A Carbon Fee Can Cut Business Taxes in NY and Elsewhere (Komanoff & Matthiessen, Huff Po)
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Why "Official" Nuke Plant Cost Estimates Are Like Campaign Promises
In my in-box are a dozen e-mails wanting my reaction to Eduardo Porter’s column in yesterday’s New York Times in which he insisted that of all non-carbon based energy sources, nuclear power is “the cheapest and most readily scalable.”
Whether my correspondents knew that in my former life I meticulously established the spectacular failure of nuclear power plants to stay on budget and produce affordable electricity, or they simply thought I might have a halfway informed opinion on reactors’ proper role in combating the climate crisis, I can’t say. But I dutifully opened up Porter’s column and was quickly appalled.
The column fails the single most critical precept in nuclear economics: don’t confuse promise with performance. I made this point in 1979, a month before the Three Mile Island reactor accident, in a review of a book that plumbed that very theme. I was struck with how the authors of Light Water: How the Nuclear Dream Dissolved — two business academics with experience in the American and French Atomic Energy Commissions — showed that from Day One nuclear power proponents mesmerized themselves with idealized cost estimates that ignored reactors’ innate complexities and razor-thin tolerances — twin Achilles Heels that time and again broke project budgets and sowed mistrust among policymakers and the public, especially in the U.S.
Things haven’t changed. In June, Porter’s colleague Matt Wald, who has covered the nuclear industry for the Times since the early eighties, reported on a nuclear plant under construction in Georgia named Vogtle — one of two reactor projects underway in the U.S. First, Wald summarized the disastrous cost escalation at predecessor projects 30 years ago:
In those decades parts of plants were built, ripped out and rebuilt because of design and regulatory problems, leading to ruinous costs. Examples sit across the muddy construction site: Vogtle 1 and 2, which opened in 1987 and 1989, cost $8.87 billion. When they were proposed in 1971 the estimated cost was $660 million.
Wald noted that the new project, Vogtle 3 and 4, had instituted cost-control measures to lock-in plant designs and also replace often-chaotic field assembly with prefabricated parts. But, he noted:
[T]he company that was supposed to be making prefabricated parts like clockwork, from a factory in Lake Charles, La., was shipping them with some parts missing or without required paperwork. Southern [Company, the reactor owner] built a cavernous “module assembly building,” 120 feet high and 300 feet long, where the parts were supposed to be welded together, largely by robots, into segments weighing thousands of tons. But shipments stopped last August and are still arriving too slowly.
“[I]t remained to be seen,” the Georgia state construction monitor told Wald, “whether modular construction would actually save time.” Meanwhile, 5,000 miles away from Vogtle and “stifling” U.S. regulations that for decades have been blamed for “suffocating” nuclear power here, an ambitious reactor project in Olkiluoto, Finland has run completely off the rails.
“The massive power plant under construction on muddy terrain on this Finnish island was supposed to be the showpiece of a nuclear renaissance,” the Times reported back in 2009. “The most powerful reactor ever built, its modular design was supposed to make it faster and cheaper to build. And it was supposed to be safer, too.”
Instead, the Times reported then, “after four years of construction and thousands of recorded defects and deficiencies, the price tag . . . has climbed at least 50 percent.” That was just the beginning. By December 2012, three-and-a-half years after the Times article appeared, the cost of the Olkiluoto reactor had doubled again, according to Wikipedia, to 8.5 billion euro — nearly triple the original €3 billion delivery price. So calamitous is the cost spiral that the Finnish electric utility owner and the French reactor supplier are suing each other.
Why bring up Vogtle and Olkiluoto? Because they exemplify the real-world experience that Porter ignored. (They also constitute a majority of reactor construction now underway in the Western economies.) Instead, Porter hung his column on — you guessed it — paper cost estimates from the U.S. Energy Information Administration and the U.K. government. Here’s Porter’s faithful workup of nuclear vs. wind and solar, per EIA:
Take the Energy Information Agency’s [sic] estimate of the cost of generating power. The agency’s [sic] number-crunchers include everything from the initial investment to the cost of fuel and the expense to operate, maintain and decommission old plants. Its latest estimate, published earlier this year, suggests that power generated by a new-generation nuclear plant that entered service in 2018 would be $108.40 per megawatt-hour. . . This is not cheap. . . Still, nuclear power is likely to be cheaper than most power made with renewables. Land-based wind farms could generate power at a relatively low cost of $86.60 per MWh, but acceptable locations are growing increasingly scarce. Solar costs $144.30 per MWh, the agency estimates. A megawatt-hour of power fueled by an offshore wind farm costs a whopping $221.50.
Case closed, eh? $108.40 a MWh for nukes, $144.30 for solar, $221.50 for offshore wind? I’ll leave it to others to see if the EIA figures for renewables properly credit the still-ongoing declines in unit costs for photovoltaics and wind. My point here is that the nuclear numbers in Porter’s column overlooked not just Vogtle and Olkiluoto but the deep-seated problem that invariably leaves paper estimates of reactor costs bearing as little resemblance to the real thing as campaign promises bear to officials’ actual policies: the fabulous energy density that makes nuclear power so appealing in theory requires heroic countermeasures that demand degrees of perfection that are only achievable, if at all, through a punishing array of rules, regulations, paper trails, quality assurance, inspection, checking and double-checking that come at enormous cost.
I documented this in painstaking detail long ago in a book, Power Plant Cost Escalation, that took me several years to conceptualize and several more to quantify and compose and finally publish, in 1981. The book’s bottom line was that through the 1970s, costs of completed U.S. nuclear plants rose twice as fast as costs of completed coal-fired plants; while the higher costs at least paid for coal plants to become much cleaner but not for nuclear plants to be made any safer, judging by the steady drip of nuclear mishaps that culminated in the meltdown of the final nuclear plant in my database, Three Mile Island Unit 2. (The book is on-line here, as a 12MB pdf, or you can pick up a hard copy from me, cheap; send me an e-mail.)
This work went viral in the energy and business world of the time, giving me a good run as expert witness for state government agencies charged with representing utility consumers in electricity rate cases. Eventually I moved on — to bicycling advocacy, road traffic pricing, and, of course, carbon taxing. These days I mostly steer clear of nukes per se, and, indeed, of specific technologies, preferring to agitate to get the most-level playing field possible, via full-cost carbon pollution pricing.
The problems with Porter’s column don’t stop with his slavish adherence to paper estimates of reactor costs. He flogs Germany for its 0.9% bump in CO2 emissions last year (“even as they declined in the United States and most of Western Europe”), ignoring that German GDP grew relative to that of every other major European economy, and that the drop in U.S. CO2 was mostly due to the horrific (and possibly transitory) boom in fracked natural gas.
Indeed, from 2010 to 2012, a two-year period encompassing the March, 2011 Fukushima catastrophe and Germany’s subsequent decision to turn off 29% of its nuclear power production (reducing reactor output from 140.6 terrawatt-hours in 2010 to 99.5 TWh in 2012), Germany actually held constant its use of fossil fuels to make electricity.
How did German society make up for the 41.1 TWh drop in reactors’ electricity generation? Numerically, it was simple:
- German solar-photovoltaic generation grew from 11.7 TWh to 28.0 TWh (a rise of 16.3 TWh).
- Wind generation grew from 37.8 TWh to 46.0 TWh (a rise of 8.2 TWh).
- Total consumption of electricity fell by 16.4 TWh (from 610.9 TWh to 594.5 TWh), despite GDP growth.
(Figures are based on data from Bundesministerium für Wirtschaft und Technologie, Statistisches Bundesamt, Arbeitsgruppe Erneuerbare Energien-Statistik (AGEE-Stat).)
The institutional mechanisms are more complex and involve feed-in-tariffs and other mechanisms to elicit investment in renewables. (You can get the full scoop on how Germany turned off nearly 30% of its nuclear power without burning more fossil fuels from the excellent Energy Transition (The German Energiewende) blog run by Craig Morris at the Heinrich Boll Institute.)
Now that’s a story worth pursuing, and one I pitched to Porter in an e-mail the week before Labor Day. Perhaps my note was too gentle. In retrospect, I might have ripped a page from Nate Silver’s playbook and muttered a cautionary tale about the 2012 election pundits who went with discredited over robust poll data and predicted a Romney victory.
Photo: BBC World Service / Flickr.
Data Points
U.S. carbon emissions have been dropping, thanks to a confluence of factors, led by stagnating household incomes, cheap fracked methane, booming wind power, and “peak driving.” From 2005 to 2012, releases of CO2 from fossil fuel burning fell an estimated 685 million metric tons, from 5,906 MMT to 5,221. The lion’s share of that reduction, 379 million metric tons, came in the electricity sector, as wind and gas grabbed market share from coal (3 percentage points went to wind and nearly 12 points to gas) while total power generation stayed flat.
(Emissions data come from CTC’s carbon tax spreadsheet model. Electricity market shares may be calculated from EIA data.)
The second largest emissions source, which I call “Personal Ground Travel” (driving) to distinguish it from goods movement (mostly by trucks), shrank only modestly, from 1,246 MMT to 1,184, a drop of just 62 million metric tons, or 5%. So imagine my surprise when I read in a New York Times editorial last month that “increased fuel efficiency helped reduce carbon dioxide emissions from passenger cars by 16 percent from 2005 to 2012.”
That August 10 editorial, A Clean-Car Boom, was nearly euphoric. Here’s its lede:
In a welcome development for the planet, the cars on American streets are becoming much more climate-friendly much sooner than many had expected. Consumers are increasingly buying fuel-efficient hybrid and electric vehicles thanks to breakthrough innovations and supportive government policies.
True enough about consumers buying … not so the earlier part about emissions dropping by 16%. In fact, in the few seconds it took to follow the editorial’s link, it became clear that the 16% passenger-car reduction applies just to new autos rather than the entire sector, which necessarily takes many years to “turn over” to more-efficient models. What also became clear, in back-and-forth e-mails w/ the editorial board, was that the Times wasn’t going to publish a correction clarifying that CO2 emissions from cars fell just 5% from 2005 to 2012, not 16%.
“I assume [the writer of the editorial] meant new models, not entire existing fleets and that is the way readers would see it,” an editor advised me in an e-mail. “I will have to check with EPA and DOT,” he added, ignoring my offer to lead him to the numbers.
Would readers “see it” as the editor assumed? Would they get that CO2 reductions from driving were only inching along rather than galloping as the Times editorial suggested? I’m not sure. As I wrote to the editor in my final e-mail:
Why does this matter (apart from getting numbers right, generally)? A certain complacency has set in about heartening/surprising progress in cutting U.S. greenhouse gas emissions, especially in mainstream environmentalist thought. Indeed, this complacency may help explain how the [editorial] writer slipped into his/her error. More importantly, it has implications for policy/politics around climate, carbon taxing, “radical” vs. “incremental” approaches, etc.
The implications I had in mind are obvious but worth saying: If you “learn” that regulations have already eliminated one-sixth of carbon emissions from driving in just seven years, you’ll be more inclined to trust that further application of regulations can get induce more reductions. And if regulations are up to the task, the need to take on the tougher job of enacting a meaningful carbon tax dissipates.
Would that were so. But regulations aren’t up to the task of eliminating 80% or more of U.S. CO2 emissions. They’re intrinsically piecemeal, long lead-time, backward-casting, and suboptimizing. They also produce no revenue, thus giving them zero salience in any possible budget deal. As I wrote here late last year, only a carbon tax can
broadcast … a clear price signal to begin shifting millions of decisions toward less energy and emissions — big decisions that determine design of vehicles and transport and that set the pace and nature of investment in low- and non-carbon energy; as well as the full gamut of household-level decisions … Almost as importantly, a robust carbon tax changes the culture by broadening the definition of pollution and valorizing conserving behaviors with monetary rewards.
