All We Are Saying: Making An Energy Revolution Where It Matters Most

Ev’rybody’s talkin’ ’bout Revolution, Evolution, Masturbation, Flagellation, Regulation, Integrations, Mediations, United Nations, Congratulations — John Lennon, “Give Peace a Chance”

The number-one energy meme of late is “fracking changes everything,” with fracked oil and methane (gas) having turned the United States almost overnight into the world’s leading extractor of hydrocarbons and, perhaps soon, even a net exporter. And that was before Russia annexed the Crimea and muscled in on the rest of Ukraine. Now the chorus of voices calling on Congress and the White House to neutralize Vladmir Putin’s use of natural gas as a geopolitical weapon by making America the “arsenal of energy” for Eastern Europe, as a former Bush NSC official urged in the New York Times, has moved into the higher decibels.

In the past week, the Times’ editorial board and the director of the Geopolitics of Energy Project at Harvard University’s Kennedy School have been among those urging stepped-up U.S. oil and gas exports (and, hence, more fracking). And that’s just on the center-lib part of the spectrum. Kentucky Senator Rand Paul is demanding approval of the Keystone XL Pipeline, and pretty much the entire U.S. Right wants our oil-and-gas spigot on full bore as well.

To paraphrase John Lennon, everybody’s talking about gas fracking, well drilling, hydrocarbing, tar sands spilling (well, not spilling). But no one, it seems, is talking about exporting a different brand of energy to gas-dependent Eastern Europe: energy efficiency and renewables. Yet therm for therm, both would be just as effective as U.S. hydrocarbons at reducing the need for Russian gas. And, it almost goes without saying, efficiency and renewable could be in place a lot faster — and in a fashion that could allow Ukrainians, Czechs, Hungarians and Poles to be active participants in their liberation. [Read more...]

Last modified: June 4, 2014

More Nuke Amnesia — This Time At The Top

“After Fukushima, Utilities Prepare for Worst,” announced the New York Times in a story timed to this week’s third anniversary of the Japanese triple reactor meltdown. The story described measures ranging from keeping earth-moving machines at the ready (to maintain plant access after disabling earthquakes) to stocking regional depots with tractor-trailers able to deliver emergency gear to stop reactor disasters from spinning out of control.

But the story also pointed, inadvertently, to a striking lapse in institutional memory at the top echelon of the U.S. Nuclear Regulatory Commission. Here’s the quote (with emphasis added):

“Fukushima woke up the world nuclear industry, not just the U.S.,” said the chairwoman of the Nuclear Regulatory Commission, Allison M. Macfarlane, in an interview. “It woke everybody up and said: ‘Hey, you didn’t even think about these different issues happening. You never thought about an earthquake that could create a tsunami that would swamp your emergency diesel generators and leave you without power for an extended period. You . . . have to think about that now.’ “

Never? Really? The record says otherwise. [Read more...]

Last modified: June 4, 2014

CTC Tells Senate Finance Committee: Carbon Tax Beats Clean-Energy Subsidies, Hands Down

The Carbon Tax Center told the U.S. Senate Finance Committee today that an economy-wide tax on the carbon content of coal, oil and gas will cut U.S. CO2 emissions more than twice as fast as proposed clean-energy subsidies delivered as tax credits.

This finding leads a new 22-page analysis, “Design of Economic Instruments for Reducing U.S. Carbon Emissions,” that we submitted today to Senate Finance Committee Chair Max Baucus. Our analysis is in the form of “Comments” on a Committee “Discussion Draft” that proposes replacing 42 federal energy tax subsidies with either credits for “clean (low-carbon) electricity” production and “clean fuels,” but also asks for input on the merits of a tax on carbon pollution instead.

Our comments can be boiled down to this ringing conclusion: A carbon tax will do everything the clean-energy credits will do, and much more. While simplifying and rationalizing the current hodgepodge of energy subsidies is all to the good, only a carbon tax can course through our entire economy and reward energy efficiencies and conservation along with low-carbon production.

Moreover, with the right design, a carbon tax can protect lower-income families and energy-intensive U.S. industries alike, at no cost to the Treasury. In contrast, even the proposed streamlined clean-energy subsidies could cost taxpayers more than $30 billion a year.

Estimated CO2 reductions from a carbon tax are 2.4 times as great as those from clean-energy subsidies.

 

 

 

 

 

 

 

 

We performed our analysis using the Carbon Tax Center’s carbon tax spreadsheet model, which may be downloaded via this link. With the model, we estimated that the proposed subsidies would reduce U.S. carbon dioxide emissions by roughly 400 million metric tons a year, whereas an economy-wide carbon tax set at the same level as the subsidies would eliminate 960 million metric tons of emissions. (For comparison purposes, U.S. carbon dioxide emissions from burning fossil fuels totaled 5,221 million metric tons in 2012, the last year for which data are available.)

