U.S. climate activists are gleeful at Sen. John Kerry’s demolition of a sometime climate skeptic at a Senate Finance Committee hearing on Tuesday, and justly so. Ken Green, a resident scholar for the corporate-financed American Enterprise Institute, won the respect of carbon tax advocates two years ago, when he co-authored an AEI report that powerfully made the case for a revenue-neutral carbon tax over a cap-and-trade system. But as an invited witness on Climate Change Legislation: Considerations for Future Jobs, Green attempted to argue that Earth’s ecosystems and human civilization could safely accommodate a global temperature rise of 2 degrees Celsius, though he admitted that any larger temperature rises would be dangerous. Kerry skillfully “outed” Green as an amateur in climatology who had published no peer-reviewed studies and could point to none to support his climate blandishments.
The interchange, summarized in a 6½-minute video assembled by Joe Romm at Climate Progress, showcases Sen. Kerry’s skill as a cross-examiner and reveals just how flimsy and muddled the case questioning the climate crisis really is. Lost in the euphoria, however, is evidence of the Senator’s own confusion — not on the need to act to avert climate catastrophe, but on the workings of competing means of pricing carbon emissions.
In an earlier part of this week’s hearing, Sen. Kerry repeated a point he made in an August 4 Finance Committee hearing on Climate Change Legislation: Allowance and Revenue Distribution: a carbon tax wouldn’t reduce emissions, Kerry claimed, because polluters would “just pay the tax,” whereas a cap would force them into making the desired reductions.
Of course, as anyone versed in climate economics knows, and as the economist-witnesses explained in August, a carbon price of, say, $20/ton would produce the same emissions reductions whether the price was set by traders in a carbon market or directly via a fee on fossil fuel producers. Under a cap with a $20/ton permit price, emitters would have no greater (and no less) incentive to reduce emissions than they would under a $20/ton tax. Reductions that can be made for up to $20 per ton will be made in either system because they will yield the same savings — as permits that wouldn’t need to be purchased under a cap, or as taxes that wouldn’t have to be paid under a tax. Similarly, reductions costing more than the set price won’t be made because it will be cheaper to “just buy the permits” (to adapt Sen. Kerry’s phrase), or “just pay the tax.”
Under either system, then, emitters retain the flexibility to make reductions when those reductions are cheaper than the carbon price and to pay the allowance cost or tax if that turns out to be cheaper. That flexibility about where, when and how to make reductions is why either a carbon cap or tax is more efficient than source-specific regulations which would force emissions reductions at times and places where they’re more expensive and would miss some reductions that were cheaper.
In the August hearing, Sen. Kerry questioned whether American businesses and households would actually respond to higher fuel and energy prices. In doing so, Sen. Kerry overlooked the vast body of evidence quantifying price-elasticity in virtually every sector of the U.S. economy. He also had evidently forgotten what happened during the summer of 2008 when gasoline hit $4/gallon: traffic congestion eased, carpools, buses and trains filled up, and SUV sales tumbled. And that was only the short-term effect of a price spike; a long-term, predictable carbon emissions price increase would allow sound business planning and create incentives for long-term investment in energy efficiency and low-carbon alternatives.
And that points to a key reason that cap-and-trade is an inferior way to set a price on carbon: the price signal under a cap would be “noisy” due to both volatility and the fact that the price must be “revealed” through the market workings of the cap rather than being stated, explicitly, in the tax code. That noise means that with cap-and-trade it takes a higher price for the economy to “hear it” and respond, even if the general trend is upward.
Sen. Kerry is on solid ground relying on peer-reviewed climate science. But his ongoing misunderstanding of the workings of carbon pricing is almost as shocking as the AEI witness’s misrepresentation this week of climate science. It’s past time for both sides to get it right: The consequences of unmitigated climate change will be grave, whereas clear, simple, predictable carbon pricing is essential to catalyzing the solutions.
Photo: Flickr / The Minnesota Independent
Jem Cooper says
You advocate a carbon tax. Unless and until the tax rate was high, it would not make investment in carbon capture and sequestration economic. But any sudden change in energy price would cause severe, unnecessary and politically unacceptable upheaval.
How much better then to make fossil fuel producers and importers contract for the capture and sequestration of a quantity of carbon dioxide equivalent to a proportion of that produced from the fuel they supply. The proportion could start at a few percent and build up gradually over the years. For those buying fuel it would look just like a tax and have all the same desirable effects on their behaviour, but even though the fuel price rise would be gradual the carbon capture would be fully funded immediately.
Furthermore the scheme could easily be extended globally because there would be no issue about who received the revenue from a carbon tax, the fuel producing nation or the consuming nation, and no national emission limits (as with a cap and trade arrangement) to be negotiated ad nauseam and perhaps not enforced.
While the effect of a carbon tax on total emissions depends on its impact on consumption and investment decisions, the effect of specifying what proportion of carbon must be captured is defined. I would hope that within as little as twenty years we could move to a system that defined the proportion of carbon to be captured, based on fossil fuel production at the time, such that global emissions were contained at the level that the oceans absorb annually, i.e. about 2.2 billion tonnes of carbon per year. Atmospheric carbon dioxide concentration would then stop rising.
Mr Jem Cooper
Burnt House
Church Road
Newick
East Sussex
BN8 4JX
01825 723917
James Handley says
The idea of a carbon fee is to gradually dislodge the “incumbent” high-carbon technology by pricing in more of its true cost, while letting all low-carbon challengers compete. Why give special preference to CCS?
As you note, CCS would be costly, and perhaps prohibitively energy-intensive. See, e.g., “Carbon capture and storage: Fundamental thermodynamics and current technology” by Page, Williamson, and Mason, published in Energy Policy.
Because we waste so much energy, conservation and efficiency improvements are easily the cheapest source of carbon reductions, with wind and solar expected to ramp up next as the carbon price and demand for low carbon alternatives rise. Eventually, if it’s viable at all, CCS might play a role. But I see no reason to give it special preference and lots of reasons for skepticism.
