Charles Komanoff – Page 168

Carbon Tax Center

Pricing carbon efficiently and equitably

Cap-and-Trade: Part of the Solution or Part of the Problem?

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This post was contributed by Kevin Bell of Convergence Research, specialists in energy, water and transportation technical and policy analysis. — CTC

As yet another case of cowboy diplomacy on the part of the Natural Resources Defense Council and Environmental Defense recedes in the rear-view mirror, it’s important to look ahead to what is at stake here.

In a little less than two years, our current Federal executive branch will be replaced. Chances are that for the first time, we will see serious movement (as well as serious posturing) on a Federal level about limiting greenhouse emissions. The problem is that the stakes are enormously high, and the window of opportunity for doing something that will actually make a difference is very small — less than a generation, probably less than a decade. We don’t get a mulligan if we blow this.

Many of our nation’s most polluting industries are acutely aware of this political calculus, and are moving to get in front of the issue. The first effort out of the gate is the US Climate Action Coalition. In addition to NRDC and ED, it includes perennial favorites like PG&E, Duke Energy, FPL, Caterpillar, GE, BP, Alcoa, and more.

Now, all of these corporations are looking for policy certainty before making infrastructure plays that they will have to live with for most of this century. Some of them buy into the idea that climate change is the single biggest threat that we as a species face in this next century, and that we need to act like it (I would put BP in this category). Others are simply looking for a way to make a financial killing, or evade having to actually do very much. Of course, every party in this coalition intends to dominate the debate over how we actually go about substantially reducing greenhouse gas emissions in the United States.

So, what are they calling for? Their twelve-page “solutions-based” PR piece, A Call for Action, is long on rhetoric and short on specifics. But the specifics that are there should make you sit up and take notice.

The short-term and mid-term suggested target reductions, not to put too fine a point on it, are lame: 10%-30% reductions from current levels by, oh, around 2025. To put that in context, California plans to reduce emissions 15% from current levels by 2020, and 80% by 2050. The UK committed to 20% reductions below 1990 levels by 2010 a decade ago (they will probably get close to, but not quite hit that target). Both the UK and Germany have committed to further reductions on the order of 40% by 2025 if — and this is a very important if — the US makes a similar commitment.

But the “money quote” is in the discussion on mechanisms on page 8. Rejecting the idea of a uniform carbon tax out of hand, the report outlines a cap-and-trade solution and then says:

A significant portion of allowances should be initially distributed free to capped entities and to economic sectors particularly disadvantaged by the secondary price effects of a cap including the possibility of funding transition assistance to adversely affected workers and communities. Free allocations to the private sector should be phased out over a reasonable period of time.

A few days ago I was asked to elaborate on why implementation of the Clean Air Act and the failure of Phase One of the European Carbon Exchange are great examples of how to do the wrong thing with mitigating carbon.

Briefly, the biggest mistake of the Clean Air Act was exempting existing coal-fired powerplants from best available control technology rules. Originally seen as a temporary concession to dirty utilities with obsolete powerplants near the end of their useful lives, it has become a permanent fixture of the emissions landscape, killing hundreds of thousands of people and wasting the time of brilliant advocates that would have been far better spent dealing with issues like climate change. Grandfathering is a terrible idea. There is no chance, politically, that such a concession would “be phased out over a reasonable period of time.”

Furthermore, the decision to give sulfur dioxide credits away to polluters, instead of going to a 100% market-driven auction system, represented a huge subsidy (and another terrible precedent) for the nation’s dirtiest utilities. Make no mistake, this is the deal that NRDC/ED’s partners in USCAP are aiming for.

Phase One of the Euro Carbon Exchange failed for two reasons: each country was allowed to make its own estimate of its greenhouse emissions, and tradable carbon credits were given, for free, to the industries in each of those countries. The three countries that actually underbid (UK, Spain, Slovenia as I recall) had to actually pay. For the rest of the Eurozone, it was free money right up to the point where everybody realized that the market was awash in surplus carbon credits, and the price dropped by 95%. They did learn a lot about how much carbon each country actually generates, and Phase Two should be tighter. But less than 10% of the available credits in Phase Two will actually be in open auction.  Once again, the vast bulk of credits will be given away to polluting industries, something that my sources in the UK government describe as a straight-up political power play by Europe’s largest corporations.

That’s the reality we’re all up against as we start to gear up for the critical fight to reduce global warming. What is troubling is that NRDC and ED have already signed onto Alcoa’s and Duke Power’s position on climate change, before the real discussion has even started.

