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Should Carbon Pricing Advocates Support the Cap-and-Dividend Bill?

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Last month’s Pricing Carbon Conference at Wesleyan U. featured a debate over three competing approaches for pricing carbon emissions, each of which is embodied in bills introduced in the 111th Congress:

The Conference also offered a workshop comparing two ways to return revenues raised by a carbon tax or by selling carbon emission permits:

  • a regular “dividend” or “green check” sent to all U.S. households; vs.
  • a series of periodic reductions in payroll taxes.

Cap-and-Dividend proponent Peter Barnes, flanked by NRDC's Dan Lashof (left) and Carbon Tax Center's Charles Komanoff (right), at the Wesleyan Pricing Carbon conference.

As hoped, the Conference has sparked a flurry of substantive and strategic discussions. For example, cap-and-dividend advocate Peter Barnes is imploring us to align the Carbon Tax Center with the CLEAR cap-and-dividend bill introduced in December 2009 by Senators Cantwell (D-WA) and Collins (R-ME).

The CLEAR bill is backed by a coalition of largely grassroots organizations, who view it as a way to achieve a guaranteed reduction in emissions without the political compromises and anti-consumer aspect of cap-and-trade with offsets. We hold Peter and his coalition partners in high regard. Their cap-and-dividend concept is certainly a quantum improvement over the cap/trade/offset model that some of the mainstream environmental groups rode to defeat (again) in 2009-2010. Yet both the concept and the particulars of the CLEAR bill fall far short of what we at CTC believe is required in carbon-pricing legislation.

In this post, we contrast the CLEAR bill with the approach taken by Rep. Larson (D-CT) and 12 co-sponsors in their carbon tax bill, America’s Energy Security Trust Fund Act, which Mr. Larson pledged at Wesleyan to re-introduce in the new Congress that convenes in January.

The CLEAR Bill at a Glance

Like all cap-based bills, the CLEAR bill relies on a declining “cap” in the number of carbon emission permits to be auctioned to emitters. In CLEAR’s case, the promised decline (relative to 2005 emissions) would be 20% in 2020, 30% in 2025, and so forth, finally reaching an 83% drop by 2050. CLEAR would return 75% of the revenues from the permit auctions to all U.S. residents, with each getting an identical amount. The remaining 25% of revenue would be placed in a “Clean Energy Reinvestment Trust Fund” (CERT) for appropriation by Congress, ostensibly to “green energy” investments, mitigation, adaptation and transition assistance.

As a brake on price volatility, and to provide a modicum of price predictability, CLEAR sets a floor and ceiling on the prices of the carbon emission permits: the floor is set at $7 per ton of CO2 rising at 6.5% annually plus the rate of general inflation, with the ceiling at $21/ton, rising at 5.5% plus inflation. The floor is intended to protect investments in low-carbon measures by ensuring that fossil fuel prices include at least a minimum charge for their carbon emissions, while the ceiling is intended to shield consumers from too-rapid price rises. When the ceiling is hit, a “safety valve” in the CLEAR bill triggers auctions of additional permits at the ceiling price; the revenue from these supplemental permits is added to the CERT fund.

CLEAR’s Biggest Problem: Its Cap Hides a Much-Too-Low Price

The Carbon Tax Center has modeled the price levels needed to achieve particular emissions reductions. Our conclusion, using historical energy price-elasticity data, is stark: the CLEAR bill’s emissions reductions targets cannot be achieved within the bill’s low price ceiling. When we conveyed this finding at a meeting with Sen. Cantwell’s staff in early 2010, the response was even more stark: “We don’t intend to use (CO2) prices to reduce emissions.” — a statement that appears to deny the fundamental role of prices in driving changes in behavior.

The apparent disconnect between CLEAR’s emission targets and its price ceiling means that the ceiling price would be hit frequently, perhaps even continuously. This in turn would open the safety valve and cause the auctioning of supplemental emission permits, whose revenue would fund CERT. In effect, then, as the cap tightened, CLEAR would function like a low carbon tax (with the level set at the safety valve auction price), an increasing share of whose revenues would flow to the CERT fund. The initial promise of returning 75% of revenue would recede as the cap tightened and an increasing share of revenue went to the CERT fund. In this respect, CLEAR might even come to resemble the “Breakthrough” proposal for a low carbon tax to fund RD&D, albeit with less specificity about which technologies Congress might choose to subsidize and less clarity about the expected CO2 prices.

The CERT Fund—Big Dogs Eat First, But Can They Reduce Emissions?

Needless to say, the same interests that wrote themselves free allowances under the Waxman bill would use their political muscle to divide up the CLEAR bill’s CERT fund. Thus, no one should be surprised if “clean coal,” ethanol and other “incumbent” energy interests garnered a lion’s share of the CERT fund’s supposed “clean energy investments.”