Cog says
ditto. The contingencies for CCS in the House Bill are just that, contingencies. You can’t require sequestration of any small fixed percent of emissions because the technology isn’t there for meaningful volumes. The practical volumetric considerations for storing CO2 place formidable constraints on how it can be done economically. Most coal plants weren’t cited directly above places to sequester their exhaust. The miles of pipe and compression forces are what explain the significant additional energy required to execute CCS. That a coal plant might have to run at 115-130% to do it is another arguement for nuclear in the final bill.
Ken Johnson says
James,
Your commentary effectively rebuts Kerry’s claim that a carbon tax wouldn’t reduce emissions — $20/ton is $20/ton whether it is imposed by permit trading or by a tax. But you and Kerry both ignore the fundamental difference between cap-and-trade and taxes:
Under a carbon tax (as envisioned by both you and Kerry), a regulated entity pays $20 for every ton of CO2 emissions that it generates. But under cap-and-trade (as implemented in Kerry’s legislation), a regulated entity only pays $20 for every ton it emits in excess of its free allocation; and if it emits less than its allocation, it earns $20/ton on the balance.
Economists and policymakers should recognize that the cap-versus-tax issue is completely separable from, and can be addressed independently of, allocation. “Free allocation” does not necessarily imply, and does not require, a free handout of emission permits; the government could just as well auction all permits and distribute any free allocation from auction proceeds. It doesn’t fundamentally matter whether an entity gets a free permit worth $20 or gets $20 in cash. Furthermore, free allocation does not necessitate a cap, or an auction, or trading. The same allocation method could be applied if the auction is replaced with a fixed-price sale of allowances (or equivalently, a carbon tax).
It should also be recognized that free allocation (of either permits or cash) does not necessarily imply allocation based on historical emissions (grandfathering), and need not exclude or discriminate against non-emitting energy sources. But leaving that aside, and assuming whatever allocation formula is used in the pending federal legislation, consider the following four policy options:
(1) Cap-and-trade, with free allocation
(2) “Cap-and-dividend” with most or all auction revenue going to consumers (similar to Obama’s original Budget Plan proposal)
(3) Carbon tax, with the same free allocation used by cap-and-trade
(4) Carbon tax, with revenue going to consumers (like cap-and-dividend)
I am not advocating any of these options, but I have two questions:
First, how would you rank the options in order of preference?
Second, I can understand why Option 4 has not gained significant political traction; but why is Option 3 not on the table, and why would either industry or environmental interests prefer Option 1 over Option 3?
James Handley says
We advocate a “carbon user fee” with substantial revenue recycled to households. See “No Tax Increase, How?”
Revenue recycling is essential because the carbon price will have to rise briskly to reduce emissions enough to reach anything like a safe atmospheric CO2 level. (Latest reports say the safe level is about 350 ppm, we’re now at 380 and rising fast.) Without revenue recycling, either via direct distribution or reduction in other taxes (“tax shifting”), the burden will soon become quite onerous especially on low and middle income households.
Carbon pricing is regressive; it hits low and middle income households harder. They spend a greater fraction of income on energy than those of high income. Recycling revenue via a direct distribution or payroll tax shift would cancel out the regressive effect and the drag on the economy that a carbon price creates; it wouldn’t take money out of the economy.
Conversely, giving away revenue (under a tax) or allowances (under a cap) to polluters and everyone else who has the political leverage to get a handout, as Waxman-Markey and now Kerry-Boxer propose, is a formula for unfairness and political revolt when prices really start to rise as they must to enable low-carbon technologies to compete.
Without substantial revenue recycling, carbon pricing won’t make it to the finish line and if the public finds that it’s been gamed by traders, the appetite for any kind of climate policy may vanish. We need a policy that can go the whole distance, and a carbon fee with full (or nearly full) recycling of revenue is the marathon runner.
Ken Johnson says
James,
Those are all plausible, well-reasoned arguments in favor of revenue recycling. The same arguments apply to “cap-and-dividend”. I might take issue with some of your points, but the question that I’m getting at is not about allocation or whether revenue recycling is preferable to grandfathering. The question is, irrespective of what allocation method is used, which is preferable: cap-and-trade or carbon taxes (assuming the same allocation method in either case)? I can understand why the political establishment prefers cap-and-trade with free allocation to carbon taxes/fees without free allocation, but why would industry and environmental interests prefer cap-and-trade over a tax using the same allocation method?
(By the way, I’m not sure that Kerry’s argument against taxes is much more than empty rhetoric, because the same argument applies to a price ceiling, which I believe is part of his cap-and-trade bill. Besides, if he is all that committed to a firm emission cap, why did he excise every occurrence of the word “cap” from the bill?)
James Handley says
Cap/trade is preferred by the USCAP crowd because it’s much easier to hide the give-aways, which they’re all standing in line for. See USCAP “Blueprint” Chorus Sings Complex Tune to Half-Empty Caucus Room.
The “soft” price collar in Kerry-Boxer only applies to the reserve allowance auction which is a tiny fraction of the allowance market. It wouldn’t limit the trading range. No, the bill is the opposite of a pricing mechanism. They’re proposing a “hard” cap with huge 2 billion tons of offsets per year as the “cost control” measure, but no real limit on price: up or down. To give you a sense of the relative size of that offset pool: it’s 2 billion out of a total of 6 that the U.S. emits. Thus, no assurance of any constraint in U.S. emissions by the cap for another two decades. See (Standford Law Prof.) Michael Wara’s excellent two page summary on offsets here.
Ken Johnson says
Yeah, everybody wants a free handout. It’s atrocious. We should make the polluters pay (us). 🙂
By the way, regarding your previous comment that “Without revenue recycling … the burden will soon become quite onerous especially on low and middle income households,” how does that work when there’s no more carbon to tax?
