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This page contains archival material bearing on efforts to advance carbon taxing or other carbon pricing at the U.S. national (federal) level.

It begins with federal legislative proposals from roughly 2008 to 2015, in reverse chronological order. Further below is material from Democratic presidential-nomination campaigning from 2019.

Unfortunately, CTC hasn’t been able to keep up with more recent (post-2015) carbon tax legislation — not that there’s been much to report in this arena. We recommend Mike Aucott’s July 2022 post , A Novel Way to Price Industrial Carbon Emissions, along with our new page about the Inflation Reduction Act of 2022. Although in many ways the IRA is the antithesis of carbon pricing — it aims to make clean energy cheaper rather than to make dirty (fossil) energy costlier — it was a landmark legislative achievement and may eventually open the door to federal legislation to price carbon emissions.

Federal Legislation (through 2015)

Climate Protection and Justice Act

On December 10, 2015, a day before the close of the UN climate summit in Paris, Senator (and presidential candidate) Bernie Sanders introduced the “Climate Protection and Justice Act.” His bill would impose a charge of $15 per metric ton (“tonne”) of CO2 emitted from fossil fuel combustion, with the fee taking effect in 2017. It would then rise at an average annual rate of $3.22/tonne, reaching $73 by 2035. At that point the tax trajectory would change to a percentage basis, growing by 5% annually until attaining a level of $150/tonne in 2050. Proceeds from Sanders’ proposed carbon tax would be returned to households making less than $100,000/year, a rebate of roughly $900 in 2017, rising to $1,900 in 2030. Revenue would also fund investments in energy efficiency and low-carbon energy.

Sanders’ press release claims his measure would reduce U.S. CO2 emissions to 80% below 1990 levels by 2050. The results of seven major integrated assessment models reported by the Stanford Energy Modeling Forum suggest that a more aggressive carbon price trajectory, rising to roughly $440/ton, would be needed to accomplish this ambitious 80% reduction target by 2050, in the absence of major technological breakthroughs. Nevertheless, model results become increasingly murky as time horizons grow more distant. In any event, Senator Sanders is the first (and, as of January 2016, the sole) candidate in the 2016 presidential race to endorse an explicit and rising tax on carbon pollution.

On April 22, 2015, Earth Day, Rep. John Delaney introduced a discussion draft of his “Tax Pollution, Not Profits Act” that would establish a tax $30 per metric ton of carbon dioxide or carbon dioxide equivalent, increasing each subsequent year at 4% above inflation. Delaney’s proposal would apply revenues to reduce the corporate tax rate to 28%, provide monthly payments to low-income and middle-class households and fund job training, early retirement and health care benefits to coal workers. At an Earth Day AEI event discussing his bill, Rep. Delaney took the bold step of suggesting his proposal for a simple economy-wide carbon tax could replace the EPA Clean Power Plan.

American Opportunity Carbon Fee Act of 2014

On November 19, 2014, Sen. Sheldon Whitehouse (D-RI), renowned for his weekly “Time To Wake Up” speeches on the Senate floor, introduced the “American Opportunity Carbon Fee Act.” This bill would impose fees on both CO2 and non-CO2 greenhouse gases, including fugitive methane from shale gas wells and coal mines, at their CO2-equivalent rates. AOCFA includes a border tax adjustment to impose equivalent climate pollution fees on imported goods from nations that have not enacted their own.

AOCFA pegs its pollution fee to U.S. EPA’s estimate of the “social cost of carbon” currently, $42/ton CO2, and would rise by only 2% annually in real terms. The Carbon Tax Center’s 7-sector price-elasticity spreadsheet model projects that the proposed starting price of $42 per ton of CO2 would quickly reduce US emissions by about 15%. But the bill’s subsequent 2% annual real price increases would barely stem the rising emission tide due to increased affluence, resulting in essentially flat emissions rather than a declining curve.

Our blog post, New Senate Bill Would Build Polluter Pays Principle into Climate Action, has more on Sen. Whitehouse’s bill.  Sen. Whitehouse and co-sponsor Brian Schatz (D-HI) re-introduced an updated version in June 2015.

Managed Carbon Price Act of 2014 

On May 28, 2014, Rep. McDermott (D-WA) introduced H.R. 4754, a direct and transparent measure to phase out free dumping of climate pollution into our atmosphere. The 21-page bill would steadily raise the cost of climate pollution, enabling investments in renewable energy and efficiency to compete effectively with continued extraction and burning of dirty fossil fuels.

McDermott’s pollution tax would start modestly at $12.50/tonne (metric ton) of CO2 and rise annually by the same amount ($12.50/tonne), reaching $125/tonne CO2 within a decade. The result, according to CTC’s carbon tax spreadsheet model, would be a one-third reduction in U.S. carbon pollution in the tax’s tenth year, vis-a-vis actual U.S. emissions in 2005. By 2030, the target year for the heralded new EPA-White House Clean Power Plan, the McDermott pollution tax would be reducing U.S. CO2 emissions by an estimated 2,051 million metric tons per year, or nearly 6 times the 355 million tonne reduction we have estimated for that year from the Clean Power Plan.

McDermott Graph

Rep. McDermott’s Managed Carbon Price Act of 2014 compared to June 2014 EPA “Clean Power” proposal

Obviously, a carbon tax like that in the McDermott bill requires an act of Congress — a far more difficult process (though administratively simpler) than the EPA plan. Nevertheless, the nearly 6-fold difference between their respective CO2 reductions is instructive, illustrating both the narrow scope of the EPA plan and the vast reach of carbon taxing.

