Guest Post by James Handley

Will you sell your vote for $25? Presidential candidates John McCain and Hillary Clinton are betting you will. They’re campaigning for a “holiday” on federal gasoline taxes for the summer months.

Of the three presidential contenders, only Barack Obama has demurred. Obama said last week:

[T]he federal gas tax is about 5 percent of your gas bill. If it lasts for three months, you’re going to save about $25 or $30, or a half a tank of gas.

Obama insists that the only permanent solution to rising gasoline and diesel fuel prices is to reduce consumption and increase use of alternative fuels.

Haven’t we been down this road before? Yes, a dozen years ago. The New York Times excoriated the same “gas tax holiday” in May 1996:

Fill ‘er up, America, this is the Memorial Day holiday and the start of the “summer driving season.” We are a road-running, gas-guzzling people and Bob Dole, Newt Gingrich and Bill Clinton all say our Federal tax should be lowered 4.3 cents a gallon. But the tax relief, if it ever comes, will be trivial — and will have a negative impact on public policy. It is, in short, something of a political fraud.

Low prices and higher demand by consumers, many of them all too willing to pay any price to drive at and over higher state speed limits, will only increase American dependency on foreign oil. If people are worried about energy, not to mention the environment and the budget deficit, suspending the 1993 gasoline tax increase (many politicians would make it permanent next year) is exactly the wrong way to go.

Now the specter of catastrophic global warming is snapping into sharp focus like a jack-knifed tractor trailer blocking all lanes as we careen along at 75 mph. Sirens are wailing and lights are flashing thanks in large part to the Nobel-winning work of the Intergovernmental Panel on Climate Change and Dr. James Hansen’s NASA-Goddard Climate team, un-muzzled despite Bush Administration threats.

And yet, U.S. energy policy is still “pedal to the metal” on the global warming accelerator — with McCain and Clinton urging us to “step on it” with a gas tax break. The exact opposite of what economists say is the essential step: pricing carbon emissions.

Yale economics professor William Nordhaus offers this litmus test:

[W]hether someone is serious about tackling… global warming can readily be gauged by… what they say about the carbon price. Suppose you hear a public figure who speaks eloquently of the perils of global warming… propose regulating the fuel efficiency of cars, or requiring high efficiency light bulbs or subsidizing ethanol, or providing research for solar power — but nowhere mentions the need to raise the price of carbon.

You should conclude that the proposal is not really serious and does not recognize the central economic message about how to slow climate change. To a first approximation, raising the price of carbon is a necessary and sufficient step for tackling global warming. The rest is largely fluff.

By declining to dangle the $25 bribe before the electorate, Sen. Obama has avoided the fluff. But he hasn’t yet taken the pro-active step of using prices to put the U.S. economy on a low-carbon diet.

Nordhaus provides the intellectual model, explaining that taxes on “bads” such as pollution and waste make our economy more productive and efficient and should therefore be viewed as the opposite of taxes on “goods” like products, income and employment.

Seven-Up soft drink was advertised in the ‘70s as the “Un-Cola.” Perhaps it’s time to market a carbon tax as the “un-tax.”

Photo: Flickr / pbo31

The British Columbia Ministry of Finance issued this News Release on April 28. It speaks for itself and requires no comment from the Carbon Tax Center.

N E W S   R E L E A S E

For Immediate Release                                                                       Ministry of Finance

2008FIN0009-000615

April 28, 2008 

CARBON TAX GUARANTEES TAX CUTS FOR BRITISH COLUMBIANS

VICTORIA — British Columbia is the first province to implement a comprehensive, revenue-neutral carbon tax – an initiative that returns every dollar raised to the people and businesses of British Columbia as tax cuts, Finance Minister Carole Taylor announced today.

“British Columbia is leading the way in addressing climate change, and the revenue-neutral carbon tax is another pioneering step forward for our province,” said Taylor. “Each step we take to change our habits and behaviours, as individuals and as a community, will help leave a legacy that our children and grandchildren can be proud of.”

By tying the carbon tax to reductions in personal and business taxes, the Province is giving the people of British Columbia the power to make their own choices.