Jem Cooper says
Why give special treatment to carbon capture and storage? Because energy saving, nuclear, renewables, electric cars and the like are merely ways of filling the energy gap that cutting carbon dioxide emissions will create and mankind has been very effectively filling energy gaps for centuries without the aid of agreed national or global strategies, taxes or caps. Carbon capture is different. It is a way of stopping pollution. If we stop the pollution the free market will fill the energy gap. You can legislate to stop pollution (which is economically inefficient) or you can use market forces by giving credits in a cap and trade system, credits against a carbon tax or by paying directly as in my proposal in the first comment above.
Opinions vary about the relative cost of CCS and other low carbon power generation options. I quote from an organisation whose members include many of the major industrial players and they should know the costs.
http://www.ccsassociation.org.uk/docs/2009/CCSA%20International%20Manifesto.pdf
“Recent studies conclude that the first CCS projects in the power sector are likely to cost between €60 – 90 per tonne of CO2 abated although these costs are expected to decline signifi-cantly reaching €35 – 50 in the early 2020s primarily as a result of cost reductions for CO2 capture.
Deploying CCS on coal fired power plants is already cost-competitive (per tonne of CO2 emission abated) with other forms of low-carbon energy.”
The idea that fossil fuel users should pay for the capture of a proportion of the carbon dioxide they produce in the fuel price seems fair. And if that proportion is sufficient to prevent a further increase in atmospheric carbon dioxide concentration that would seem to put them on an equal footing with clean technologies. But a generator would be paid for all the carbon dioxide he captured while only having to pay back a proportion of it in his fuel price. The difference is support that other zero carbon generators would not get.
The mix of generation options would not therefore necessarily be at its economic optimum. Governments could choose to tax away the differential support raising power prices and exacerbating the painful process of change for their citizens and industry, but most would see this special advantage as a price well worth paying if it stops global warming effectively.
Some time flexibility could be allowed in capturing the carbon dioxide. For example the contract might permit capture to be delayed for a year if the quantity captured were increased by 10%, and for another year for another 10% etc. This would not only help with plant problems or construction delays in the early days when there might only be a few plants, but would also allow contracts to be placed today thus providing a huge incentive to get plants up and running as soon as possible.
One way or another we must very soon stop carbon emissions from power generation, cement manufacture etc. and substitute electricity for fuel use in many domestic, industrial and transport applications. Taxing carbon, capping emissions or contracting for carbon capture when fuel is produced could all provide the economic incentive but unless applied globally will not be sufficient.
Carbon capture is guaranteed to reduce carbon dioxide emissions from burning fossil fuel to whatever global annual target is set and is the easiest option to apply globally because:
It will appeal to rapidly growing and mature countries alike. There are no national caps to restrict relative growth.
It will allow all industries in all countries to compete on a level playing field. There are no tax or carbon credit differentials and no allowances for governments to give out or auction.
Because there is only one number to agree, the global annual target, extensive international negotiations and commitment to national targets or tax rates will be unnecessary.
Enforcement is straightforward and does not rely on co-operation or even the consent of every country. The contracts would be traded and recorded centrally, mostly placed and paid for by the international energy companies. If countries were uncooperative and used their own fuel internally without contracting for carbon capture, a central monitoring organisation could impose an increased capture proportion on imports or exports of fuel for that country to compensate.
Richard A. says
A carbon tax wouldn’t reduce emissions, Kerry claimed, because polluters would “just pay the tax”
What Kerry is claiming here is that that the demand elasticity for carbon based energy is zero. If this were true, any suppression of supply thru caps will cause prices to go to infinity.
David Collins says
Senator Kerry’s background is in law. Not only by education; he was an effective prosecutor in Massachusetts. His successful grilling of Dr Green should be no surprise.
His science background consists of briefings by advisors, most of whom appear good; his economics background is of similar source. Unfortunately, his performance in the Senate shows he has severe difficulties with learning as an ongoing process rather than an accomplishment. And even worse, he is not alone.
Like virtually all of us, he suffers from Confirmation (or Assimilation) Bias, the selective interpretation of information in such a way that it reinforces judgments already formed without ongoing reevaluation. An example of this is his refusal to even consider that the ouster of the last elected President of Honduras, my wife’s native country, was not an old-style Banana Republic “golpe de estado” (coup d’etat). When the law library of the Library of Congress reported otherwise, Senator Kerry was one of the first to demand that said report be redone, in accordance with what he “knew”. And ignore Senator Jim DeMint: he’s merely playing the politics game, out to score polical points (often victimizing Hondurans in the process).
And how do I know all this? My wife has been spending hours a day, on the Internet, on the telephone, reading the news from all over Latin America, discussing matters with relatives (who span the full spectrum of Honduras, in politics, socio-economic status, religion), and filling me in on every detail and development.
I have no wish to argue Honduran politics here. (I get enough of it at home!) I do wish to state that making political progress on the fundamental issue of the Carbon Tax Center will depend on overcoming several Confirmation Biases in way too many influential people. Including good people who are trying to do good and not just play the politics game.
Dan says
The link to “this week’s hearings” takes us to a 145-minute video. It would be helpful if you would specify where, in that video, Senator Kerry says that a tax wouldn’t work because polluters will just pay it.
I randomly went to about minute 80 of the video and found Senator Kerry saying that a tax wouldn’t work because, to be effective, a tax would have to be higher than the Senate would accept. As pointed out in Mr. Handley’s blog post, the same problem would likely exist with cap and trade.
Nevertheless, the problem of insufficient elasticity of demand with respect to price is one that I don’t think has been adequately addressed. Senator Kerry’s objections to an emission fee appear to be based on his understanding of empirical econometrics rather than a fundamental disagreement with an emission fee.