The Senate Finance Committee’s Dec. 18 statement, Baucus Unveils Proposal for Energy Tax Reform,” is available by clicking here. That two-page letter contains a link to the Committee staff’s 8-page discussion draft, which solicited comments on both the proposed subsidies realignment and on alternatives that would tax carbon emissions directly.

Our comments were submitted on behalf of the Citizens Climate Lobby and the Citizens Climate Education Corp. CCL/CCEC are the most visible and vociferous grassroots organizations advocating for a revenue-neutral U.S. carbon tax, and we are proud to stand with them. CCL chapters and members across the U.S. submitted their own comments backing a carbon tax as well.

Our hope is that the Senate Finance Committee’s discussion draft signals a new interest in carbon taxing among the tax-writing committees on Capitol Hill . . . and that CTC’s comments along with those from others will persuade incoming Committee Chair Sen. Ron Wyden (D-OR) to convene informational and/or legislative hearings this year on the optimal choice of economic instruments to reduce U.S. carbon emissions. (Longtime Committee Chair Baucus is leaving the Senate to serve as U.S. Ambassador to China.)

In the interim, we believe that our comments stand as the first broad quantification of the relative efficacy of a carbon tax vs. energy subsidies (even rationalized ones) to reduce emissions. As the figures in the table indicate, a carbon tax wins hands down.

CTC’s comments were researched and written by CTC director Charles Komanoff and CTC senior policy analyst James Handley. Support for their preparation and submittal was provided by the Alex C. Walker Educational and Charitable Foundation. We are grateful for their support.

Last modified: January 31, 2014

Help Accelerate the Climate Solution: Donate to the Carbon Tax Center

Two weeks ago, I caught a tantalizing glimpse of a possible carbon tax in China.

I was part of an international delegation brought to Hangzhou to meet with 200 officials from 11 provinces, 30 cities, and at least a dozen universities at China’s first-ever “International Forum on Economic Policies for Traffic Congestion and Tailpipe Emissions.”

CTC director Charles Komanoff presenting on congestion pricing in Hangzhou, Dec. 12.

Traffic gridlock and tailpipe emissions are mounting in China’s megacities, and officials are looking to economic policy instruments to control both. It seems only a matter of time — and perhaps not much time — before Chinese cities begin to charge vehicles a fee to be driven into their central areas during peak periods.

And if congestion pricing is truly on the table for China, might a carbon tax, which is cut from the same cloth of cost internalization and price incentives, be close behind?

My experience in China, which you can read about here, reinforces my conviction that there will be a U.S. carbon tax.

Maybe, if we get lucky with the new Congress, as part of tax reform in 2015. Or perhaps not till after 2016 or even 2020, given our low-functioning political system.

The push may need to come from the states and spread to D.C., as it has for marriage equality. Or a carbon tax may be forced upon Congress as China and other countries enact carbon taxes and impose carbon tariffs on our exports.

But a national carbon tax will come. The moment will arrive when, to paraphrase Jim Hansen, the laws of physics and chemistry, not to mention economics, overwhelm even denialism and gridlock.

The Carbon Tax Center works to accelerate that moment. And to ensure that the carbon tax that eventually passes Washington isn’t piecemeal and opaque, but is rapidly rising, transparent, and just.

Just under the radar — ­ in think tanks, meeting halls and, yes, Congressional offices ­ — carbon pricing is inching back into conversations about climate, energy policy and fiscal and tax reform. And CTC is key to these discussions.

We run numbers for Capitol Hill staff, journalists and grassroots advocates. We cross-pollinate the carbon tax grapevine to keep others in the field up-to-date and connected. We help fellow climate proponents see that neither subsidies for clean-tech nor EPA regulations can rid our economy of fossil fuels fast enough . . . and to grasp that a robust and transparent carbon pollution tax is needed to level the entire playing field, not just select pieces.

The Carbon Tax Center does all this on a budget that barely qualifies as shoestring. With your help now, we’ll do it even more vocally, in more arenas, and more effectively in 2014.

Your contribution, of any size, will help us grow support for a U.S. carbon tax in Washington and the states. Please click here, now, to make your tax-deductible donation.

Thank you for your past and future support. Have a wonderful New Year.

  — Charles Komanoff, founder-director, Carbon Tax Center

Photo: Silvia Moroni, Mobility, Environment and Land Agency, Milan.

Last modified: December 26, 2013

A Carbon Fee Can Cut Business Taxes in New York … and Elsewhere

This post, co-written with Alex Matthiessen and published in the Huffington Post over Thanksgiving (2013), is reproduced here with a handful of minor changes. Alex, a CTC board member, is president and founder of Blue Marble Project, Inc., an environmental consulting firm.

