Will Carbon Trading Work?

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Carbon trading might contribute marginally to objective (2), but will probably not midwife any big or important breakthroughs. Gasoline prices in Europe are about double U.S. prices, because EU governments tax gasoline at $3.00 a gallon and more. Gasoline taxes are implicit carbon taxes. Taxing gasoline at $1.00 a gallon is roughly equivalent to taxing the carbon dioxide emissions from gasoline at $100 per ton. So, European motorists are paying carbon dioxide penalties of $300 or more per ton. For perspective, the American Council on Capital Formation and the National Association of Manufacturers estimate that carbon permits under the Lieberman-Warner legislation would sell for $55-$64 ton in 2020 and $227-$271 a ton in 2030.

Yet where in Europe is the miracle fuel to replace petroleum? Where are all the zero-emission vehicles? Europe is not one mile closer than we are to achieving a “beyond petroleum” transport system. In fact, from 1990 to 2004, EU transport sector carbon dioxide emissions increased by almost 26 percent.

In a February 2007 report, EIA estimated that a cap-and-trade plan with a “safety valve” initially set at $7.00 per ton carbon dioxide-equivalent would allow U.S. coal generation to increase by 23% from 2004 to 2030—less than half the 53% increase projected in the reference case. Would this encourage utilities to invest in carbon capture and storage technology? No. EIA concluded that, “the allowance prices in this analysis are not sufficiently high to compensate for the increased capital and operating costs. As a result, power plants using carbon capture are not projected to be commercially viable within the 2030 time frame of the analysis cases” (p. 26).

Would a tougher carbon penalty do the trick? One might suppose so—except that even the relatively small permit price of $7.00 per ton is enough to cut the projected growth of coal generation in half. It is surely conceivable that a steeper penalty would simply deter new investment in coal generation. Emissions would be lower than in the baseline, but because electric supply would be lower (and/or more costly) than in the baseline, not because carbon trading commercialized carbon capture and storage.