What an Energy-Efficiency Hero Gets Wrong about Carbon Taxes

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

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

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

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

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

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

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

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

Here's the math behind the economics

Here’s the math behind the economics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Crux

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

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

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

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

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

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

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

Carbon Taxing Going Forward

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

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

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

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

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

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Last modified: September 2, 2015

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

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

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

Seattle, June 2015: Petitioning for Carbon Washington.

Seattle, June 2015: Petitioning for Carbon Washington.

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

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

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

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

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

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

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

Measure I-732 steers revenues to households and manufacturers.

Measure I-732 steers revenues to households and manufacturers.

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

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

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Last modified: July 16, 2015

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

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

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

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

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

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

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

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

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

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

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Last modified: June 27, 2015

Earth Institute Chief Trashes the Carbon Tax

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

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

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

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

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

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

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

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

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

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Last modified: June 27, 2015

Don’t Anchor a Carbon Tax to the Social Cost of Carbon

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.

Ice Shelf on eastern edge of Edgeoya, Norway. Waterfall. (20090812) (Strcorarius parasiticus)

Ice Shelf Melting in Eastern Norway (Paul Hoogeveen, Flickr)

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…]

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Last modified: June 28, 2015

Book Review: “Climate Shock”

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)

climate shock coverWagner, 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)

"Climate Shock" authors Martin Weitzman (left) and Gernot Wagner.

“Climate Shock” authors Martin Weitzman (left) and Gernot Wagner.

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.
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Last modified: May 29, 2015

Harvard Economist Charts Escape From Kyoto

[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.

Which is simpler: negotiating one price, or 190 emissions caps?

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…]

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Last modified: May 27, 2015

A Carbon Tax Can Carry Earth Day’s Legacy

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.

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Last modified: April 22, 2015

Carbon Tax Polling Milestone: 2/3 Support if Revenue-Neutral

For more years than I care to count, the Carbon Tax Center beseeched pollsters to take Americans’ temperature on revenue-neutral carbon taxes. Time and again we explained that polling about carbon taxes had to incorporate the option of returning revenues to households ― as most carbon tax bills would do. Otherwise, the tax came off as all stick and no carrot, and about as appealing to most folks as a cold shower.

Finally, a Stanford University-Resources for the Future poll asked that question. The results, released today, show that two-thirds of Americans support making corporations pay a price for carbon pollution, provided the revenues are redistributed, i.e., made revenue-neutral. The poll’s finding is the most powerful indication yet that the public is warming to carbon taxation as the premier policy for combating climate change.

Poll-Graphic-Pie-Chart-AltStanford and RFF commissioned the polling firm SSRS to interview 1,023 U.S. adults on climate-related issues in January. Two findings from the poll — that Americans of Hispanic descent are particularly climate-concerned, and that half of Republicans would favor a presidential candidate who supports fighting climate change — led to front-page New York Times stories. (Click here for the story on Hispanics and here for the story on Republicans.) The full poll was made publicly available today at a briefing at the National Press Club in Washington.

The poll was supervised by RFF university fellow Jon Krosnick, who has been polling Americans on climate change for two decades as head of Stanford’s Political Psychology Research Group. Its section on carbon taxation included these two questions: [Read more…]

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Last modified: April 30, 2015

Climate Idealism Can’t Hold a Candle to Collective Action

Why do Copenhageners ride bicycles? The key reason, says Yale economist and best-selling author (“Irrational Exuberance”) Robert J. Shiller, is that Danes are idealists who resolved, after the oil crisis of the 1970s, “to make a personal commitment to ride bicycles rather than drive, out of moral principle, even if that was inconvenient for them.”

“The sight of so many others riding bikes motivated the city’s inhabitants and appears to have improved the moral atmosphere enough,” Shiller wrote in yesterday’s New York Times, that the share of working inhabitants of Copenhagen who bike has reached 50 percent.

From “Copenhagen: City of Cyclists” (2010), a report by the City of Copenhagen.

From “Copenhagen: City of Cyclists” (2010), a report by the City of Copenhagen.

In much the same way, Shiller argues, “asking people to volunteer to save our climate by taking many small, individual actions” may be a more effective way to bring down carbon emissions than trying to enact overarching national or global policies such as carbon emission caps or taxes.

Goodness. Rarely do smart people so badly mangle both the historical record and basic economics. I say “people” because Shiller attributes his column’s main points to a new book, “Climate Shock: The Economic Consequences of a Hotter Planet” by Gernot Wagner of the Environmental Defense Fund and Martin L. Weitzman, a Harvard economist. And I say “smart” because the three stand at the top of their profession. Shiller won the Economics Nobel in 2013, Weitzman is a leading light in the economics of climate change, and Wagner is highly regarded young economist.

But mangle they have (I haven’t seen the Wagner-Weitzman book but assume that Shiller represents it fairly).

Let’s start with the history, which is fairly well known to anyone versed in cycling advocacy, as I’ve been since the 1980s, when I spearheaded the revival of New York City’s bike-advocacy group Transportation Alternatives (as recounted here.) Copenhagen’s 40-year bicycle upsurge, and indeed much of the uptake of cycling across Denmark, Germany and the Netherlands, came about not through mass idealism but from deliberate public policies to help cities avoid the damages of pervasive automobile use while reducing oil dependence.

If idealism played a part at the outset it was a social idealism that instructed government to undertake integrated policies ­― stiff gas taxes and car ownership fees; generously funded public transit; elimination of free curbside parking; provision of safe and abundant bicycle routes ― that enabled Copenhageners to do what they evidently desired all along: to use bikes safely and naturally.

The telltale is in the graphic. Only one in eleven Copenhageners who cycle have environment and climate in mind. The majority do it because it’s faster than other ways to travel, and around a third of cyclists say they ride because it’s healthy, inexpensive and convenient ― belying Shiller’s meme of Danes idealistically choosing bikes despite their inconvenience vis-à-vis cars. [Read more…]

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Last modified: April 15, 2015