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Brookings Panel Points To “Grand Bargain” – Carbon Tax to Reduce GHG Pollution and Deficit

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Last Wednesday, the Brookings Institution hosted “America’s Energy Future: New Solutions to Fuel Economic Growth and Prosperity.” The first panel, “New Policies for a Cleaner Economy,” featured heavy-hitters: John Deutch (MIT “Institute” professor, former CIA Director…), Joseph Aldy (former Obama assistant on climate & energy), as well as Brookings Senior Fellows Ted Gayer and Michael Greenstone, who moderated.

Greenstone opened by noting how closely-linked energy consumption is to our well-being, but strongly cautioned about very serious un-priced side effects, especially from fossil fuels. Gayer recommended reforming government cost-benefit analysis to focus more on those un-priced externalities, especially since consumer benefits, he noted, are already efficiently priced into markets. Deutch advocated creation of a national energy technology research corporation to harness private sector investment free of a Department of Energy that “is mostly about bombs.” Aldy proposed a technology-neutral “National Clean Electricity Standard” to tax carbon-intense electricity generation and credit low- and zero-carbon electricity,  while providing federal revenue.

Greenstone asked the panel if their proposals wouldn’t be better replaced by a “grand bargain” to provide more of what we like: income, and less of what we dislike: carbon pollution. “[T]he giant prize standing in front of us is the realization that one could raise revenue instead of raising income taxes… through a carbon tax or some kind of carbon charge.” Aldy enthusiastically agreed, claiming “evidence of bipartisan support” and pointing out that he and Brookings economist Adele Morris proposed a carbon tax to the Obama deficit commission.

Deutch chimed in, “I couldn’t agree more with a proposal to do a comprehensive greenhouse gas tax. It depends, of course, on how it’s designed… and how you allocate the revenue. So if you put onto a tax proposal like you say a revenue proposal, then you have at least some chance of selling it.” Deutch urged return of some revenue to taxpayers as “walking around money.” “We’ve got to get the legislation passed,” he concluded.

New Converts to Carbon Tax: Welcome Aboard, Now Start Rowing

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(Note: NYT DotEarth blogger Andy Revkin linked to this post today in a piece that has more from Bill Gates on carbon pricing. Click here. – C.K., Sept 2.)

Last week, Bill Gates. This week, Bjorn Lomborg. With the world’s #1 software magnate and the man whom the Guardian labeled “the world’s most high-profile climate change skeptic” both endorsing a carbon tax, is the tide of influential opinion on climate policy and carbon pricing turning?

Yes and no.

Bill Gates. Photo: Steve Jurvetson (flickr).

Let’s look at Lomborg first. The Danish policy analyst built a lucrative career lambasting climate-change advocates as scaremongers who would consign millions to early death by devoting resources to decarbonizing the world economy rather than fighting killer diseases like malaria. But in a new book to be published next month, the self-styled “skeptical environmentalist” reportedly will call global warming “one of the chief concerns facing the world today” and “a challenge humanity must confront.” According to the Guardian, Lomborg will urge investing tens of billions of dollars a year to tackle climate change, with the funds to be raised through a carbon tax.

In somewhat overheated prose, the Guardian called Lomborg’s new-found resolve to combat global warming “an apparent U-turn that will give a huge boost to the embattled environmental lobby.”

Gates, on the other hand, has long worried about climate change. But in an interview in Technology Review last week, he added a new wrinkle: criticism of cap-and-trade:

TR: [A]lmost everyone agrees that there needs to be a price on carbon–whether a Pigovian tax or a cap-and-trade system. Without a price, there’s going be very little incentive to do the kinds of research, or create the kinds of technologies, or build out the kind of infrastructure, that we need.

Gates: No, that’s not right. It’s ideal to have a carbon tax, not just a price on carbon, which is this fuzzy term that includes cap-and-trade.

TR: Well, ideally, you’d do a Pigovian tax —

Gates: No, not a Pigovian tax. A Pigovian tax is where you pay for the damage. Here, you’re not paying for the damage — you can’t pay for the damage. You’re using the tax to create a mode shift to a different form of energy generation.

TR: That sounds very rational, pragmatically feasible, and humane. It also sounds politically unlikely.