I keep hearing references to a $20 per tonne of carbon dioxide-equivalent fee (or tax) or price limit in a cap and trade system. That amounts to less than $0.20 per gallon of gasoline, $0.10 per therm of natural gas, and 1.2 cents per kWh of electricity (using the national average carbon intensity of electricity). All of those price variations have been exceeded (greatly-exceeded in the cases of gasoline and natural gas) in the last couple of years without much sustained effect. At a price of $20 per tCO2e, the desired signal is likely to be lost in the noise of normal price variations.
The Carbon Tax Center has suggested that a price of $37 per tCO2e would be adequate to meet emission reduction objectives. If that is a defendable figure based on econometrics, then the task is to make it politically acceptable. I intuitively doubt, though, that an extra 37 cents per gallon of gasoline will create the desired decrease in demand.
James Hansen has proposed a price on the order of $100 per tCO2e. That seems about right to me – it’s what we should move toward over the next decade. If we overshoot, we can celebrate and back off.
A note – Richard A. in comment #10 appears to imply an invalid inverse relationship between elasticity of demand with respect to price and elasticity of price with respect to supply. It is entirely possible that, if the price of gasoline were to increase by $0.50 per gallon, I would not change the amount of gasoline that I buy. But if I were issued permits to buy only 200 gallons of gasoline per year, I would not necessarily be willing to pay an unlimited price to obtain more than 200 gallons.
James Handley says
Dan,
Like Dr. Hansen, we’re advocating a carbon tax that rises by $10/T CO2 to $100 over 10 yrs.
Kerry’s assertion that polluters will “just pay the tax” was near the end of the August 4 hearing. As you heard, he repeated the idea last week when he asserted that a tax would have to be too high for Congress to pass, implying that somehow a cap could garner reductions without similarly raising prices.
Ken Johnson says
Responding to James Handley’s response to Dan,
The following are points that I have raised previously on the CTC blog (but which James Handley has not adequately addressed). I repeat them here because I believe revenue allocation is the one main issue that is really behind Kerry’s and most politicians’ disaffection with carbon taxes:
(1) An initially low and gradually rising carbon tax, like cap-and-trade, is fundamentally a strategy of procrastination. Renewable energy technologies need high price incentives now, while they have not yet overcome market barriers and achieved economies of scale. There should be no need to wait ten or more years before initiating large-scale decarbonization of electricity.
(2) A high price incentive for energy decarbonization does not necessarily imply a high carbon fee. For example, if a 1 cent-per-kWh fee is applied to coal energy and is used to finance a 9 cent-per-kWh subsidy for new renewables, then the resulting 10 cent-per-kWh price advantage of renewables over coal would be roughly equivalent to a $100/ton carbon price.
(3) Carbon-tax advocates wish to forfeit the potential order-of-magnitude gain in renewables’ price advantage in favor of “revenue recycling” on the grounds that clean energy would otherwise be unaffordable to low- and middle-income households. This rationale for revenue recycling is untenable because (a) it neglects the impact of clean-energy subsidies on price competition and energy prices; (b) if subsidies are focused on new sources, then only an initially small segment of the energy market will be subsidized; and (c) as renewables gain market share, technology advancement and economies of scale will reduce clean-energy costs. Without some quantification of projected energy price increases — both near-term and long-term, and comparing new-source subsidies and revenue-recycling strategies — there is no justification for revenue recycling. A minor fraction of revenue might appropriately be used to sustain particularly disadvantaged consumers. But in my opinion the strategy of diverting most or all revenue to consumer handouts simply reflects an unwillingness to invest in the future; and carbon-tax advocates’ single-minded fixation on revenue recycling is killing any chance of instituting a sensible national climate policy.
Dana Stokes says
I’m confused about the concept of “revenue recycling”. Would recipients of this revenue be restricted to spending it on renewable energy to increase market demand for renewable power? Has there been any discussion of spending
half of carbon tax revenue on investment in cost-efficient renewable technologies and the other half on consumer energy efficiency rebates/tax credits to reduce energy consumption?(The latter has worked beautifully in California.)
James Handley says
Ken and Dana,
A carbon tax is inherently regressive. Without revenue recycling, it would unfairly disadvantage low- and middle-income families. We need a system that can continue to decarbonize our economy while gaining support for 40+ yrs. British Columbia’s gradually-increasing carbon tax which recycles revenue to households helped re-elect Gordon Campbell.
A gradual, predictable ramp-up in carbon prices would make early low-carbon energy investment attractive because of the expected return, so it’s not a strategy of procrastination. In contrast, cap/trade’s volatile carbon prices would delay needed investments by a decade.
Subsidizing “clean” energy has two major flaws: First, Congress would choose the technologies (funding thermodynamically-challenged “clean coal”, biofuels that produce no net reductions (e.g., corn to ethanol) or further subsidizing nukes, for example). Why try to pick winners this early in the low-carbon energy race? A rising carbon price would let the low carbon alternatives compete. Second, subsidies maintain our “cheap energy uber alles” paradigm that stymies energy conservation. Numerous studies (most recently McKinsey) show that efficiency and conservation are easily the cheapest and most abundant near-term source of carbon reductions. We do agree that some funding of R&D may be needed. We’ve endorsed Rep. Larson’s bill which would dedicate a small fraction of carbon revenue to research and development of low-carbon alternatives.
I’m glad you’re digging into these issues. I recommend the explanations under “Read these first” on our homepage, as well as our “issues” pages that go into more depth than I can here. Also, try searching our blog archives where we’ve discussed various papers and hearings on related subjects including links to source documents. For instance, see “Carbon Revenue Recycling is Focus of Capitol Hill Briefing.”
Ken Johnson says
Dana,
What CTC refers to as “revenue recycling” is basically giving carbon tax revenue to consumers. There would be no restrictions on how recipients can spend the money.