“Pricing carbon sends a clear message that there is a cost to the environment involved in emitting carbon,” said Taylor. “Leading economists and scientists agree that introducing a revenue-neutral carbon tax is the right thing for our province, today and for the future. We took time to design a model that protects low-income families and moves British Columbia to being one of the lowest-taxing provinces in Canada.”

In the first three years, the carbon tax is estimated to generate $1,849 million in revenue, which will be returned to British Columbians as follows:

The bottom two personal income tax rates will be reduced for all British  Columbians, resulting in a tax cut of two per cent in 2008, rising to five per cent in 2009 on the first $70,000 in earnings – with further reductions expected in 2010: $784 million.

Effective July 1, 2008, the general corporate income tax rate will be reduced to 11 per cent from 12 per cent – with further reductions planned to 10 per cent by 2011: $415 million.

Effective July 1, 2008, the small business tax rate will be reduced to 3.5 per cent from 4.5 per cent – with further reductions planned to 2.5 per cent by 2011): $255 million.

Beginning July 1, 2008, the new Climate Action Credit will provide lower-income British Columbians a payment of $100 per adult and $30 per child per year – increasing by five per cent in 2009 and possibly more in future years: $395 million.

Total tax cuts over three years:$1,849 million.

This groundbreaking legislation is supplemented by an immediate Climate Action Dividend, $100 for every man, woman and child in British Columbia. This dividend, which will further support our community’s ability to make greener choices, will go out to residents of British Columbia starting in late June.

For further information about the carbon tax and ideas for making greener choices, please visit:

Guest Post by James Handley

The year-long effort to enact congestion pricing in New York City had a lot going for it:

• Traffic congestion is roundly despised. Gridlock has few defenders.
• NYC’s mass transit system, the asserted beneficiary of revenues from the traffic fee, is riding a 25-year upswing and is understood to be the linchpin of the city’s prosperity.
• A broad coalition of business, labor and environmental groups supported and actively campaigned for congestion pricing.

The demise of the pricing plan — it passed the City Council last week but wasn’t brought up for a vote in the State Legislature yesterday — is prompting much hand-wringing in the City. The New York Times today decried the powerful Speaker of the State Assembly for failing to throw his weight behind the proposal. The blogs, from the estimable Streetsblog ("covering the Livable Streets Movement") to the Times’ dot Earth, are asking what pricing’s defeat says about the fate of other, larger issues, from livable urban streets to the campaign to stop climate change.

There’s soul-searching at the Carbon Tax Center as well. Having argued last year that congestion pricing and carbon taxing were thematically linked — both entail valuing the commons to preserve it; both appear income-regressive but can be made strongly progressive by fairly and effectively allocating the revenues — we’re obliged to ponder what the failure of congestion pricing portends for carbon taxes in America.

We’ve already posted a Top 10 Reasons piece to Grist. It’s a bit on the lite side, but it makes some salient points, such as this:

Misplaced emphasis on climate: Hitching congestion
pricing to climate protection, even in part, was disingenuous. The anticipated traffic reductions would have eliminated no more than 1% of NYC’s CO2. The emphasis should have been on cutting the scourge of traffic, whose theft of time, sanity, and safety from New Yorkers outweighs the climate damage from CBD-bound tailpipes by a couple of orders of magnitude.

(That was reason #10; it would probably rank higher on this blog.)

Our Grist post elicited a number of candid, private replies. Here are three worth pondering (edited, and with the names redacted):

A chemical engineer and policy analyst who worked with congestion pricing theorist and Nobel Laureate Bill Vickrey, honed in on the winners/losers conundrum:

The central problem policy problem, both here and around the world, continues to be that the losers from any policy change know who they are and are always far better organized than are the winners. Indeed, some winners are bamboozled into thinking that they will be losers. Nowhere is this more true than with congestion pricing — invariably this has been opposed by a majority before introduction but is warmly welcomed by a majority afterwards.

This is why political leadership is so important. Such leadership emerges in New York only very rarely if ever and is one of the reasons New York continues to decline relative to other states.  History tells us that this has long been true however; consider how T.R. got on the national ticket with McKinley in 1900.

