Why taxes on carbon pollution are essential, what’s happening now, and how you can help

McDermott economy-wide charge eliminates nearly 6x as much CO2 as EPA power plant rule.

McDermott economy-wide charge eliminates nearly 6x as much CO2 as EPA power plant rule.

Earth’s climate is changing in costly and painful ways. Yet the transition from climate-damaging fossil fuels to energy efficiency renewable sunlight and wind energy is slow and halting. The biggest obstacle to clean energy is that the market prices of coal, oil and gas don’t include the true costs of carbon pollution. A robust and briskly rising U.S. carbon tax will transform energy investment and consumption and sharply reduce the carbon emissions that are driving global warming.

  • A carbon tax is an “upstream” tax on the carbon content of fossil fuels (coal, oil and natural gas) and biofuels.
  • A carbon tax is the most efficient means to instill crucial price signals that spur carbon-reducing investment. View our spreadsheet to see how fast emissions will fall at different tax levels.
  • A carbon tax will raise fossil fuel prices — that’s the point. The impact on households can be softened through “dividends” (revenue distributions) and/or reducing other taxes that discourage hiring and investing (“tax-shifting or swapping”).
  • Carbon taxing is an antidote to rigged energy pricing that helps fossil fuels destabilize earth’s climate. Unlike cap-and-trade, carbon taxes don’t create complex and easily-gamed “carbon markets” with allowances, trading and offsets.

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Is the rift between Nordhaus and Stern evaporating with rising temperatures?

August 21, 2014 by Charles Komanoff Comments (1)

Lead author of this joint post is Peter Howard, Economic Fellow at the Institute for Policy Integrity at New York University School of Law.

The political task of enacting carbon taxes ­― and maintaining those in place ― has proven so daunting that questions of the tax’s appropriate level have gotten short shrift. Carbon tax advocates do not often discuss: How high is the optimal carbon tax? Along what trajectory should it increase over time? What, if anything, can climate science tell us about the right carbon tax to aim for?

Prof. William D. Nordhaus, Yale University

Prof. William D. Nordhaus, Yale University

In the academic realm, the distinguished Yale economist and public intellectual William Nordhaus has taken a leading role in the discussion. Nordhaus first modeled energy-economy interactions in the 1970s, and since the early 1990s successive versions of his Dynamic Integrated model of Climate and the Economy, or DICE model, have been used to estimate costs and benefits of carbon mitigation strategies in one prestigious report after another ― most recently in the Fifth Assessment Report by the UN Intergovernmental Panel on Climate Change (IPCC).

Given Nordhaus’s concerns over global warming, reflected in his ongoing repudiations of climate change denialists as well as his impatience with cap-and-trade schemes, it has been jarring for some to see him advocate for a relatively low carbon tax. In his 2008 book, A Question of Balance, which relied on the 2007 version of DICE, Nordhaus proposed a year-2005 starting price of just $8 (U.S.) per short ton of CO2 (from his Table 5-4, adjusted to 2012 dollars and recalibrated from metric to short tons and from C to CO2), which would then take two decades to double and another 30 years to double again.

Nicholas Stern (Baron Stern of Brentford)

Nicholas Stern (Baron Stern of Brentford)

In contrast, the Carbon Tax Center and its allies at the Citizens Climate Lobby have long advocated a steeper, stepwise ramp-up, with an initial price of around $10 per ton of CO2 followed by annual increases of the same magnitude for at least a decade and perhaps much longer. This policy recommendation is more in line with the views of Nicholas Stern ― lead author of the Stern Review on the Economics of Climate Change (2006) ― who argues that strong climate policies are necessary immediately to forestall large future damages from global warming. In the past, Nordhaus (along with several other economists) disregarded these findings based on the low discount rate assumed in the report.

Recently, however, this difference in opinion between the Nordhaus and Stern camps with regards to policy (though not discount rate assumptions) has lessened. Using the latest version of the Nordhaus model, DICE-2013, Nordhaus finds an optimal initial (2015) carbon price of approximately $21 per short ton of CO2 in 2012 U.S. dollars (a near tripling from DICE-2007). Moreover, the optimal tax according to Nordhaus rises more rapidly over time as compared to DICE-2007.[1] A tax of this amount would restrict the average global temperature increase to approximately 3 degrees Celsius above pre-industrial levels.[2]

As economist and NY Times columnist Paul Krugman noted in his review of Nordhaus’s 2013 book, The Climate Casino,even Nordhaus seems surprised by his finding that both the international consensus of a 2 °C limit and the carbon tax necessary to achieve it are nearly economically rational.[3] And given that DICE-2013 fails to account for climate tipping points (as Nordhaus himself notes), an even lower temperature limit and higher carbon tax are justifiable.

