Giving Up on Carbon Markets in Favor of a Giant Vacuum in the Sky?
I sat next to a distinguished climate scientist at a recent dinner, who told me point blank that “carbon markets have failed, which means one should give up on market based approaches to reducing emissions”. After the ecologist on my other side had heimliched a poached organic beet from my windpipe, I launched a vicious full frontal attack on said climate scientist’s blue-eyed dreams of a world that only gets 1.5 degrees warmer. We all have our fantasies. In my fantasy world, we aggressively tighten caps or raise carbon taxes to reduce emissions. In his world, we use lots of public funds to develop a vacuum, which sucks all additional carbon out of the atmosphere some time mid-century.
The chorus pronouncing cap and trade as a failure has become louder and is often echoed by my friends in the physical climate community. It’s not a song I enjoy. What’s the supporting evidence? It’s always the same: Prices are too low and emissions reductions have been too small. Well, duh. If you set a loose cap, prices will be low. Then there is grouchy mumbling of manipulation of markets and whining about offsets. Where there’s a will (for more emissions reductions), there’s a higher price. So let’s talk about more emissions reductions. The type of emissions reductions needed for limiting warming to 1.5 degrees Celsius.
My buddies over at Carbon Brief analyzed how many years of current emissions it would take to limit warming to below 1.5 degrees Celsius. To make a long and super nerdy story short, we will blow through the remaining carbon allowed to limit the “chance” of exceeding the 1.5 degree target to 66% over the next 5 years. If you are willing to lower the “chance” to 33% you might have 16.5 years. This means we need to go to zero emissions by as soon as 2021. Yes, fellow economists, I can hear you laughing. This is about as likely as Donald Trump picking Bill McKibben as his VP. We have 2 billion people without access to electricity, explosive growth in energy consuming durables across the rapidly developing world and some of the lowest fossil fuel prices in recent memory. Even if you double these timelines and give us 30 years, this economist is highly skeptical that we can get there.
This is where the vacuum in the sky comes in. The argument by my dining companion was that we should mobilize massive amounts of public (and possibly private) capital to focus most innovation in this space on developing a technology that removes CO2 from the atmosphere. This would prevent us from having to suffer the higher prices from those pesky carbon markets and we can get our 1.5 degree world. This vacuum won’t be free to install or operate of course. You will still want to engage in all mitigation efforts with lower marginal cost than the magical Miele. In fact, the way you would incentivize a carbon vacuum is probably by marrying it to a cap and trade system. To this rational economist and his even more rational friend Jim Sallee (who pointed this out), the vacuum and pricing should be complements, not substitutes.
To be fair, there are some ambitious efforts under way to develop such technologies and they might just come about. But, I am not willing to bet my planet on it. In fact I think this line of argumentation is just plain reckless. This is the equivalent of arguing that an obese person should continue eating Monte Christo sandwiches for breakfast, lunch and dinner, since surely weight loss science will provide a pill that will prevent reasonably bad long run health consequences. And, if you aren’t a fan of geo-engineering, this should make you worry too. Betting the farm on direct capture makes geo-engineering a Plan B (which, you know, is the second letter of the alphabet).
So what do we do? We economists will swallow our pride and admit that we live in a world that will in most places not go for pure price based approaches to reducing emissions. We will put a price on the heads of as many carbon molecules as we can, kill the rest by (gulp) using the least offensive versions of command and control policies. We should then get serious about R&D in all sorts of things, including that giant vacuum in the sky. We should do this with or without revenue from a carbon tax or cap and trade. I seriously hope that vacuum works. Because if it does, I am going out and getting myself one of those 1965 Shelby GT350s. That will probably be on my 130th birthday though. What a wonderful world that would be.
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Maximilian Auffhammer View All
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.
Energy Institute Blog 
Clearly, political choices in market design can act to undermine the efficacy of social policy markets that attempt to internalize an externality. It’s frustrating to see things like a $10/T carbon market prices and a $300/T imputed cost of renewable power mandates. But this isn’t justification for abandoning market-based methods, since it’s not an either-or choice. Regulatory interventions, such as renewable standards or fuel use standards, operate better in an environment where market-based incentives are in alignment with the social policy objective, rather than in opposition. In addition, markets provide a measurement framework and information that can be a valuable source of data on policy effectiveness that would not otherwise be available. Finally, the “failure” that Max’s colleague laments is not a failure of carbon markets themselves, but rather a failure of the political process to unfetter these markets to serve their intended purpose.
Maximilian, I have had the conversation you lay out in your blog many times. Having done the first and many of the early carbon offset projects, and worked on the design and implementation of measures like the Kyoto Protocol’s Clean Development Mechanism, I’ve always been a proponent of the idea that market mechanisms are a key part of any serious carbon effort. But it’s been frustrating to see how poorly we tend to implement those mechanisms, and we tend not to talk about the real problems:
1. Many market measures end up having to decide between the political expediency of lowering industry compliance costs and the environmental goal of delivering a meaningful price signal, but the inherent contradiction is rarely discussed. Policy makers have to identify the objective and direct the mechanism to be designed accordingly – that generally doesn’t happen.
