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08 Nov 2012

Forget the Kyoto Accord And Tax Carbon Consumption

Given the failure of international climate negotiations, a tax on carbon consumption is the most effective way of lowering CO2 emissions. If nations are serious about addressing climate change, then they must pay for the carbon pollution caused by what they consume.
By dieter helm

It is a stark and frightening fact that, despite more than two decades of international effort — including enormous time and energy expended on the Kyoto Protocol — and significant economic costs, carbon emissions are now rising even faster than they were in 1990. Back then they were going up by about 1.5 parts per million (ppm) per year. Now it is 2 ppm. The critical 400 ppm global threshold will shortly be crossed, and there is little reason to believe that this trend is likely to be halted any time soon.

This raises two obvious questions. How could so much effort lead to so little result, and how could so much political capital and economic cost be expended to so little effect? The second follows from the first: Given that current approaches have so lamentably failed, what new directions do we need to take if climate change is to be cracked?

The obvious place to start is with the causes of these emissions. The answers are straightforward: Coal has been the big winner in meeting the growth of energy demand since 1990, particularly for electricity generation.
It is carbon consumption that measures the carbon footprint, not carbon production in particular countries.
It has increased from around 25 percent of world primary energy demand to nearly 30 percent — a rising percentage on a sharply growing underlying demand. Much of that extra coal has been burned in China, and despite moves to reduce coal’s share of electricity generation, China is going to burn a lot more over the rest of this decade. China and India together currently add around three new coal stations a week, and between now and 2020 around 400 to 600 gigawatts of new coal is likely to come onto the world’s energy systems.

But before we get carried away blaming China, it is important to work out why this increase has taken place. China’s phenomenal economic growth has been based on exports, notably of energy-intensive goods, from steel and petrochemicals to a host of manufactured products. These have been bought largely by the U.S. and Europe, which together account for nearly 50 percent of world GDP.

It is carbon consumption that measures the carbon footprint and hence responsibility, not the carbon production in particular geographical areas. Yet remarkably the Kyoto framework does not take consumption into account. Instead it focuses on carbon production, and mostly in Europe, where deindustrialization and the collapse of the former Soviet Union make compliance with the targets easy. For example, the UK’s carbon production fell by more than 15 percent between 1990 and 2005, but once imported carbon is taken into account, carbon consumption went up more than 19 percent. This explains how carbon production can be falling in Europe in line with its Kyoto targets, while global carbon emissions keep going up.

This sadly is not the only fault line in the Kyoto-style approach. It is riddled with free rider problems — in which some nations reduce emissions while others do nothing — and it does not target the countries where the
While talking is usually a good idea, the fabric of Kyoto is not going to head off climate change.
emissions really matter. No wonder the U.S. kept out. Indeed it is a miracle that the Kyoto Framework could even hold itself together at the Durban climate conference in December 2011. The price was inaction: All that could be agreed was that the parties would try to agree by 2015 what might happen after 2020. By that time, all those new coal power stations will have been built and atmospheric concentrations of CO2 will be well above 400ppm. The upcoming summit in Doha, Qatar, will not make much difference to this timetable.

It is time to recognize that while talking is usually a good idea, the fabric of Kyoto is not going to head off climate change. So the answer to our first question — why there has there been no dent in emissions? — leads to the second: What would we need to do to make such a dent?

There are three parts to the answer. The first two are related. Unless people pay the cost of their pollution, they will not do much about it. And that pollution is best measured by carbon consumption, not carbon production. Therefore there has to be a price (a tax) on carbon consumption — a carbon tax with border adjustments to ensure that imports of carbon-intensive goods from countries without a carbon price are treated on the same basis as domestic production.

Immediately howls of political protest will be heard. Politicians do not like carbon taxes, because they fear we the voters will chuck them out if they dare to make us pay for our pollution. Carbon border taxes are claimed to be protectionist, interfering with world trade. Yet a moment’s reflection tells us something quite profound: If we don’t want to pay for the pollution we cause, we don’t really want to address climate change, since a carbon price is almost certainly cheaper than the alternatives of command-and-control and detailed government intervention. Setting specific pollution controls on large industrial installations, picking “winners” among technologies, setting quotas, and targeting subsidies to influence investment decisions are all open to interference by lobbyists seeking to profit from the interventions.