Gates: Which is more likely: a [hidden] carbon tax [Gates’ way of describing cap-and-trade] with all sorts of markets and options and uncertainties about prices, and traders in the middle, and confusion about who initially gets the most advantage? Or a regulatory thing that says you mark every coal plant in the country with when it has to be retired, and a 2 percent tax to fund the R&D so that utilities know they can buy a plant that’s emitting hardly any CO2?

Gates’ disparagement of cap-and-trade is striking. But neither his 2% carbon tax nor Lomborg’s, which appears to resemble Gates’ in magnitude and function ─ funding energy R&D ─ is going to end the reign of fossil fuels in the foreseeable future.

Bjorn Lomborg. Photo: Emil Jupin (Lomborg.com).

The notion of an R&D solution is alluring. Who doesn’t want there to be global warming antidotes lurking in garages and labs, waiting for funding to unlock them? But it’s a chimera. Even with unlimited research funding, no technological breakthroughs can dislodge carbon-based fuels from dominion over the world’s energy economy. Fossil fuels’ energy density is too great, and their positional advantages of infrastructure and institutions too powerful.

Yes, subsidies can help push renewables past the “hump” in the S-curve to where scale economies can kick in and take a few bites out of the fossil fuel pie. But as New Republic blogger Brad Plumer pointed out recently, “Government subsidies just don’t pack the same punch as a market price on carbon pollution.” When a commodity or activity causes harm, the surest way to reduce it isn’t to subsidize a thousand and one alternatives but to directly discourage the thing by internalizing the cost of the harm into its price.

Ironically, Barack Obama appeared to grasp this during his run for the presidency. In a February 2008 interview with the San Antonio Express he enthused over the idea of a carbon tax:

Q. Have you considered … taxing emerging energy forms, for example, say a penny per kilowatt hour on wind energy?

A. Well, that’s clean energy, and we want to drive down the cost of that, not raise it. We need to give them subsidies so they can start developing that. What we ought to tax is dirty energy, like coal and, to a lesser extent, natural gas. (emphasis added)

How big a carbon tax is needed? A lot more than 2%. Raising electricity prices by 2%, if that’s what Gates envisions, would reduce electricity usage by an estimated 1.4% over the long run. Assuming, as modeling at the Carbon Tax Center suggests (xls), that fuel substitution (gas and nuclear for coal, wind and solar for gas, etc.) contributes roughly two units of carbon reduction for each unit gained from demand destruction, the total impact of the Gates tax on carbon emissions from the electricity sector would be just 4-5%. Since other sectors are less price-elastic, the average economy-wide reduction would be even less, probably just a few percent.

Contrast this with the bill introduced by Rep. John Larson (America’s Energy Security Trust Fund Act of 2009, H.R. 1337), which has a first-year carbon tax of $15 per ton of CO2 increasing steadily and predictably at $10-$15/ton each year, that would cut (xls) U.S. carbon emissions by approximately 30% by 2020, or an order of magnitude more than Gates-Lomborg carbon taxes. And Larson would return the vast bulk of carbon revenues to workers’ paychecks while setting aside a fund for the sort of clean energy R&D that Gates and Lomborg espouse.

Why the 10-fold difference in impact? A large carbon tax like Rep. Larson’s would create profound incentives: on the demand side to use less energy (via billions of decisions at household and social levels), and on the supply side to shift fuels and power to low- and zero-carbon sources (via thousands of decisions by entrepreneurs, utilities and energy companies). A mere 2% carbon tax, even one with revenues allocated to R&D, would not.

In his Technololgy Review interview, Gates at least coupled his carbon tax with a notion of ordering utilities to shut down CO2-intensive plants at such and such a time:

And then you just take all the carbon-emitting plants, you look at their lifetime, and you say on a certain date this one has to be shut down, and when a new one is put in place, it has to be low-CO2-emitting.

But how this would come to pass in the absence of price signals and corrections justifying it financially is, to be charitable, unclear.

Both Gates and Lomborg deserve plaudits for their disavowals: of cap-and-trade by Gates, of climate-change denialism by Lomborg; and for embracing the idea of a carbon tax. They now need to see the next light: to have the necessary impact, a carbon tax can start modestly but must keep rising predictably. Fortunately, we have the example of British Columbia to show that an upward-trending carbon tax of the needed size can be politically popular if the revenue is returned to the public.

