U.S. carbon emissions have been dropping, thanks to a confluence of factors, led by stagnating household incomes, cheap fracked methane, booming wind power, and “peak driving.” From 2005 to 2012, releases of CO2 from fossil fuel burning fell an estimated 685 million metric tons, from 5,906 MMT to 5,221. The lion’s share of that reduction, 379 million metric tons, came in the electricity sector, as wind and gas grabbed market share from coal (3 percentage points went to wind and nearly 12 points to gas) while total power generation stayed flat.

(Emissions data come from CTC’s carbon tax spreadsheet model. Electricity market shares may be calculated from EIA data.)

The second largest emissions source, which I call “Personal Ground Travel” (driving) to distinguish it from goods movement (mostly by trucks), shrank only modestly, from 1,246 MMT to 1,184, a drop of just 62 million metric tons, or 5%. So imagine my surprise when I read in a New York Times editorial last month that “increased fuel efficiency helped reduce carbon dioxide emissions from passenger cars by 16 percent from 2005 to 2012.”

That August 10 editorial, A Clean-Car Boom, was nearly euphoric. Here’s its lede:

In a welcome development for the planet, the cars on American streets are becoming much more climate-friendly much sooner than many had expected. Consumers are increasingly buying fuel-efficient hybrid and electric vehicles thanks to breakthrough innovations and supportive government policies.

True enough about consumers buying … not so the earlier part about emissions dropping by 16%. In fact, in the few seconds it took to follow the editorial’s link, it became clear that the 16% passenger-car reduction applies just to new autos rather than the entire sector, which necessarily takes many years to “turn over” to more-efficient models. What also became clear, in back-and-forth e-mails w/ the editorial board, was that the Times wasn’t going to publish a correction clarifying that CO2 emissions from cars fell just 5% from 2005 to 2012, not 16%.

“I assume [the writer of the editorial] meant new models, not entire existing fleets and that is the way readers would see it,” an editor advised me in an e-mail. “I will have to check with EPA and DOT,” he added, ignoring my offer to lead him to the numbers.

Would readers “see it” as the editor assumed? Would they get that CO2 reductions from driving were only inching along rather than galloping as the Times editorial suggested? I’m not sure. As I wrote to the editor in my final e-mail:

Why does this matter (apart from getting numbers right, generally)? A certain complacency has set in about heartening/surprising progress in cutting U.S. greenhouse gas emissions, especially in mainstream environmentalist thought. Indeed, this complacency may help explain how the [editorial] writer slipped into his/her error. More importantly, it has implications for policy/politics around climate, carbon taxing, “radical” vs. “incremental” approaches, etc.

The implications I had in mind are obvious but worth saying: If you “learn” that regulations have already eliminated one-sixth of carbon emissions from driving in just seven years, you’ll be more inclined to trust that further application of regulations can get induce more reductions. And if regulations are up to the task, the need to take on the tougher job of enacting a meaningful carbon tax dissipates.

Would that were so. But regulations aren’t up to the task of eliminating 80% or more of U.S. CO2 emissions. They’re intrinsically piecemeal, long lead-time, backward-casting, and suboptimizing. They also produce no revenue, thus giving them zero salience in any possible budget deal. As I wrote here late last year, only a carbon tax can

broadcast …  a clear price signal to begin shifting millions of decisions toward less energy and emissions — big decisions that determine design of vehicles and transport and that set the pace and nature of investment in low- and non-carbon energy; as well as the full gamut of household-level decisions …  Almost as importantly, a robust carbon tax changes the culture by broadening the definition of pollution and valorizing conserving behaviors with monetary rewards.

Or, as CTC’s Washington rep, James Handley, put it, in an early-2012 post dissecting putative EPA regulations of CO2 emissions from power plants, “EPA regulations might, optimistically, achieve significant near-term reductions, albeit at a higher cost than a CO2 pollution pricing system. But more importantly, those regulations can’t be expected to induce further innovation.”

Indeed, James’s post drew on work by noted Resources for the Future economist Dallas Burtraw to conclude that in the near term, EPA regulation of greenhouse gases was unlikely to reduce carbon pollution any more than a small carbon tax, say, one starting at $10/ton of CO2 and rising by just $3.50/ton per year. “Moreover,” James noted, “it’s not clear how much further EPA regulation could reduce emissions after 2020. That’s because regulations are essentially static and do little to induce innovation or to reduce fossil fuel demand via conservation.”

With or without a correction by the Times, there’s no getting around the need for a robustly rising carbon tax.

* * * * *

Separately, we call your attention to a new report by prolific automobile researcher Michael Sivak and two colleagues at the University of Michigan Transportation Research Institute, “A Survey of Driver Opinion About Carbon Capture in Vehicles.” Using an opinion survey, the three inferred that Americans “appeared to be willing to pay about $100 for a 20% reduction in [their car’s] carbon dioxide emissions.” Applying an average 25 mpg fuel economy for newly purchased vehicles, an annual distance driven per vehicle of 11,000 miles, and a typical 11-year vehicle life, that 20% reduction equates to 9.5 tons of CO2. A willingness to pay $100 to eliminate 9.5 tons equates to just $10-$11 per ton of CO2 removed, suggesting that relying on Americans’ altruism isn’t going to do the heavy lifting of reducing carbon emissions.

Photo: Veee Man, via Flickr.

We present this guest post by Robert J. Shapiro, Co-founder and Chairman of Sonecon, LLC, and U.S. Under Secretary of Commerce for Economic Affairs during 1997-2001. Click here for his full bio, and here for the same post on Sonecon’s blog. Dr. Shapiro joined CTC’s board earlier this year. 

The Supreme Court’s blockbuster decisions on voting rights and same-sex marriage attracted most of the attention, but President Obama also moved decisively last week, on climate change. The facts that drove the President are scientifically undisputed. Increasing concentrations of greenhouse gas emissions in the earth’s atmosphere continue to raise global temperatures; and without serious action, the long-term effects on sea levels and climate could be catastrophic. Yet climate-change deniers on the far right have a tight hold on a majority of congressional Republicans, who now won’t even acknowledge the threat. With no hope of reaching a reasonable accommodation, the President put forward new regulations that don’t need their approval — and ultimately will be less effective and more costly for average Americans than the alternatives which Congress won’t consider.

For a while now, most climate experts and economists have broadly agreed that the most efficient and effective way to reduce these carbon and other greenhouse gas (GHG) emissions is the direct approach: Raise the price of fuels based on the GHG emissions they produce, and so raise the price of all goods and services based on the emissions created to produce them. In principle, this approach could attract bipartisan support. It rests on one of the bedrock tenets of conservatism, the power of prices in free markets, as well as the liberal disposition to create national programs to improve the general welfare. Yes, the most straightforward way to achieve such climate-friendly fuel prices is apply a dreaded tax to all forms of energy based on their carbon dioxide (CO2) and other GHG emissions. But even that, in more placid political times, could be a basis for attracting broad support, since the revenues from a climate tax could be dedicated to cutting payroll, corporate and other, more economically-distorting taxes.

The truth is that every other serious approach to climate — from a cap-and-trade system to the President’s new regulations — also would raise prices: Directly or indirectly, they make it more expensive to use fuels that emit more than their share of greenhouse gases, relative to other fuels that damage the climate less. Over time, those price differences should gradually move millions of businesses and tens of millions of households to favor the cheaper, more climate-friendly fuels and technologies, and the goods and services produced using them.

The sobering news is, we don’t have much time. Scientists warn that however broadly we might adopt the current generation of cleaner fuels and technologies, the atmospheric concentrations of CO₂ and other GHG will soon reach levels that will produce serious climate changes. However, the economics of setting a clear and hefty price on carbon and other GHG would also create new incentives that could extend the frontiers of climate technology. If energy companies, scientists and entrepreneurs can be certain about the price of carbon and other greenhouse gases, looking forward — if they know how much more it will cost people to use climate-damaging fuels, compared to climate-friendly ones — that would create strong incentives to develop and adopt the next generation of climate-friendly fuels and technologies.