Or, as CTC’s Washington rep, James Handley, put it, in an early-2012 post dissecting putative EPA regulations of CO2 emissions from power plants, “EPA regulations might, optimistically, achieve significant near-term reductions, albeit at a higher cost than a CO2 pollution pricing system. But more importantly, those regulations can’t be expected to induce further innovation.”
Indeed, James’s post drew on work by noted Resources for the Future economist Dallas Burtraw to conclude that in the near term, EPA regulation of greenhouse gases was unlikely to reduce carbon pollution any more than a small carbon tax, say, one starting at $10/ton of CO2 and rising by just $3.50/ton per year. “Moreover,” James noted, “it’s not clear how much further EPA regulation could reduce emissions after 2020. That’s because regulations are essentially static and do little to induce innovation or to reduce fossil fuel demand via conservation.”
With or without a correction by the Times, there’s no getting around the need for a robustly rising carbon tax.
* * * * *
Separately, we call your attention to a new report by prolific automobile researcher Michael Sivak and two colleagues at the University of Michigan Transportation Research Institute, “A Survey of Driver Opinion About Carbon Capture in Vehicles.” Using an opinion survey, the three inferred that Americans “appeared to be willing to pay about $100 for a 20% reduction in [their car’s] carbon dioxide emissions.” Applying an average 25 mpg fuel economy for newly purchased vehicles, an annual distance driven per vehicle of 11,000 miles, and a typical 11-year vehicle life, that 20% reduction equates to 9.5 tons of CO2. A willingness to pay $100 to eliminate 9.5 tons equates to just $10-$11 per ton of CO2 removed, suggesting that relying on Americans’ altruism isn’t going to do the heavy lifting of reducing carbon emissions.
Photo: Veee Man, via Flickr.
Which Carbon Tax: Robust or Miniature?
Not all carbon tax proposals are equal. Some would raise the level of the tax robustly enough over time to transform the energy supply and the ways everyone uses energy. Others envision miniature carbon taxes meant to generate revenue targeted for specific purposes. The Breakthrough Institute (BTI) advocates a miniature version: a $5/T CO2 tax to fund energy R&D that they insist will unleash cheap new sources of low-carbon energy to undercut fossil fuels. In contrast, the Carbon Tax Center finds that a briskly-rising economy-wide carbon price is needed for energy efficiency and renewable energy to displace the vast bulk of fossil fuels by mid-century. An excellent example is the measure proposed by Rep. John B. Larson (D-CT) in 2009 for a CO2 tax starting at $15/T, rising to more than $100/T over a decade, which we estimate would reduce U.S. CO2 emissions by one-third in that time.
The “robust” carbon tax met the “miniature” carbon tax at the BTI meeting last month in Sausalito, CA. James Handley, the Carbon Tax Center’s Washington DC representative, discussed his paper, “Reaffirming the Case for a Briskly Rising Carbon Tax,” which responded to BTI’s draft (and not yet citable) paper, “Costs and Complexities of Carbon Pricing.” The BTI paper asserts that only a fully revenue-neutral carbon tax set at a socially-optimal price with full participation by other nations would be more effective than subsidies and regulations at reducing CO2 emissions. The paper points to the ineffectiveness of the low carbon prices induced by the European Union’s Emissions Trading Scheme and argues that the public won’t tolerate carbon prices rising to levels high enough to reduce emissions substantially. Because modest carbon taxes can’t deliver the needed emissions reductions, BTI argues that the carbon tax to shoot for is a small one funding targeted R&D that will unleash a technology breakthrough leading to abundant, cheap energy. (BTI supports “fourth generation” nuclear power, using fast breeder reactors as touted in the film “Pandora’s Promise.”)
In rebuttal, Handley argued that taxing CO2 pollution instead of productive activity such as work and investment is a climate policy offering enormous climate benefits at little or no cost. Successful carbon taxes in British Columbia and Sweden are proof that voters can be persuaded to embrace carbon taxes that reduce taxes on individual and business income, retail sales and payrolls. These taxes, along with Australia’s new carbon tax, demonstrate that well-designed carbon taxes can effectively reduce emissions quickly, at minimal cost, without stunting economic growth.
Handley further noted that the effectiveness of BTI’s proposal hinges on the ability (and willingness) of Congress and federal agencies to identify and fund nascent low-carbon energy technologies capable of breaking fossil fuels’ economic dominance. Yet a steadily-rising economy-wide carbon price can perform this task far more broadly and effectively, Handley argued, by encouraging every energy supplier and every energy user to look for ways to reduce emissions, spurring innovation across the entire spectrum of energy supply and use. He noted that diverting carbon tax revenues to R&D would preclude using carbon tax revenue to reduce other taxes, thus undercutting political support.
CTC’s Carbon Tax Model: Peering Under the Hood … and Beyond
This post is a response to a set of five questions we received from Paula Swedeen, an ecological economist from Olympia, WA. Paula graciously granted permission to reprint her e-mail; our answers follow each of her five questions.
Hello Mr. Komanoff — I recently downloaded and read through your updated carbon tax model. Thanks for making this publicly available — it’s an extremely useful tool for thinking through how a carbon tax might work and potential optimal designs. I also read the exchange that you and your colleague James Handley had with Dave Roberts at Grist last November-December which laid out some interesting questions about how to spend revenue from a carbon tax. I have a few questions about the policy implications of the results of your default case, and about some of the assumptions in the model.
My background is in ecological economics and biology, and I work quite a bit at the intersection of forests and climate change. I consult for non-profit environmental groups and Tribes on conservation policy for forests and aquatic ecosystems. While I have worked on the portion of California’s climate policy that impacts forests, I am not wedded to using cap-and-trade for addressing climate change, and think a carbon tax has some important advantages at the national level.
Here are my questions.
1) Your default case of starting a tax at $15/ton of CO2 and increasing it by $12.50 a year results in an average rate of emission reductions of 2% per year between 2014 and 2036 (amount of average annual reductions compared to emission levels in 2013, the year before the tax starts). While this results in substantial reductions compared to what we are doing today, much research, as you are no doubt aware, points to the need for global emissions to decline at rates in excess of 5-6% per year, starting now, in order to meet even a 50% chance of staying below a 2 degree C temperature rise (a frighteningly weak goal to start with). From a global equity perspective, the U.S. ought to at least meet that average requirement, if not exceed it given our historical emissions. See for example, Anderson and Bows, 2011 (http://rsta.royalsocietypublishing.org/content/369/1934/20.full.pdf+html).
What other policies, in addition to the already robust carbon tax you propose, do you see as being available to accomplish the other 3-4% annual rate of emission declines we should be achieving?
Answer: Our default tax is based on the 2009 Larson bill. I calculate a slightly stronger reduction rate for it than you did: 2.5% a year from 2012 to 2036. (Here I’m comparing projected 2036 emissions of 2,860 million metric tons of CO2 with actual 2012 emissions of 5,243, and of course I’m compounding the average.) But your point stands.
To some extent, that disturbingly small average is an artifact of the diminished “bite” built into any additive tax that increments by a constant annual amount: the tenth $12.50/ton tax increment has less salience to households and industry than the first. At some point, the additive rises would need to give way to constant-percentage-increase rises, unless the rate had already achieved market-clearing levels — a scenario we critiqued in this space several years ago as over-optimistic.
Any model tends to have greater predictive value in the near term than the far, and thus we’re more heartened by the 3.1% average decline rate predicted for the first dozen years than we are discouraged by the 1.9% average rate for the second dozen. But even a 3% annual decline rate is wanting, as you noted.
The ideal carbon tax is, thus, steeper even than Larson’s “aggressive” bill. But we have to begin somewhere. As for complementary policies, we’re impressed with the 100% Wind-Water-Sunlight vision propounded by Stanford professor Mark Z. Jacobson and his team. His new paper in Energy Policy, “Examining the feasibility of converting New York State’s all-purpose energy infrastructure to one using wind, water, and sunlight,” is a good place to start.
2) In your exchange with Dave Roberts, you acknowledge that there are barriers to clean technology deployment, but state that the strength of your tax compared to the proposals coming out of Brookings or MIT would exert more technology pull to overcome these barriers. However, given that this pull looks to result in about half or less of the rate of emission reductions needed, does this influence your perspective on whether spending some of the revenue from a carbon tax on deployment and R&D would be worthwhile?
Answer: We’re all for basic energy research, but less enamored of government-funded development and deployment. In any event, we believe that dedicating “incremental carbon-tax revenue” to transparent and progressive federal tax-shifting or per-household dividends will do more to cut carbon than spending it on RD&D. It will do so by preserving the political bargain that makes possible next year’s carbon-tax increment, and the increment after that, and so on (as evidenced in British Columbia, where 100% revenue return preserved political support for the yearly tax rise), and thus creates powerful price signals that can drive investment, not to mention research and development.
3) The equity argument of needing to refund the tax to consumers, especially low income households, is very important. Using the revenue numbers from your default case, and U.S. Census Bureau numbers for household income distribution, it looks like over $500 billion in dividends would go to households making more than $200,000 a year over the 22 years you modeled out the tax. This is a substantial sum of money going to people that could arguably afford higher energy prices, and whose carbon consumption behavior may not change all that much based on the size of the refund compared to their incomes. What do you think about directing that money to clean energy deployment and other emission reduction efforts instead? I understand the political reasons for giving a refund to everyone. However, are there other technical or economic arguments for not having an upper income cut-off and instead using the revenue for direct emission reduction projects?
I am very interested in your perspective on this point, because it seems that given how late we are in the race to avoid an irreversible threshold to a largely uninhabitable planet, we should be throwing everything we have at the problem. I have a hard time seeing how we can afford to refund such large sums of money to high income households when it could be used to important effect elsewhere. Would it not be worthwhile to vastly expand public transportation, and/or put as many solar arrays on available roof-tops as could be purchased, or keep forests standing rather than recycling revenue to those who likely don’t need it? A $200,000 annual income cut-off for a refund would still shield low and middle income families from energy price increases. Obviously, other income cut-offs could be used, but you get the idea.
I definitely get the idea, and I thank you for the calculation (which I confirmed , probably using the same Census income table as you; it puts 4.2% of U.S. households at or above your cutoff, which I multiplied by the projected $14.8 trillion in cumulative “available” carbon-tax revenue to 2036, to calculate $620 billion.)
My response parallels my answer to Question #2: for me, the value of preserving the structure of the overall arrangement (in which equal per-household dividends of the tax revenue engender public and political support for the tax to keep rising) overrides both my strong personal feelings about economic inequality and my awareness (which I share with you) of the potential payoff from allocating the $620 billion to infrastructure and energy projects that could push down CO2 emissions further. Here I’m particularly concerned with the perceived arbitrariness of an income cutoff. Consider that in just the tenth year of the tax (2023 if it starts in 2014) the per-household dividend will exceed $4,000; in which case a household with an income of $199,000 will make more money, with the dividend, than one with an income of $201,000. Yes, sliding scales could be devised, but these threaten to make the distribution so complex that it becomes vulnerable to other carve-outs which then cascade to a point where it loses its public appeal.