Stern has now taken this recent scholarship a step further. In a June paper co-authored with economist Simon Dietz, Stern demonstrates that the DICE framework can support an even stronger mitigation effort than the latest Nordhaus specification of the model.Their paper, “Endogenous growth, convexity of damages and climate risk: how Nordhaus’ framework supports deep cuts in carbon emissions” (co-published by the Centre for Climate Change Economics and Policy as Working Paper No. 180, and by the Grantham Research Institute on Climate Change and the Environment as Working Paper No. 159), is not a rehash of the Stern-Nordhaus dispute over discounting. Rather, the paper accepts Nordhaus’s choice of discount rate for argument’s sake but modifies the 2010 edition of Nordhaus’s model in three critical ways.

  1. Whereas DICE-2010 counts only economic costs from climate damage to current consumption (e.g., decreased agricultural productivity, loss of coastal habitation, etc.), Dietz and Stern contend that climate change will also erode the ability to generate new wealth by inhibiting the accumulation of physical capital and impeding overall learning in the economy, i.e., the accumulation of technological and intellectual capital; both of which are key drivers of economic productivity and growth.
  2. Dietz and Stern conclude that Nordhaus’s model specification of the climate “damage function” ― the function that translates increases in temperatures into declines in GDP ― also needs to be modified to reflect possible climate tipping points such as those emphasized in the recent IPCC report, “Climate Change 2013: The Physical Science Basis.” Dietz and Stern note that, as presently constituted, the DICE-2010 model leads to the unrealistic result that nearly three-quarters of world economic output would survive an average global temperature increase of 12 °C (22 °F). Nordhaus himself notes this anomaly for DICE-2013 in his latest book, and states that climate tipping points and the large damages associated with them could potentially occur with temperature increases as low as 3 °C.
  3. Dietz and Stern update the DICE model’s “climate sensitivity” parameter, which relates atmospheric levels of greenhouse gases to expected temperature increases and other climate impacts. These updates reflect recent findings from climate models, including the higher probabilities assigned to climate tipping points such as methane emissions triggered by melting permafrost. This change would bring DICE in line with the latest versions of other Integrated Assessment Models, such as Richard Tol’s FUND model and Chris Hope’s PAGE model.

Dietz and Stern’s modifications to the DICE model are mathematically sophisticated and not for the uninitiated. But the bottom line is this: even leaving Nordhaus’s higher discount rate untouched, the three changes to DICE-2010 result in a two- to seven-fold increase in the optimal price assigned to a ton of carbon emissions in 2015, according to Dietz and Stern, and a temperature limit of 1.5 to 2 degrees Celsius. Their paper’s conclusive statement with respect to price and temperature is worth stating in full:

As a guide, we find that these models suggest the carbon price in a setting of globally coordinated policy, such as a cap-and-trade regime or a system of harmonised domestic carbon taxes, should be in the range $32-103 [per metric ton of CO2] (2012 prices) in 2015. It must be remembered that the DICE model lacks adjustment costs, so the high end of the range should be interpreted cautiously. On the other hand and potentially of great importance, we have . . . omitted important risks in relation to the distribution of damages, which could give higher carbon prices. Within two decades the carbon price should rise in real terms to $82-260/tCO2. Doing so would, according to the model, keep the expected atmospheric stock of carbon dioxide to a maximum of c. 425-500 ppm and the expected increase in global mean temperature to c. 1.5-2 °C above pre-industrial.

Given that Nordhaus finds an even stricter temperature limit using DICE-2013 than DICE-2010 (i.e., approximately 3 degrees Celsius instead of 3.5 degrees Celsius), even more ambitious temperature limits and carbon taxes are economically rational.

The results of both Nordhaus (2013) and Simon and Dietz (2014) demonstrate that the DICE model supports ambitious climate policies ― potentially even the temperature limit agreed upon under the Copenhagen Accord. Thus, while Nordhaus and Stern may differ on whether a carbon tax should be imposed as a ramp or a steep hill, and on the appropriate discount rate for converting anticipated future damages to present terms, this debate is progressively less relevant as the steepness of this ramp increases with model sophistication and the further delay of a carbon tax. If steps are not taken soon to achieve optimal greenhouse gas emission reductions, the slight distinction between their respective optimal climate plans will likely grow even smaller – mooting any remaining disagreement over the tax’s appropriate level.