The question is, how efficient and effective are each of these approaches, and which is most likely to spur new advances? The question highlights the costs of the extreme right’s current hold on congressional Republicans, which drives the political stalemate on climate policy and has left President Obama with few options apart from executive regulation. His new regulatory agenda has three parts. It includes, first, higher energy-efficiency standards for appliances and buildings, aimed at reducing energy use whether clean or otherwise. There also are new loan guarantees for projects to reduce or isolate the greenhouse gases emitted by fossil fuels, and additional grants to develop more efficient biofuels. These guarantees and grants are designed to promote greater use of more climate-friendly technologies and fuels by reducing the cost of capital to develop them. While these measures provide a sense of the administration moving on many fronts, their combined impact on the climate crisis will be modest.

There is one measure that could matter a great deal more: The President has directed the EPA to develop new CO2 and other GHG emission standards for existing power plants. This follows EPA regulations proposed last year that set similar standards for new power plants. The logic is straight-forward: Set standards that will force utilities to rapidly shift from coal to natural gas and renewable fuels. This makes sense, since the use of cheap coal to generate electricity accounts for about half of worldwide carbon and other GHG. Shifting to natural gas worldwide would cut life-cycle GHG emissions by 20 percent, and shifting to renewable fuels would reduce those emissions by as much as 40 percent.

There is no doubt that sufficient regulation could move the United States to a path under which our GHG emissions would decline in a sustained way. But using regulation in this way will cost Americans a great deal more than a carbon tax with the same result.

Under the new regulation, existing power plants will have to develop and adopt new investments that meet a new, uniform standard by reducing their emissions from fossil fuels or converting their plants to use cleaner fuels. To begin, monitoring and enforcing such regulation will cost a lot more than collecting a tax. More important, the program suffers from the inefficiencies of most regulation, because some utilities will be able to meet the regulation much more cheaply than others, based on the state of their current plants. For example, plant A could reduce its emissions by a required unit by investing $1,000,000, while plant B could reduce its emissions by the same unit for $250,000, and by two units for $500,000. So, reducing emissions by two units under the regulation will cost $1,250,000, while plant B could achieve the same result for the climate under a tax or a cap-and-trade system for $500,000. Under all of these alternatives, most of the costs are passed along to the ratepayers and consumers. But a tax with offsetting tax reductions could return much of those costs to everyone. Based on a simulation from several years ago, those costs could average some $1,500 per-household, year after year.

Finally, while the new regulations should spur technological innovations to enable utilities to meet the standard more efficiently, the incentive to innovate will dissipate once the standard is met. By contrast, the economic incentives to develop and adopt cleaner fuels and technologies never go away under an emissions tax, since every incremental advance would reduce the tax and, with it, the price of energy.

This past weekend, President Obama also devoted his weekly address to his new climate program. He deserves credit for refusing to be cowed by his opponents’ intransigence. He could truly elevate his presidency, however, by taking the case for a carbon/GHG tax with offsetting tax cuts to the country, and beating his opponents on one of the most fateful challenges we face today.

Guest post by Lindsay Sturman, a writer living in Los Angeles with her family.

We all hate taxes, but we also want and need government services. Rather than raise taxes or cut services, there’s a Third Way that has been overlooked: tax behavior that costs the public money.

“Sin taxes,” or better yet, “Smart Taxes” create a virtuous cycle – the tax raises the price of the product, causing consumption to drop, thus reducing the costly and damaging behavior. It’s Economics 101 – if we raise the price, we’ll get less of the behavior.

It’s unusual in government to have your cake and eat it too – but “Smart Taxes” is one of those rare perfect storms.

Tobacco is a great example, because most people wish fewer of us smoked, especially children. Over a hundred studies have shown that raising the price of cigarettes causes consumption to go down. Smoking also costs taxpayers dearly in health care costs treating Medicare and Medicaid patients for lung cancer, emphysema, chronic pulmonary disease and heart disease. Economists across the political spectrum agree that a pack of cigarettes should be taxed to reflect the true cost to society of smoking so taxpayers are not subsidizing tobacco companies.

Think about it: tobacco companies put out a product that causes disease and death, they make a handsome profit, and society is stuck with a huge bill estimated to cost the U.S. $96 billion a year, according to the Campaign for Tobacco-Free Kids. Economists have a word for the damage: an “externality.” In a perfect capitalist system, the cost of the externality of lung cancer would be captured in the price of a pack of cigarettes.

Carbon combustion is another area that costs us dearly – in higher rates of diseases such as asthma, traffic crashes, tailpipe and smokestack pollution, and the potentially catastrophic effects of global warming. Why should taxpayers subsidize the corporate pollution and the detrimental effects of a product, while the polluters walk away with a huge profit? Let the polluters pay, and let the price reflect the cost.

Along with cigarette taxes, another smart tax in use for decades is alcohol taxes, which cover at least some of the cost of alcohol-related disease and accidents. Along the same lines, a tax on bullets could offset some of the societal costs of shootings – the costs to hospitals, police departments and the court and prison system; this was once a political non-starter, but there is now a growing movement calling for this change. We could also be made better off, economically and health-wise, by taxing sugar and soda consumption that contributes to the marked increase in diabetes and obesity-related diseases; the costs are staggering, with obesity alone costing America a shocking $147 billion a year.

Here are examples of Smart Tax proposals from across the political spectrum:

• Carbon tax — Carbon Tax Center puts revenue in the trillions with a substantial cut in emissions – $1.5 trillion over 8 years.
• Soda tax — 1 cent per what? tax would raise $160 billion over 10 years while motivating 8-10% decline in consumption, lowering our health care costs.
• Tobacco tax— 50 cent per pack rise could raise $80 billion in 10 years (Congressional Budget Office).
• Marijuana tax – In states where legal, could raise $90 billion in 10 years and save the same in reduced law enforcement. Net gain: $180 billion.

By taxing “bads” we can achieve the trifecta: raise money to treat the disease/damage/costs, reduce consumption and thus prevent disease/damage/costs in the first place, and make a dent in health care spending and the cost of government across the board. Not to mention avoiding the incredible suffering these diseases cause – which is the best reason to do it.

Smart Taxes do not have to be a tax increase, but rather a tax shift. For every dollar raised in carbon, alcohol, and tobacco taxes, another tax could be lowered dollar for dollar: payroll taxes, income taxes, business taxes, or sales taxes. Lowering those taxes would encourage the economic activity that we want more of but which our upside-down tax system inhibits. Republicans and Democrats alike agree that sales taxes cut down on sales and payroll taxes impede job growth.

Smart Taxes could motivate the next taxpayer revolution. Whatever our political persuasion, we as citizens need to demand that our elected officials lower taxes on “goods” and raise them on “bads.”

Photo: A.C.N. Photography, via Flickr.

Guest Post by Sieren Ernst, Principal of Ethics & Environment.  [See 3/23 post-script, below.] 

Whether or not simplicity is a personal virtue, it’s certainly an important advantage of a carbon tax over other forms of carbon pricing. Thus, the “discussion draft” on carbon taxes released last week by a bicameral task force headed by Rep. Henry A. Waxman (D-CA) and Sen. Sheldon Whitehouse (D-RI) shows a laudable trend toward simpler, more transparent ways to price carbon pollution. Despite that encouraging trend, some aspects of the draft seem to have steered out of the way to complicate an otherwise elegant concept.

Dozens of peer-reviewed economic papers have examined the key design questions that the Waxman-Whitehouse draft asks: How high should the tax start? What should the escalation rate be? Where to use the revenue? The Waxman-Whitehouse task force offered up a menu of options and asked the public to weigh in, reality-tv style, on their favorites at cutcarbon@mail.house.gov.

It’s axiomatic to microeconomics that larger price signals produce larger responses on both the supply and demand side. One need not consult economic models to know that the impact of a low carbon price and tiny escalation rate — such as the task force’s low-end option of $15 per ton of CO2 with an escalator of 2% per year — would be minuscule. Would you modify your driving behaviors more than slightly over an increase of 15 cents per gallon of gasoline? Clearly, we need the task force’s higher-end option — $35 per ton and 8% escalator — to put a real dent in U.S. CO2 emissions, or at least to top the expected reductions from EPA regulatory proposals.