For better or worse, NRDC and ED are the go-to national environmental organizations that corporations want to talk to. Occasionally the outcome has been positive. More often the result has been catastrophic. But always NRDC and ED seem fixated on a style of cowboy diplomacy that forecloses a substantive and genuinely progressive outcome, often for years to decades.

We don’t have years to decades to get this one right. I really, really hope that NRDC and ED don’t end up being part of the problem.

Carbon Tax, not “Peak Oil,” Can Save Climate

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"It’s the fifth time to my count that we’ve gone through a period when it seemed the end of oil was near and people were talking about the exhaustion of resources," said Daniel Yergin, author of a Pulitzer Prize- winning history of oil, who cited similar concerns in the 1880s, after both world wars and in the 1970s. "Back then we
were going to fly off the oil mountain. Instead we had a boom and oil went to $10 instead of $100."

That’s from a front-page article, Oil Innovations Pump New Life Into Old Wells, in today’s New York Times. The article uses Chevron’s Kern River oil field near Bakersfield, CA, whose life has been extended by injections of high-pressured steam, as a template for how advancing technology and profit opportunities from today’s higher oil prices are combining to increase recovery rates at oil fields around the world.

Oil_Well.jpgThe bottom line: peak oil will come some day, but not soon enough to avert climate catastrophe. I’ve long maintained that "peak oil" wouldn’t be a climate lifesaver. In my first talk centered on carbon taxing, at the "Philly Beyond Oil" meeting in 2005, I noted that $70 crude would "stimulate conservation, extraction and substitution," and that only the first of this trio (conservation) would be a climate-helper. Quoting the trenchant economics writer Doug Henwood, I cautioned that there’s "no shortcut around political
agitation," which is why Dan Rosenblum and I founded the Carbon Tax Center earlier this year.

The Times article closes by quoting a Chevron engineer: "… peak oil is a moving target [and the supply of] oil is always a function of price and technology." True enough. Our task is to make the use of oil, coal and gas a function of a climate-aware price and technology.

At present, the fuel prices that determine the demand side of the equation include nothing for the climate damage resulting from
burning those fuels, resulting in vast overuse. Moreover, those feedback mechanisms I mentioned in my 2005 talk invariably overshoot the mark, resulting in the kind of wild price swings that Yergin described. These fluctuations drown out underlying movements toward higher prices, frustrating investment in low-carbon alternatives on both the demand and supply sides.

What to do? A tax on carbon fuels will internalize the costs of carbon damage and make manifest today the long-term trajectory of rising carbon-fuel prices. No other policy option — not cap-and-trade, not fuel efficiency standards, not subsidies for renewables — can do that.

Photo: RavenHawk / Flickr 

United Nations Foundation and Sigma Xi on Confronting Climate Change

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‘The world is experiencing climate disruption now and the increases in droughts, floods, and sea level rise that will occur in the coming decades will cause enormous human suffering and economic losses. The poorest are likely the most vulnerable. We imperil our children’s and grandchildren’s future if we fail to improve society’s capacity to adapt to a changing climate,’ according to Rosina Bierbaum, former Acting Director of the White House Office of Science and Technology Policy, announcing the findings of Confronting Climate Change: Avoiding the Unmanageable and Managing the Unavoidable. The report was prepared by the United Nations Foundation – Sigma Xi Scientific Expert Group on Climate Change, and released on Feb. 27.

‘The global-average surface temperature has already risen about 0.8 deg C [1.4 deg F] above pre-industrial levels and is projected to rise another 2-4 deg C [4-7 deg F] by 2100 if CO2 emissions and concentrations grow according to mid-range projections. Prudence dictates limiting the average temperature increase to no more than 2-2.5 deg C [3.6-4.5 deg F] above the pre-industrial level, and our report offers clear recommendations for achieving that goal,’ said John Holdren, the Teresa and John Heinz Professor of Environmental Policy, Harvard University, Director of the Woods Hole Research Center, and Board Chair of the American Association for the Advancement of Science.

The report recommends new global policy framework for mitigation that includes “mechanisms that establish a price for carbon, such as taxes or ‘cap and trade’ systems. A carbon price will help provide incentives to increase energy efficiency, encourage use of low-carbon energy-supply options, and stimulate research into alternative technologies. Markets for trading emission allocations will increase economic efficiency.”