Join the Earth Day Climate “Revival” This Sunday

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There are good reasons, ranging from corporate sponsorship to vapidity, to have been cynical about recent Earth Day observances. But there are even more compelling reasons — the imminence of the climate crisis and the recent gain in denialists’ political standing — to put cynicism aside and come to Washington this Sunday for what organizers hope will be the “largest climate rally ever.”

Earth Day’s original national coordinator Denis Hayes and the Earth Day Network are aiming for a 40th anniversary revival of the “spirit of 1970” that catapulted environmentalism into public consciousness, launching a decade of environmental reforms, winning landmark legislation, and birthing the modern environmental movement.

The list of speakers is impressive for its heft and diversity. They include:

  • Climate scientist James Hansen
  • Filmmaker James Cameron (Avatar; Titanic) and author Margaret Atwood (The Handmaid’s Tale; The Blind Assassin)
  • Business executives from Siemens and Phillips, and union leaders from the AFL-CIO and the SEIU
  • Rainbow Coalition leader Jesse Jackson and NAACP V-P for advocacy Hilary Shelton
  • Evangelical creation-care advocate Rev. Richard Cizik
  • Climate-policy blogger Joe Romm

Plus a stellar roster of musicians including Bob Weir, Mavis Staples, Willy Colon, Booker T, and Sting

And the program’s diversity includes sharp differences over climate policy. Hansen in recent years has moved beyond climate science to climate politics, becoming the most visible (and perhaps most aggressive) U.S. advocate of fee-and-dividend — a federal carbon tax whose revenues would entirely be returned, per capita, to the American people. For his advocacy and his criticism of carbon cap-and-trade, Hansen has been censured by Romm, the climate blogger for the Center for American Progress, which is closely linked to cap-and-trade advocates in the Democratic Party and the mainstream environmental movement.

On Sunday, these differences can and should be put aside. As Romm did in his blog on the rally, we defer to Denis Hayes’ post on Grist:

Humanity must swiftly abandon dirty energy sources and switch to safe, clean, decentralized, renewable energy sources like solar, wind, and geothermal. The world, led by America, must abandon the appallingly inefficient way it uses energy and swiftly embrace the most efficient new housing, transport, and industrial processes that exist. We Americans must slash our politically risky and economically catastrophic dependence on the oil wealth of nations that don’t like us very much.

A necessary—though not sufficient—common denominator is to establish a price on carbon that reflects the costs of climate disruption, blowing the tops off mountains, and acidifying the world’s oceans. We must place a firm cap with no loopholes on the amount of carbon fuels we consume each year and ratchet that cap down at a prescribed rate every year in the future until we hit something very close to zero. Only a federal law can accomplish this goal.

If this were easy, we would have begun a quarter century ago. The junk science, climate-denying interest groups are rich, powerful, and ruthless. But sooner or later they will lose. Sooner is better

They will lose for the same reason that IBM and Control Data lost to Microsoft, Apple and Dell. They will lose for the same reason that Ma Bell—the most powerful monopoly in the world—lost to cellular upstarts and Internet-telephony. They lost because their thinking was anchored in the past instead of envisioning the future

The junk science, climate-disruption-denying interest groups will lose because 19th century answers won’t solve 21st century problems.

At some point, this climate-disrupting madness has to start to stop. Come to the Mall between the Capitol Building and the White House on Sunday, April 25. Bring your spouse, your parents, your kids, your neighbors, your friends, your co-workers, your congregation, your bowling league. Vote with your bodies on April 25th at the largest climate rally ever.

While we at the Carbon Tax Center differ with Denis’s emphasis on a cap — we’re convinced that only a carbon tax or fee can give U.S. entrepreneurs, investors and families the clear price signal they need to move to clean technologies, fuels and lifestyles — we salute Denis’s 40 years of advocacy (some of which is on fine display in the documentary Earth Days that PBS is airing this week).

We also salute the late Sen. Gaylord Nelson of Wisconsin, who more than any other individual conceived Earth Day (originally as a national day of teach-ins on the environmental crisis) and whose staff hired Denis Hayes to co-ordinate it.

Let’s come to the Mall this Sunday and make our voices heard for climate sanity and the central policy measure that can take us there: a federal, revenue-neutral carbon tax.