But the task force didn’t ask for input on a myriad of important design issues that needlessly clutter up the proposal. A major advantage of a carbon tax over cap-and-trade is its simplicity and crystal-clear price signal. An advantage touted by cap-and-trade supporters over a carbon tax is that the pricing mechanism is flexible. The ‘discussion draft’ seems to offer a carbon tax with cap-and-trade characteristics that isn’t especially simple nor flexible.

For starters, the bill uses a confusing and complex upstream/downstream approach, imposing the tax upstream in some instances and downstream in others. The “backgrounder” accompanying Waxman-Whitehouse proposal claims that this is “simpler” and imposes a lower reporting requirement. The background document asserts that “taxing carbon in natural gas at the point of production may be impractical, as there are over 500,000 produce natural gas wells in the United States.” But the number of natural gas wells isn’t the operative figure, insofar as a single corporate entity can control thousands of wells. Even the authors of the backgrounder seem to realize they may have picked an unwieldy point of regulation. They concede, “Applying a tax at the first point of sale would require establishing a new regime, as the federal government does not currently tax the vast majority of natural gas production.” True. Most carbon tax proposals suggest taxing natural gas “midstream” at the pipeline level because there are relatively few pipeline companies and they’re already regulated.

The Waxman-Whitehouse task force suggests that their approach would cover a larger share of the economy. But according to the Congressional Research Service, the Climate Protection Act, an upstream carbon tax proposed last month by Senators Sanders and Boxer, would cover 2,869 facilities and 85% of the greenhouse gas emissions in the economy. According to EPA, the Waxman-Whitehouse discussion draft would cover 7,000 facilities and…85% to 90% of the economy. The EPA and CRS’s methodology may differ but it seems clear enough that imposing the tax upstream would create far less administrative and regulatory burden.

The discussion draft instructs the Department of Treasury to sell polluters permits for each ton of CO2 emitted. But the proposal stresses that permits can’t be banked, borrowed, or traded. So why add the extra machinery for a permit-based system instead of a straight point-of-sale tax?

All in all, Waxman and Whitehouse’s proposal looks like an enormous stride, especially when compared to complex, opaque proposals of just a few years ago. But its choice of a permit-based system raises the question of whether their aim is to start with a carbon tax but wind up with linked cap-and-trade systems as Australia and South Africa have announced they will do. Which leads one to ask: Why not continue the trend toward simplicity with a simple, upstream carbon tax with a substantial escalator calibrated to hit long-term emissions targets?

Photo: flickr, Wikipedia: Rube Goldberg machine (“Self-operating napkin”)

 

Post Script: Coverage of Non-CO2 Greenhouse Gases (3/23/13):

In addition to taxing CO2 pollution, the Waxman-Whitehouse “discussion draft” would tax six non-CO2 greenhouse gases (GHGs): methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbon-23, perfluorinated chemicals and nitrogen triflouride at CO2-equivalent rates. According to the “backgrounder” released with the discussion draft, these non-CO2 GHGs account for about 20% of the climate damage from U.S. GHG emissions. To address that sector, the draft would apply emission fees to facilities whose emissions of those gases exceed the 25,000 ton CO2-equivalent per year threshold in EPA’s GHG reporting rule.

Those emissions total about 263.3 million tons CO2-equiv. That’s substantial: it’s roughly 4% of the 6.7 billion tons CO2-equiv of U.S. GHG emissions in 2011 and helps explain the Waxman-Whitehouse proposal’s reported coverage of 85-90% of emissions; 5% more than the 85% coverage of the Boxer-Sanders proposal that applies only to CO2 emissions.

But it’s striking that the Waxman-Whitehouse proposal would cover only 263.3 million of the 1.1 billion tons of non-CO2 GHG’s in EPA’s inventory. Given the potent climate impacts of non-CO2 greenhouse gases and reports indicating substantial fugitive methane emissions, we recommend a more comprehensive approach, either by applying the tax further upstream (where more of the emissions would be attributable to large emitters above the threshold) or by reducing the 25,000 ton CO-equiv. threshold, or both.

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

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

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

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

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

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

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

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

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

Photo: Flickr– Public Citizen

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

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

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

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

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

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

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

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

Just before Thanksgiving, Grist political blogger David Roberts posted a sharp challenge to carbon-tax advocates, contending that we were, in effect, ascribing “magical” properties to carbon taxes. Roberts spelled out 10 drawbacks to carbon taxes, with this bottom line: any carbon tax legislation that could make it through Congress would likely be feeble and regressive, and perhaps even counter-productive.

David is arguably the green community’s most prolific and astute blogger, particularly on environmental politics. His qualms about pushing for a U.S. carbon tax deserve to be taken seriously. We’ve reproduced his Grist post, below. Alongside it is our point-by-point response. Let us know what you think.