Nevertheless, CLEAR proponents appear to assume that the CERT fund would achieve near-miraculous reductions in carbon emissions. Our modeling indicates that because CLEAR’s price level is held so low, the bill would have to rely on the CERT fund to achieve more than half of its mandated 2009-2020 emissions reductions. Indeed, with its low (5.5%) annual increase rate, CLEAR’s $21 ceiling price would rise to only about $35 in a decade; that’s less than a third of the 2020 price in the Larson bill. No wonder Larson is projected to reduce emissions by 30% by harnessing the power of real price signals, whereas the CLEAR bill would have to rely on unspecified (and likely pork-laden) energy “investment” simply to achieve a reduction of 20%.

The Vast Costs of Hiding the Price

The main (political) appeal of a cap seems to be to hide the price. Yet hiding the price from investors and households guarantees that caps will be far less effective than direct pricing mechanisms at inducing investment in low-carbon energy and efficiency. The Brattle Group, a well-respected economics consultancy, studied the price volatility in the European Union’s Emissions Trading Scheme and concluded, first, that the noisy, hidden price signal there delayed investment in alternative energy by a decade; and, second, that the cap-derived CO2 price would have to rise roughly twice as high to get the same emissions reductions as an explicit tax.

Moreover, as we saw in the acrimonious and puerile debate over the Waxman bill, “hide the price” leaves everybody with an Internet link free to speculate on the cost of the legislation, with estimates ranging from astronomical (by those opposing action) to microscopic (by those claiming that “cost controls” such as offsets would avoid the need for significant CO2 prices). The result of “hide the price” in 2009-10 was a confused public and a stymied Congress. There’s no reason to expect a clearer discussion if cap systems continue to be the preferred way to price carbon emissions.

Hiding the price under a cap also complicates international harmonization. As we described in a post here in March 2009, and “Report from Copenhagen: Forget carbon targets, just set a price” an explicit carbon tax with border tax adjustments can be an effective incentive for other nations to enact their own carbon taxes to garner the tax revenue that their carbon-taxing trading partners will otherwise collect on imports at the border.

CLEAR’s Flimsy Wall Around Wall Street

The CLEAR bill seeks to avoid inducing speculative secondary markets by fiat: prohibiting entities that buy or sell emission permits from buying and selling carbon derivatives. It also would require CFTC, FERC and FTC to promulgate regulations on CO2 emissions trading. But as the Congressional Budget Office, Robert Shapiro and other economists have concluded: because of the energy industry’s need for insurance against wild price swings, the use of hedging instruments is unavoidable in the large and volatile CO2 markets that are inherent when setting a price indirectly using a cap. It appears inevitable that a secondary market would emerge overseas, if not illicitly onshore.

CLEAR’s Big Contribution: Revenue Return

The CLEAR bill did perform a great service by bringing revenue return via “dividends” into public discussion, at a time when Waxman-Markey proposed what amounted to a 40-year earmark of carbon revenues. (W-M would have allocated 85% of allowances, overwhelmingly to “incumbent” energy interests – effectively, a hidden, volatile and regressive tax.) CLEAR would at least start with 75% revenue return, although as discussed, that fraction would diminish as the cap tightened and the price ceiling was hit. Nevertheless, revenue return via a “dividend” or “green check” offers transparency and accountability that could help build political support for carbon emissions pricing.

On the other hand, returning revenue via reduced taxes on workers, as Rep. Larson proposes, would also avoid regressivity while offering the additional advantage of employment stimulus. This kind of tax-shifting seems to be a key ingredient in the continued political and economic success of the carbon tax in British Columbia and its effectiveness has been widely recognized here, too. Cutting payroll taxes has been praised by the Congressional Budget Office as one of the most cost-effective ways to reduce unemployment. The bipartisan “Hire Now” Act, co-sponsored by Senators Hatch and Schumer, effective in March 2010, eliminated the first six months of payroll taxes on employers that hire the unemployed.

While pro rata “dividends” offer appealing transparency and simplicity, the potential for a “job-creating carbon tax” to cut payroll taxes while de-carbonizing our economy seems no less attractive, particularly with officially-measured unemployment persisting above 10%. Though we conclude that CLEAR bill is too flawed to serve as effective carbon pricing legislation, it did at least jump-start the much-needed debate about revenue return. For that, Senators Cantwell and Collins and CLEAR’s supporters deserve high praise.

Photo: Wesleyan University

From Wesleyan: An Energized Call to Price Carbon

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Author’s note, Dec. 22, 2010: Video and Powerpoints of Hansen, McKibben, the Congressmembers, the carbon-pricing “debate” and other sessions are now available at this page of the Pricing Carbon conference Web site.

Forgive us if this post is a bit breathless. We’re still reeling from the energy we experienced at the Pricing Carbon conference this past weekend at Wesleyan University.

More than 500 people attended the Pricing Carbon conference.

Over 500 people participated in the panels, workshops and strategy meetings, which began Friday evening and continued into Sunday afternoon. A majority were students, including 175 members of Students For a Just and Stable Future, a dynamic activist organization that began in Massachusetts and has spread across New England. Non-students were well represented too, with activists, policy professionals and concerned citizens from two dozen states and Canada. Opinion was unanimous — among presenters and participants alike — that the conference was a vital and worthwhile experience. And as of Sunday morning, Wesleyan’s IT staff had counted 33,000 hits to their site streaming conference video.

