A Case for CATs

I have been working on this paper in bits and pieces since the summer. It is a position paper advocating a "Carbon Added Tax" on embodied emissions.

This is the intro:

A Carbon Added Tax (CAT) is like a sales tax on the carbon emitted to produce the goods and services we consume. From the CAT perspective, when you buy say, a computer, you are responsible for the carbon emitted in producing its mother board and the hard disk and each subcomponent in the computer, as well as that emitted from the fuel burnt by ships and trucks transporting it, and to power the electricity in the shop selling it. A CAT levies a tax on the consumer for all this “embodied” carbon, at the point of sale.

This paper argues that a CAT represents a better way to affect global carbon emissions, because it leverages the global nature of the world economy to cut through geographic and legislative boundaries. The paper also addresses the major arguments against the CAT – the assumed difficulty of measuring embodied carbon and administering the tax. It discusses the latest developments in this area, and proposes structural incentives to overcome those obstacles.

And here is what's in it:

The Moral Imperative: Consumer vs Producer Responsibility
The Quantitative Impact of the Consumer Responsibility Perspective
The Economics: A Global Public Good
Structural Problems with the Producer Responsibility Paradigm
The CAT in Practice
Accounting View: Counting Carbon for CATs
A Philosophical Note: Archimedes’ Lever
A Time to CAT?
Conclusions

Macbook Environmental Report

Kudos to Apple for putting out an environmental report on their new Macbooks (via earth2tech).

Of course, I will have to point out that Apple estimates its embodied emissions (ie emissions from production and transport) to be 60% of the total lifecycle emissions of the product, versus 39% for customer use. Not to repeat myself too often, but why is it every one seems to be focusing on the 39% portion?

The CAT is out of the bag

I’ve been toying with the idea of a Value Added Tax on embodied carbon, and I’ve been meaning to put some thoughts in writing. So I came up with what I thought was the brilliantly original acronym: CAT for a “Carbon Added Tax”.

Then I did a search, and found that Nobel-laureate Joe Stiglitz recently proposed the same idea:

"A carbon added tax (CAT), levied at each stage of production, would have some of the same advantages that a value added consumption tax has. Each producer would have to show receipts for the carbon tax paid on inputs into its production. The taxes levied at each stage of production would be passed on to consumers. It is as if the tax were imposed on consumers… A carbon value added tax will both discourage production in more carbon intensive ways and discourage the consumption of carbon intensive goods."

His proposal pretty much sums up my thought process…

But perhaps even more interesting is that some one called Ewan O'Leary, registered the URLs for carbonaddedtax.com and .org last February. Now that is some real forward thinking!!! ;-)

Letters to Economist Editors

I read the Economist religiously - or rather I partly skim and partly read the Economist religiously every week. So it was nice that they published a letter I wrote them. (Of course, it relates to Embodied Emissions.)

What was surprising is how much they edited the letter. At first, I was taken aback: after all, they had lost the nuance of some of my points. On reflection though, it is quite amazing and flattering that they would take the time and effort to completely re-write such letters to drive home the point they think is worth publishing.

In any case, here is the original letter I sent:

Dear Sir,

Your article entitled “Emissions Suspicions” (June 19 2008) ignores the principle of “consumer-responsibility” - that consumers can be responsible for the carbon embodied in the goods they consume. If our society decides to proactively reduce its total carbon emissions, it makes little sense to just focus on the carbon being emitted (or “produced”) directly in our society. For example, a study by Oxford’s Dieter Helm showed that while “UK greenhouse gas [emitted directly in the UK has] fallen by 15% since 1990…on a consumption basis, the illustrative outcome is a rise in emissions of 19% over the same period… Trade may have displaced the UK’s greenhouse gas appetite elsewhere.” Whether this displacement was caused by carbon regulations or other factors is less relevant - What matters is the total amount of carbon that was emitted to produce the goods and services consumed in the UK.

As such, a “carbon tariff” on embodied carbon should not be compared to traditional “import taxes”. The correct analogy is a “Sales tax”. Today, governments tax goods and services both at the point of production (via corporate taxes) and consumption (via VATs or other sales tax). But emissions regulations to-date have been aimed solely at the “production” of green house gases. It is the principle of reducing carbon “consumption” that matters more than the economic implications of leakage (which is the focus of your article.)