(Some) Carbon Tax Advocates Are Serious

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CTC rep James Handley’s comment on columnist Eric Pooley’s recent piece “Exxon Works Up New Recipe for Frying the Planet” (Bloomberg) sparked this illuminating, constructive exchange.

Dear Mr. Pooley,

Thanks for your article. Climate crisis deniers are indeed doing great harm. Are they really changing tactics from bogus science to bogus economics or just using both? I was with you until I read this:

“A tax wouldn’t guarantee any carbon reductions, let alone bring about the steep cuts needed to stave off the worst climate changes.”

If you’re suggesting that a cap would “guarantee” emissions reductions in some way that a tax would not, I must disagree.

Consider economist Alan Viard’s Aug. 4 testimony to the Senate Finance Committee:

If the market price of allowances under cap and trade is $20 per ton, every firm has an incentive to take any step that can reduce emissions at a cost of less than $20 per ton, but no incentive to take any step that reduces emissions at greater cost… precisely the incentive that each firm would face if it were subject to a carbon tax of $20 per ton or if it were subject to a cap-and-trade program (with the same $20 allowance price) in which all allowances were auctioned.

… The difference, of course, is that the carbon tax or the auction would raise government revenue equal to the aggregate value of the allowances. If the allowances are freely allocated, then that value instead accrues to firms. Cap and trade with free allocation is equivalent to a carbon tax with transfer payments to firms.” [Emphasis added.]

I work with the Carbon Tax Center because, along with most 3008597225_8813ce8c7ceconomists who’ve considered the question, I’m convinced that a clear, transparent, gradually-increasing price on carbon pollution is essential to spur energy conservation as well as development and implementation of alternatives to fossil fuels. A carbon tax, with revenue recycled directly to households to build political support and mitigate the economic impacts of what portends to be a decades-long trek to a low carbon economy, offers a real “game changer” to move broadly enough to substantially mitigate climate catastrophe.

British Columbia has shown that a revenue-neutral carbon tax can be implemented in a few months and gain public support. And it’s far more effective than trading in carbon allowances, especially with offsets. Price volatility has prevented the EU’s cap-and-trade from spurring investment in alternative energy and conservation. See e.g., EU Cap-and-Trade System Provides Cautionary Tale (Roll Call).

The enemy of my enemy isn’t necessarily my friend. Climate crisis deniers’ opposition to cap-and-trade doesn’t make it a good idea. And the “endorsement” of a carbon tax by (former?) deniers can obscure the fact that a growing environmental and social justice coalition is advocating a carbon tax with revenue-recycled to households. Please don’t help the “deniers” poison the water for the most effective, transparent climate policy.

– James Handley, Carbon Tax Center

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James,

Thank you for your very thoughtful note. A full treatment of the cap v. tax debate was beyond the scope of the column, but I didn’t mean to suggest that a well -designed tax would be unworkable, rather that any tax Exxon would support is likely to be ineffective.

My basic concern here is political rather than economic– that the carbon tax will siphon enough support to derail cap and trade, but not enough to pass, and we will be left with nothing. I tend to agree with Al Gore when he points out that the nations that have been most effective in reducing emissions have both a cap-and-trade program and a carbon tax in place; ultimately we are likely to need both as well, but that’s a ways off. In the meantime, as Gore has said, “a cap-and-trade system is also essential and actually offers a better prospect for a global agreement, in part because it is difficult to imagine a harmonized global CO2 tax.” The fact is, cap and trade is the only climate program that has a chance of passing now. There’s a big game going on inside the stadium, but the carbon tax proponents are outside in the parking lot, dreaming about next year.

I don’t think cap and trade is (as many tax proponents have argued) a faintly disreputable cousin to the tax which no one would welcome if the tax itself were passable now. I think the cap has real advantages, which I’ll get to. I understand the longing for a simpler approach to the problem but have my suspicions about the simplicity argument; a tax bill would have to respond to the same legitimate regional and sector cost issues that complicated Waxman-Markey, so a bill that could pass would not be simple. How for instance would the straight per capita tax rebate or payroll offset I often see proposed deal with the higher cost burden in coal-dependent states? Staffers on the Hill tell me that adjusting the tax every few years would require a new Act of Congress every few years — it’s hard enough to get this done once.

