Putting A Price On Emissions Presents Challenges

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At the climate conference in Copenhagen, all the talk is over how to reduce carbon emissions. For economists, the problem boils down to one thing — putting a price on carbon emissions. Generally, placing a price on a commodity — corn or soy or a car — is a fairly easy matter. But putting a price on carbon presents particular challenges.

MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

Today Secretary of State Hillary Clinton arrived at the climate talks in Copenhagen. She announced that the U.S. will help raise $100 billion for poor countries to cope with climate change. That announcement injected new energy into the stalled talks which end this weekend. In a moment we will hear from the head of the U.S. negotiating team, Todd Stern.

BLOCK: First, if you've gotten lost in all the procedural wrangling in Copenhagen, we have a simple way for you to look at the problem. Dealing with climate change really boils down to one thing: The world needs to put a price on something you can't see, can't smell and something no one wants.

From Copenhagen, David Kestenbaum, of NPR's Planet Money team explains.

DAVID KESTENBAUM: In the financial world, there are markets for corn, coffee, hogs and if the countries of the world agree to a climate deal there could be a huge market for carbon dioxide or rather permits to emit carbon dioxide. There's actually a small market now, and by small I mean a $100 billion a year. But it could grow to trillions.

Ms. JANET PEACE (Vice President, Markets and Business Strategy, Pew Center on Global Climate Change) It is a strange idea. It's not a soybean market. We are not creating a market for - so, it's a created market.

KESTENBAUM: Janet Peace is an economist with Pew Center on Global Climate Change. The problem right now is that at least in the U.S. emitting carbon is free. Power plants, factories, us driving our cars, we can put as much as we want into the atmosphere. It's damaging the environment - but that cost? It does not show up in the price of anything. So, when you hear about cap and trade proposals or carbon taxes that's all really about one idea.

Ms. PEACE: We are trying to include or put back in that price. So, people think about that price then they make their decisions when they look at what kind of factory they want to build in the future, when they look at what kind of car they might want to buy in the future.

KESTENBAUM: Now this is not a new idea. In 1995, to combat acid rain the U.S. basically put a price on a different gas, sulphur dioxide. If you own a coal plant you're going to need a pollution permit for each ton of sulphur dioxide. There are a limited number of permits. And Europe already has created a market for greenhouse gases permits, carbon permits, though the market had a rocky start a few years ago. Dirk Forrister works for a company called Natsource, which has a carbon trading desk.

Mr. DIRK FORRISTER (Managing Director, Natsource): The carbon price was chugging along at about - it was rising up above 30 euros a ton, now that's like $40 - $50 a ton. That was a pretty serious price.

KESTENBAUM: But, then the market for pollution permits totally crashed.

Mr. FORRISTER: So, eventually those became worthless if you were holding very many of those. So, thankfully we were not.

KESTENBAUM: And this is a peculiar thing about these kinds of artificial markets. The price of oranges depends on the weather and the growing season -the price of carbon? It depends in part on the government. The government sets how many pollution permits are out there. Forrister says that was a test period and the kinks have been worked out.

Today, for instance, carbon pollution permits traded for $20 a ton. The price was higher when the climate talks started but it went down as the prospects for a deal dimmed. Carbon markets have some potential problems though. I found a sign that illustrated one nicely here. A protestor outside was holding it. It was a rally and the sign was handwritten. The letters are all different sizes. At first I thought he'd left a word off.

Hey, can I talk you while you're dancing?

(Soundbite of song)

Mr. GEORGE FEITH(ph): Sure.

KESTENBAUM: You can keep that thing if you want.

Mr. FEITH: Hard to talk though. Whoo whoo.

KESTENBAUM: Tell me what your sign says.

Mr. FEITH: It says emission is not a good.

KESTENBAUM: Shouldn't it be emission is not a good thing?

Mr. FEITH: No, emission is not a good as like you can not sell it or buy it.

KESTENBAUM: Oh. George Feith, that's his name. He was actually objecting to the idea of carbon credits for trees. That's a major issue in these huge international talks. If carbon has a price, trees become more valuable because trees suck up carbon. So, maybe it makes sense to pay people in Indonesia not to cut down their forests. But the accounting for trees is actually pretty complicated. And the concern is this could be a place for what amounts to tax evasion. We end up paying people for their forests but delay dealing with the problems at home like coal plants and cars.

David Kestenbaum, NPR News, Copenhagen.

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