But is this principle practicable? Your article also claims that assessing embodied emissions is an “impossibly complicated task.” But much work has been done in this area, specifically by UK based “Carbon Trust” (with the BSI and DEFRA) to create standards and make the process simpler, fair and practical. It would have been more appropriate to reference (if not, assess) these efforts in your article, rather than to dismiss them out of hand, as impossible.

Regards,
Salman Farmanfarmaian
http://salmanff.blogspot.com/
Geneva, Switzerland

And here is how it was reprinted:

Green consumer-taxes

SIR – If a society decides to proactively reduce its total carbon emissions it makes little sense just to focus on the carbon it directly produces (Economics focus, June 21st). For example, a study by Dieter Helm of Oxford University shows that although greenhouse gases emitted directly in Britain had fallen by 15% since 1990 measured by the conventional method, “on a consumption basis, the illustrative outcome is a rise in emissions of 19% over the same period” and that “trade may have displaced” Britain’s “greenhouse-gas appetite elsewhere”.

Whether trade displacement is caused by variances in carbon regulations among countries, which you focused on, or other factors is less relevant than the total amount of carbon that was emitted to produce the goods and services consumed in a single country. As such, plans to introduce a “carbon tariff” on goods imported from countries such as China misses the point. Consumers are responsible for the goods they consume and the carbon emitted to produce them.

Emissions regulations have so far been aimed solely at the production of greenhouse gases, but governments tax goods and services at the point of production and consumption. It would therefore be more sensible to introduce an emissions “sales tax” rather than a carbon tariff.

Salman Farmanfarmaian
Geneva

I wonder which version is better.

The Polluter is the Consumer

Here is another high level analysis of embodied carbon in imports by Oxford’s Dieter Helm (et al). It looks at the UK’s carbon emissions from the “consumption point of view.” The paper notes that using conventional producer-based carbon accounting-methods,

“UK greenhouse gas emissions have fallen by 15% since 1990. In contrast, on a consumption basis, the illustrative outcome is a rise in emissions of 19% over the same period. This is a dramatic reversal of fortune… It suggests that the decline in greenhouse gas emissions from the UK economy may have been to a considerable degree an illusion. Trade may have displaced the UK’s greenhouse gas appetite elsewhere.”

The same paper has a well-articulated overview of the “consumer vs producer” paradigm:

“Both these [currently used] methodologies are based on the location of the production of greenhousegases. This, however, is a somewhat misleading and partial basis for policy purposes. For a country could have a very low production of greenhouse gases, but at the same time have a high consumption level. It could produce low-GHG-intensity goods, but import and consume high-GHG-intensity goods. Thus, a developed country might cease to produce steel, aluminium, glass and chemicals domestically, but import the manufactured goods from abroad. In the UK’s case, the shift of production in such activities to China, India and other developing countries in the last two decades suggests that this effect may be considerable… China might argue that, although it produces high emissions, these are on behalf of consumers in developed countries, and therefore the consumers should pay for the relevant reductions. In this way, the polluter is not the producer, but rather the consumer.”

Also, the paper finds that “by 2006, the trade deficit in greenhouse gases [in the UK] was 341 MtCO2e, around 50% of domestic UK greenhouse gas emissions.” Another data point in understanding our total carbon footprint.

____________________________
Notes:
Thanks to David McKay’s blog for pointing me to the above paper.
Also - Bold emphasis above added.

Transportation and Carbon-Conscious Consumers

As a sector, transportation is certainly a significant source of carbon emissions. But perhaps because it is so visible, or even tactile, transportation gets a lot of attention, and people tend to overstate its role in embodied emissions. Some recent NY Times articles make references to some related data which are worth quoting:

From the Green Issue of the Magazine: “It is the locavore’s dilemma that organic bananas delivered by a fuel-efficient boat may be responsible for less energy use than highly fertilized, nonorganic potatoes trucked from a hundred miles away. Even locally grown, organic greenhouse tomatoes can consume 20 percent more resources than a tomato from a far-off warm climate, because of all the energy needed to run the greenhouse.”

The same issue also quoted the famous New Zealand studies, though in a somewhat skeptical tone: “A handful of studies have recently suggested that in certain cases under certain conditions, produce from places as far away as New Zealand might account for less carbon than comparable domestic products.”

Also, when Timberland studied the embodied emissions of its shoes, “the company was surprised to find that transportation may account for less than 5 percent of its greenhouse-gas emissions — while almost 80 percent may come from making the leather, a process buried deep in its supply chain.” (Note however that Timberland seems to have overestimated the emissions related to the leather.)

