What an Energy-Efficiency Hero Gets Wrong about Carbon Taxes

It’s rare that critiques of carbon taxing are as quantitative as the post last month by David Goldstein on the Natural Resource Defense Council’s Searchlight blog.

Goldstein qualifies as a genuine energy-efficiency hero, in my book. He has spearheaded NRDC’s pioneering analyses of appliance engineering, manufacture and marketing since the 1970s and guided the council’s strategic interventions in utility governance and energy standard-setting in California and at the federal level. This in-the-trenches work has slashed power consumption and carbon emissions from refrigerators, air conditioners, light bulbs and building envelopes in all 50 states. Goldstein’s 2002 MacArthur Foundation “genius award” was richly deserved. (The Washington DC-based Alliance for an Energy Efficiency Economy, ACEEE, merits a shout-out as well.)

Befitting his analytical bent, Goldstein’s critique sticks to the high road. No self-fulfilling taunts about carbon taxers’ naivete or the tax’s political infeasibility. His post does drag out a straw man, though, insisting up-front that “carbon emissions fees alone cannot solve the climate problem” — a position held by few carbon tax advocates. (We ourselves “recommend carbon taxes in addition to energy–efficiency standards.”) His criticism sharpens at the end: “In summary, carbon pollution fees, as a stand-alone policy, are incapable of doing much to solve the climate problem.”

Goldstein has certainly thrown down the gauntlet. He has four main arguments, which I’ll treat in order. Some math is involved, but it’s central to the issue.

Argument #1: Carbon Taxes Must Raise U.S. Energy Prices 44-Fold to Meet Our Carbon Targets

Let’s start with an assertion by Goldstein that is startling but accurate — mathematically:

If we wanted energy demand to drop by 85 percent [the minimum required for the U.S. to meet IPCC temperature-rise targets] due to price, the math behind elasticities shows that we would require a price increase of 44 times. This is an impossibility condition. (emphasis added)

Price-elasticity is how economists denote the extent to which a rise in price causes demand or usage of a good or service to diminish. Assuming, as Goldstein does for argument’s sake (and as we do in modeling carbon taxes), that the price-elasticities of the various forms in which energy is used in the U.S. have an average value of minus 0.5, then a doubling of energy prices, whether effected through a carbon tax or market fluctuations, will cause energy use over time to shrink by 29 percent. (See sidebar for calculations.) With two doublings in price, the shrinkage would be 50 percent.

Here's the math behind the economics

Here’s the math behind the economics

Note that the second doubling in price produces less of a decrease in usage than the first, reflecting the famed Law of Diminishing Returns. Indeed, three price doublings would only bring about an overall 65 percent drop in usage. To hit the 85 percent reduction target requires a 44-fold energy-price rise. Goldstein’s math is spot-on.

But not the use to which it is put. While an 85 percent reduction in energy use would indeed cure the United States’ carbon obligations (not to mention protect and conserve air, water and land), it far exceeds what’s required, thanks to the ongoing and parallel reduction in the carbon intensity of energy supply. This decarbonization of supply is prominent in energy and climate discourse, and has been evident in the electricity sector over the past decade. Measured as pounds of CO2 emitted per kWh generated, the emission rate for all electricity generated in the U.S. last year was 16 percent less than the rate in 2005. For that we can thank increased generation from lower-carbon natural gas and zero-carbon wind. (Solar electric generation, though growing very fast, started from a tiny base and wasn’t a notable factor in the decarbonization to date.) Energy efficiency has helped as well by reducing the need to fire up high-carbon coal plants.

A carbon emissions tax, which by its nature favors wind and solar over gas, and gas over coal, will help sustain and accelerate this encouraging supply-side trend. Indeed, the price-sensitivities built into CTC’s spreadsheet model imply that energy supply decarbonization will account for an estimated 53 percent of the overall projected CO2 reductions from any carbon tax. This means that reductions in emissions via demand, i.e., conservation and/or efficiency, that are Goldstein’s stock-in-trade need only accomplish a bit under half (47 percent) of the total task.

Price-Elasticity Curve for Energy-Efficiency Hero post _ 2 Sept 2015The relevant math, then, is this: Thanks to supply decarbonization, the U.S. can limit its reduction in energy usage to 59 percent and still achieve the 85 percent CO2 reduction target. While a roughly 60 percent reduction in energy consumption is still a very tall order, it’s far less fantastical than 85 percent. Assuming energy price-elasticities average minus 0.5, that 60 percent reduction in usage could be effected with a “mere” 6-fold rise in energy prices. No 44-fold rise required. (See calculations at end of this post.)