At a New York Academy of Sciences forum on Feb. 27, Professor Holdren observed that although many people generally think a cap and trade system would be relatively easy to implement, the details of an effective cap and trade system would actually be quite complicated. Responding to concerns that a carbon tax could not be implemented because politicians fear the “T” word, Professor Holdren stated that a carbon tax is possible “with a modicum of political leadership.”

When Snow Won’t Fall

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We’re forever on the lookout at the Carbon Tax Center for new and outsized ways in which Americans are using energy. Too often, today’s novelty item is just a clever marketing campaign away from tomorrow’s sizeable carbon emitter. Witness high-definition televisions, or Jet Skis.

If history is a guide, efficiency standards to govern new devices’ fuel consumption won’t be promulgated until after they have proliferated — if ever. Carbon taxes, in contrast, could help rein in new products’ energy requirements from the git-go, i.e., in the design stage. Where a product has little redeeming social value, the price signals from a carbon tax might even keep it from gaining a toehold in the culture.

Spray.jpgThese thoughts came to mind when we read an article in The New York Times last week about suburbia’s latest must-have energy-guzzlers: home snowmaking machines.

“Since Nature can no longer keep to her early deadlines,” The Times reminded us in a veiled nod to climate change, dads from Darien to Denver “are taking matters into their own hands, and creating their own seasons, at least when it comes to winter.”

They’re doing it with snowmakers — machines named “Backyard Blizzard” and “Snow at Home” that feed on water and run on electricity, lots of it. According to the manufacturer, the Blizzard Sport model uses 2 kilowatts. The Times article gave a lower figure — which didn’t appear until the nineteenth paragraph and came with the curious note that “a clothes dryer guzzles more power.”

Of course, most clothes dryers aren’t left on for two days straight. That’s how long a snow-loving Greenwich, CT developer profiled in The Times story had been running his two snowmakers when the reporter dropped by.

Another two-machine man, owner of a boat repair business owner near Atlantic City, NJ, made this admission: “My neighbors are going to work at the casinos at 3 a.m. and I’m out there, too, messing with the guns. It’s really hard to turn the guns off.”

Hmm, what did Miles Davis tell Coltrane when the saxophonist said he sometimes didn’t know how to end a solo? “John, just take the horn out of your mouth.” In this case, given the large helpings of fossil fuels that go into powering snowmakers, a carbon tax might provide a strong incentive to users to turn them off, or to refrain from buying them in the first place.

We calculate that using two snowmakers — one evidently isn’t enough — twice a month, for two days straight, over four months of the year consumes around 3,000 kWh — enough to pump out 1,220 pounds of CO2, based on the national average mix of fuels used in making electricity. On that average, the $370/ton carbon tax that CTC proposes (after a 10-year phase-in) would add
$225 a year in operating costs.

Based on the high price-elasticities for many luxury goods, the tax might be expected to reduce sales of home snowmakers by around a third. That’s a nice hit, though admittedly it’s far from the 75% market shrinkage that is probably needed to strangle the snowmaker industry in its cradle. (Achieving that through a tax disincentive alone would require a carbon tax five times larger than the one CTC is seeking.)

Which suggests that by itself a carbon tax won’t determine the outcome every time. But it would nudge some of us away from making certain climate-damaging choices. And at least the polluter — whether it’s a giant factory or, as in this case, dear old snowmaker dad — would be made to pay.

Photo: el moose / Flickr

Don't Trade Carbon, Tax It

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Yesterday Gristmill ran a curious article by Bill Chameides of Environmental Defense, attacking a carbon tax strawman that no one is advocating, least of all the Carbon Tax Center.

Chameides stated that the "government would use additional tax dollars to subsidize the development of selected low-carbon technologies." We invite him to look at CTC’s proposed carbon tax, which is revenue-neutral. Revenues will go to reduce regressive taxes or to finance progressive, equal rebates to all U.S. residents. Contrary to Chameides’ charge, we have never advocated targeting tax revenues to any technology, privileged or otherwise. Nor, to our knowledge, have the Washington Post‘s Anne Applebaum, whom he also took to task, or the dozens of columnists, economists, scientists, and other public figures who support taxing carbon.

Chameides and ED are throwing their weight behind a carbon cap-and-trade system, on the premise that the successful sulfur cap-and-trade model can be extrapolated to carbon. We believe this is flirting with disaster. A model that worked when the parties were limited to a few dozen electric utility companies is ill-suited when the stakeholders — essentially every business and household in the country — number 100 million or more. Moreover, electric generators seeking to reduce sulfur emissions had a variety of technological alternatives available. There are no comparable methods available to reduce carbon emissions other than fuel-switching and, perhaps sometime in the future, sequestration.

