Carbon taxes and floors

While Brian Cowen and Brian Lenihan continue to insist that there will be no new budget for 2009, Eamon Ryan announced that a carbon tax may well be introduced this year. It was on Morning Ireland, so he may have misspoken and meant that it will be announced this year for introduction in 2010.

Another remark is deeply worrying. Ryan mentions a “floor price”. The only price around in this context is the carbon price at the Emissions Trading Scheme. This is an EU wide market. If the Irish government is to guarantee a minimum price, it would have to buy up permits from all over Europe. That would blow another big hole in the budget.

A floor price in Ireland can also be guaranteed by a domestic carbon tax. This is double regulation: a price instrument (tax) on top of a quantity instrument (permit trade). Such a tax would bring in revenue. It would not reduce emissions, however, as any tonne avoided in Ireland would be emitted elsewhere in the EU. The tax is purely redistributive, from the private to the public sector. This would of course raise the cost of energy in Ireland, and thus hurt our competitive position. See Tol (2007) for more detail.

Poznan and all that

The latest round of international negotiations under the United Nations Framework Convention on Climate Change in Poznan reached its conclusion last week. The parties to this convention meet twice a year. The latest talks were a preparation for the Copenhagen negotiations scheduled for late 2009. Nothing much happened in Poznan. These were talks about talks.  Should one pity the civil servant who attends these boring meetings, or envy her for all the foreign travel at the taxpayers’ expense?

By the way, the Irish taxpayer need not worry about such expense: The Irish delegation to the climate negotiations travels on account of official development aid. Poor foreigners foot the bill.

The irrelevance of Poznan is best illustrated with the fact that the European Council met during the “crucial” end-phase of the Poznan conference — and made decisions about European climate policy. The decisions are bizarre from an economic viewpoint.

The main target of European climate policy was unchanged. We will reduce greenhouse gas emissions in 2020 to 20% below their 2005 levels. A number of countries expressed concern about the costs of meeting such a strict target. These worries were placated by grandparenting more emission permits, and auctioning fewer. This is exactly wrong. Cap-and-trade with grandparented emission permits is roughly equivalent to a carbon tax with lump-sum recycling. Cap-and-trade with auctioned permits allows for a smarter recycling of revenue. In fact, almost any recycling scheme is smarter than lump-sum. In this particular case, the revenue is essentially a capital subsidy to energy-intensive industries (but long after credit will be uncrunched), although it can also be interpreted as a windfall profit. The agreed compromise is not bad for the environment as some environmentalists have claimed because emission targets are the same. The agreed compromise is not good for the economy either, contrary to the claims of the politicians involved. It is bad for the economy, but good for shareholders in energy-intensive industries.