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Lecture 36

EPS 7 Lecture Notes - Lecture 36: George P. Shultz, James Hansen, Carbon Price

Earth And Planetary Science
Course Code
David Romps

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Lecture 36
Carbon tax: government sets the prices of CO2 emissions and the market sets the
amount of CO2 emissions
Government price ($/tC) --market--> total emissions (tC/year)
Carbon tax: The simple policy solution
How it works
- The government taxes fossil fuels, either as burned or as they are pulled out of
the ground or brought into the country.
- That extra cost is passed on to subsequent products (e.g., coal-powered
electricity, gas heating, oil-deprived gasoline).
- Faced with these higher costs, businesses switch to using the cheaper
Cap and trade: government sets the amount of CO2 emissions, and the market sets
the price of CO2 emissions
Government total emissions (tC/year) market price ($/tC)
Cap and trade: how it works
- The year’s number of emissions permits (1 permit per 1 tC) is fixed by the
- At the end of the year, each polluter must have enough permits to cover all of
their emissions
- Polluters buy and sell permits to make sure they have enough to cover their
- The cost of the permits is passed on to subsequent products, and businesses
Who sets the price?
Who gets the money?
- Citizens’ Climate Lobby (CCL) advocates a carbon fee and dividend, which is
a carbon tax that returns all proceeds to households
- Advisory board: James Hansen, George Shultz
- The victims of global warming are future generations
1) Adaptation
2) Mitigation
- Tax companies in proportion to their current emissions and pay companies in
proportion to their past emissions
ABC Co. historically emits 3tC/ year
Imagine that the carbon tax is $1 / tC
ABC Co. gets paid 1$ for each tC of
historical emissions and gets charged 1$
for each tC of current emission
Year 1: emits 3tC/ year
ABC Co. loses nothing
Year 2: emits 4 tC/ year
ABC Co. loses $1
Year three emits 2 tC/ year
ABC Co. earns $1
DEF Co. forms after the carbon tax has
It has 0 tC/ year of historical emissions
Assume, as before, that the carbon tax is
$1/ tC
ABC Co. emits 3 tC year
ABC Co. loses nothing
DEF Co. emits 3t C/ year
DEF Co. loses $3
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