Argument #2: A Carbon Tax High Enough to Be Effective Would Distort the U.S. Economy

To his credit, Goldstein appears to have anticipated my rebuttal above. He posits a 5-fold increase in energy prices, slightly on the easy side of my 6-fold rise, which he then dismisses on three grounds. Each is problematic, however:

1. “Energy would be pushing a fourth of GDP” (vs. today’s share of ten percent or less), says Goldstein, and, thus, would be gobbling up too much economic activity. The idea of expensive energy colonizing the economy is certainly a legitimate concern in a last-gasp laissez-faire economy in which the costly energy arises through “extreme extraction” of oil in the Arctic, deep waters, and tar sands. But a carbon tax would have the opposite effect, obviating most energy exploration, extraction, conversion, transport and combustion, in accordance with the 60 percent decline in usage posited above. In short, a carbon tax will make our society and economy less energy- and fuel-intensive, not more (while the energy barons, with their wealth clipped, will wield less political power).

2. A 5- or 6-fold increase in energy prices “is not politically possible. Electricity at 50 cents a kilowatt hour?,” Goldstein asks rhetorically. “Gas at $12 a gallon?” Here, Goldstein presumes that a carbon tax would impose those lofty price levels overnight, rather than being phased in over decades. In the latter scenario, the impacts will be softened, yet the price signals guiding long-term investments will be loud and clear. The impacts will be tempered further as the improved efficiency of usage lets businesses and households heat, cool, light and move with fewer units of energy. (Ironically, it was Goldstein and his NRDC colleagues who decades ago coined the mantra that what matters is electricity bills and not rates. Note also that CTC is on record criticizing proposed carbon taxes that would start with abrupt energy price rises, on account of the likelihood of economic dislocation.)

3. The carbon tax required to boost energy prices 5- or 6-fold “would be potentially devastating to the poor,” Goldstein argues. Potentially yes, if the wealthy are allowed to siphon off the carbon tax revenues that could buffer U.S. households from the higher energy prices. But the carbon tax designs with the most adherents are those that either use the proceeds to reduce regressive job-killing payroll taxes or distribute them pro rata to households as “fee-and-dividends.” In fact, the need for a socially and economically just distribution of carbon tax revenues only underscores the urgency for environmental progressives to coalesce now behind carbon tax legislation that can safeguard the 90 percent rather than solidifying the advantages held by the top 10 or 1 percent.

Argument #3: Energy Demand is Price-Inelastic, So a Carbon Tax Won’t Affect It

Goldstein next revisits energy price-elasticity in an attempt to show that its actual value lies closer to a barely behavior-influencing (minus) 0.1 than the more robust (minus) 0.5 figure he granted earlier for argument’s sake. But curiously, he builds his case on a commodity that no end-user actually purchases: crude oil. Refineries consume crude, of course, but the businesses and households whose decisions determine aggregate demand consume petroleum products: The fuels whose price-elasticities need to be estimated empirically are gasoline, diesel fuel and jet fuel ― not crude oil.

Over the years there’s been no dearth of claims by representatives of Big Green groups that changes in the price of gasoline elicit little change in usage. Most of these claims are either mere assertions or rest on cursory and selective glances at the data. Perhaps this year’s surge in gasoline sales will finally put that notion to rest: U.S. gasoline sales in the first half of 2015 exceeded comparable 2014 sales by 3.3 percent — the biggest year-on-year increase in gasoline demand since the late 1970s (subject to the caveats that the comparison covers only six months in each year, and June 2015 data are unverified). The driving force behind this surge isn’t economic activity ― GDP for the first half of 2015 grew only at a middling rate of 2.8 percent; the reason is free-falling pump prices.

Year-on-Year Changes in U.S. Gasoline Consumption for Energy-Efficiency Hero post _ 2 Sept 2015In any event, the way to estimate gasoline’s (or other fuels’) price-elasticity is with multivariate regression analysis. Here’s a summary of the estimation I performed for gasoline for CTC’s carbon-tax spreadsheet:

Using an approach suggested by retired energy economist Vince Taylor, who earned his PhD at M.I.T. from Nobel laureate Robert Solow in the 1960s, and whose insights animated my 1981 magnum opus on nuclear power cost escalation, I “regressed” the annual percentage changes in U.S. gasoline consumption from 1960 through 2014 on three independent variables: (i) the same year’s percentage change in economic activity (GDP); (ii) the same year’s percentage change in the average real retail price of gasoline; and (iii) the average percentage change in that price over the 10 years prior to the current year. The third variable was intended to reflect lags inherent in Americans’ responses to changing gasoline prices, insofar as automobile purchases and location choices that affect usage tend to change over years rather than weeks or months. The parameters may be referred to as income-elasticity, short-term price-elasticity, and long-term price-elasticity, respectively.