So if climate change is to be dealt with, there is no real alternative but to face down the critics of carbon pricing. Whether politicians rise to the challenge remains to be seen. Yet a combination of the need for new sources of revenue, coupled with the piecemeal emergence across a number
A carbon consumption tax would include a domestic tax on carbon and a tax on carbon imports.
of countries of some form of carbon pricing, suggest some limited grounds for optimism.

Not to have a carbon price is an export subsidy and hence a distortion to trade. Making sure we have a level carbon-pricing field is pro-trade and enhances efficiency. It might of course be complex, but it turns out that a small number of large, energy-intensive industries make up the bulk of the carbon trade and so in practice it will not require much to make a big difference to the outcome. It is better to be roughly right, than precisely wrong.

A carbon consumption tax would comprise two elements — a domestic tax on carbon, and a tax on carbon imports. There are a variety of ways of approximating the domestic dimension, from upstream taxes at the point of extraction, to downstream taxes on enterprises or consumers. Externally, the border tax could start with steel, aluminium, petrochemicals, and fertilizers, and then be gradually expanded. The added attraction is that this can be done bottom-up: Countries can do this individually, rather than wait for an international agreement. In other words, it gets around the free-rider problem facing countries that want to be early movers. They can act without disadvantaging their own industries.

A carbon price signals to both the demand and supply sides of the market, and gives a long-term signal to investors. Its immediate effect, however, is almost all on the relative economic costs of coal and gas, making coal proportionately more expensive. In Europe a pathetically low, volatile and short-term carbon price generated through the EU’s Emissions Trading Scheme has had no significant impact, and indeed it has allowed a major dash from nuclear to coal and from gas to coal. Germany leads the way — it is burning more coal in its existing coal power stations and it is adding new lignite coal stations.

The immediate priority is to deal with this coal problem. Coal is really dirty stuff. It kills lots of miners — several thousand a year in China, for example. Coal mines leak methane, they pollute the water table with heavy metals, and it takes a lot of energy to dig out the coal and transport it to power stations, which then emit not just carbon but other major pollutants. Coal-fired power plants use lots of water for cooling and the ash needs to be disposed of.

Gas provides a temporary stopgap, with half the carbon footprint of coal and few of the other pollutants. In the U.S., with little or no energy or climate policy, shale gas is making major inroads into coal, resulting in
Money must be available to spend on all the new technologies that might just crack climate change.
some of the biggest drops in emissions in the developed economies, outside the Kyoto agreement. In Europe, by contrast, governments (notably France) have been banning shale gas, on the grounds that it might lead to methane leakage and water table contamination. These are real problems that need regulating, but a moment’s reflection should lead to the conclusion that if shale gas is to be banned, then all coal mining should be illegal, too. Yet in Europe the shackles being placed on gas mean yet more coal is being burned.

Gas is a temporary fix, and unless there is some massive success with carbon capture and storage it will eventually need to be phased out, too, in a decarbonized world. This brings us to renewables. It is a sad fact that none of the current renewables are capable of bridging the gap toward decarbonization. Wind, conventional rooftop solar, and various biofuels and biomasses require areas of land and water resources that are simply impossible to provide. It takes an enormous number of intermittent wind turbines, at best a few megawatts each, to deliver the output of a conventional power station. It takes a lot of roofs and more agricultural land than currently in total use in the U.S. and Europe to make much inroads into car fuels.

Yet it is these current renewables where all the effort — and money — is going. Europe in particular is determined to meet the short-term renewables and biofuels targets by 2020, spending billions on offshore wind and rooftop solar. Not only does this undermine Europe’s

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competitiveness against the shale gas-powered U.S., but it means that the money is not available to spend on future renewables and all the new technologies that might just crack climate change. These include next-generation solar, which involves improving the chronic inefficiency of existing solar panels, in particular through the infrared part of the spectrum, and a host of new materials to capture solar energy. Then there is solar thermal; artificial photosynthesis; geothermal, still in its infancy; next-generation nuclear; and a number of ancillary transformational technologies like smart grids and meters, which influence demand, and batteries and storage, which might solve the inherent storage problem that has long bedeviled the electricity industry.

Current renewables cannot bridge the gap, so either it’s climate change or it’s new technologies. Yet if, in the meantime, a serious carbon price can be introduced based upon carbon consumption and we can get off the coal escalator into gas quickly, then there is a hope that the 500 ppm threshold will not be crossed by 2050. But carrying on as we are, hoping Kyoto will solve the problem, is worse than wishful thinking: It carries lots of cost for almost no benefits.