2. The even bigger problem is that policy makers and regulation writers simply have trouble internalizing the fact that there are 1,000 very smart and motivated people sitting in the next room who will immediately start trying to game whatever regulations are written. This problem certainly isn’t unique to carbon market mechanisms, but for most carbon market mechanisms to date it hasn’t been that hard to game the system in ways the undercut its potential environmental impact.
3. We have developed this weird idea that means and ends are the same thing. Liquid carbon markets have commonly been confused with working carbon markets. Carbon pricing has now become an end in and of itself. You see it in all the business calls for carbon pricing and many other places, where there’s never any discussion of the carbon price itself, just applause that the fraction of the global economy under some kind of carbon price is growing. But carbon pricing is only a means to and end – and at the end of the day it has to have an impact on emissions. If not, what was the point?
So you’re right – without market mechanisms we’re taking a critical piece of the puzzle off the table, and that doesn’t make sense. But let’s start learning from the experience with carbon market mechanisms that now spans 25 years! And let’s start designing them to actually do something about climate change.
Max,
What kind of vacuum? You mean the Lackner extractor? Lackner claims that while it now costs $600/per ton of carbon removed from the atmosphere, he expects that price to fall to $30 (if only someone funds the R&D). So it’s imaginable that your friend Jim’s scheme would work.
Now for the really important question: What will Jim be called after he inherits your 1965 GT350?
Mustang Sallee.
Max – I agree on most. But not that high performance vehicles need to burn gasoline.
Before you get a Shelby GT350, you may want to check out some electrics.
(NOTE km/h)
“This is the equivalent of arguing that an obese person should continue eating Monte Christo sandwiches for breakfast, lunch and dinner, since surely weight loss science will provide a pill that will prevent reasonably bad long run health consequences.”
The opposite mistake is planning for a future in which everything is the same as today, which produces useless results – like city transportation “planners” who continue to self-driving cars, or energy sector “planners” who ignored fracking, or Kodak who ignored digital cameras, or AT&T et al. who ignored the wireless telephony market and lost a trillion dollars to the Apple and Android platforms, and on and on.
The trick is to balance investment in future alternative options against production/consumption choices today. So be careful – because you can’t do *either* of these things with your head stuck in the sand…
Yep. a few people have suggested this. Only problem is, you need a lot of carbon free energy to make it work (separating co2 from air is not free). Now, gosh, what else could we do with all that carbon free energy?
Years ago DOE did a feasibility study of building a 1,000 MW nuclear plant next to a 1,000 MW coal plant to power the carbon capture and storage process at the coal plant. Fascinating idea!
Taxes [incl the transfer involved in cap n trade] are a problem with payers unless it is clear who/what is making out. The basics of infrastructure building tied to taxes is fine. But when the incessant taxation is only opaquely associated with a public benefit I get a beet stuck in my throat. Much of the renewable energy spending [i refuse to call it investment since we have little to show for it] has benefitted a special interest group of researchers and associated producers. The ROE is not high, the costs have not come down etc. The computations of the total cost of renewable energy i have seen are lacking in depth and scope. The life-cycle analyses leave out essential elements, which when i add them in make the costs uneconomic in any reasonable timeframe. Crazy ideas like windmills in the sky tethered to a terrestrial ‘foundation’.
Change the framework of how taxes are allocated and you will have my support for higher ‘carbon’ prices. And they shouldnt be ‘carbon’ taxes, they should be taxes on all energy consumption – only then will the gameplaying and incentive manipulation stop.
Climate scientists don’t necessarily know much about climate solutions. It is true, however, that the economists’ ideal solution of a carbon tax rising at the real rate of interest (or a cap and trade system with a steadily declining cap that results in the same price) has not been implemented anywhere yet, and that’s not surprising. There are good reasons to believe that the political pain of using a carbon charge alone at the high prices that would be required with a “pricing only” approach will prevent such a solution from ever being implemented. Instead, a modest carbon charge (which will primarily affect the electricity supply side because of the low fuel prices and high carbon content of coal) combined with non-price policies (funded by the revenues from the carbon tax) will likely be the most effective combination of policies to reduce emissions. The simple models that lead economists to advocate only pricing solutions as “optimal” don’t describe the real world particularly well, and that realization has important implications for this discussion: Koomey, Jonathan. 2013. “Moving Beyond Benefit-Cost Analysis of Climate Change.” Environmental Research Letters. vol. 8, no. 041005. December 2. [http://iopscience.iop.org/1748-9326/8/4/041005/]
So what price would do the trick? $100/T?
We often talk as if there is “a” carbon price that needs to be imposed. The reality is that different sectors will be sensitive to very different levels of carbon pricing. The electricity sector probably needs to see $30-50/ton to seriously influence decision-making. But the transportation sector probably needs $100-200/ton to the same end.