Here are the two “models” that best fitted the data, both statistically and conceptually. (All variables were statistically significant.)

      • One model yielded an income-elasticity of 0.47; a short-term price-elasticity of (minus) 0.12; and a long-term price-elasticity of (minus) 0.21. The sum of the short- and long-term price-elasticities was (minus) 0.34.
      • The other model added a “dummy” variable to adjust for an arguably atypical six-year period covering 2002-2007. This variable was premised on the unusually high discounts/rebates offered for SUV’s during that period, as well as America’s post-9/11 paranoia and Iraq War-inspired triumphalism that may have contributed further to higher purchases and use of SUV’s. (SUV’s average more gas per mile than sedans, of course.) The regression results were, respectively: +0.46, -0.13, -0.24, and +1.4%, indicating an income-elasticity of 0.46; a short-term price-elasticity of (minus) 0.13; and a long-term price-elasticity of (minus) 0.24. The sum of the short- and long-term price-elasticities was (minus) 0.37. (We ignored the dummy variable as transitory; its inclusion in the model was to filter out influences that could distort the elasticity estimates.)
      • From the two sets of regressions, we rough-averaged the respective price-elasticity sums of (minus) 0.34 and (minus) 0.37. The result, a figure of (minus) 0.35, is the price-elasticity we use in our spreadsheet model to estimate the responsiveness of gasoline demand to a carbon tax.

In the CTC carbon-tax model we specify higher price-elasticities for other energy-use sectors: (minus) 0.5 for diesel fuel, (minus) 0.6 for jet fuel, and (minus) 0.7 for electricity. We premise them on businesses’ greater capacity to respond to higher energy prices than drivers’, and on our gleanings from the extensive literature of price-elasticity.

The takeaway? The price-elasticities of U.S. energy usage, while not necessarily high (all are below one), are not only much greater than what Goldstein suggests; they’re large enough to establish beyond any doubt that taxing carbon emission will indeed reduce energy usage, rather than merely punishing consumers into paying more for the same amount of energy.

Argument #4: The Best Path to Carbon Reductions is Prescriptive Energy Policies

So what is the Goldstein-NRDC solution, if not carbon emissions pricing? Here’s Goldstein’s prescription:

This [pessimistic] analysis does not apply to actually implemented or proposed cap-and-trade plans, such as the one adopted by California pursuant to AB32 or the one proposed in the Waxman-Markey bill, both of which rely primarily on non-price energy policies. The overwhelming bulk of emissions savings come from (1) improved building and equipment efficiency standards, (2) integrated land use and transportation system planning that meets goals for travel reduction, (3) emissions standards on fuels and vehicles, (4) requirements for utilities to purchase and integrate renewable energy sources, (5) regulatory reforms that encourage utilities to rely primarily on energy efficiency, and (6) a host of other policies that are independent of energy prices. Numerals added; otherwise quoted verbatim.

That’s NRDC’s credo in a nutshell, and much of it is admirable — particularly #1, which I touted at the start of this post; also #4, which helped jump-start the U.S. wind-power industry (though perhaps no more than did the federal Production Tax Credit for wind electricity), and #5, an effort in which I participated peripherally as a utility reform advocate at the dawn of the “demand-side management” era several decades ago.

On the other hand, it can be argued that the vaunted CAFE standards (#3) were only able to be legislated in the mid-1970s and ramped up several times since then because of rising gasoline prices — somewhat mooting the standards and demonstrating the power of prices that Goldstein largely discounts. Moreover, his #2 is stunningly squishy (“planning that meets goals for travel reduction”); yes, Goldstein had to shoehorn his description but the fact is that NRDC’s standards-and-regulations approach, which has proven so potent in making appliances more efficient, is powerless to rein in the use of vehicles.

The Crux

And therein lies the fundamental difference between Goldstein’s (NRDC) and my (CTC) respective approaches. Miles-per-gallon rules reduce carbon emissions per vehicle-mile driven, but they do nothing to affect the other half of the formula that equally determines emissions: the number of vehicle-miles driven.

In contrast, a carbon tax effectively makes every action that reduces fossil fuel use less costly, by raising the rewards from using less fuel. Taxing carbon will open up multiple paths that will influence the literally billions of daily decisions that determine energy usage and, hence, carbon emissions.

In driving, a carbon tax will affect whether and how far and often to drive . . . which car to take on a family trip . . . how high an mpg rating to demand in the next lease or purchase . . . and, at the societal level, whether public transit investments “pencil out” and might be prioritized over wider highways, and whether hyper-efficient car designs pencil out in corporate boardrooms and venture-capital spreadsheets.