James,
You have again asserted that without revenue recycling, a carbon tax “would unfairly disadvantage low- and middle-income families”; but so much prose without numbers is meaningless. I repeat: “Without some quantification of projected energy price increases — both near-term and long-term, and comparing new-source subsidies and revenue-recycling strategies — there is no justification for revenue recycling.”
Re “A gradual, predictable ramp-up in carbon prices …”: Low-carbon energy investment needs to overcome a price barrier before it can be economically viable. Renewable energy technologies need high price incentives now, while they have not yet overcome market barriers and achieved economies of scale — not ten years from now. You wish to forfeit a potential order-of-magnitude gain in renewables’ price advantage in favor of “revenue recycling” on the untenable grounds that clean energy would otherwise be unaffordable to low- and middle-income households.
Re “Subsidizing ‘clean’ energy has two major flaws …”: You made the same points in a previous post (10/20/2009), and I repeat my prior response: “We need not know which low-carbon technologies will prove most effective because the fees and subsidies would be based strictly on emission performance, not on technology type. … Clean-energy generation (i.e., minimum CO2 per kWh) and energy efficiency (minimum kWh per unit of economic utility) can be incentivized using separate, but similar, pricing approaches.”
Regarding your recommended reading list, I don’t see in any of the references answers to the following basic questions: How much would consumer electricity rates (cents per kWh) be expected to rise under a carbon tax with revenue recycling, assuming a carbon tax of, say, $100/ton? And how much would rates rise if carbon fee revenue were applied exclusively to subsidize new, renewable energy sources, with the fee rate determined to give new renewables a $100-per-ton price advantage over fossil fuels?
James Handley says
Ken,
Re: Price barriers, see No Magic Price Point for Kicking Carbon.
Re: Emissions reductions, we estimate these with our four sector model spreadsheet which will generate graphical results from your inputs.
I gather that you’re advocating a carbon tax to directly fund low carbon energy that would be performance-based. I don’t understand how that would work or why it would be better than a clear gradually-increasing price on carbon. It would seem to miss the “low-hanging” fruit: efficiency gains and would not address the problem of regressivity.
On your other points, I’ve done my best to answer (as you note, sometimes more than once) and to link you to information on our site and elsewhere. At this point, I’m throwing in the towel.
Ken Johnson says
James,
Re “I don’t understand how that would work …,” it would work because giving renewables an immediate price advantage of $100/ton would have more impact than a $10/ton price incentive. (You can find more details on how new-source subsidies could work here.)
Re “low-hanging” fruit: Pricing instruments such as appliance feebates, or financing mechanisms, could effectively motivate efficiency gains (without regressivity impacts, because efficiency is generally profitable).
Re “the problem of regressivity”: What problem? Do any of your cited references demonstrate and quantify a regressivity problem resulting from levying carbon fees on fossil-fuel energy and using the revenue to subsidize competing, new-source, low-carbon energy production? (I’m not asking for much — just a number, cents per kWh.)
Jem Cooper says
James,
Do you have a copy of the paper you keep citing on carbon capture ‘thermodynamically-challenged “clean coal”’ that you could email me at jemcooper@tinyonline.co.uk ? Your link only goes to the abstract and I don’t feel like forking out $19.95 for the actual paper.
If what it alleges is supported, it undermines one of the major accepted planks in sorting global warming, although I must admit I am more inclined to believe the people who are operating, designing and constructing carbon capture (see http://www.ccsassociation.org.uk/docs/2009/CCSA%20International%20Manifesto.pdf)or the IPCC (see http://www.ipcc.ch/pdf/special-reports/srccs/srccs_summaryforpolicymakers.pdf) than university researchers at Canterbury New Zealand, particularly when they make the claim that ‘many uncertainties remain over the permanence of CO2 storage in geological formations’. What do they think has been stopping the natural gas leaking out for millions of years?
James Handley says
Ken,
Resources for the Future has done good work defining and measuring regressivity of carbon pricing. See: The Incidence of U.S. Climate Policy and their more recent paper that discusses ways to recycle revenue to counteract regressivity: The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction. See also CBO’s The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions; I don’t recall whether they attempted to quantify. See Metcalf, Tax Policy Towards Energy and the Environment which does attempt to quantify.
Jem,
I don’t have access to the full CCS thermodyanamics paper (Page, et al) — I’d like to read it myself. But they’re not the only ones raising doubts. The IPCC estimated that CCS would require 25 – 40% more fuel to make the same electricity. (IPCC special report on Carbon Dioxide Capture and Storage, p 28, et seq. The integrated coal gasification combined cycle (IGCC) process promises to be the most efficient, but it means building entirely new and much more expensive power plants. The IPCC’s review concluded that even IGCC would add 20-55% to electricity prices.) We subsidize a huge corn-to-ethanol industry without accounting for the fossil fuels used to make the stuff. CCS looks to me like a similar money pit; the myth of serious potential for CCS conveniently keeps coal on life support. Even if CCS turns out to be viable, we already know that efficiency and conservation measures as well a renewables like wind can beat CCS if we do full cost and life cycle energy accounting. (Stern estimated that CCS wouldn’t be competitive until we reach $50/T CO2 — and that’s the lowest figure I’ve seen.)
David Collins says
I want to express support for the gradual ramping-up of the Carbon Tax rate, as opposed to applying it with a massive step function. Simply knowing that it’s there, and that it’s growing, would inspire much planning. It would also give time to prepare: planning, investing. Folks can make great decisions, left to their own devices, and do a far better job of it than well-meaning, well-educated bureaucrats could do for them. Far better than big business would do for them.
For instance, during the early stages of the ramp-up, people would have the chance to use a gas-guzzler motor vehicle while figuring what to do next. (For instance, they just might decide to keep on using it, just driving it less. Or whatever.) Businesses might even make wise decisions about their operations!