ABOUT THE AUTHOR


Dieter Helm is professor of energy policy at the University of Oxford, Fellow in Economics at New College, Oxford, and author of The Carbon Crunch: How We Are Getting Climate Change Wrong and How to Fix It.

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COMMENTS


A carbon price, including a tariff at borders, would be a way to make it work. But see what happens now that the EU has moved all flights in/out of the EU into the ETS system. That is a minor step, but it already generated lots of resistance.

Posted by Nichol on 08 Nov 2012


Regarding this:

"This explains how carbon production can be falling in Europe in line with its Kyoto targets..."

As hinted - although not explicitly stated - in the preceding sentences, the levels set in Kyoto were a function of historical anomalies in Europe. Why was 1990 chosen as a baseline for Kyoto in 1997, and kept in still later agreements? That was a rhetorical question. The year 1990 was chosen because the Germans got the reductions that came from closing old coal fired plants in the former East Germany, and the British got the reductions that flowed from closing their own old coal-fired plants that were at the end of their operating lives in any case. Add to that the French indifference - they run on nuclear, and so don't have to pay a price for CO2 reductions - and the attraction of 1990 is obvious for the 'leaders' of climate change action in Europe.

THAT is how Europe cut its CO2 output - by ginning the game from the beginning in a cynical, smoke-filled room deal that reeked of hypocrisy. Britain and Germany got their 'cuts' by doing nothing. And now Germany is busy building a new generation of coal-fired power plants to replace their CO2-neutral nuclear facilities.

Regarding new solar innovations: unless these innovations involve keeping the sun in the sky 24 hours per day, this is a non-starter. Anyone who disagrees is free to pull themselves off the reliable, gas/nuclear/coal grid and power all their electrical needs with solar. That means no lights at night, no refrigeration at night, no appliances at all when they sun doesn't shine. Live that way for six months, and then get back to me. Photovoltaic power is a toy - and an expensive toy at that. Making a more efficient toy does not keep factories and hospitals running 24/7/365.

Posted by MarkB on 08 Nov 2012


Interesting argument, but if the author believes that carbon pricing at the border is not "open to interference by lobbyists seeking to profit from the interventions" — the charge he uses to dismiss the alternatives — then he has not studied trade policy.

Border carbon adjustment regimes sound intuitively fair and appear deceptively simple. For a snapshot of the vexing complexities under that smooth surface, see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2163203.

Posted by Aaron Cosbey on 08 Nov 2012


This is an excellent idea, but in my opinion it understates the powerful role the revenue from this tax could play as well in enhancing the feasibility of this proposal. In an era when reducing deficits is at the forefront of the policy agenda and additional revenue is likely to be inevitable, deriving revenue from a tax levied on something we don't want (pollution) rather than something we do want might elicit broader support.

Posted by Tom Tietenberg on 08 Nov 2012


A carbon import tax strictly penalizes the consumer. The manufacturer who benefits from the production and export of a product bears no burden in this tax scenario. Therefore, a producer that uses coal-derived electricity is treated in the same way as a producer that uses solar or wind derived electricity. The concept proposed by Mr. Helm creates no incentive for the producer to go green.

Posted by Joseph Castillo on 08 Nov 2012


I welcome the idea of questioning business as usual. But I am not persuaded that the author has done a required analysis of the politics of climate change. It is not that we have a failed global solution to climate change because "the Kyoto approach", the negotiations only reflect the disproportionate power of the high carbon lobby both in developing and developed countries - in the US in general and DC in particular. This lobby fuels the expensive politics of fear and misinformation. A war on math, science and responsibility do not hesitate to derail efforts - be them a 2015 global deal or a national climate law in any given nation.

So the argument that a carbon tax will have more political success than other options feels theoretical: why would that be the case? And isn't it a bit of wishful thinking: it reads as as "we tax carbon, deal with the nasty externality, and industrial countries do not have to ever deal with global negotiations?"

The article is very opinionated about Kyoto. Fair enough. Understandable. But the point is not Kyoto but multilateralism so where is the counter factual? No multilateral negotiations mean a shift from a rule-based system to a power-based systems where solutions are decided by a handful of thinkers from a tiny group of large economies with disproportionate power. No thanks. (My country is Costa Rica and believes is a multilateral forum where we can shape the outcome so that we increase our own responsibility to act but also hold climate laggars accountable especially on their adaptation finance obligations)

Do keep sharpening the argument for carbon taxes - we need creative economists that are not wedded to cap and trade only - but I would strongly recommend to reframe the argument so it avoids locking in a false dychotomy that unhelpful idea that we have to choose between either a multilateral negotiation or a carbon tax. Such binary debate tends to polarize.