Small beer is perhaps too kind a term for the prosaic proposals being batted around by New York Governor Andrew M. Cuomo’s tax reform commission: close loopholes, broaden the base, modernize collection of property taxes, stop taxing retirement income. Little about restructuring taxes to help New York State businesses create new jobs and give hard-pressed working families a break. And nothing about tax reform that could establish New York as a leader in curbing climate change.

Yet one possible reform, a carbon tax swap, can do all of the above — and is already being used successfully in other countries. With whole sections of the Philippines in ruins from Typhoon Haiyan, and the Warsaw global climate talks ending in tatters, the governor’s tax commission needs to go long and put a carbon tax swap at the top of its pending report.

Author Komanoff (foreground) hauling supplies to hurricane-stricken Far Rockaway, Nov. 10, 2012.

What’s a carbon tax swap? It’s revenue-neutral tax reform in which a new fee collected on the carbon content of fossil fuels lets the state slash existing taxes that hamstring businesses and make it hard for middle class New Yorkers to make ends meet.

Albany wouldn’t keep a dime under the swap. Instead, taxes that stifle enterprise would be replaced by a fee on polluting fossil fuels that would motivate businesses and homeowners to accelerate the transition to clean energy.

One obvious candidate for tax relief is the state sales tax, which adds four cents onto each dollar spent on goods and services from Buffalo to Babylon. (Localities tack on another three to five cents.) NY State’s average combined rate, the country’s eighth highest, exerts a double drag on commerce, driving purchases — and businesses — out of state and cutting into households’ buying power.

A statewide carbon tax on oil, gas and coal used in vehicles, buildings, industry and power generation of $20 per ton of carbon dioxide — the equivalent of 19 cents per gallon of gasoline — would net $3.5 billion a year. With this revenue, legislators could reduce the state sales tax from 4 percent to 3 percent. Plus, there would still be $500 million to invest each year to finance storm-related infrastructure and help building-owners finance climate-friendly solar power systems.

Alternatively, the new revenue could pay down business taxes that place New York in the bottom 10 percent of Forbes‘ rankings of state business climates. Abolishing one such tax, the $2.7 billion corporation franchise tax, would give companies much-needed administrative and financial relief, and help attract businesses and jobs to New York.

Yes, the carbon tax will make electricity, gasoline and other fuels more expensive. That’s by design. But less-affluent families use less energy than average and thus will bear less of the burden. Meanwhile, upstate hydropower, which is carbon-free, will be exempt from the tax, offsetting many rural residents’ greater usage of gasoline and heating fuels. (New York City residents have smaller homes and drive less.) A reduction of the sales tax would disproportionately benefit lower-income family, thus mitigating further the impact of the swap on working families.

How much would a $20-per-ton carbon tax reduce New York’s emissions? Around 6 to 8 percent. While that’s barely a tenth of what most climate scientists believe must be the nationwide emissions-reduction target for 2050, it would constitute a strong start toward a 100 percent clean-energy economy for New York. It would also create a template that other states could follow, especially if, as some climate-policy specialists suggest, U.S. EPA lets states use carbon taxes to meet national carbon-pollution reduction standards.

A year ago, Hurricane Sandy made the devastating reality of climate change painfully clear to 20 million New Yorkers from Gov. Cuomo on down, as well as other Americans. Yet Congress has proven incapable of enacting even a single meaningful measure to mitigate it. On climate, as with marriage equality, the states will have to show the way.

Now the governor’s tax-reform push gives him the chance to provide national leadership on how states, with a single policy instrument, can start delivering both tax and climate relief to their people.

Click here for a 6-page brief backing up most of the tax-swap figures in this post. Go to CTC’s “States” Web page for info on how advocates in Oregon, Washington and elsewhere are working to advance state-level carbon taxes. 

Last modified: December 6, 2013

Why "Official" Nuke Plant Cost Estimates Are Like Campaign Promises

In my in-box are a dozen e-mails wanting my reaction to Eduardo Porter’s column in yesterday’s New York Times in which he insisted that of all non-carbon based energy sources, nuclear power is “the cheapest and most readily scalable.”

Whether my correspondents knew that in my former life I meticulously established the spectacular failure of nuclear power plants to stay on budget and produce affordable electricity, or they simply thought I might have a halfway informed opinion on reactors’ proper role in combating the climate crisis, I can’t say. But I dutifully opened up Porter’s column and was quickly appalled.

Finland’s Olkiluoto fiasco shows that reactor cost escalation isn’t peculiar to the U.S.

The column fails the single most critical precept in nuclear economics: don’t confuse promise with performance. I made this point in 1979, a month before the Three Mile Island reactor accident, in a review of a book that plumbed that very theme. I was struck with how the authors of Light Water: How the Nuclear Dream Dissolved — two business academics with experience in the American and French Atomic Energy Commissions — showed that from Day One nuclear power proponents mesmerized themselves with idealized cost estimates that ignored reactors’ innate complexities and razor-thin tolerances — twin Achilles Heels that time and again broke project budgets and sowed mistrust among policymakers and the public, especially in the U.S.