Other Key Features of McDermott’s Managed Carbon Price Act:

  • Dividend: Returns 100% of revenue to individuals as equal (pro rata) “dividends.”
  • Other greenhouse gases: The five other major GHG’s, including methane, are taxed at their CO2 climate-damage equivalence.
  • Border Tax Adjustments: HR 4754 would tax the climate pollution of imported goods at the same rate as domestic goods, creating strong and growing incentives for other nations to tax climate pollution while protecting U.S. manufacturers from unfair competition by countries that do not tax climate pollution.

Sanders-Boxer “Climate Protection Act”

On February 14, 2013, Senators Bernie Sanders (I-VT) and Barbara Boxer (D-CA) introduced the Climate Protection Act. Sanders-Boxer would  impose an economy-wide tax on CO2 pollution, starting at $20/T CO2 and rising over a decade to $33/T CO2. We estimate that this price signal and trajectory would induce a 12% reduction in CO2 emissions over the course of a decade. The measure includes border tax adjustments to protect domestic industry and encourage other nations to enact their own carbon taxes. Sen. Sanders posted a rousing op-ed in the Huffington Post in July 2014 in support of his and Sen. Boxer’s bill.

The Progressive “Back to Work” Budget

The House Progressive Caucus has also included a carbon tax in its 2014 Better Off Budget proposal. The tax would start at $25/T CO2 and rise 5.6% annually, raising $1.1 trillion in revenue between 2014-2023.

Earlier Carbon Pricing Proposals

Carbon Tax Proposals:

Rep. Stark (D-CA) introduced H.R. 594 “Save Our Climate Act of 2009″ (1/15/09):

  • A carbon-content tax on fossil fuels starting at $10/ton CO2
  • Increasing by $10 every year.
  • Upstream:  Fossil fuels taxed they enter the U.S. economy (i.e., at the production or importation level).
  • Revenue use: not specified.
  • Exports credited for carbon tax.

Rep. Larson (D-CT) introduced H.R. 1337 “America’s Energy Security Trust Fund Act of 2009″ (3/5/09):

  • A carbon-content tax on fossil fuels starting at $15/T CO2.
  • Increasing by $10 each year, but in any year that EPA-identified emission targets (based on reaching 80% below 2005 emissions by 2050) are not met, the tax would increase by $15.
  • We have estimated the carbon-reducing impact of the Larson bill, using CTC’s 4-Sector Carbon Tax Impact Model. Projected emissions reduction trajectory would meet 80% by 2050.
  • Upstream (at production or importation).
  • Revenue use:
    • 1/6 of first year’s revenue for clean energy technology research (funding amount remains fixed at tax rate increases),
    • 1/12 (declining to zero over 10 years) for affected industry transition assistance,
    • All remaining revenue distributed to individuals. Returns payroll taxes via a federal income tax credit. In the first year, payroll taxes on the first $3,800 of earnings returned; amount of returned revenue rising with the tax rate. Social Security recipients receive a 10% supplement.
  • Border Adjustments: carbon equivalency fee on carbon-intensive goods imported from non-carbon taxing nations.  Exported goods credited for carbon tax.

Rep. Inglis (R- SC) introduced H.R. 2380, “Raise Wages, Cut Carbon Act of 2009’’ (5/13/09):

  • Upstream carbon tax.
  • Starting at $15/T CO2 rising to $100 in 30 years.
  • All revenue used to reduce payroll tax rate.  (Contrast with Larson bill which would exempt first ~ $3,800 earned from payroll tax.)
  • Tax reduction split between employer and employee.
  • Border Adjustments: equivalent tax on imports, exports credited.

“Managed Market” Proposal

Rep. Doggett (D-TX) introduced H.R. 1666 “Safe Markets Development Act of 2009″ (3/23/09):

  • Cap-and-trade program to reduce greenhouse gas emissions from covered sources from 6.153 billion metric tons in 2012 to 253 million in 2050.
  • Treasury to auction 100% of allowances quarterly.
  • Board (6 members, appointed by President) to set targets for allowance prices, manages quarterly auctions by changing supply of allowances to maintain a smooth price path through 2019, oversees secondary markets (not clear how).
  • Covered entities may bank up to 5% of allowances from a calendar year.
  • Revenue use: not specified.

Cap and Trade Proposal:

Reps. Waxman (D-CA) and Markey’s (D-MA) “American Clean Energy Security Act” (7/7/09):

ACESA included a cap-and-trade title, including 2 billion tons of offsets (up to 75% international) effectively delaying domestic U.S. emissions reductions by at least a decade. The bill would have given away 85% of allowances, auctioning only 15%. (Grist summary here.)

“Cap and Dividend” Proposals:

Senators Cantwell (D- WA) and Collins (R-ME) introduced the Carbon Limits and Energy for America’s Renewal (CLEAR) Act (12/11/09):

While retaining a “cap” and limited trading, CLEAR would avoid the most profound flaws of the Waxman-Markey bill (passed by the House) and the Kerry-Boxer bill (which stalled in the Senate).  CLEAR would set a floor and ceiling (“collar”) on carbon allowance prices, authorize only “covered entities” to hold allowances and would not allow offsets to be used in place of allowances.  CLEAR proposed to “recycle” 75% of revenue directly to households, contrasting sharply with the cap-and-trade bills’ give-away of carbon revenue and its equivalent in free allowances to an array of special interests and energy projects.  With Sen. Susan Collins’ (R-ME) co-sponsorship, CLEAR began as a bipartisan proposal.

