Gilbert E. Metcalf, Tufts University economist specializing in energy and the environment. U.S. Leaves the Markets Out in the Fight Against Carbon Emissions, NY Times, July 1.
Last modified: July 14, 2015
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.
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.
Last modified: July 16, 2015
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 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. 
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. 
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. Nevertheless, 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
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?”
Careful 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: September 15, 2015
Editor’s note: Yesterday the world’s most influential newspaper finally did what CTC and other carbon tax proponents have sought for years: publish a ringing endorsement of a U.S. carbon tax. With its editorial, The Case for a Carbon Tax, the New York Times joins the growing community of opinion leaders, policy experts and, yes, elected officials who not only recognize the power of carbon taxes to quickly and equitably reduce emissions but also sense the emergence of a political critical mass that can enact fees into law. This heartening development signals that it’s not too soon to focus on the design of a U.S. carbon tax, especially its magnitude and rate of increase, as CTC senior policy analyst James Handley does in this post.
Which is the more effective way to set a tax on carbon pollution?
A. Start aggressively, then raise the rate slowly (“sprint”).
B. Start modestly, then raise the rate briskly and predictably (“marathon”).
You probably guessed that if the goal is to instill incentives that will bring about big emission reductions fast enough to avoid runaway global warming, the answer is B, the marathon. Yet a leading U.S. Senate advocate of legislative action on climate seems to be starting off like a sprinter, perhaps because his legislation is pegged to estimates of the Social Cost of Carbon that don’t account for the possibility that climate change will turn out to be catastrophically costly.
More on that senator in a moment — after this tutorial:
The Social Cost of Carbon (SCC) is a construct to quantify in monetary terms the damage caused by each additional ton of CO2 added to the atmosphere. While the SCC may sound arcane or academic, estimating its magnitude has real world implications: governments are pegging climate-related regulatory decisions to SCC estimates. A low SCC can make all but the lowest-cost clean-energy policies pencil out as expensive; higher estimates justify more rapid and aggressive measures, since moving too slowly to reduce emissions shows up as a mistake whose costs accumulate at a frightening pace.
Calculating the damage from a ton of CO2 turns on a host of assumptions that span wide ranges. Not surprisingly, estimates of the SCC reported in the peer-reviewed economics literature range from as little as $10 per ton of CO2 to over $400. A profoundly important modeling choice is how heavily to weigh the risks of climate-induced catastrophes. High-risk climate scenarios with nearly infinite costs, such as rapid release of methane from arctic permafrost or sudden sliding of vast ice masses into the ocean, “misbehave” in the equations used for conventional cost-benefit analysis, leading some modelers to omit them altogether.
One widely-used model assumes that economic growth rates will not be affected by climate change, thereby predicting that half of the world’s economic activity would continue after a whopping 18 degrees C of global warming. Other models dilute the high-risk scenarios by assigning them arbitrarily low probabilities that suppress their impact when their costs are averaged in with low-risk scenarios. A further problem in estimating the SCC is the bias toward high “discount rates” that telescope future impacts down to seemingly manageable proportions.
Amidst fraught debate and widely-divergent estimates, the Interagency Working Group has settled on $42 per ton of CO2 as the “official” U.S. government social cost of carbon. While that’s an improvement over past practice that omitted climate costs entirely — tacitly, an SCC equal to zero — the $42 figure grossly understates the large-scale global risks that dominate concern over global warming and climate change. [Read more…]
Last modified: June 28, 2015
Rachael Sotos is a political theorist and adjunct professor with a background in philosophy, classics and environmental studies.
Climate Shock: The Economic Consequences of a Hotter Planet, is both a tidy summation of the state of the art in climate economics and a powerful call for action. For all the uncertainties and challenges, “the overall policy framework needed for addressing climate change is clear and has been for decades,” state co-authors Gernot Wagner and Martin L. Weitzman (p. 23). “Carbon dioxide is the problem. Pricing it properly is the solution.”(38)
Wagner, a senior economist at the Environmental Defense Fund, and Weitzman, a celebrated economist at Harvard, are an intriguing blend of young and elder, and realist and idealist. They exhort economists and climate advocates to get past the “epic debates” between taxes and cap-and-trade and, while consensus builds toward carbon pricing, to engage in the work required for “second -, third-, and fourth-best solutions”(26): electricity grid reform, stronger CAFE standards, and strategic application of subsidies and U.S. EPA regulations. “At the very least,” they say, “these regulations could provide a real bargaining chip when it comes to U.S. Congress considering comprehensive climate policy and a direct price on carbon down the line.”(19).