The same goes for other energy-use sectors. Costlier diesel fuel will not only stiffen legislators’ and regulators’ spines in promulgating truck mpg standards; they’ll incentivize local and regional provision over far-flung shipping of food, raw materials and consumer goods, thus cutting down on freight-miles and resultant emissions. Rising electric rates — at least during the decades until carbon fuels are eliminated — will not only strengthen NRDC’s and ACEEE’s case for ever more-efficient appliances; their price pressures will help restrain the size and number of appliances sold and also motivate consumers to use them more efficiently.

Costlier electricity and natural gas will likewise discourage developers from building, and families from insisting upon, gargantuan homes whose outsize volumes must be heated and cooled. Not to mention that a carbon tax provides an antidote to the oft-postulated “rebound effect” by which increased energy efficiency, by reducing the implicit price of energy services, can engender greater energy usage and inadvertently cancel some of the intended savings from those efficiencies. A carbon tax acts as a direct brake on that implicit price reduction and, thus, on the rebound effect.

The point is clear: No other policy can match a carbon tax’s reach, or its simplicity. As we wrote last year in comments we submitted to the Senate Finance Committee concerning energy subsidies and pricing:

The U.S. energy system is so diverse, our economic system so decentralized, and our species so varied and innovating that no subsidies regime, no matter how enlightened, and no system of rules and regulations, no matter how well-intentioned, can elicit the billions of carbon-reducing decisions and behaviors that a swift full-scale transition from carbon fuels requires. At the same time, nearly all of those decisions and behaviors share a common, crucial element: they are affected, and even shaped, by the relative prices of available or emerging energy sources, systems and choices. Yet those decisions cannot bend fully toward decarbonizing our economic system until the underlying prices reflect more of the climate damage that carbon fuels impose on our environment and society.

Carbon Taxing Going Forward

Two carbon tax bills now before Congress — submitted by Reps. Jim McDermott (D-WA) and John Larson (D-CT) — ramp up the tax level steadily and predictably to reach triple digits (i.e., $100 per ton of CO2) a decade on. Our modeling suggests that either bill, by the end of its tenth year, will have reduced total U.S. carbon emissions from fossil fuel burning by more than 30 percent, vis-à-vis 2005 emissions — with the reductions rising as the tax level continues ramping up. As noted, a little more than half of the reductions will come about by sustaining and accelerating the ongoing decarbonization of the U.S. fuel mix, not just in electricity but by motivating increased electrification of sectors like driving that are now dominated by hydrocarbon fuels. The remainder will result from energy efficiency and conservation, i.e., reduced usage per unit of economic activity.

Such a carbon tax has myriad other advantages, including the ease with which it can be replicated globally, that no other approach can match. One unsung advantage is that taxing carbon harmonizes with other measures for reducing energy consumption and carbon emissions. My or other individuals’ energy-savings don’t undermine the tax’s effect on other economic actors ― whereas under cap-and-trade, autonomous energy-saving actions lower the price of the emission permits and thus attenuate the price signal. Likewise, a carbon tax reinforces the economic effectiveness of the appliance and vehicle and building efficiency standards so ably championed by David Goldstein and NRDC, just as those standards play an essential role in overcoming the market failures that are hard to counteract with price signals alone.

It’s 26 years and counting since my first carbon tax op-ed, and almost 9 years since I co-founded the Carbon Tax Center. We at CTC have long since abandoned the hope that NRDC or the other big green giant, the Environmental Defense Fund, would lead the charge for a U.S. carbon tax. We’re okay with that, but we ask our environmental colleagues to refrain from devising and attacking straw-man versions of carbon taxes.

We’ve never said that “carbon emissions fees alone can . . . solve the climate problem.” Rather, we believe that the climate problem can’t be solved without them.

Calculations for 9th paragraph in post: If decarbonization of supply is to account for 53% of the CO2 reduction, and reduction in usage for the other 47%, then K, the percentage change in usage needed to reduce CO2 by 85%, is calculated by the equation: K x K x .47/.53 = 0.15. That is solved by K = 0.41, which equates to a 59% reduction in usage. To effect such a reduction, assuming price-elasticity of -0.5, the factor increase in energy prices, M, is given by the equation: M^(-0.5) = 0.41. The solution is M = 5.95, denoting a 6-fold price rise.


Last modified: September 2, 2015

Bipartisan Plaudits for Rep. Delaney’s “Tax Pollution, Not Profits Act”

If any climate legislation could garner at least nominal bipartisan support, it might be Rep. John Delaney’s Tax Pollution, Not Profits Act. Delaney is in his second term representing Maryland’s 6th CD, which runs from the DC suburbs to the western end of the state. His proposal, introduced on Earth Day at the American Enterprise Institute in Washington, would tax carbon dioxide and CO2 equivalents from methane and other sources at a rate of $30 per metric ton, increasing annually at 4% above inflation. The measure includes border tax adjustments to protect energy-intensive domestic industry from unfair competition from nations that haven’t enacted carbon taxes.