CLEAR purported to preclude a secondary market (or “derivatives”) in carbon allowances.  But analysts raised doubts about whether the bill could prevent large energy users  from contracting to hedge against seasonal and cyclical price swings. Also, the low price range of bill — $7 to $21 per ton of CO2 in the initial year, 2012, rising each year at approximately 6% above inflation — is not nearly sufficient to achieve the needed emissions reductions. CTC’s Carbon Tax Model suggests that this price trajectory would only lead to a 7.5% drop in U.S. CO2 emissions from 2005 levels in 2020. Instead of a substantial price signal, the bill relied heavily on subsidies for clean-energy investment which would come from the 25% of revenue not returned to households.  CLEAR’s goal was emissions reductions of 20% from a 2005 baseline by 2020. CLEAR’s price collar would have made carbon prices more predictable, closer to a carbon tax than other cap-and-trade proposals. But its $7 – 21 range was wide enough to allow significant volatility that could discourage investment in alternatives and efficiency while generating profits for speculators. Potential volatility combined with CLEAR’s low price meant that its price signal would be “noisy” and small — not the clear upwardly trending price signal that would most strongly encourage low-carbon energy.

Finally, a volatile price would have made linkage to international carbon markets (or carbon taxes) needlessly complex or even impossible.

Rep. Van Hollen (D-MD) introduced H.R. 1862 “Cap and Dividend Act of 2009″ (1/1/09):

  • CO2 Cap. Fossil fuel producers, importers surrender permits for CO2 emissions each year. Permits decline annually, leading to an 85% reduction below 2005 CO2 emissions from covered entities by 2050.
  • 100% auction of permits
  • Permits tradeable.
  • Volatility-limiting measures: Unlimited banking. Borrowing if permit prices increase more than 100%.
  • Revenue use: Funds distributed monthly in equal amounts to those with a social security number.
  • Border Adjustments: Exporters credited, importers pay “carbon equivalency fee.”

Related CTC Blog Posts and News Items:

2020 presidential campaign

Last update: June 11, 2019

Inslee demands DNC rescind its climate-debate ban

Washington Gov. Jay Inslee used his June 11 appearance on “Democracy Now” (downloadable MP3) to demand the Democratic National Committee withdraw its threat to exclude from its forums any presidential candidate who participates in non-DNC-sanctioned debates.

Inslee addressed the DNC stance at the start of his 30-minute interview with Democracy Now hosts Amy Goodman and Juan Gonzalez (the segment begins at minute 13:00 of the program). The interview focuses, as does Inslee’s campaign, on climate change but it also ranges across related topics such as immigration, health care and economic development.

Biden climate plan includes a fee on carbon pollution . . . and carbon tariffs

Former V-P and current Democratic front-runner Joe Biden “proposes that Congress pass a law by 2025 to establish some form of price or tax on carbon dioxide pollution, a policy championed by most economists as the most effective way to fight climate change,” the New York Times reported on June 4.

Though Biden did not specify a dollar level for a carbon tax, and a 2025 launch date appears very far off, his climate plan, which goes far beyond a carbon price, was applauded by some activists. “He put out a comprehensive climate plan that cites the Green New Deal and names climate change as the greatest challenge facing America and the world,” Varshini Prakash, executive director of the Sunrise Movement, told the Times. “The pressure worked.”

The Biden plan also includes “carbon tariffs” on imported goods, according to the Times. Such a measure presumes a U.S. carbon tax, since carbon tariffs would be levied on the excess of domestic U.S. carbon taxes relative to other countries’ own carbon price. (For more on carbon tariffs see our Border Adjustments page.)

Dems: 8 out of 18 strongly for taxing carbon emissions

A year and a half out, the 2020 presidential campaign has already paid more attention to climate change than any previous election — perhaps even every previous election combined. (Bill McKibben surveyed the depressing history as part of an election preview for Politico.)

The best news of all is that voters are speaking up. In an April 2019 Monmouth University Poll of Iowa Democrats, climate change ranked second among issues of concern, albeit far behind health care. (Environmental concerns generally also ranked fairly high, which may also reflect climate concern.) The June 4 Times article cited above (re Biden) quoted a Democratic pollster proclaiming, “Climate change is an incredibly important issue for the Democratic base right now. It’s about the future, and it’s something that [President Trump] has made worse in the minds of the Democratic base.”

The candidates — well, the Democrats, anyway — are responding:

The dozen candidates shown above have pledged to campaign free of fossil fuel contributions, according to Oil Change International

Only three candidates have explicitly endorsed a carbon tax, however. Aside from Biden, Former Maryland representative John Delaney  was an original cosponsor of the Energy Innovation and Carbon Dividend Act of 2018, which largely followed Citizens’ Climate Lobby’s fee-and-dividend template. And South Bend, Indiana, mayor Pete Buttigieg made an articulate case for the same approach in an appearance on the Tonight Show (beginning at 6:15):

There’s also a plan called a carbon tax and dividend. Basically you set a price on things that put carbon into the atmosphere, but then you can rebate that back out to the American people so most of us would actually be better off if we did it. Meanwhile it would help change the economic incentives so that you’d see less activity that hurts the environment. Because the true cost is not reflected in the price of, for example, energy that comes from coal. If you were facing the true cost of it you’d have to set that price a lot higher.