— Charles Komanoff & James Handley

10 reasons a carbon tax is trickier than you think By David Roberts, Grist House GOP leaders recently confirmed again what I wrote last week: There isn’t going to be a carbon tax in the next two years or, probably, for as long as the GOP controls the House. I’ve been asked by a few climate types, “Why not spend your time pushing for it rather than poo-pooing its chances?” It’s a reasonable question. The answer, I suppose, is that I do not regard it with the same reverence as many economists and climate hawks. That’s not to say I wouldn’t welcome a substantial, well-designed carbon tax. But is it the sine qua non of climate policy, the standard against which all climate solutions are measured and for which any sacrifice is justified? No. Those who support a carbon tax over cap-and-trade often tout its simplicity, but the fact is, there are plenty of ways to screw up a climate tax too. Not everything that goes under the name is worthy of support, especially if it’s achieved at the expense of other liberal or green priorities. And given the current political milieu, it’s likely that any carbon tax that did manage to pass would be a bum deal for America’s poor and middle class. (Actually, that’s probably true for anything that passes, period.) Here are 10 reasons for a more tempered and realistic attitude toward a carbon tax.	To save climate, no other policy tool comes close to a carbon tax By Charles Komanoff & James Handley, Carbon Tax Center Thank you for elucidating your reservations about placing a carbon tax at the heart of U.S. climate policy. Until now, your many Grist posts critiquing carbon taxes have focused on political infeasibility. Now you’ve presented your policy objections. Thanks for bringing your concerns out into the open. No surprise: the Carbon Tax Center indeed views a U.S. carbon tax as the sine qua non of effective climate policy — provided it builds toward a substantial price that rises steadily and predictably over time. With a ramped-up tax, the initial carbon charge can be modest, giving businesses and families time to adapt, while still broadcasting a clear price signal to begin shifting millions of decisions toward less energy and emissions — big decisions that determine design of vehicles and transport and that set the pace and nature of investment in low- and non-carbon energy; as well as the full gamut of household-level decisions, many of which can’t and won’t be touched without a carbon tax. Almost as importantly, a robust carbon tax changes the culture by broadening the definition of pollution and valorizing conserving behaviors with monetary rewards. Here are our counterpoints to David’s 10 points.
1. It’s conservative. There’s a reason so many conservative (and neoliberal) economists support carbon taxes: They fit comfortably in a worldview that says problems are most effectively solved by markets, with minimal government intervention.Current markets have a flaw: They do not reflect the external costs associated with carbon dioxide emissions (namely, the impacts of a heating planet). The answer, economists argue, is to determine the “social cost of carbon” and to integrate that cost into markets via a carbon price, tax, or fee. With an economy-wide, technology-agnostic carbon tax in place, the market will eliminate carbon wherever it is cheapest to do so, insuring that we don’t “overpay” for carbon reductions. Implicit (and often explicit) in this view is the notion that other attempts to tackle carbon — say, EPA power plant rules, or fuel-economy standards, or clean-energy tax credits — are merely backdoor, inefficient ways of pricing carbon. If you get the social cost of carbon right and levy an economy-wide tax that prices all tons of carbon equally, then you have optimized the market, carbon-wise. All other regulations and subsidies will only serve to disrupt market efficiency. They are sand in the gears, as it were. The problems with this worldview are too many to list here, much less to litigate. Economists James Galbraith and Dean Baker argue that free markets are a myth; all markets everywhere are already designed, shaped, and regulated, usually to the benefit of the wealthy. Economist Dani Rodrick argues that industrial policy — “picking winners and losers” — is ubiquitous, a feature of all advanced economies, whether acknowledged or not. Sociologist Fred Block argues that virtually every industrial success story (e.g., fracking) can be traced to government-supported innovation. Anyone familiar with the U.S. electricity sector knows that there is little resembling a market in that Rube Goldberg hodgepodge of overlapping jurisdictions and quasi-monopolies. The entire U.S. coal sector depends on supply from the Powder River basin, which is public land administered by the government. Internal-combustion vehicles are heavily favored by a century of road-building and sprawling land use. And so on. There is no pristine “free market” for regulations and subsidies to besmirch. The game is always rigged, and right now it’s rigged in favor of the fossil-fueled status quo. The notion that a problem like climate change, with its century-spanning effects and potentially existential risks, will be solved exclusively or even primarily with “market mechanisms” is a religious doctrine, not a realistic appraisal. What government proactively plans, encourages, and accomplishes is just as important to the climate struggle as what the market penalizes. Put more bluntly: the spending matters as much as the taxing. Which implies that …	1. A carbon tax is conservative and progressive. We don’t think of a carbon tax as a market mechanism; there’s no need to create a new market. It’s a price mechanism. Call it a market corrective if you wish, but the term “market” is both a misnomer and a turnoff for carbon tax adherents (actual and potential) who don’t identify with market ideology. A carbon tax would correct existing markets that systematically under-reward virtually every action, every device, every innovation that reduces fossil fuel use because the prices of those fuels omit the costs of climate damage (not to mention most of the other harms from mining and burning coal, oil and gas). We don’t accept your suggestion that economists and policy-makers need to “get the social cost of carbon right” in order to set a carbon tax. For one thing, no two economists will ever agree on that number. More importantly, every climate-aware person already lives with the knowledge that the social cost of carbon is enormous: the likely descent of human civilization into chaos in the face of wholesale climate disruption. Our job as advocates isn’t to fix the “right” price of carbon but to maximize the internalization of carbon’s societal costs into the prices of fossil fuels. (Could any politically viable carbon tax capture the entire social cost?) And we emphatically reject the insinuation that we’re beholden to a purist belief that complementary measures to control and reduce carbon are irrelevant or harmful. Like you, we’re painfully aware of the multitude of ways in which market barriers like split incentives, inadequate information and path-dependence impede innovation and buy-in for energy efficiency and renewables. Therefore, like you, we strongly support regulatory standards, especially those that address inefficiency in product and building design. Still, let’s be realistic about their limits: Standards and regs tend to motivate threshold-meeting behavior but no more. Standards and regs provide no incentive to conserve on usage — by right-sizing new homes, for example; or driving less; etc. We can’t expect standards and regs to address more than a subset of the thousands of types of machines, appliances and vehicles that collectively consume the world’s energy. Standards don’t catch up to new products until they’ve been adopted widely ― and have “locked in” energy waste (e.g., plug loads). Standards and regs generate zero revenue and thus can’t figure in tax or fiscal “deals.” As you note, David, there is no pristine “free market” in energy or anything else. But so what? By itself a carbon tax won’t level the playing field, but it will lower the tilt. And as the tax rises, the tilt will diminish, allowing clean energy and a conservation ethic to compete with dirty energy and an ethic of waste.
2. It’s the revenue, stupid. Brookings notes that …… a carbon tax starting at $20 per ton and rising at 4 percent annually per year in real terms would raise on average $150 billion a year over a 10-year period while reducing carbon dioxide emissions 14 percent below 2006 levels by 2020 and 20 percent below 2006 levels by 2050.$150 billion a year — pretty soon you’re talking about real money! That could be used to support cleantech R&D or deploy renewable energy or build green infrastructure … or it could be used for none of those. Point is, what happens to the revenue should be at the center of climate hawks’ negotiating strategy; it’s not some peripheral bargaining chip.	2. “Revenue recycle” will help the tax to rise. We think you’ve got the revenue matter backwards. Revenue treatment is important, of course, as befits any new tax that puts hundreds of billions a year in play. But rather than fund cleantech R&D and green infrastructure, we need to direct the revenue to support productive economic activity and offset the hit to poor and middle-income families’ disposable incomes. Doing so will help win the political buy-in to legislate periodic renewal of the annual rises in the tax that will drive the needed changes in behavior, infrastructure and R&D far better than subsidies. This is why we frame carbon tax revenue treatment in macro-economic rather than energy-policy terms. (We say more about this at #3, next.)
3. “Revenue-neutral” means foregoing any money for climate solutions. A “revenue neutral” carbon tax is one in which all of the revenue raised is returned automatically to taxpayers. Most of the carbon tax proposals floating around today are revenue neutral, mainly, as far as I can tell, because conservatives demand it. (Conservatives don’t trust government with revenue.) There are three ways to achieve revenue neutrality, which I will list from most to least desirable: A dividend system (supported by James Hansen, Bill McKibben, and lots of other greenies) would distribute the carbon revenue to citizens on a flat per-capita basis, the same way Alaska distributes its permanent fund money. A similarly progressive option is to use carbon revenue to reduce payroll taxes, which are paid by around 80 to 90 percent of Americans. A regressive option is to use carbon revenue to reduce income taxes, which are paid by between 50 and 60 percent of Americans and are the main source of progressivity in the U.S. tax system (wealthier people pay a higher rate). Replacing a progressive tax with a regressive tax would redistribute wealth upward. Unsurprisingly, that’s the policy supported by Republicans like economist Art Laffer, who have long loathed the income tax. Note what all these uses of carbon revenue have in common: They do nothing to reduce carbon emissions or encourage clean energy. And to boot, they wouldn’t even reduce taxes much.	3. “Revenue-neutral” helps keep the carbon tax rising. Like many carbon tax advocates, though not all, we (Charles & James) personally have progressive perspectives. Outside the Carbon Tax Center we advocate for robust government investment in education, public transportation, health protection, housing, and a broad spectrum of social services and support nets. Yet we ardently want carbon taxes to be close to 100% revenue-neutral (with minor and transitory exceptions for assistance for displaced workers and communities), for two reasons: First, as you have detailed in many posts over the years, it’s next to impossible politically to direct carbon tax revenues to “good things” (e.g., green tech, mass transit) without also opening the floodgates for bads like “clean” coal, next-generation reactor loan guarantees, and biofuel boondoggles. Better to hold the line and continue to fund R&D from established pots of money. Second, the carbon tax is going to have to rise steeply and steadily over a long time period to provide strong, ongoing incentives to phase out and finish off fossil fuels. Returning essentially all of the revenues to American households — whether through reductions in taxes like payroll taxes that discourage hiring and are distributionally regressive, or monthly electronic ”dividends,” or a combination — is essential to winning support for the rising carbon tax. Indeed, we want Americans to find these revenue return mechanisms so appealing that they will welcome ongoing rises in the carbon tax level so as to expand their size (and, ultimately, sustain them in the face of the declining carbon tax base as fossil fuel use dwindles, as we discuss in #6, below).