The above study is consistent with Weber and Matthews’ study on the embodied emissions of imports into the United States, which suggests that “CO2 emissions due to international freight transport are unlikely to increase the totals [of embodied emissions in imports] by more than 10%.”

In an article on the environmental impact of groceries, it was calculated that a bottle of European wine drunk in New York has 1.4kg of embodied CO2, while a Napa bottle would have 2.5kg. Ironically, in this case, the major difference does lie in transportation, since Napa wine is trucked to New York, while French wine is shipped, thus consuming far less carbon per mile shipped.

So much for drinking local (or at least national.)

Finally, a hopeful note in today’s article on transportation’s direct carbon footprint. “A paper presented by Travelport at the World Economic Forum in Davos in January… stated that consumers want information about their carbon footprint as it relates both to business and personal travel. 'That desire for information has the potential,' the paper said, 'to reshape the travel policies companies set and the choices companies and consumers make across a broad range of decisions: how they travel; when and where they travel; what airlines, hotels, and rental car companies they use; where they hold meetings and events — even whether they travel at all.'

Whatever the impact of the transportation sector on global carbon emissions, it will be interesting to watch the impact of carbon-conscious consumers on the transportation sector.

Saul Griffith’s Carbon Footprints Part II – Some numbers

Following my previous post, I thought to look at Saul’s energy usage / carbon footprint calculations by separating out his personal energy usage from his work related consumption.

See the notes below on how I have separated the work from the personal energy usage. The chart below separates out the numbers into 4 categories, and speaks for itself. Almost half of Saul’s home energy usage comes from “Food and Stuff” which represents the embodied emissions of his consumer purchases. Of course, as Saul has pointed out, he has probably underestimated the energy usage associated with these categories.



Again, people can dispute the difficulty of calculating the embodied emissions of “stuff”, but at almost 4 times the energy usage of his home heat and electricity, Saul’s calculations should at least, again, put the importance of embodied emissions in perspective.

__________________________
A few other notes:

• Like the truck driver in my previous post, Saul’s major source of carbon emissions relates to his travel for work. His total work related energy use should be compared to the value of his work, in revenues from his company or at least with the costs associated with the company. This figure should be compared to other businesses in the same sector.
• Energy usage of ‘stuff’ related to work would probably need to be more comprehensive, including things like capital goods (servers, furniture), services delivered to his workplace (fedex, as well as consumables (like pencils and paper and printer toner.)

• Here is the data:

Some notes on separating work from home usage:

• Saul mentions that most of his air travel is for work, so I put in a “wild guess” number of 90% related to work. Inversely, I assumed 90% of his car usage was for personal (ie home) use.
• In stuff, I only allocated his laptop to work. As noted above, there are probably other work related goods that should be added to his work “stuff”
• The allocation of societal consumption is an interesting one. Here I have assumed it is half for work and half for home. After all, government exists to serve both individuals and to support businesses. Although the actual impact at ~3% in total is not very big, a more thoughtful method may still be needed here. For example, there could be an argument that government is there only to serve the people, so 100% should be allocated to individuals. At the same, this would distort the picture for developing nations (and the goods they export), especially since substantial government resources are probably expended on supporting businesses.

Saul Griffith’s Carbon Footprints Part I – More on Consumer vs Producer Responsibility

“Power Consumption at work... This... brings up a very interesting point... where do you draw the lines in figuring out your own energy consumption? Does work energy go against you or the product of that work?”

Saul Griffith’s excellent presentation gives a very thorough view of carbon foot-printing, and the particular question above is quite fundamental. I would argue that personal energy consumption should be treated separately from energy use for work. The energy use related to our work should show up embodied in the product of our work.

A few examples could help illustrate why…

1. Say I am truck driver that delivers apples ( ;-) ) to a local grocery store. It would not make sense to mix my personal energy consumption behavior with my job as a truck driver. Even if I lead a carbon neutral personal life, mixing my stellar home footprint and my work related emissions would give a distorted view of the choices I can make – ie the factors which are under my control, in my personal life.
2. Now let’s imagine the exact opposite case. Let’s say you are a small business owner, doing most of your work from the office using emails and phones. Again, you could be driving a hummer from home to work, and leave your oven on 24 hours a day, but if you mix your personal and work energy usage, you would still seem more eco-friendly than the me.
3. Now, to drive the point home, imagine that you are my boss, and you are responsible for deciding the kind of truck I would drive. Clearly, the distortion created by mixing personal and professional energy use and footprints would make the exercise quite meaningless.