We’re sifting through videos, photos and notes from presentations which featured four members of Congress, renowned climate scientist James Hansen, author-advocates Bill McKibben and Peter Barnes, activists including Cecil Corbin-Mark, Tim DeChristopher and Bill Shireman, Wesleyan professors Gary Yohe and Barry Chernoff (director of Wesleyan’s new College of the Environment, the conference host and co-sponsor), and CTC’s own James Handley and Charles Komanoff.

Here’s a handful of quotes from the Congressmembers:

I’m the proud author of that bill, America’s Energy Security Trust Fund Act, and I will be proud to introduce it again in the next Congress. — Rep. John Larson (D-CT)

I’m a carbon tax person. — Rep. Jim McDermott (D-WA)

Conference-goers swarmed Rep. Inglis after his talk.

Biblical Law says, “You keep your stuff on your property.” We need to say to coal and oil, “Keep your stuff on your property.” — Rep. Bob Inglis (R-SC)

The Republicans have done us a favor — they’ve given us two years to think, two years to build a movement.” — Rep. Bob Filner (D-CA)

I didn’t need to come up here. There are no votes for me here. I came up here and you gave me faith. Now you need to be thinking about how you’re going to get meetings like this in every part of the country. — Rep. Jim McDermott (D-WA)

Veteran activist Ted Glick, policy director of the Chesapeake Climate Action Network, summed it up neatly:

There was a positive and energetic spirit throughout the conference. One reason for this was the conscious structuring of the conference to maximize opportunities for participation by all of those in attendance; e.g., by limiting the amount of time for speakers in plenaries and workshops, to allow for more time for questions and dialogue.

It was also because the co-sponsoring groups and many of the people who participated believe that the demise of the cap and trade model for comprehensive climate legislation opens up the possibility that a much better approach to pricing carbon and reducing greenhouse gas emissions can now become the preferred national approach. And it was due to the positive combination of a cross-section of older activists, scholars, political leaders and heads of organizations interacting with large numbers of students and youth seriously interested in and passionate about the climate issue.

Click here for the Wesleyan Statement of Carbon Pricing Principles. Come back to this page shortly after Thanksgiving for a sign-on page; links to conference Powerpoint presentations, photos and videos; and, for conference participants, a Google news-group to help us stay connected and strengthen the movement to price carbon emissions efficiently, equitably and transparently.

Help Make Our November Conference A Turning Point for Climate Action

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Dear Friend —

A carbon tax was always going against the grain — against the presumption that the most straightforward and effective approach to carbon emissions pricing couldn’t prevail over America’s special-interest politics and tax aversion — and against the smart money that insisted on hiding the price and buying off the opposition.

Well, the insiders’ cap-and-trade strategy has crashed and burned, but we carbon tax advocates are still standing and still facing a headwind. But we see a shift on the horizon: we’re convening a national conference next month at Wesleyan University in Connecticut designed to rally public and political support for effective and fair carbon taxing. And we’re asking you to help us make the Nov. 19-21 Pricing Carbon Conference a turning point at which a growing coalition of U.S. climate advocates unites under the banner of a revenue-neutral carbon tax.

It’s true that support for climate action is polling at near-record lows. But while part of that is due to the economy along with the highly orchestrated campaign of climate denialism, the spectacle of polluter giveaways under cap-and-trade has also convinced many that there’s no equitable way to price carbon emissions. We aim to turn that sentiment around, and show Americans that a national carbon tax with the revenues returned equally to U.S. households via “green checks” — carbon “fee-and-dividend,” as James Hansen terms it — can arrest the climate crisis while enhancing most families’ financial well-being. (Coupling those green checks with strategic “tax shifting” would be equally fair and effective.)

We’ve lined up an impressive and diverse roster of speakers for the conference, including Jim, Bill McKibben, Juliet Schor, Brent Blackwelder, Peter Barnes, Bill Shireman, two nationally known leaders from the environmental justice community, Cecil Corbin-Mark and Angela Johnson Meszaros, and members of Congress from both sides of the aisle. (A more complete list with links to speaker bios is here.)

As co-host of the conference, Wesleyan’s College of the Environment is providing additional experts including economist Gary Yohe along with world-class facilities for the conference presentations and discussion forums.

Now we need your help: to pay for speakers’ travel and lodging; for buses to bring delegates from New York, Boston and Washington; and for advertising and publicity to ensure that the halls are packed and the proceedings are communicated far and wide. We’re also eager to assist a growing number of young climate activists seeking “scholarship” assistance with travel and lodging. These are the people whom we will be counting on to take our mission forward. And they are also the people who will likely be most inspired by participating in the conference.

Your check, made out to “Wesleyan University” and mailed to The Price Carbon Campaign, P.O. Box 125, South Lee, MA 01260, will go entirely for conference organizing and will be tax-deductible. To contribute on-line, go to www.citizensclimatelobby.org.  On the right, select the lower donate button (tax-deductible donation).  Please fill out the form in its entirety.  In the second address line, enter: pricing carbon, then hit continue. (Citizens Climate Lobby is a conference sponsor.) As always, you can contribute to the Carbon Tax Center via the “Donate Now” button elsewhere on this Web site.