4. Carbon money should fund clean energy. There are two distinct tasks for climate policy. One is to reduce carbon emissions at lowest cost. The other is to develop and deploy a new energy system. The evidence shows that a carbon tax is good at the first, but not great at the second. That’s where the revenue comes in.I was going to gather together the research on this, but then I discovered that Mark Muro of Brookings has done it for me. Bless you, Mark Muro of Brookings. (Pardon the long excerpt — all the emphases are mine.) [Ed. note: We’ve put the long Muro excerpt in italics. — Komanoff] “The sticking point here is that while the conventional wisdom among carbon pricers holds that higher dirty energy prices will provide the right market signals to entrepreneurs, who will then develop and deploy clean new technologies, a ton of evidence suggests that pricing alone won’t generate enough deployment to get us where we need to go. Instead, it is becoming increasingly obvious that along with pricing we need a direct technology deployment push. “One hint of this comes from the modelers. Under neither of their respective carbon tax proposals do the Brookings or MIT groups forecast that emissions will drop enough to even come close to the 80 percent cut in emissions below 1990 levels that is the nation’s long-term carbon emissions goal. Yes, fossil fuel use would go down, oil imports would shrink slightly, and emissions would decline, but much more work would need to be done to tackle global warming. Similarly, an interesting analysis by the Breakthrough Institute concluded that a $20 per ton carbon tax would offer just one-half to one-fifth the incentive of today’s subsidies for the deployment of solar, wind, and other zero-carbon technologies. “These results reflect the growing body of literature that has begun to suggest—and document—that broad economy-wide pricing strategies alone induce only modest technology change and deployment. Last year, Matt Hourihan and Rob Atkinson of the Information Technology and Innovation Foundation ran through some of the literature pertaining to a wide range of industries, while at the same time, scholarship specifically on energy has been accumulating. “Ackerman argued a few years ago that getting the price right is necessary but far from sufficient to mitigate climate change and that direct public sector initiatives are required to disrupt path-dependencies and accelerate learning. Acemoglu and others more recently demonstrated that the optimal carbon policy is not one-sided but involves both carbon taxes and direct research subsidies. They urge immediate action. “Turning to empirical evidence, Calel and Dechezleprêtre looked at company patenting patterns under the EU emissions trading system (a cap-and-trade pricing scheme) and concluded that the system has had very little impact on low-carbon technology change. And then, earlier this year, a Swiss-German team found that the EU system has stimulated only limited adoption of low-emissions technology and that research, development, and deployment (RD&D) technology ‘push’ measures induced more action. This group concluded that none of the first three phases of the trading system were ‘capable of triggering increased non-emitting technology adoption’ and that ‘only renewable-technology pull policies had this effect.’ “And so we arrive back at the revenue: The accumulating evidence and the appropriate fit of the tax to its use argue heavily for at least a portion of the revenue of any carbon pollution fee to be applied to direct investment in energy system clean-up, whether through R&D or later-stage deployment supports.” In short, the tax side is not enough. Effective climate policy also requires spending. This is commensurate with some of the revenue being rebated to low-income taxpayers, or used to reduce taxes, or wasted on the fake long-term deficit problems. Public investment in clean energy is not the only legitimate use of the revenue. But it is the use for which climate hawks should be advocating most strongly.	4. A strong enough carbon tax will indeed drive investment to clean energy. We don’t dispute Mark Muro’s assertion in his “Carbon Tax Dreams” post that we’ll never usher in massive cleantech investment or otherwise shrink fossil fuel use and carbon emissions to near zero with just the price signals from a carbon tax that starts at a mere $15 to $20/ton and rises only 4% a year faster than inflation. The Carbon Tax Center’s carbon tax spreadsheet model yields the same conclusion. So does a pocket calculator: assuming 3% annual inflation, a tax rising 4% a year faster than inflation would take a decade to double in nominal terms, and almost two decades to double in real terms. That’s way too slow a ramp-up, considering that a carbon price of $40/ton of CO2 would add a mere 36 cents to a gallon of gasoline and 1.5 cents/kWh to the average U.S. retail electricity price. We need a carbon tax that quickly gets to much higher rates than that. It doesn’t have to start like gangbusters; indeed, it shouldn’t, since families, businesses and institutions all need (and deserve) time to adapt to the new reality of higher fuel and energy prices. A steady and steep ramp-up rate is far more important and beneficial than a high starting point. These considerations make the ideal carbon tax close to that embodied in legislation introduced in 2009 by Representative John Larson (D-CT). Rep. Larson’s carbon tax starts at $15/ton and rises each year by $10-$15, with the actual increment depending on whether emissions are being driven down fast enough. In the tenth year of a carbon tax, the CO2 price would be between $100 and $145 per ton of CO2 under the Larson bill, vs. $28-$37 per ton for Muro’s scenarios. That 3-fold to 4-fold difference in the respective tenth-year carbon price would start to narrow eventually, though not until the start of the fourth decade, in absolute terms — indicating how fundamentally different the Larson tax scenario is from Mark Muro’s. The corollary, David, is that while your boldfaced assertions that “pricing alone won’t generate enough [clean-energy] deployment to get us where we need to go” and “broad economy-wide pricing strategies alone induce only modest technology change and deployment” may well hold for the undersized and only gradually rising tax levels you cited in your post, they don’t necessarily apply to the kind of robust tax presented in Rep. Larson’s bill. We do take seriously Frank Ackerman’s caveat in the paper you cited, that “Price incentives alone cannot be relied on to spark the creation of new low-carbon technologies.” But recall that Ackerman, writing in 2008, was in part responding to an IMF report published earlier that year whose year-2100 climate “targets” could have come from the Koch Brothers playbook: a CO2 concentration of 550 ppm, annual declines in emissions of only 0.6% till then, and a carbon tax starting at around $1/ton of CO2 and rising by just 67 cents a year. We suspect Dr. Ackerman might have a more sanguine view of the “market pull” of a carbon tax whose rate, like Rep. Larson’s, is a full order of magnitude greater than what the IMF envisioned. Our bottom line, then, is that we don’t believe that a small carbon tax used for subsidies and/or RD&D would provide anything close to the sustained broad market pull toward innovation that is required to address the climate crisis, and that could result from a substantial and briskly rising carbon tax. In our view, starting with as close to 100% revenue return as possible is the best way to build growing political will for a robust and effective carbon tax, i.e., one with sustained, predictable and sizeable increases from each year to the next. There, the market pull (including long-term price expectations) should suffice to elicit clean-tech innovation and revolution. In that case, however, “revenue return” is mandatory — ethically, to offset households’ higher energy costs, and politically, to forge and maintain the constituency to keep the tax level rising.
5. Carbon taxes are regressive. I mentioned this is passing already, but it’s worth emphasizing. On their own, carbon taxes hit the poor harder because the poor spend a larger proportion of their income on energy. It isn’t difficult to solve that problem. Using the revenue to reduce payroll taxes would do it. Setting aside some revenue for direct rebates to low-income taxpayers would do it. (By the way, the Waxman-Markey bill did exactly that.)But swapping a carbon tax for the income tax wouldn’t. Using carbon tax revenue to reduce the deficit wouldn’t. If climate hawks want progressivity — and they should, if they hope for broad grassroots support — they’ll have to fight for it.	5. Tax regressivity is an anathema . . . but curable. No argument here, David, though we spin this issue a bit differently. We agree that (i) putting revenue use aside, a carbon tax has a greater proportional impact as household income declines, and (ii) progressive revenue treatment such as a revenue swap on payroll taxes, or pro rata dividends, or low-income support, can mitigate and eliminate the regressivity. The Carbon Tax Center insists on such progressive treatment, though we concede that a final bill may be less than scrupulous on this score. (We also question the extent to which Waxman-Markey would have solved this problem, but we’ll save that discussion for another time.)
6. Carbon tax revenue is supposed to decline. Remember, the goal of a carbon tax is to decarbonize the economy. As carbon declines, carbon tax revenues will decline, unless the tax is almost continuously ramped up. This wouldn’t matter so much for revenue earmarked for clean energy or direct rebates. There will be less need for that revenue as the economy decarbonizes. But what if carbon taxes have replaced payroll taxes, which fund Social Security? As revenue declines, so will funding for Social Security. Not good. Or what if carbon taxes have replaced income taxes? As revenue declines, individual tax burdens will decline, which will delight conservatives, but should be a source of concern for liberals in favor of active government. The fact that a carbon tax is intended to phase itself out over time cannot have escaped the attention of its conservative supporters.	6. The eventual decline in revenue is a non-problem. “The fact that a carbon tax is intended to phase itself out over time,” as you put it well, David, belongs in the class of problems that at this juncture should matter only to extreme policy wonks. The Larson Bill, which we discussed under Point #4 above, and which certainly falls on the “aggressive” end of the carbon tax rate spectrum of, doesn’t reach max revenue until Year 18, when the annual intake is projected to plateau at just under $800 billion. (Note: that figure, which is drawn from our modeling of the Larson bill assuming annual rises of $12.50/ton, may change with revisions to the model now underway.) Long before then, there should be ongoing discussions about how to replace that revenue stream as it slowly and predictably shrinks. Indeed, given the amounts in question, we would expect those discussions to be a central feature of public policy in future decades.
