Today’s New York Times turned over a patch of its most coveted space — on its op-ed page — to a curious essay. On Carbon, Tax and Don’t Spend is vexing and even a tad bipolar, in one moment calling a carbon tax "glamorous" (who knew?), but in the next insinuating that a revenue-neutral carbon tax could be a big no-no for the U.S.
The article’s big idea is that carbon tax revenues should be allocated to industry as lump-sum incentives to invest in cutting carbon, rather than returned to households to offset higher prices for energy and products. To support this thesis, the author points to carbon-taxing Scandinavia, where Denmark, the only country to dedicate carbon tax revenues to industry, is also the only one where CO2 emissions have plummeted.
On close examination, this "finding" turns flimsy. The fly in the ointment is that while all four Scandinavian countries have indeed levied some form of carbon tax since the early 1990s, in each case the tax levels so far have been on the "lite" side, making it difficult to tie changes in emissions to specific tax and revenue policies.
Sweden, for example, taxes carbon at $150 per ton (that’s a hefty $41 per ton of carbon dioxide), as we report elsewhere on this site, but fuels to generate electricity are untaxed, and industries pay only 50%. Denmark’s carbon tax is $14 per ton of CO2, reports Alan Durning of Sightline Institute; while that’s not chicken feed — it equates to around half-a-buck per gallon of gasoline — it’s still insufficient to account for more than a fraction of Denmark’s carbon reductions, especially considering that, as in Sweden, industry in Denmark is taxed at only half the going rate.
Denmark has trimmed CO2 emissions impressively. The Times op-ed puts the drop in per-capita emissions at 15% from 1990 to 2005; using regression analysis, which infers the trend line from all the annual data points instead of just the first and last, we calculated the per-capita drop at 15% using EIA data and 18% using CDIAC data. This decline is heartening, but we’re inclined to ascribe it primarily to Denmark’s aggressive pursuit of wind power (which now accounts for over 20% of electricity generation), steep taxes on coal-fired electricity (not quite a carbon tax though with similar impact) and ongoing promotion and enabling of bicycle transportation, which now accounts for 24% of urban trips by vehicle, nationwide.
Our big beef with the article is with its use of Norway as a lesson in failed carbon taxing. Unlike Denmark, Norway doesn’t dedicate carbon tax revenues to industry, and per capita emissions have risen 43%. Ergo, implies the author, carbon taxing with revenue return is tantamount to allowing producers
"to continue polluting while handing over cash to the government." Not only is that argument a non sequitur, its premise may be shaky if Norway’s carbon accounting hasn’t been adjusted for oil infrastructure and exports, which have grown enough recently to make Norway the world’s third largest oil exporter.
We’ll concede that countries with sturdy safety nets and small carbon taxes can probably get away with directing the tax revenues to industry or other agents for low-carbon investment. But for big carbon taxes in the USA, we think a revenue-neutral tax with revenue recycling will be imperative to keep not only poorer Americans but much of the middle class from being pushed to the wall.
Notwithstanding our dissatisfaction with the op-ed, we regard the author, Monica Prasad of Northwestern University, as an interesting thinker. Her new paper on which she based her essay, Taxation as a Regulatory Tool: Lessons from Environmental Taxes in Europe, is a provocative work that uses behavioral economics as a window for evaluating taxes and other policies for curbing carbon emissions. It’s worth careful study, by us and by you.
Photo: Flickr / Less Salty.
Ken Johnson says
Suppose an energy producer has the option of either emitting 1 ton of CO2, and paying a $100 carbon tax to cover the emissions, or alternatively paying $100 for technology to eliminate the emissions without reducing energy production. Under a tax recycling scheme that gives the tax revenue to consumers (e.g., via tax shifting), the consumers will get $100 if the producer emits the 1 ton, but will get nothing if there are no emissions. This is a fundamental weakness of tax recycling: It makes the beneficiaries of the recycled tax economically dependent on continued GHG emissions.This problem is avoided by refunding the emission tax to industry in proportion to energy output (i.e., at a uniform dollar-per-MWh rate). Since all energy sources – clean and polluting – get the same refund subsidy, the refunding has no effect on the relative competitiveness of different energy sources. For example, the regulatory cost difference between coal and wind power will be the same with or without the refund. The advantage of refunding (from and environmental perspective) is that by reducing industry’s regulatory costs it becomes feasible to impose a higher tax rate, which will incentivize technology investments in greater emission reductions through low-carbon or renewable energy generation. Furthermore, because the refunded tax is revenue-neutral within the regulated industry, it can be combined with complementary policies such as appliance efficiency incentives without "double counting" emissions.Aside from Denmark’s example, another good example of this policy approach is Sweden’s program for regulating stationary-source NOx emissions [http://www.acidrain.org/pages/publications/acidnews/2000/AN2-00.pdf].
David Collins says
Mr. Johnson: The purpose of the tax is to DISCOURAGE the use or consumption of goods or services taxed; the purpose of the shift is to REDUCE the hardship imposed on those least able to shrug their shoulders at the tax. Those who cut back in their use or consumption of that which is taxed also reduce the need for reducing the concommitant carbon emissions. Furthermore, the externalities tend to be positive: reduced electric power consumption, reduced vehicular transport, etc. all bring significant benefits besides less skyward CO2. And it is worth mention that a carbon tax is far easier to apply to livestock operations (most of which are super-gross emitters of greenhouse gases, while a tiny minority can even have negative greenhouse gas footprints), for which a rebate for technology is as applicable as a castrated stud bull.