4) Forest loss is a large source of carbon emissions globally. Most of the emissions come from tropical deforestation, but conversion of forests to housing and commercial real estate in the U.S. (and some other management changes) is projected to make domestic forests a net source of emissions by 2030. Allocating a very modest portion of carbon tax revenues to both the U.S. contribution to financing an end to tropical deforestation, and to preventing forest conversion domestically directly reduces CO2 emissions, and has numerous ecological and social co-benefits. Having worked in this particular field for over 20 years, I know that coming by adequate funding for forest conservation is a huge challenge – this is another race we are losing to disastrous consequences. Carbon taxes are being used by other nations, like Norway, to address emissions from tropical deforestation. And Waxman-Markey allocated some auction revenue for forest conservation. Using carbon tax revenue to reduce forest-based emissions, or even increase biological sequestration, also has the advantage of not trading off forest emission reductions for a portion of fossil fuel emission reductions, as occurs under an offset system with cap and trade. I am concerned that if no portion of carbon tax revenue goes to this purpose, there will be few other sources of revenue adequate to the task. Do you have any thoughts on this topic?
Answer: We advocate briskly-rising carbon taxes as a needed corrective to spur low-carbon energy innovation and to encourage renewables and efficiency in a price system that lets them compete fairly. But the same logic that points to the need for a carbon tax to “internalize” the social cost of carbon pollution in fossil fuel prices suggests that payments are needed to assure the continued social benefit of carbon sequestration services by forests and aquatic ecosystems. As you point out, these ecosystems are being diverted to more financially lucrative uses because their climate and other ecological benefits are unpriced. Under “the polluter pays” principle, those who benefit from dumping carbon into the atmosphere should pay for the service of sequestering it safely. And yes, that’s a lot more direct and clear than using offsets under cap-and-trade to fund ecological services.
As noted, we recommend returning carbon tax revenue (either as a tax shift or a direct payment) primarily as a way to mitigate regressive effects and to build the kind of long-term political support we’ve seen for British Columbia’s revenue-neutral carbon tax. But the argument for using at least a portion of the revenue stream to fund carbon sequestration services strikes us as compelling. Several carbon tax proposals suggest allocating funds from harmonizing border tax adjustments (essentially tariffs) on carbon-intensive imports to finance international forestry projects. Under that structure, carbon tax revenue from domestic goods would be “recycled” to households, while the import tariff would fund preservation and restoration of forests and perhaps aquatic ecosystems’ capacity to sequester carbon.
5) Can you briefly describe your confidence in your price elasticity assumptions? I noticed when ramping up the tax in your model, for example to start at $40/ton and increasing it by $20/year, the average rate of emission decline does not respond that dramatically — it goes from 2% up to 2.6% per year. Do you have any sense of the chances that your model might either over or underestimate individual and business reaction to carbon price increases?
Answer: My math yields a somewhat different result. Comparing projected 2036 emissions with actual 2012, and again using compound averages, I calculate a 2.5% annual average decline with the default $15.00/$12.50 tax, and a 3.7% decline rate with “your” $40.00/$20.00. Your tax is roughly two-thirds higher than mine in 2036 and has achieved a roughly one-half greater decline rate, which seems plausible.
Again, though, your broader point is well-taken: the elasticities in the model are merely estimates, not “facts,” and they are particularly uncertain on the supply side, which is the anticipated locus of the decarbonization process under a carbon tax. (In three of the model’s six sectors, a majority of the CO2 reductions come from fuel decarbonization, whereas in only one, air travel, does a majority come from reduced usage; one sector is split 50-50 and reductions in the sixth, natural gas usage in industry and heating, are necessarily all via less usage because natural gas can’t be decarbonized further.)
It does appear that our model is conservative (predicting lower CO2 reductions) than most other models. Perhaps it needs to be more attuned to the extent to which strong, clear price signals will encourage development and deployment of low- and zero-carbon technologies. We hope to explore and explain these differences via further analysis.
Thanks for any time you have to address these questions.
Best,
Paula Swedeen
Thank you for your collegial and thought-provoking questions!
Presenting: An Even Better Carbon-Tax (Spreadsheet) Model
Today we unveil our enhanced carbon tax model. The link on our Home Page takes you automatically to the new version. (You may also download the model by clicking here.)
As before, the model is a compact (600 kB) Excel spreadsheet that runs on PC’s or Macs with Excel 2003 or later. Like prior versions, it splits the U.S. energy-economy into a handful of “sectors” (e.g., electricity, passenger vehicles) and, for each, generates 20-year-or-more projections of usage and per-unit carbon emissions with and without a price on carbon pollution. You can set the prices yourself — we say “prices,” plural, because you can specify both the initial price and the rate of year-to-year increase; or you can use our “out of the box” pre-set prices.
The result is a pair of emissions projections — one with the carbon price and the other without — with both referenced to the same set of anticipated changes in economic activity and energy prices. The difference between the respective projections is the emission savings (reductions) imputed to the carbon tax.
Here are the key new features (these bullet points have been updated to reflect the 2014 version of the model):
- The model is baselined to 2013 levels of economic activity and fuel use. Thus it reflects the dizzying shifts of late in electricity generation shares, from high-carbon coal (which lost six percentage points of market share from 2010) to lower-carbon gas (up four points) and zero-carbon wind (up four points).
- The model employs “official” U.S. forecasts of economic growth, general inflation, and, most importantly, of prices for electricity, natural gas and crude oil, rather than our own forecasts. (The carbon tax is layered “on top of” the official prices.)
- Explicit treatment of inflation. First, the carbon tax itself can be indexed to general inflation, or not; second, energy prices (including the carbon-tax-affected prices) are translated into the nominal (inflation-inclusive) prices in which end-users actually experience (i.e., pay) them. While this may sound complex, the model results are more rigorous (accurate) than before.
- The model has seven sectors, up from five. We’ve split our catch-all category of “Other” energy uses (other than electricity, driving and other personal ground travel, freight movement, and aviation) in two: uses fueled by natural gas, and uses fueled by petroleum products. This enables the model to more fully capture differences in gas and petroleum prices including sensitivities to carbon taxes. A “miscellaneous” category captures CO2 emissions from non-electricity-generation uses of coal; from non-energy uses of fossil fuels such as natural gas used in chemical plants, LPG (liquid petroleum gas), lubricants and naphtha; and fuels used for energy in U.S. territories (which are not included in other tabs).
- We’ve overhauled our derivation of the tax’s impact on petroleum usage. Not only was our previous method needlessly convoluted; it also over-calibrated oil’s shares of the different sectors and thus led to overstating the reductions in petroleum usage from the carbon tax-caused reductions in future energy usage. (The predicted reductions are impressive nonetheless: for the Larson bill, which we model with inflation-indexed prices of $15/tonCO2 in the first year, incremented by $12.50/ton each year, the tenth-year reductions in oil usage are 4.3 million barrels a day from 2005 levels, and 2.6 million b/d from projected oil requirements without a carbon price; for comparison, the Keystone XL pipeline is intended to deliver 0.83 million barrels a day of crude from Canadian tar sands to U.S. refineries.)
- A new spreadsheet tab, Index, has links that improve navigation among the 22 different tabs.
- Clearer graphs of CO2 reductions and petroleum savings, and a new graph of revenue generation, expressed both nationally and per-household.
- Generally improved layout and presentation.
The key result — the model’s estimate of CO2 reductions from U.S. carbon taxes — is largely unchanged from earlier versions. In the tenth year of a “Larson”-type carbon tax, with the carbon tax rates noted in the large bullet-paragraph above, projected U.S. emissions CO2 from fossil fuel combustion are 1.8-1.9 billion metric tons less than predicted without a carbon price, a 33% reduction.
A few tabs in the spreadsheet aren’t yet complete. Nevertheless, the features enumerated here constitute such a large improvement over the prior version to warrant posting it today. We invite all users of the model, old and new, to kindly:
- Update earlier findings you may have drawn from prior versions of the model, substituting results from this one.
- Walk through the model with an eye toward evaluating it for logic, rigor, presentation and functionality. Please e-mail us all suggestions and criticisms, via info@carbontax.org.
Happy modeling, and best wishes.
— Charles
Carbon Tax on Trial: Chimera or Green Charm?
Just before Thanksgiving, Grist political blogger David Roberts posted a sharp challenge to carbon-tax advocates, contending that we were, in effect, ascribing “magical” properties to carbon taxes. Roberts spelled out 10 drawbacks to carbon taxes, with this bottom line: any carbon tax legislation that could make it through Congress would likely be feeble and regressive, and perhaps even counter-productive.
David is arguably the green community’s most prolific and astute blogger, particularly on environmental politics. His qualms about pushing for a U.S. carbon tax deserve to be taken seriously. We’ve reproduced his Grist post, below. Alongside it is our point-by-point response. Let us know what you think.
— Charles Komanoff & James Handley
10 reasons a carbon tax is trickier than you thinkBy David Roberts, Grist House GOP leaders recently confirmed again what I wrote last week: There isn’t going to be a carbon tax in the next two years or, probably, for as long as the GOP controls the House. I’ve been asked by a few climate types, “Why not spend your time pushing for it rather than poo-pooing its chances?” It’s a reasonable question. The answer, I suppose, is that I do not regard it with the same reverence as many economists and climate hawks. That’s not to say I wouldn’t welcome a substantial, well-designed carbon tax. But is it the sine qua non of climate policy, the standard against which all climate solutions are measured and for which any sacrifice is justified? No. Those who support a carbon tax over cap-and-trade often tout its simplicity, but the fact is, there are plenty of ways to screw up a climate tax too. Not everything that goes under the name is worthy of support, especially if it’s achieved at the expense of other liberal or green priorities. And given the current political milieu, it’s likely that any carbon tax that did manage to pass would be a bum deal for America’s poor and middle class. (Actually, that’s probably true for anything that passes, period.) Here are 10 reasons for a more tempered and realistic attitude toward a carbon tax. |
To save climate, no other policy tool comes close to a carbon taxBy Charles Komanoff & James Handley, Carbon Tax Center Thank you for elucidating your reservations about placing a carbon tax at the heart of U.S. climate policy. Until now, your many Grist posts critiquing carbon taxes have focused on political infeasibility. Now you’ve presented your policy objections. Thanks for bringing your concerns out into the open. No surprise: the Carbon Tax Center indeed views a U.S. carbon tax as the sine qua non of effective climate policy — provided it builds toward a substantial price that rises steadily and predictably over time. With a ramped-up tax, the initial carbon charge can be modest, giving businesses and families time to adapt, while still broadcasting a clear price signal to begin shifting millions of decisions toward less energy and emissions — big decisions that determine design of vehicles and transport and that set the pace and nature of investment in low- and non-carbon energy; as well as the full gamut of household-level decisions, many of which can’t and won’t be touched without a carbon tax. Almost as importantly, a robust carbon tax changes the culture by broadening the definition of pollution and valorizing conserving behaviors with monetary rewards. Here are our counterpoints to David’s 10 points. |
