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

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

Free-Market Economist Milton Friedman

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

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

InsideClimate News just posted this piece as a guest editorial — today’s entry in a series leading to and during Climate Week in New York City.

By Charles Komanoff • Charles Komanoff directs the Carbon Tax Center in New York.

Which is mightier—the obstacles to enacting a U.S. carbon tax, or the tax’s unique capacity to drive down global-warming emissions quickly, massively and equitably?

At the Carbon Tax Center we’ve bet on the latter. And our bet will only get better if the climate movement coalesces its advocacy and organizing around a carbon tax.

Making polluters pay to emit carbon isn’t just textbook economics and basic fairness—though it is those things. A carbon tax is the only way for the climate damage caused by burning fossil fuels to be brought inside the arc of individual and societal decision-making that determines how much of those fuels society uses and, thus, how much carbon it emits.

Our banner sagged a bit during the People’s Climate March. Our message couldn’t be more clear.

These decisions range from the immediate and quotidian: take transit vs. car, refill at the tap vs. buy bottled water; to institutional and far-reaching: build airplane frames with ultralight composites vs. aluminum, locate in town vs. on the outskirts, contract with a wind farm vs. a coal generator.

Without a tax on carbon emissions, every choice like these―and billions are made daily―will remain so rigged that fossil fuels will never yield their central position in world energy supply—or at least not fast enough to keep climate change from spiraling out of control. But a tax gives us a fighting chance to keep climate tipping points at bay and stave off global warming’s most dire effects.

Notice I said carbon tax, not “price on carbon.” Forget cap-and-trade. It’s too complicated to resonate with the public, and too prone to manipulation and gaming. Moreover, the “revealed” prices from markets in carbon permits will always be too volatile for low-carbon entrepreneurs to bank on and for treasury departments to count on.

For a carbon price to be revenue-neutral—as I believe it must to command broad and bipartisan support—the revenue it will generate from one year to the next must be reasonably predictable. That means a knowable price, which only a carbon tax provides.

Why not pursue the politically easier path of subsidizing clean energy? Empirical evidence, for one thing. As we demonstrated in a report to the Senate Finance Committee earlier this year, even a perfectly tailored subsidies regime won’t deliver half as much carbon reduction as an equivalently priced carbon tax. Not to mention that subsidies require taxpayer dollars.

What about the EPA Clean Power Plan? Ingenious and well-meaning, to be sure. But too little, too late. The cuts apply only to electricity, they’re measured against a high (2005) baseline, and the states have until 2030 to comply. These concessions, while defensible on political grounds, have whittled down the plan’s target to a mere 7 percent cut in total U.S. CO2 emissions. And even that will necessitate navigating a minefield of litigation.

Why not simply mandate ever-decreasing carbon contents in every sector of use? Standards have helped make autos and appliances far more efficient, but making them the central climate strategy would require thousands of efficiency standards, each one bitterly contested. Moreover, standards by nature are reactive and binary, which leaves huge savings untapped. Not so for a carbon tax, which incentivizes each and every investment and behavior that cuts emissions.

The “gold standard” for a carbon tax is the Managed Carbon Price Act introduced in May by Rep. Jim McDermott (D-Wash.). The tax starts modestly, at $15 per ton of carbon dioxide, but rises stepwise to pass $100 within a decade. By effectively raising the prices of every BTU of natural gas, oil and, especially, coal burned in the United States, the McDermott bill will, by our estimates, cut U.S. carbon emissions by 30 percent by its 10th year―a pace nearly seven times faster than the EPA plan.

Not only that, the McDermott bill taxes the carbon content of imports from non-taxing countries, protecting U.S. manufacturers from unfair competition while motivating other nations to tax their climate pollution. It taxes methane and other greenhouse gases at their CO2 climate-change equivalents. And it returns every dollar of tax revenues to individuals as pro rata dividends—a simple but profound design that just might placate conservatives and other fiscal hawks. This “fee and dividend” revenue treatment will buffer two-thirds of U.S. households, including most low-income families, from the energy price increases the tax will entail. (Rep. John Larson’s America’s Energy Security Trust Fund Act of 2014 also specifies a robustly rising, revenue-neutral emissions tax.)

If the biggest block to game-changing climate legislation has been the fossil fuel-funded denialist movement, the timidity of climate advocates about carbon taxing may qualify as the runner-up. But as yesterday’s big march in New York City showed, the climate movement is rising and the American public may finally be stirring. Time is dreadfully short. Whatever qualms we’ve had about the t-a-x word must yield to opportunity and reality.

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

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

Prof. William D. Nordhaus, Yale University

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

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

Nicholas Stern (Baron Stern of Brentford)

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

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

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

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

First, whereas DICE-2010 counts only economic costs from climate damage to current consumption (e.g., decreased agricultural productivity, loss of coastal habitation, etc.), Dietz and Stern contend that climate change will also erode the ability to generate new wealth by inhibiting the accumulation of physical capital and impeding overall learning in the economy, i.e., the accumulation of technological and intellectual capital; both of which are key drivers of economic productivity and growth.

Second, Dietz and Stern conclude that Nordhaus’s model specification of the climate “damage function” ― the function that translates increases in temperatures into declines in GDP ― also needs to be modified to reflect possible climate tipping points such as those emphasized in the recent IPCC report, “Climate Change 2013: The Physical Science Basis.” Dietz and Stern note that, as presently constituted, the DICE-2010 model leads to the unrealistic result that nearly three-quarters of world economic output would survive an average global temperature increase of 12 °C (22 °F). Nordhaus himself notes this anomaly for DICE-2013 in his latest book, and states that climate tipping points and the large damages associated with them could potentially occur with temperature increases as low as 3 °C.

Third, Dietz and Stern update the DICE model’s “climate sensitivity” parameter, which relates atmospheric levels of greenhouse gases to expected temperature increases and other climate impacts. These updates reflect recent findings from climate models, including the higher probabilities assigned to climate tipping points such as methane emissions triggered by melting permafrost. This change would bring DICE in line with the latest versions of other Integrated Assessment Models, such as Richard Tol’s FUND model and Chris Hope’s PAGE model.

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

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

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

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

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

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

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

Photos courtesy of Yale University and Wikipedia, respectively.

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

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

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

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

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

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

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

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

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

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

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

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

I have four points:

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

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

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

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

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

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

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

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

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

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

Why it’s still not “game over” for global warming (Brad Plumer, Vox)

EPA Quietly Signs Off on State Carbon Taxes (Ben Geman, Frontiers of Freedom)

We Can Do Better Than Obama’s Climate Plan (US News)