Bob Narus

Carbon Tax Center

Pricing carbon efficiently and equitably

Green New Dealers Should Embrace a Carbon Tax

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CTC policy associate Bob Narus wrote last month that Carbon Tax Advocates Should Embrace a Green New Deal. Here is his mirror-image brief for including a robust carbon tax in a Green New Deal.

The Green New Deal isn’t a policy yet. Right now, it’s mostly an aspirational slogan and a set of bullet points, which is fine for the moment. There’s time to work out the policy details. But it’s important that a robust carbon tax become one of those bullet points, because without it no deal, no matter how new and green, can do everything we need to do to prevent global climate change from spinning out of control.

Rally in Victoria, BC, March 2019. Photo courtesy of Anne Hansen.

Whether a carbon tax is part of the Green New Deal depends on whose Green New Deal you mean. The Data for Progress report, A Green New Deal — essentially Document Zero for the Green New Deal movement — doesn’t endorse a carbon tax but does note that “there is new analysis that a carbon tax will not hamper the economy, particularly as revenues are reinvested smartly in communities.”

The Alexandria Ocasio-Cortez/Ed Markey resolution, H.R. 109/S.R. 59, doesn’t mention a carbon tax, or any other potential source of funding for its ambitious goals, but AOC herself has publicly recognized the need for taxes to internalize the externalities of some industries or markets.

The policy details will fall into place over time. In particular, one hopes the many Democratic presidential candidates who have endorsed a “Green New Deal” will say more about what they mean by that — which policies they would include, what they’ll cost, how to pay for it all.

In short, we will have a national conversation about the Green New Deal. To everyone engaged in that conversation, here’s a quick take on why a carbon tax should be part of it:

1. If you believe the IPCC, we have to do everything.

In its most recent report, the IPCC called for roughly halving (from 2010 levels) world carbon dioxide emissions by 2030. Achieving that in the U.S. would require a 5 percent annual decrease in carbon emissions from fossil fuels, which would quadruple the actual rate of decline from the mid-aughts to 2017 (see technical note at end). And right now we’re going in the wrong direction: The Rhodium Group estimates that U.S. CO2 emissions rose 3.4 percent in 2018.

With a challenge like that ahead of us, we can’t afford to take any option off the table. As I argued recently, a carbon tax alone will not do the job. But neither will anything else. We need to throw everything we’ve got at the climate crisis, and that definitely includes the most economically efficient tool.

2. A carbon tax will make everyone a partner in the effort.

Addressing the climate crisis is going to demand a heavy dose of government intervention in the economy. But it will require more than that. A carbon tax will deliver economy-wide impact, giving every business and household incentives to change how they produce things and what things they buy. Getting the job done will take billions of dollars in public investments and millions of smaller decisions in the marketplace. A carbon tax will make more of the latter happen.

3. A carbon tax can affect industries that are hard to regulate.

There’s no question that performance standards and other regulations must be a major part of climate policy. But not everything lends itself to such regulation. As energy analyst Hal Harvey explained to Vox’s David Roberts late last year:

It’s hard to set a performance standard that works for glass, pulp and paper, steel, chemicals, and so forth. So in those realms, setting a price is a nice way to handle it. Then businesses can simply internalize the costs and make better decisions.

4. A carbon tax makes everything else we need to do easier.

Want to subsidize renewables? Higher fossil fuel prices will allow smaller subsidies to close the cost gap between carbon-based and renewable power. The same amount of spending on subsidies will then bring more renewables online.

Want to incentivize clean energy investments, like energy efficiency? Higher fossil fuel prices shorten the payback period on  those investments. Again, we’ll be able to reduce the degree of subsidies or other inducements required to get households and businesses to make those investments.

Carbon taxes can even replace some regulatory efforts. Citizens’ Climate Lobby argues that its fee-and-dividend proposal could reduce emissions in the power sector more and faster than President Obama’s Clean Power Plan proposal. That means regulatory efforts could concentrate instead on sectors, like transportation and buildings, that are less responsive to energy pricing signals than power generation.

5. A carbon tax can affect emissions beyond our borders.

It’s not enough to reduce U.S. emissions. The rest of the world must do its part. (Of course, right now the rest of the world is saying that about us.) A carbon tax with a border adjustment can pressure other countries to impose their own robust carbon pricing measures. The border adjustment adds a fee to imports tied to the level of carbon emissions required to make that product. (This is, admittedly, not an easy thing to do. Adele Morris of The Brookings Institution treats the complications in a policy brief.)