[1] Figure 14 in the DICE-2013 Manual. In a recent update of DICE-2013 (i.e. DICE-2013R), Nordhaus finds an optimal initial CO2 price of approximately $19 per short ton of CO2 (in 2012 USD); this is a 239% increase from DICE-2007.

[2] Figure 8 in the DICE-2013 Manual. Dietz and Stern (2014) find that the optimal mitigation path in DICE-2010 implies a temperature increase of up to 3.5 °C above pre-industrial temperatures. DICE-2013R seems to fall somewhere between DICE-2010 and DICE-2013 in terms of the optimal temperature increase.

[3] Krugman (2014) states that the “the optimal climate policy if done right would limit the temperature rise to 2.3 °C [above pre-industrial levels].”

Photos courtesy of Yale University and Wikipedia, respectively.

One Cheer for a New “Cap-and-Dividend” Bill

July 30, 2014 by Charles Komanoff Comments (12)

If you believe that the best policy for cutting U.S. carbon emissions — and the easiest political sell — is “cap-and-dividend,” you’re loving a NY Times op-ed keyed to a bill being introduced today by Rep. Chris Van Hollen (D-MD).

Van Hollen’s Healthy Climate and Family Security Act of 2014 would (i) create a permit system covering CO2 emissions for all fossil fuels extracted or brought into the U.S., (ii) auction off permits equaling U.S. emissions in 2005, (iii) ratchet down the number of permits by 80% by 2050, and (iv) distribute all of the proceeds “to the American people as equal dividends for every woman, man and child,” according to the op-ed, entitled The Carbon Dividend.

CTC finds that a 100% carbon-dividend will improve finances for 65% of U.S. households, not for 80%.

CTC finds that a 100% carbon-dividend will improve finances for 65% of U.S. households, not for 80%.

A bill structured like that is fairly ambitious, and it’s good to see it submitted to Congress alongside the McDermott Managed Carbon Price Act of 2014 introduced two months ago on May 28. (Our write-up of the McDermott bill is here.) And the Times op-ed, by U-Mass economics professor James Boyce, is written with unusual grace and persuasiveness, especially at the start:

From the scorched earth of climate debates a bold idea is rising — one that just might succeed in breaking the nation’s current political impasse on reducing carbon emissions. That’s because it would bring tangible gains for American families here and now.

A major obstacle to climate policy in the United States has been the perception that the government is telling us how to live today in the name of those who will live tomorrow. Present-day pain for future gain is never an easy sell. And many Americans have a deep aversion to anything that smells like bigger government.

What if we could find a way to put more money in the pockets of families and less carbon in the atmosphere without expanding government? If the combination sounds too good to be true, read on.

That’s terrific writing, and smartly keyed to the compelling theme that climate policy need not be sacrificial or a greased path to so-called big government. Read more…

A Breatkthrough in Polling on a U.S. Carbon Tax

July 22, 2014 by Charles Komanoff Comments (0)

A surprising but frustrating obstacle to carbon tax progress has been opinion polling. It took years for pollsters to even *ask* about a carbon tax rather than (or in addition to) cap-and-trade proposals. Even when that changed, little or no context was provided about possible uses of the revenues. Asking “do you support a carbon tax?” without at least hinting at possible revenue uses was akin to asking “Where should we land this punch?”

A revenue-neutral carbon tax, in which all tax revenue would be returned to the public as a rebate check ["dividend"], receives 56% support. The largest gains in support [relative to opinion on a carbon tax w/o revenue mention] come from Republicans.

A revenue-neutral carbon tax, in which all tax revenue would be returned to the public as a rebate check ["dividend"], receives 56% support. The largest gains in support [relative to opinion on a carbon tax w/o revenue mention] come from Republicans.