Things haven’t changed. In June, Porter’s colleague Matt Wald, who has covered the nuclear industry for the Times since the early eighties, reported on a nuclear plant under construction in Georgia named Vogtle — one of two reactor projects underway in the U.S. First, Wald summarized the disastrous cost escalation at predecessor projects 30 years ago:

In those decades parts of plants were built, ripped out and rebuilt because of design and regulatory problems, leading to ruinous costs. Examples sit across the muddy construction site: Vogtle 1 and 2, which opened in 1987 and 1989, cost $8.87 billion. When they were proposed in 1971 the estimated cost was $660 million.

Wald noted that the new project, Vogtle 3 and 4, had instituted cost-control measures to lock-in plant designs and also replace often-chaotic field assembly with prefabricated parts. But, he noted:

[T]he company that was supposed to be making prefabricated parts like clockwork, from a factory in Lake Charles, La., was shipping them with some parts missing or without required paperwork. Southern [Company, the reactor owner] built a cavernous “module assembly building,” 120 feet high and 300 feet long, where the parts were supposed to be welded together, largely by robots, into segments weighing thousands of tons. But shipments stopped last August and are still arriving too slowly.

“[I]t remained to be seen,” the Georgia state construction monitor told Wald, “whether modular construction would actually save time.” Meanwhile, 5,000 miles away from Vogtle and “stifling” U.S. regulations that for decades have been blamed for “suffocating” nuclear power here, an ambitious reactor project in Olkiluoto, Finland has run completely off the rails.

“The massive power plant under construction on muddy terrain on this Finnish island was supposed to be the showpiece of a nuclear renaissance,” the Times reported back in 2009. “The most powerful reactor ever built, its modular design was supposed to make it faster and cheaper to build. And it was supposed to be safer, too.”

Instead, the Times reported then, “after four years of construction and thousands of recorded defects and deficiencies, the price tag . . .  has climbed at least 50 percent.” That was just the beginning. By December 2012, three-and-a-half years after the Times article appeared, the cost of the Olkiluoto reactor had doubled again, according to Wikipedia, to 8.5 billion euro — nearly triple the original €3 billion delivery price. So calamitous is the cost spiral that the Finnish electric utility owner and the French reactor supplier are suing each other.

Why bring up Vogtle and Olkiluoto? Because they exemplify the real-world experience that Porter ignored. (They also constitute a majority of reactor construction now underway in the Western economies.) Instead, Porter hung his column on — you guessed it — paper cost estimates from the U.S. Energy Information Administration and the U.K. government. Here’s Porter’s faithful workup of nuclear vs. wind and solar, per EIA:

Take the Energy Information Agency’s [sic] estimate of the cost of generating power. The agency’s [sic] number-crunchers include everything from the initial investment to the cost of fuel and the expense to operate, maintain and decommission old plants. Its latest estimate, published earlier this year, suggests that power generated by a new-generation nuclear plant that entered service in 2018 would be $108.40 per megawatt-hour. . . This is not cheap. . . Still, nuclear power is likely to be cheaper than most power made with renewables. Land-based wind farms could generate power at a relatively low cost of $86.60 per MWh, but acceptable locations are growing increasingly scarce. Solar costs $144.30 per MWh, the agency estimates. A megawatt-hour of power fueled by an offshore wind farm costs a whopping $221.50.

Case closed, eh? $108.40 a MWh for nukes, $144.30 for solar, $221.50 for offshore wind? I’ll leave it to others to see if the EIA figures for renewables properly credit the still-ongoing declines in unit costs for photovoltaics and wind. My point here is that the nuclear numbers in Porter’s column overlooked not just Vogtle and Olkiluoto but the deep-seated problem that invariably leaves paper estimates of reactor costs bearing as little resemblance to the real thing as campaign promises bear to officials’ actual policies: the fabulous energy density that makes nuclear power so appealing in theory requires heroic countermeasures that demand degrees of perfection that are only achievable, if at all, through a punishing array of rules, regulations, paper trails, quality assurance, inspection, checking and double-checking that come at enormous cost.

I documented this in painstaking detail long ago in a book, Power Plant Cost Escalation, that took me several years to conceptualize and several more to quantify and compose and finally publish, in 1981. The book’s bottom line was that through the 1970s, costs of completed U.S. nuclear plants rose twice as fast as costs of completed coal-fired plants; while the higher costs at least paid for coal plants to become much cleaner but not for nuclear plants to be made any safer, judging by the steady drip of nuclear mishaps that culminated in the meltdown of the final nuclear plant in my database, Three Mile Island Unit 2. (The book is on-line here, as a 12MB pdf, or you can pick up a hard copy from me, cheap; send me an e-mail.)