Separately, that link to the Media Matters article on the Fox “News” blathering about the Zobel & Williams video is appreciated. I pointed it out to my wife. We got a good laugh out of it. She remembered that, some years ago, a Fox News reporter interviewed a Palestinian doctor, who showed that Israeli soldiers had used a forbidden type of bullet on civilians (in this case, a child); we never saw that reporter again in Palestine. (I should add that the mainstream media also ignored that story.)
Ken Johnson says
James,
The RFF papers that you cited do not consider the policy option of “levying carbon fees on fossil-fuel energy and using the revenue [exclusively] to subsidize competing, new-source, low-carbon energy production”; so they do not justify revenue recycling.
Furthermore, the policies considered in the papers are not designed specifically to counteract regressivity because the recycled revenue is not directed exclusively to low-income consumers who would otherwise bear a disproportionate regulatory burden. Per-capita dividends or tax rebates directed to higher-income consumers would increase regressivity. More effective ways of counteracting regressivity would be to make income tax rates more progressive, or to use income-tiered electricity rates.
David Collins,
If carbon fee revenue is applied exclusively to subsidize new-source, low-carbon energy production, then there would be no massive step function in fees. In fact, fees would start out at zero because there would initially be no “new” sources, and the fees would increase gradually as new sources gain market share. But the very first new, renewable source to go online will get a production subsidy equivalent to a carbon price of around $100/ton. The “massive step function” would be in the subsidy rate, not the fee.
Regarding gas-guzzler motor vehicles, people already have a price incentive of more than $200/ton to improve fuel economy, just based on fuel savings. It isn’t lack of a carbon price that is limiting clean-vehicle technology; what is really needed is more efficient financing mechanisms.
Jem Cooper says
James your 50$/ton of carbon dioxide is only equivalent to 21$/barrel or 0.44$/gallon of gasoline. These are pretty small numbers compared to the changes we have seen over the past year or so. Even if the cost of carbon capture were twice as high it would be worth considering wouldn’t it? Windmills and solar panels are never going to be enough to sustain civilisation as we know it and are no cheaper. I have just read that worldwide half of our fossil fuel emissions come from large point sources (power stations, steel etc.) where it would be practical to apply carbon capture.
James Handley says
Ken,
RFF showed that distributing carbon revenue directly as a “dividend” would eliminate carbon pricing’s regressivity. I like Rep. Larson’s bill (HR 1337) even better: use carbon revenue to exempt earnings from an even more regressive tax, the payroll tax. Net effect: very progressive, arguably stimulative of employment.
Jem,
Sure, let CCS compete — fairly. A gradual rise in carbon prices will let low cost alternatives start first. As carbon prices rise, if CCS works out thermodynamically, and other alternatives can’t continue to beat CCS, then the market says it makes sense. But no special funding for CCS facilities (or ethanol or nukes) before we know whether it will work or whether and how much will be needed.
Ken Johnson says
James,
The “dividend” would eliminate carbon pricing’s regressivity by eliminating most or all revenue that could otherwise be used to give new, renewable energy sources an order-of-magnitude price advantage over coal.
If the purpose of revenue recycling is to protect low-income consumers who cannot afford energy price increases, then it would be much more efficient to use a portion of carbon pricing revenue to only compensate those disadvantaged consumers by an amount sufficient to offset price increases, and not compensate higher-income consumers who do not need the dividend.
If we are concerned not about affordability, but rather about inequitable burden-sharing, then the inequity could be redressed by shifting the tax burden from low-income to high-income consumers, rather than distributing dividends uniformly to all consumers. There would be no need to siphon off carbon pricing revenue to neutralize the regressivity.
But the main point that neither you nor any of your cited references have recognized is that using carbon fee revenue to subsidize new, low-carbon energy production could itself significantly reduce consumer costs and regressivity. Consumers would derive their dividends in the form of affordable clean-energy prices, rather than cash handouts.
We do not agree on which approach is preferable, but would you at least agree that the subsidy approach should be given equal consideration by economists and policymakers?
James Handley says
K,
If you like subsidies, Waxman-Markey & Kerry-Boxer are your bills. Hidden, volatile, regressive carbon tax collected by Wall St, letting the E&C and EPW Committees bypass the appropriations process and dole out funds as they see fit. Some good stuff, but mostly payola.
The bills include a “wires charge” on existing fossil fuel generated electricity that would be dedicated to funding CCS. Sounds like the kind of thing you’re advocating. Not me.
So, why not subsidize “green” energy with carbon tax revenue?
1) A competitive market would pick technology winners (including efficiency and behavior changes that conserve energy) far better than Congress. Congress picked losers like the nuke or corn-to-ethanol programs — and now those industries are dependent on special rules and regular infusions of government largess. Coming attraction: billions poured into CCS regardless of whether it will work cost-effectively.
2) British Columbia’s carbon tax is popular and survived what amounted to a referendum in part because EVERYONE gets his or her share of the revenue garnering widespread support and eliminating regressivity. Stephane Dion lost his bid for Prime Minister of Canada in part because his proposed carbon tax turned out not to be revenue-neutral as advertised.
3) Republicans and fiscal conservatives, e.g., Rep. Inglis and Sen. Corker won’t go for a carbon tax if it’s a way to increase government spending. But Inglis has been actively pressing for a revenue-neutral carbon tax.
Ken Johnson says
James,
You have entirely mischaracterized the “kind of thing” that I am advocating, which is net subsidies for actual energy production (not for research or demonstration projects or good intentions, etc.), based on emissions performance (not based on technology type or any other politically-biased cherry-picking criteria).
You also have still not resolved, and are evading, this fundamental question: What impact would subsidized clean-energy production have on consumer costs and regressivity? “Revenue recycling” cannot be justified while this question remains unresolved.
To the extent that recycling some carbon pricing revenue to low-income consumers is justified, you have not justified the recycling of most or all revenue, or the recycling of some revenue to high-income consumers.
