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

Earth’s climate is changing in costly and painful ways. 2014 was the globe’s hottest year on record, and the dozen warmest have all come after 1997, as this graphic shows clearly.

Global warming not happening? Look again.
Global warming not happening? Look again.

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, re-shape 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.
EPA power plant rule can't hold a candle to economy-wide CO2 charge.

EPA power plant rule can’t hold a candle to an economy-wide CO2 charge.

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First Tax Oil, Then Carbon

January 22, 2015 by Charles Komanoff Comments (2)

Low oil prices and cheap gasoline bring a host of positives and negatives, as befits petroleum’s dual nature as a bestower of motion and light but also smog, traffic and climate change. This clash has bedeviled energy and climate policy for decades. Now we have a golden opportunity to resolve it.

Heading the good things is inexpensive oil’s boost to the economy. Cheap gas gives consumers more money to spend, and that means more jobs and better wages. Geopolitically, low oil prices are a scourge on several bad actors on the world stage, from Russia to Iran. And as drilling gets less profitable, thousands of fragile places might be left alone.

But when oil is cheap, the world gears up to use more of it, which accelerates climate change. For all we rightfully target coal, burning oil releases almost as much climate pollution. Boeing and Airbus are reportedly apprehensive that their latest fuel-efficient aircraft may go begging. And of course the faster oil usage rises, the more quickly the price rebounds, teeing up the next recession.

A refundable oil tax can pave the way for a full-fledged carbon tax.

A refundable oil tax can pave the way for a full-fledged carbon tax.

What’s needed is a way to safeguard the benefits of low oil prices while fending off the downsides. The trick to this feat, which should unite all sides of our fractured body politic, is to let consumers collect a tax on oil. Or rather, have government collect the tax at ports and wellheads and distribute the revenues to consumers each month, the same way Alaska distributes the revenues from its wildly popular tax on its oil flows.

Yes, we take Sarah Palin nationwide, taxing oil and disbursing the dollars — all of them — to U.S. households, the same “dividend” for each.

Because the tax dollars stay in circulation, the amount of money families have to spend doesn’t fall and the windfall to the economy persists. Most families of limited means will come out ahead because on average they spend fewer dollars on oil than they will receive in their monthly revenue check. Economic inequality eases a little, at no cost to economic activity.

Why have the tax at all, then? Answer: to simulate high fuel prices, preserving incentives to get more fuel-efficient. In this way, motorists will keep buying high-mileage cars and driving them somewhat less, manufacturers will build ever-more efficient vehicles and aircraft, and cities and counties will keep broadening their transit infrastructure. The same goes for freight movement ― goods produced nearby will be advantaged, boosting local agriculture and domestic jobs.

How high an oil tax are we talking about? Fifty dollars a barrel, which is less than the drop in price so far, is a good starting point for discussion. It could be phased in with a $20 per barrel levy now, rising by $10 a barrel a year for three years to reach $50 in 2018.

The startup tax of $20 a barrel equates to half a buck for a gallon of gas or diesel. Not chump change, yet even with the tax, prices of motor fuels will be lower than they were in September. And the knowledge that the tax will rise should ward off the natural tendency to splurge. We’ll be less tempted to go back to buying guzzlers, and the psychological and physical infrastructure that for a century made it second-nature to use ever more oil will start to relinquish its hold.

How large will that monthly dividend check be? If adults get full shares and children half, and allowing for conservation, a 4-person household will get $120 a month in the first year. Most families will find that the extra money more than offsets the costlier gas, airfares and prices of shipped goods. Some may even relish the annual increases in the tax that will augment the incentive to conserve.

This program resembles one advanced recently by former Treasury Secretary Lawrence Summers to let oil’s “price swoon” pave the way to a carbon tax. Others singing this tune include the Economist magazine, with an editorial noting that “cheaper energy brings the chance to inject some coherence into the world’s energy policies.” We agree except on one key point: the price plunge — and the corresponding cushion to offset the tax — is far less pronounced in electricity and natural gas than in petroleum products.

To be sure, a revenue-neutral carbon tax that distributes the proceeds via monthly dividend checks comes with a built-in cushion. But the American public needs to be persuaded. A refundable oil tax can provide proof of concept. After three years of tangible dividends, Americans might be ready to extend the oil tax to the other carbon-based fuels in proportion to their carbon content.

The monthly revenue check, an abstraction no longer, could be the ticket to Congress’s finally taxing carbon fuels for their climate damage and putting America, and the world, on a climate-safe course.

Economist Steven Stoft, author of “Carbonomics,” aided in the conceptualization and writing of this post.