Most of the field has been tiptoeing around the issue, perhaps fearing, in the words of New York Times columnist David Leonhardt, that carbon taxes “focus people’s attention on the short-terms costs of moving away from dirty energy” instead of on the benefits of clean energy.

But if they aren’t running on carbon pricing, at least some of the candidates aren’t running away from it, either. In April 2019, when the Times surveyed the announced Democratic candidates (18 at the time) on climate change, it found seven who “put their weight firmly behind a carbon tax”: Cory Booker, Pete Buttigieg, Julián Castro, John Delaney, Kirsten Gillibrand, Marianne Williamson and Andrew Yang. (Presumably, Biden has joined the ranks.)

Five others said they were “willing to consider” a carbon tax, according to the Times: Jay Inslee, Amy Klobuchar, Beto O’Rourke, Tim Ryan, Eric Swalwell.

In  May 2019, Citizens Climate Lobby posted a more detailed survey, Which 2020 candidates support carbon pricing?, with thumbnails of eight Democratic candidates as well as two possible Republican challengers to President Trump.

Sanders is said to “demote” carbon taxing

A Climatewire story in early June examined the reticence of climate hawk and erstwhile carbon tax proponent Sen. Bernie Sanders to express support for carbon taxing in 2019. Though the story, Sanders demotes carbon taxes. Here’s what it means for Dems, leads with the Vermont senator, it finds a similar reluctance across much of the Democratic field.

First, about Sanders:

His [Sanders’] 2020 presidential campaign still focuses on global warming, but gone are the regular broadsides over carbon pricing. Missing, too, is any reference to carbon taxes in the climate section of his official campaign website. Instead, Sanders has chosen to emphasize the Green New Deal when talking about climate change — a shift that underscores how much the politics of global warming have transformed in a few short years. Part of that, perhaps, is a broader decline in enthusiasm for carbon pricing among left-leaning politicians and activists.

Climatewire also notes:

Sanders’ shift in focus is striking. During the 2016 campaign, Sanders repeatedly hammered Clinton over her unwillingness to get behind a tax on carbon emissions. “I would ask you to respond. Are you in favor of a tax on carbon?” he asked in one debate. Later — after Clinton had sewn up the Democratic nomination — Sanders pressed to include carbon taxes in the party’s 2016 platform in part by appointing longtime environmentalist Bill McKibben to the drafting committee.

(We reported those 2016 developments in two posts, What the Sanders-Clinton Clash over a Carbon Tax Says about Democrats and Climate Change, and Democratic Platform Vote Was a Win for Carbon Taxes.)

The Climatewire story concludes with a curious but revealing quote from an advisor to Congressmember and Green New Deal spearhead Alexandria Ocasio-Cortez. “I feel we’re very locked into what we can do when we lead with a carbon tax,” says Andrés Bernal. The operative word is “lead,” as the story implies by noting that Bernal’s statement “doesn’t mean [he] doesn’t see carbon taxes as part of the equation at some point.”

Even so, any “lock-in” would be in the realm of politics, not policy. A carbon tax was never going to be a stand-alone, but rather both a market-pulling force and a pay-for, as this site has pointed out practically since its founding in early 2007, most recently in the April post by CTC policy associate Bob Narus, Green New Dealers Should Embrace a Carbon Tax.

Beto O’Rourke

On April 29, former Texas representative Beto O’Rourke surprised everyone by being first out of the Democratic gate with a comprehensive climate policy. His four-part plan includes:

  • Immediate executive and regulatory actions ranging from controlling methane leakage and building efficiency standards to “clean” government procurement
  • $1.5 trillion in spending (paid for by taxes on the wealthy and corporations), leveraging an additional $3.5 trillion in non-government spending, on clean energy investments and R&D
  • A 2050 target date for net-zero emissions
  • Efforts to protect communities, agriculture and military installations from the impacts of climate change

O’Rourke doesn’t use the term “carbon tax,” but he does promise a “legally enforceable standard” for meeting the 2050 deadline, explaining:

This standard will send a clear price signal to the market to change the incentives for how we produce, consume, and invest in energy, while putting in place a mechanism that will ensure the environmental and socio-economic integrity of this endeavor — providing us with the confidence that we are moving at least as quickly as we need in order to meet a 2050 deadline.

That language seems to envision some form of carbon pricing.

Jay Inslee

On May 3, Washington Governor Jay Inslee released his “100% Clean Energy for America Plan” in several media (video, Web page, 8-page pdf). Carbon pricing isn’t mentioned. Excerpts from the Inslee campaign’s Web page:

Governor Jay Inslee’s 100% Clean Energy for America Plan will achieve 100% clean electricity, 100% zero-emission new vehicles and 100% zero-carbon new buildings. This plan will empower America to make the entire electrical grid and every new car and building climate pollution-free, at the speed that science and public health demand.

The 100% Clean Energy for America Plan is the first major policy announcement in Governor Inslee’s Climate Mission agenda – a bold 10-year mobilization to defeat climate change and create millions of good-paying jobs building a just, innovative and inclusive clean energy future, with meaningful targets and plans for execution based on his experience as a governor. Governor Inslee will announce additional major planks of his detailed climate plan in the coming weeks.