Dan says
Ken has asked for some calculations. Below, I have tried to do what he suggests, using only enough accuracy to illustrate overall trends. I limit the analysis to the electricity sector.
Total U.S. electricity generation = 4 billion MWh/year (or 4 B MWh/y; approximately)
50 percent of electricity is from coal (2 B MWh/y) with a carbon intensity of about one tonne carbon dioxide (tCO2) per MWh; yielding 2 BtCO2/y. A fee of $10/tCO2 would cost $20B/year and would add about $10/MWh to the typical wholesale price of coal power of $50/MWh (marginal costs of coal power are less than this, but $50 is okay for this illustration).
About 20 percent of U.S. electricity is from natural gas (0.8 B MWh/y) with a carbon intensity of about 0.4 tCO2/ MWh (assuming combined cycle plants rather than simple cycle); yielding 0.32 BtCO2/y. A fee of $10/tCO2 would cost $3.2B/year. The cost of generating power from natural gas depends on the price of gas, which has fluctuated considerably in the last year (high of more than $10 per million Btu to about $4/MMBtu). For now, let’s assume a wholesale price of $60/MWh; which would correspond to a gas price of about $5/MMBtu.
A carbon fee would add nothing to the cost of nuclear power (about 20 percent of total electricity) or hydropower (about 7 percent of total electricity) or renewables (about 3 percent of total).
So, the carbon fee would initially collect about $23.2B/year ($20B from coal and $3.2B from gas).
Ken suggests that this revenue be used entirely to subsidize new wind (and maybe other renewables). Electricity from wind typically costs about $100/MWh. Currently, wind generators get about $20/MWh from the federal government production tax credit (PTC). They get another $20 to $30 per MWh from renewable energy credits (RECs), resulting from state-government-imposed renewable portfolio standards (RPS) (or they get an equivalent benefit by selling to a utility that is required to meet an RPS). They may also get other state or local incentives designed to promote renewable. So, the electricity costing $100 to produce can compete with other power produced at $50 to $60 per MWh through the current governmental incentives of $40 to $50 per MWh.
As I understand, Ken would have the entire cost of wind power subsidized from the carbon fee revenue. So, we could produce 0.23 billion MWh per year of electricity from wind. This is about 6 percent of the total U.S. electricity generation.
The effect of all of this would be to decrease coal-fired electricity by 0.23BMWh per year. At $50/MWh, costs would decrease by something less than $11.5B (we wouldn’t save the entire $50/MWh because we would just be reducing marginal costs, which are less than total costs and typical sale price). At the same time, we would pay about $23B in carbon fees (the fee would be a bit less than the $23.2B mentioned above because, in the process of adding wind, we would decrease our use of fossil fuel electricity; thereby decreasing revenue from carbon fees).
The net effect is that we would add about $11.5B to our total electricity bill (i.e., consumers would pay $23B to cover fees minus $11.5B in reduced coal electricity costs). The current retail price of electricity is typically about $100/MWh. This includes $50 to $60 for generation, plus $30 for transmission and distribution, plus $10 for miscellaneous utility expenses. For 4 billion MWh/year, that comes to $400B per year.
The carbon fee of $10/tCO2 would yield an approximate increase of 2 or 3 percent in the retail expenditures for electricity (i.e., $11.5B added to $400B). For this, we would get about 6 percent of our electricity from wind.
Now, for some observations: First, many states have already imposed renewable portfolio standards that would increase renewable electricity from the current low values of about 3 percent of total electricity to 20 percent of total electricity. The Waxman-Markey bill would extend this requirement nationwide. In this regard, the 6 percent of electricity from wind that we could expect from Ken’s approach is less favorable to the wind industry than current legislation would provide.
Second, the increase in electricity rates of only 2 or 3 percent resulting from Ken’s plan is probably not sufficient to induce much new conservation. A gradual increase in carbon fees to a value of $100 per tCO2, as proposed by the Carbon Tax Center, would provide the strong incentive for energy conservation that we need.
Third, in Ken’s proposal, there would be no relief to poor people to help make up for the 2 or 3 percent increase in electricity prices because the revenue from fees would be channeled entirely to wind power plant developers and operators.
Fourth, the 10-year phase-in of a $100 per tCO2 fee, as proposed by CTC, would increase the cost of coal-derived electricity by about $100/MWh, which is more than sufficient to induce growth in the wind power industry. That industry seems to be already growing rapidly with subsidies amounting to only $40 to $50 per MWh.
Fifth, in the CTC’s proposal of moving toward a $100/tCO2 fee, everyone will see a big increase in their electricity costs. That sends the desired price signal. It promotes a shift away from coal and it aggressively promotes conservation. Giving most of the collected revenue back to individuals on a basis that is independent of their individual electricity consumption will prevent undue suffering that would otherwise be caused by the steep increase in power prices.
Sixth, in addition to promoting renewables, the carbon fee proposed by CTC will encourage a rapid substitution of natural-gas-derived electricity for coal-derived electricity. A fee of something less than $100/tCO2 would cause a shift from coal to natural gas. That would cause a higher use of already-installed combined-cycle power plants that are currently operated only during daytime.
Other than giving a boost to wind power developers that greatly exceeds their needs, I don’t see much merit in Ken’s proposal.
Ken Johnson says
Is this blog still accepting comments?
Ken Johnson says
Dan,
Thank you for the calculations. This is excellent.
One point of clarification, re “As I understand, Ken would have the entire cost of wind power subsidized from the carbon fee revenue.” If $100/MWh wind power is competing against $50/MWh fossil fuels, then wind would only need a $50/MWh subsidy (not $100/MWh) to be cost competitive. So the $10/MWh carbon fee could actually support 0.46 TWh of wind power (not 0.23), nearly 12% of total U.S. generation. The total increase in national generation cost would be about $23B (not $11.5B), corresponding to a retail rate increase of almost 6% (not 3%).