A writer on transportation and public spaces blamed congestion pricing’s messenger:

Appalling though this setback is, I think it has its up-side — Bloomberg
is not really the champion you want for this kind of fundamental
change.  He (your reason #3) never really "got it" in anything other than a
gaudy, intellectualized fashion and, as you say, certainly never put in the work needed to make this
real. The plan was
never properly linked to specific, pre-visualized, and fully explained transit
and other benefits (your reason #2); and for all of Bloomberg’s newly-donned, enviro-conning
green robes he is planning a Manhattan top-heavy with the swaggerers
(your #6 reason). So I think your 10 reasons actually boil down to 1: the
Mayor.

Another writer on public policy was more pessimistic:

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.

This post reprints in its entirety a column today by veteran Washington reporter Darren Samuelsohn of ClimateWire, a new on-line news service published by E&E News. Samuelsohn’s column focuses on the controversial “safety valve” mechanism that would release additional CO2 permits whenever the price of carbon emissions overshot some set limit. The column, while lengthy, is essential reading for anyone seeking to understand the “devilish details” in carbon cap-and-trade proposals. Note that links to documents in the article are available only to ClimateWire subscribers. — CTC

Behind ‘safety valve’ debate resides 30+ years of history
Tuesday, March 11, 2008

By Darren Samuelsohn, ClimateWire senior reporter

Congress’ effort to pass passing global warming legislation faces many sticking points, but few are as sticky — or as wonky — as the battle over whether a cap-and-trade system for greenhouse gas emissions should include what is called a “safety valve.”

What started as an obscure, almost monastic dispute among economists three decades ago has now emerged as a potential make-or-break point for the proposed legislation. Tracking its tangled history may now be essential to outsiders who want to understand this issue — and the huge economic stakes involved — as champions on both sides of the political arena saddle up to do battle over it.

In recent years, New Mexico Democratic Sen. Jeff Bingaman has become the lawmaker most linked to this cause. His version of the safety valve emerged in 2005 in a legislative proposal that created a price cap on carbon. It would guarantee that American companies pay no more than $12 for every ton of carbon dioxide they release into the atmosphere. This rate would go up five percent annually beyond inflation.

Rallying against him are environmental groups and commodity traders who are concerned his plan would stifle investment in new low- and zero- carbon energy technologies. Meanwhile industry and labor unions are forming up their ranks behind Bingaman.

Finding a compromise to settle this feud won’t be easy. It has been brewing since 1974 when Martin Weitzman, then an economist at Massachusetts Institute of Technology, lit the fuse for the first salvo. An expert on how socialist governments distributed goods, Weitzman published “Prices vs. Quantities.” In it, he examined the best way to set a government policy where there is considerable uncertainty over a potential regulation’s costs and benefits.

Weitzman’s work didn’t have global warming specifically in mind. In fact, it touched only tangentially on environmental issues. But as many other academics have since noted, his findings helped to trigger the debate over how to minimize costs while reducing heat-trapping emissions.

Essentially, Weitzman found that government is best positioned to regulate by stepping in to manipulate prices when there is uncertainty about the net environmental benefits of taking action. But when the chances for an environmental catastrophe are high, Weitzman said, it’s better to tackle a problem with a quantity-based target.

“It’s without a doubt one of the most heavily cited papers in environmental economics,” said Joseph Aldy, a former White House economist now working as a fellow at the Washington-based Resources for the Future think tank. “And one of the most widely cited in economics.”

Engaging President Clinton

Building off Weitzman’s work, Mark Roberts and Michael Spence, who would go on to win a Nobel prize in 2001 for his work on information flows and market development, came up in 1976 with a “hybrid” system for reducing pollution. The Harvard economists premised their paper on the concept that a government could set up a cap-and-trade program to control pollution in the most cost-effective manner.

But because of uncertainty over those costs, Roberts and Spence suggested regulators could withhold some of the credits in this system and only release them if compliance prices exceeded a fixed trigger point.

Several more economists followed with their own complex formulas, but it wasn’t until the 1990s that the safety valve idea blossomed in government policy circles. In this case, it was the Clinton administration preparing for the 1997 United Nations climate negotiations in Kyoto, Japan.

Australian economist Warwick McKibbin and Peter Wilcoxen, then based at the University of Texas-Austin, published a paper in 1997 suggesting a ceiling price on carbon dioxide emissions permits.

Their work was followed by Billy Pizer, Raymond Kopp and Richard Morgenstern of RFF. The trio argued a few months later that climate change can’t be regulated with any specificity to prevent damage to the environment. Building off Weitzman’s work, they suggested a “safety valve” that provides a price guarantee for industry.