This work went viral in the energy and business world of the time, giving me a good run as expert witness for state government agencies charged with representing utility consumers in electricity rate cases. Eventually I moved on — to bicycling advocacy, road traffic pricing, and, of course, carbon taxing. These days I mostly steer clear of nukes per se, and, indeed, of specific technologies, preferring to agitate to get the most-level playing field possible, via full-cost carbon pollution pricing.

The problems with Porter’s column don’t stop with his slavish adherence to paper estimates of reactor costs. He flogs Germany for its 0.9% bump in CO2 emissions last year (“even as they declined in the United States and most of Western Europe”), ignoring that German GDP grew relative to that of every other major European economy, and that the drop in U.S. CO2 was mostly due to the horrific (and possibly transitory) boom in fracked natural gas.

Indeed, from 2010 to 2012, a two-year period encompassing the March, 2011 Fukushima catastrophe and Germany’s subsequent decision to turn off 29% of its nuclear power production (reducing reactor output from 140.6 terrawatt-hours in 2010 to 99.5 TWh in 2012), Germany actually held constant its use of fossil fuels to make electricity.

How did German society make up for the 41.1 TWh drop in reactors’ electricity generation? Numerically, it was simple:

  • German solar-photovoltaic generation grew from 11.7 TWh to 28.0 TWh (a rise of 16.3 TWh).
  • Wind generation grew from 37.8 TWh to 46.0 TWh (a rise of 8.2 TWh).
  • Total consumption of electricity fell by 16.4 TWh (from 610.9 TWh to 594.5 TWh), despite GDP growth.

(Figures are based on data from Bundesministerium für Wirtschaft und Technologie, Statistisches Bundesamt, Arbeitsgruppe Erneuerbare Energien-Statistik (AGEE-Stat).)

The institutional mechanisms are more complex and involve feed-in-tariffs and other mechanisms to elicit investment in renewables. (You can get the full scoop on how Germany turned off nearly 30% of its nuclear power without burning more fossil fuels from the excellent Energy Transition (The German Energiewende) blog run by Craig Morris at the Heinrich Boll Institute.)

Now that’s a story worth pursuing, and one I pitched to Porter in an e-mail the week before Labor Day. Perhaps my note was too gentle. In retrospect, I might have ripped a page from Nate Silver’s playbook and muttered a cautionary tale about the 2012 election pundits who went with discredited over robust poll data and predicted a Romney victory.

Photo: BBC World Service / Flickr.

Last modified: November 21, 2013

Trade Expert Is Latest to Endorse Border Adjustments to Carbon Taxes

Border tax adjustments (“BTA’s”) — tariffs imposed on imported carbon-intensive goods with corresponding rebates of carbon taxes on domestically-produced goods destined for export — are one of the more technical issues in carbon tax policy. They’re also controversial; some analysts warn of trade wars or lengthy trade litigation in the World Trade Organization over a carbon-tax with BTA’s. But stay with us as we report on a new paper detailing two routes by which WTO rules would unequivocally support national carbon taxes with border tax adjustments and thus offer a route to a harmonized global carbon price.

Typhoon Haiyan Underscores the Urgency of Global Action to Curb Global Warming

The paper, published last July by the German Marshall fund of the United States, the American Action Forum and Climate Advisers, is hardly the first to reach such conclusions. In recent years, journal articles from leading academics including Joost Pauwelyn (Duke Univ. Law, 2007 & 2012), Gilbert Metcalf & David Weisbach (Harvard Envt’l Law, 2009), and Carolyn Fisher & Alan Fox (RFF, 2009) have pointed to the potential for BTA’s to create incentives for globally-harmonized carbon taxes. But the July paper, “Changing Climate for Carbon Taxes, Who’s Afraid of the WTO?,” comes from an even more prominent and unimpeachable source.

The author, Jennifer Hillman, a German Marshall Fund senior transatlantic fellow, is one of the world’s leading trade experts. Hillman served for four years as counsel to the WTO Appellate Body (the “Supreme Court” of trade law) and, prior to that, served an eight-year term as a U.S. International Trade Commissioner. From 1995-1997, as General Counsel to the Office of United States Trade Representative, she oversaw U.S. government submissions in dispute settlement cases before both WTO and NAFTA.

So Hillman is an impressive messenger. Here’s why her conclusions are important, and why BTA’s are a crucial element of an effective U.S. carbon tax.

For carbon taxes to form the cornerstone of policies to de-carbonize the world economy, carbon pricing will need to “go global.” But without border tax adjustments, unilateral U.S. climate policy won’t necessarily lead to global emissions reductions (due to “off-shoring” of factories) and could disadvantage domestic energy-intensive business.