Chameides claims that the "marketplace does a better job of developing new technologies, and a tax takes money out of the marketplace." That argument was pertinent when the alternative to cap-and-trade was "command and control" regulation of NOx and SO2 emissions, but it’s irrelevant to a comparison with a carbon tax. Both a cap-and-trade and a carbon tax provide price signals that encourage polluters to look for ways to avoid the cost of emitting CO2.

A carbon tax actually provides more precise price signals, provides them sooner, and provides them in a more understandable and transparent fashion. To attack global warming, every energy-critical decision needs to be predicated on a trajectory of rising energy prices. A phased-in carbon tax allows this, whereas cap-and-trade will do little to mitigate the price roller-coaster that discourages emissions-minimizing investment.

Not only would a carbon cap-and-trade system provide less effective price signals, it would do so only after considerable delay consumed by protracted negotiations, making a mockery of Chameides’ claim that a cap will guarantee climate-stabilizing cuts. Compounding the problem, once a cap-and-trade system is finally implemented, we’re likely to be locked into the approach for years, with industry insisting, "Don’t change it until we see how it works." Carbon taxes will require no new administrative structures, can be implemented now, and can be adjusted as necessary.

Another serious drawback to cap-and-trade is that its inherent complexity leaves it open to exploitation by special interests, not to mention perverse incentives to "bank" pollution now against future credits. Carbon taxes are relatively immune to manipulation.

Ironically, Chameides’ hesitancy about trusting the government with tax dollars applies more aptly to his cap-and-trade proposal. Since the tax proposed by CTC and most other carbon tax proponents is revenue-neutral, there are no tax dollars to spend and potentially misuse. In contrast, even an optimal cap-and-trade system such as the Northeast’s Regional Greenhouse Gas Initiative, in which emissions allowances are auctioned, would saddle end-users with the functional equivalent of a tax, along with the same conundrum Chameides raised about how to spend the money. Except worse, because the cap-and-trade model necessarily requires that a chunk of the "tax revenues" be used to provide market participants with a profit paid by consumers.

And that’s under a relatively benign cap-and-trade, in which the allowances are auctioned. The alternative, giving polluters the
allowances outright, combines the worst of both worlds: a hidden tax on energy users, with all the increased energy costs given to the polluters or other market participants. An explicit tax that offsets other taxes is preferable to a covert tax that goes into someone else’s pocket.

Finally, we reject Chameides’ defeatism over the chances of Congress passing a carbon tax. On the contrary, the stars are aligned as never before to actually do something about carbon emissions. There is now a general acceptance of the need for action (even Exxon concedes there’s a problem), and no less than Wall Street demigod Paul Volcker
called last week for taxing CO2. The question is what will work best. For reasons discussed in more detail on our website, we believe that a carbon tax coupled with progressive tax-shifting can be a winner politically.

The last thing we want to do is lock in a suboptimal solution and then have to wait years before the stars are again aligned. Now is the time to work for a real solution that maximizes environmental gains and minimizes hardships.

This article was written with CTC co-director Dan Rosenblum. It appeared first on Gristmill. Dan and I invite commenters to post there as well as here.

Majority of Surveyed Economists Favor a Carbon Tax to Encourage Develoment of Alternatives to Fossil Fuels

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According to the Wall Street Journal’s Monthly Economic Forecasting Survey; February 2007, 85% of the surveyed economists believe the government should encourage development of alternatives to fossil fuels. When asked "what is the most economically sound way for the government to encourage development of alternatives to fossil fuels," 54% responded with "taxes that raise the cost of purchasing fossil fuels." The next largest category was "other" at 28%, followed by "subsidies for producers of alternative fuels" at 13%.

According to former Fed Chairman Paul Volcker, as quoted in the International Herald Tribune, taxes either on emissions or on petroleum could be effective in
reducing global warming, that it would be wiser to impose a tax on oil
than wait for the market to force prices up, that measures to reduce
global warming would not be economically devastating and, putting the
issue in perspective:

"What may happen to the dollar, and what may happen to
growth in China or whatever," he said, raising his voice, "pale into
insignificance compared with the question of what happens to this
planet over the next 30 or 40 years if no action is taken."

(Economist Paul Volcker Says Steps to Curb Global Warming Would Not Devastate an Economy, Feb. 6)