The border adjustment would be waived on imports coming from countries with carbon pricing equivalent to ours. Each country would face a choice: Pay the U.S. a border adjustment on your exports, or pay yourself the equivalent amount via a carbon tax. For countries that export to the U.S. market, that shouldn’t be a hard decision.

6. A carbon tax will raise revenue that can be used for other climate mitigation programs.

A Green New Deal will create lots of jobs primarily by spending lots of money — rebuilding the power grid, subsidizing clean energy, retrofitting buildings, redesigning cities to be less automobile-dependent, creating an infrastructure to recharge electric cars, etc. That money comes from somewhere, and a carbon tax is a logical source of funds — especially a robust tax that would, in the out years, bring in hundreds of billions of dollars per year.

This is only half an argument for a carbon tax, however, because there are reasons based in economic justice to use the revenue differently. Any carbon tax will hit low-income households proportionally harder than high-income ones, and some or all of the revenue ought to be used to offset the tax’s regressive effects. Fortunately, there are many progressive funding streams — including taxes aimed at high incomes, wealth, or financial transactions — for raising the revenue to fund a Green New Deal. But if the only politically practical way to pay for a Green New Deal requires some carbon tax revenue, the revenue will be there.

*   *   *

A carbon tax was never an easy sell on its own, and it won’t be an easy sell as part of a Green New Deal either. David Leonhardt at The New York Times just posted a good history of its difficult political fortunes, and comes down about where we are:

The better bet seems to be an “all of the above” approach: Organize a climate movement around meaningful policies with a reasonable chance of near-term success, but don’t abandon the hope of carbon pricing. Most climate activists, including those skeptical of a carbon tax, agree about this.

Carbon tax advocates should take this call to heart. Even with a Democratic takeover in 2020 — which is no sure thing — the U.S. is some years away from either a Green New Deal or a carbon tax. We should use that time to make sure the ultimate answer is “both.”

Here’s how we calculated our figures in the first numbered paragraph: CTC’s carbon-tax spreadsheet model (downloadable Excel file) puts U.S. CO2 emissions from fossil fuels at 5,409 million metric tons (MMT) in 2010 and 4,992 MMT in 2017. With Rhodium’s 3.4% one-year increase, emissions were 5,162 MMT in 2018. To cut that to 2,704 MMT (half of 2010 emissions) in 2030 requires a 5.2 percent annual drop (calculated by exponentiating 2704/5409 to the 1/12 power – 12 years – which is 0.948). A similar calculation from 2005 emissions of 5,822 MMT to the 2017 figure of 4,992 MMT yields an average annual drop of 1.3% over those 12 years.

Carbon Tax Advocates Should Embrace a Green New Deal

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Most carbon tax proposals are standalone initiatives. They outline the level at which the tax starts, how fast it rises over time, how the revenue will be used — and not much else. Simplicity has its virtues, for both policy and political reasons. But in the United States, at least, this approach has been unsuccessful.

Carbon tax bills introduced in Congress have gotten as many as a few dozen sponsors — recently even a couple of Republicans — but nary a hearing, let alone serious consideration in committee, even when Democrats controlled one or both houses. Washington State voters turned down carbon tax initiatives in 2016 and 2018 (demonstrating in the process that use of the revenues doesn’t greatly affect political viability). For those who imagined the Climate Solutions Caucus could be the route to bipartisan support for a carbon tax, the cleaning-out of its GOP wing in the 2018 midterms was a body blow.

It was never a surprise that taxes, carbon or otherwise, revenue-neutral or not, would be a tough sell with voters and potentially toxic to politicians. But more than that, a carbon tax by itself, even a robust one, is no longer enough.

Rep. Ocasio-Cortez and Sen. Markey introducing their Green New Deal resolution in Feb. 2019. Photo Saul Loeb AFP/Getty Images, w/ thanks to Politico.

Last fall’s IPCC report on the impacts of a 1.5ᵒC warmer world found that the rate of carbon dioxide emissions must fall 40 to 60 percent from 2010 levels by 2030 to even come close to keeping the temperature rise that low.

If the U.S. had passed a robust carbon tax — one rising at say $10 per tonne per year — a decade ago, we would be on a path to approach that level today. But passing such a tax in 2021 and implementing it in 2022 — which is the earliest that could happen — might not get us much more than halfway to the 2030 goal. And passage even in 2021 is probably a long shot.