Two weeks later came Phase 2 — Inslee’s Evergreen Economy Plan.  The 38-page plan defies easy summarization, but highlights include:

  • a Rebuild America Initiative to upgrade buildings
  • a $90 billion green bank to support clean energy projects
  • a $3 trillion infrastructure program
  • a clean manufacturing program, including federal procurement standards
  • greatly expanded clean-energy R&D
  • higher wages, benefits and union rights for clean-energy workers

All told, Inslee proposes spending $300 billion per year, leveraging another $600 billion in private investment , for a total of $9 trillion over a decade. No word yet on where he plans to get that $300 billion/year. “I have plans,” he told us at a Manhattan meet-and-greet the same day he released the proposal.

Not surprisingly, Inslee is winning the David Roberts Primary:

To put it bluntly, Inslee is writing a Green New Deal. . . . This isn’t just a campaign play, it’s a document the next Democratic president is going to want in-hand when the time comes to get to work.

Alexander Kaufman at Huffington Post also has a good summary of Inslee’s plan.

Tax Shifting

The distribution of carbon tax burdens creates an opportunity for “progressive tax-shifting,” in which a portion of carbon tax revenue is dedicated to reducing regressive taxes such as the payroll tax (at the federal level) or sales taxes (at the state level). An early proponent of such a carbon tax shift was Al Gore, with his exhortation to “Tax what we burn, not what we earn.” Shifting taxes away from payroll and/or sales taxes and onto carbon pollution could raise, not lower, the after-tax incomes of a majority of below-median-income households, giving this approach a net progressive effect.

In addition to this potential progressive effect of tax shifting, a wide range of economists, [including Lawrence Goulder, Roberton Williams & Ian Parry, Gilbert Metcalf & David Weisbach, Alan Viard, Robert Shapiro, Donald Marron & Eric Toder] have concluded that use of revenue to reduce other taxes would improve the overall efficiency of the economy, for example, by removing burdens on work.

In October 2007, the Brookings Institution published a A Proposal for a U.S. Carbon Tax Swap — An Equitable Tax Reform to Address Global Climate Change by Tufts University economics professor Gilbert E. Metcalf, describing a national carbon tax paired with an income tax credit for payroll taxes paid. Metcalf assessed the impact of a tax of $15 per metric ton of carbon dioxide and five major greenhouse gases. Revenues would be used to credit payroll tax paid on the first $3,660 of earnings per worker. Metcalf showed that such a tax swap would be both revenue-neutral and distributionally-neutral. (Harvard professor and former Bush Administration economist Gregory Mankiw mentioned the Metcalf paper in a Sept. 2007 New York Times op-ed, discussed on our blog.) Rep. John Larson (D-CT) adopted Metcalf’s framework for his “America’s Energy Security Trust Fund Act,” discussed on our Bills page.

C tax revenue efficiency -- RFFMore recent analysis has confirmed the importance of carbon tax revenue wisely; using it to reduce other “distortionary” taxes can offer large enough efficiency benefits to reduce or even possibly eliminate the economic drag that a carbon tax would otherwise create. In Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts (2013) researchers from Resources for the Future found that using carbon tax revenue to reduce corporate income tax rates offers large enough efficiency benefits to more than overcome the efficiency loss of a carbon tax. The next best option is using revenue to cut wage taxes, while using revenue to cutting other consumption taxes is somewhat less efficient. Finally, refunding carbon tax revenue in a “lump sum rebate” (dividend) offers the least economic efficiency benefit.

Reducing the top marginal corporate income tax rate has been articulated as a goal by leaders of both major political parties. In an effort to attract Republican interest, Rep. John Delaney (D-MD) has introduced a carbon tax measure that would devote half its revenue to corporate income tax reduction.

Nevertheless, the growing economics literature on carbon taxes suggests a strong a tradeoff between the efficiency benefits of using carbon tax revenue to cut taxes on capital (as the Delaney proposal would do) and the distributional benefits of cutting taxes on labor (as Rep. Larson’s proposal would).

Related CTC blog posts and articles:

Related journal articles and papers:

Which Carbon Tax: Robust or Miniature?

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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

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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

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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

Sanders-Boxer Set “Gold Standard” But Write Off Fiscal Potential of Carbon Tax

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One day after 48 climate protesters were arrested at the White House and three days before what is billed as “the largest climate rally in history,” Senators Bernie Sanders (I-VT) and Barbara Boxer (D-CA) set a new “gold standard” for transparent, effective climate legislation. Their Climate Protection Act (“CPA”) would impose an upstream carbon pollution fee starting at $20 per ton of CO2, rising in ten years to $33/T, and would tax methane emissions at their CO2 climate equivalency. Gone are “hide the price” gimmicks of cap-and-trade. No trading, offsets, banking, borrowing or allowance give-aways to polluters. Sanders-Boxer would return 60% of revenue directly to households monthly, allot 25% to deficit reduction and dedicate the remaining 15% to green energy, weatherization and infrastructure “hardening” under a companion bill, the Sustainable Energy Act. The CPA bill includes border tax adjustments to protect U.S. energy-intensive industry and nudge our trading partners to enact their own carbon pricing measures.

Senators Boxer and Sanders Introduce Carbon Fee Legislation

Opening a packed Capitol Hill press briefing yesterday morning, Sanders inveighed against partisan squabbling which he insisted must yield before the ineluctable laws of physics. Earlier scientific projections were wrong, Sanders said, “the crisis facing our planet is much more serious than they previously believed.” Sanders and Boxer conveyed alarming warnings of “global climate disruption” from a Senate Environment and Public Works Committee briefing on Wednesday. The panel of four scientists had concluded that without aggressive action, the earth will warm by 8 degrees Fahrenheit within a century, with consequences including 3 – 6 feet of sea level rise, more frequent and forceful damaging storms, drought, extreme crop loss and submerging of coastal cities.