Among some members of the Clinton administration, the RFF paper sounded like a perfect fit. Clinton was still bruised from Congress’ rejection of his proposed energy tax on the carbon content of fossil fuels. Officials from the Treasury Department and Clinton’s own Council on Economic Advisers pushed for the cost containment measure. They said it was the best method for dealing with climate change absent an outright tax on carbon emissions.

Others in the administration urged Clinton not to meddle with future carbon prices. They insisted there would be an “announcement effect”: once the government revealed its climate plans, companies would undertake new technological innovations.

This debate entered the public arena two months before the Kyoto negotiations, when Vice President Al Gore asked about the price ceilings during a daylong forum that Clinton hosted at Georgetown University.

Alarmed by Gore’s question, environmental groups quickly pounced. Seventeen nonprofit groups, led by Environmental Defense Fund and the Sierra Club, sent Clinton a letter warning him against using what they dubbed a “relief mechanism.”

“This proposal would weaken, if not eliminate, any incentive for private sector innovation and investment in clean technologies that … is the key to successfully addressing the global warming problem,” they wrote.

Clinton decided to leave the safety valve out of the U.S. position going into Kyoto.

“The ED letter had a big effect,” recalled Rafe Pomerance, a top State Department official at the time. “It was basically dropped.”

Joseph Romm, a safety valve opponent who ran the Energy Department’s renewable lab office during the Clinton administration, said Aldy, then working for the White House, handed him a note after one high-level meeting following Clinton’s decision. It read: “Economists 0, Romm 1.”

But neither side could claim victory. John “Skip” Laitner, a top U.S. EPA economist from 1996-2006, explained: “They didn’t take the safety valve, but we didn’t win either. Because to win meant we had to come in with some really good domestic policies that would allow the market to be given a clear signal about the slow transition needed and to give the market greater capacity to respond.” Laitner is now director of economic analysis at the American Council for an Energy-Efficient Economy.

Courting Bush, McCain, Bingaman

Proponents of the safety valve pushed on. As President Bush arrived in Washington, Pizer shifted to the White House Council of Economic Advisers, where he served as a fellow under Chairman Glenn Hubbard. “He had a significant insider role,” said Pomerance.

There, Pizer recommended Bush use a safety valve as he advanced a campaign pledge to regulate carbon dioxide emissions from power plants. Bush, however, soon backed away from his pledge.

Attention turned next to Sens. John McCain (R-Ariz.) and Joe Lieberman (I-Conn.), who emerged in the fall of 2001 as lead authors of an economy-wide bill to cap U.S. greenhouse gas emissions.

After he left the Bush administration for a job on the Columbia University faculty, Hubbard sent McCain a letter urging him to consider the safety valve in his climate legislation. He was joined by fellow Columbia colleague Joseph Stiglitz, a top Clinton administration economist who had also won the Nobel Prize with Spence.

“Our support for the safety valve stems from the underlying science and economics surrounding the problem of global climate change, and is something that virtually all economists — even two with as politically diverse views as ourselves — can agree upon,” they wrote in their 2003 letter. “The climate change problem is a marathon, not a sprint, and there is little environmental justification for heroic efforts to meet a short-term target.”

McCain, no fan of Hubbard, threw the brief in his waste basket.

But ideas are hard to kill. The safety valve idea emerged again in a widely publicized 2004 report from the bipartisan National Commission on Energy Policy. The commission, a collection of industry officials, politicians and environmentalists, was asked to offer solutions that could help end the stalemate over U.S. energy and environmental policy. Their study recommended Congress pass legislation with a cap-and-trade system and a safety valve that didn’t allow CO2 prices in the first year to go beyond $7 per ton.

Such a price “reflects a judgment about the political feasibility of establishing a federal framework for reducing greenhouse gas emissions in the near term,” the NCEP report said.

A year later, Bingaman, then the ranking member of the Senate Energy and Natural Resources Committee, floated draft legislation with the safety valve as a centerpiece. Last summer, Bingaman introduced a formal version of his bill with a trio of high-profile Republican cosponsors: Pennsylvania Sen. Arlen Specter and Alaska Sens. Ted Stevens and Lisa Murkowski.