Every successful revolution — in policy as well as politics — has begun with a small band of people who nurtured a new idea that went against the grain. A carbon tax that transparently and unmistakably builds the costs of climate damage into the price of fossil fuels is no different. This is our moment, and the Wesleyan “Pricing Carbon” conference is our vehicle for seizing it. Please write your check today and be as generous as you can.

Best wishes … and thanks!

Charles Komanoff (director, Carbon Tax Center)

PS: Of course, we’d love to have you join us at the conference. To register, click here: www.pricingcarbon.org or click the REGISTER NOW button higher up on this page. You can also call (413) 243-5665.

Photo: Flickr / Carlos Gotay Martínez

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

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

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

Yes and no.

Bill Gates. Photo: Steve Jurvetson (flickr).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Senate's New Openness to Carbon Tax Demands New 'Framing'

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With the ranking Republican on the Senate Energy & Natural Resources Committee now urging serious consideration of a revenue-neutral carbon tax, we carbon-tax advocates may want to re-examine our “framing,” even as we call upon cap-and-trade supporters to unite with us behind a carbon tax.

Let’s start with today’s news from GreenWire’s Darren Samuelsohn, which was picked up by The New York Times, that the ice jam blocking sound climate policy is finally beginning to break up:

Anna_AndresThe Senate climate debate detoured from cap-and-trade legislation today as the Energy and Natural Resources Committee weighed alternatives like a carbon tax or even sector-specific limits on power plants.

“We need to dispense with the blind loyalty to cap and trade, or at least begin to question if it is warranted,” said Sen. Lisa Murkowski (R-Alaska). “We should objectively review the strengths and weaknesses of our policy options and develop a measure that protects both our energy and the environment.”

Murkowski, the committee’s ranking member and a co-sponsor last year with Democrats of a cap-and-trade bill, said Americans now associate the cap-and-trade concept as a tax that will raise prices on a range of consumer goods. That, she added, should prompt Congress to consider other less-expensive legislative approaches that take aim at reducing greenhouse gas emissions.

“We need to be honest about those costs, and ensure that the revenues associated with them are returned to the people who will bear the burden of compliance,” Murkowski said.

Here are my takeaways from Murkowski’s statements:

  1. The odds for passing the Waxman-Markey / Kerry-Boxer cap-and-trade bill are worsening steadily.
  2. With Sen. Bob Corker (R-Tenn.) and Rep. Bob Inglis (R-So. Carolina) already in the fold, a semblance of a “GOP Caucus for a Revenue-Neutral Carbon Tax” may be starting to emerge — in contrast to monolithic Republican opposition to carbon cap-and-trade.
  3. The political fallout from cap-and-trade has the potential to make winning public acceptance of a carbon tax even tougher.

The import of Takeaway #3 is obvious: Committing to revenue-neutrality may not be enough to push a carbon tax through the political fog and past the fossil-fuel lobby. And rhetorically tying the carbon tax to a tax-shift and/or dividend may not suffice, either. Radical re-framing may be in order.

One possible approach is to push the tax dividend before the tax itself. That’s precisely what the Canadian environmental campaigner and writer Silver Donald Cameron did in an essay last month, Tax Those Carbon Gluttons:

LEMME TELL YOU about a carbon tax you’re gonna love… The fun starts with the government giving you maybe $2,000 as a carbon dividend.

You like it so far? Thought so. And the government gets the money by imposing a tax on everything that emits carbon dioxide into the air. The total amount raised by the carbon tax is the same amount that’s being distributed as a dividend. So it’s a wash. The government is no better off at the end of the day.

But you’re better off — if you’ve been frugal with energy, living in a snug house with solar hot water and wood heat, travelling on public transport, eating local food. You lose a bit of your dividend in taxes on gasoline and electricity and what-not — but you get to keep a good chunk of your carbon dividend. Let’s say you pay $400 more in taxes. That money just reduces your windfall dividend. The carbon tax still leaves you $1,600 ahead. How does that sound, sonny?

Fred Foulwater doesn’t.

Fred’s a carbon glutton, so he’s definitely worse off. Sure, he also gets his $2,000 dividend — but he lives in a huge house in the outer suburbs, he doesn’t turn down his thermostat and he commutes 60 kilometres to work in a monstrous SUV. He has a penchant for exotic tropical fruit in midwinter and he flies a lot, so in the end he pays a lot of tax — which doesn’t exactly feel like a tax, but feels like higher prices. Let’s say Fred’s profligacy adds $3,600 to his overall tax bill. So the new taxes have eaten up all of his $2,000 dividend — and another $1,600 besides. That’s the $1,600 that ended up in your pocket, buddy.

Pollute if you want. Buy junk if you like. Emit as you choose. But it’s going to cost you — and the money captured from you goes directly to your clever neighbours. As time goes by and the whole society becomes more serious about slashing emissions, the taxes and the dividend go up. Stupidity becomes more and more expensive.

(Emphases added.  Cameron’s piece is no longer available at its original Nov. 22 posting at the Nova Scotian / Chronicle Herald, but by clicking here you can download it as an MS-Word doc.)