Rep. Delaney

Rep. John Delaney (D-MD)

Delaney’s measure offers a sweetener to conservatives: a promise to apply roughly half of carbon tax revenues to reduce the top corporate income tax rate from 35% to 28%. The bill would also provide monthly payments to low- and middle-income households and fund job training, early retirement and health care benefits for coal workers. At least as critically, at the AEI unveiling, Delaney committed near-apostasy by suggesting that his carbon tax could substitute for the Obama administration’s Clean Power Plan, final regulations for which EPA issued last month.

The Carbon Tax Center assessed the Delaney proposal’s effectiveness using our 7-sector model. We project that in its third full year the measure’s $30 price would reduce U.S. CO2 emissions to 8% below emissions in the year before enactment. Unfortunately, its schedule of 4% annual real rises is too tepid to continue reducing emissions more than fractionally over the longer term. The low upward price trajectory is a shortcoming shared by the American Opportunity Carbon Fee Act, introduced by Senators Sheldon Whitehouse (D-RI) and Brian Schatz (D-HI) in June.

In contrast, carbon tax proposals introduced in this Congress by Rep. John Larson (D-CT) and Rep. James McDermott (D-WA) would rise briskly to exceed $100 per metric ton within a decade, which we estimate would reduce U.S. emissions below this year’s levels by more than one-fourth in that time (and by nearly a third below 2005 emissions).

In an online discussion forum hosted by OurEnergyPolicy.org, Rep. Delaney asked for comments on his proposal. Below, we group and summarize those comments. [Read more…]


Last modified: September 2, 2015

Last modified: August 10, 2015

“Clean Fuels” vs. Carbon Tax in the Pacific Northwest

Even in ecologically-minded Washington and Oregon, states where voters want government action on climate change, a divide among environmentalists threatens to undermine progress on the issue. A Carbon Washington ballot initiative to create a statewide carbon tax is gaining momentum, as we wrote last month. Yet several environmental groups are attacking the proposal as politically infeasible and socially regressive.

Instead, state and regional groups like Climate Solutions and the Alliance for Jobs and Clean Energy are pushing “clean” fuels standards. Their proposal, patterned on regulations in California and British Columbia, would mandate a mere 10% drop in the carbon intensity of transportation fuels over 10 years ― a small fraction of the deep reductions needed.

The carbon tax sought by Carbon Washington would cut emissions 4-5 times as much as the proposed WA Clean Fuels Standard (Source: CTAM).

The carbon tax sought by Carbon Washington would cut CO2 4-5 times as much as the proposed WA Clean Fuels Standard (Source: CTAM).

Their course is difficult to fathom. Carbon taxes would cut emissions more and cost less than clean fuels regulations. And dividing environmentalists in order to pursue a lesser policy makes no sense strategically. Here are three reasons why a clean fuels standard doesn’t stack up:

1. Clean fuels standards won’t be effective

A model used by the Washington State Department of Commerce allows us to compare projected emissions reductions from the clean fuels standard with the carbon tax proposed by Carbon Washington in a measure known as I-732. (The tax would start at $10/ton of CO2, rise to $25 in year two, then increase 3.5% annually plus inflation.)

The 10% clean fuels standard would lower overall Washington CO2 emissions only 4% by 2040, not even a quarter as much as the 18% reduction projected from the I-732 carbon tax.

The reason is simple: a clean fuels standard only attacks emissions from the supply side of one sector, albeit an important one, transportation. In contrast, a carbon tax works across the entire economy, influencing every carbon-related decision about both supply and demand in every sector ― manufacturing, heating, electricity, etc. This means that, while a clean fuels standard only affects the carbon content of liquid fuels, a carbon tax also incentivizes less fuel usage, period. This transforms economies, cutting pollution and congestion through a vast array of actions encompassing urban density, freight logistics, walking, cycling, transit, and more mindful decision making.

clean fuels transport graph _ snippedIn short, the difference in emissions between a carbon tax and a clean fuels standard is the difference between a society that takes current levels of automobile dependence as a given, and one that seeks to support a myriad of ways to transition to something different.

2. Clean fuels standards are more expensive

The Oregon Environmental Council writes:

The Clean Fuels Program costs the state virtually nothing. The burden of responsibility for reducing pollution is placed on the oil industry.

This conspicuously ignores how the oil industry passes down its costs of compliance to consumers in the form of higher prices. The Oregon Department of Environmental Quality (DEQ) has said gas prices will rise between 4 and 19 cents per gallon. An industry lobby group, the Western States Petroleum Association, is garnering support to repeal clean fuels by highlighting this not-so-hidden price increase.