The legislation captured attention because he had won over three GOP senators who previously had not supported mandatory limits on greenhouse gas emissions. Major labor groups and the chairmen and CEOs of PNM Resources, Exelon, American Electric Power and Duke Energy Corp. also appeared at Bingaman’s press conference when he introduced the bill.

‘The worst case is X’

Safety valve advocates base their argument on one of Weitzman’s principal theories: that a price mechanism is best when there’s uncertainty over environmental benefits. Global warming is a byproduct of greenhouse gas concentrations built up over decades and centuries, and any one year’s emissions won’t push the climate over the tipping point.

Also, they claim a price limit will guarantee the new U.S. climate program won’t lead to a volatile market in the short-term. They also like being able to tell cost-conscious senators and congressmen exactly what the bottom line is.

“Ph.D.s, all of them, can make very reasoned-sounding presentations that reach shockingly different conclusions,” said Jason Grumet, executive director of the National Commission on Energy Policy. “Legislators don’t have the ability to differentiate among those.”

If he’s asked the worst-case scenario for energy or coal prices, Grumet said he can turn to the safety valve for a simple answer. “We didn’t have to start our response with, ‘Well, we think’ or ‘Our models project.’ We could simply say, ‘The worst case is X.'”

Labor groups, including the AFL-CIO, see the safety valve as a must have, though they’ve recently signalled a willingness to negotiate. So too do many industries.

“The way [Bingaman’s] come at it is the only way you can do this,” said Fred Palmer, senior vice president for governmental affairs at Peabody Coal. “There’s a big group in Congress who thinks we’re paying enough for energy now.”

“If you think that cap-and-trade is the best way to go, then the safety valve is your insurance policy,” said Aldy. “The reason you buy insurance is because the future is uncertain. We want to protect against the things we can’t currently imagine. This is a way to do it.”

Weitzman, who moved to Harvard in 1990, said he would prefer Congress impose a carbon tax of $50 per ton on the fossil-fuel content of energy sources.

But he also acknowledged that the political reality suggests lawmakers will go with cap-and-trade legislation. He’s open to that too, but said it must include a safety valve. “A very strong safety valve is equal to a tax,” he said. “If you don’t allow the price to vary very much, it’s the equivalent to taxing it.”

Counterattacks

Opponents say a safety valve would undermine the very nature of a cap-and-trade program. “Those who have taken global warming seriously have never supported something like a safety valve,” said Romm, now a senior fellow at the liberal Center for American Progress.

Indeed, the safety valve’s critics have lined up a number of political players to reject the idea, including Clinton, Gore, 2004 Democratic presidential nominee Sen. John Kerry and Sen. Barbara Boxer (D-Calif.), the chairwoman of the Senate Environment and Public Works Committee.

“There are a number of no-gos and poison pills, and safety valve would be among those,” explains Brent Blackwelder, president of Friends of the Earth. He added that any effort to add a safety valve would lead sponsors of the Lieberman-Warner bill to pull it off the floor.

Jonathan Pershing, director of the Climate, Energy and Pollution Program at the World Resources Institute, cautioned that none of the major U.S. environmental trading programs — for nitrogen oxides and sulfur dioxide — include a safety valve. The European system for greenhouse gases also avoided it.

Pershing said the safety valve doesn’t fit with the growing scientific warnings associated with global warming that call for near-term actions.

Europeans are weighing in too. “You can also pretty much forget about a global carbon market,” said Damien Meadows, a top climate official from the European Commission. “If Europe linked to America, and the price cap was reached, and we were just sending money across to the U.S. Treasury, that would be a major issue just as if American companies were paying Europe to do nothing because you reached our price cap.”

Meadows added, “Nobody has actually explained to me how that is overcome. And when people tend to think about, they tend to go ‘Oh yeah, I see.'”

Several proponents of the safety valve envision Europe adopting a cost ceiling to match up with the United States. “A cap sends the message that you really are prepared to wimp out of this,” counters Romm. “It sends the message to all the businesses that if they just whine enough that you can stop whatever it is you’re doing.”

A ‘Fed’ compromise?

A bill from Lieberman and Sen. John Warner headed for the Senate floor doesn’t include Bingaman’s safety valve. But it has several provisions designed to dampen the costs to the economy. One piece supported by environmental groups would allow companies to bank away extra emission credits they haven’t used. Another lets them borrow against future years, with interest.

