There are 2 'market based' mechanisms for reducing greenhouse gas emissions. One is to limit the quantity being 'traded' and let the market dictate the price (emissions trading schemes). The other is to set the price and let market mechanisms determine the quantity being traded.

Neither option is 'set and forget'. Both require politically driven changes over time. For trading schemes, the quantity being traded will have to be gradually reduced. The less gradual the reduction, the more the price will tend to fluctuate wildly. For tax schemes, the price will have to be increased, probably at a rate higher than inflation (though not necessarily), in order to bring about long term goals in emissions reductions.

The main advantage given for emissions trading schemes is that they put a clear and fixed limit on emissions. However, this is not what we actually want. We want emissions to go down gradually, as this will achieve our long term goals with minimum economic disruption. Furthermore, it is not the annual emissions that matter, but the cumulative emissions over the next half century or so. Getting the right level every year is not important, but the accumulated emissions over the years are. If you mandate a 5% reduction upfront, the price of electricity may skyrocket in the first year or two, then plummet back to the old price once the market adjusts and impliments cheap options for reducing emissions.

What is important over the short term is that the price of emissions does not fluctuate wildly. This would happen under an emissions trading scheme, but not with taxes. There is a strong chance that engineering and scientific advances will make it very cheap to reduce emissions over the long run. However, forcing a rapid response may see the price of electricity etc skyrocket in the short term. Even if this happens, the incentive to invest in technology to reduce emissions may not be there, as they may become worthless by the time the schemes are implimented. For a company wishing to develop or purchase technologies to reduce emissions, there may be 5 or ten year payback period. For the people making these decisions, there is a huge risk associated with the price fluctuations under trading schemes. So far, all trading schemes have seen the price of emissions plummet, so even if the price of electricity skyrockets in the short term, companies may still not invest in reducing emissions because they expect it to plummet a year or so later. Under trading schemes, financial investors speculating on the price changes will only add to the volatility of the price. This is bad for you, the consumer, bad for the economy, but gives no long term benefit to the environment. It may even make the problem worse if the public rejects the scheme completely and throws the baby (a price on emissions) out with the bathwater (cumbersome trading schemes).

In short, what matters more on an annual basis is not the rate of emissions, but that the price is steady and predictable for companies wanting to invest. What matters in the long term is the cumulative emissions. Carbon taxes get this balance right, but trading schemes do the opposite. What is often touted as the main advantage of trading schemes is actually a major flaw.

In practice, trading schemes are always modified to make them as similar as possible to a carbon tax, for example by putting a cap on the price of emissions and allowing companies to buy extra permits above the nominal allowance. The reason for this is that trading schemes are easy to sell to the public from a political perspective, because many people will stop paying attention as soon as they hear the word tax come out of a politician's mouth.

Quote:


We need to reduce our own emissions, not just those of other countries.

Also, taxing the profits alone misses many opportunities to reduce emissions. For example, if the price of coal drops due to increased production, emissions go up, but the tax revenue raised (and the disincentive to pollute) goes down. It is not profits that are the problem. These are good from an environmental perspective, as it means people are paying a higher price to pollute. The problem is the emissions themselves. To be effective, taxes need to be directed at the actual problem, rather than proxy measures of it. They need to address all possible sources of emissions, not just those from one sector.

In your own words:

Quote:

I might be missing something, but how is taxing coal going to make electricity cheaper?

Quote:


Not exactly. Our goal is to reduce GHG emissions, not subsidise electricity. These apparently small variations between the target of tax changes and our actual goals can cause big economic problems and make it far more expensive than necessary to reduce GHG emissions.

Quote:


I suggest you come up with an example with real figures.

Quote:


No it wouldn't, because the electricity would not actually be cheaper. Eventually someone has to pay for it. We need to avoid unnecessary churn where the government taxes one item and gives handouts with anothers. Your subsidies are unnecessary churn, nothing more.

Quote:


Again, you really should try to come up with an example of how that would actually work. You'll find that the sums just don't add up. 20 billion may seem a big number, but so is the cost of these subsidies.

It's an interesting theory muso, but I don't think it would actually make electricity cheaper. Do the maths.

Even if it did, the harm to the eocnomy would be huge for a very small environmental benefit.

Quote:


Muso, people aren't that silly. They realise that the cost is not only what you pay for it. That is why they accept that electricity prices need to go up. That is why they also realise that if the government subsidises an item, you still end up paying the full price for it. In fact, once you take the waste into account, you end up paying more.

That is why you should never subsidise an item without a rigorous economic or moral justification. There is no such justification for renewable energy.

Sure, some are on their way down, but not for reasons that would make you happy.

There are plenty of ways to 'capitalise' on it. No point just choosing the first one that pops into your head. Like you said, we need to minimise the economic damage. Your idea does not do that.

freediver wrote on Aug 12^th, 2010 at 9:33am:


What other way do you suggest that will capitalise on it and use the money to build a renewable energy infrastructure for our future? If you have a better way, I'd be interested.

I'm all ears.