Flying their Pigovian colors from Preface to Epilogue, the authors are emphatic and unambiguous; “Putting a proper price on carbon isn’t a question of if, it’s a question of when.”(xi) Our best hope is “a high enough price on carbon to reflect its true cost to society.”(152)
Unfortunately, the bracing clarity of Climate Shock appears to have been lost on some reviewers. Earlier this month, NY Times columnist Joe Nocera misconstrued Wagner and Weitzman’s extensive discussion of geo-engineering as surrender to the political obstacles to carbon pricing. On Nocera’s reading, insofar as “a carbon tax on the worst emitters has gotten nowhere,” it’s time for Plan B: “chemo for the planet.” Au contraire, Wagner and Weitzman do not delve into geo-engineering scenarios like sulfates dispersal in lieu of ambitious policies to reduce emissions. Rather, they insist, “the specter of geo-engineering should be a clarion call for action. Decisive, and soon.”(29)
If Nocera reconfigured Wagner and Weitzman to suit his own techno-utopian ends, Yale Nobel economist Robert J. Shiller, also in the Times, willfully invested Climate Shock with libertarian designs. Directly contravening the thoughtful and informative discussion of social change presented in Climate Shock (and previously thematized in Wagner’s 2011 But Will the Planet Notice?), Shiller proposed idealistically-motivated incrementalism as a way around Kyoto’s failure “to impose strict taxes on carbon emissions.”
According to Shiller, Wagner and Weitzman “say that we should be asking people to save our climate by taking many small, individual actions.” Climate Shock actually says the opposite: “the numbers don’t add up. They’ll only begin to add up when environmentalists use their collective political powers to move the policy needle in the right direction, toward a price on carbon.”(40) (See also CTC director Charles Komanoff’s recent takedown of Shiller’s piece in regard to both facts and theory.)
Shiller’s misreading is doubly unfortunate because, as Wagner and Weitzman point out, the imperative to seriously engage policy must be directed toward average citizens, “those in the middle of the political spectrum,” as well as those already conversant with climate economics.(136) Certainly we should all do what we can to encourage virtuous cycles of ethical engagement and political participation – “Recycling well leads to better environmental policies, which allow for a more environmentally enlightened citizenry; a more enlightened citizenry, in turn, leads to more people recycling well.”(132)
Indeed. But, as Wagner and Weitzman are right to remind: in a greenwashed world seemingly structured to distract and misinform the average person, the most virtuous deeds can dead end. In the practical economics of everyday life, single actions sometimes crowd out other forms of engagement: “when people substitute single, individual actions – like recycling – for larger policy actions – like voting.”(133) Pigovians from start to finish, Wagner and Weitzman are emphatic: “if you have to make a choice between recycling and voting for a price on carbon, choose voting.”(137)
Yet another review, this one by Yale economist William D. Nordhaus in the current New York Review of Books, is notable on several grounds, not least of which is Nordhaus’s outsized reputation as a pioneering climate economist and modeler. Respectful in tone, Nordhaus engages of Climate Shock’s discussions of geo-engineering, the economics of uncertainty and the pitfalls of negotiating climate treaties. Strangely, however, Nordhaus takes up Weitzman’s path-breaking analyses of catastrophic risk without acknowledging any critiques of his own perennially optimistic approach.
Last modified: May 29, 2015
It is true that the stroke of the presidential pen with which Barack Obama last week granted Shell Oil Corp. permission to drill off Alaska’s Arctic Coast cannot also put into force a U.S. carbon tax, without authorization by Congress. And it is all too possible that when climate reality eventually sweeps over the Capitol, the resulting carbon tax may be modest in scale and take a lot longer than a decade to reach the $100/ton level that would drive massive reductions in fossil fuel use and CO2 emissions.
All the same, it’s instructive to compare the capacity of Arctic drilling to supply oil with that of a robust carbon tax to quench the need for it. The outcome — the carbon tax wins — may not surprise. But the lopsidedness is startling: in just its tenth year, the carbon tax proposed last November by Rep. Jim McDermott (D-WA), starting at $12.50 per metric ton of carbon dioxide and rising annually by $12.50 as well, would be eliminating the need for oil at around a dozen times the rate at which Shell would be pulling the stuff from the Arctic.
Here are the numbers:
♦ Royal Dutch Shell’s Chukchi Sea project is projected by the U.S. Bureau of Ocean Energy Management to extract 4.3 billion barrels of crude over a 44-year period. (See Chukchi Sea Oil & Gas Lease Sale 193 Draft Second Supplemental Environmental Impact Statement, Volume 1 [pdf]; go to pp. 6 or 62 or 182 of 694.) This equates to daily production of 268,000 barrels. An estimated 2.2 trillion cubic feet of methane (natural gas) would be extracted as well; on a btu basis that equates to 360 million barrels of oil, or 23,000 barrels a day. Combined extraction of hydrocarbons is then around 290,000 barrels a day. (Note that we have not netted the energy expended to “discover,” extract and transport the oil.)
♦ For the carbon tax, we modeled McDermott’s Managed Carbon Price Act of 2014, setting the annual increases as the midpoint between the bill’s floor and ceiling prices. The price per U.S. (not metric) ton of CO2 in the tenth year, 2024, is $113.40. (Our model, which we’ll update soon, had the tax starting in 2015.) As indicated in the graph, the reductions in petroleum requirements would be substantial in every consuming sector. They sum to 3,486,000 barrels a day — 12 times the 290,000 bpd equivalent anticipated from Shell’s Arctic venture.