I happen to like Cameron’s messaging. A lot. I like that he puts the “dividend” up front. (By the way, the dividend could be a tax cut  as well as a check, though the check seems cleaner and clearer.) I like the libertarian, “Pollute if you want … But it’s going to cost you.” And I like the simplicity.

A carbon tax, even revenue-neutral, has always been a tough sell. The fact that cap-and-trade has been partly branded as a carbon tax might make the sell tougher still. But we may be breaking through the “That’s politically impossible” screen. With the right messaging, we could get there — into and through Congress — even faster.

Photo: Flickr /Anna.Andres

The Three Newest Flaws in Cap-and-Trade

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Democratic Senators Barbara Boxer (CA) and John Kerry (MA) are expected to introduce their long-awaited climate-change bill tomorrow. As the Houston Chronicle reported last weekend, the bill was delayed for months “by negotiations aimed at appeasing moderate Democrats worried that new emissions caps could impose hefty economic costs on the energy industry, struggling manufacturers and coal mining.”

The Boxer-Kerry bill is expected to be modeled after the Waxman-Markey bill that squeaked through the House in June. This means it will employ the cap-and-trade architecture that underpinned the 1997 Kyoto Accords and has been the cornerstone of the U.S. Big Green lobby’s legislative offensive on climate ever since.

[Addendum: The 821-page Boxer-Kerry “Clean Energy Jobs and American Power Act” was introduced Sept. 30. Go here for text, or here for section-by-section summary. — C.K., Oct. 1.]

Cap-and-trade has been attacked on many grounds: lack of a clear price signal, inherent complexity, and necessary reliance on trading mechanisms that would unleash a pandora’s box of financial machinations that could destabilize global finance. Of late, three new objections have surfaced against cap-and-trade as an “architecture” for reducing greenhouse gases. Each is worth considering as the Senate begins tackling climate legislation in earnest.

<em>Outside NRDC's New York City headquarters, Sept. 24</em>

Outside NRDC's New York City headquarters, Sept. 24

The first concerns what has heretofore been billed as cap-and-trade’s greatest virtue: its foundation on a quantified emission target, i.e., a “cap.” Alas, the nature of a cap is to be fixed, and therefore not adaptable to changing circumstances — including, now, the sudden drop in U.S. emissions.

As everyone knows, the Great Recession has shrunk economic activity in the United States. And fossil fuel burning and CO2 emissions have been shrinking particularly fast. Consider just one sector, albeit a key one: coal-fired electric power generation.

Until very recently, coal-fired power plants were responsible for almost a third of all U.S. emissions of carbon dioxide. This year, however, the bottom has fallen out.

First-half 2009 figures released last week by the Energy Information Administration show an almost 13% drop in electricity generation from coal and an attendant 11% drop in the physical tonnage of coal burned to make power vis-à-vis the first half of 2008, as coal has absorbed the entire unprecedented 5% drop in overall electricity production. By my calculations, this six-month drop in coal burning alone has already translated to 106 million fewer metric tons of carbon dioxide, singlehandedly reducing total annual U.S. emissions by almost 2%. If continued through December, the 2009 decline in coal burning would cut U.S. emissions by 3% from 2005 levels, thereby achieving, in one sector, almost a fifth of the Waxman-Markey target of reducing 2020 emissions by 17%,

Yes, emissions will eventually “rebound” as economic recovery takes hold. But not all of the lost output will be made up. Moreover, some observers, The Earth Policy Institute’s Lester Brown among them, believe that much of the sudden drop in coal-fired and other emissions is due to emerging structural factors such as fuel-efficiency standards, the liftoff in renewable energy, and more widespread awareness of the perils of oil dependence. These developments too are cutting the Waxman-Markey 17% target down to size. While in theory this “stature gap” could be restored by writing a tougher target into the Senate bill, in practice it’s unlikely the bar will be raised this fall, or ever. If so, the vaunted “emissions certainty” in cap-and-trade will lock in a hollow achievement.

The second new flaw, variously referred to as the “voluntary reductions conundrum” or the “virtue dilemma,” concerns the prospect that under a cap-and-trade regime, any “extra” steps to reduce CO2 emissions stand to be canceled out by corresponding increases in emissions that the cap enables somewhere else. In effect, any action to, say, ride a bike instead of driving (or, on a larger scale, to create a bicycling infrastructure that can replace thousands of car trips), or to permit a wind-turbine farm whose output allows the grid to cut back on fossil-fuel generation, ends up creating “room” under the cap that lets other parties increase driving or coal-burning and emit the “saved” emissions.

The mechanism for this perverse consequence of a carbon cap would be a decrement in the auction price of allowances due to the increment in bicycling or wind output, encouraging a corresponding increment in driving or fossil-fuel power generation elsewhere within the capped entity. In effect, the celebrated cap in cap-and-trade dictates an emissions equilibrium that, in turn, vitiates any given decarbonizing measure which, absent the cap, would have reduced emissions.

The implication is troubling, to say the least. No more could one promote a proposed renewable-energy or energy-efficiency project as a climate-saver, if its fossil-fuel-saving virtue will be offset by an equal helping of fossil-fuel vice somewhere else. At the same time, a dirty-energy project (or failure to implement a clean one) could be justified on the grounds that the resulting propping up of allowance prices will enable other low-carbon investments or behaviors to come into being and pick up the slack. The idea that “the cap will provide” turns out, it seems, to be a two-edged sword.