The free allowance formula devised by EEI and incorporated in Waxman-Markey, by taking into account carbon intensity, isn’t perfect but does a good job of responding to the regional disparity issue. And since the bill requires LDCs [local (electric) distribution companies] to pass on the value of all allowances to their ratepayers, it would prevent the LDCs from enjoying windfalls. Alan Viard’s testimony ignores this requirement when it claims that the value of free allowances accrues to firms. That’s not how the bill works—it’s one of many misconceptions about Waxman-Markey. Overall I’m impressed with the way Waxman et al. learned from the mistakes in the EU ETS. Over-allocation and lack of baseline data were the biggest drivers of volatility there, and this program would avoid those. Nor would utilities be able to charge opportunity costs to their ratepayers, as EU generators did. Giving the transitional allowances to LDCs instead of generators solves other problems as well. It sends a clean price signal to the generators while cushioning ratepayers.

As for the ‘guarantee,’ of course there is no magic wand. But the cap is more than a price signal. We do have the technology to monitor and verify reductions, and I want to see that framework put in place as soon as possible. Finally, no one seems to talk about the penalties for busting the cap, which under Waxman-Markey amount to 2x the allowance price plus a replacement allowance, or three times to compliance incentive — under your $20/ton comparison, the compliance incentive for the cap is actually $60 per allowance, vs. $20 for the tax, plus the strong market signal driven by the knowledge that the cap is ratcheting down over time. The aggressive 2030 reduction target in Waxman-Markey — 42% below 2005 levels —has not received the attention it deserves. It would transform the energy investment decisions of American businesses.

Thanks again for your email and for your work at the Carbon Tax Center. I really would welcome either a tax or a cap. But at the risk of turning your words against you, let me suggest, as someone who has been watching this debate unfold, that it is the carbon tax advocates who have at times been poisoning the water against the cap. Probably both sides have been guilty of this, but it’s too bad that the climate action community is divided at the very moment unity is so badly needed.

– Eric Pooley

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Eric,

Thanks for your reply. I think we’re in strong agreement on most points. I want to respond to three:

1) You wrote: “My basic concern here is political rather than economic– that the carbon tax will siphon enough support to derail cap and trade, but not enough to pass, and we will be left with nothing…”

Fortunately, it’s not ACESA or nothing. Although, given that ACESA’s attempted domestic emissions reductions are so modest, and that its cap-and-trade system would entrench Wall Street traders and purveyors of offsets and set the stage for another financial crisis, I’d probably opt for nothing.

If ACESA fails to pass, EPA can continue to develop a regulatory system under the Clean Air Act, which the Center for Biological Diversity has concluded could be quite comprehensive (and might include a cap-and-trade system). This is likely to be better than ACESA in several key ways. For instance, I gleaned from EPA’s Advance Notice of Proposed Rulemaking last year that its rule would not include offsets. (Can you imagine EPA trying to justify the up to 1.5 billion tons of international offsets — essentially, transfer payments — that make a mockery of the notion of a “hard cap” in ACESA?) Furthermore, ACESA as passed by the full House would eviscerate EPA’s proposal to account for indirect impacts of biofuels (e.g., forest clearing to grow corn for ethanol).

Because the Clean Air Act covers stationary sources, mobile sources and the content of fuels, the scope of an EPA GHG reduction program can be very broad. President Obama’s representatives could go to Copenhagen with an EPA draft rule in hand, pointing out that the U.S. is in the process of regulating (or “capping”) more of its GHG sources than any other industrialized nation. That’s far from the most effective policy (a revenue-neutral carbon tax) but it’s also a long way from “nothing.”

2) You quote Al Gore “…a cap-and-trade system is also essential and actually offers a better prospect for a global agreement, in part because it is difficult to imagine a harmonized global CO2 tax.”

Gore’s got it backwards. As the Congressional Budget’s report, “Policy Options for Reduction of CO2 Emissions,” explains, if nations choose different carbon tax rates (or fail to enact them) WTO authorizes border adjustments to equalize tax rates on imported products to the same levels applied to similar domestically-produced products. In effect, the U.S. would collect the carbon tax on imports from any country that didn’t enact its own, providing a powerful incentive for our trading partners to follow our lead.

In contrast, under cap-and-trade, harmonization would require determining the implicit carbon price in a system where carbon prices are hidden and fluctuating. The CBO observed, “Linking cap-and-trade programs would… entail additional challenges beyond those associated with harmonizing a tax on CO2.” The report noted, for example, that linked cap-and-trade programs tend to create perverse incentives for countries to choose less stringent caps so they could become net suppliers of low-cost allowances.