At Thursday’s press briefing, climate activist-author and 350.org founder Bill McKibben thanked Sanders and Boxer for grasping the “depth of the climate problem” and moving to end the fossil fuel industry’s free dumping of pollution into the atmosphere. Sierra Club director Michael Brune, Public Citizen’s Tyson Slocum, Tara McGuiness of the Center for American Progress and Meg Power of the National Community Action Foundation all praised the effectiveness and fairness of the bills.

Reporters immediately questioned how the two bills could move forward. Boxer said she has just begun seeking co-sponsors and hasn’t conferred with Majority Leader Harry Reid about scheduling. But she expects to conduct hearings and markup in Environment & Public Works and to bring the measures to the Senate floor by summer. Replying to a question about EPA greenhouse gas regulations, she said, “We’ve beaten back” Republican repeal efforts. “The Clean Air Act is the law of the land” which the President “must carry out.” Boxer suggested that public opinion on climate is “far ahead” of Congress, “no one is asking for dirtier air or water.” But she offered no plans to reach across the aisle to enact their bills, either in the Democratic-controlled Senate or the Republican House. She called on environmental and public interest organizations to build support for climate legislation. Sanders suggested that the public hold accountable “Republicans who refuse to even recognize the reality of climate change.”

The Climate Protection Act certainly sets a high standard. By our lights, it’s the most potent climate legislation ever introduced in the Senate. The Carbon Tax Center gauges efficacy primarily by the price polluters would pay. Along with most economists, we are convinced that a briskly-rising price on CO2 pollution is hands down the most broadly-effective and potent force to reduce emissions and open the way for renewables, efficiency and innovation. While the CPA’s price trajectory isn’t nearly as aggressive as our own “gold standard,” Rep. John Larson’s 2009 bill (which we’ve been told he will reintroduce soon), we view CPA as a good start. We estimate Sanders-Boxer would reduce emissions by about 12% below 2005 levels in a decade. (In contrast, Rep. Larson’s more robust carbon price ramp-up would reduce emissions by 30% in the same time period.)

CPA’s proposed direct distribution of 60% of revenue would protect most low- and moderate-income households from the effects of energy price increases, without diluting incentives for everyone to reduce fossil fuel use. Its 25% share of revenue designated for deficit reduction (essentially compelled by Congressional Budget Office accounting rules) could appeal to deficit hawks. We’re less confident that energy subsidies would be well spent. But as Senator Sanders noted, home weatherization that cuts utility bills is like a permanent tax cut. Instead of subsidies, we recommend more revenue return to households to ensure growing public support for continued brisk increases in the price of carbon pollution needed to achieve scientifically-mandated emissions reduction in the range of (or exceeding) 80% by 2050. In British Columbia, dedicating carbon tax revenues to cutting a range of other taxes on work, business and consumption has marshaled public support for four annual carbon tax increases.

As we heard the press conference, Boxer and Sanders seem to have written off every member of the Republican caucus as a potential collaborator on climate policy. If that’s the case, they may be writing off this Congress and the opportunity that a looming sequester and debt ceiling crisis may present to shift taxes on productive activity to taxes on CO2 pollution.

It’s true that the House Republican leadership has pledged to reject any climate measure that generates revenue. But that may still leave room for revenue-neutral tax swaps. Kevin Hassett (American Enterprise Institute), Adele Morris (Brookings) and Donald Marron (Tax Policy Center) have suggested funding cuts in corporate income tax rates with a carbon tax. That kind of proposal should interest legislators like Ways & Means chairman Dave Camp who has repeatedly stated his desire to cut corporate income tax rates.

A proposal like Sanders-Boxer combined with one like those of Hassett, Morris and Marron could yield a broad and popular carbon tax swap like British Columbia’s. We simply can’t afford to give up on this Congress and wait any longer to start putting the brakes on global climate disruption.

Photo: Flickr– Public Citizen

Breaking News: Alaska Sen. Murkowski Rejects $450/ton Carbon Tax

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The arguments being marshaled by U.S. Senator from Alaska Lisa Murkowski to reject either a carbon pollution tax or a carbon emissions cap are timeworn and easy to deflect. Equating more energy with prosperity (and less energy with deprivation) is so far behind the curve, it even got upended in a Super Bowl commercial. (OK, the spot only aired in the Tri-State New York region, but it still had a major car company pushing fuel efficiency with the punchline, “The only way to pay less for gas is to pay for gas, less.”)

What’s harder to absorb is Murkowski’s embrace of that equation at the dawn of the 113th Congress, when enacting a U.S. carbon tax requires at least a modicum of Republican support.

Sen. Murkowski in 2006 with her catch of the day: a 63-lb King Salmon

Murkowski, the ranking Republican on the Senate Energy Committee, has long been regarded as the Republican Senator most likely to someday go for a carbon tax. Back in 2007 she even co-sponsored a carbon cap-and-trade bill, in part because she understood that her state has been experiencing even more severe temperature upheavals than the other 49. Not to mention that the Alaska  Permanent Fund’s pro rata distribution of North Slope oil royalties to households has become a model for the fee-and-dividend carbon tax approach.