1. It’s conservative.
There’s a reason so many conservative (and neoliberal) economists support carbon taxes: They fit comfortably in a worldview that says problems are most effectively solved by markets, with minimal government intervention.Current markets have a flaw: They do not reflect the external costs associated with carbon dioxide emissions (namely, the impacts of a heating planet). The answer, economists argue, is to determine the “social cost of carbon” and to integrate that cost into markets via a carbon price, tax, or fee. With an economy-wide, technology-agnostic carbon tax in place, the market will eliminate carbon wherever it is cheapest to do so, insuring that we don’t “overpay” for carbon reductions. Implicit (and often explicit) in this view is the notion that other attempts to tackle carbon — say, EPA power plant rules, or fuel-economy standards, or clean-energy tax credits — are merely backdoor, inefficient ways of pricing carbon. If you get the social cost of carbon right and levy an economy-wide tax that prices all tons of carbon equally, then you have optimized the market, carbon-wise. All other regulations and subsidies will only serve to disrupt market efficiency. They are sand in the gears, as it were. The problems with this worldview are too many to list here, much less to litigate. Economists James Galbraith and Dean Baker argue that free markets are a myth; all markets everywhere are already designed, shaped, and regulated, usually to the benefit of the wealthy. Economist Dani Rodrick argues that industrial policy — “picking winners and losers” — is ubiquitous, a feature of all advanced economies, whether acknowledged or not. Sociologist Fred Block argues that virtually every industrial success story (e.g., fracking) can be traced to government-supported innovation. Anyone familiar with the U.S. electricity sector knows that there is little resembling a market in that Rube Goldberg hodgepodge of overlapping jurisdictions and quasi-monopolies. The entire U.S. coal sector depends on supply from the Powder River basin, which is public land administered by the government. Internal-combustion vehicles are heavily favored by a century of road-building and sprawling land use. And so on. There is no pristine “free market” for regulations and subsidies to besmirch. The game is always rigged, and right now it’s rigged in favor of the fossil-fueled status quo. The notion that a problem like climate change, with its century-spanning effects and potentially existential risks, will be solved exclusively or even primarily with “market mechanisms” is a religious doctrine, not a realistic appraisal. What government proactively plans, encourages, and accomplishes is just as important to the climate struggle as what the market penalizes. Put more bluntly: the spending matters as much as the taxing. Which implies that … |
1. A carbon tax is conservative and progressive.
We don’t think of a carbon tax as a market mechanism; there’s no need to create a new market. It’s a price mechanism. Call it a market corrective if you wish, but the term “market” is both a misnomer and a turnoff for carbon tax adherents (actual and potential) who don’t identify with market ideology. A carbon tax would correct existing markets that systematically under-reward virtually every action, every device, every innovation that reduces fossil fuel use because the prices of those fuels omit the costs of climate damage (not to mention most of the other harms from mining and burning coal, oil and gas). We don’t accept your suggestion that economists and policy-makers need to “get the social cost of carbon right” in order to set a carbon tax. For one thing, no two economists will ever agree on that number. More importantly, every climate-aware person already lives with the knowledge that the social cost of carbon is enormous: the likely descent of human civilization into chaos in the face of wholesale climate disruption. Our job as advocates isn’t to fix the “right” price of carbon but to maximize the internalization of carbon’s societal costs into the prices of fossil fuels. (Could any politically viable carbon tax capture the entire social cost?) And we emphatically reject the insinuation that we’re beholden to a purist belief that complementary measures to control and reduce carbon are irrelevant or harmful. Like you, we’re painfully aware of the multitude of ways in which market barriers like split incentives, inadequate information and path-dependence impede innovation and buy-in for energy efficiency and renewables. Therefore, like you, we strongly support regulatory standards, especially those that address inefficiency in product and building design. Still, let’s be realistic about their limits:
As you note, David, there is no pristine “free market” in energy or anything else. But so what? By itself a carbon tax won’t level the playing field, but it will lower the tilt. And as the tax rises, the tilt will diminish, allowing clean energy and a conservation ethic to compete with dirty energy and an ethic of waste. |
2. It’s the revenue, stupid.
Brookings notes that …… a carbon tax starting at $20 per ton and rising at 4 percent annually per year in real terms would raise on average $150 billion a year over a 10-year period while reducing carbon dioxide emissions 14 percent below 2006 levels by 2020 and 20 percent below 2006 levels by 2050.$150 billion a year — pretty soon you’re talking about real money! That could be used to support cleantech R&D or deploy renewable energy or build green infrastructure … or it could be used for none of those. Point is, what happens to the revenue should be at the center of climate hawks’ negotiating strategy; it’s not some peripheral bargaining chip. |
2. “Revenue recycle” will help the tax to rise.
We think you’ve got the revenue matter backwards. Revenue treatment is important, of course, as befits any new tax that puts hundreds of billions a year in play. But rather than fund cleantech R&D and green infrastructure, we need to direct the revenue to support productive economic activity and offset the hit to poor and middle-income families’ disposable incomes. Doing so will help win the political buy-in to legislate periodic renewal of the annual rises in the tax that will drive the needed changes in behavior, infrastructure and R&D far better than subsidies. This is why we frame carbon tax revenue treatment in macro-economic rather than energy-policy terms. (We say more about this at #3, next.) |
3. “Revenue-neutral” means foregoing any money for climate solutions.
A “revenue neutral” carbon tax is one in which all of the revenue raised is returned automatically to taxpayers. Most of the carbon tax proposals floating around today are revenue neutral, mainly, as far as I can tell, because conservatives demand it. (Conservatives don’t trust government with revenue.) There are three ways to achieve revenue neutrality, which I will list from most to least desirable:
Note what all these uses of carbon revenue have in common: They do nothing to reduce carbon emissions or encourage clean energy. And to boot, they wouldn’t even reduce taxes much. |
3. “Revenue-neutral” helps keep the carbon tax rising.
Like many carbon tax advocates, though not all, we (Charles & James) personally have progressive perspectives. Outside the Carbon Tax Center we advocate for robust government investment in education, public transportation, health protection, housing, and a broad spectrum of social services and support nets. Yet we ardently want carbon taxes to be close to 100% revenue-neutral (with minor and transitory exceptions for assistance for displaced workers and communities), for two reasons: First, as you have detailed in many posts over the years, it’s next to impossible politically to direct carbon tax revenues to “good things” (e.g., green tech, mass transit) without also opening the floodgates for bads like “clean” coal, next-generation reactor loan guarantees, and biofuel boondoggles. Better to hold the line and continue to fund R&D from established pots of money. Second, the carbon tax is going to have to rise steeply and steadily over a long time period to provide strong, ongoing incentives to phase out and finish off fossil fuels. Returning essentially all of the revenues to American households — whether through reductions in taxes like payroll taxes that discourage hiring and are distributionally regressive, or monthly electronic ”dividends,” or a combination — is essential to winning support for the rising carbon tax. Indeed, we want Americans to find these revenue return mechanisms so appealing that they will welcome ongoing rises in the carbon tax level so as to expand their size (and, ultimately, sustain them in the face of the declining carbon tax base as fossil fuel use dwindles, as we discuss in #6, below). |
4. Carbon money should fund clean energy.
There are two distinct tasks for climate policy. One is to reduce carbon emissions at lowest cost. The other is to develop and deploy a new energy system. The evidence shows that a carbon tax is good at the first, but not great at the second. That’s where the revenue comes in.I was going to gather together the research on this, but then I discovered that Mark Muro of Brookings has done it for me. Bless you, Mark Muro of Brookings. (Pardon the long excerpt — all the emphases are mine.) [Ed. note: We’ve put the long Muro excerpt in italics. — Komanoff] “The sticking point here is that while the conventional wisdom among carbon pricers holds that higher dirty energy prices will provide the right market signals to entrepreneurs, who will then develop and deploy clean new technologies, a ton of evidence suggests that pricing alone won’t generate enough deployment to get us where we need to go. Instead, it is becoming increasingly obvious that along with pricing we need a direct technology deployment push. “One hint of this comes from the modelers. Under neither of their respective carbon tax proposals do the Brookings or MIT groups forecast that emissions will drop enough to even come close to the 80 percent cut in emissions below 1990 levels that is the nation’s long-term carbon emissions goal. Yes, fossil fuel use would go down, oil imports would shrink slightly, and emissions would decline, but much more work would need to be done to tackle global warming. Similarly, an interesting analysis by the Breakthrough Institute concluded that a $20 per ton carbon tax would offer just one-half to one-fifth the incentive of today’s subsidies for the deployment of solar, wind, and other zero-carbon technologies. “These results reflect the growing body of literature that has begun to suggest—and document—that broad economy-wide pricing strategies alone induce only modest technology change and deployment. Last year, Matt Hourihan and Rob Atkinson of the Information Technology and Innovation Foundation ran through some of the literature pertaining to a wide range of industries, while at the same time, scholarship specifically on energy has been accumulating. “Ackerman argued a few years ago that getting the price right is necessary but far from sufficient to mitigate climate change and that direct public sector initiatives are required to disrupt path-dependencies and accelerate learning. Acemoglu and others more recently demonstrated that the optimal carbon policy is not one-sided but involves both carbon taxes and direct research subsidies. They urge immediate action. “Turning to empirical evidence, Calel and Dechezleprêtre looked at company patenting patterns under the EU emissions trading system (a cap-and-trade pricing scheme) and concluded that the system has had very little impact on low-carbon technology change. And then, earlier this year, a Swiss-German team found that the EU system has stimulated only limited adoption of low-emissions technology and that research, development, and deployment (RD&D) technology ‘push’ measures induced more action. This group concluded that none of the first three phases of the trading system were ‘capable of triggering increased non-emitting technology adoption’ and that ‘only renewable-technology pull policies had this effect.’ “And so we arrive back at the revenue: The accumulating evidence and the appropriate fit of the tax to its use argue heavily for at least a portion of the revenue of any carbon pollution fee to be applied to direct investment in energy system clean-up, whether through R&D or later-stage deployment supports.” In short, the tax side is not enough. Effective climate policy also requires spending. This is commensurate with some of the revenue being rebated to low-income taxpayers, or used to reduce taxes, or wasted on the fake long-term deficit problems. Public investment in clean energy is not the only legitimate use of the revenue. But it is the use for which climate hawks should be advocating most strongly. |
4. A strong enough carbon tax will indeed drive investment to clean energy.
We don’t dispute Mark Muro’s assertion in his “Carbon Tax Dreams” post that we’ll never usher in massive cleantech investment or otherwise shrink fossil fuel use and carbon emissions to near zero with just the price signals from a carbon tax that starts at a mere $15 to $20/ton and rises only 4% a year faster than inflation. The Carbon Tax Center’s carbon tax spreadsheet model yields the same conclusion. So does a pocket calculator: assuming 3% annual inflation, a tax rising 4% a year faster than inflation would take a decade to double in nominal terms, and almost two decades to double in real terms. That’s way too slow a ramp-up, considering that a carbon price of $40/ton of CO2 would add a mere 36 cents to a gallon of gasoline and 1.5 cents/kWh to the average U.S. retail electricity price. We need a carbon tax that quickly gets to much higher rates than that. It doesn’t have to start like gangbusters; indeed, it shouldn’t, since families, businesses and institutions all need (and deserve) time to adapt to the new reality of higher fuel and energy prices. A steady and steep ramp-up rate is far more important and beneficial than a high starting point. These considerations make the ideal carbon tax close to that embodied in legislation introduced in 2009 by Representative John Larson (D-CT). Rep. Larson’s carbon tax starts at $15/ton and rises each year by $10-$15, with the actual increment depending on whether emissions are being driven down fast enough. In the tenth year of a carbon tax, the CO2 price would be between $100 and $145 per ton of CO2 under the Larson bill, vs. $28-$37 per ton for Muro’s scenarios. That 3-fold to 4-fold difference in the respective tenth-year carbon price would start to narrow eventually, though not until the start of the fourth decade, in absolute terms — indicating how fundamentally different the Larson tax scenario is from Mark Muro’s. The corollary, David, is that while your boldfaced assertions that “pricing alone won’t generate enough [clean-energy] deployment to get us where we need to go” and “broad economy-wide pricing strategies alone induce only modest technology change and deployment” may well hold for the undersized and only gradually rising tax levels you cited in your post, they don’t necessarily apply to the kind of robust tax presented in Rep. Larson’s bill. We do take seriously Frank Ackerman’s caveat in the paper you cited, that “Price incentives alone cannot be relied on to spark the creation of new low-carbon technologies.” But recall that Ackerman, writing in 2008, was in part responding to an IMF report published earlier that year whose year-2100 climate “targets” could have come from the Koch Brothers playbook: a CO2 concentration of 550 ppm, annual declines in emissions of only 0.6% till then, and a carbon tax starting at around $1/ton of CO2 and rising by just 67 cents a year. We suspect Dr. Ackerman might have a more sanguine view of the “market pull” of a carbon tax whose rate, like Rep. Larson’s, is a full order of magnitude greater than what the IMF envisioned. Our bottom line, then, is that we don’t believe that a small carbon tax used for subsidies and/or RD&D would provide anything close to the sustained broad market pull toward innovation that is required to address the climate crisis, and that could result from a substantial and briskly rising carbon tax. In our view, starting with as close to 100% revenue return as possible is the best way to build growing political will for a robust and effective carbon tax, i.e., one with sustained, predictable and sizeable increases from each year to the next. There, the market pull (including long-term price expectations) should suffice to elicit clean-tech innovation and revolution. In that case, however, “revenue return” is mandatory — ethically, to offset households’ higher energy costs, and politically, to forge and maintain the constituency to keep the tax level rising. |