The third and last cap-and-trade flaw attracting notice concerns transnational fungibility. Shorn of its recondite name, it denotes the difficulty if not impossibility of establishing a normative quantity-reduction target for greenhouse gases. In a nutshell, if the U.S. were to establish an emissions reduction goal of 17%, or any other number, for 2020 or any other future year, by what criterion should that target be deemed appropriate for any other country? After all, the United States emits twice as much CO2 per capita as comparably wealthy countries in Europe, and, of course, 5 to 20 times as much per person as China, India, Brazil, et al. (And this comparison doesn’t reflect the even greater disparities in historical or aggregate emissions.)

Needless to say, this problem of fungibility, or its lack, doesn’t apply to a carbon tax. A U.S. carbon tax of so many dollars per ton of CO2 might or might not be the “optimal” level, but it would at least translate fairly and equally across borders, disadvantaging manufacturers in every nation more or less equally. Moreover, as Elaine Kamarck has pointed out, many countries lack the administrative capacity to manage a cap-and-trade system, whereas most governments can at least collect taxes.

Nor would a carbon tax be beset by flaws #1 or #2. The impacts of a carbon tax on U.S. investment decisions, infrastructure provisions and personal behaviors will be relatively unaffected by aggregate contractions in emissions. Moreover, unlike cap-and-trade, a carbon tax won’t undercut virtue but will reinforce it, since each and every elimination of emissions will be rewarded by a corresponding reduction in the tax.

At this point, cap-and-trade seems to have little going for it other than institutional inertia. Let us hope that all of its drawbacks are closely and fairly scrutinized in the Senate debate now set to begin.

Photo: David Pine, rising tide north america

Hansen Tells Ways & Means: Revenue-Neutral Carbon Tax Needed to Spur Clean Technology Revolution

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A planetary crisis “threatening the young and unborn” compels a “substantial, gradually-increasing carbon tax with all revenue distributed directly as monthly ‘dividends’ to each household,” Dr. James Hansen told Congress today.

Hansen, director of NASA’s Goddard Institute for Space Studies and the unofficial dean of climate scientists, testified that measurements of Earth’s historical climate sensitivity to atmospheric CO2 make clear that rising levels are now driving our climate into ranges that will have lethal consequences. Current concentrations of 385 ppm amplify dangerous feedback mechanisms such as loss of reflective ice surfaces and release of methane gas from permafrost, he said. Atmospheric concentrations must be brought below 350 ppm as quickly as possible, Hansen stressed, specifically rejecting the target of 80% reductions by 2050 advocated by leading environmental groups.

Hansen_World_Development_Movement.jpgHansen testified at a House Ways & Means Committee hearing this morning, kicking off debate in Congress over legislation to help the U.S. achieve deep cuts in carbon emissions through a cap-and-trade system, a carbon tax, or perhaps a hybrid approach. Hansen and Union of Concerned Scientists geochemist Dr. Brenda Ekwurzel both testified in favor of vigorous action, although they differed on the cap vs. tax question. A third witness, University of Alabama professor John Christy, argued for a go-slow approach.

Hansen told the committee that a transparent carbon tax with direct dividend would “spur rapid replacement of our inefficient infrastructure” and lead to an “efficient phase-out of coal.” He strongly criticized cap-and-trade proposals, calling caps “hidden taxes,” contending that they would undermine essential price signals through price volatility while enriching traders and lobbyists at the expense of the public. He predicted that cap-and-trade could lead to "blackmail" by electricity suppliers, who would force the public to choose between meeting emissions targets and blackouts, and pointed out that the European Union’s cap-and-trade system has failed to reduce carbon emissions.

UCS’s Ekwurzel testified that acidification has already diminished the oceans’ ability to absorb more carbon dioxide — a development that will accelerate global warming. She advocated a “cap and invest” program in which emission permits are auctioned and the proceeds used to finance energy efficiency and renewable energy.

Christy’s appearance was sponsored by Republican members of Ways & Means. He testified that cloud effects outweigh human effects on climate, and contended further that any U.S. actions to reduce emissions would be overwhelmed by emissions from China and India, both of which have rejected carbon caps. He suggested that the best way to reduce CO2 emissions is a massive nuclear power construction program.

Committee Chairman Charles Rangel, who represents Manhattan’s Harlem neighborhood and parts of the Bronx, asked Hansen about the effects of a carbon tax on low-income households. Hansen explained that under his proposal to distribute 100% of carbon tax revenues to U.S. residents, a steadily increasing tax reaching $115 per ton of CO2 would result in estimated dividends of $9,000 per two-child household, assuming that adults got one “share” and each of the first two children got one-half. [Ed. note — Using CTC’s carbon tax impact model, we estimate that a $115/ton carbon tax would provide the average family of four with a $7,500 annual dividend.] Hansen noted that because households that use below-average amounts of fossil fuel would receive more in dividends than they paid in higher energy costs, his program would help the vast majority of middle- and lower-income Americans. Hansen also cited Congressional Budget Office findings that carbon taxes are five times as efficient as caps at reducing emissions.

