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Two world views on carbon revenues

Abstract

The introduction of a price on CO2 is expected to be more efficient than prescriptive regulation. It also instantiates substantial economic value. Initially, programs allocated this value to incumbent firms (grandfathering), but the growing movement toward auctioning or emissions fees makes carbon revenues into a payment for environmental services. This paper asks to whom should this payment accrue? If the atmosphere resource, as a common property resource, is viewed as the property of government, then the decision of how to use the revenue can be viewed as a fiscal problem, and efficiency considerations dominate. If the atmosphere is viewed as held in common, then the revenue might be considered compensation to owners and delivered as payment to individuals. This decision has efficiency and distributional consequences that affect the political economy and the likelihood and durability of climate policy. We summarize trends among six existing carbon-pricing programs.

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Notes

  1. 1.

    An emissions rate trading program is emerging as a likely policy to regulate CO2 under the Clean Air Act. The economic value created under this type of trading program remains within the regulated industry.

  2. 2.

    Such a question is reminiscent of another issue in environmental thought: willingness to pay versus willingness to accept, which also hinges on the assignment of property rights (Bromley 1995).

  3. 3.

    Although individuals are harmed in different ways by the introduction of a price on carbon and compensation can be a political necessity, if viewed as part of a larger fiscal problem where the efficiency criterion is consistently applied across the government’s portfolio of policies, then the efficiency objective leads to economic growth that is expected to benefit all individuals (Polinsky 1972).

  4. 4.

    Several authors have noted that this efficiency benefit is lost if the government directs the revenue to unproductive activities. Another important caveat is that the theory and computational models that have developed this policy guidance include the assumption of a fully employed economy and simplistic representations of labor force stratification and household labor and consumption decisions. In an underemployed economy, cash payments to households might be expected to have a stimulus effect, while the tax interaction effect may be unimportant (Burtraw and Parry 2011).

  5. 5.

    In reality, the government is the institution that we use to define and enforce property rights, whether they are assigned to the state, the church, or other organizations or individuals. As noted, it is not uncommon for the government to reassign property rights to achieve a utilitarian outcome, but this can be problematic because the stability of property rights is important to their value in encouraging economic activity.

  6. 6.

    One potential consequence is that consumers may spend the revenue on energy-intensive activities that erode some of the emissions reductions.

  7. 7.

    Sterner and Coria (2012) evaluate how well suited are various policy instruments including emissions trading with various forms of allocation or an emissions tax to meeting various definitions of environmental ownership.

  8. 8.

    Linked compensation enables subjective comparisons that are cognitively easier to make than comparisons between dissimilar effects, such as changes in energy prices and tax policy (Camerer and Kunreuther 1989). In psychology, this is known as the compatibility hypothesis (Tversky and Thaler 1990).

  9. 9.

    Moreover, the size of the sulfur dioxide market was 2 orders of magnitude smaller than the potential for a carbon market, meaning that windfall profits that might have accumulated after deregulation of the electricity industry were much smaller than could be expected in a carbon market.

  10. 10.

    See the press release from December 20, 2006 (http://www.bundeskartellamt.de/wEnglisch/News/Archiv/ArchivNews2006/2006_12_20.php).

  11. 11.

    In 2013, for the majority of member states, 100 % of the allowances associated with the electricity sector will be auctioned; however, for eight member states, it will be 30 %. For aviation, 15 % of allowances will be auctioned, and for industry, 20 % will be auctioned. The percentages that are auctioned increase over time (see http://www.cdcclimat.com/IMG//pdf/13-01-24_climate_brief_no25_-_auction_revenues_in_eu_ets_phase_3.pdf).

  12. 12.

    At least 50 % of EU revenues must go to combating climate change (see http://ec.europa.eu/clima/policies/ets/cap/auctioning/index_en.htm).

  13. 13.

    http://www.rggi.org/docs/Documents/2011-Investment-Report.pdf.

  14. 14.

    It is noteworthy that an important part of the free allocation would have accrued to electricity consumers through reductions in their electricity bills to offset the increase in energy costs associated with the trading program.

  15. 15.

    Consumers may see higher product prices, which is the source of potential windfall profits under free allocation.

  16. 16.

    We do not include New Zealand, which initiated its cap-and-trade program in 2008. This program is excluded because no allowance auctions have been conducted as of July 2013. We also do not include existing carbon taxes in nine European nations, all of which also participate in the EU ETS.

  17. 17.

    https://germanwatch.org/en/download/7749.pdf.

  18. 18.

    http://www.climatechange.govt.nz/emissions-trading-scheme/ets-amendments/.

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Acknowledgments

The authors gratefully acknowledge the financial support provided by the FORMAS project Human Cooperation to Manage Natural Resources. The authors benefited from comments made by Peter Barnes, Eban Goodstein, Molly Macauley, Brady McCartney, Richard Morgenstern, William Shobe, and an anonymous reviewer.

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Correspondence to Dallas Burtraw.

Appendix

Appendix

Table 2

Table 2 Five payment for environmental services revenue categories and their descriptions

Sources for table and figures

Table 1

RGGI: Auction results

British Columbia:

European Union: 2012 average allowance price and total quantity of allowances available

California:

  • Burtraw D, Szambelan SJ (2012) For the benefit of California electricity ratepayers. San Francisco: Next10 report.

Australia:

Figures 2 and 4

RGGI: Auction results and description of revenue investments

British Columbia: Annual carbon tax budgets

European Union: Phase 2 auction revenues, average annual allowance prices, and Germany’s revenue expenditure plan

Alberta: Annual allowance revenues and investments reports for CCEMC

California: Auction results, asset value calculations, and description of revenue investment plans

Australia: Annual carbon tax budgets

Figure 3 (see Fig. 2 references for complete list)

British Columbia: Population

European Union: Population

Alberta: Population

California: Population

Australia: Population

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Burtraw, D., Sekar, S. Two world views on carbon revenues. J Environ Stud Sci 4, 110–120 (2014). https://doi.org/10.1007/s13412-013-0151-y

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Keywords

  • Auction
  • Cap and trade
  • Emissions fee
  • Emissions tax
  • Allocation
  • Grandfathering
  • Climate change
  • Policy