Please find below the
Please review the following Judges' comments:
I think this proposal is very well written, well presented, and the concept seems to have many benefits. One thing I would like to see addressed is the political barriers, and how they may be able to be overcome.
I do appreciate the effort of the author to address previous comments and improve the proposal, which was nicely done. Nevertheless, I do find a few issues that are nagging and prevent me from fully supporting this proposal in its current form. Starting from the least important, I would say that the estimate of the abatement cost from PV is significantly outdated as todays' systems are consistently below $1/W installed, especially for utility scale projects. So the CTET would be lower or even negative depending on the costs of electricity. With PPAs of 2c/kWh for large scale PV, it is the cheapest form of primary electricity available today. Perhaps the stored electricity should now be the estimator for CTET. Second, the fundamental issue of fairness, was not really addressed and perhaps misinterpreted so I will provide it with an example. Manufacturer A sells 10 vehicles with average emissions of 100g/km at $10,000/car and Manuf. B sells 1 vehicle with average emissions of 150 g/km but at $100,000/car. All vehicles are driven the same: 10,000km. MFA has a ratio of 100tCO2/Million while MFB has a ratio of 15tCO2/Million. Now MFA is punished for offering popular AND lower emissions vehicles. Perhaps a better ratio would normalize against number of vehicles sold. Third and perhaps more important, the issue of how to attribute the CTET between industries becomes difficult. If it were unfair before, now it becomes practically impossible as different industries have different operational characteristics and 'value' to society. How will you apply this on say hospital services or food manufacturing? Also the discussion of political compatibility is missing. While a fee and dividend approach is quite clear cut, the proposed approach it is not and will likely rise even more complaints by the affected industries than a straight forward single price on carbon.
I am afraid that this is a rather academic exercise that will be very difficult to implement in practice.
This is an interesting idea towards taxation of CO2 emissions presented in a very powerful way. I particularly like the idea of splitting up compliance at the sector-level (CTET) and covering external costs (CTED). My biggest concerns are (i) that politicians will not be able to determine efficient emission intensities for sectors (thereby potentially inducing significant inefficiencies); and (ii) fairness concerns, for example for measuring intensities per revenue, which clearly favors premium manufacturers. Also, I am not sure who exactly would be taxed - which might change the incentive structures. In addition, for transportation, I am afraid that taxation should be tied to driving behavior, which wouldn't be the case with the proposed solution.
The judges and fellows thank you for submitting this proposal.
The judges felt the proposal has high potential in accounting for externalities not currently addressed by the market.
A few suggestions could help refine and improve the proposal:
- the proposal should clarify how the tax was set. The CTET may not need to be as high as described since other renewable energy sources may be cheaper than solar
- the proposal may result in economic inefficiencies due to the break-down of emissions goals to sectors (e.g. aviation has a high CO2 abatement cost while electricity generation has a lower abatement cost)
- the proposal should consider the fairness associated with using carbon intensity to set revenues, since this may result in unfairness (e.g. BMW is a high-price luxury manufacturer and produces smaller number of cars)
- the proposal could be improved by adding a forecast of how emissions intensity of individual companies could change as a result of the two taxes
- the proposal could be streamlined with a more compelling, concise story and less text
Nov 5, 2017
Judges' comment: the proposal should clarify how the tax was set. The CTET may not need to be as high as described since other renewable energy sources may be cheaper than solar.
Author's response: We have added a new subsection called "Setting the CTET" describing how it is set to $230/t based on the cost basis of a 10 kW solar PV panel. We have also allowed for cheaper options such as wind and geothermal, and offered that the final value of CTET may be a weighted average of strategically appropriate mix of solar, wind and geothermal. Assuming the current mix of the 3 in the US, we show this would lower the CTET to $188/t-CO2.
Judges' comment: the proposal may result in economic inefficiencies due to the break-down of emissions goals to sectors (e.g. aviation has a high CO2 abatement cost while electricity generation has a lower abatement cost).
Author's response: In the "How will it work" section, we have added 3 new subsections. The third one entitled "From an economic efficiency perspective", we describe how the two keys features of the proposal, namely (i) the competitive pressure from within the sector, and the taxing relative to the sector average performance generate the proper incentives and market dynamics that will lead to greater emissions reductions without undermining either the micro-economics (company/sector level) or macro-economics at the country level (GDP). Also, we have added a paragraph below Fig. 3 elaborating on the specific managerial implications of a CTET on the sector's excess emitters, such as GM and Honda.
Judges' comment: the proposal should consider the fairness associated with using carbon intensity to set revenues, since this may result in unfairness (e.g. BMW is a high-price luxury manufacturer and produces smaller number of cars).
Author's response: We have addresses this question in a new subsection, entitled "Is it Fair?", below Fig. 4. We tested the hypothesis on whether the higher average price per vehicle that luxury manufacturers sell, e.g. Daimler and BMW, correlates with a lower emission intensity compared with the lower priced manufacturers, e.g. GM. We found that indeed there was correlation, albeit a relatively weak one. We also found that when excluding Daimler and BMW, the correlation drops to zero. We hence re-applied our model to the auto sector, excluding those two players, and found that the sector's average emission intensity rises from 31.6 to 36.4 t-CO2e/$M, resulting in a 28% and 43% drop in CTET tax for GM and Honda respectively.
Judges' comment: the proposal could be improved by adding a forecast of how emissions intensity of individual companies could change as a result of the two taxes.
Author's response: Our response to this suggestion is in the new subsection "Staying on the Curve", where we show the forecasted total sector emissions from 2015-2025 in Fig. 5 (Note that the forecast of emission intensity was already shown in Fig.2 of the proposal.) Another subsection "Net Results" shows that the total impact of the CTET through its direct mitigation of excess emissions, and indirect reduction incentives would amount to a about 25.7% in net reductions of emissions between 2015-2025, or about the same level of reduction under Obama Power Plan in about half the time.
Judges' comment: the proposal could be streamlined with a more compelling, concise story and less text
Author's response: We have done our best to restructure the proposal in smaller sections and subsections, and eliminated as much superfluous text as possible.