THE ECONOMICS OF CARBON
PRICING IN VERMONT
JOSHUA FARLEY, PHD
PROFESSOR OF ECOLOGICAL ECONOMICS
COMMUNITY DEVELOPMENT AND APPLIED ECONOMICS
FELLOW, GUND INSTITUTE FOR ECOLOGICAL ECONOMICS
UNIVERSITY OF VERMONT
WHY PRICE CARBON EMISSIONS?
• Current price fails to account for costs to humans and nature
• Health care costs alone of coal fired power plants exceed value added by industry
• Total unpaid costs more than 5x value added by industry
Muller, Nicholas Z., Robert Mendelsohn, and William Nordhaus. 2011. "Environmental Accounting for Pollution in the United States Economy."
American Economic Review, 101(5): 1649-75
• Current price ignores demand by future generations
• Price of oil is lower than cost of pumping it
WHY PRICE CARBON EMISSIONS?
• Users ignore costs, keep emitting even when costs exceed benefits
• Users get the benefits, others pay the costs
• Additional use makes us worse off: uneconomic
• Failure
to invest in cheaper alternatives
• “US Wind Energy Selling At Record Low Price of 2.5 Cents per kWh”
• Solar energy project in Nevada cheapest in US last year: 3.87 cents/kWh
• Price of solar has dropped 70% since 2009 Christina Nunez (2015) Solar Energy Sees Eye-Popping Price Drops.
National Geographic http://news.nationalgeographic.com/energy/2015/10/151002-solar-energy-sees-eye-popping-price-drops/
IS CARBON PRICING RADICAL?
• Supported by economic advisers to Reagan, Bush, Clinton, Obama.
• Those opposed are to right of Reagan, left of Sanders
• Don’t believe in climate change or don’t believe in basic market principles
• Energy users should pay costs; those who suffer costs should benefit
• All of society suffers
• Vermonter poll:
• 95.2% of Vermonters believe that “Vermont's atmosphere is a resource that belongs to all Vermonters
•
equally”
82.5% believe that “individuals or companies should be charged money if they pollute the atmosphere”
(Kirk, 2010)
HOW TO PRICE CARBON
• Taxes
• Atmosphere belongs to representative government, pay to use it.
• Easiest to tax fossil fuels as the enter state
• Price determines emissions level
• Cap and auction
• Limit total carbon emissions (best to respect ecological constraints)
• Auction off to highest bidder
• Emissions level determines price
• Cap and trade
• Permits distributed to users—often to major polluters, but could also be distributed equally to everyone
• Can be sold
ESSENTIAL RESOURCES
• Modern society depends on fossil fuels
• 5000 hours of work in barrel of oil
• ”Push your car to work day”
• Outcompetes labor at 1 cent/hr
• Consumption not very sensitive to price
• High tax scenario $1.35 gallon. Little impact
• Major retrofits to expensive infrastructure required
• High enough price to affect consumption would hurt the poor, e.g. food in 2007-2008
HOW SHOULD REVENUE BE SPENT
• Dividends payable to all Vermonters
• As individuals
• By sectors
• Tax shift: use to eliminate inefficient taxes
• Re-invest in energy efficiency
• $1 invested yields $2.60 in savings (Efficiency Vermont)
HOW SHOULD REVENUE BE SPENT
• Vermonter Poll:
•
•
•
•
Dividend: 5.8%
Invested in environment: 64.2%
Invested for social well-being (education, healthcare): 14.2%
Combination of dividend and investments: 15.8%
• Efficiency investments more than double our money