If you want price stability, the answer is a carbon tax, not cap-and-trade.
Health issues and a carbon cap and trade are significantly different issues and I think the mixing is mudding the waters a bit.
Most air districts use what amounts to a cap and trade system for some pollutant emissions such as particulate matter (PM10) and sulfur oxides (SOx). Essentially, for a source to increase emissions of these pollutants, they have to buy emission reduction credits (ERCs) from a source that has reduced their emissions. To further limit the amount of emissions, districts can impose requirements for purchase of credits in excess of 1:1. For example, Sulfur Emitters Inc. wants to increase emissions by 100 tons per year, so they might have to buy 110 tons worth of credits created Shrinking Sulfur Production LLC installed new scrubbers. The air district generally removes the difference from the available emissions and places them in a special bank.
By looking at historical data, it’s easy to see that this strategy generally works. One of the reasons it works is that SOx, PM10, volatile organic compounds (VOCs) and carbon monoxide (CO) are localized pollutants. Most of the impact is limited to the air basin where they are emitted. You can’t emit in the Los Angelis air basin and buy credits from Michigan; the credits have to be local. These localized pollutants are the ones with the most direct health effects.
GHG doesn’t work that way. Global emissions have global impacts. The cap needs to be global, and that’s where things get very sticky. If oil is extracted in Russia and burnt in Hungary, who is responsible for the emissions? Generally, it would be Hungary, but if you get into land use emissions, things become very complicated. If a tree is chopped down in Brazil, turned into furniture and shipped to Denmark where it’s used for 50 years, then landfilled in Germany what emissions and credits are involved? Is the carbon in the landfill sequestered? If the tree were incinerated rather than landfilled, is that carbon biogenic or anthropogenic?
Generally speaking, I like the idea of cap and trade. Pollution should have a cost that is incorporated into the product, just like resource consumption and disposal already do. Cap and trade essentially works for local pollutants. I don’t want to see cap and trade implemented in a half-baked way that pushes all of the emissions outside the cap and results in no net emission reduction.
Line 10 on the 2008 federal 1040 tax form says: “Taxable refunds, credits, or offsets of state and local income taxes (see page 22)”. On page 22, it says:
So, in other words, the refund only ends up being taxable if you deducted the state or local income taxes you paid the previous year from your taxes, in which case that refund you got represents money that was never taxed. (The worksheet is necessary because they actually only make it taxable to the extent that the deduction that you took was greater than the standard deduction that you alternately could have taken.)
If you did not take advantage of this deduction and then reported the refund on your tax return the next year on that line 10 of the 1040 form, you made a mistake and paid tax on it when you didn’t have to. I admit the whole thing can be a bit confusing…but it really makes perfect sense: the government doesn’t want to tax you twice on the income but it does want to make sure it gets to tax you once on it.
<hijack>I’m not sure that C&T works that well for mercury, since it tends to pollute the immediate area, not the environment as a whole (unlike SO2, NOx and CO2), so if a power company bought a whole bunch of mercury credits, they could end up basically poisoning the nearby community. This is different that SO2 and NOx, which can contribute to acid rain nationwide (and in other nations) and CO2 which can cause global warming. I think you work (or do work for) a power company, so you probably know better than me. If I’m wrong, please correct me.</hijack>
Mercury emissions from one source would likely be limited through different means, even if all mercury emissions were owned by one company. Most air districts prohibit emissions that would result in a significant local health risk, which is yet another mechanism limiting air pollution. While NOx and VOC emissions create smog and ozone throughout the district, but have limited impact elsewhere, airborne toxics impact is generally limited to a localized plume. Here in California, they’re pretty rigorous about screening major emitters of toxics to determine downwind impacts.
Also, as an addendum to my previous post, it appears I was confusing “cap and trade” with “baseline and credit.” Cap and trade imposes a strict cap on emissions whereas the baseline approach quantifies increases and decreases as compared to the baseline. Given the difficulty of quantifying global and national GHG emissions (as demonstrated by the European cap and trade troubles), I’m leaning more toward the baseline methodology that we use for most pollutants.
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Sailboat: Sorry, I garbled that quote from the IRS 1040 instruction booklet in my post above. It should read
This makes it clear that you don’t need to report the refund as taxable income if you did not deduct state and local income taxes in the previous year.
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Overall, the opinion of our economics experts is that decreased volatility is much more important than the actual price. The utilities I’ve worked with on an array of compliance options are more concerned with making the best choice, rather than the actual economics. That is, if carbon allowances were $30/ton and varied between $25 to $35, that’s much better than carbon prices at $10/ton and varying from $0 to $100.
Mercury emissions travel much further than you think, which means that if we want to control mercury deposition there needs to be a multi-national effort.
I don’t have my work laptop with all its references on it, but two come to mind, and I Googled for a third one.
For example, see this paper: http://www.publish.csiro.au/paper/EN08010.htm
Take a look at this paper, on the first page summary: http://www.air.dnr.state.ga.us/airpermit/downloads/aqrules/caircamr/comments/CAMR/10-31-06Comments/Oglethorpe_Power_Part2.pdf
See also Levin, Leonard. “Update on Mercury: Its Origins, Fate, and Effects” EPRI (2001) which says “40% or more of U.S. (mercury) deposition originates overseas.” (no link that’s freely available, I have a copy from the author. If you have an academic account I think you can get it - his statement is on Page 8)
Una, thanks. I stand corrected.
Thanks for the info. Seems like with the desirability of that sort of price stability, a carbon tax might be more utilities-friendly than cap-and-trade. Is that a common belief in the utilities industry?
Possibly - that is, you could be right, but I don’t know enough to say one way or the other as that hasn’t come up as much as talking about cap-and-trade.