Consumers aren’t stupid, they generally realize more regulations mean higher prices. A carbon tax raises fossil fuel prices too, of course ― that’s the point; but the revenue it generates can be disbursed to consumers as income or sales tax cuts, or via a straight-up “dividend” check, as Oregon Climate has proposed. [Read more…]


Last modified: August 18, 2015

Transformational It’s Not: Running the Numbers on Obama’s Latest Climate Regs

Notwithstanding the hype in the New York Times — “the strongest action ever taken in the United States to combat climate change,” “an aggressive plan to sharply limit greenhouse gases” — the final version of the US EPA “Clean Power Plan” being released today at the White House by President Obama actually constitutes a marked slowdown in reductions in electricity-sector emissions.

According to published reports, the administration plan calls for a 32% reduction in U.S. power-sector CO2 emissions in 2030, relative to actual 2005 power-sector emissions. That’s slightly more ambitious than the 30% reduction envisioned in the initial Clean Power Plan released in June 2014. Since 2005 power-sector emissions were 2,413 million metric tons (MMT), the targeted 32% reduction would be 772 MMT, or 7% of total projected U.S. emissions (from all sectors) of 5,684 MMT (projected by CTC in the absence of a U.S. carbon pollution price).

Emissions will fall 40% more slowly, under the Clean Power Plan rules released today.

Emissions will fall 40% more slowly, under the Clean Power Plan rules released today.

Nearly half of that reduction has already been achieved, however. Actual 2014 U.S. power-sector emissions were 2,038 MMT, or 375 MMT less than the 2005 baseline level of 2,413 MMT. Expressed on an annual average basis, power-sector emissions of CO2 fell during 2005-2014 by 42 million metric tons a year.

To fulfill the total 772 MMT 2005-2030 reduction target, the “remaining” 2014-2030 reduction in power-sector emissions need only be 397 MMT. The implied annual rate of reduction over the next 16 years is just 25 million metric tons a year. That’s 40% less than the actual annual 2005-2014 reduction rate in power-sector emissions of 42 MMT per year.

It is probably true that we’re not likely to see a repeat of two factors that contributed to the 2005-2014 reduction in power-sector emissions — the long and deep recession that began in 2007-2008, and the advent of cheap fracked methane that grabbed market share from higher-polluting coal-fired generation. But two other emissions-reducing phenomena remain in full swing: ongoing cost reductions in carbon-free wind and solar photovoltaic power, and the harnessing of both digital tech and new business models to boost energy efficiency in buildings, appliances and businesses.

In this light, it seems premature, if not downright bizarre, to bestow “legacy status” on a plan that targets just one sector (albeit a key one), and that settles for cutting emissions in that sector at a lesser pace than the rate at which they’ve already been falling for a decade.


Last modified: August 3, 2015

Feeling the Heat: A Carbon Tax Gains Grassroots Momentum in Washington State

Seattle on the summer solstice. Crowds line Fremont Avenue in anticipation of the annual parade of naked bicyclists. Carbon Washington co-director Kyle Murphy is giving a pep talk to a group of volunteers that includes idealistic college students, veteran environmentalists, and former Seattle Mayor Mike McGinn.

“You’re simply offering them the opportunity to participate in the democratic process. You don’t need to persuade anyone, just give them a chance to say yes.”

Seattle, June 2015: Petitioning for Carbon Washington.

Seattle, June 2015: Petitioning for Carbon Washington.

I’m helping Carbon Washington (CW) collect signatures for Measure I-732, which would put a carbon tax on the state ballot in 2016. In general, people want to participate. Almost no one turns me down. I pass out multiple signature sheets as parade-goers fumble for pens. I’m talking to eight people at once, even while competing with the naked bikers for attention. A record-breaking drought is setting the stage for a long wildfire season, and climate change is already on everyone’s mind. In a single afternoon we collect more than 1,500 signatures.

The appeal of CW’s proposal is rooted in its overarching simplicity. Polluters pay, everyone else benefits. The measure would put a price on carbon emissions, forcing fossil fuel companies to internalize some of the social and environmental externalities of their business. The tax starts at $15 per ton of CO2, rises to $25 in year two, and then increases at 3.5% plus inflation annually. This long and steady increase will drive down CO2 emissions in the state.

