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

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

Is the Social Cost of Carbon Determinable?

by Emil Morhardt

The Social Cost of Carbon (SCC) release into the atmosphere is what you need to know if you want to make a case for reducing its output. Down the road sometime, there may be social consequences [costs] that will cause us to regret not doing something to reduce our current carbon output, but if it would cost less to do something about it then then to to make the investment now, we might as well wait. So there are two basic questions to ask: What will the social costs of our carbon emissions, if any, be? And how much more or less will it cost to mitigate them when we experience them than it would to avoid them in the first place by cutting carbon emissions? Pizer et al. (2014), writing in Nature, discuss the impact of different estimates of the SCC and the importance, if difficulty, of getting a correct estimate, observing the contrast between the estimate made by the US government in 2008 which suggested that we might as well wait, versus the one made in 2013 which showed the costs of waiting are triple those of doing something now. They also note that above all, the assumed discount rate in the economic models is crucial to the calculations, concluding that it would be ideal if both social costs and discount rates were routinely recalculated on a 5-year basis by multiple government agencies and reviewed by the National Research Council. Their goal is to use the best possible social and natural science and economics, free of political input. Continue reading