All of which makes it confounding that, according to press reports, Murkowski’s new energy “blueprint” brings down the hammer on both carbon price disincentives and limits on fossil fuels:

A carbon tax or a cap and trade proposal or something that is going to make energy more expensive is not going to help us . . . We like to be comfortable in our temperatures. We like to be able to move around. This is the mark of a successful and an economically healthy world. Where you have energy these are the prosperous areas.

Those remarks are not from Murkowski’s energy blueprint, called Energy 20/20, which isn’t Web-available yet. They’re direct quotes from the Senator, from a carefully reported article last weekend in the Anchorage Daily News. The same article helpfully reminded readers that “Murkowski herself co-sponsored an attempt in 2007 to impose a cap on carbon emissions, saying at the time that ‘the permafrost is melting, Arctic ice is disappearing and wildlife habitat is changing.’“

But that was then, as the saying goes. The article makes painfully clear that after years of tantalizing climate advocates, Murkowski has resolved to steer clear of carbon tax legislation — at least for now. Indeed, the headline, “Murkowski energy plan calls for more drilling, nothing to rein in greenhouse gases,” says that loud and clear. But here’s the topper:

If you’re sitting in Aniak [a town 300 miles west of Anchorage] and you get a press release from your senator saying the good news is we are going to address emissions, the bad news is you’re no longer going to be paying $6.99 a gallon for your fuel you’re going to be paying $10.99 then do you feel good about that? I can’t do that.

Where to begin? Well, to raise petroleum product prices by $4.00 a gallon, a carbon tax would need to be around $450 per ton of CO2. That’s literally off the charts: $450/ton is quadruple the 10th-year tax level in the Carbon Tax Center’s preferred bill, Rep. John Larson’s America’s Energy Security Trust Fund Act, and 10-20 times as high as taxes advocated by the Brookings Institution, among others.

And the upside of such a massive carbon tax ― of any carbon tax ― is the revenue it raises, which Murkowski’s “Aniak” sound-bite ignored. Carbon tax revenues could be dedicated to reducing the regressive and stifling payroll tax; or they could be “dividended” to Americans. In the latter scenario, Sen. Murkowski’s implied $450/ton carbon tax would yield annual dividend checks to every American household of $8,000, or six times the size of Alaska Permanent Fund checks.

Maybe that would play in Aniak after all.

Photo: Flickr / Esteban Salazar Herrera.

Congress: Put the Brakes on Carbon Pollution, Not Economic Activity

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Forget the 1% and the 99%. Forget the 2% and the 98%. The numbers that matter in last week’s fiscal cliff outcome are 77% and $150 billion. The first number, 77%, is the fraction of households whose federal tax burdens jumped January 1. The second number, $150 billion, is the annual loss in GDP projected by economist Nigel Gault and others due to the expiration of the payroll tax “holiday,” a stimulus measure that had reduced employee payroll tax rates from 6.2% to 4.2% for the past two years. By letting the payroll tax “holiday” lapse, Congress slammed the brakes on the halting economic recovery, taking $20/week off the average employee’s take-home pay at time when growth is sluggish and unemployment remains stubbornly high.

The payroll tax hike effectively eliminated the past year’s worth of wage gains in one month.

The payroll tax, which funds Social Security, is withheld from wages up to $113,000. Two years ago, the Congressional Budget Office pointed out that cutting payroll taxes is a cost-effective spur to job growth and consumer spending, offering more stimulus per dollar than most other kinds of government “spending.” Moreover, it’s the kind of stimulus policy conservatives like; putting money in consumers’ hands, not government contractors’. (Which helps explain why the payroll tax holiday was extended last year with bipartisan support.)

Cutting wage taxes to stimulate economic activity makes intuitive sense: higher take-home pay spurs employment and spending. Similarly, raising taxes on fossil fuels makes sense: we want less pollution, especially CO2 that’s disrupting the global climate system. Even skeptics of global warming science want to breathe less smog, soot and mercury that cause respiratory illness and cancer.

Cutting taxes on work and raising taxes on CO2 pollution can push and pull together: the revenue stream from a modest starter tax of $25 per ton of CO2 would more than fund permanent extension of the 2% payroll tax holiday. This use of the carbon tax revenue would compensate for the potentially regressive effects of carbon taxes. But why stop there? By briskly ramping up the carbon tax to $140/ton over the next decade, we could simultaneously eliminate both employer and employee payroll taxes; a permanent 12.4% pay raise. That’s a big push toward higher employment and a huge downward pull on carbon pollution. As workers cost less and dirty energy costs more, clean energy and efficiency innovators and entrepreneurs will invest and hire where they find opportunities. “Green” jobs without a bureaucracy to oversee special programs. And no increase to overall tax burdens or deficits; it’s a revenue-neutral tax shift, and about as good as it comes.

It is true that the 2011-2012 payroll tax “holiday” required replacing Social Security funds out of general revenue (increasing the federal budget deficit), which some fear compromises the integrity of the Social Security Trust Fund. The worry is that replacing lost revenue with general revenue violates the separate “lock box,” which if extended could effectively reduce retirees who’ve paid into Social Security into just another set of claimants on the federal treasury.