Emissions would fall more if Washington's power wasn't nearly all hydro. (Source: CTAM model)

Emissions would fall more if Washington’s power wasn’t nearly all hydro. (Source: CTAM model)

The tax is revenue neutral to appeal to conservatives. It uses the expected $1.7 billion in annual revenue to overhaul Washington State’s notoriously regressive tax code. Most of the money goes to lower the state sales tax from 6.5% to 5.5%. The 3.5% annual increase in the carbon tax is designed to carefully offset the rising value of the sales tax reduction, so that the measure stays revenue-neutral for 40 years. Another $200 million a year is used to fund the Working Families Rebate – an extension of the federal Earned Income Tax Credit. These two pieces make I-732 the state’s most progressive tax legislation since groceries were exempted from sales taxes in 1977.

The third element of CW’s plan takes $200M to eliminate the state’s Business & Occupation tax on manufacturers. The intent is to make the state’s businesses more competitive and cushion any job losses due to the tax. The average manufacturer will pay in carbon taxes close to what it will gain from the elimination of the B&O tax. Unlike the B&O tax, however, carbon taxes do not increase as the business grows – as long as it can grow without increasing its carbon emissions.

Still, Carbon Washington faces high hurdles. A ballot initiative requires 246,372 signatures – 8% of the votes cast for governor in the most recent election. Since up to one-quarter of signatures fail the verification process, CW is aiming for 315,000. Successful initiatives, like a Michael Bloomberg-financed gun-control measure that passed in 2014, have needed to raise around a million dollars to reach that threshold. Carbon Washington is hoping to rely on an extensive volunteer network to do it for less than half the price. Still, more funding and volunteers are needed.

Measure I-732 steers revenues to households and manufacturers.

Measure I-732 steers revenues to households and manufacturers.

Assuming CW succeeds, it’ll have to defend its proposal on the ballot against the inevitable onslaught of Koch-funded interest groups. Some other environmental groups are skeptical that Washingtonians will vote for a proposal that openly uses the dreaded ‘T’ word. Climate Solutions, a regional organization, threw its weight behind Governor Jay Inslee’s cap-and-trade proposal. Despite attempts to appeal to Republicans, including a carve-out for the state’s only coal plant, that proposal failed to gain traction in the legislature. Climate Solutions isn’t backing CW’s proposal, afraid to lose what will surely be a big fight.

Yet if the conversations I had were any indication, Washingtonians are receptive. They have an example to their north, in British Columbia, of a successful and popular carbon tax, so oil industry scare tactics may prove less effective with voters. In polls, support varies between 30% and 60%, depending on how the issue is framed. Victory will be determined by whether enough voters can be educated about the proposal. By talking to voters and collecting signatures one at a time, Carbon Washington is getting a head start.


Last modified: July 16, 2015

Last modified: July 14, 2015

Here’s What’s New in CTC’s Carbon Tax Spreadsheet Model

We’ve just posted an update to our spreadsheet model — our powerful but easy-to-use tool for predicting future emissions and revenues from possible U.S. carbon taxes. We say taxes, plural, because the model accepts any carbon tax trajectory you feed it and spits out estimated nationwide emission reductions and revenue generation, year by year. Here’s a rundown of what’s new in the update.

1. A year of new data: The most obvious change is the addition of 2014 baseline data on energy use, CO2 emissions and emission intensity for each of the model’s seven sectors.

Our spreadsheet model lets you compare different carbon tax trajectories.

Our spreadsheet model lets you compare different carbon tax trajectories.

2. Smoothing the carbon tax impact: A new feature lets users smooth the impact of the tax to reflect real-world lags in households’ and businesses’ adaptation to more-expensive fossil fuels. (You get to set the adaptation “ceiling” rate; any excess gets carried over to future years.) This feature is helpful for trajectories like the Whitehouse-Schatz bill, whose rate starts with a bang at $45 per ton of carbon dioxide but then rises only slowly. Under our default setting, the reductions from the $45/ton initial charge are spread over four years rather than, unrealistically, assigned to the first year.

3. Future baseline is calibrated to official forecast: We tweaked a few model parameters to make our 2040 emissions forecast without a carbon tax match the analogous forecast in the Energy Information Administration’s “Annual Energy Outlook.” This allows for apples-to-apples comparisons with other models that are explicitly calibrated to the EIA/AEO forecast.

[Read more…]


Last modified: July 16, 2015

Who’s “Out of Step” on Climate — Pope Francis or Harvard Expert?

New York Times climate reporter Coral Davenport writes today that Pope Francis’s warning against cap-and-trade as a tool to address the climate crisis creates a “paradox”:

[W]here Francis’ environmental and economic agendas meet, he leaves something of a paradox. . . While urging swift action to curb the burning of fossil fuels that have powered economies since the Industrial Revolution, he also condemns the trading of carbon-emission credits, saying it merely creates new forms of financial speculation and does not bring about “radical change.” But carbon trading is the policy most widely adopted by governments to combat climate change, and it has been endorsed by leading economists as a way to cut carbon pollution while sustaining economic growth.

