What's Best? Carbon Trades or Carbon Tax?

Market Failure in Everything: The Carbon Emissions Edition, Economist's View: What's the best approach to limiting carbon emissions, cap and trade or a carbon tax? Many economists will tell you a carbon tax is best. Political consultants, for the most part, will tell you something else:

Getting on a low-carbon diet, by Ronald Brownstein, Commentary, LA Times … Skeptics…point to the troubles of the cap-and-trade system the European Union has used since 2005... Under pressure from industry, European governments gave away too many credits to polluters; the result was that the price of the credits collapsed, undermining the incentive to cut emissions or use cleaner fuels. ... A second round ... scheduled for next year could ameliorate the problem, but at the least, the European experience suggests that designing a successful cap and trade is an enormously complex undertaking which may require some trial and error before it works. …

Comments

[green marketeer]

As an American who is concerned both about global warming and the health of the US economy, I would like to bring to your attention a policy proposal that can make a significant dent in US greenhouse gas emissions and oil consumption, while actually improving the efficiency of the economy and increasing overall consumer benefit. Believe it or not, this can be achieved without a carbon tax, CO2 cap and trade, raising CAFE standards, increasing taxes or the budget deficit, developing new fuels, or replacing gas-guzzlers with hybrids.

This can be done simply by reforming how auto insurance rates are determined.

Currently, car insurance is sold on an unlimited mileage, per-year basis. In their 2006 paper “The Accident Externality from Driving” Aaron S. Edlin (Professor of Economics and of Law at UC Berkeley, former senior economist for President Clinton's CEA) and Pinar Karaca-Mandic (RAND Corporation) show that drivers’ crash-related costs may be four or five times larger than what they are currently paying for liability and collision coverage. When accident costs are thus “externalized”, drivers receive an erroneously low price signal, creating a powerful incentive for all motorists to drive more than they would otherwise and resulting in subsidies from low-mileage drivers to high-mileage drivers.

William Vickrey, who was awarded the Nobel Prize for Economics in 1996, was the first to notice this phenomenon and proposed an alternative that bases premiums on miles driven, in addition to existing rate factors. Within any rating class, the less you drive the more you save, so every driver enjoys an incentive to reduce those miles that provide the least
benefit, while preserving the option of driving when the perceived benefit is great. Todd Litman of the Victoria Transport Policy Institute estimates that the introduction of per-mile auto insurance could reduce total vehicle miles traveled (VMT) by 15% of more, with corresponding reductions in gasoline consumption and CO2 emissions. And because a relatively small number of high-mileage drivers account for a large percentage of VMT, a majority of drivers could expect to pay less for per-mile insurance than they do currently.

Insurance companies won’t voluntarily adopt the per-mile basis because any firm that did would bear all the costs (enforcement costs and reduced premiums) of doing so, but its competitors would reap most of the benefits (reduced accident-related payouts). Therefore, public policy measures requiring all insurance companies to offer per-mile insurance (at least as a consumer option) are needed to eliminate this market distortion.

Per-mile auto insurance would start to reduce energy consumption and greenhouse gas emissions as soon as enacted, and would also reduce costs related to accidents, traffic congestion, local air pollution, and transportation infrastructure. The true beauty of this proposal is that, rather than merely transferring resources from one group in the economy to another, it would result in a net increase in consumer welfare by increasing the efficiency of the transportation sector.

Per-mile auto insurance is supported by many environmental organizations, including Environmental Defence, USPIRG, and Resouces for the Future.

See another paper by Edlin entitled "If Voters Won’t Go for Taxing Oil to Conserve Energy, How Do We Do It?"

[Frank Yacenda]

Without arguing the merits or demerits of limiting carbon or the whole global warming debate, let me just ask from where you are getting your auto insurance? My insurance company (USAA) has offered discounts for low-mileage usage for as long as I have had them (nearly 20 years), and I do not think they are alone in this. And all companies penalize policyholders who use their insured vehicles for commuting. So I do not know that this is such a new idea.

[Steven Earl Salmony]

Are unsustainable activities recklessly driving economic globalization taking the family of humanity toward some sort of colossal wreckage?

What could be happening?

Perhaps powerful people and huge human institutions are driving the relentless, and soon to be unsustainable, expansion of the global political economy, that is requiring unbridled increases of economic production/distribution capabilities, conspicuously unrestrained per-capita consumption of resources and the continuous growth of absolute global human population numbers.

But why?

As we having been observing in recent months, another huge "bubble" has been "manufactured" by economic powerbrokers and allowed to grow ominously within the world economy. Not unexpectedly, the sub prime "bubble" is doing now what bubbles eventually do. Bubbles burst. We can readily observe how the credit markets of the world banking system are seizing up, stocks are tumbling and the value of the dollar is sinking. Who knows, a financial meltdown of the economic system worldwide could be in the offing.

How could this be happening?

For a moment, let us consider that the organizers, managers and Wall Street whiz kids overseeing the global economy (and the unraveling of the worldwide sub prime swindle) are running the artificially designed economy of the human community as a pyramid scheme. This is to say straightforwardly that the international financial system is being operated so that most of the wealth rises pyramidally into the hands of a small minority of people at the top of the world economy where this wealth is accumulated and consolidated endlessly. At the same time, the vast majority of people on Earth, near the bottom of the global economic pyramid, are left with very little wealth. In the 1980s, this global financial operation was called a "trickle down" economy. We have been told over and over again how this economic scheme "raises all ships." From this limited scope of observation, the billion people living on resources valued at less than one dollar per day and the additional 2.7 billion people being sustained on two dollars per day of resources in 2008 appear to be stuck in squalid conditions. The 'ships' carrying these billions of people do not appear to be lifting them out of poverty.

Could anything be done to beneficially change these unfair, inequitable and, in so many billions of instances, intolerable circumstances?

Of course. There is plenty to do. The global economy is undeniably a manmade construction. Because the world's economy is a product of human activity, our economic system is known to one and all to be imperfect. Afterall, human beings can better themselves and their imperfect products can be ameliorated. Only works of God are perfect, I suppose. With this in mind, if it is so that the human economy is imperfect, it is just as obvious that the global economy of the family of humanity can be re-designed, modified and otherwise changed, as necessary. The system of economic globalization can be reorganized, "downsized" and "powered down" so that the global economy meets the primary needs of majority of people. In this way, the economy of the human community could be sustainably reconstructed so as to realize more fully and more equitably the principles of democracy.

What are the principles of sustainable ECO:NOMICS?

Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilitysoutheast.org/