Greenhouse Emissions and Carbon Taxes
The Most Contentious Facet of Sustainability
I'd like us all to temporarily cleanse our minds of any preconceived notions of greenhouse gases or carbon. Deep breath in, hold for 5 counts, deep breath out. Go to a serene place. Get a beverage and come back. I'll wait.
There are entire swaths of the practice of sustainability which, with discussion, rationale, and logic, can be met with incredible support in virtually every corner. Waste minimization and energy reduction tend to fall into this category. It's about living lean, reducing waste, and saving money while saving the planet. It's about responsibility, stewardship, and not wasting all of the work it took to create that aluminum can. It takes a little messaging and discussion, but, invariably, success can be had with even the most skeptical among us.
And then comes the issue of greenhouse gases (GHG) and carbon taxes.
In this topic, I would like us to explore a concept known as The Tragedy of the Commons (Hardin, 1968) as an entry point to help us understand why carbon regulation is a logical step which can help drive innovation and eliminate the market-biasing subsidies mentioned in the last section. For more about this please watch the following 6:36 video.
Video: Tragedy of the commons | Consumer and producer surplus | Microeconomics (6:36)
If you would like, you can read Hardin's original 1968 article setting forth this concept.
The Tragedy of the Commons is an intuitive explanation of something that happens every day in the world around us: finite, common-access resources–such as air, water, or fisheries–are depleted when individuals are given unrestricted access. In this regard, we must remember that the concept of "maximizing gain" is not necessarily restricted to physical benefit, but to any erosion of public resources by the self-interests of individuals. Regardless of the specific expression of the Tragedy of the Commons, the ultimate result is the same: the resource is either depleted or eroded to the point of collapse.
Greenhouse gases could perhaps be the purest expression of The Tragedy of the Commons: a byproduct which is invisible and created in thousands of ways in daily life and that will damage entire systems of common resources, worldwide. The idea of a finite, tangible resource, such as a pasture or pond being depleted is quite accessible, but when it comes to impacts on the scale of greenhouse gases, it can be so large as to be almost inconceivable.
Greenhouse gases refer to a group of seven gases found in the atmosphere: carbon dioxide, methane, nitrous oxide, chlorofluorocarbons (CFCs), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride. There is also some level of discussion about other potential greenhouse gases, one of which is perfluorotributylamine, a man-made chemical which currently exists in extremely small quantities in the atmosphere, yet is "7.100 times more powerful at warming the Earth over a 100-year time span than CO2" (Goldenburg, 2013). Typically, the discussion on greenhouse gases tends to center squarely on carbon dioxide, as it is the most prevalent greenhouse gas and is generated heavily through the combustion of fossil fuels. In total, greenhouse gases share a common attribute in that they trap heat (infrared radiation) in the atmosphere and work to elevate temperatures.
In sustainability reporting and in the calculation of the greenhouse gases generated from an entity (commonly referred to as the "carbon footprint"), the common measure used is carbon dioxide equivalent or "CO2e", which accounts for the emission of carbon dioxide and methane. The amount of these gases generated is typically normalized as "kilograms of CO2e" per (hour, mile, kilowatt or other measure of usage or operation) and can be utilized in measuring the emissions of virtually any direct or indirect activity, from operating a tractor to composting. Measuring and reporting carbon emissions is made easier by the excellent availability of data to calculate Scope 1 (direct) carbon emissions, but measurement becomes far more complicated in the calculation of Scope 2 and Scope 3 (indirect) emissions. These emissions are generated in the creation of energy utilized (Scope 2) or as consequences of transport, production, supply chain, and other outside activities (Scope 3). As we will see in many issues of sustainability in coming lessons, measuring and reporting Scope 2 or 3 emissions many times requires one to make estimations and judgment calls based on the best information available... and many times, comes down to being transparent about the assumptions made.
If you would like to see an example of Scope 1, 2, and 3 carbon emissions created in the brewing of beer, take a look at New Belgium Brewing Company's graphic representation of their GHG emissions.
We may consider that any currency, be it the US Dollar or any other, is not inherently "good" or "bad". It is simply a mechanism by which the market accepts and unifies around a means of trade. We may consider the sheer mechanism of CO2e measurement in a similar way. It is a mechanism which the world at large accepts as the unified measurement of greenhouse emissions from virtually any activity from lighting a baseball field to burning off a wheat field. CO2e is so able to be empirically measured, we can even go as far as discerning the difference in emissions from burning the wheat straw residue vs rice straw residue:
|Emission factor (g/kg)|
|Wheat straw||7.37± 2.72||156±22||45|
|Defalt emission ratio|
The versatility of CO2e is that it can be a universal mechanism of measurement which may be applied to help us avoid The Tragedy of the Commons, and furthermore which may be used to eliminate the market biasing effect of subsidies. For example, imagine that, in attempting to avoid The Tragedy of the Commons, a government would like to tax the negative impact of emissions from antiquated power generation operations and use the funds to research alternative fuels.
Without measuring CO2e, the government in question could attempt to modify behavior in a few different ways, all of which are somewhat removed from the actual goal of reducing damaging emissions:
- Tax on a per-site basis. This is flawed in that a power company could have a shuttered facility which is in no way contributing to the negative impact of carbon emissions. Furthermore, the emissions of the restricted class of plants could be drastically different, yet they would all be taxed in the same way.
- Tax the revenue of the site. This approach is difficult in that the accounting can be quite complex, and therefore prone to loopholes.
- Subsidize clean energy. This may sound appealing, but consider that these subsidies are reducing price signals in the market, and therefore distorting market balance. This would also not deter a profitable company with antiquated plants from continuing their operations.
- ... and so on
Taxing CO2e emissions directly, on the other hand, would be considered a Pigovian tax, so named for British economist, Arthur. C. Pigou. Pigovian taxes are defined by the shared trait that they are designed to mitigate "negative externalities" (such as overgrazing, or greenhouse gas emissions) with the application of taxes specifically valued to offset the negative impacts. If you think back to The Tragedy of the Commons, it is an almost perfect parable of negative externalities: an activity where individual use of a shared resource is of detriment to others. In their purest form, we may think of Pigovian taxes as not artificially choosing "winners or losers" as subsidies may, but simply acting as an unbiased, unemotional accountant. These taxes essentially say, "You can build whatever kind of powerplant you prefer, but you will pay your share of any damage to shared resources."
The classic issue with Pigovian taxes is the valuation of the negative externality, essentially placing value on the erosion of a shared resource which is already difficult to valuate. For example, imagine placing a value on the shared visual damage wrought by a new residential development in a picturesque area, or the Pigovian price tag of a kilogram of carbon emissions. These are not easy determinations, but they may indeed change the landscape of daily life in the coming decades.
Professor Robert H. Frank, of Cornell University, wrote an excellent, short explanation of Pigovian taxes and mutual benefit for The New York Times.