With due respect to Davenport as well as Robert Stavins, the Harvard climate economist whose concerns figure prominently in her story, there is no paradox. Francis’s encyclical, On Care For Our Common Home, doesn’t muddy the climate change debate because a carbon tax, not cap-and-trade, is economists’ preferred policy tool for curbing carbon pollution. Francis-cap-tradeFrancis criticizes emissions trading on three grounds: First, trading carbon allowances allows traders to profit from the climate crisis — indeed, it’s designed to do that. Second, “offsets” that are virtually hard-wired into cap-and-trade shift the burden of pollution to developing countries. Third, cap-and-trade with offsets absolves the wealthy of responsibility to rein in their carbon-intensive lifestyles. In Francis’s own words:

The strategy of buying and selling carbon credits can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors. [171]

What, then, does Francis demand? That societies internalize the costs of pollution, especially climate pollution:

[O]nly when the economic and social costs of using up shared environmental resources are recognized with transparency and fully borne by those who incur them, not by other peoples or future generations, can those actions be considered ethical. [195]

A reference in that passage attributes Francis’s calls for polluters to pay “the economic and social costs” they incur to his predecessor, Pope Benedict. (Both pontiffs presumably intended “impose” rather than “incur,” i.e., for costs to be borne by those who impose them, but no matter.) Those resources surely include clean air. The new encyclical thus aligns the Catholic Church with the century-old “Pigovian” tradition of economists urging policies to internalize costs. Francis-carbon4-taxNevertheless, in an email quoted by Davenport, Stavins brands Francis as “out of step with … informed policy analysts around the world,” in effect labeling the Pope as economically-illiterate and naïve:

“I respect what the pope says about the need for action, but this is out of step with the thinking and the work of informed policy analysts around the world, who recognize that we can do more, faster, and better with the use of market-based policy instruments — carbon taxes and/or cap-and-trade systems,” Robert N. Stavins, the director of the environmental economics program at Harvard, said in an email.

That Stavins is the lone environmental economist quoted in Davenport’s piece did not deter her from claiming that “environmental economists criticized the encyclical’s condemnation of carbon trading, seeing it as part of a radical critique of market economies.” Hardly. The Pope, like legions of environmental activists and economists worldwide, has seen the shams of emissions trading and carbon “speculation” for what they are. [Read more…]


Last modified: June 27, 2015

Earth Institute Chief Trashes the Carbon Tax

Steven Cohen, executive director of Columbia University’s prestigious Earth Institute, recently weighed in on the carbon-tax debate in the Huffington Post. The results are breathtaking – and not in a good way.

Cohen’s June 8 screed, “A Carbon Tax Is Not Feasible or Practical,” was a riposte to a New York Times editorial two days earlier endorsing a carbon tax as “one of the best policies available” to address global warming. The Times is wrong, says Cohen, as he proceeds to lay out a multi-count indictment. Among his anti-CT arguments are the following:

1. Carbon taxes are politically infeasible: Given the system’s deep hostility to tax hikes, “the space between the carbon tax as a policy idea and the reality of American politics is too vast to overcome. For better or worse, here in America we are in a period of tax policy paralysis that is unlikely to be surmounted anytime soon.”

2. Carbon taxes are unfair: They “cause people on the lower end of the economic ladder to pay a higher portion of their income on energy,” while corrective measures aimed at redistributing the costs “are far from simple to implement, might stigmatize recipients, and would become easy and obvious political targets.”

3. Contrary to The Times, carbon taxes are unequal to the problem of climate change because they would founder on the shoals of international politics: “China and India would need to go along, and given the urgency of their energy and development needs, it is difficult to imagine that they would agree to such a measure.”

4. Carbon taxes are anti-urban: “I sometimes think the push for a carbon tax comes out of an early 20th century environmentalist mindset that scolds people for consumption and living in evil, immoral cities.”

5. Finally, carbon taxes are unnecessary since tax breaks can be just as easily used to encourage alternative energy development: “Why waste time and effort on an infeasible policy that will never happen? Why not devote time and effort to building a real partnership between the public and private sector to create a sustainable economy?”

NYT-CohenCareful readers will notice that the first two items are variations on a theme, which is to say the futility of relying on the U.S. political system to pass a well-crafted carbon-tax plan that discourages fossil fuels without burdening workers and the poor. The same can be said for number three, which is about the inability of a beggar-thy-neighbor international system to institute significant reform. Whether the fault lies with Washington, Beijing, or New Delhi, Cohen argues, the point remains that politicians of all nationalities are too selfish and shortsighted to deal intelligently with a carbon tax, so it’s best to forget the whole thing.

Charges four and five are different, so let’s tackle those first. [Read more…]


Last modified: June 27, 2015