Geoscience Reference
In-Depth Information
Let's begin with the economic analysis. Recall that carbon emis-
sions are economic externalities—activities in which people consume
things but do not pay the full social costs. When I turn on my air con-
ditioner, I pay for the electricity. But I do not pay for the damage done
by the CO 2 emissions because the price of CO 2 emissions in the United
States is zero. If you look back at the list of carbon-producing household
activities in Table 6, you will see that none of these includes a CO 2 price
that refl ects the social costs.
How can we fi x this omission? This is one of the few areas where
the economic answer is very simple. Governments must ensure that
people do pay the full costs of their emissions. Everyone, everywhere,
and for the indefi nite future must face prices that refl ect the social costs
of their activities.
Putting this differently, putting a price on carbon represents a soci-
etal decision about the priority of reducing CO 2 emissions. The signal is
similar to the one given by a high price of land. When land in central
Manhattan sells for an astronomical price, that high price indicates that
this is not an economical place for a golf course. A price tag on carbon
emissions will provide a signal that emissions are harmful and should
be reduced.
So much for the economic theory. What is a carbon price in prac-
tice? It is the price attached to the burning of fossil fuels (and similar
activities). In other words, whenever a fi rm or person burns fossil fu-
els, and the CO 2 enters the atmosphere, the fi rm or person must pay
an additional price that is proportional to the quantity of CO 2 emitted.
In the examples that follow, I generally use a carbon price of $25 per
metric ton of CO 2 so that readers can become familiar with this price.
I suggest later that this is a reasonable target to aim for in near-term
policies.
Electricity generation provides an example for understanding the
role of carbon pricing. Consider a household that consumes 10,000
kilowatt hours (kWh) of electricity each year at the current price of 10
cents per kWh, or $1,000 per year. If half the electricity is generated
from coal and half from natural gas, the generation would produce 8
tons of CO 2 emissions. If the carbon price were $25 per ton of CO 2 , this
 
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