BTA’s offer a way to not only protect domestic energy-intensive industry but also provide carrots and sticks to induce our trading partners to enact their own carbon taxes and to prevent “carbon leakage” from relocation of energy-intensive industries. Moreover, a WTO-based process could obviate the U.N. Kyoto Protocol (“COP”) meetings where nations have wrangled for almost two decades to allocate the Earth’s dwindling carbon “budget.” Instead, the U.S. (or any large trading bloc) could simply enact a carbon tax and use WTO-sanctioned border tax adjustments to induce other nations to follow.

The General Agreement on Tariffs and Trade (GATT) functions as the “constitution” of the World Trade Organization in its mission to foster global trade. Hillman shows that GATT Articles II.2 and III.3 empower countries to impose taxes on imports provided they do not exceed the taxes imposed on “like” domestically-produced goods. (Historically, tax systems that have run afoul of Article II and III have been discriminatory attempts to favor domestically-produced goods by imposing higher tariffs on foreign-produced goods.) GATT allows taxes based on the production process — in the case of a carbon tax the “carbon intensity” of the production process. This would require data on production processes abroad, which may be difficult to obtain. Hillman suggests that, absent such data, WTO would accept an assumption that an imported product’s carbon intensity is similar to that of a like domestically-produced product. (Companies producing goods less carbon intensively than U.S.-produced equivalents could petition for reductions in their border tax adjustment.)

Hillman offers a second avenue for BTA’s via GATT Article XX, which authorizes WTO members to adopt policies to protect human, animal or plant health or to conserve exhaustible natural resources. The general WTO policy of non-discrimination and non-interference with international trade would also apply to tariffs adopted pursuant to Article XX.

Hillman also recommends a rebate of carbon taxes paid on exported goods to ensure that domestic producers selling goods into non-carbon-taxing countries aren’t disadvantaged. She concludes that WTO should permit such rebates so long as they don’t exceed the carbon tax actually paid.

Hillman concludes

Policymakers have sufficient latitude with this [WTO] framework to design and implement a carbon tax system that represents a good faith effort to reduce carbon emissions while encouraging all other countries to cut their emissions too, all while preserving the competitive position of U.S. companies. Policy makers can be bold; the WTO will recognize genuine climate change measures for what they are and is unlikely to find fault with such measures, provided they do not unfairly discriminate in favor of U.S. companies.

Photo: Jun Tokumori (Flickr)

Last modified: October 9, 2014

Could the “Green Paradox” Thwart a Carbon Tax?

One of the best attributes of carbon taxes is that they’re fairly immune to the law of unintended consequences. No gaming or criminal mischief. No rebound effects. Just a classic downward-sloping demand curve: the fossil fuel provider pays the tax, the price of the petroleum product or coal-fired kilowatt-hour goes up, dirty energy’s market share goes down.

Could a Fast-Rising Carbon Tax Accelerate Oil Production?

But there’s a lurking concern that surfaces from time to time in the literature of resource economics and “Pigovian” taxes: raising the prices of fossil fuels too rapidly might induce the owners of those resources to extract them faster in the near term, a phenomenon known as the “green paradox.” In this scenario, fossil fuel owners would flood the market to reap higher sales before the carbon tax got big enough to kill off business. This near-term fossil fuel binge would increase CO2 emissions, obviating the fuel-shifting and demand-busting that a carbon tax would otherwise induce.

The green paradox is a direct corollary of Hotelling’s rule, a bedrock principle of resource economics. It came to mind this week as we digested the new report from the 34-nation Organization for Economic Cooperation and Development, Climate and Carbon: Aligning Prices and Policies. The OECD report urges an “explicit price on carbon” as the key mechanism to reduce global CO2 emissions. The report points to the IPCC’s newly confirmed finding that atmospheric greenhouse gases must not exceed 450 parts per million CO2-equivalent. Adhering to the resulting global “carbon budget” will necessitate zeroing out net global emissions by the second half of this century, according to OECD.

Topping OECD’s list of necessary national policies are:

[e]xplicit carbon pricing mechanisms, such as carbon taxes and emissions trading systems, [which] are generally more cost-effective than most alternative policy options in creating the incentive for economies to transition towards zero carbon trajectories.

OECD adds:

[U]se of these [pricing] mechanisms is expanding in developed, emerging and developing economies, but there is considerable scope for further uptake by governments. Overcoming political opposition to putting an explicit price on carbon will often require close attention to the distributional and competitiveness implications on the domestic economy.

OECD also stresses the need for governments to eliminate fossil fuel subsidies and to enact complementary policies such as energy efficiency standards for buildings, homes and automobiles.

If, as OECD suggests, explicit carbon pricing is to drive CO2 emissions to zero by mid-century, it will have to be aggressive enough so that fossil fuels become uneconomical and are overtaken by zero-carbon alternatives. The Carbon Tax Center and a number of economists have attempted to model the price trajectory needed. While such modeling is highly speculative — it’s almost impossible to explicitly model technological innovation, for example — we estimate that the CO2 price will need to surpass $300/ton by mid-century.