What we need is a new level of political imagination that can help us break the gridlock in key capitals and engineer the right local and multilateral synergies.

Happy to discuss further.

Posted by Monica Araya on 08 Nov 2012


One big question we need to ask ourselves is whether we are trying to "stop" climate change or remove human’s impact and restore natural historical climate change cycles.

If we are trying to stop climate change all together and find a way to maintain our current weather patterns, the consequences will be just as deleterious and efforts just as fruitless.

Posted by Jeramie Jones on 08 Nov 2012


While a carbon tax would mitigate global warming in the current context of globalized corporatism, it is also immoral to the extent that it is similar to a tax on slavery. I propose that what is newly perceived to be immoral should be phased out and thereafter outlawed. Perhaps a tax could be a short term solution, but it is more likely to become an entrenched excuse for further contamination.

Also, the idea of taxing what world governments subsidize to the tune of at least a half trillion dollars annually would seem to be the very definition of big government and inefficiency. Do you drive with your foot pressed on brake and accelerator?

Would we "starve or freeze" without igniting fossil substances? Not if the rapid necessary transition to "carbon neutrality," effecting a stabilized then decreasing atmospheric concentration, were implemented during the coming decade or generation. Essentially all of the strategies and technologies are available for such a transition. It is only the investor class of fossilized finance and militant nation-state corporatism that remain significant obstacles.

Lastly, "natural gas" ie. prehistoric methane is not an "energy resource" or "a form of energy."
It is a form of matter (100 times more powerful in radiative forcing at release than carbonic acid gas).

Posted by James Newberry on 08 Nov 2012


Excellent piece, thank you. One thing jumps out for me: the relative lack of attention to efficiency and demand reduction.

Dramatic reductions in demand, through smart, whole-system design (best-articulated in my opinion by the Rocky Mountain Institute and Amory Lovins, particularly in his most recent book, Reinventing Fire) is absolutely necessary in addressing the climate crisis. It also helps existing renewable technologies "bridge the gap," if the gap is 80-90 percent smaller.

A carbon price would go a long way in reducing demand, and I think all options should be on the table for making that happen, so thanks again for this piece.

Posted by Georges Dyer on 09 Nov 2012


Heavens above. This is a worry. Firstly you will castigate me as a "climate denier" as I question the validity of the warmist body of opinion.

Secondly I am concerned that your prescription of a carbon tax will have the effect of reducing the rate of economic expansion in developing countries, hence keeping millions in grinding poverty.

Government policy is pushing millions into "fuel poverty" as it is called in the UK. The imposition of green levies on fuel bills has increased our energy costs by 10 percent at a time when incomes are declining.

The only hope is that self interest will kill any chance of your baby being born. What hope do you really have of a worldwide agreement on this folly when the past is littered with bickering, blood and feathers regarding agreement on the principle of reducing emissions. Towards 400 ppm and beyond! No cooling in 14 years! Open your minds.....

Posted by Alan Crawford on 10 Nov 2012


Why so anti current renewables? They do the job and if they had benefited from the same subsidies as fossil fuels would already have been practically universally applied.

Posted by Turboblocke on 10 Nov 2012


How do we educate America that natural gas can be consumed so much more efficiently than is being done today? Natural gas is "our" energy source that can be consumed to near 100 percent Energy Efficiency. With the technology of Condensing Flue Gas Heat Recovery, the heat energy is recovered out of the waste exhaust gases, so that this heat energy can be used back in the building or facility.

Going into the atmosphere is COOL exhaust, some days even cooler than the outside air temperature.

The converted coal to natural gas power plants should be constructed with no chimney's. The heat from the exhaust recovered and utilized to produce bio fuels or food, two things that America needs to get off of imported oil and support the world.

Natural gas can be consumed so efficiently that the WATER can be recovered from these cooled combusted exhaust gases, and this clean-distilled water is very usable.

So much good can come from natural gas here in America, if only our governments and industry ~ research and realize.

Today America wastes 40 percent (?) of all the natural gas consumed. It goes up chimneys across the country as HOT exhaust into the atmosphere.

In 2011 America consumed approx. 17.5 Trillion cu.ft of natural gas in commercial buildings, industry and power plants, and this number is going to increase greatly over the next few years.

What natural gas is not wasted today, will be there to be used another day.

