A simple, equitable scheme to reduce CO2 emissions and allow for uncertainties about effects

This scheme is designed to bring the best science into the policy making process around impacts of climate change through market means based on the standard mechanisms of insurance. It builds on a previously posted scheme to create incentives for reduction in CO2 emissions while minimizing the harm to domestic production and employment. As was the case with the earlier scheme, this is presented not in the expectation that its virtues alone will lead to its adoption, but to elicit responses from economists, policy makers, and others in order either to improve the proposal as is or to expose ways that the actual world departs from the ideals of the market.

• Responses to the scheme can be made in the comments section -- view and post comments

Underlying principles

1. In a genuine market there are no hidden subsidies. All costs of pollution and uncertainty about the costs are reflected in the price of the product so that buyers can factor this into their choices of what and whether to buy.
2. Insurance policies allow people, corporations, and governments to put a present cost on uncertain future costs. (Insurance can ensure that future generations do not subsidize the current generation by bearing the costs of current pollution.)
3. Policy makers may rely on different assessments of the costs and the uncertainties about future costs, but, if there is no displacement of costs to others (in different places or times — see #1 & 2), then they have an incentive to bring the best science into the policy making process — or else lose their jobs or offices to others who make more reliable assessments.

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Part A. Simple, equitable reduction of CO2 emissions
It is possible to achieve both the reduction of CO2 emissions while minimizing the harm to domestic production and employment because this part of the scheme eliminates the incentive for importing from high emitting countries or countries that are not party to the treaty. It factors in past contributions so as not to penalize current high emitters while favoring past high emitters. It allows national politics to determine the size of the carbon tax in light of the economic incentives and disincentives in the scheme. Finally, the scheme is simple and the factors are transparent -- view and post comments

1. Calculate an Emission Load Per Capita for each country i (ELPCi) =
Sum of (carbon fuels use over the last y years * discount factor for older emissions) / current population

• Update ELPCi's every x years, and make those figures available to all.
• The discount factor might be 1/2^[(current year-year t)/positiveconstant], that is, a “half-life” for a country's responsibility for past emissions = the positiveconstant.

2. x, y, and discount factor are agreed to by all countries signing on to the CO2 emissions reduction treaty.

• For example, x might be 5, y might be 100, and the positiveconstant in the discount factor might be 30.

3. Each country i in the treaty imposes its own carbon tax constant, ki, and taxes each unit of carbon fuel sold at ki * ELPCi. Ditto for each unit of biomass turned to CO2 through clearing, decay, or fires. Biomass accumulation, e.g., through reforestation, is rewarded by a negative tax (but if these end up turned back into CO2, they are positively taxed when that happens).

• These ki figures are available to all.
• The revenue is used to support energy conservation, alternative energy production, and impact insurance (see part B).
• Biomass burned or decayed on non-private lands is still taxed, in that case by transferring funds from general revenue to the funds to support energy conservation and alternative energy production.

4. Each country in the treaty imposes duties (or provides an import subsidy) in its own currency on goods from country j equal to (ki-kj) * ELPCi per unit of carbon fuel used in the production and transport of the goods.

• The subsidy reduces the cost in country i of goods from country j when ki < kj. This subsidy is paid out of carbon tax revenue. If the subsidy is not paid, then country j imposes additional import duties on goods from country i and uses these to subsidize costs of exports to country i.
• For countries j not party to the treaty kj is taken as equal to the lowest of the the values among the treaty signing countries.
• kj is converted to the currency of country i using the exchange rate at the date of arrival of the import.

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Notes
a. If country i sets its ki too low, goods it exports will have import duties imposed on them. Such countries will not have tax revenue to support energy conservation and alternative energy production so their ELPCs will stay high.
b. Equally importantly, the differences in ki's and ELPC's will be visible to all, so countries can be shamed into action as the effects of CO2-induced climate change become apparent.
c. Foreign owners of lands and fuel-using production are subject to the within-country taxes, but there are no offsets of their home country's carbon usage. Markets for cross-national investments may continue as usual, subject to the usual uncertainties about exchange rates and, in this case, about changes that might be made in ki values by future governments.
d. This part of the scheme does not promote population control; that has to happen by some other means.
e. This part of the scheme does not provide support for adaptation to or mitigation of the effects of CO2-induced climate change; that has to happen by some other means. For example, a separate treaty could “tax” the carbon tax revenue to support adaptation and mitigation. After all, the effects of climate change on countries will not be proportional to their ELPCi.
f. This part of the scheme may be duplicated in treaties that address other greenhouse, such as methane, and possible linked to them via equivalencies.
g. This part of the scheme does not prevent a “race to the bottom,” where in every country sets a ki too low to prevent CO2 increases that lead to destructive climate change. At the same time, it does not harm countries that set a high ki. Which way things go depends on political pressure within countries based on a global responsibility or national interest for countries affected directly or indirectly by climate change and on the insurance part of the scheme, to follow.
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Part B. Insurance-policy-science connection
1. Each entity (household, corporation, state) takes out insurance to cover the costs of climatic events, whether or not those events are linked to CO2 and other emissions.

