An Internalised Price on Carbon (IPC) by christaylor

Chris, having reviewed the summary of your proposal, there are a few statements/assumptions that move me to comment. First, it is not so much the fossil fuel industry that is the obstacle to a carbon pricing plan. Well, OK, the API is a big obstacle. But it is mainly congress. See the comment on our thread prior to yours. Exxon and Shell (and likely others) are already behind the idea of carbon pricing and saying so publicly. Second, taxing the carbon they bring to market will not sap them of capital. Not only are these the most profitable companies in the world, they will simply pass on the cost to consumers. If you are suggesting that an in-house tax will not be passed on to consumers, how would you suggest they be prevented from doing so? Exxon already taxes itself in-house to reduce its own carbon footprint--at a rate of $60/ton. You also suggest that all of the revenue from the tax be recycled to transition fossil fuel companies to become low carbon energy suppliers. If they don't pass the costs on to consumers and consumers receive no dividend, then consumers are not involved in steering the economy toward low-carbon. As you can see from our proposal, we are looking for a vehicle that educates and involves the public. If a carbon pricing solution does not do that, can it be regarded as a market solution? If there is no public involvement in the real world economic decisions about carbon use, no incentives to change their purchasing habits, will they push congress to do anything? And if there is no push from below, what would move congress? Further, I think we are also looking for incentives for the broader manufacturing sector to lower their own carbon footprints as well. If, under your scenario, fossil fuel companies do pass the costs on to their customers and get to keep all the money from the self-imposed tax, then the public would, in effect, be subsidizing the fossil fuel companies to become low carbon energy suppliers. By creating such an anti-competitive market for low carbon energy, along with the subsidies they have so long enjoyed, the fossil fuel companies would be perpetuating their market advantage over the renewable sector.

christaylor - Nice free market approach. "Internalized" is less complex than my "Opportunity". You might adjust the title and first few paragraphs to be more immediately clear to fossil fuel executives and congressional staffers. Maybe the Pitch: Fossil fuel companies set aside income to invest in renewable energy and storing CO2.

Chris, this is a response to your comment above: The job of lobbyists is not to "keep things running smoothly." It is to tilt the legislative, taxation and regulatory playing field in their direction. The fossil fuel industry has been enormously successful in that respect, using their wealth to avoid taxes, externalize their costs, retain subsidies, obfuscate public understanding of global warming, obstruct climate legislation and delay or kill regulation. You may be correct that the public has other things in mind than pushing for a carbon pricing measure. But what suggests to you that the public would accept a measure that rewards the one industry, rewards the bad behavior of that one industry, by allegedly forcing them to transition to a low carbon business model-- at public expense? That looks like just another form of corporate welfare that the public is getting right fed up with and which has brought us to this brink of time. Likewise, Rex Tillerson himself just told XOM shareholders he doesn't think there will be any stranded assets. So what makes you think the carbon energy sector would even be interested in forced transition? They might well use their K Street army to fight it. I say let them compete on a fair playing field like all the other energy companies, carbon and renewable alike. No favorites. No subsidies. No free externalities. If I have an agenda beyond reducing emissions, it's NO MORE BUSINESS AS USUAL.

Hi Chris, I would suggest you look into what is known as “windfall profits” that some companies earned in the European Trading Scheme. Although the mechanism there is different, there are strong parallels that could be drawn from the way some companies in the ETS received free carbon allowances, passed on the “cost” of these allowances to their users and the point ghorvitz in his first comment (Para 2 & 3). This paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2376177 looks into how windfall profits occurred before, what was done to address them and how they might resurface in a different form.

Hi Chris, I understand that there are no allowances in your system, but there is a "cost" that companies could (and, in some cases might even be compelled to) pass on to their consumers. That "cost" however, is also going to come back to the company so that it can invest in renewables. That seems very similar to the windfall profits companies in the ETS got, despite the fact that, as I mentioned before, the mechanism is different. It seems to me that you are assuming that a dollar invested in any energy source will output the same amount of energy, so that changing the energy mix can simply be achieved by shifting money from one energy source to the other so that "the increase in costs for fossil fuels equals the decrease in costs to low carbon energy". Am I understanding that correctly? One more aspect you might want to expand on: how would you promote adoption and enforce compliance?

Hi Felipe, Just to continue where I left off, the nice thing about the above penalty is that even if an energy company doesn't meet it's monthly CO2 emissions reduction standard, just through the distribution of the penalty revenue, carbon emissions will be cut. It's a real win win situation. Staying on the topic of enforcement and compliance, I am also expecting a certain amount of self policing as I mention in this paragraph: "Once the scheme is started, it'll be in the fossil fuel companies interest to ensure it doesn't fail. A failure in carbon price would delay low carbon energy becoming cost competitive with fossil fuels, making any investment into low carbon technology by the fossil fuel industry worthless. Because the financial fallout would be catastrophic the fossil fuel industry would also want to audit each other's books, to insure against widespread cheating which could bring the system down." This type of self enforcement is important because government auditors don't understand the energy industry as well as the energy industry itself.

