment studies and establish their suitability in determining the climate implications of harvesting terrestrial biomass. Continue reading

Economic Impact of Extreme Sea-level Rise

by Makari Krause

Sea level rise is one of the most concerning facets of climate change, Pycroft et al. (2014), examine its effects on the social cost of carbon. Rapid ice sheet melting or collapse which would cause rapid, significant sea level rise is hard to incorporate into climate models because it is difficult to gauge the likelihood of such events. This difficulty stems from the fact that the underlying processes are, themselves, hard to model. Pycoroft et al. use an integrated assessment model to examine the impacts and costs of large-scale damage associated with sea level rise. In their model they adjust the physical aspects that contribute to sea level rise and the economic consequences of those aspects. Their model shows that incorporating extreme sea level rise significantly increases the social cost of carbon. Continue reading

Political Economy Constraints on Carbon Pricing Policies

by Makari Krause

While the scientific community and much of the public accept the reality of climate change, little is being done to curb our emissions. There are a number of ways to get emissions in check. You can have command and control regulations, you can use economic means such as a cap and trade system for GHG emissions or a tax on GHG emissions, and you can also provide subsidies or set production quotas for low-carbon energy sources. A lot of research has been done on these different alternatives and unsurprisingly the studies usually find that carbon-pricing policies are the most efficient. In their paper Jenkins et al. (2014) refer to this method of pricing as the “first-best” response or the most cost effective way to accomplish emission mitigation. While economists argue that carbon pricing should be used alone in order to internalize the negative externality, this is rarely the case in the real world. Often pricing policies are combined with many other instruments such as energy efficiency incentives and regulations to meet goals. While this mix of policy instruments may not provide the theoretically most efficient solution, in the real world this theoretical solution may not be attainable and research has shown that a mix of policy instruments may actually provide a better result than using only carbon pricing instruments. Continue reading

Risk Mitigation and the Social Cost of Carbon

by Makari Krause

In 2009 the Obama administration convened a working group to determine the social cost of carbon. To achieve this goal the group used three main models: Nordhaus’ (2008) ‘‘Dynamic Integrated Climate Economy’’(DICE) model; Hope’s (2008) ‘‘Policy Analysis of the Greenhouse Effect’’ (PAGE) model; and Anthoff and Tol’s (2010) ‘‘Climate Framework for Uncertainty, Negotiation, and Distribution’’ (FUND) model. The group decided to use discount rates of 2.5%, 3%, and 5% in each of the models. These discount rates were chosen based on a review of the literature. Continue reading