7. The carbon lobby will want to axe EPA regulations in exchange. Exxon has been supporting a carbon tax (notionally) for several years, but it’s made clear that it sees such a tax as “an alternative to costly regulation.” This is what everyone’s favorite dirty-energy lobbyist Frank Maisano recently wrote (behind a paywall):No carbon tax should be considered before serious regulatory reform is undertaken. The U.S. EPA is moving forward on an approach that regulates carbon, which is akin to fitting a square peg in a round hole. Not only is it legally dubious, but it is not likely not work in practice, either. Suffice to say, the fossil fuel lobby would never give a carbon tax their OK unless EPA regulations on carbon (and possibly other pollution regs) were scrapped. We saw this fight play out once already, around the cap-and-trade bill. Unless it was for a high-and-rising tax (which is unlikely), that would be a terrible trade for greens. The implicit carbon price in EPA regs is higher than an explicit tax would likely be. In developing regulations, EPA uses the government’s official “social cost of carbon,” which is around $26/ton. There’s good reason to think that figure is dramatically too low. But it is already higher than a politically realistic carbon tax.	7. EPA regulation of climate pollution may not measure up to its regulation of public-health pollution. This issue should be straightforward. Greens should hold the line on health-and-safety rules pertaining to the energy sector — emission limits governing pollutants like NOx and mercury (e.g., Mercury and Air Toxics Standards); mining and combustion waste (a/k/a Coal Combustion Residuals); fugitive emissions like methane; and “macro” regs like the Cross-State Air Pollution Rule. But prospective EPA rules directed at CO2 emissions may be another matter. Based on the authoritative 2011 paper by Burtraw et al. for Resources for the Future, new EPA regs will at best reduce greenhouse gas emissions (GHG’s) in 2020 by only 13% (vs. 2005). Further reductions would be harder to come by, given that “a regulatory approach is likely to lead to less innovation … than would occur under a flexible incentive-based program” such as a carbon tax. Moreover, unlike a carbon tax, GHG regulations would generate zero revenue. Symbols matter, and EPA authority on public-health pollution is vital. But EPA regulation of CO2 may be less valuable than you presume, David. (That EPA uses a $26/ton social cost of carbon in its analyses doesn’t mean that its regulations would bring the same reductions as would result from a $26/ton price.)
8. The carbon lobby will want to axe clean-energy support programs in exchange. The same argument goes for clean-energy subsidies: the implicit cost of carbon in those subsidies is far higher — two to five times higher — than a $20/ton carbon price. Trading subsidies for a tax would, especially in early years, represent far less direct support for clean energy.	8. A robust carbon tax will do far more for clean energy than direct subsidies. See #4, above, for our argument that a strongly rising carbon tax will drive investment to clean energy. In the limited space available here, we add that phasing out clean-energy subsidies would build political momentum to get rid of subsidies for fossil fuels and other forms of dirty energy. [Addendum: We nailed this issue in our Jan. 2014 formal comments to the Senate Finance Committee. Details, and link to those comments, are here. — Komanoff]
9. The environmental benefits are uncertain. The great benefit of a carbon cap over a carbon tax is that a cap ensures a particular level of emissions reductions (yes, yes, depending on how carbon offsets are used). The thing with a tax is, no one can be sure in advance how much it will reduce emissions. The history of environmental policy is one of overestimating costs, so chances are good that the initial tax level will be set conservatively. That’s what typically happens with cap-and-trade systems — compliance costs are overestimated, there are too many emission permits issued, permit prices plunge, and there’s little financial incentive to reduce emissions. But a cap-and-trade program has a built-in protective measure: the cap. Emissions are either falling or they aren’t, and if they aren’t, the cap provides a statutory basis for further action. It’s not perfect, but it’s something.What happens if a tax isn’t reducing emissions enough? It means Congress has to raise it. How much does Congress like raising taxes? How much do American voters like it when Congress raises taxes? Now imagine raising a tax repeatedly, on an ad hoc basis. Unless taxes take on a very different political valence in U.S. politics, that looks like a nightmare. The carbon tax could end up limping along at hopelessly low levels for ages, like the U.S. gasoline tax. Now, theoretically, the tax could be programmed to rise a certain percentage each year, like the one Brookings modeled. Or there could be a “look back” provision that periodically assesses the tax’s performance and adjusts it accordingly. But …	9. Certainty in emission reductions is overrated. That “no one can be sure in advance how much [a carbon tax] will reduce emissions” may well be the number one canard about carbon taxes. After all, what’s the use of knowing now how fast emissions will shrink, when we know that they have to shrink as fast as possible, which means faster than any carbon tax and/or other possible measures can deliver? The climate calamity is many orders of magnitude more dire and global than the acid rain problem. So can we please stop grafting the acid rain model onto climate? The declining sulfur cap in the 1990 Clean Air Act Amendments was intelligently tailored to estimates by limnologists of Northeast U.S. lakes’ remaining capacity to withstand acid rain emissions. But we’ve already overshot the 350 ppm target for climate sustainability; atmospheric CO2 is at 390 ppm and rising. There’s no safe level for CO2 emissions now or in the foreseeable future. Any target ― 17% less by 2020, 40% less by 2030, 80% less by 2050 ― is no more than a talisman. What happens, you ask, if the carbon tax isn’t reducing emissions enough? In some proposals, the tax would rise automatically, in others Congress would have to raise it. But either way it’s crucial to structure revenue return so that a majority of Americans come out ahead and will back increases in the carbon tax rate. (See Points #2 and #3, above.) Built-in, recurring increases will not only obviate the need to return to Congress constantly; they will instill transformative price signals in America’s energy systems, infrastructure, land use and culture that, collectively, will move us from fossil fuels to clean energy.
10. All political incentives push toward a poorly designed tax. It’s true that a carbon tax can be well-designed. For economists, that means using the revenue to reduce distortionary taxes. For clean-energy hawks, it means using the revenue to spark cleantech growth. For both, it means provisions that automatically boost the tax if emission reductions are not on track. (And there are other considerations too: how far upstream to levy the tax, how to deal with cross-border “leakage,” etc. This post could have been even longer, trust me.) The worst possible thing to do from both perspectives would be to set the tax at a static, low level and use a bunch of the revenue to carve out special deals for various industries. Then you’d get the economic hit from the tax and malign distributional issues.And yet … that is exactly where all the incentives point. There are many financial interests involved. Every one of them will be leaning on legislators to a) keep the tax as low as possible and b) secure them favorable treatment. This same rent-seeking spectacle took place around the climate bill. But another benefit of a cap-and-trade system is that no matter how distributional issues are settled (i.e., no matter how the permits are allocated), the cap remains the same and the environmental benefits are guaranteed. When it comes to a tax, however, loopholes and kickbacks reduce environmental benefits. Securing those benefits will be a constant, running battle. Environmentalists will be “those people who are constantly fighting to raise taxes.” That is unlikely to endear them to the public or generate support for other green initiatives. To sum up A well-designed carbon tax would be a fantastic thing. In my dream world, it would start at $50/ton and rise 5 percent a year. Twenty-five percent of the revenue would go to rebates for low-income taxpayers; 25 percent would go to reducing payroll taxes; the rest would go to public investments in clean energy RD&D and infrastructure. Whee! Even a tax considerably smaller than that, done right, could enable Obama to meet the emission reduction goals he pledged in Copenhagen. It might also inspire other countries to follow suit, or at least convince other countries that the U.S. is finally in the climate game. It would be a big deal. But a carbon tax is not magic. If climate hawks go into negotiations accepting that carbon pricing must be revenue neutral, that market incentives can solve climate change on their own, that government spending and regulatory actions merely inhibit proper market functioning, that the overall tax burden needs to be reduced, that deficit reduction is an overriding short-term priority … well, even if they come out of that negotiation with a carbon tax (which, as noted earlier, they won’t), it will be low, regressive, and ineffective. And they will have worked themselves into an ideological corner that will be difficult to escape. Worse yet, what if they make all those concessions and come out of it with nothing? The concessions will remain on the record forever, serving as the baseline to future negotiations. (That’s pretty much how the cap-and-trade battle worked out.) What’s needed on climate change, ultimately, is a wholesale, society-wide commitment to remaking energy, agricultural, and land-use systems along low-carbon lines. “Market mechanisms” like a carbon tax are a crucial part of that effort, especially as a source of funding, but they are in no way a substitute for that effort. We won’t get out of this that easily.	10. & Summation. Climate advocates’ job is to maximize political incentives for a robust carbon tax. All political incentives push toward climate inaction, period, and not just toward a poorly designed carbon tax. We can either give up . . . or we can keep working to break the impasse — primarily by building support from below, but also by choosing policy strategically. Since giving up isn’t an option, let’s start by reviewing what we’ve established about carbon taxing thus far: Carbon taxing has potential appeal on both sides of the political aisle (Point #1). “Revenue recycle” can build the constituency to enable the tax to rise. (#2 & #3) A high enough carbon tax will spur investment in clean energy, without subsidies. (#4 & #8) Tax regressivity is anathema, but curable. (#5) Eventual revenue decline isn’t a problem. (#6) EPA regulation of climate pollution isn’t in the same league as a serious carbon tax (#7) Emission-reduction certainty is overrated. (#9) To these assertions, let’s add this: The ballpark magnitude of revenue from a carbon tax is knowable in advance — giving a carbon tax salience in fiscal and tax reform. Unlike revenue from selling tradeable emission permits, which would be subject to the extreme price volatility that has characterized every carbon cap-and-trade system, the revenue from a carbon tax is sufficiently predictable to serve as a building block for tax overhaul. (Lags in responding to the price signal make this particularly true in the tax’s initial years, which happen to be the most politically germane.) Earlier, under Point #4, we referenced the carbon tax proposed by Rep. John Larson, which our modeling suggests would reduce U.S. emissions by 30% within a decade while stimulating employment and economic activity. The Larson bill also includes border tax adjustments to protect domestic energy-intensive industries and to nudge U.S. trading partners to enact their own carbon taxes, leading to a global carbon price. The Larson bill could be said to be patterned on the British Columbia carbon tax, which went into effect in 2008 at a rate of roughly $9 per ton of CO2 and was incremented annually to its current (2012) level of approximately $27. On every criterion — climate, macro-economic, distributional, political — the tax appears thus far to be a resounding success. Consider: BC’s carbon tax funds reductions in payroll, income, sales and corporate income taxes. BC has experienced strong economic growth and reductions in CO2 emissions, both absolute and relative to the rest of Canada. The BC political party that instituted the tax was retained in power in the next election. To be sure, there are big differences between British Columbia and the 50 U.S. states, including hydro-rich BC’s effective exemption of electricity from its tax. Nevertheless, these lessons are ours for the taking: first, it may be better to square up to the political pain of raising the carbon price than to hide it; and second, a tax with transparent and ironclad revenue recycling can build the political appetite for raising the tax level to the point where deep carbon cuts actually take place. In sum: a carbon tax isn’t the whole answer, yet a transparent, briskly rising carbon tax will spur the development of many answers large and small that add up to a cultural transformation. Taxing carbon aligns everyone on the side of reducing emissions as fast and as far as possible. In reach, transparency and affordability, no other policy tool comes close.