Moreover, as Elaine Kamarck of Harvard’s Kennedy School has pointed out, almost every nation has a tax collection mechanism that could be used to administer a carbon tax, but few (if any) have the means to enact and enforce a complex cap-and-trade system. If we’re going for a global carbon reduction system, it’s a carbon tax.

3) You wrote: “…a tax bill would have to respond to the same legitimate regional and sector cost issues that complicated Waxman-Markey, so a bill that could pass would not be simple… adjusting the tax every few years would require a new Act of Congress every few years — it’s hard enough to get this done once.”

The complexity (and length) of Waxman-Markey seems to have much more to do with preserving (and even expanding) the coal industry than with addressing regional disparities in household income caused by carbon pricing, which, in fact, are relatively small. (See our summary: Regional Disparities.)

Economist Dallas Burtraw (Resources for the Future) studied the regional “incidence” of carbon pricing and concluded that regional differences are dwarfed by very large disparities across the income spectrum. CTC’s proposed carbon tax shift would more than compensate for the inherent regressivity of a carbon tax by distributing revenue progressively either through a payroll tax cut (as proposed in legislation introduced by Rep. John Larson) or a direct, equal distribution. Waxman-Markey only attempts to compensate the lowest income group, leaving middle income households to shoulder the burden of carbon pricing. (Burtraw and others have also shown that ACESA’s free allowances to LDCs would mostly benefit commercial, not residential electricity users.)

We recognize that some regional adjustment might also be needed; but that’s a relatively simple proposition under a carbon tax and could be done administratively, without the need for legislation. Rep. Larson’s bill provides for automatic increases in the carbon tax level to ensure that the trajectory of emissions reductions is in line with the scientific consensus.

Thanks again,

James

———-

James,

I think you’re kidding yourself about the EPA’s ability to impose cap-and-trade under CAA. Someone who knows a lot more about politics than either of us, former White House Chief of Staff John Podesta, has said it would be difficult for EPA to do so without Congressional assistance. Protracted litigation would see to it that years went by before such a system came into force. And there is no chance that an administration promise of such rulemaking – which any subsequent administration could undo – could form the basis of a treaty.

Dallas Burtraw is a fine economist, but the many Senators and members of Congress I have been talking to all summer simply do not agree with him. Regional and sectoral disparities are the single biggest obstacle to climate action, and lawmakers do not believe that the “simple carbon tax” solves them. That’s why Rep. Mike Doyle of Pennsylvania backed Waxman-Markey instead of John Larson’s carbon tax. It’s one of the reasons Waxman-Markey passed the House and Larson’s bill didn’t make it to markup. If the politics were reversed and a carbon tax had a shot at passing, I would expect cap-and-traders to get behind the carbon tax and push hard. But right now, it is the cap that has a real chance of passage, and it could be years before the next opportunity presents itself. Please don’t let your strong shoulders go to waste.

– Eric

———-

Eric,

Regional and income disparities arise under either a carbon tax or cap-and-trade (in fact, Burtraw considered it the same problem), but it’s easier to mitigate these regional and income disparities under a transparent carbon tax by directly distributing the revenues to households.

Rep. Larson and the other members of the Ways and Means Committee, which held a series of very illuminating hearings last spring about the very serious volatility and gaming with cap-and-trade, didn’t get a shot at climate legislation because the House leadership didn’t permit amendments – they didn’t want any discussion of alternatives to cap-and-trade.

I agree with economist Robert Shapiro (Clinton undersecretary of Commerce and U.S. Climate Task Force co-chair) who said at our July 13 Senate briefing that ACESA deserves to be defeated. He fears that, as in the E.U., cap-and-trade would fail to reduce emissions and would delay needed reductions by a decade or more. I cannot support a hidden, volatile and regressive carbon tax (set and collected by Wall Street) whose main advantages seem to be that it hides the price and is called “cap-and-trade”. I believe an explicit, predictable and progressive carbon tax with revenue recycled to households is essential. British Columbia’s experience shows that a revenue-neutral carbon tax is politically feasible. But, to return to my original point, first we need to get beyond magical thinking about “caps”.

– James

photo: Flickr / random dude