That’s a hard sell politically, of course, though we often point out that a carbon tax can replace other taxes so our total tax burden need not increase. But there’s also Hotelling’s rule to consider.

In a seminal paper published in 1931, Harold Hotelling posited that exhaustible resources are a form of capital available for extraction at any time at a known cost. He showed mathematically that in a dynamic, competitive equilibrium (where sellers compete and are free to respond to changes in supply and demand), prices of such resources rise at the rate of interest. Imposing a tax that raised the price of fossil fuels faster than the interest or “discount” rate would therefore make the resource more valuable now than in the future. Thus, the “green paradox”: a carbon tax rising too fast could induce more global warming by triggering a near-term rush to extract and market fossil fuels. (Note that an expectation of rapidly rising subsidies to renewable energy could induce a similar rush to extract fossil fuels.)

Nevertheless, a new paper by Prof. Robert D. Cairns of McGill University concludes that fears of the “green paradox” are overblown in the context of oil pricing. In The Green Paradox of the Economics of Exhaustible Resources, Cairns points out that oil and gas production is limited by the drilling activity in the previous period; production from wells tends to diminish along a predictable “decline curve” reflecting diminishing hydraulic pressure in the formation. Because producers can’t cost-effectively increase production very rapidly, the assumptions of Hotelling’s rule don’t apply. Similarly, capacity to drill new wells is limited in the short term by availability of drilling rigs and related equipment; investments in additional capacity don’t pay off immediately, they must be amortized over time by expected future activity.

Cairns concludes:

Hotelling may reign but he does not rule. Models in his tradition assume free allocation of
resources over time. The rule is an arbitrage condition relating the values of net price over the
productive life of the reserve. Empirical evidence suggests that allocation is subtler than in the
Hotelling model. The operative constraint in oil industry is that allocation over time is capped in
one of a number of ways, so that arbitrage among periods is constrained. Calculations and comparisons are not simply of current costs at different time periods but of commitments, especially sunk costs, predicated on the entire future of operations.

Economic theory and empirical evidence suggest that Cairns’ conclusion isn’t limited to oil. Coal and gas extraction are also constrained by physical and capital factors that limit resource owners’ ability to accelerate production enough to overwhelm the benefits of a predictably-rising carbon price.

Like the vast majority of economists, we agree with OECD that a global carbon price is key to zeroing out global CO2 emissions. Prof. Cairns and a growing body of literature show that fears of the “green paradox” shouldn’t deter policy-makers from setting an aggressively-rising carbon tax trajectory that meets the goal of zero emissions by mid-century.

Photo: Flickr– photos of Rob

Last modified: October 23, 2013

RFF Study: Young Generation Would Benefit Most From Climate and Fiscal Benefits of Carbon Tax

A new paper, “Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts” by economists at the Washington, DC think-tank Resources for the Future, finds that a $30/ton tax on CO2 pollution would reduce U.S. emissions 16% by 2025. The report concludes that dedicating the carbon tax revenues, estimated at $200 billion each year, to “down payment” of the federal budget deficit offers greater economic-efficiency benefits than other revenue-return options. Moreover, according to RFF, using the carbon tax revenues to pay down the deficit would especially benefit the young, by curbing global warming and its associated future costs, and by reducing tax burdens of today’s young people far into the future.

Using a new intergenerational economic model, RFF economists examined different ways to use revenue generated by carbon taxes, revealing the impacts of those choices across the age spectrum of the U.S. population. They modeled four scenarios: three in which the carbon tax revenues are used to reduce taxes on 1) capital, 2) labor, and 3) sales of goods, and a fourth in which the revenues are returned in lump sum “dividends.” RFF found the differences in annual aggregate welfare among the four options to be relative small ― less than 3 percent. Interestingly, returning revenue as lump-sum dividends offers a slightly more progressive income distribution than a labor tax shift.

More striking differences are revealed across the age spectrum: people who are now too young to vote would benefit most from a carbon tax used to fund deficit reduction, according to RFF. The authors conclude: “[E]nacting such a policy [a carbon tax used to pay down the deficit] will be politically difficult unless current generations are altruistic” enough to act now to curb global warming and to pay down deficits, both of whose impacts will be greatest on the young. That’s an understatement.

Last modified: October 20, 2013

Data Points

U.S. carbon emissions have been dropping, thanks to a confluence of factors, led by stagnating household incomes, cheap fracked methane, booming wind power, and “peak driving.” From 2005 to 2012, releases of CO2 from fossil fuel burning fell an estimated 685 million metric tons, from 5,906 MMT to 5,221. The lion’s share of that reduction, 379 million metric tons, came in the electricity sector, as wind and gas grabbed market share from coal (3 percentage points went to wind and nearly 12 points to gas) while total power generation stayed flat.

(Emissions data come from CTC’s carbon tax spreadsheet model. Electricity market shares may be calculated from EIA data.)