The takeaway is that any U.S. carbon tax today must be part of a broader set of policies to address all significant sources of greenhouse gas emissions. A solid roadmap for these policies is the new book by energy analyst Hal Harvey, Designing Climate Solutions: A Policy Guide for Low-Carbon Energy. Harvey and his team outline a suite of policies that “create a powerful symbiosis that can drive deeper carbon emission reductions than policies in isolation while increasing cost effectiveness,” including:

  • Performance standards, regulations setting standards for energy efficiency, emissions reductions, and other goals
  • Economic signals, including both carbon pricing and subsidies for renewables and efficiency investments
  • Support for research and development, both basic research and government collaborations with private-sector R&D

In an interview last fall with David Roberts at Vox, Harvey explained that carbon pricing is most effective in sectors like power generation where clean alternatives exist, but less so where the price signals tend to be swamped by other costs ( e.g., automobiles) or where they don’t necessarily reach the parties that can do something about emissions (think renters who pay the utility bills but don’t design, construct, or maintain the building):

The thing about carbon pricing is, it’s helpful, but it’s not dispositive. There are a number of sectors that are impervious to a carbon price, or close to impervious. A carbon price works when it’s part of a package that includes R&D and performance standards. It does not work in isolation. It helps, but it doesn’t do nearly as much as is required.

(Designing Climate Solutions is a rich lode of energy policy wonkery in the best sense. It notes that only 20 countries are responsible for 80 percent of carbon emissions and attacking emissions in a handful of sectors in those 20 countries can deliver a substantial down payment on the overall reductions we need. For more, see both the Roberts-Harvey interview and an extensive summary of the book. There’s also an online Policy Simulator that lets you indulge your inner energy czar.)

There’s also a powerful political argument for joining carbon pricing to a broader climate strategy: In the same way you can hide your dog’s pill in a morsel of meat, wrapping a carbon tax in a package of more popular initiatives — renewables, job-creating infrastructure investments, etc. — can help make the medicine go down. Fortunately, such a package is in the works.

The Green New Deal means many things to many people, but the unifying concept is to position climate change mitigation as a retooling of the U.S. economy, particularly our infrastructure, with massive green investment and millions of green jobs. The closest thing to an official statement of purpose is H. Res. 109, introduced by Rep. Alexandria Ocasio-Cortez (D-NY) with 90 cosponsors and counting. Senator Edward Markey (D-MA) introduced a companion resolution in the Senate.

The resolution sees a Green New Deal as “a historic opportunity . . . to create millions of good, high-wage jobs in the United States” by investing in new infrastructure to replace our fossil fuel-based systems and industries. At a moment when economic inequality and economic anxiety have reached political critical mass on both left and right, Green New Deal proponents argue that addressing climate change can also address issues that voters care about more (while — at least for the moment — eliding the awkward question of where the money for all this infrastructure is going to come from).

There’s a surge of grassroots energy behind the idea, most of which appears open to a carbon tax as part of the whole. The Sunrise Movement and its partners are likely to be a much more valuable ally to carbon tax advocates than a colloquium of center-right economists.

And the synergy works both ways. A Green New Deal can make a carbon tax more digestible, and a carbon tax can make a Green New Deal more effective. I’ll have more on the latter point in a follow-up post.

Revenue-Neutrality Rises from the Dead

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On Wednesday, Rep. Ted Deutch (D-FL) and a small bipartisan group of cosponsors introduced the strongest carbon pricing bill dropped into the Congressional hopper in years. H.R. 7173 closely follows the fee-and-dividend proposal long championed by Citizens’ Climate Lobby, employing not just the dividend template but the robust price trajectory.

The Deutch bill sets an initial tax rate of $15/metric ton, rising by $10/tonne annually thereafter. The increase rate would rise to $15/tonne if annual emissions targets are not met. All of the revenue, net of expenses, would go toward equalized dividends to all American households, based on household size, making the overall proposal revenue-neutral.

H.R. 7173 includes a border adjustment for both imports and exports, to protect the competitiveness of American manufacturing. And it restricts the government’s powers to regulate greenhouse gas emissions, at least for their impact on global warming — a limitation that may be more symbolic than substantive, given the modest emissions impact of President Obama’s signature Clean Power Plan, especially when compared to likely reductions from the new bill’s steep price trajectory.