This is not to say we shouldn’t worry about our work related energy use. All of us have some say in the energy consumption of our workplace. And we can make choices to affect it. But the energy consumption of my apple delivery business should be compared with the energy consumption of other apple delivery businesses, or delivery businesses in general. The result of our work, and the energy we consume to deliver it, would both be manifested in the product of our work – in this case, an apple. So it would also make sense to use metrics like CO2 emissions per apple delivered…

Or, for practical purposes, so as to be able to generalize (and mix apples and oranges in the same truck), one could measure, CO2 per dollar of revenue delivered…

Or rather, to be able to account for each business’s share of economic activity, carbon emissions per dollar of economic value add.

(To illustrate: Let’s assume I have an apple delivery business using apples from my brother’s farm. And say you have an apple farm and deliver the apples yourself. Ultimately, we would want to compare the total lifecycle emissions for each apple. Say, you sell apples for $2 and emit 2 grams of carbon per apple, from the farm to the final delivery. My brother emits one gram of carbon per apple and sells them to me for $1. If I emit 1 gram of carbon in delivering the apples and sell them for $2, the total embodied emissions of the apples I sell are the same as yours – 2 grams in total. But if I calculate emissions per dollar of revenue, I would get 0.5 grams of emissions for every dollar of revenue – ie 1 gram for every $2 apple – which is the wrong comparison. In effect, I am emitting 1 gram for every $1 of economic value add, since I am buying the apples for $1.)

So, the best way to compare apples and apples is to compare the total embodied emissions in each product, including each part of the full supply chain, preferably in the form of a carbon label. And each part of the supply chain would weigh its emissions against the economic value that it is adding to the product, and compare that to similar businesses - ie comparing apple delivery to apple delivery.

From a consumer responsibility perspective, it would be up to each apple buyer to decide between different kinds of apples and take responsibility for that purchase decision. If an apple delivery company decides to use solar powered trucks, then that should show up on the carbon label of the apples it delivers, and affect the carbon footprint of the buyers of those apples.

Many argue that carbon labels are impractical because the carbon footprint of each product is very hard to calculate. I don’t believe that to be the case, especially if you weigh that difficulty against the total impact of embodied emissions (also see here and here.)

Carbon Emissions in Developing Countries: Producer vs Consumer Responsibility

“Developing countries, whose economies and populations are growing fastest, [will] contribute 74% of the increase in global primary energy use [until 2030]. China and India alone account for 45% of this increase.”
World Energy Outlook 2007, IEA

So three quarters of all new power production capacity will be in developing countries. Close to half of it in India and China. And according to the same report:

“China, with four times as many people, overtakes the United States to become the world’s largest energy consumer soon after 2010. In 2005, US demand was more than one third larger.”

And...

“In the longer term, [in China,] demand slows as the economy matures, the structure of output shifts towards less energy-intensive activities and more energy-efficient technologies are introduced.”

This last sentence is the most interesting. It sounds like the basic assumption of the report is that China will make a typical progression towards a more advanced economy: As the country becomes richer, not only will it care more about the environment and prioritize more energy efficient technologies, but the economy as a whole will become more service oriented, much like that of the US. Of course, this does not mean that the world will consume fewer goods. It just means that those goods will be produced in a new generation of up and coming developing nations – and those nations would account for the ~30% of the total increased energy use until 2030.

One could imagine that, like China today, those countries will want to use the cheapest (and thus potentially the dirtiest) fuels. They might also argue that it would be unfair to impose environmental restrictions on them since they too have a right to grow their economies. Just as China points to Europe and America’s growth and how they were fueled by dirty coal, those countries may point to China along with Europe and America and make the same argument.

And from their perspective, they would be right, just as China is “right” in its argument today.

The problem is the paradigm upon which the argument relies. It is a “producer responsibility” paradigm of CO2 emissions, looking at emissions based on where they were produced or emitted, not on why they are produced, and for whom. The "producer responsibility" world view ignores the "end-user" or consumer of the products which were created using those emissions.

Many developing countries, especially in their early stages of development, rely heavily on exports. In effect, they are using much of that new energy capacity to produce goods which are consumed in the more advanced economies. A “consumer responsibility” approach to carbon emissions could create a paradigm shift. It could give consumers the leverage to make decisions on whether they want to buy products which were produced using say, a new coal fired power plant. And it would shift the debate away from esoteric arguments about the "right" of government bureaucrats to pursue their nations' best interests.