But there are ways to sidestep this important “integrity” concern. A sterling example is the bill introduced in 2009 by Rep. John Larson (D-CT). It’s a briskly-rising tax on carbon pollution (reaching $140/T CO2 in ten years) that applies the revenue to reimburse payroll taxes through a federal income tax credit. Thus, Larson’s proposal wouldn’t touch the Social Security Trust Fund. The structure could easily be expanded to reimburse both employers’ and employees’ payroll taxes as the carbon tax rises annually. At the end of a decade, we’d have pushed up effective wages by 12.4%, while pulling down CO2 pollution by around one-third. All by smartly shifting taxes, not adding to total tax burdens. 

Cartoon: Tom Toles, Washington Post 12/9/12

Carbon Tax on Trial: Chimera or Green Charm?

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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 think

By 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 tax

By 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:

  • Standards and regs tend to motivate threshold-meeting behavior but no more.
  • Standards and regs provide no incentive to conserve on usage — by right-sizing new homes, for example; or driving less; etc.
  • We can’t expect standards and regs to address more than a subset of the thousands of types of machines, appliances and vehicles that collectively consume the world’s energy.
  • Standards don’t catch up to new products until they’ve been adopted widely ― and have “locked in” energy waste (e.g., plug loads).
  • Standards and regs generate zero revenue and thus can’t figure in tax or fiscal “deals.”

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:

  • A dividend system (supported by James Hansen, Bill McKibben, and lots of other greenies) would distribute the carbon revenue to citizens on a flat per-capita basis, the same way Alaska distributes its permanent fund money.
  • A similarly progressive option is to use carbon revenue to reduce payroll taxes, which are paid by around 80 to 90 percent of Americans.
  • A regressive option is to use carbon revenue to reduce income taxes, which are paid by between 50 and 60 percent of Americans and are the main source of progressivity in the U.S. tax system (wealthier people pay a higher rate). Replacing a progressive tax with a regressive tax would redistribute wealth upward. Unsurprisingly, that’s the policy supported by Republicans like economist Art Laffer, who have long loathed the income tax.

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:

  • Carbon taxing has potential appeal on both sides of the political aisle (Point #1).
  • “Revenue recycle” can build the constituency to enable the tax to rise. (#2 & #3)
  • A high enough carbon tax will spur investment in clean energy, without subsidies. (#4 & #8)
  • Tax regressivity is anathema, but curable. (#5)
  • Eventual revenue decline isn’t a problem. (#6)
  • EPA regulation of climate pollution isn’t in the same league as a serious carbon tax (#7)
  • Emission-reduction certainty is overrated. (#9)

To these assertions, let’s add this:

  • The ballpark magnitude of revenue from a carbon tax is knowable in advance — giving a carbon tax salience in fiscal and tax reform.

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.

Carbon-Tax Champion Pete Stark Loses House Seat

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Tuesday’s election results were mostly positive for climate advocates. The defeats of far-right GOP Senate candidates Richard Mourdock (IN) and Todd Akin (MO) produced a twin blow to the anti-science Tea Party, while two of Congress’s most ardent carbon tax proponents, Rep. John Larson (D-CT) and Rep. Jim McDermott (D-WA), won handily. The re-election of President Obama over Republican Mitt Romney, aided by a dramatic last-minute embrace from superstorm Sandy-battered New Jersey Republican Governor Chris Christie, could also augur well for action on climate. So too could wins for a host of progressive state ballot initiatives, most notably California’s Proposition 30, which will generate $6 billion a year in new tax revenues to support public education.

Californian Pete Stark was first elected to Congress in 1973.

There was this sour note for climate advocates, however:  long-time California Congressmember Pete Stark lost his seat to a fellow Democrat, thanks to redistricting that cut off Stark from a majority of his former constituents, as well as the state’s new “top-two” primary system that pitted Stark against a centrist fellow Democrat rather than a GOP opponent. The victor, Eric Swalwell, an Alameda County prosecutor, is 31. Stark is 80, and has represented parts of California’s East Bay region since 1973, making him the dean of California’s Congressional delegation.

Rep. Stark was both an early and consistent leader in promoting a carbon tax in Congress. In April 2007, Stark introduced legislation that would have levied an upstream tax on fossil fuels equivalent to $10/ton of the fuel’s carbon content, rising annually by $10/ton until CO2 emissions had dropped by 80% from 1990 levels. The bill went nowhere, what with the then-majority House Democrats in the thrall of competing cap-and-trade legislation. But as the first submittal of carbon tax legislation to Congress, it helped galvanize carbon tax advocates, particularly at green groups not beholden to cap-and-trade, including the Carbon Tax Center. Last fall, Rep. Stark dusted off his 2007 bill, upped the tax level to $10 per ton of CO2 (a nearly 4-fold increase) and introduced it as the Save Our Climate Act of 2011.

Pete Stark has been outspoken on many fronts in addition to climate. He was a vocal opponent of the War in Iraq and a strong supporter of a single-payer health-care system. Perhaps even more remarkably, in 2007 Rep. Stark publicly declared his disbelief in a Supreme Being, making him the first openly-declared atheist to serve in Congress. The following year, Stark’s courage was honored with the Humanist of the Year award from the American Humanist Association.

America will be the poorer for losing Rep. Stark’s independence, critical thinking and passion for justice in Congress. The Carbon Tax Center will miss him for these qualities and his vision to place a steadily rising carbon tax at the center of climate protection. A fitting legacy would be enactment of legislation along the lines of Pete Stark’s Save Our Climate Act.

Addendum, Dec. 5, 2012: A profile of Eric Swalwell posted today in the New Republic touches on the missteps that made Rep. Stark politically vulnerable and contributed to his defeat.