As brutal drought and punishing heat waves remind voters how deeply climate affects our lives, Washington State Democrat Jim McDermott today stepped up to the climate plate. Rep. McDermott, a 12-term House member who sits on the powerful tax-writing Ways & Means Committee, introduced the “Managed Carbon Price Act of 2012.” His carbon tax bill would substantially reduce emissions of carbon dioxide and other greenhouse gases by predictably raising their costs relative to energy efficiency, renewables and innovation.

The Carbon Tax Center estimates that by imposing a steadily rising “upstream” tax on polluters emitting the six principal greenhouse gases driving global warming, McDermott’s bill would reduce U.S. greenhouse gas emissions by a whopping 30% within a decade. His elegant bill, just 21 pages of legislative text, would start modestly with a price of $12.50 per ton of CO2, but would then ramp up the cost of carbon pollution to $125 per ton of CO2 over a decade. (The actual price would fall within a tight, predictable price range. Non-CO2 greenhouse gases would be taxed at their CO2-equivalent rates.) CTC estimates that within a decade, McDermott’s price path would reduce greenhouse gas emissions almost twice as much as the most optimistic projections for prospective EPA regulations or the targets in the Waxman-Markey bill passed by the House in 2009 but dropped in the Senate the following year.

Consistent with World Trade Organization rules, McDermott’s bill would exempt U.S. exports of energy-intensive goods while imposing an equivalent pollution tax on imports. The bill would thus protect U.S. domestic energy-intensive trade-exposed industries from unfair competition while offering an irresistible (and growing) “carrot” for our trading partners to enact their own carbon taxes in order to capture a rising stream of carbon tax revenue that would otherwise flow to the U.S. Treasury.

The McDermott bill also obviates the need for emissions trading by requiring polluters to purchase permits as needed. It returns 75% of revenue directly to households through a monthly “dividend” for each adult (with a half share for each dependent). This provision eliminates regressive income effects on low- and middle-income households while preserving a clear price signal across the entire economy so that everyone is rewarded for efficiency, innovation and investment in renewable energy. The remaining 25% of the bill’s revenue would be dedicated to deficit reduction, a feature that is sure to be salient as Congress confronts the looming “fiscal cliff” next January.

CTC estimates that the revenue stream available for deficit reduction in the tenth year after enactment would be roughly $100 billion, even accounting for the 30% reduction in emissions.

Photo: Flickr — WSDOT

Co-authored with Sieren Ernst, Environmental Markets Advisory.

“The Case For A Carbon Tax” (Island Press, 2011, 233 pp) brings to mind Hans Christian Andersen’s “ugly duckling” story. The word “tax” screams “cost” to most people, and so the beauty of a carbon pollution tax isn’t apparent on first glance. Prof. Hsu reveals the beauty as he shows why a gradually-rising carbon tax is the least costly and most effective policy for curbing the pollution driving global warming, and how enacting such a tax can usher in a new era of clean energy and efficiency.

Trained in engineering, law and economics, Shi-Ling Hsu, a law professor who is moving from the University of British Columbia to Florida State University, deftly marshals a multi-disciplinary “case” for a carbon tax. He opens by describing and comparing the four main climate policy tools: subsidies, regulations, cap-and-trade, and carbon taxes. Then he briskly articulates ten arguments for a carbon tax, emphasizing economic efficiency and the advantages of basing a coordinated international system on a simple, transparent tax.

Hsu is especially strong in rebuttal, answering the arguments against carbon taxes, including the oft-repeated assertion that a carbon tax is politically impossible. He dissects psychological “hang-ups” that have kept the public and elected officials from embracing carbon taxes. Hsu points to British Columbia’s enactment and implementation of North America’s first carbon pollution tax, arguing that it is broadly supported because its revenue is used to reduce taxes for individuals and businesses. As Hsu and Yoram Bauman wrote this week in their New York Times op-ed, “The Most Sensible Tax of All“:

On Sunday, the best climate policy in the world got even better: British Columbia’s carbon tax — a tax on the carbon content of all fossil fuels burned in the province — increased from $25 to $30 per metric ton of carbon dioxide, making it more expensive to pollute. This was good news not only for the environment but for nearly everyone who pays taxes in British Columbia, because the carbon tax is used to reduce taxes for individuals and businesses. Thanks to this tax swap, British Columbia has lowered its corporate income tax rate to 10 percent from 12 percent, a rate that is among the lowest in the Group of 8 wealthy nations. Personal income taxes for people earning less than $119,000 per year are now the lowest in Canada, and there are targeted rebates for low-income and rural households.

Hsu crisply articulates the theory of Pigouvian taxes — the idea of taxing pollution rather than productive activity. But he sidesteps the thorny question of how high to set a carbon tax and how rapidly to increase it. And he does not mention the potential efficiency advantages of using carbon tax revenues to reduce other taxes such as taxes on work and thereby use climate policy to improve overall economic well-being. (Economists call that a “double dividend.”) He notes that while British Columbia’s carbon tax is revenue-neutral, the regressive effects of carbon taxes can be addressed by a wide variety of other mechanisms, leaving substantial revenue for cash-strapped governments, as recent reports and a new book by the International Monetary Fund have stressed.