Hi Ross, Thanks for your interest. I don’t know much about departmental management in large energy companies, but I would imagine they would already be departmentalised. This is how BP UK has organised it’s divisions: http://www.bp.com/en/global/corporate/about-bp/bp-worldwide/bp-united-kingdom/contact-bp-in-the-uk.html and Shell Global: http://www.shell.com/global/products-services/solutions-for-businesses.html In the EU, departmentalising became popular to improve efficiency in the 90’s. Each department now invoices it’s services to other departments within the company. Because no department wants to go over-budget, they are careful with paying for resources from other departments. This means that a department within a company cannot expand without there being an increase in demand for that department. I would imagine that energy companies would naturally want to use the same strategy for its different divisions of energy sources. As the price on carbon kicks in, the carbon intensive divisions would become less in demand and be able to raise less invoices for their services. To cut costs, those divisions would have to contract. Overall, each division would be operating at it’s maximum efficiency, ensuring that the whole company was operating at maximum efficiency. It’ll be the fossil fuel departments which will be raising the revenue from the price on carbon. This will be a cost to them, and encourage those departments to cut the amount of carbon in their fuels. However, it’ll be the low carbon energy generation departments who will be demanding their right to this revenue, and because all the departments are in the same company, they will know how much revenue they are due. Further, there is an Emissions Reduction Standard, (See Emissions Reduction Standard) enforced by the government of 0.17% per month. If this standard is breached by a company, that company will forfeit its carbon revenue to all the other companies in the scheme. This will force the carbon revenue raised to be spent on low carbon generation. Without enough investment in low carbon generation, a company will soon start to breach the Emissions Reduction Standard. Under such a scheme, it will be the energy companies who will be demanding enforcement. Such a huge investment into low carbon technology and generation will only see profitable returns if low carbon energy becomes cheaper and fossil fuel energy becomes more expensive. Without low carbon energy becoming competitive, there will be no market for it, and billions, if not trillions, of investment capital into the low carbon sector will have been wasted. The financial fallout will make 2008 look like a picnic. This is why fossil fuel companies will insist on legislation demanding that they can audit each others accounts. I hope this answers your questions.

Hello Chris, just letting you know that I linked your proposal into ours, from the point of view of just assessing the Internalised Price that you invented. Global 4C provides globalised rewards, and so there is a need to assess the differences between the two and benefits. Under how do these sub-proposals fit together. Best Regards Delton https://www.climatecolab.org/web/guest/plans/-/plans/contestId/1300701/planId/1307204

Hello Chris After reading you proposal again, some of my questions are answered. I wrote some alternative views on IPC. Something to ponder... 1) The -2% emissions reductions standard (ERS) is a regulation for the supply side of energy. The rising carbon tax is not a tax, but is a fee. The 'fee' that is imposed is 'returned' but only for another type of energy production. I am not sure if it is then a subsidy, because it is the fee given back but conditional that the company to diversify into another business model. (see point 2). Maybe it is a actually a 'bond'. A bond for good behaviour upon condition of meeting regulations and producing more energy. 2) Government is putting conditions on companies to produce specific goods & services? This is fundamentally important because the U.S. is very pro capitalism and anti socialism. If the govt starts telling companies what they have to produce and how much (goods and services) that's quite significant. Perhaps I am wrong, maybe the Govt does that often (refer 4) 3) I am unsure about the -2% ERS exact definition. You refer to both fossil fuel companies and energy companies. Lets say for example, an oil and gas company only sells liquid and gas fuel. How do they reduce emissions by 2% ? Is it the carbon content? 4) Based on the oil and gas example, if the government tells the oil & gas company to start making solar, wind, nuclear etc, then it is directly controlling the marketplace. One problem is that the oil & gas company may not have the skills and resources to build a solar power plant. They might just buy one. But then they're buying another company to offset their shrinking oil and gas business. Why buy a solar power plant? Maybe they could buy a software company instead? So the the IPC is Government interventionism. 5) I think your proposal still has merit, because it forces certain companies to start making cleaner power. My feeling (and I stand corrected) is that this proposal actually transcends capitalism and is morphed into state control. Perhaps this is what is needed. 6) I like the fact that the fee/tax is delivered back to invest in cleaner power. The fee & dividend sends the revenue to the public for their personal use. My gut feeling is that the IPC has some good ideas, and maybe the power companies would love it. Maybe if you just impose the -2% ERS that is all we need. But when I look at the latest reports - quote: "For the U.S. to do its share in reaching the 2°C target, by 2050 this per capita emissions level will need to decrease by an order of magnitude. " -- DDPP (2014). And so this means about 6% ERS. I am not sure if Congress would like it ?!? So there may be a need to introduce carbon taxes or F&D to reduce the demand side as well. Carbon tax, F&D, regulations (IPC) etc and a reward system (e.g. Global 4C would offset the costs for everybody by diluting the global money supply) are options. Of these only Global 4C is globalised. The big question is actually political, as you might agree. Delton