Duke University’s Nicholas School for Environmental Policy Solutions also came up with a program added to the Lieberman-Warner bill that establishes a Carbon Market Efficiency Board. It would monitor the new U.S. climate market and release carbon credits when the cost gets too high, much as the Federal Reserve uses its powers to influence interest rates.

Under the Lieberman-Warner bill, the president appoints the board’s seven members to 14-year terms. Tim Profeta, a former Lieberman aide and the Duke school’s director, acknowledged that the concept falls distinctly on one end of Weitzman’s equation. “I think the Fed itself is a middle ground,” he said.

Harvard economist Robert Stavins disputes any correlation between this plan and the Federal Reserve, which, he notes, carries “a tradition of political independence,” a research board staffed by 200 Ph.D.s in Washington and reserve banks across the country.

Sponsors of the Lieberman-Warner bill are now on the hunt for additional compromises — and House members are only beginning to grasp this slippery subject. To find a middle ground will require movement from all sides. Grumet thinks that’s not impossible. “I’ve never seen a number in Congress that’s non-negotiable,” he said.

Photo: Monceau / Flickr.

On the same day that real crude oil prices broke a 28-year record, the Wall Street Journal heralded a long-awaited drop in U.S. gasoline consumption.

The Journal’s lead story today, Americans Start to Curb Their Thirst for Gasoline, was a powerful rebuttal of the notion that gasoline use is inelastic, and a vote of confidence in carbon tax advocates who have insisted that rising fuel prices will dampen energy demand.

Here are excerpts from the Wall Street Journal story, spiced with our commentary.

As crude-oil prices climb to historic highs, steep gasoline prices and the weak economy are beginning to curb Americans’ gas-guzzling ways.

In the past six weeks, the nation’s gasoline consumption has fallen by an average 1.1% from year-earlier levels, according to weekly government data.

That’s the most sustained drop in demand in at least 16 years, except for the declines that followed Hurricane Katrina in 2005, which temporarily knocked out a big chunk of the U.S. gasoline supply system.

This time, however, there is evidence that Americans are changing their driving habits and lifestyles in ways that could lead to a long-term slowdown in their gasoline consumption.

Economists and policy makers have puzzled for years over what it would take to curb Americans’ ravenous appetite for fossil fuels. Now they appear to be getting an answer: sustained pain.

Of course, unlike the pain of "market-driven" high prices, the pain of socially mandated carbon pricing would be offset by rebating the revenue or tax-shifting.

Over the past five years, the climb in gasoline prices, driven largely by the run-up in crude oil, hardly seemed to dent the nation’s growing thirst for the fuel.

Conventional thinking held that consumption would begin to taper off when gasoline hit $3 a gallon.

But $3 came and went in September 2005, and gasoline demand didn’t flinch. Consumers complained about the cost of filling their tanks, pinched pennies by shopping at Wal-Mart, and kept driving.

Economists who study the effects of gasoline prices on demand say consumers tend to look at short-term price spikes as an anomaly, and don’t do much to change their habits. They might spend less elsewhere to compensate, or take short-term
conservation measures they can easily reverse, such as driving slower or taking public transportation, but the impact is minimal.

Regular gasoline prices jumped to $2.34 a gallon at the end of 2006, up 62% from 2003, according to the EIA. Yet demand continued to grow at an average 1.1% a year. Consumers were better able to absorb the increase because it was spread over
four years, and the economy was doing fairly well.

Then again, annual demand growth of just 1% while the economy was expanding at 3% was strong evidence of at least some short-run price-elasticity.

Today, a weakening economy is intensifying the effects of high gasoline prices… The combination of forces is prompting Americans to cut back on driving, sometimes taking public transportation instead. It’s also setting the stage for what may be a long-term slowdown in gasoline demand by forcing Americans to become more fuel-efficient faster.

"If you think about the fact that U.S. motorists are responsible for one out of nine barrels of oil consumed in the world…and that consumption is no longer growing the way it used to, that’s a major structural change in the market," says Adam Robinson, analyst with Lehman Brothers.