The estimated oil savings from the McDermott carbon tax amount to nearly one-fifth of U.S. oil consumption in both 2013 (the last data year in our model) and 2024 projected without a national carbon price. The biggest reduction in absolute terms is in what we call personal ground travel (chiefly driving), which dominates petroleum use. But on a proportional basis the savings would be greater in commercial sectors such as freight movement, oil refining, and construction, as the unmistakable price signal from the annually rising tax drives innovation enabling lower usage.
Still, the projected reduction in gasoline consumption for personal ground travel in 2024, 1.4 to 1.5 million barrels per day, commands attention. [Read more…]
Last modified: May 27, 2015
The High Cost of Dirty Fuels, NY Times editorial, May 21, 2015.
Last modified: June 1, 2015
[T]he quantity-based Kyoto-type approach [to UN climate negotiations] has pretty much broken down, leaving the world with a highly non-optimal patchwork of sporadic regional volunteerism that does not address centrally how to correct the critical externality of global warming. — Harvard economist Martin Weitzman.
The Kyoto Protocol is broken. What can replace it? Professor Weitzman, considered one of the world’s most influential economists, proposes a game change: Instead of squabbling over the quantity of fossil fuels each nation may burn, negotiate a single carbon price all can adhere to.
Weitzman is best known for modelling the economics of catastrophic climate change. In a ground-breaking 2009 paper, he demonstrated that conventional cost-benefit analysis under-weights the risk of catastrophic scenarios. In two new papers, he scrutinizes the Kyoto Protocol’s quantity-based structure through the lens of game theory. He calls Kyoto’s attempt to set and divvy up a global emissions cap “the ultimate… top-down worldwide treaty.” That’s not a compliment. Observing that Kyoto hasn’t come close to its goal of “an internationally harmonized binding system of emissions caps,” Weitzman shows why: the Kyoto framework induces each nation to game the system by attempting to maximize the efforts required of others while minimizing its own.
Weitzman lays out three criteria for an effective global emissions reduction system:
1. It should induce cost-effective emissions reductions.
2. It should allow negotiators to focus on negotiating one central and highly salient parameter.
3. It should align negotiators’ incentives toward internalizing climate costs.
On the first criterion, Weitzman points out that while a carbon tax is more easily administered and more transparent than a cap-and-trade system, a carbon cap or a tax can both achieve cost-effective emissions reductions.
On the second, Weitzman builds on Nobel-laureate Thomas Schelling’s pioneering game theory analysis establishing the importance of a clear focal point in negotiations. Kyoto’s quantity-based approach assigning different binding emissions quotas to each nation has no focal point. In contrast, a price-based negotiation offers a single focal point for all parties.
And building on the seminal work of Ronald Coase, Weitzman stresses the importance of minimizing transactions costs. Coase showed that parties that might otherwise negotiate an agreement can be deterred by the high costs of getting to yes. Weitzman points out that any quantity-based structure such as Kyoto necessarily multiplies transaction costs: “It is easier to negotiate one price than n quantities — especially when the one price can be interpreted as ‘fair’ in terms of equality of effort,” he writes.
The bulk of Weitzman’s analysis focuses on his third and most important criterion: the need to negotiate a structure that counteracts parties’ national self-interests and aligns their incentives toward reducing emissions. [Read more…]
Last modified: May 27, 2015
In 1970 I was teaching math in a New York City suburb. On Earth Day I stood at a highway off-ramp with members of the high school ecology club. One of their signs read, “The Earth is a Closed Garage.” Another said, “Make Polluters Pay.”
There’s been some progress since then. Breathing New York’s air, once equated to smoking two packs of cigarettes a day, is many times safer. Wind turbines now provide five percent of the nation’s power, and electricity produced with solar cells rose ten-fold in the past three years. Driving has flatlined nationwide over the past decade, partly because Americans are strapped but also because the intoxication with cars is wearing off.
That’s great news for the environment, but it’s not nearly enough for climate. CO2 levels are still rising inexorably. Ditto global temperatures, polar ice melting and extreme weather. Emissions need to be cut radically even as seven-and-a-half billion people strive for prosperity.
For that to happen, prices of fossil fuels have to reflect the climate costs of carbon pollution. The way to do this, of course, is with carbon taxes:
To demystify carbon taxes and showcase their appeal, we’re rolling out the Carbon Tax Center’s first video. It explains how a carbon tax will transform investment, re-shape consumption and sharply reduce carbon emissions. As the video shows, no other policy can match its reach or simplicity. No other policy can be replicated globally, from China to Chile to Chad.
A carbon tax is no mere “technical fix.” It’s both a symbol and a means for us to respect nature and each other.
The central messages on Earth Day 1970 were to abide by nature’s limits and make polluters pay. On this Earth Day, let’s spread the word about a carbon tax. Let’s educate and organize so that the U.S. and other nations make taxing carbon the central policy to combat catastrophic climate change and sustain the Earth we love.
Last modified: April 22, 2015