5. Carbon taxes are regressive.
I mentioned this is passing already, but it’s worth emphasizing. On their own, carbon taxes hit the poor harder because the poor spend a larger proportion of their income on energy. It isn’t difficult to solve that problem. Using the revenue to reduce payroll taxes would do it. Setting aside some revenue for direct rebates to low-income taxpayers would do it. (By the way, the Waxman-Markey bill did exactly that.)But swapping a carbon tax for the income tax wouldn’t. Using carbon tax revenue to reduce the deficit wouldn’t. If climate hawks want progressivity — and they should, if they hope for broad grassroots support — they’ll have to fight for it. |
5. Tax regressivity is an anathema . . . but curable.
No argument here, David, though we spin this issue a bit differently. We agree that (i) putting revenue use aside, a carbon tax has a greater proportional impact as household income declines, and (ii) progressive revenue treatment such as a revenue swap on payroll taxes, or pro rata dividends, or low-income support, can mitigate and eliminate the regressivity. The Carbon Tax Center insists on such progressive treatment, though we concede that a final bill may be less than scrupulous on this score. (We also question the extent to which Waxman-Markey would have solved this problem, but we’ll save that discussion for another time.) |
6. Carbon tax revenue is supposed to decline.
Remember, the goal of a carbon tax is to decarbonize the economy. As carbon declines, carbon tax revenues will decline, unless the tax is almost continuously ramped up. This wouldn’t matter so much for revenue earmarked for clean energy or direct rebates. There will be less need for that revenue as the economy decarbonizes. But what if carbon taxes have replaced payroll taxes, which fund Social Security? As revenue declines, so will funding for Social Security. Not good. Or what if carbon taxes have replaced income taxes? As revenue declines, individual tax burdens will decline, which will delight conservatives, but should be a source of concern for liberals in favor of active government. The fact that a carbon tax is intended to phase itself out over time cannot have escaped the attention of its conservative supporters. |
6. The eventual decline in revenue is a non-problem.
“The fact that a carbon tax is intended to phase itself out over time,” as you put it well, David, belongs in the class of problems that at this juncture should matter only to extreme policy wonks. The Larson Bill, which we discussed under Point #4 above, and which certainly falls on the “aggressive” end of the carbon tax rate spectrum of, doesn’t reach max revenue until Year 18, when the annual intake is projected to plateau at just under $800 billion. (Note: that figure, which is drawn from our modeling of the Larson bill assuming annual rises of $12.50/ton, may change with revisions to the model now underway.) Long before then, there should be ongoing discussions about how to replace that revenue stream as it slowly and predictably shrinks. Indeed, given the amounts in question, we would expect those discussions to be a central feature of public policy in future decades. |
7. The carbon lobby will want to axe EPA regulations in exchange.
Exxon has been supporting a carbon tax (notionally) for several years, but it’s made clear that it sees such a tax as “an alternative to costly regulation.” This is what everyone’s favorite dirty-energy lobbyist Frank Maisano recently wrote (behind a paywall):No carbon tax should be considered before serious regulatory reform is undertaken. The U.S. EPA is moving forward on an approach that regulates carbon, which is akin to fitting a square peg in a round hole. Not only is it legally dubious, but it is not likely not work in practice, either. Suffice to say, the fossil fuel lobby would never give a carbon tax their OK unless EPA regulations on carbon (and possibly other pollution regs) were scrapped. We saw this fight play out once already, around the cap-and-trade bill. Unless it was for a high-and-rising tax (which is unlikely), that would be a terrible trade for greens. The implicit carbon price in EPA regs is higher than an explicit tax would likely be. In developing regulations, EPA uses the government’s official “social cost of carbon,” which is around $26/ton. There’s good reason to think that figure is dramatically too low. But it is already higher than a politically realistic carbon tax. |
7. EPA regulation of climate pollution may not measure up to its regulation of public-health pollution.
This issue should be straightforward. Greens should hold the line on health-and-safety rules pertaining to the energy sector — emission limits governing pollutants like NOx and mercury (e.g., Mercury and Air Toxics Standards); mining and combustion waste (a/k/a Coal Combustion Residuals); fugitive emissions like methane; and “macro” regs like the Cross-State Air Pollution Rule. But prospective EPA rules directed at CO2 emissions may be another matter. Based on the authoritative 2011 paper by Burtraw et al. for Resources for the Future, new EPA regs will at best reduce greenhouse gas emissions (GHG’s) in 2020 by only 13% (vs. 2005). Further reductions would be harder to come by, given that “a regulatory approach is likely to lead to less innovation … than would occur under a flexible incentive-based program” such as a carbon tax. Moreover, unlike a carbon tax, GHG regulations would generate zero revenue. Symbols matter, and EPA authority on public-health pollution is vital. But EPA regulation of CO2 may be less valuable than you presume, David. (That EPA uses a $26/ton social cost of carbon in its analyses doesn’t mean that its regulations would bring the same reductions as would result from a $26/ton price.) |
8. The carbon lobby will want to axe clean-energy support programs in exchange.
The same argument goes for clean-energy subsidies: the implicit cost of carbon in those subsidies is far higher — two to five times higher — than a $20/ton carbon price. Trading subsidies for a tax would, especially in early years, represent far less direct support for clean energy. |
8. A robust carbon tax will do far more for clean energy than direct subsidies.
See #4, above, for our argument that a strongly rising carbon tax will drive investment to clean energy. In the limited space available here, we add that phasing out clean-energy subsidies would build political momentum to get rid of subsidies for fossil fuels and other forms of dirty energy. [Addendum: We nailed this issue in our Jan. 2014 formal comments to the Senate Finance Committee. Details, and link to those comments, are here. — Komanoff] |
9. The environmental benefits are uncertain.
The great benefit of a carbon cap over a carbon tax is that a cap ensures a particular level of emissions reductions (yes, yes, depending on how carbon offsets are used). The thing with a tax is, no one can be sure in advance how much it will reduce emissions. The history of environmental policy is one of overestimating costs, so chances are good that the initial tax level will be set conservatively. That’s what typically happens with cap-and-trade systems — compliance costs are overestimated, there are too many emission permits issued, permit prices plunge, and there’s little financial incentive to reduce emissions. But a cap-and-trade program has a built-in protective measure: the cap. Emissions are either falling or they aren’t, and if they aren’t, the cap provides a statutory basis for further action. It’s not perfect, but it’s something.What happens if a tax isn’t reducing emissions enough? It means Congress has to raise it. How much does Congress like raising taxes? How much do American voters like it when Congress raises taxes? Now imagine raising a tax repeatedly, on an ad hoc basis. Unless taxes take on a very different political valence in U.S. politics, that looks like a nightmare. The carbon tax could end up limping along at hopelessly low levels for ages, like the U.S. gasoline tax. Now, theoretically, the tax could be programmed to rise a certain percentage each year, like the one Brookings modeled. Or there could be a “look back” provision that periodically assesses the tax’s performance and adjusts it accordingly. But … |
9. Certainty in emission reductions is overrated.
That “no one can be sure in advance how much [a carbon tax] will reduce emissions” may well be the number one canard about carbon taxes. After all, what’s the use of knowing now how fast emissions will shrink, when we know that they have to shrink as fast as possible, which means faster than any carbon tax and/or other possible measures can deliver? The climate calamity is many orders of magnitude more dire and global than the acid rain problem. So can we please stop grafting the acid rain model onto climate? The declining sulfur cap in the 1990 Clean Air Act Amendments was intelligently tailored to estimates by limnologists of Northeast U.S. lakes’ remaining capacity to withstand acid rain emissions. But we’ve already overshot the 350 ppm target for climate sustainability; atmospheric CO2 is at 390 ppm and rising. There’s no safe level for CO2 emissions now or in the foreseeable future. Any target ― 17% less by 2020, 40% less by 2030, 80% less by 2050 ― is no more than a talisman. What happens, you ask, if the carbon tax isn’t reducing emissions enough? In some proposals, the tax would rise automatically, in others Congress would have to raise it. But either way it’s crucial to structure revenue return so that a majority of Americans come out ahead and will back increases in the carbon tax rate. (See Points #2 and #3, above.) Built-in, recurring increases will not only obviate the need to return to Congress constantly; they will instill transformative price signals in America’s energy systems, infrastructure, land use and culture that, collectively, will move us from fossil fuels to clean energy. |
10. All political incentives push toward a poorly designed tax.
It’s true that a carbon tax can be well-designed. For economists, that means using the revenue to reduce distortionary taxes. For clean-energy hawks, it means using the revenue to spark cleantech growth. For both, it means provisions that automatically boost the tax if emission reductions are not on track. (And there are other considerations too: how far upstream to levy the tax, how to deal with cross-border “leakage,” etc. This post could have been even longer, trust me.) The worst possible thing to do from both perspectives would be to set the tax at a static, low level and use a bunch of the revenue to carve out special deals for various industries. Then you’d get the economic hit from the tax and malign distributional issues.And yet … that is exactly where all the incentives point. There are many financial interests involved. Every one of them will be leaning on legislators to a) keep the tax as low as possible and b) secure them favorable treatment. This same rent-seeking spectacle took place around the climate bill. But another benefit of a cap-and-trade system is that no matter how distributional issues are settled (i.e., no matter how the permits are allocated), the cap remains the same and the environmental benefits are guaranteed. When it comes to a tax, however, loopholes and kickbacks reduce environmental benefits. Securing those benefits will be a constant, running battle. Environmentalists will be “those people who are constantly fighting to raise taxes.” That is unlikely to endear them to the public or generate support for other green initiatives. To sum up A well-designed carbon tax would be a fantastic thing. In my dream world, it would start at $50/ton and rise 5 percent a year. Twenty-five percent of the revenue would go to rebates for low-income taxpayers; 25 percent would go to reducing payroll taxes; the rest would go to public investments in clean energy RD&D and infrastructure. Whee! Even a tax considerably smaller than that, done right, could enable Obama to meet the emission reduction goals he pledged in Copenhagen. It might also inspire other countries to follow suit, or at least convince other countries that the U.S. is finally in the climate game. It would be a big deal. But a carbon tax is not magic. If climate hawks go into negotiations accepting that carbon pricing must be revenue neutral, that market incentives can solve climate change on their own, that government spending and regulatory actions merely inhibit proper market functioning, that the overall tax burden needs to be reduced, that deficit reduction is an overriding short-term priority … well, even if they come out of that negotiation with a carbon tax (which, as noted earlier, they won’t), it will be low, regressive, and ineffective. And they will have worked themselves into an ideological corner that will be difficult to escape. Worse yet, what if they make all those concessions and come out of it with nothing? The concessions will remain on the record forever, serving as the baseline to future negotiations. (That’s pretty much how the cap-and-trade battle worked out.) What’s needed on climate change, ultimately, is a wholesale, society-wide commitment to remaking energy, agricultural, and land-use systems along low-carbon lines. “Market mechanisms” like a carbon tax are a crucial part of that effort, especially as a source of funding, but they are in no way a substitute for that effort. We won’t get out of this that easily. |
10. & Summation. Climate advocates’ job is to maximize political incentives for a robust carbon tax.