Posted by Sid Abma on 15 Nov 2012


Yes, thank you for putting the focus on Carbon Consumption, instead of Carbon Production.

Does anyone have figures for consumption per capita by country?

I have long favored (for the USA) a border-adjusted carbon tax with equal per capita refund of the proceeds as taxable income (to be factored into the calculation of needs-based benefits, disability benefits, and the minimum wage).

Perhaps one way to avoid the complexity of border adjustments would be to extend the tax (and the corresponding refund) to cover the whole world's population. This may also be the best way to create an international agreement which is fair to all parties.

Posted by William Fraser on 15 Nov 2012


I spent my midlife crisis running as a "Green Republican" in the Wisconsin Republican primary in 1992 against a sitting Senator (Bob Kasten), and I road tested some political ideas. My main point was to call for a REDIRECTION of the tax burden away from income, property, and sales taxes onto pollution, resource depletion, and vice. I had no chance to win, but I did get 20 percent of the votes (>50,000 votes). Kasten must have been stunned, and he later lost to Russ Feingold. Something I learned from that is that my best line from the campaign "No new taxes means same old taxes" has legs politically!

Posted by Roger Faulkner on 19 Nov 2012


Thank for a good proposal. We have had carbon taxes here in Finland since 1990. They are in gasoline prices and natural gas ane coal prices which are used for heating. Elecricity has no carbon tax, but there is carbon trading since 2000 in EU level.

However, this carbon trading is not effective, while the price is today at 8 €/ton (6 €MWh). It sohoul be about 30-50 €/ton, to put gas fired plants in merit order before the coal plants. Our governments have budget deficits about 2-8 percent from GDP. Thus tax could help them to balance the budgets.

I really look forward to see 1000 lb/MWh CO2-emission standard to be in force in US. This would make a big change. We do not have is in Europe yet. I hope that the U.S. will now show the way.

Asko Vuorinen
writer www.askovuorinen.fi

Posted by Asko Vuorinen on 26 Nov 2012


No mention of energy efficiency?

Posted by Evan Paul on 29 Nov 2012


@MarkB : I first wondered if I had written that comment about how the Germans cheated the game by choosing 1990 -) They on the other hand did put themselves a higher target, which means that the effort was not that much lower than the one of other countries. I didn't know your point about England.

It should be said about France that it's probably only the stupidity of the then government or inability to think over short term political gains that lead to acceptance of the terms of the agreement. Kyoto does ask for an as high reduction of CO2 than for other countries. And we now see France spending money on the completely futile task of reducing CO2 emission of an already decarbonated electric sector (it's a more recent stupidity that leads to everyone being unable to see that it's in the other sectors that France needs to do the effort and that it would pay much more. However other sectors are also quite more difficult than electricity, and the Green by constantly focusing on renewables that only provide electricity constantly hide that).

Posted by jmdesp on 04 Dec 2012


Part of what I loved about Mr. Helm's Carbon Crunch book, is the debunking of faux multi-lateralism. His may not be a perfect solution, particularly if "globalization" declines as natural gas enables more domestic manufacturing. Excise taxes are easier to impose than domestic taxes. The focus needs to be on utilities and transportation in U.S., China India. US and China will each reduce carbon impact, although perhaps slower than most would prefer. India's governance issues continue to plague it. Fresh water is the larger issue in any event.

If there can be a break in silo thinking and a genuine effort to use scientists, planners, environmentalists, financiers and other business people to find acceptable compromise solutions that incrementally advance the carbon reduction (or any other sustainable) goal I think Mr. Helm would be satisfied. Process remains the larger problem.

Posted by Brooks White on 18 Dec 2012


America is producing less CO2 now than any time since 2005, thanks to cheap natural gas.
This has rendered coal plants useless. The U.S.'s current CO2 amounts actually meet the Kyoto's level of output. Since the mid 2000's, we have continued to outsource factories in China, where they actually don't care about the environment and pollute in the name of development. So in retrospect while we have cut our emissions China has made up the difference and sped up the process of global warming. Combine that with all of the forests that are cut down by the poor people in southeast Asia, and you are headed down a road you can't control.

This is just bad legislation that will drive up the cost of operations, further discourage small businesses, and give more cash to Green Cronies whose businesses have otherwise mostly failed (see Evergreen Solar, A123 Batteries, Solyndra, etc.). Anytime you give a government agency more revenue they will find very stupid ways to spend it (see European and American Entitlement spending).

Posted by matthew on 05 Feb 2013



 

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