Happily, a poll released yesterday by researchers at the University of Michigan breaks the mold. Here’s their abstract:

Conventional wisdom holds that a carbon tax is a political non-starter. However, results from the latest version of the National Surveys on Energy and Environment (NSEE) provide evidence of substantial public support for a tax on the carbon content of different fossil fuels when specific uses of tax revenue are attached. A majority of respondents support a revenue-neutral carbon tax, and an even larger majority support a carbon tax with revenues used to fund research and development for renewable energy programs. The carbon tax coupled with renewable energy research earns majority support across all political categories, including a narrow majority of Republicans. These findings generally confirm previous NSEE results when revenue use options are linked to carbon taxation. These are among the latest findings from the Spring 2014 NSEE [National Survey on Energy and Environment] from the Center for Local, State, and Urban Policy at the University of Michigan and the Muhlenberg College Institute of Public Opinion. (Click here for source; emphases added.)

The Center’s press release on the new survey follows, printed in full.

FOR IMMEDIATE RELEASE — Public Views on a Carbon Tax Depend on the Proposed Use of Revenue, from the National Surveys on Energy and Environment (NSEE) / Press Release /July 21, 2014
Read more…

On the Latest Distraction from Carbon-Taxing: “Carbon Budgets”

July 8, 2014 by Charles Komanoff Comments (3)

Over the Fourth of July holiday, Lorna Salzman forwarded me half-a-dozen emails about “global carbon budgets” that had been posted to an informal list-serve of U.S. and U.K. climate advotes. Lorna and I have been friends and colleagues since 1974; she may have been the first person to take seriously my interest in carbon taxing, circa 2003, and her encouragement had a lot to do with my starting the Carbon Tax Center several years later and more recently to my ramping up my involvement in CTC. This morning I posted the following response.

I have four points:

1. I’m flat-out befuddled by the interest from some in this group in “carbon budgets,” whether national, global or whatnot. I think they’re a dead end politically as well as a dodge scientifically.

The author, 40 miles from his lower-Manhattan home (2012 photo).

The author, 40 miles from his lower-Manhattan home (2012 photo).

Why a dead end? Because nations cannot and will not agree on who should be allowed to consume and emit how much carbon pollution. Because devilish “details” like offshoring will inevitably confound any negotiations. Ditto, population growth, which will require continual dynamic adjustments to national shares.

Why a dodge? Because every link in the emissions-to-catastrophe chain is riven with uncertainty. We don’t know with great precision what level of emissions will lead to any level of warming. We don’t know what level of warming will be catastrophic. There isn’t even agreement on what “catastrophe” is.

What we can agree on is that (i) any feasible level of emission reduction is insufficient, and (ii) deeper reductions are better than shallow ones. These facts are irreconcilable with carbon budgets.

2. A carbon tax must be at the center of any effective policy to rein in emissions. It’s folly to think that regulations (even enlightened ones) and/or clean-energy subsidies (even efficient ones) and/or public-sector mobilization such as by the Allies to win World War II can ever push back comprehensively against the massive tide of cheap fossil fuels (that is: cheap sans a price for their climate damage). Read more…

Cantor’s Defeat Won’t Change Much on Climate

June 13, 2014 by Charles Komanoff Comments (0)

Washington is still abuzz with the surprise defeat of House Majority Leader Eric Cantor in this week’s Virginia Republican primaries. We asked former U.S. Under Secretary of Commerce for Economic Affairs Rob Shapiro to comment. Rob, the co-founder and chairman of Sonecon, LLC, an advisory firm that analyzes changing national and world economic and political conditions and their relationship to government policies, is a member of CTC’s board of directors. — C.K.

Rep. Eric Cantor addressing the 2013 Conservative Political Action Committee. Photo: Gage Skidmore

Rep. Eric Cantor addressing the 2013 Conservative Political Action Committee. Photo: Gage Skidmore

Following Eric Cantor’s unceremonious primary loss, a carbon-tax climate program remains hostage to the divisions cracking apart the Republican Party. Majority Whip Kevin McCarthy, who represents Bakersfield and the southernmost part of California’s San Joaquin Valley, almost certainly will succeed Cantor as House Majority Leader, with no discernible difference in the GOP’s stance on climate or anything else.

Some pundits insist that Cantor’s defeat will make establishment Republicans more sensitive to Tea Party activists. But apart from raising the debt ceiling to avoid an economically (and politically) catastrophic debt default, when have the GOP’s traditionalists stood up to their ideological fringe on any significant issue? With even once-stalwart Republican supporters of climate reform sidling towards the caucus of climate-change-deniers, serious reforms that require Congress’ approval will attract little if any support from any Republican. Read more…