All political incentives push toward climate inaction, period, and not just toward a poorly designed carbon tax. We can either give up . . . or we can keep working to break the impasse — primarily by building support from below, but also by choosing policy strategically. Since giving up isn’t an option, let’s start by reviewing what we’ve established about carbon taxing thus far:
To these assertions, let’s add this:
Unlike revenue from selling tradeable emission permits, which would be subject to the extreme price volatility that has characterized every carbon cap-and-trade system, the revenue from a carbon tax is sufficiently predictable to serve as a building block for tax overhaul. (Lags in responding to the price signal make this particularly true in the tax’s initial years, which happen to be the most politically germane.) Earlier, under Point #4, we referenced the carbon tax proposed by Rep. John Larson, which our modeling suggests would reduce U.S. emissions by 30% within a decade while stimulating employment and economic activity. The Larson bill also includes border tax adjustments to protect domestic energy-intensive industries and to nudge U.S. trading partners to enact their own carbon taxes, leading to a global carbon price. The Larson bill could be said to be patterned on the British Columbia carbon tax, which went into effect in 2008 at a rate of roughly $9 per ton of CO2 and was incremented annually to its current (2012) level of approximately $27. On every criterion — climate, macro-economic, distributional, political — the tax appears thus far to be a resounding success. Consider:
To be sure, there are big differences between British Columbia and the 50 U.S. states, including hydro-rich BC’s effective exemption of electricity from its tax. Nevertheless, these lessons are ours for the taking: first, it may be better to square up to the political pain of raising the carbon price than to hide it; and second, a tax with transparent and ironclad revenue recycling can build the political appetite for raising the tax level to the point where deep carbon cuts actually take place. In sum: a carbon tax isn’t the whole answer, yet a transparent, briskly rising carbon tax will spur the development of many answers large and small that add up to a cultural transformation. Taxing carbon aligns everyone on the side of reducing emissions as fast and as far as possible. In reach, transparency and affordability, no other policy tool comes close. |
"Once the climate tipping point is past …"
Every so often, you read something that stops you in your tracks. That happened to me yesterday, when I came across this:
We are talking about our grandchildren living in a resource-constrained future where they have a chance to learn to live in balance with the planet, or our grandchildren living in a future truly filled with squalor, death and misery. Once the climate tipping point is past, human beings will pay any price to go back but it will be to no avail. And they will wonder why their ancestors thought driving SUVs and air conditioning the outdoors was more important than water, food and survival of their progeny.
I read this passage yesterday on Amtrak as I was returning to New York City from Washington. Last Saturday, I participated in one of the “Fossil Fuel Disaster Relief Rides” organized by the direct-action environmental group Time’s Up. We hauled supplies by bike to the Rockaways, one of dozens of districts in the New York region devastated by Hurricane Sandy, and we stuck around to help residents drag the sodden wreckage of their living rooms and garages onto the sidewalk. The scene was post-apocalyptic: trash mounds towering over twisted bungalows; dump trucks and ‘dozers lumbering down dirt-caked streets; dust, muck and ruin stretching for miles; the sun filtered through a torn sky. I also knew from published reports that my home town of Long Beach, on the next barrier beach to the east, had similarly been laid waste.
“Human beings will pay any price to go back but it will be to no avail.” Fittingly, the writer was responding to a post on Streetsblog, the blog of the “livable-streets” movement, that for some dubious reason was pouring cold water on the hope that a carbon tax might figure in the emerging equation for tax and fiscal reform. Not only that, the writer was telling other commenters that a visit to our (Carbon Tax Center) Web site could dispel their doubts that a carbon tax could be made effective and fair. Here’s her comment, in full:
Again, please see the link that Komanoff posted below in the very first comment. (www.carbontax.org) Most of the questions raised below are answered — how to measure carbon emissions, at what point in the emissions stream to effectively tax it, how a carbon tax can be revenue neutral, why no one is or will ever suggest taxing people breathing, etc.
As to how to deal with off-shoring of carbon emissions, we would indeed have to be more responsible about this than we have been with off-shoring all our other pollution. We could either refuse to trade with countries that don’t impose carbon taxes at similar levels, or we could levy a tariff on all imported products based on the level of that country’s gross fossil-fuel burning carbon emissions. (We would no doubt have to estimate in cases where self-reported numbers are unreliable.) This would have an added benefit of on-shoring manufacturing jobs back to the US.
With a carbon fee and dividend program, people would actually make money as long as they kept their usage below that of the average energy-squandering American. This is not difficult to do! All it takes it takes is simple behavioral changes and/or very small investments of money that will be paid back with lower fuel bills. But there simply must be a price signal or people will not change their energy consumption and carbon emissions patterns. And these carbon emission patterns need to drop immediately. Not by 2020 or 2030. Any plan that talks about doing something 2020 and beyond is a plan to do nothing because it will be too late. It is hypocritical greenwashing designed to distract and pretend, pure and simple.
We are talking about our grandchildren living in a resource-constrained future where they have a chance to learn to live in balance with the planet, or our grandchildren living in a future truly filled with squalor, death and misery. Once the climate tipping point is past, human beings will pay any price to go back but it will be to no avail. And they will wonder why their ancestors thought driving SUVs and air conditioning the outdoors was more important than water, food and survival of their progeny.
I don’t know if I’ve ever seen the case for a carbon tax made more powerfully and eloquently than in those four paragraphs. I know that I in lower Manhattan and my fellow New Yorkers in the Rockaways and Long Beach and Staten Island now wish we could have paid whatever it would have taken to buy the reduction in sea-level rise and ocean-temperature rise that might have quenched some of the force of Hurricane Sandy. Taking that knowledge and building it into support for a robust U.S. carbon tax is our new mission at the Carbon Tax Center.
PS: As for that Amtrak trip to DC yesterday. That’s where AEI, RFF, the IMF and Brookings held an all-day conference — before a packed house — on The Economics of Carbon Taxes. Click the link to unpack the acronyms and see the program. We’ll post a report soon.
Bloomberg No Stranger to Climate Advocacy — Especially for a Carbon Tax
New York City Mayor Michael Bloomberg’s endorsement yesterday of President Obama’s re-election may have caught the political class by surprise, but not the Carbon Tax Center.
It was five years ago today, in Seattle, at a climate summit organized by the U.S. Conference of Mayors, that Bloomberg made a full-throated appeal to Congress to enact a carbon tax. His speech then, on Nov. 2, 2007, remains the most passionate and compelling call for truly effective climate action by any major American political figure.
The Carbon Tax Center’s New York headquarters are currently off the grid, due to Superstorm Sandy. We hope to be back around Election Day with fresh commentary, including discussion of whether the President’s first-term climate program and second-term outlook merited Bloomberg’s endorsement. For now, to show what real climate leadership looks like, please feast on the full text of Mayor Bloomberg’s 2007 speech, included here, courtesy of The New York Times. (The mayor’s extensive discussion of carbon taxing comes toward the end.)
— Charles Komanoff
Remarks by New York City Mayor Michael R. Bloomberg, in Seattle, Washington, Nov. 2, 2007, before the U.S. Conference of Mayors’ “Climate Protection Summit”
I’ve had the pleasure of working with Mayor Palmer, Mayor Nickels, Mayor Diaz — and many others in this room — through our coalition of Mayors Against Illegal Guns, which now includes more than 240 mayors from all around the country — Republicans, Democrats, and independents. If you haven’t joined yet, we’d love to have you — and I think illegal guns and climate change are two of the best examples of cities leading where Washington has not. On both issues, those in Washington prefer talk to action. On illegal guns, they extol the virtues of the Second Amendment, which is all well and good, but let’s get serious: protecting the Second Amendment does not stop you from keeping illegal guns out of the hands of criminals. It’s just a political duck-and-cover that allows legislators to escape responsibility for fixing a serious problem. And innocent people — and police officers — are dying as a result.
On climate change, the duck-and-cover usually involves pointing the finger at others. It’s China-this and India-that. But wait a second. This is the United States of America! When there’s a major challenge, we don’t wait for others to act. We lead! And we lead by example. That’s what all of us here are doing.
This conference has highlighted just how much local leadership there is on the issue of climate change and how many innovative new projects are going on in cities around the country: Seattle’s incentives for greening existing buildings, Los Angeles’s million tree initiative, Miami’s bus rapid transit program — and the list goes on. When we developed our long-term sustainability plan in New York, which we call PlaNYC, we made no apologies for stealing the very best ideas — and we came up with some of our own, including converting our 13,000 taxis to hybrids or high-efficiency vehicles. This will not only help clean our air and reduce greenhouse-gas emissions, it will save each driver about $4,500 a year in gas costs.
Cities and states are both taking action, but the fact is, no matter how far we push the boundaries of the possible, there will be no substitute for federal leadership. Leadership is not waiting for others to act, or bowing to special interests, or making policy by polling or political calculus. And it’s not hoping that technology will rescue us down the road or forcing our children to foot the bill. Leadership is about facing facts, making hard decisions and having the independence and courage to do the right thing, even when it’s not easy or popular. We’ve all heard people say, “It’s a great idea, but for the politics.” And let me give you just one example from New York.
Last spring, as part of our PlaNYC initiative, we proposed a system of congestion pricing based on successful programs in London, Stockholm and Singapore. The plan would charge drivers $8 to enter Manhattan on weekdays from 6 a.m. to 6 p.m., which would help us reduce the congestion that is choking our economy, the pollution that has helped produce asthma rates that are twice the national average, and the carbon dioxide that is fueling global warming.
Now, the question is not whether we want to pay, but how do we want to pay. With an increased asthma rate? With more greenhouse gases? Wasted time? Lost business? Higher prices? Or do we charge a modest fee to encourage more people to take mass transit and use that money to expand mass transit service? When you look at it that way, the idea makes a lot of sense, but for the politics, because no one likes the idea of paying more. But being up front and honest about the costs and benefits, we’ve been able to build a coalition of supporters that includes conservatives and liberals, labor unions and businesses, and community leaders throughout the city.
There is no problem that can’t be solved if we have the courage to confront it head-on — and put progress above politics. Mayors around the country are doing it — and those in Washington can, too. I believe it’s time for both ends of Pennsylvania Avenue to come together around a national strategy on climate change and to lead the way on an international strategy. And I believe that until they do, it’s our job as mayors to point the way forward. That’s why right after this conference, several of us will be testifying before a House committee that is holding a hearing on climate change here in Seattle. It’s why I’m pleased to announce that New York City has recently joined a new campaign being launched by The Climate Group called “Together.” It will unite businesses, think tanks, advocacy groups, faith-based organizations, and cities — and I urge all of the cities in this room to join, and to invite your neighbors. It will be a national effort to help all Americans make a difference in the fight against climate change. And it’s why next month, I will go to the U.N. climate change summit in Bali, in the South Pacific, as a guest participant, and to support our delegation.