UCS’s Ekwurzel argued that retrofitting homes and  transportation would be a better use of carbon cap revenue than direct dividends. However, she did not address whether “breaching” strict revenue-neutrality on behalf of energy efficiency and renewables might unleash a torrent of less benign uses of the cap or tax proceeds. For his part, Christy seconded Hansen’s view that a carbon tax would be  more transparent than a carbon cap-and-trade system.

Rep. Dave Camp (R-Mich.) and several other Republican members branded carbon caps as hidden taxes. They insisted that the Ways & Means Committee assert jurisdiction over any cap or carbon tax legislation.

Rep. Sander Levin (D-Mich.) responded to Christy’s testimony, saying “nobody is talking about the U.S. acting alone.” Hansen explained that the U.S. could use “average carbon content data” to set tariffs on goods from countries that didn’t enact their own carbon taxes. A U.S. tax with harmonizing tariffs would encourage trading partners to enact their own carbon taxes to negate tariffs and capture tax revenue themselves, he said.

Connecticut Democrat John Larson cited Friends of the Earth’s recent report describing carbon trading as potentially the world’s largest “dark, unregulated” derivatives market and asked why anyone should think that auctioning tradeable permits wouldn’t lead to “a speculative mess.”

During a recess in the hearing, Peter Barnes of Cap and Dividend and Mike Tidwell of Chesapeake Climate Action Network asked Hansen if he would support legislation to cap emissions and recycle revenue via a direct “dividend” to households. Hansen replied, "I don’t see what a cap gets you. We need maximum reductions as soon as possible and a tax gets that."

Committee members asked one cogent question after another. Rep. Jim McDermott (D-Wash.) focused on volatile prices under a cap, which he said would discourage clean energy entrepreneurs. Rep. Chris Van Hollen (D-Md.), a strong supporter of cap-and-dividend, asked about revenue-recycling, noting Hansen’s testimony that a carbon price will need to be high enough to affect behavior and purchasing decisions. Rep. Doggett noted that Exxon now supports a carbon tax after years of climate-change denial.

Hansen stressed the importance of a dividend to ensure continued political support as carbon prices rise. He urged Congress to direct the National Academy of Sciences to report on climate science as a way to end the debate over anthropogenic global warming once and for all. 

After the hearing, I had the good fortune to join Dr. Hansen for lunch. I asked him about clean coal. He said “there is no such thing as clean coal, and there never will be.”

Links to testimony
Hansen: http://waysandmeans.house.gov/hearings.asp?formmode=view&id=7577
Erwurzel: http://waysandmeans.house.gov/media/pdf/111/ekw.pdf
Christy: http://waysandmeans.house.gov/media/pdf/111/ctest.pdf

Photo: Flickr / World Development Movement.

Could Palin Pick Spotlight "Alaska Dividend" Solution to Climate Crisis?

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Note: On Oct. 15, the Alaska Permanent Fund Corporation wrote CTC with helpful details that clarify and correct some of the representations in our Aug. 29 post. The APFC graciously granted permission for us to print their e-mail in full, which we have done at the foot of this post. — C.K.

John McCain’s pick for vice-president isn’t shaping up as a win for Teddy Roosevelt-style conservation. A list of Alaska Gov. Sarah Palin’s positions on key environmental issues posted by the folks at Grist includes these anti-green stances:

  • Opposed a statewide ballot initiative to prohibit or restrict new mining operations that could affect salmon in the state’s streams and rivers.
  • Has pushed to build a natural-gas pipeline from Alaska’s North Slope
  • Sued the Interior Department over its decision to list the polar bear as a threatened species
  • Has proposed eliminating Alaska’s gas tax
  • Has pushed to open Arctic National Wildlife Refuge to drilling

But the Grist list also includes this:

  • Got the state legislature to pass a bill to provide each Alaskan $1,200 to help with energy costs

Gov. Palin_1.jpgWhich naturally brings to mind the Alaska Permanent Fund, the 49th State’s long-established program that annually sends every Alaska resident an identical check drawn from the state’s North Slope oil royalties.

The $1,200 per capita “resource rebate,” was proposed by Palin in July and enacted by the legislature on Aug. 7 “as a way for the state to share some of its multibillion-dollar oil revenue surplus with Alaska residents,” according to the Anchorage Daily News, effectively making it a hybrid of the Alaska Permanent Fund and the federal economic stimulus package that distributed checks to U.S. families earlier this year.

As we have long pointed out, the Alaska Permanent Fund offers a proven, straightforward model for distributing federal (or state) carbon tax revenues in revenue-neutral and progressive fashion: returning those revenues equally to all U.S. residents.

With carbon tax revenues distributed through pro rata dividends, the vast majority of poorer households, and a majority of middle-income families as well, would get back more in the dividends than they would pay in the tax. (For a federal carbon tax, the dividend checks should be provided at least quarterly and perhaps even monthly to keep households ahead of the budget treadmill.) This would cushion the impact of higher prices from carbon pricing while retaining the incentives for businesses, institutions and individuals to transist rapidly to a low-carbon economy.

