Varun Sivaram

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Will China Follow Lomborg’s Advice on Carbon Taxes?

by Michael Levi
May 17, 2010

Barbara Finamore at NRDC has a nice rundown of internal Chinese discussions about imposing a carbon tax beginning in 2012. A Chinese carbon tax would be a positive development. But it’s important for observers to understand what it would do and what it wouldn’t. Based on the numbers being discussed, this looks like it’s more about raising money (albeit money that might be earmarked for green “research and development investment”) than about directly altering Chinese emissions: the tax being proposed would be equivalent to about $1.50 per ton of CO2 in 2012 and would rise to a bit less than six bucks by 2020. Praise from the environmental advocacy community for this step is thus more than a bit ironic: it’s pretty much in line with what The Breakthrough Institute, Roger Pielke Jr, and Bjorn Lomborg have called for.

The report that Barbara cites envisions a tax of 10 RMB per ton of carbon dioxide starting in 2012, rising to 40 RMB in 2020. Coal generates (PDF) about a kilogram of emissions for every kilowatt-hour of electricity produced. The hypothetical Chinese carbon tax would thus raise prices of coal-fired electricity by about 0.01 RMB/kWh in 2012 and 0.04 RMB/kWh in 2020. Put that in context: electricity prices (costs are obviously somewhat lower) in China range from about 0.5 to 0.8 RMB/kWh.

Here’s another way to look at it. A recent OECD study projects a 3 c/kWh cost for coal generation in China, a 3.6 c/kWh cost for gas, and a 3-3.6 c/kWh cost for nuclear, the cheapest non-emitting option (all assuming a 5% discount rate). A 0.01-0.04 RMB/kWh carbon tax adds 0.0015-0.006 c/kWh to the cost of coal generation, which simply does not change decisionmaking. (If one uses a 10% discount rate, coal comes in at 3.3 c/kWh, nuclear at 4.4-5.5, and gas at 3.9, making the gap even bigger.)

One last bit: How does this all compare to what’s in Kerry-Lieberman? The bill has a hard floor of $12/tCO2 starting in 2012. That rises at 3% real each year, which leads to a floor price of $15 in 2020 (in 2012 dollars). That’s equivalent to 82 RMB/tCO2 in 2012 and 104 RMB/tCO2 in 2020 (converted using U.S. CPI; take this last one with a grain of salt). (I use market exchange rates to convert because that seems to be most appropriate for power prices, which depend mainly on the cost of capital, materials, and resources.) The floor price in Kerry-Lieberman is thus quite a bit higher than the proposed Chinese price, though not staggeringly so by 2020.

Bottom line? A carbon tax in China would be a positive development. But it’s important to recognize the proposed tax for precisely what it is.

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