It’s time for America to re-establish its leadership on all issues of international importance, including climate change. Because if we are going to remain the world’s moral compass — a role that we played throughout the 20th century, not always perfectly, but pretty darn well — we need to regain our footing on the world stage. That means ending the “go-it-alone” approach to foreign affairs that has never served America well. It didn’t work in the 1920s, when we tried to isolate ourself from the world, and it hasn’t work in recent years, when we’ve tried to stand above it, pretending that vital international treaties can simply be ignored. The fight against global warming is a test of America’s leadership — and not just on the environment.
Climate change presents a national security imperative for us, because our dependence on foreign oil has entangled our interests with tyrants and increased our exposure to terrorism. It’s also an economic imperative, because clean energy is going to fuel the future. Jobs are on the line here — good jobs of every kind: Farm jobs. Factory jobs. Engineering jobs. Sales jobs. Management jobs. If we don’t capture these jobs, they’ll just move overseas. Green energy is going to be the oil gusher of the 21st century, and if we’re going to remain the world’s economic superpower, we’ve got to be the pioneers — just as America always has been.
How do we do it? I think we need a strategy that embraces four basic principles, and I’d like to briefly outline them today. First, we need to increase investment in energy R & D. Right now, we’re spending just one-third of what we were in the 1970s. If we really want to be able to manufacture competitively priced biofuel and solar power, if we really want to sequester the carbon dioxide released from coal, we have to be willing to make the commitments that will drive private capital to these projects — and right now, we’re just not doing that.
Second, we have to stop setting tariffs and subsidies based on pork barrel politics. For instance, Congress is currently subsidizing corn-based ethanol at 50 cents a gallon — and you can argue that’s good agricultural policy, but you can’t argue that it’s good for consumers or the environment. Because it isn’t. Consumers pay more for food, and producing corn-based ethanol results in much more carbon dioxide than producing sugar-based ethanol. But are we subsidizing sugar-based ethanol? No! We’re putting a 50-cent tariff on it. Ending that tariff makes all the sense in the world, but for the politics. Everyone knows that politically driven policies are costing taxpayers billions while providing only marginal carbon reductions — but we need leaders who will do something about it!
Third, we have to get serious about energy efficiency — and the best place to start is with our cars and trucks. In 1975, Congress passed a law requiring fuel efficiency standards to double over 10 years, from 12 miles a gallon to 24, with incremental targets that auto manufacturers were required to meet. But since 1985, Washington has been paralyzed by special interests. If the same incremental gains had been adopted for the last two decades, think of where we would be now! We’d all be saving money at the pump, we’d be producing less air pollution and greenhouse gas, Detroit would be in a stronger competitive position and the “Big Three” may not have lost so many more jobs. (Just yesterday, Chrysler announced another 12,000 job cuts.)
Those job losses hurt hard-working Americans, and we have to ask ourselves: Do we want even more middle-class factory workers to be handed pink slips and left to look for service jobs at half the wages? Because that’s the direction we’re heading in if we continue to fall further and further behind other countries in producing fuel-efficient vehicles. The current Senate energy bill would raise Corporate Average Fuel Economy (CAFE) standards from 27.5 to 35 miles per hour by 2020. That’s nowhere near the leap we made from 1975 to 1985, and many foreign cars are already getting 35 miles to the gallon. Even so, U.S. automakers are trying to water down the Senate bill — and if Congress caves, you can bet the loudest cheers will be heard in Japan. Raising fuel efficiency standards is the best thing we could do for U.S. automakers — and it would’ve been done years ago, but for the politics.
Fourth and finally, we have to stop ignoring the laws of economics. As long as greenhouse gas pollution is free, it will be abundant. If we want to reduce it, there has to be a cost for producing it. The voluntary targets suggested by President Bush would be like voluntary speed limits — doomed to fail. If we’re serious about putting the brakes on global warming, the question is not whether we should put a value on greenhouse gas pollution, but how we should do it. This is where the debate is moving, and I’d like to briefly touch on the pros and cons of the two approaches that are most often discussed: creating a cap-and-trade system, and a putting a price on carbon.
Both of these ideas share the same goal: raising the cost of producing greenhouse gas pollution. If you want less of something, every economist will tell you to do the same thing: make it more expensive. Of course, none of us wants to pay more for electricity or gas or anything else. Rising energy costs, rising health costs, rising college tuition — the middle class is getting squeezed left and right. But raising the cost of pollution can actually save taxpayers money in the long run — and I’ll explain how in a minute. But first, you might be thinking: “Wait a second. Five years ago, oil was selling at $30 a gallon. Now it’s selling at more than $90, and we’re not buying any less of it. So why would raising the cost of carbon make any difference?” The answer is: It would and it wouldn’t. People are going to keep buying gas whether it costs $1 a gallon or $2.75 a gallon — or even more — because the demand for gas is inelastic. But the demand for coal is far more elastic than oil, and so if its price goes up, many power plants would likely switch to natural gas, which is much cleaner, and the 100 coal plants that are now on the drawing boards would likely convert to natural gas as well. Raising the cost of carbon would also make alternative energy sources more cost-competitive, which would lead more consumers and property owners to make the switch.
To raise the cost of carbon, we can take either an indirect approach — creating a cap-and-trade system of pollution credits — or a direct approach: charging a fee for greenhouse gas pollutants. The question is: Which approach would be more effective? I’ve talked to a number of economists on this issue, people like Gilbert Metcalf at the National Bureau of Economic Research, and every one of them says the same thing: A direct fee is the better approach — but for the politics. There’s that phrase again: “But for the politics!”
Cap-and-trade is an easier political sell because the costs are hidden — but they’re still there. And the payoff is more uncertain. Because even though cap-and-trade is intended to incentivize investments that reduce pollution, the price volatility for carbon credits can discourage investment, since an investment that might make sense if carbon credits are trading at $50 a ton may not make sense at $30 a ton. This price volatility can also lead to real economic pain. For instance, if 100 companies release higher emissions than they had planned for, they all have to buy more credits, which can create a very expensive bidding war. That’s exactly what’s happening in parts of Europe right now, and it’s going to cost companies there billions of dollars.
There are also logistical issues with cap-and-trade. The market for trading carbon credits will be much more complex and difficult to police than the market for the sulfur dioxide credits that eliminated acid rain. And there are political issues — because the system is subject to manipulation by elected officials who want to hand out exemptions to special interests. A cap-and-trade system will only work if all the credits are distributed from the start — and all industries are covered. But this begs the question: If all industries are going to be affected, and the worst polluters are going to pay more, why not simplify matters for companies by charging a direct pollution fee? It’s 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.
A direct charge would eliminate the uncertainty that companies would face in a cap-and-trade system. It would be easier to implement and enforce, it would prevent special interests from opening up loopholes and it would create an opportunity to cut taxes.
I was in England a month ago talking to the Conservative Party, which has proposed a series of revenue-neutral “green taxes” that would be offset by reductions in other taxes. I believe that approach merits consideration — and the most promising idea I’ve heard is to use the revenue from pollution pricing to cut the payroll tax. After all: Employment is good, pollution is bad. Why shouldn’t we lower the cost of the good and raise the cost of the bad? Studies show that a pollution fee of $15 for every ton of greenhouse gas would allow us to return about $500 a year to the average taxpayer. And a charge on pollution would be less regressive than the payroll tax, because the more energy you consume, the more you would pay. That would give us all of us an incentive to reduce our energy use — whether that’s buying a more fuel efficient appliance, or making the switch to compact fluorescent light bulbs, as we’ve done in New York’s City Hall – and as I’ve done in my own home. Under this approach, even though energy costs would rise, the savings from tax cuts and energy efficiencies could, over the long run, leave consumers with more money in their pockets.
Creating a direct charge for greenhouse gas pollution would also incentivize the kinds of innovation that a cap-and-trade system is designed to encourage — without creating market uncertainty. To do this, a portion of the revenue from the pollution charge would be used to create an innovation fund, which would finance tax credits for companies that reduce their greenhouse gas pollution. As a result, companies would have two big incentives to reduce their pollution: minimizing the charges they would have to pay and maximizing their tax savings. And unlike a cap-and-trade system, the certainty of tax credits would be more likely to lead companies to make the long-term investments in clean technology that will allow us to substantially reduce greenhouse gas pollution.
Both cap-and-trade and pollution pricing present their own challenges — but there is an important difference between the two. The primary flaw of cap-and-trade is economic — price uncertainty. While the primary flaw of a pollution fee is political, the difficulty of getting it through Congress. But I’ve never been one to let short-term politics get in the way of long-term success. The job of an elected official is to lead – not to stick a finger in the wind. It’s to stand up and say what we believe — no matter what the polls say is popular or what the pundits say is political suicide.
From where I sit, having spent 15 years on Wall Street and 20 years running my own company, the 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. I think it’s time we stopped listening to the skeptics who say, “But for the politics” and start being honest about costs and benefits. Politicians tend to prefer cap-and-trade because it obscures the costs. Some even pretend that it will lower costs in the short run. That’s nonsense. The costs will be the same under either plan — and if anything, they will be higher under cap-and-trade, because middlemen will be making money off the trades. (I happen to love middlemen. They use Bloomberg terminals and support my daughters. But what’s right is right!)
For the money, a direct fee will generate more long-term savings for consumers, and greater carbon reductions for the environment. And I don’t know about you, but when the economists say one thing and the politicians say another, I’ll go with the economists.
Of course, I also understand that you can’t let the perfect be the enemy of the good. Whether it’s a direct fee or cap-and-trade, we can’t be afraid to try something — to do something — to act. As mayors, we’re all familiar with those who respond to every problem by saying, “Do another study,” or by scaring voters with doom-and-gloom predictions. That approach is why we have health care costs that have spiraled out of control, it’s why we have public school systems that were allowed to collapse, and it’s why we’re still fighting poverty with the same old programs that haven’t worked.
But remember, this is America! We can’t be afraid to lead, to innovate, to experiment. Cities aren’t afraid. We’re showing that we can do better, we can make progress, and we can do it in a way that is good for the environment and the economy. It’s time for Washington to do the same and to show the world that America is ready to be a leader. When our representatives run for re-election or higher office, they talk about “a chicken in every pot.” But why not tell us who’s going to pay, how it’s going to work, when it’s going to be implemented, and if it doesn’t work, what’s Plan B? We need our leaders to have the courage to talk about and implement real climate change solutions, not just because it’s good for the world, but because it’s good for America, our environment, our national security and our economy. Make no mistake: Real jobs are on the line here — because cleaner energy sources are going to be a cornerstone of the 21st-century economy.
If we’re going to remain the world’s economic superpower, we have to create predictable incentives that will drive technological innovations and allow us to lead the world in developing clean, reliable and affordable energy. We can do it! If we stop saying: But for the politics!
In the weeks and months ahead, our job is not just to continue innovating — but to demand that those in Washington join us. Tell them that it’s O.K. to stand up and be honest about the costs and benefits of real solutions. We’ve done it — and we’ve not only lived to tell the tale, we’ve won support and respect from our constituents. They can, too. And we’ve got to hold them accountable for doing it. So let’s get to work.
The “Bad Cop” Survives: Court Upholds EPA Greenhouse Gas Regulations
On Tuesday, a unanimous three-judge panel of the DC Circuit Court of Appeals declined to block the U.S. Environmental Protection Agency’s process of regulating greenhouse gases under the Clean Air Act. The 81-page decision upheld EPA’s 2009 endangerment finding that “anthropogenically induced climate change threatens both public health and public welfare,” and concluded that having made that finding, EPA is “unequivocally” compelled by the Supreme Court’s decision in Massachusetts v. EPA (2007) to regulate greenhouse gases as pollutants under the Clean Air Act.
