Carving the Cost of Climate Change

In 2005, the United States emitted about 7 billion tons of the most prominent greenhouse gas, carbon dioxide into the atmosphere. Colorado produced about 117.7 million tons, just under two percent, of that total, according to the Colorado Greenhouse Gas Inventory.

In widely quoted “business-as-usual” scenarios, U.S. emissions will double by 2050, to about 14 billion tons. The Colorado Inventory only projects emissions out to 2020. It’s reference case projections show a 26 percent increase over 2005 emissions, to about 157 million metric tons of carbon.

Atmospheric concentrations of CO2 are already at levels not seen on the planet in 400,000 years, and perhaps not for 30 million years. Records from that long ago are incomplete, as you might imagine. Carbon dioxide and other greenhouse gases trap heat in the atmosphere, making the earth warmer. Scientists from the Intergovernmental Panel on Climate Change estimate that the average global temperature will warm between 2.5 degrees Fahrenheit and 10.4 degrees F by the end of the 21st century.Global warming is, as the term implies, a global problem, requiring coordinated action to address effectively. Inaction by the federal government has led to several efforts by concerned local and regional groups to deal with the issue such as they can at home.

According to the Pew Center on Global Climate Change:

Twenty-eight states have adopted climate action plans detailing steps they will pursue in addressing climate change, and 12 states actually have set targets, ranging from modest to aggressive, to reduce their GHG emissions in the decades ahead.

Colorado has begun to take some steps on its own. Gov. Bill Ritter is exploring joining an initiative with five other western states to reduce state emissions. Denver has a greenhouse gas reduction plan.

And local activists are proposing a carbon tax. The Colorado Carbon Tax Initiative is considering offering a state ballot initiative that would impose a per-ton tax on carbon emissions from electricity generation, transportation and other sources. Electricity and transportation account for about 60 percent of GHG emissions nationally. A proposed amount of the tax has not been determined, but if it were at, say $6 per ton, that amount would be imposed incrementally each year, that is, $6 per ton in 2010, $12 per ton of carbon in 2011, $18 in 2012, and so on. For each $6 a ton increment, the cost of gasoline would go up about five cents a gallon, and the cost of electricity about one-half cents per kilowatt hour. The tax would be “revenue neutral,” i.e., for every dollar a taxpayer paid in carbon taxes, his state tax burden would be reduced in some other area, like sales or income taxes.

But the idea of a carbon tax is a relative newcomer to the climate mitigation debate, and it isn’t without its critics, even among those those who want to see urgent action in curbing GHG emissions.

Janet Peace, an economist with the Pew Center, says,

“We prefer cap-and-trade to a tax. Cap-and-trade provides certainty about what you’re going to get. It places a limit on the overall amount of greenhouse gas emissions. There is a certainty about what that level will be at the end of the day.

“The tax is a market mechanism, but it doesn’t give you certainty about the level of emissions.”

“Cap-and-trade” means that regulatory level of emissions is set and emitters hold allowances to cover their emissions. They can trade these allowances among each other. If an emitter reduces his emissions below his allowance, he can sell the right to emit to another company that may not have been able to do so. But the absolute level of emissions remains constant. The New England and Mid-Atlantic states have entered into a regional cap-and-trade program.

One advantage of cap-and-trade over a tax is that it can be more easily implemented across borders.

Frank Maisano, a D.C. lobbyist and spokesman for power generators, oil companies and others with a large stake in carbon emission issues, says that it is too soon to do anything, that no consensus about the best approach has yet emerged:

“What we’ve talked about in Washington is, `We’ve got to do something about climate change.’ Nobody is really willing to talk about what it would cost for us to do that.

“The cost issue is a big problem, and it’s one that we’ve never been able to get over, other than saying, `Oh, we can do it by changing light bulbs, we can just do it by increasing our efficiency, we can just do it by using a cap-and-trade program.’

“Unfortunately, all of those things have residual costs and unintended consequences.”

True enough, says Peace, but so does the alternative of doing little or nothing:

“We’re more afraid of the impacts of not taking action. While today we may not have very good information about the costs of controlling climate change, over the long term as we implement these technologies we will have more and more …

“The cost of doing nothing is far greater than the cost of doing something. Some people say we can’t do anything because everything is too expensive. There is a huge cost of doing nothing. There are ways to do this that don’t kill the economy. Economic modeling shows that we can do this at a fairly low cost, and the cost of doing nothing is greater.”

So how much is a ton of carbon actually worth? “That’s the million dollar question, isn’t it?” says Peace. The answer is that nobody really knows. The Colorado group’s model shows that a cost of  about $11 a ton is necessary to achieve an 80 percent reduction in emissions by 2050. (80 percent, which seems like a lot, is roughly the realistic amount of reduction from business-as-usual emissions that is required to have an impact on atmospheric GHG concentrations.)

The only active carbon market in the U.S. is the Chicago Carbon Exchange. The price for a ton of carbon on the CCX on June 29 was between $3.20 and $3.55 a ton. The recent prices on the European carbon exchange was about $27.80 a ton. The Bingaman-Specter climate legislation currently in Congress allows the purchase of emissions allowances at $12 ton in the first year, rising by five percent a year thereafter.

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Dan Whipple

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