The Deutch fee-and-dividend bill would surpass the most aggressive recent Democratic carbon tax after five years and would have twice the impact soon after.

The buzz thus far has focused on the bill’s initial cosponsors, two of whom are Republicans: Brian Fitzpatrick (R-PA) and Francis Rooney (R-FL). This is not their first trip to the rodeo. Both also cosponsored a much weaker carbon tax bill introduced in July by Carlos Curbelo, who lost his bid for reelection. A third Republican, Dave Trott (R-MI), has since signed on. The two Democratic cosponsors are Charlie Crist (D-FL) and John Delaney (D-MD).

It’s important not to make too much of the bipartisanship on display here. Fitzpatrick, Rooney, and Trott represent an underwhelming 1.5% of the incoming Republican caucus in the House. More particularly, they constitute a mere one-seventh of the surviving Republican members of the all-too-quiescent Climate Solutions Caucus, which is losing most of its GOP contingent to defeat or retirement. Deutch and Curbelo were the founding chairs of the Caucus.

The larger substantive story here is the long-term impact of the Deutch proposal. His $15/tonne starting tax rate is lower than other bills introduced in this session, which range from $24/tonne (Curbelo) to $49/tonne (two Democratic proposals, S. 1639 and H.R. 4209). But the rates in those bills would generally rise by only 2% above inflation annually. Deutch’s proposal, though it starts from a lower base, would outstrip them in impact after just five years, with the differential only widening over time.

According to the Carbon Tax Center spreadsheet model, Deutch’s bill would reduce U.S. CO2 emissions below 2017 levels by 35% in a decade. The best of the Democratic proposals would see a smaller reduction of 25%.

The chances of any carbon tax bill passing in the next Congressional session are close to nil. It is hard to imagine such a proposal getting a floor vote in a chamber led by Sen. Mitchell McConnell (R-Coal Country, aka Kentucky). Even if it did, the veto pen of Donald Trump awaits. Nevertheless, the next two years will allow a debate within the Democratic Party over what its position will be on climate change in the 2020 campaign and, assuming that election goes well for them, in the 2021-22 Congressional session.

The Deutch bill is clearly a contender in that debate. And the more Republican cosponsors Deutch and CCL can recruit this session, the more likely it can become that a robust carbon tax, with revenues going back to American households, will be at least part of the answer.

The other major contender for a Democratic climate program right now is the as-yet-unspecified Green New Deal with major green infrastructure investments possibly funded by a carbon tax. Interestingly, the carbon tax bill with the most support in the House at present, with 21 cosponsors, would also devote most of the revenue to infrastructure, though not specifically green infrastructure. That’s H.R. 4209, the America Wins Act sponsored by longtime carbon tax champion Rep. John Larson (D-CT).

The important thing for carbon tax advocates to remember is that the best bill is the one that can pass. So may the best bill win.

Here Comes the Green New Deal

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The Democrats flipped the House all right, turning a 41-vote Republican margin into a 34-vote Democratic edge. Intra-party debate is already under way over how to make productive use of the next two years while the rest of the government remains in Republican hands. In the climate space, there’s a hot (though hardly new) progressive idea: a Green New Deal.

Last week, climate activists led by the Sunrise Movement took the idea to (literally) the halls of Congress, demonstrating outside the office of presumptive speaker Nancy Pelosi. They were joined by the newly elected and already iconic progressive star Alexandria Ocasio-Cortez, who has drafted an ambitious resolution calling for a Select House Committee on a Green New Deal.

The committee would be charged with developing:

a detailed national, industrial, economic mobilization plan . . . for the transition of the United States economy to become carbon neutral and to significantly draw down and capture greenhouse gases from the atmosphere and oceans and to promote economic and environmental justice and equality.

Pelosi, for her part, immediately announced her intention to reconstitute the Select Committee on Energy Independence and Global Warming, which she had created as speaker in 2007-2011. For the full context, we recommend two posts by Dave Roberts of Vox that bracketed the Capitol Hill protest. The day before, he discussed the Democrats’ prospects in a divided Congress. The day after, he reported on how the protest played out, including Ocasio-Cortez’s role.

A Green New Deal workforce will be more urban, female and diverse than its honorable forebear.

The Green New Deal is still little more than a concept. The phrase has been a favorite of New York Times columnist Tom Friedman at least since 2007 and was part of presidential candidate Barack Obama’s platform in 2008. (Grist published a nice history last summer.) Needless to say, Friedman’s Green New Deal and Ocasio-Cortez’s Green New Deal aren’t close to the same thing. The devil will be in the many details to be worked out in that select committee.