The panel also held that the parties challenging EPA’s action were not harmed by (and thus had no legal “standing” to challenge) the Agency’s decision, via the “tailoring rule,” to regulate only the largest sources of greenhouse gases. The court thus swept away the last remaining obstacle to broad regulation of the largest category of greenhouse gas polluters, existing stationary sources.
The ruling came the day after a report in Bloomberg News that owners are selling off, at deep discounts, coal-fired power plants that have been under EPA mandates to install emission controls on “conventional” (non-climate) pollutants such as sulfur dioxide and mercury. The fire sale occurs as cheap natural gas has been displacing coal as the main fuel for electricity generation in many parts of the U.S. Calculations by the Carbon Tax Center’s Charles Komanoff show a 14% drop in coal-powered electricity last year vs. the 2007 peak, with nearly half of the decline filled by gas (with the rest from increased wind and hydro-electricity). Behind the coal-to-gas trend, which is accelerating thus far in 2012, are 10-year low natural gas prices stemming from the controversial fracking boom.
The spectacle noted in the Bloomberg article of billions of dollars left “stranded” in uncompetitive coal-fired power plants points to a serious limitation in using the regulatory process to constrain emissions of greenhouse gases. If regulation, rather than carbon pollution taxes, is to drive the 80% or greater reduction in emissions that scientists say is needed in the next several decades, then emissions standards for coal plants will need to be tightened again and again, rendering many of those investments obsolete long before the end of their assumed economic life.
Indeed, “stranded capital” looms as a huge problem in any inflexible regulatory system to cut down on sources of greenhouse gases that have long lives. Adding costly capital equipment to those dinosaurs is likely to waste utility ratepayers’ money while driving up the financial stakes of owners who have invested in retrofits that may never get to pay for themselves. Because stabilizing the climate will be a long-term and very capital-intensive process, the cost of inefficiencies built into regulations will be enormous and cumulative.
In contrast to this regulatory lock-in, a predictable, gradually-increasing carbon pollution tax would reward long-term investment and innovation in the lowest-carbon technologies while reducing demand. Even too much investment in gas-fired power plants might be ill-advised under a briskly-rising carbon price.
As things now stand, the renewables industries must make regular pilgrimages to Congress to continue their life-support “production tax credits.” A long-term, rising carbon tax would make long-term investments in renewables safer while spurring innovation (and obviating the need for those pilgrimages). And a rising carbon tax will also signal when to efficiently retire old, coal fired power plants — dirtiest first.
Economist and former Undersecretary of Commerce Robert Shapiro was asked about climate policy at a recent National Journal panel. Shapiro said that as EPA moves ahead with greenhouse gas regulations in the next year, he hopes complaints from industry will spur Congress to replace those cumbersome regulations with a more effective, broad-based carbon pollution tax.
That prospect gives a new dimension to yesterday’s DC Circuit decision to uphold EPA regulations. The decision is indeed a victory — not because EPA regulation of existing stationary sources can be effective long-term climate policy, but because the threat of their cost could help prod Congress to take the most efficient (and least bureaucratic) step to reduce carbon emissions: enact a substantial, gradually-rising carbon pollution tax.
Photo: Flickr — arbyreed
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Shortly after posting this commentary on June 27, I received e-mail comments from three well-known analysts of climate policy ― two resource and environmental economists and an attorney who has analyzed ways to regulate greenhouse gases under the Clean Air Act. We share some of that exchange below. ― James Handley, June 30.
Commenter 1: James – a nice piece, lots of important issues here. But I think you are mis-stating the stranded costs problem, and overstating the merits of a carbon tax.
You have compared myopic regulation – this year’s regulation can be treated as permanent until, oops, we have to change it again – with a long-term, gradually and predictably rising carbon tax. One could equally well have long-term, gradually and predictably tightening regulations, or a myopic carbon tax (it will never go above $21/ton until, oops, etc.).
James Handley: True; there are no guarantees that a carbon tax would keep rising. But a revenue stream (especially if committed to an important purpose in advance) seems to offer additional incentives to stay on course.
C-1: Stranded costs result from making long-term investments under the myopic approach to taxes OR regulation, not from regulation per se. A “read my lips – no carbon tax increase above today’s level” tax policy could induce large investments in incremental technologies, which would then be stranded when taxes were raised. (Or would lead to overwhelming political pressure not to raise the tax, in practice.)
JH: I agree.
C-1: A long-term schedule of predictably tightening future regulations would have the same salutary effect as a long-term schedule of predictably rising carbon taxes (and would be almost equally difficult to achieve, in realistic political terms).
JH : Yes, Joe Aldy [former Obama White House climate economist, now at Harvard Kennedy School] suggests a carbon intensity standard declining on a pre-announced schedule.
Richardson & Burtraw (Resources for the Future) have expressed doubt about whether the Clean Air Act offers such flexibility or allows more flexible options like utility-wide carbon intensity standards. (See Greenhouse Gas Regulation under the Clean Air Act: Structure, Effects, and Implications of a Knowable Pathway.) EPA said in a Notice of Proposed Rulemaking that it is not mandating fuel switching and does not contemplate it as a compliance option — which I think also means they’re contemplating rules that can be met without switching to renewables. So the “knowable pathway” probably comes down to plant-specific technology standards. And those are hard to ratchet down, especially predictably and smoothly. In practice, EPA tends to look at the technology available and set standards that can be met.
And technology mandates for coal power plants, especially existing ones, can only go so far. Retrofitted plants would be a lot more energy intensive. The thermodynamic minimum energy penalty (independent of process) for capturing and sequestering CO2 is roughly 1/3 of the energy output of a power plant. (I’ve read of research to use the vast waste heat from power plants to do the work of capturing, but nobody’s done it.)
So I don’t expect EPA technology mandates to offer anything like the flexibility and predictability of a tax. Nor do they offer revenue, create broad incentives to reduce energy demand or offer monetary incentives for innovation.
C-1: I think a carbon tax along the lines you propose would be great. But so would a well-planned, progressively tightening system of command-and-control regulation. The real advantages of a carbon tax, in terms of administrative simplicity, are important for many purposes, but it isn’t right for every situation and it shouldn’t be oversold.
JH: Having worked to prosecute polluters for 14 years at EPA, I have doubts about the Agency’s ability to effectively enforce declining technology-based emissions standards. I feel more confident that IRS can collect a carbon pollution tax.
Commenter 2: Excellent dialogue that inspires many thoughts, and two comments.
Despite many virtues, I am not convinced a carbon tax is administratively simpler. It could/should be, but won’t necessarily be simpler. Various exemptions and especially border tax adjustments or rebating revenues to energy intensive trade exposed industries could get complicated.
JH: Compared to the voluminous EPA Clean Air Act regs?
We like the Border Tax Adjustment (BTA) in Rep Stark’s bill, the Save Our Climate Act. It’s short, not complicated. And BTA’s strike me as vastly superior to rebates of carbon taxes to the Energy Intensive Trade-Exposed Industries. Rebates would enshrine dirty, inefficient practices and sacrifice revenue; BTA’s would protect domestic industry while offering a rising bounty for trading partners to enact their own carbon taxes.
I’m surprised by all the worry about World Trade Organization rules. WTO’s trade-harmonization provisions were written to accommodate a consumption tax — the EU’s VAT. Why wouldn’t a simple, non-discriminatory carbon tax be similarly consistent with WTO? I wonder if the EU is blundering by asserting that its aviation tax is an environmental measure. That’s a harder standard in WTO. Taxing authority is clear. (As Chief Justice Roberts just said about the constitutionality of the health care mandate.)
C-2: I think a BTA will become more complicated when offended parties claim things like their renewable support programs or smooth roadway surfaces or color of roofing shingles contribute to mitigation efforts, and hence must be considered as part of a border tax adjustment calculation that is tied specifically to a carbon tax.
JH: Yikes. Metcalf & Weisbach proposed setting BTA’s using a default carbon intensity for five energy intensive commodities (steel, aluminum, chemicals, paper, cement) derived from average U.S. production practices. (See [Design of a Carbon Tax, Harvard Env’tl L. Rev, 2009, p. 540, et seq.) Carbon content for each imported (or exported) good would be calculated by summing the “carbon content” of those five. An importer (or exporter) asserting that their goods’ carbon content is lower (or their competitors’ is higher) would have the burden of proof. (Is that when they’d point out their white roof, smooth road, etc?)
C-2: My other comment is that although EPA cannot raise revenue for the national government, I understand it could raise revenues for state governments. That is, a plausible scenario is that states administer implementation plans under the Clean Air Act that raise revenues through taxes or auctioned allowances. There are a lot of possible obstacles to that happening, especially political, but no single legal obstacle…so I understand. A real conservative might like that state’s rights aspect of CAA regulation.
JH: That’s interesting. States enacting carbon taxes as their State Implementation Plans to meet their Clean Air Act requirements. Does that assume EPA chooses to set a National Ambient Air Quality Standard for CO2? In various Federal Register notices they’ve shown no stomach for NAAQs, despite Bill Snape’s (Center for Biological Diversity) efforts.
And 50 separate State Implementation Plans? What about the law of one price? All kinds of arbitrage and distortions there? And wouldn’t the international trade harmonization problems come up then, too?
C-2: 50 SIPs, not. For instance, the northeast states will try to submit a coordinated SIP around a strengthened RGGI [Regional Greenhouse Gas Initiative], with one price in that region. Given the flexibility of it, Pennsylvania might opt in, compared to less flexible options.
In sum, I would walk to Chicago to get a carbon tax in place, but I am increasingly dubious of the Faustian bargain some have suggested of sacrificing the Clean Air Act in exchange. I really agree with [C-1] about the virtues of the CAA. Let the CAA go slack or lag behind if the tax is doing the work. But I would be glad it is there as a backup. Nonetheless, I will walk with you to Chicago.
JH: I imagine we’d have a good time. Maybe Jim Hansen and Bill McKibben would join us.
C-2: I’ll carry a copy of the CAA as ballast in my backpack.
JH: It’s ~ 300 pages [the Clean Air Act statute]. But I meant the implementing regulations (in the Code of Federal Regulations) ~ 10x. I knew EPA lawyers who enforced just one part of the CAA regs (e.g. mobile source rules) for decades.
I much appreciate this discussion, your solidarity “walk to Chicago”… CAA as a backup to a carbon tax might be point where some bargaining could happen. It might also help address the concern about a carbon tax not rising or not rising fast enough.
Commenter 3: I agree 99% with [C-2]. However, the 1% is that it’s not so easy to let the CAA “go slack”. It grants a lot of discretion to EPA about how to act but not over whether to do so. Mass v. EPA and the recent DC circuit ruling illustrate that EPA can be compelled to start the regulatory process, and that it is hard to stop it w/o legislation. I understand that summary elides over a political shift in the middle. I also agree strongly with the result in both cases (though I think the tailoring rule should go down if a plaintiff with standing can be found).
The CAA isn’t written as a menu option. It’s a powerful statute that’s hard to stop. Usually that’s a good thing. But not always, especially when you have a better tool in place. The best solution would be a carbon price with a CAA tweaked to serve specifically as a backstop tool. But that’s a big political ask.
JH: I take your word on the difficulty of letting CAA go slack… yes, a fall-back would be terrific. Would industry prefer a carbon tax (because of flexibility and lower cost) even with EPA as a fall-back?
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