New Senate Bill Would Build “Polluter Pays” Principle into Climate Action

November 19, 2014 by Charles Komanoff Comments (3)

(co-authored with CTC senior policy analyst James Handley)

Sheldon Whitehouse gained renown last year for his series of weekly “Time To Wake Up” speeches on the Senate floor addressing the climate crisis. Today, the Democratic Senator from Rhode Island took his climate leadership further as he introduced a comprehensive bill intended to end free dumping of climate pollution into the atmosphere. (Click here for video of the senator’s 80th speech, introducing his bill.)

Whitehouse calls his 30-page measure, which is co-sponsored by Democratic Senator Brian Schatz of Hawaii, the “American Opportunity Carbon Fee Act.” It builds squarely on the growing consensus that clean energy will rapidly and fully displace fossil fuels only when polluters are made to pay for causing climate damage. AOCFA would impose fees on both CO2 and non-CO2 greenhouse gases including fugitive methane from shale gas wells and coal mines. AOCFA also includes a border tax adjustment to impose equivalent climate pollution fees on imported goods from nations that have not enacted their own climate pollution fees. (Click here for background on border tax adjustments.)

AOCFA pegs its pollution fee to U.S. EPA’s estimate of the “social cost of carbon.” The fee would start at EPA’s current estimate of that cost, now $42 for each ton of carbon dioxide, and would rise by 2% annually in real terms. Emissions of methane and other greenhouse gases would be charged in proportion to their estimated per-unit global warming impacts relative to carbon dioxide.

The Senator’s office estimates that AOCFA would raise $2 billion in revenue in its first ten years, money that would fund an “American Opportunity Trust Fund” to be returned to the American people in as many as nine different ways including tax cuts, dividends, infrastructure investments and debt relief. E&E News reporter Jean Chemnick wrote today that the bill “leaves open the question of how those revenues would be spent as an invitation for would-be Republican collaborators to negotiate.”

Sen. Whitehouse’s decision to link his bill’s climate pollution fees to the social cost of carbon could be problematic, however. Published estimates of the social cost of carbon vary from as little as $10 per equivalent ton of CO2 to over $300, depending on what is counted as climate damage, what discount rate is assumed to convert future losses to present terms, and how heavily if at all catastrophic risk scenarios are factored in. And while hitching the pollution fee to the EPA social-cost estimate may resonate with some stakeholders, it could limit the level of the carbon tax and, thus, its ability to drive down U.S. emissions rapidly enough, let alone global emissions.

After a rapid drop due to the bill's aggressive starting price, emissions would stabilize instead of declining further, on account of the low price trajectory.

After a rapid drop due to the bill’s aggressive starting price, emissions would stabilize instead of declining further, on account of the low price trajectory.

Indeed, we ran the Whitehouse bill through the Carbon Tax Center’s 7-sector price-elasticity spreadsheet model and found both good news and bad. The proposed starting price of $42 per ton of CO2 would quickly reduce US emissions by about 15%. (Though our graph shows the full drop occurring immediately, the decline would actually materialize over several years due to lags in behavioral and equipment changes.) But the bill’s subsequent 2% annual real price increases would serve only to offset the rising emission tide due to increased affluence, resulting in essentially flat emissions rather than a declining curve. Read more…

25% by 2025 Can’t Happen Without a Carbon Price

November 12, 2014 by Charles Komanoff Comments (2)

Today’s welcome announcement of a surprise U.S.-China agreement to curb greenhouse gas emissions almost certainly commits the United States to a national carbon price. Non-pricing measures, such as the EPA Clean Power Plan to cut power plant emissions and the ramp-up of auto fuel economy standards now underway, won’t be nearly enough by themselves to meet the new U.S. target of 25% lower emissions by 2025 vis-a-vis a 2005 baseline, according to calculations by the Carbon Tax Center.

This could be terrific news for carbon tax proponents, since it would finally require climate-concerned organizations and officials to put carbon pricing — preferably in the form of a revenue-neutral carbon tax — at the heart of their climate agenda. On the other hand, given the new Congressional ascendancy of the climate-deaf Republican Party, the 25% target could prove to be just another climate goal scuttled by U.S. political resistance.

Let’s start with the carbon emission numbers, which we’ve broken down between emissions from electricity generation, which account for around 40% of U.S. CO2 pollution, and emissions from the various “non-electric” sectors like automobiles, goods movement, air travel, industry and heating, which account for the other 60%. This division is useful for at least two reasons: there’s much greater maneuverability in electricity due to the relative ease of substituting clean sources like solar and wind for dirty coal and gas, and the U.S. already has an emissions goal for the electricity sector: the 30% reduction by 2030 (from 2005) embodied in the Clean Power Plan announced by President Obama this past June.

Non-electric-sector emissions will need to drop sharply to meet the 25% 2005-2025 reduction goal.

Non-electric-sector emissions will need to drop sharply to meet the 25% 2005-2025 reduction goal.

