Lauren Summerhill said
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I can't wrap my head around carbon credits... Once energy is spent, and carbon is in the atmosphere...
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and discreetgent said
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Carbon credits are different than hedging against weather. As Lauren points out the carbon is in the air one way or another, although the theory is if it costs to put them in the air then it may cut back on it, not clear that reality will match theory.
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Yes, and that's precisely the point. An economist would say that, today, a [take your pick: coal-fired power plant, or an airline, or a manufacturer of portland cement (*** an interesting(?) aside, I seem to recall that after fossil fuel combustion and deforestation, the manufacture of cement is the next-largest contributor to anthropogenic CO2 in the atmosphere)] is able to reap the full economic income of their activity (e.g., when they sell the electricity to end-users, or they sell airplane tickets, or they sell cement to construction contractors) but only has to suffer a
portion of the true economic cost of the activity, because some of the cost is not borne by the manufacturer but instead is shoved off onto society (and the global economy) as a whole in the form of the ultimate massive negative effects of global warming. In essence, we are
all being forced to subsidize the profits of the oil company and the coal-burning electric company and the cement maker, just as surely as if Congress were taxing us and then simply cutting a check directly to give a gift of billions of taxpayer dollars to those industries.*
(*Of course, Congress does sometimes
literally do that, but usually that sort of
blatant crony capitalism is reserved for the "too-big-to-fail" banks, and military contractors...)
Thus, the "market mechanism" (i.e., Adam Smith's "invisible hand") -- which does in fact work great -- at least in theory and when prices accurately reflect real economic costs and real economic profits -- has suffered a failure. And, as a result, absent a correction, the economy as a whole is providing an incentive for our CO2-intensive industries to engage in much more CO2-producing activity (and thus to pump much more CO2 into the atmosphere) than is "efficient" if the price signals weren't broken and if the market mechanism were in fact functioning properly.
The way to correct this market failure -- and thereby to reduce the amount of CO2 emissions to their "efficient" level -- is to force CO2-intensive industries to re-internalize the externality -- so that they have to bear the real economic costs of the fact that their actions are contributing to the fact that (for example) 100 million people currently living in Bangladesh will find their entire country underwater as result of rising sea levels a short handful of decades hence -- and as a result they will, at the margin, produce less CO2 by making fewer marginal airplane flights, or, say, by realizing that -- once the prices are made to reflect economic reality -- it's actually much
cheaper and
more profitable to invest in solar, wind, wave, tidal, safe-nuclear, and other non-fossil-fuel based sources of electrical generation.
That's the theory, anyway. And one way to achieve that price-correction (and thus restore the market mechanism to healthy functioning) is through a so-called "Pigovian Tax," in which the amount of the tax is equal to the amount of the externality -- a rare example of a tax, in and of itself (and regardless of how the government spends the funds) actually
increasing overall social welfare.
But, because in our stupid political environment "Tax" is a dirty word, another way to achieve a similar end is to grant existing CO2-intensive industries "permits" to produce a set (fixed total) amount of CO2, and allow them to sell them to others at a profit if they can find ways of reducing their own CO2 emissions. The devils are obviously in the details, but at least in theory (and if governed by well-designed rules and policed by intelligent and non-corrupt regulators) it ought to be able to achieve the same result of reducing overall CO2 emissions in the long-term.