The rush to fuel efficiency is more of a trickle.

The second largest emissions source, which I call “Personal Ground Travel” (driving) to distinguish it from goods movement (mostly by trucks), shrank only modestly, from 1,246 MMT to 1,184, a drop of just 62 million metric tons, or 5%. So imagine my surprise when I read in a New York Times editorial last month that “increased fuel efficiency helped reduce carbon dioxide emissions from passenger cars by 16 percent from 2005 to 2012.”

That August 10 editorial, A Clean-Car Boom, was nearly euphoric. Here’s its lede:

In a welcome development for the planet, the cars on American streets are becoming much more climate-friendly much sooner than many had expected. Consumers are increasingly buying fuel-efficient hybrid and electric vehicles thanks to breakthrough innovations and supportive government policies.

True enough about consumers buying … not so the earlier part about emissions dropping by 16%. In fact, in the few seconds it took to follow the editorial’s link, it became clear that the 16% passenger-car reduction applies just to new autos rather than the entire sector, which necessarily takes many years to “turn over” to more-efficient models. What also became clear, in back-and-forth e-mails w/ the editorial board, was that the Times wasn’t going to publish a correction clarifying that CO2 emissions from cars fell just 5% from 2005 to 2012, not 16%.

“I assume [the writer of the editorial] meant new models, not entire existing fleets and that is the way readers would see it,” an editor advised me in an e-mail. “I will have to check with EPA and DOT,” he added, ignoring my offer to lead him to the numbers.

Would readers “see it” as the editor assumed? Would they get that CO2 reductions from driving were only inching along rather than galloping as the Times editorial suggested? I’m not sure. As I wrote to the editor in my final e-mail:

Why does this matter (apart from getting numbers right, generally)? A certain complacency has set in about heartening/surprising progress in cutting U.S. greenhouse gas emissions, especially in mainstream environmentalist thought. Indeed, this complacency may help explain how the [editorial] writer slipped into his/her error. More importantly, it has implications for policy/politics around climate, carbon taxing, “radical” vs. “incremental” approaches, etc.

The implications I had in mind are obvious but worth saying: If you “learn” that regulations have already eliminated one-sixth of carbon emissions from driving in just seven years, you’ll be more inclined to trust that further application of regulations can get induce more reductions. And if regulations are up to the task, the need to take on the tougher job of enacting a meaningful carbon tax dissipates.

Would that were so. But regulations aren’t up to the task of eliminating 80% or more of U.S. CO2 emissions. They’re intrinsically piecemeal, long lead-time, backward-casting, and suboptimizing. They also produce no revenue, thus giving them zero salience in any possible budget deal. As I wrote here late last year, only a carbon tax can

broadcast …  a clear price signal to begin shifting millions of decisions toward less energy and emissions — big decisions that determine design of vehicles and transport and that set the pace and nature of investment in low- and non-carbon energy; as well as the full gamut of household-level decisions …  Almost as importantly, a robust carbon tax changes the culture by broadening the definition of pollution and valorizing conserving behaviors with monetary rewards.

Or, as CTC’s Washington rep, James Handley, put it, in an early-2012 post dissecting putative EPA regulations of CO2 emissions from power plants, “EPA regulations might, optimistically, achieve significant near-term reductions, albeit at a higher cost than a CO2 pollution pricing system. But more importantly, those regulations can’t be expected to induce further innovation.”

Indeed, James’s post drew on work by noted Resources for the Future economist Dallas Burtraw to conclude that in the near term, EPA regulation of greenhouse gases was unlikely to reduce carbon pollution any more than a small carbon tax, say, one starting at $10/ton of CO2 and rising by just $3.50/ton per year. “Moreover,” James noted, “it’s not clear how much further EPA regulation could reduce emissions after 2020. That’s because regulations are essentially static and do little to induce innovation or to reduce fossil fuel demand via conservation.”

With or without a correction by the Times, there’s no getting around the need for a robustly rising carbon tax.

* * * * *

Separately, we call your attention to a new report by prolific automobile researcher Michael Sivak and two colleagues at the University of Michigan Transportation Research Institute, “A Survey of Driver Opinion About Carbon Capture in Vehicles.” Using an opinion survey, the three inferred that Americans “appeared to be willing to pay about $100 for a 20% reduction in [their car’s] carbon dioxide emissions.” Applying an average 25 mpg fuel economy for newly purchased vehicles, an annual distance driven per vehicle of 11,000 miles, and a typical 11-year vehicle life, that 20% reduction equates to 9.5 tons of CO2. A willingness to pay $100 to eliminate 9.5 tons equates to just $10-$11 per ton of CO2 removed, suggesting that relying on Americans’ altruism isn’t going to do the heavy lifting of reducing carbon emissions.

Photo: Veee Man, via Flickr.

Last modified: September 20, 2013