The key numbers are shown in the graphic. A 2025 target equaling 75% of actual 2005 CO2 emissions of 5,855 million tonnes (metric tons) from all U.S. sources equates to 4,391 million tonnes. With that figure established, let’s switch our reference frame to current (2013) emissions, which were 5,317 million tonnes. (All figures are from CTC’s carbon tax model, and some may differ from recently released official U.S. emission figures, but only slightly.)

The difference between 2013 emissions (5,317 million tonnes) and 2025-targeted emissions (4,391 million tonnes) is 926 million tonnes. That’s a 17.4% drop over just a dozen years. The questions are: where in the U.S. economy will these reductions take place, and how will they come about? Read more…

New EU Emission Target Outpaces U.S. — And Then Some

October 30, 2014 by Charles Komanoff Comments (3)

The European Union announced last week its intention to reduce emissions of greenhouse gases by 40% from 1990 levels by 2030. Meanwhile, the U.S. goal remains a 17% emissions cut from 2005 levels, by 2020.

Two different percentages over two different time periods. How do the EU and U.S. trajectories compare? Is the EU’s use of a 1990 baseline cheapening its goal, as some have suggested?

EU target is nearly twice as ambitious as US goal.

EU target is nearly twice as ambitious as US goal.

No, it turns out. As the graphic shows, the 27 countries making up the European Union generated slightly less CO2 in the EU’s baseline year of 1990 than in the 2005 baseline chosen by United States authorities. More importantly, after running a few numbers, we can safely report that the EU emissions objective embodies nearly twice as high a reduction rate to 2030 from 2012 (the most recent year with comparable data) as the US target: an average annual decline in emissions of 1.87% for the EU, vs. 1.02% for the United States.

To be sure, both 2030 figures are targets, nothing more. (Because the U.S. has not established a 2030 target, we extended to 2030 the annual U.S. 2005-2020 reduction rate implied by the objective of cutting emissions by 17%. Note also that all figures are carbon dioxide emissions from energy consumption only, i.e., CO2 from forestation changes or cement manufacture are excluded, as are emissions of methane and other greenhouse gases. All historical data are from a terrific on-line database compiled by the U.S. Energy Information Administration, which shows CO2 emissions for virtually every country and major region each year from 1990 through 2012.)

As for getting to those targets: The current U.S. strategy relies primarily on two elements: the EPA Clean Power Plan to cut electricity-sector emissions 30% from the 2005 level, and mandated increases in automobile fleet economy of around 60% for 2025 new vehicles vs. 2012 (though much less for bigger light trucks). While there is no single EU strategy, most if not all European eyes are on Germany, whose Energiewende (energy transition) is rapidly making over the physical and energy landscape of Europe’s powerhouse economy.

How big a carbon tax would enable the U.S. to meet its 2030 target? Assuming a linear ramp-up with annual increases equal to the starting tax rate, a national tax starting in 2015 at $5.35 per (short) ton of CO2 and rising by $5.35/ton each year would do the job, according to CTC’s carbon tax spreadsheet model. Alternatively, to accelerate the reductions to match the EU’s target trajectory, the starting and rising per-ton rates would need to be around $11.20 — coincidentally a tad less than the $11.34 per short ton (or $12.50 per metric ton) starting and annual rampup rates embodied in the McDermott Managed Carbon Price Act of 2014, and not much more than the $10 rates in Rep. John Larson’s America’s Energy Security Trust Fund Act of 2014.

Finally, consider the hassles of comparing different percentage reductions from different baseline as yet another reason to move policy discussions toward a structure that reinforces rising national carbon prices — calibrated to meet global climate stabilization goals. That’s what we hope the United Nations Climate Change Conference (COP 21) will do late next year in Paris as the Kyoto Accords finally expire.

Conservatives: Unpriced Carbon Pollution is Theft — Milton Friedman Would Tax It

October 9, 2014 by James Handley Comments (3)

Free dumping of CO2 pollution into the atmosphere is nothing less than “theft” from future generations who stand to suffer from unabated global warming, declared University of Chicago economist Steve Cicala at a symposium last week in honor of the conservative icon Milton Friedman. “It is theft,” said Cicala. “That’s a loaded term, but if someone else has a better term for taking something from someone without their consent and without compensating them, I’d be happy to hear it.”

E&E News reports that Cicala and former Obama White House adviser Michael Greenstone, who holds the Friedman chair at the U. of Chicago and directs its Energy Policy Institute, asserted that “if the late free-market economist Milton Friedman were alive today, he’d probably support pricing carbon.”

Free-Market Economist Milton Friedman
Free-Market Economist Milton Friedman

According to E&E, Cicala and Greenstone argued that,

Friedman… would have viewed climate change as a negative externality associated with burning fossil fuels and would have believed that society was entitled to recover its losses from those who emit carbon to advance their economic interests… While there is a market for the products that are associated with greenhouse gas emissions — like electricity, fuel and steel — there is no market for the pollution inflicted by their manufacturers on the public. Read more…