This Labor Day weekend and beyond, the media will doubtless focus on Gov. Palin’s impact on McCain’s election chances. Let’s hope that a few enterprising reporters will use the selection of a candidate from the Last Frontier State as an occasion to focus on the “Alaska Dividend” as an equitable and politically palatable way of packaging a revenue-neutral national carbon tax.

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Oct. 15, 2008

Mr. Komanoff –

I saw your post today that you wrote in August mentioning the Alaska Permanent Fund.  I thought you might want to know that the Fund does not send out checks from oil taxes or royalties. The Fund invests 25% of the oil royalties that the State receives (no portion of any oil taxes come to the Permanent Fund) and then sends dividends from the income on investments. This includes rent on commercial real estate, stock dividends and bond interest.

Since 1977 the Fund has received $13.2 billion in oil deposits, which has grown through investments to a current value of $30 billion while paying out $16.7 billion in dividends since 1982.

This year was a little confusing because the dividend was $2,069 per person.  On top of that Governor Palin and the Legislature added an additional $1200 that came straight out of oil revenues (royalties and taxes) in the State’s general fund.

Since you are proposing our model as something that could have a broader US application, I thought you might want to know that it isn’t a straight redistribution of oil revenues. Please let me know if you have any questions.

Laura Achee, Director of Communications, Alaska Permanent Fund Corporation, www.apfc.org

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Photo: Flickr / vincentd_indy.

B.C. Carbon Tax Backlash: How Real?

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bbboon___gas_pump___money.jpgFor months we’ve been touting the British Columbia carbon tax, and for good reason. Not only is BC’s carbon tax the highest by far in North America ($10 per metric ton of CO2 this year, rising stepwise to $30 in 2012), but the rollout of the tax has seemed to be handled with great intelligence. The Liberal Party provincial administration took pains to make the tax revenue-neutral (mostly via reductions in personal and business tax rates), a feature it underscored by sending B.C. residents $100 carbon tax dividend checks as a down payment in the week before the tax went into effect on July 1.

So we were dismayed to read in mid-July of a poll showing a clear majority of B.C.’ers opposed to the tax. Even the $100 dividends came off badly in the poll, with at least one respondent complaining that her check only served to remind her of the loathsome tax.

Columnist Bill Tieleman, who posted the story on the Vancouver Web outlet 24 hours, drives home the point in a later story, Carbon tax has no supporters around here. Tieleman seems to fancy himself as a populist voice against B.C. premier Gordon Campbell in general and the tax in particular.

Over the weekend we discussed the poll with social entrepreneur Peter Barnes, progenitor of the intriguing Cap-and-Dividend approach to revenue-neutral carbon pricing, as follows:

Komanoff:

  • Much is made of Americans’ supposed sensitivity to gasoline prices, and the same may be applying in B.C., exacerbated of course by the "market-based" rise in pump prices which has been an order of magnitude greater than the (9 cent a gallon) carbon tax. Mathematically, each of those $100 checks covers the carbon tax on 1,111 gallons, though the true coverage is less considering that gasoline accounts for only ~35% of the carbon tax bite in BC (21-22% in the U.S.). Needless to say, most BC’ers don’t consume 1,100 gallons of gas a year.
  • Most likely the BC government could have done more and better p.r. Yet overall they’ve been savvy … consider if the $100 checks had lagged rather than preceded the rollout of the tax!
  • The poll question wasn’t straight-up, since it suggested that the $100 check was all that BC’ers would get, when it’s actually just the down payment. Here’s that Q: "The provincial government has sent every British Columbian a cheque for $100 as a one-time ‘Climate Action Dividend.’ The total cost of ‘Climate Action Dividend’ is $440 million. This expenditure will
    be paid for by B.C.’s new carbon tax of 2.4 cents per litre of gasoline and other fuel. Do you agree or disagree with this expenditure?"
  • One always wants to know how the poll respondents were selected. (Recall the notorious Literary Digest poll picking Landon over FDR in ’36!) Still, this isn’t to deny that even the dividend concept which you’ve been so prolific and persuasive in disseminating is an uphill fight.

Barnes: 

  • One problem (from a PR standpoint) might be that the BC tax cuts are divided between individuals and businesses. So even if there is overall revenue neutrality, most voters will only get back about half of what they pay in higher prices.
  • The way in which tax cuts rise along with carbon prices is not transparent or seemingly automatic. The carbon tax revenue is not placed in a separate trust fund (so far as I can tell) but is blended with general revenue. It is then up to future legislatures to adjust the tax rates. This could reasonably make people skeptical.
  • A one-time dividend is an obvious gimmick. Recurring (and rising) dividends are likely to create more credibility.
  • This goes to the heart of the question of whether to return carbon revenue via tax credits or dividends, which is something Obama will have to decide.

Peter concludes: "The British Columbia experience suggests that segregating carbon revenue in a trust fund and returning all of it to individuals through automatic monthly dividends (as James Hansen and others have proposed) is the best way to sustain political support." We at CTC heartily agree.

Photo: Flickr / bbboon