Dirty Power / Shift the Baseline

At an MIT Energy Initiative talk last week, a representative from China"s electric company told us about China's aggressive green energy goals for the next few decades. On one slide, he talked about reducing carbon emissions by 45% per unit of GDP. This sounds great, until you realize that China expects to grow its economy 6x in the same period, so you are looking at a 3x increase in carbon. Putting the two slides together, I felt a bit hoodwinked.

This has been a constant point of contention between the developed and the developing world. Our post-industrial economies hum along efficiently and provide us with a standard of living unimaginable to our grandparents. Meanwhile, 5 billion people are struggling to lift themselves out of a pre-industrial existence. Instituting a nation-by-nation carbon cap freezes the status quo in a manner that probably should be unacceptable to a group of people who largely don't even have indoor plumbing.

In a static, closed system it shouldn't matter much whether you auction off a quantity-limited set of carbon allowances or impose a carbon tax. The magic of price/supply elasticity dictates that the outcome should be the same either way. But that magic only applies within one nation. How do you decide ahead of time the allowable carbon output for each nation? Can you? Should you?

Would you set caps or targets normalized to GDP as implied by the Chinese representative? Could such a system kick an economy while it is down? (A local depression would reduce your relative carbon allowances, making it harder to recover.) Is is verifiable?

There is a simplicity in taxing emissions rather than auctioning quantity limits. A roughly consistent worldwide price on carbon would automatically and dynamically adjust emissions as economies develop and become more or less energy intensive. It is much more transparent and implementable than a single global allowance auction. It would enable developing nations to grow and increase their absolute and relative output while still recognizing the cost of that growth.

Nobody wants to mire developing nations in poverty. Nobody wants them to have a free ride either. We need a regulatory framework which recognizes that 1/3 of the world is growing faster than laws or treaties can adapt.