Ocasio-Cortez’s resolution calls for:

  • 100% renewable power generation
  • a national energy-efficient smart grid
  • upgrading the energy efficiency of all buildings
  • decarbonizing transportation, manufacturing, agriculture and other sectors
  • massive investment in capture of greenhouse gases
  • making “green” technology a major U.S. export

Her proposal also includes a number of broader but arguably connected goals, including retraining, a job guarantee, a living wage, environmental justice, and greater economic equality.

There’s also a concurrent debate over strategy. The Democrats’ initial aim on climate has been to write the Clean Power Plan and rising CAFE standards — both under threat by the Trump Administration — into statutory form and force the Republican Senate (and/or Trump himself) to go on record opposing those popular measures. Sunrise and other progressive groups are demanding much more: development of a fleshed-out program to be enacted as soon as Democrats re-establish control of Congress and the White House.

What will a Green New Deal mean for a carbon tax? For one thing, any program to move U.S. society and economy quickly off fossil fuels will cost a lot of money; a carbon tax — which has climate benefits irrespective of how the revenue is used — is a logical source of funding. In particular, a robust carbon tax makes everything we want to do on climate easier — reducing the need for renewable subsidies, shortening the payback period for clean energy investments, etc.

Furthermore, as the most recent IPCC report explained, the planet’s back is now against the wall, and we need to do everything we can as fast as we can to limit the most damaging consequences of climate change. Clean-energy subsidies and efficiency standards by themselves won’t be sufficient. Leaving carbon pricing on the table would be a dereliction of duty.

Finally, U.S. action, necessary as it is, won’t be enough. A carbon tax, combined with border adjustments against countries without similar policies, can help move the entire globe in the right direction.

An important caution is that the right question needs to be asked when deciding how high a carbon tax should be. The question is not, How much money do we need?, but How much emissions reduction do we want to achieve through pricing? And for the sake of equity, a good portion of carbon tax revenues should be devoted to dividends or tax offsets that buffer households, and especially lower-income ones, against the impact of higher energy prices.

The new push for a Green New Deal represents a serious movement within which a carbon tax can and should play a key role. Nothing will happen as long as Republicans sit atop most of the federal government, of course. But the Green New Deal offers the kind of ambitious platform that carbon tax advocates have been calling for all along.

The Seattle Times Misfires on I-1631

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Washington state’s largest newspaper is urging a No vote on I-1631, the carbon tax initiative on the state’s Nov. 6 ballot.

The Seattle Times editorial raises a few sound objections. But the paper falls into the same trap that ensnared some I-1631 proponents who fought a predecessor carbon tax initiative, I-732, two years ago: missing the forest for the trees.

Despite its flaws, it’s critical that Washington voters pass the initiative.

The Times editorial drills into I-1631’s prime weak spot — accountability:

It [I-1631] would collect more than $1 billion yearly. An un-elected board appointed by the governor would propose how to spend it. The initiative requires seats for powerful entities, such as labor and tribes, promising them large cuts.

The Legislature has the final say on appropriations. But the carbon board is structured to be a political juggernaut. Legislators might have difficulty mustering political will to change course.

Graphic courtesy of Sightline Institute.

Yes, taxpayer dollars ideally should be appropriated by the legislators those taxpayers elected rather than by an unaccountable panel of interest group representatives. (If you don’t see the problem there, imagine a board chosen by a conservative Republican governor.)

And granted, the initiative specifies that most of the carbon revenues must be dedicated to “clean air and clean energy investments.” But the language leaves plenty of room for projects that might have little or no impact on the state’s greenhouse gas emissions.

The Times also expresses dismay that the measure will — gasp! — raise prices of fossil-fuel energy, as if that weren’t the whole point. It’s a bit like complaining that cigarette taxes will raise costs for smokers.

Most of the revenue from the defeated 2016 carbon tax initiative, I-732, would have gone to cut the state’s regressive sales tax, easing the cost burden on households and businesses. I-1631 dedicates some funds to bringing cleaner energy to low-income households. But some Washingtonians with high energy bills relative to their incomes — especially low-income and rural residents — will nevertheless face higher costs. Proponents counter this concern in part by noting that some funds will flow to and benefit rural areas, as this Sightline Institute report argues.