Ken Johnson says
Mr. Collins: One problem with tax shifting is that if the policy succeeds in achieving carbon neutrality there will be no tax to shift. Secondly, the most important effect of emission taxes is not to reduce consumption of goods or services, but rather to induce a shift to low-GHG technologies that reduce the carbon intensity of goods and services. It is not necessary to induce high prices on all GHG-intense goods and services to induce technology shift; it is sufficient only to induce high price differences between high- and low-carbon commodities. Tax shifting (i.e. extracting revenue from the regulated industry) can greatly diminish the technology-forcing incentive (e.g. by an order of magnitude) relative to a policy that is revenue-neutral within the industry. Furthermore, consumption reduction can be induced with complementary policies. (See my comment on "double counting".)
Will Candler says
Mr. Johnson,
1. The objective is to end the use of fossil fuel, so if there is no tax because there is no use of fossil fuel, then that is happiness. Problem solved.
2. The problem is not to use “low GHG-technologies” but to eliminate the use of fossil fuels. Yes something can be achieved by planting trees or capturing biological methane, but this is marginal. It is manipulating carbon within the carbon cycle, whereas using fossil fuel is adding to the carbon in the cycle. How are you going to define GHG, to include CO2, such as I breath out? What about emissions from the ocean? (Approximately 88 billion metric tons of carbon per year.)
3. However, giving revenues back to industry is one way to make the tax carbon neutral. I can see how this would work for electricity (or possibly gasoline), but have you thought about natural gas, coal used in the steel industry?
4. You probably have more realistic numbers, but I envisage the electrical case as working roughly as follows:
i) 100 units of electricity, 90 units from coal, and a tax of $1 per unit.
ii) Total tax revenue $90, returned to produces as 90c per unit of electricity produced.
iii) Coal producers raise prices by $0.10 to cover the difference between the tax and revenue returned.
iv) Consumer prices rise by $0.10 per unit.
v) Fossil-free electricity producers get an extra $1.00 per unit ($0.90 from the revenue return, and $0.10 from the higher price for electricity).
Is that how it works?
5. The good news is that electricity prices are not raised greatly, and the bad news is that there would only be a modest demand-side response.
6. I would be interested to see this idea spelt out with more realistic numbers, and whether it can be adapted to industrial use of coal, and to natural gas.
Will Candler says
The Prasad articles, in the NYTimes, and the paper on which it is based are an interesting example of not coming to grips with a problem. The problem I have in mind is, of course, global warming. In the underlying paper Prof. Prasad describes Scandinavian experience with a carbon tax, which appears to have been mixed. She uses behavioral economics to hypothesize why this might be, and how demand elasticity could influence the effectiveness of a tax. What is entirely missing is any discussion of what might be a more effective policy, what demand elasticities are, or the magnitude of taxes needed to have a perceptible impact. For U.S. policy she concludes:
“Environmental taxes have seemed in some ways to be a panacea: just pop in the economic incentives and watch them work their magic. But the experience of the European countries suggests that a certain surrounding infrastructure, including substitutability and carrots as well as sticks, is necessary to make these taxes work. In particular, this examination leads to the prediction that environmental taxes will fail in the absence of investments into alternative energy sources. In the presence of alternative and cleaner burning fuels, currently developing norms may well lead households to behave in environmentally friendly ways even without taxes. The role of environmental taxes should be to nudge firms to take up the substitute fuels and technologies once they are present, and to invest in their creation until they are.”
It seems far more likely that “in the absence of environmental taxes alternative energy sources are unlikely to develop rapidly”. Note also the generalized term “environmental taxes” that certainly includes a carbon tax, but what else? Does anyone know what we are talking about? If we are talking about a carbon tax, let’s call it a carbon tax. There is of course absolutely no empirical information that would support the hope that households “will behave in environmentally friendly ways without taxes”, in sufficient numbers to solve the problem of global warming.
The NYTimes article concludes that for the U.S. “if we want to reduce carbon emissions, then we should follow Denmark’s example: tax the industrial emission of carbon and return the revenue to industry through subsidies for research and investment in alternative energy sources, cleaner-burning fuel, carbon-capture technologies and other environmental innovations.
Wrong on three counts in my view:
It is administratively much simpler to tax fossil fuels at the mine, well-head or point of importation, than trying to measure emissions themselves.
It is essential to return the carbon tax to consumers, otherwise the politically acceptable tax level will be too low to produce significant supply or demand side responses.
Subsidizing individual technologies, involves the Government in “picking winners”, a job much better left to the market.
Ken Johnson says
Mr. Candler,Regarding your first comment, that "The objective is to end the use of fossil fuel", I agree – that is why it is imprudent to give carbon tax revenue to consumers. Not only will it make them economically dependent on the GHG emissions that you are trying to eliminate, but they will probably spend the revenue in ways that increase emissions (e.g., travel, commodity imports, etc.).Trying to eliminate GHG emissions by eliminating energy use ("demand side response") is not feasible (at least not without ending civilization). A more practical approach is to focus primarily on substituting non-emitting or renewable energy sources for fossil fuels. You don’t need to make all emitting energy sources very expensive to induce the technology shift; it is sufficient to make high-GHG energy sources much more expensive than low-GHG sources. Your example #4 illustrates how refunding works: The tax is applied to GHG emissions, and the refund is applied to energy output, giving renewables a net subsidy and inducing in a net cost spread between high- and low-GHG sources that can be much larger than what would be politically feasible without the refund. Competition for low-emission (even negative-emission) energy is greatly increased. If coal producers raise prices to cover the net tax they will price themselves out of the market that much sooner.For numbers, see my March 17 comments at http://www.arb.ca.gov/cc/scopingplan/pgmdesign-sp/meetings/meetings.htm