The longer gasoline prices remain high, the greater the potential consumer response. A 10% rise in gasoline prices reduces consumption by just 0.6% in the short term, but it can cut demand by about 4% if sustained over 15 or so years, according to studies compiled by the Congressional Budget Office.

The implied 0.4 long-run price-elasticity noted above is precisely the level we (CTC) assume in our 4-sector carbon tax impact model, which may be downloaded here.

As consumers make major spending decisions, such as where to live and what kind of vehicle to drive, they are beginning to factor in the cost of fuel. Some are choosing smaller cars or hybrids, or are moving closer to their jobs to cut down on driving. Those changes effectively lock in lower gasoline consumption rates for the future, regardless of the state of the economy or the level of
gasoline prices.

Anne Heedt, of Clovis, Calif., has been moving toward a more fuel-efficient lifestyle for the past few years. She owns a Toyota Prius hybrid but takes her bike on errands when weather permits.

"We’re not always going to have the same accessibility to gasoline that we’ve had in past decades, so we do have to start thinking about what we’re going to do over the next 50 years," said the 31-year-old Ms. Heedt, who used to work at a
medical office but is between jobs.

Way to go, Anne. You should be CTC’s poster child!

The housing boom encouraged the development of far-flung suburbs, contributing to longer commutes. Now developers are building more walkable neighborhoods close to city centers and public transit, and Americans are beginning to migrate back toward their workplaces, city planners and other experts say.

David Hopper, who lives in the rural community of Markleville, Ind., is preparing to move to a new house in Plainfield, cutting his commute to Indianapolis to 15 miles from 47 miles. Mr. Hopper decided to move closer to the city last summer, when gas prices hit
$3.40 a gallon in his area.

Together, Anne’s and David’s examples suggest the broad range of ways in which individuals respond to carbon-pricing signals. It’s heartening to see this reporting in a major paper like the Journal.

Pinched consumers also are speeding up their shift to more fuel-efficient cars. Sales of large cars dropped by 2.6% in 2006 and by 10.5% in 2007. In January, they plummeted 26.5% from a year earlier, according to Autodata Corp.

Car dealers are selling fewer minivans and large sport-utility vehicles. In fact, only small cars and smaller, more fuel-efficient SUVs, are showing a rise in sales. Small-car sales in January were up 6.5% from a year earlier, while sales of crossover vehicle grew 15.1%, Autodata Corp. says.

These trends evidently deepened in February. The New York Times reports that sales of SUV’s and pickups in the U.S. fell 14% last month, vs. a 5% drop in car sales.

Music to our ears. Meanwhile, the The Times is reporting that crude oil prices finally surpassed the historical inflation-adjusted peak from April 1980. How sad for Americans that the record-high price includes fabulous "rents" for oil owners and extractors. How much better instead to tax carbon fuels and re-allocate the revenues to American families.

Photo: bicyclesonly / Flickr

Michael Bloomberg has made it official. “I am not — and will not be — a candidate for president,” New York City’s mayor said in an op-ed in today’s New York Times.

The article ends months of speculation that Bloomberg, a self-made billionaire who has emphasized a managerial, non-partisan approach to governing, would enter the race as an independent.

Bloomberg’s announcement robs the U.S. election campaign of an outspoken supporter of a national carbon tax. In a highly publicized speech to the U.S. Conference of Mayors last November, which we reported here, Bloomberg proclaimed his strong preference for a carbon tax over a carbon cap-and-trade scheme:

[T]he certainty of a pollution fee — coupled with a tax cut for all Americans — is a much better deal. It would be better for the economy, better for taxpayers and — given the experiences so far in Europe — it would be better for the environment… [W]hy not simplify matters … by charging a direct pollution fee? … a direct fee will generate more long-term savings for consumers, and greater carbon reductions for the environment.

[A carbon tax is] like making one right turn instead of three left turns. You end up going in the same direction, but without going around in a circle first.

Bloomberg made similar remarks favoring carbon taxes over cap-and-trade at the UN Framework Conference on Climate Change in Bali in December.

For carbon tax advocates, the potential silver lining is that Bloomberg might now refocus on gaining city and state legislative approval for his plan to cut traffic and fund transit through a congestion fee to drive into Manhattan.