Hi Delton, Thank you for your observations. Your arguments are all very valid and my proposal is far from perfect. What an IPC tries to do is give some leeway to the fossil fuel companies. Your rewards program is one of the few proposals put forward which doesn’t directly penalise the fossil fuel companies with a tax. IPC is attempting to do the same. The fossil fuel companies understand that there is a risk that they’ll have to pay a tax on carbon, so an IPC is an opportunity for the fossil fuel companies to avoid such tax revenues leaving their coffers. But it does more than this, the returned revenue acts as a subsidy for diversifying into low carbon generation, a subsidy which will not be available to other green competition, giving the fossil fuel company a clear advantage. I agree with you that congress would not accept a 6% ERS, which is why I’ve limited it to 2%. At around 2040, when low carbon generation becomes cheaper than fossil fuel generation, the market will then become the driver of emissions reduction. The IPC is still required before then, to make the price of low carbon generation competitive. Finally, an IPC demonstrates that the future is still bright for the fossil fuel industry, they’ll just need to relabel themselves as Big Clean Energy. Chris

Hi Climate CoLab judges/staff. Thank you for selecting my proposal. It’s important to me, because I really think I bring a novel perspective which doesn’t rely on an apathetic public creating the political will required. I will now go about answering your concerns, and then, where space allows, incorporate these answers into my proposal. ---------- "While this proposal recognizes importance of fossil industry interests and transition, it goes too far and ignores consumer impacts, as if it is not consumers who will pay increased fees or taxes. Discussing consumer impacts is important if this proposal is to advance into the final round." The impacts to consumers under an IPC would be much smaller than those under what the EPA and US Department of Energy is attempting to do presently. The subsidies, both direct and through government loan guarantees, offered to low carbon ventures is paid for by taxpayers and not the fossil fuel companies. Under an IPC, the fossil fuel companies subsidise the low carbon energy. To make matters worse for taxpayers, low carbon ventures will become dependant on government subsidies. If the subsidies are removed, consumers will go back to buying fossil fuels. Under an IPC the carbon revenue reduces the price of low carbon energy, making it competitive with fossil fuels, allowing the market to take over with no extra costs in taxes. An IPC is the only carbon price system which reduces the price of low carbon energy, making it twice as effective. Further, through the EPA demanding reductions in CO2 emissions, fossil fuel companies get hit with extra costs, which get passed onto the consumers. Without an IPC to bring down the price of low carbon energy, consumers are left with no alternative. ---------- "Assumption that every fossil company would like to diversify into low carbon fuels is dubious. This assumption therefore needs to be justified from the literature, media, or other sources." A fossil fuel company given the choice between paying the revenue raised through a price on carbon to the government, taxpayer or citizens, compared with investing it in its own low carbon energy ventures, would definitely choose the latter. However, to be fair, under an IPC, I would have nothing against a system giving the fossil fuel companies a choice. ---------- "A serious concern is that this would devolve into windfall profits for companies as they pass on the carbon tax to consumers, but then capture the profits. What regulatory/enforcement mechanism will ensure that these companies don't capture windfall profits?" The enforcement would be the regulatory 2% Emissions Reduction Standard per year (ERS). Initially, the carbon revenue raised would be small, and the cost of adhering to the 2% ERS would be greater than this. However, once the low carbon energy becomes cost competitive, the margin made through its sale would be limited by competitive pressure between energy companies. At this stage, the fossil fuel departments would have great difficulty passing on the carbon revenue costs because of the competition from low carbon energy. ---------- "How will the government/regulator ensure that these companies are investing carbon revenue in alternative energy R&D?" Initially, the 2% Emissions Reduction Standard per year (ERS) would ensure that more and more energy would have to be produced from low carbon generation. Secondly, because each ring fenced energy department would be responsible for maximising its own profit, low carbon generation departments would ensure that they receive all the carbon revenue that they are due. ---------- "Who will monitor/punish firm activity, a new organization or an existing one?" The fossil fuel companies will be tasked with setting up a committee to enforce self regulation. The whole operation will be audited by the US Department of Energy. Administration costs would be paid for from the carbon revenues. A company not adhering to the Emissions Reduction Standard or other regulation would forfeit one months carbon revenue, which would be paid to the other companies in the IPC scheme on a per energy unit basis. This will ensure prudent self regulation. After a while, the sheer amount of investment in low carbon hardware will ensure that the energy companies will not want the IPC scheme to fail.

Overall, This is an elaborate version of revenue recycling; very complicated requirement for implementation via DOE. DOE would have to assess if they're making the right investments to qualify, something that would be very difficult to figure out. Also difficult to ensure equitability. Seems like the proposal would lead to all kinds of mergers and incentives we can't appreciate in terms of how people organize their business and reap benefits. The political feasibility would likely suffer as a result.