Geoscience Reference
In-Depth Information
would increase the annual cost of electricity generation by $200 and
raise household electricity expenditures by 20 percent.
RAISING PRICES THROUGH TRADABLE PERMITS OR TAXES
How do governments actually put a price on CO
2
emissions? I dis-
cuss this at length in Chapter 20, but it should be introduced very early
to highlight the idea. There are two ways to raise the price of carbon.
• The easiest way is simply to tax CO
2
emissions: a “carbon tax.” It
would require fi rms and people to pay a tax on their emissions
much the same way as they do when buying gasoline.
• A second and more indirect method requires fi rms to have per-
mits to emit CO
2
, and to allow them to be bought and sold. This is
called “cap and trade” because the quantity of emissions is capped,
but the rights to emit can be traded for a price among fi rms.
While these two mechanisms sound different, they both accomplish the
same economic goal of raising carbon prices. I discuss their similarities
and differences in Chapter 20, but it is central to understand that these
are the two ways, and in reality the only two ways, to put a market
price on the externality of greenhouse-gas emissions.
There is one technical but important detail: Who actually pays the
price? You might naturally say, “Look, I didn't burn the coal. In fact, I
don't even know how or where my electricity is made. How can anyone
calculate the right price?”
This is an astute observation. An important administrative issue
in designing a carbon pricing system is deciding who writes the check.
Consider the oil fl owing out of the well, into the pipeline, to the refi n-
ery, then perhaps on a truck to the gas station, into the storage tank,
through the gas pump, and then into your car. Who would pay for the
CO
2
emissions? In principle, anyone along the chain of production might
pay. However, the most economical system would probably have re-
fi neries pay the price rather than gas stations or consumers. For coal,
since there are a few large users, perhaps power plants would write the
check. Imports and exports would need to be included in the system
as well.