Notwithstanding its drawbacks, passing I-1631 is critical. If the U.S. is ever to price carbon in a serious way, some state will have to go first, and that first measure probably won’t be perfect. Some of the groups promoting I-1631 today got that wrong two years ago when they opposed I-732 because they didn’t like how the revenue was used. Now the Seattle Times is repeating that mistake.

We need to start taxing carbon, — even the apolitical IPCC said so earlier this month — and arguably the best thing to do with the revenue is whatever will get the most votes for taxing carbon. I-732 wasn’t it. I-1631 might be.

A recent poll by the reputable firm Elway Research found 50% of voters supporting and only 36% opposing the initiative this time. Still, Elway’s survey size, just 400 voters, was thin, and polling on public questions is notoriously tricky. Moreover, there’s a $26 million oil-money war-chest working to turn the vote around in the final days. Anything can happen.

The good news is that this time the pro-initiative forces are also well-funded, with almost $14 million banked, including $1 million from Microsoft founder Bill Gates. Gates posted a powerful endorsement of I-1631 on LinkedIn earlier this month. He gets what the Seattle Times doesn’t:

If 1631 passes, it will create the first [carbon] fee in the United States. Going first is never easy, but Washington has a history of pioneering new ideas. And because of all the benefits — shoring up nuclear and hydropower, enhancing the state’s role as a leader in innovation, and most of all accelerating progress on climate-change solutions — I believe it will be worth it.

OECD report: miles to go on carbon pricing 

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Carbon pricing is catching on around the world, but only at “a snail’s pace,” and carbon-pollution prices remain far too low to make much of a dent in emissions, says a new report from the Organization for Economic Cooperation and Development.

Effective Carbon Rates 2018: Pricing Carbon Emissions through Taxes and Emissions Trading reports that the “carbon pricing gap” — the amount that current carbon prices lag an admittedly low benchmark price — shrank from 83% in 2012 to an estimated 76.5% this year. The figures cover 42 countries with advanced economies and account for 80% of all carbon emissions.

A key pillar of globalism, the OECD grew out of the postwar Marshall Plan and is dominated by three dozen “developed” countries in North America and Europe but also includes Turkey, Chile and Japan. Its “effective carbon rate” is defined as the sum of revenues from three types of policies:

  1. taxes on specific fuels
  2. carbon taxes
  3. prices of tradeable emissions permits

We added the pull quote shown above. The OECD report articulates the economic and geopolitical case for carbon pricing even as it documents the hesitant pace of progress.

The report compares that rate to the revenue that would be raised with economy-wide carbon prices at benchmark levels of 30 or 60 euros per metric ton (about $35/$70US at current exchange rates, or $32/$64 per “short” ton). The report didn’t count the impact of fossil fuel subsidies that lower market prices of carbon fuels, though these tend to be fairly low in the 42 countries studied.

For individual countries, the carbon pricing gap — the distance between actual pricing and the €30/tonne benchmark — ranges from 27% to 100% in 2015, the latest year for which complete individual-country data is available. The US, with a gap of 75%, ranked 31st among the 42 countries studied. Top rankings go to Switzerland (27%), Luxembourg (30%), and Norway (34%).

Russia, at the bottom of the list, has no carbon pricing at all. China ranks 39th, with a 90% shortfall from the €30/tonne benchmark, though the report notes that implementation of nationwide carbon-permit trading in China “could lead to a significant drop in the global carbon pricing gap, to 63% in the early 2020s.”

Schematic from OECD report. The bottom category, specific taxes, is most countries’ primary contributor to the effective carbon rate.

The report is upfront about its benchmark’s limitations. The World Bank–affiliated High Level Commission on Carbon Pricing warned last year that carbon prices must range from $40 to $80US per tonne by 2020 and $50-$100/tonne by 2030 to meet the emission targets of the Paris Climate Agreement. (And remember that those goals are almost universally regarded as too low.) Moreover, the 30 euro benchmark falls below even the bottom of the 2020 range. And advanced economies — which most of the countries studied are — should err toward the high end of that range, according to the Commission, to leave room for developing economies to reap at least some of the fruits of industrialization.

Applying a more realistic 60€/tonne benchmark (about $64US per short ton) casts the pricing shortfall into even sharper relief: under that benchmark the 2015 US gap would be 88%.

