Carbon Pricing Is Far Cheaper than Realized
Why 23¢ per person per day does the job
Our job is to put in place a climate policy capable of solving the problem, but our job is not to solve it. That will take 50 or 100 years. We cannot commit future generations; we can only put in place an agreement capable of carrying out the necessary changes.
Wreck the economy? The main reason people oppose climate and energy policies is because the believe they are expensive. Unfortunately, many environmental policy proposals inadvertently lend credence to this concern. Two strategic mistakes account for most of the self-inflicted damage:
Focus on what is needed. We cannot lock in the future 40 years in advance. What we need is a solid first step. Here is why that step is exceedingly cheap, if we let carbon pricing do the job rather than handing the carbon revenues to special interests.
Proof by example. Consider a simple example of carbon pricing. If the price of carbon is $30/ton, would anyone pay $50/ton to save carbon? No, they would just pay the price of carbon instead.
That puts a limit on the cost of abatement -- at most a $30 carbon price can cost us $30 for each ton saved. But that's "at most." Insulating houses can save more money in heating bills than it costs to insulate. That's a negative net cost. The Environmental Protection Agency assumes that on average the cost of saving emission will be half way between zero and $30 the the carbon price is $30. That gives us the EPA formula for cost, which is the most important formula in global-energy economics.
Abatement Costs = 1/2 × (the emission reduction) × (the price of carbon)
Table 1 uses this formula. In the US, we emit about almost 20 tons/person per year. So reducing that 20% means a 4 ton reduction per year. If the price of carbon is $30 then our abatement cost will be (on average) 4 × $30 / 2 = $60/year, which is just under 16¢/person/day -- just as shown in Table 1. (See calculations)
Table 1 also assumes a Green Fund that charges countries $2/ton for emissions above the world-average per-capita rate, and that funds low-emission countries at the same rate for emissions below the world average. It also assumes carbon pricing cuts emissions almost as much as the Waxman-Markey bill says it will -- a 20% reduction by 2020.
Table 1. shows how cheap carbon pricing really is -- without subsidies and give-aways. Note that the cost is given in cents per day per person. This global system would be far more effective that what the U.S. can do alone.
India would come out ahead, and china would pay over five times less than the U.S. The GEP Center Paper, Global Carbon Pricing explains why this can't be far off and most likely errs on the high side. Moreover, this policy would cut emissions most cost effectively.