• Insurers will provide lower premiums to entities that have taken measures to reduce the costs of such events.

2. If the insurance taken out does not cover the costs, a larger entity might bail them out but only on the proviso that they take out more insurance for the future and that the bail out is paid back over time (i.e., no hidden subsidies).

• Insurance companies will anticipate such bail outs and increase the costs of the insurance to the larger entity (just like auto insurance includes an amount for accidents caused by uninsured drivers).

3. Insurance companies will have an incentive to base their assessment of any entity's risk on the best science available. Similarly, entities paying insurance will have an incentive to take preventive measures (and to pressure entities that they may have to bail out to do likewise) so as to be rewarded with lower rates.
4. Insurance companies investing the premiums in enterprises conducted by entities will factor in the full costs of production (including insurance [which will rise as the country's population to be insured grows] and duties or subsidies that follow from the country's carbon tax level).
5. If an entity cannot pay its premiums or payback for a bail out, then a larger entity can take over its obligations, set its policies, and allow for migration of people and production to less vulnerable areas.
Notes
a. Insurance companies buffer risks in ways that have been subject to speculation and manipulation. Within-nation and international policies would be needed to address this possibility (e.g., non-profit insurance authority).
b. Part B checks the race to the bottom that is possible under Part A because any country that sets a high carbon tax constant will have funds to pay for adequate insurance and to take preventive measures that end up lowering their insurance rates.

Comments (transcribed from a soon-to-be-expired nabble forum) Feb 13, 2012; 3:22pm Merchants of doubt pjt111 One motivation for adding Part B to the earlier scheme was to bring the flawed track record of “merchants of doubt” (Oreskes & Conway, 2011) into policy making. That is if policy makers follow them only to leave someone else later to pick up the tab, then insurance companies will provide a check against that. Moreover, O&C describe the commitment to “freedom” that drives some of these people's opposition to government action. OK, but it is not freedom for all if policies one promotes lead to costs that others (perhaps via taxes to their governments) have to pay. Feb 13, 2012; 5:51pm who is really going to keep track of terrestrial biocarbon stocks? Who is really going to keep track of terrestrial biocarbon stocks? Dick N. (an economist who has participated in IPCC) What international agency is going to see that each country is doing its job? Dick N. (an economist who has participated in IPCC) Feb 14, 2012; 12:32pm Serious jolt to the economy, not likely politically in the USA The scheme is interesting and has many novel features. My main concern in terms of practicability is no different from that for any other reasonable and fair scheme: To achieve reductions of a magnitude that is meaningful in terms of reducing the pace of climate change significantly have to be so large that they will require a very substantial carbon tax (about tripling of US gasoline prices at least?). However we sugarcoat this, it represents a serious jolt to the economy of economies that are highly petroleum dependent, in which the USA is the leader. It would require politicians of high commitment and sagacity to take such a step, in whatever form. Right now, USA politics seems far removed from anything like this. Sharad, who works on environment and development in India Feb 15, 2012; 12:44pm Raúl García-Barrios a mexican political economist and environmental activist It could be interesting to assess the policy scheme while changing the underlying principles: a) No markets are or can be "genuine" (perfect). All are power-ridden and allow for hidden subsidies (endogenous and permitted inefficiencies). b) The current global crisis of the debt has clearly shown that financial and insurance markets are not efficient, that is, the current price of risk insurance does not reflect future uncertain costs. c) Since the future is REALLY uncertain, policy makers and economic advisors who make mistakes do not necesarilly loose their jobs (the market for knowledge is also imperfect). Power is power is more stable, and smart guys can always spread their responsibility by claiming that "nobody could see that coming". ¿Nobody? Further, for many countries developed countries in trouble there are three ways out of the current debt crisis: a) Austerity (reduce deficit). b) Devaluate their debt through inflation and exchange rate depreciation. c) Default The United States will work out their way by combining a) and b) in order to reduce its imports and increase its exports and growth rate. Since it will not accept the agreement (the costs are too high), the signing parts will decrease their imports from the US. Therefore, the US will use its political leverage to undermine the schema. Other heavily industrialized and indebted countries in similar positions (Japan) will respond in a similar ways. ¿What will China do? Other countries, of course, could find the schema to their advantage and could collectively try to implement it. What is the economic and political viability of the schema, or any other "market" climate management solution, in these conditions? Feb 17, 2012; 10:16am Countries that don't sign on.. 1. Countries that don't sign on can simply develop their economies at an accelerated rate in a self-contained way, even though the duties make trade hard for them. This will become easier (at least in the tropics, where natural resources are not lacking) because of cheap fabrication and free downloading of books, movies, software, open hardware designs, etc. 2. Doesn't it lead to some kind of liberal surveillance regime comparable to the nuclear weapons inspections in Iraq before 2003? How else would anyone know how much carbon other nations are burning? Lee W. Feb 17, 2012; 10:19am the poor "I wonder what would happen to the poor who might not be able to afford the insurance or increase of costs. Is there an option for them to contribute in non-monetary ways...?" Sandra M.