Perhaps surprisingly, the largest of the three contributors to OECD’s effective carbon rate is neither explicit carbon taxes nor tradeable carbon emssion permits, but taxes on specific fuels, especially in road transport. European countries, especially, began taxing gasoline and diesel fuel at high rates decades ago, not as a climate measure but to reduce car dependence in urban areas, to help rail and other public transit maintain market share, and to fund social programs. Years later, those taxation policies are now, properly, being recognized for their role in protecting climate as well.

Agreed: Carbon Pricing Isn’t Working. Now What?

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A headline like “Why Carbon Pricing Isn’t Working” isn’t the kind of news carbon tax advocates like to see. But Jeffrey Ball, writing in the July/August Foreign Affairs, has a point:

[E]xisting carbon-pricing schemes tend to squeeze only certain sectors of the economy, leaving others essentially free to pollute. And even in those sectors in which carbon pricing might have a significant effect, policymakers have lacked the spine to impose a high enough price. The result is that a policy prescription widely billed as a panacea is acting as a narcotic. It’s giving politicians and the public the warm feeling that they’re fighting climate change even as the problem continues to grow. (emphasis added)

To be clear, Ball, a scholar-in-residence at Stanford and nonresident senior fellow at the Brookings Institution, likes and wants carbon pricing. His quarrel isn’t with the concept but with the political execution — or lack of it:

If governments proved willing to impose carbon prices that were sufficiently high and affected a broad enough swath of the economy, those prices could make a real environmental difference. But political concerns have kept governments from doing so, resulting in carbon prices that are too low and too narrowly applied to meaningfully curb emissions.

Ball is discussing both carbon taxes and cap-and-trade here. Cap-and-trade regimes have been limited to a few economic sectors — most typically, electricity generation. And the caps set so far have been too high (i.e., loose) to generate the robust carbon prices that can really impact these sectors. Though reforms are in the works in both Europe and the U.S., Ball is rightly skeptical about how far they will go.

I-95, Miami. A robust carbon tax can help un-jam highways while also cutting carbon emissions.

The news for carbon taxes isn’t much better, so far. A commission of economists convened by the Carbon Pricing Leadership Coalition last year recommended a tax in the $40-80/ton range by 2020. Only six countries — Sweden, Switzerland, Liechtenstein, Finland, Norway, and France — have carbon taxes that high, according to the World Bank.

Ball’s alternative is what he calls “more targeted moves,” but his reasoning seems muddled. He argues that politically feasible levels of carbon taxation won’t change how much or which vehicles people drive, but then endorses higher gasoline taxes to motivate those very changes. (For the record, we estimate the price-elasticity of gasoline to be negative -0.35, meaning that the price of gas has to rise by one-third to reduce usage by one-tenth.) He also contends that carbon taxes give builders no incentive to erect energy-efficient buildings, yet there is abundant evidence that buyers and tenants are willing to pay premiums for efficiency-certified properties (see here and here) — a preference that will only grow if energy prices rise.

Ball urges carbon tax proponents to redirect their efforts to more conventional approaches — basically, regulating the bad stuff and subsidizing the good stuff:

[P]ursuing these measures directly offers a politically realistic path to significant environmental benefit. . . . To the extent that the carbon-pricing experiment lets policymakers and the public delude themselves that they are meaningfully addressing global warming, it’s not just ineffectual; it’s counterproductive.

There’s a double standard here, however. The regulations and subsidies that U.S. environmental and climate advocates have won over the years have a mixed record. Production-tax credits and renewable portfolio standards helped jump-start the meteoric rise in wind and solar, but those gains, while impressive, accounted for a mere one-fifth of the 25 percent drop in carbon emissions from U.S. power generation since 2005 (energy efficiency and the rise in fracked gas each accounted for two-fifths). In transportation, cheap gasoline is a key reason that U.S. drivers are burning more gasoline now than a dozen years ago.

Moreover, directing massive subsidies to carbon capture and sequestration — another remedy Ball endorses — doesn’t look much more politically realistic than serious carbon pricing. And as a general proposition, subsidizing alternatives to carbon-burning fuels is at best only half as effective at cutting emissions as raising the prices of those fuels, as CTC demonstrated in its groundbreaking comments to the Senate Finance Committee four years ago.

If arresting global warming were politically easy, we would have done it already. But it’s not, and discounting perhaps the most potent arrow in our quiver when every other alternative is far more limited in scope doesn’t make much sense. Addressing the climate crisis is hard work; we might as well expend that effort on a policy that could actually do the job.