The $23B cost is unrelated to the choice of policy instrument — it is simply the technology cost of replacing 12% of U.S. fossil fuel generation (at $50/MWh) with wind energy (at $100/MWh). That money has to come from somewhere. When wind energy is one or two percent of total generation, the money can come from government financing (grants or tax credits), but probably not when it gets up to 10 or 20 percent. The problem with government subsidies, like “cash for clunkers”, is that the subsidy ends when the cash runs out. With financing derived from carbon pricing, the financing source is depleted only as carbon is phased out.
At current growth rates, it would take perhaps another decade for new wind energy to reach the 12% level, at which time the costs will probably be significantly below $100/MWh, and may have attained grid parity. (PV is also quickly catching up with wind.) Of course, we would like to accelerate that transition, not just in the U.S., but globally. New-source subsidies are primarily intended to facilitate low-carbon energy expansion in the early phase of this transition.
The key point that I hope you (and your readers) recognize is this: An initial carbon fee of $10/tCO2, with revenue recycling, will give renewables approximately a $10/MWh price advantage over coal; whereas new-source subsidies, financed by carbon fees starting out well below $10/MWh, could provide new renewables a price advantage on the order of $100/MWh immediately — not ten years from now.
If low-carbon energy prices do not come down, as expected, then high technology costs will lead to increasing electricity rates as low-carbon energy gains market share. In this case, a minor fraction of revenue might appropriately be used to sustain particularly disadvantaged consumers; but giving relief to poor people is not the same as distributing most or all carbon revenue to all consumers regardless of need.
Regarding energy conservation incentives, one of the most-cited examples of pricing impacts on conservation is high gas prices. But the conservation incentive from gas prices is already well in excess of $200/ton, far higher than any contemplated carbon price. Clean-vehicle technology is limited more by lack of efficient financing incentives than by lack of a carbon price. Pricing instruments such as appliance feebates could also create targeted incentives for energy efficiency.
Regarding NG substitution for electricity, new-source subsidies are based on emission performance, not technology type, so new NG generation would gain an immediate price advantage over coal, as would renewables.
Regarding “giving a boost to wind power developers that greatly exceeds their needs,” again, the policy is technology-neutral, and the $50/MWh subsidy that wind power now gets from government subsidies and tax credits may be difficult to sustain as wind energy gains significant market share. Also, in response to your first observation, RPS standards, like cap-and-trade, are more “brittle” than pricing instruments because they impose a predetermined target no matter how high the cost, and do not provide incentives for exceeding the target no matter how low the cost. (On that point, I think you might agree.)
Charles Komanoff says
Ken —
You wrote:
Actually, that’s not the primary purpose of revenue recycling. Rather, the primary purpose is to provide the most universally fair carbon fee system imaginable, in order to (i) create the political wherewithal to maximize the pace and slope of the carbon fee ramp-up, and (ii) maximize fairness as an end in itself.
A supportive criterion for revenue recycling is to minimize the carve-outs, giveaways, exemptions, etc., in order to be able to (i) preserve revenue recycling, and (ii) forestall the subsidization of suboptimal allocations or investments under the banner of decarbonization.
To rephrase my first point (so it’s not too cryptic): American society doesn’t seem politically capable of choosing to protect only, the bottom 20%, say. The temptation to move the bar to include the bottom 20.1%, or 20.2% … 80%, is too strong.
Perhaps seeing 100% revenue recycle in this light might help it make more sense to you.
Best,
Charles (co-director, CTC)
Ken Johnson says
Charles,
What is your perspective on paragraphs 3 and 4 in Comment #26?
[Note: My response to Dan’s Comment #29 was blocked, but I cross-posted it on my Grist author page.]
Daniel Rosenblum says
Ken,
I don’t see any indication on our site that your response to Dan’s (not me) comment was blocked. I tried and failed to find your cross-posting on Grist. Why don’t you try again to post it on our site?
I’m not sure why your comment #32 asked for a response to paragraph 3 of your comment #26. Charles already responded in his comment #31. I agree with Charles, although I would not argue for 100% revenue recycling. I prefer the way James put it in comment #5 – “substantial revenue recycled to households.”
Regarding paragraph 4 of your comment #26, you state that “Consumers would derive their dividends in the form of affordable clean-energy prices, rather than cash handouts.” How would you quantify the “dividends”? Wouldn’t most of the “dividends” go to those that use the most energy? Your response to these questions may be in the response that you believe has been blocked. I hope you try again to post it.
Dan Rosenblum (CTC Co-Director)
Ken Johnson says
Dan [Rosenblum] –
I tried three times to post my response to the other Dan. Maybe the embedded links caused your spam filter to reject it. (But I’m not trying to sell anything!) If you search Grist for “Carbon Taxes” (sort by newest) it should pop up (“Are Carbon Taxes a Viable Option” 11/20/2009).
Regarding Charles’ comment #31, he was rebutting my suggestion in #26, paragraph 2, that recycled revenue be used only to preserve energy affordability by low-income consumers. Paragraph 3 in #26 suggested an alternative way to neutralize carbon taxes’ regressivity: Make other taxes or utility rates more progressive. This would not require diversion of carbon pricing revenue.
The “dividends” referred to in paragraph 4 are basically energy production subsidies. To the extent that increased energy prices are regressive, subsidized energy prices would be progressive.
Rather than trying to re-post my entire response to #29, I will just restate one paragraph:
The key point that I hope you (and your readers) recognize is this: An initial carbon fee of $10/tCO2, with revenue recycling, will give renewables approximately a $10/MWh price advantage over coal; whereas new-source subsidies, financed by carbon fees starting out well below $10/tCO2, could provide new renewables a price advantage on the order of $100/MWh immediately — not ten years from now.
Daniel Rosenblum says
Ken,
I finally went through our spam and found the note you sent. Sorry one of us didn’t do it earlier, when it was more timely. You’ll find the note above.
Dan