The conceptual and political parallels are strong between municipal congestion pricing and national carbon taxing. Both entail ending free exploitation of “the commons”; both demand a clear commitment to invest or return the revenues progressively; and both require mobilizing the multitude of citizens, who often don’t grasp that they stand to benefit, to clamor more loudly than the polluting minority whose entitlement is threatened. A congestion pricing win in New York City could undercut the notion
that a carbon tax is politically impossible.

Meanwhile, another prominent American who supports carbon taxes declared his presidential candidacy. Ralph Nader, the consumer advocate and  anti-corporate crusader who turned 74 yesterday, entered the race last weekend as an independent candidate.

While Nader has been roundly criticized and even ridiculed as a spoiler and perennial candidate (Nader was the Green Party candidate for president in 1996 and 2000, and he ran as an independent in 2004), his campaign platform includes unambiguous support for a carbon tax. “Adopt a carbon pollution tax” is Issue #6 on Nader’s campaign issues page, Twelve Issues That Matter for 2008.

As a non-profit organization, CTC can’t endorse candidates for elective office. We are non-partisan by temperament as well. We anticipate that Nader’s candidacy could become a double-edged sword with respect to carbon taxes, elevating carbon taxing’s visibility but also hurting its credibility among Americans who have grown disaffected with him.

What do you think?

We reported last week that British Columbia will implement a carbon tax of $10 per metric ton of carbon on July 1, rising in $5/tonne annual increments to reach $30 in 2012.

In both scope and size, the tax leapfrogs North America’s other, modest carbon taxes, in Quebec and the City of Boulder, Colorado. How did the tax come about? CTC supporter Jurgen Hissen filed this account from Vancouver.

The idea for a carbon tax came from the top ranks of the BC government. It wasn’t foisted upon them. I think they were actively seeking ways to justify it to the citizenry.

BC Liberals — who aren’t connected to Canada’s national Liberal Party — have always been pro small-government. When they came into office in 2001, they cut taxes and government spending extensively. BC Liberals have also historically emphasized personal responsibility and environmental issues, and a carbon tax (a consumption tax) is pretty consistent with that.

After meeting last year with California Governor Arnold Schwarzenegger, BC Premier Gordon Campbell resolved to set carbon reduction targets for BC. Suggestions of a carbon tax began circulating, but the real push likely came from Carole Taylor, Campbell’s finance minister.

In late 2007, Taylor assembled a committee, the Select Standing Committee on Finance and Government Services, to collect public input on the budget. The committee issued a questionnaire to every household in the province; how to tackle climate change covered three of the six questions, and two of them were what pollsters would call “leading”:

The Province currently provides tax incentives to encourage the purchase of hybrid vehicles [… etc.]. What tax changes would you make to encourage environmentally responsible choices? and

What tax changes would you make to discourage British Columbians from activities that contribute to greenhouse gas emissions?

Clearly, the government was looking to rationalize carbon taxes. The response was favorable, and crucial, not to mention broad-based. A carbon tax was backed by business leaders, a group of 60 economists from BC universities, and key religious leaders.

Taylor, the finance minister, reported getting 700 letters in support of a carbon tax (about 10 of those were mine, I think), and only about 160 opposed — a fact she cited on the day she announced the tax.

CTC invites readers from British Columbia or elsewhere to write with further details/insights on the development of BC’s carbon tax as well as potential implications for other provinces and the U.S.

Photo: Wikipedia

British Columbia’s Finance Minister Carole Taylor introduced a revenue-neutral carbon tax today that will serve as an excellent model for the United States. According to a story in the Canadian Press, the carbon tax will be effective July 1, will be phased in over five years and will start at a rate of $10 per tonne of carbon emissions. It will rise $5 a year to $30 per ton by 2012. The carbon tax revenues will be returned to taxpayers through personal income and business income tax cuts, according to Taylor. 

According to the same story, climate specialist Ian Bruce of the David Suzuki Foundation stated that "The Government has used the most powerful tool, a carbon tax, to reduce greenhouse gas emissions." As Bruce pointed out, "Green choices will become cheaper."

B.C. can now be proud of its natural beauty and its wise public policy designed to reduce the impact of climate change. Note that the proposed new carbon tax is very similar to the revenue-neutral, phased-in carbon tax proposed by the Carbon Tax Center. 

For more on the new B.C. carbon tax, see stories at right under "Latest Headlines." 

Photo: bfraz / flickr