Hsu delves into the limitations of EPA regulations, which he shows cannot create the broad incentives for innovation and planning needed to drive carbon eminssions way down:

A [carbon] tax, by imposing a cost on every single ton of pollutant, constantly engages the polluter with the task of reducing her pollution tax bill. By contrast, a command and control scheme that mandates a one shot, irrevocable installation of pollution control equipment allows for the polluter to stop thinking about pollution reduction. Why, if compliance is achieved, should the polluter look for other ways to reduce?

There are further problems, too: EPA can too easily be persuaded or intimidated by industry into granting exemptions and relaxing standards. Hsu also glosses over the enormous effort that would be required to write and enforce permits for each of the thousands of point sources of CO2. One has to wonder where and how the already-stretched EPA (and state environmental agencies) would find funding for such a massive undertaking.

Hsu neatly unveils the hidden high cost of taxpayer-funded subsidies of renewables and supposed low-carbon fuels. Subsidies, along with regulations and cap-and-trade with offsets, are attractive to the public and Congress despite serious limitations on their effectiveness, because their costs are largely hidden. Not only is Congress notoriously ineffective at picking technology winners, but subsidies create “lock-in” to incumbent technologies and businesses, foreclosing opportunities to spur innovation. In contrast, as Hsu shows, a carbon pollution tax’s laser focus on CO2 pollution creates incentives for all low-carbon alternatives, leaving specific technology decisions to engineers rather than politicians.

Cap-and-trade with offsets seems to be Hsu’s choice for second-best policy; it allows flexibility and could result in a “price on carbon” pollution, albeit one that is indirect and subject to price volatility. Happily, Hsu debunks the notion of “emissions certainty” that was used to sell cap-and-trade, by pointing out that for a “stock” pollutant such as CO2 that persists in the atmosphere for a century, the objective must be cumulative rather than annual reductions. Even year-to-year “emissions certainty” is vitiated in the European Emissions Trading System by provisions allowing borrowing and banking of allowances as well as by voluminous offsets. Carbon prices there have remained so low that recent analyses have concluded that industrial facilities will have little incentive to reduce their emissions through at least 2020.

Hsu points out the hidden costs that cap-and-trade would impose on consumers, profiting the financial sector and purveyors of offsets. His most egregious example: Chinese refrigerant manufacturers who garnered far more revenue from offsets awarded for destroying their greenhouse gas byproducts than from the sale of their underlying products. As documented by UN and GAO reports, the carbon market paid about 100 times more for the installation of emissions reducing equipment (an HCFC 23 incinerator) than the price of the equipment. The Chinese refrigerant manufacturer and the investors in the offset project reaped those windfalls, contradicting claims about the efficiency of cap-and-trade.

As Hsu illustrates, evaluating and verifying offset projects is staggeringly difficult. Applications for hundreds of different project types are submitted to a single U.N. panel with little capacity to evaluate “additionality” — to determine whether projects would have occurred in the absence of offset funding. Stanford University law professor and offset expert Michael Wara estimates that 30-50% of offset projects in the U.N. systems should not have been awarded credit, a fraction so large as to overwhelm any claim of “emissions certainty” under a cap with offsets.

Hsu concludes that linking cap-and-trade internationally would offer constant opportunities for mischief and arbitrage. In contrast, under a tax every country would have an incentive to scrupulously monitor emissions in order to collect the revenue. Moreover, the transparency of a carbon tax offers potential for international linkage via World Trade Organization sanctioned Border Tax Adjustments. WTO rules were built around a consumption tax — the European Union’s Value Added Tax; Hsu suggests that a carbon tax should similarly be supportable under WTO rules. But he seems to understate the capacity of Border Tax Adjustments to protect domestic energy-intensive industry while offering a growing monetary incentive to trading partners to enact their own carbon taxes.

Finally, Hsu’s discussion of the psychology of carbon taxes adds a dimension that we haven’t seen elsewhere. As behavioral economists like Daniel Kahneman have shown, we humans tend to underestimate the benefits of avoiding future harms while overestimating the cost to avoid them. And when a harm isn’t clearly identified with a specific person or persons, we have difficulty feeling concern. One child trapped in a well evokes national interest and empathy, but because we can’t see or name the millions who might drown or starve because of climate instability, we refuse to bear the near-term price of avoiding catastrophe. And we are easily misled into thinking that policies whose price is hidden, such as subsidies, regulations or cap-and-trade with offsets, are preferable to a carbon tax. Hsu proposes that polls disclose the cost of all policy alternatives in order to fairly gauge public opinion.

Hsu’s book offers a readable and authoritative, comprehensive and concise “case” for the most broadly effective, least-bureaucratic and least-costly approach to the climate crisis: a gradually-rising carbon pollution tax. We highly recommend “The Case For A Carbon Tax” to both general audiences and to those steeped in climate policy who may be seeking further insight on the nuances.

Photo: Flickr — jbparker

On Tuesday, a unanimous three-judge panel of the DC Circuit Court of Appeals declined to block the U.S. Environmental Protection Agency’s process of regulating greenhouse gases under the Clean Air Act. The 81-page decision upheld EPA’s 2009 endangerment finding that “anthropogenically induced climate change threatens both public health and public welfare,” and concluded that having made that finding, EPA is “unequivocally” compelled by the Supreme Court’s decision in Massachusetts v. EPA (2007) to regulate greenhouse gases as pollutants under the Clean Air Act.

The panel also held that the parties challenging EPA’s action were not harmed by (and thus had no legal “standing” to challenge) the Agency’s decision, via the “tailoring rule,” to regulate only the largest sources of greenhouse gases. The court thus swept away the last remaining obstacle to broad regulation of the largest category of greenhouse gas polluters, existing stationary sources.

The ruling came the day after a report in Bloomberg News that owners are selling off, at deep discounts, coal-fired power plants that have been under EPA mandates to install emission controls on “conventional” (non-climate) pollutants such as sulfur dioxide and mercury. The fire sale occurs as cheap natural gas has been displacing coal as the main fuel for electricity generation in many parts of the U.S. Calculations by the Carbon Tax Center’s Charles Komanoff show a 14% drop in coal-powered electricity last year vs. the 2007 peak, with nearly half of the decline filled by gas (with the rest from increased wind and hydro-electricity). Behind the coal-to-gas trend, which is accelerating thus far in 2012, are 10-year low natural gas prices stemming from the controversial fracking boom.

The spectacle noted in the Bloomberg article of billions of dollars left “stranded” in uncompetitive coal-fired power plants points to a serious limitation in using the regulatory process to constrain emissions of greenhouse gases. If regulation, rather than carbon pollution taxes, is to drive the 80% or greater reduction in emissions that scientists say is needed in the next several decades, then emissions standards for coal plants will need to be tightened again and again, rendering many of those investments obsolete long before the end of their assumed economic life.

Indeed, “stranded capital” looms as a huge problem in any inflexible regulatory system to cut down on sources of greenhouse gases that have long lives. Adding costly capital equipment to those dinosaurs is likely to waste utility ratepayers’ money while driving up the financial stakes of owners who have invested in retrofits that may never get to pay for themselves. Because stabilizing the climate will be a long-term and very capital-intensive process, the cost of inefficiencies built into regulations will be enormous and cumulative.

In contrast to this regulatory lock-in, a predictable, gradually-increasing carbon pollution tax would reward long-term investment and innovation in the lowest-carbon technologies while reducing demand. Even too much investment in gas-fired power plants might be ill-advised under a briskly-rising carbon price.

As things now stand, the renewables industries must make regular pilgrimages to Congress to continue their life-support “production tax credits.” A long-term, rising carbon tax would make long-term investments in renewables safer while spurring innovation (and obviating the need for those pilgrimages). And a rising carbon tax will also signal when to efficiently retire old, coal fired power plants — dirtiest first.

Economist and former Undersecretary of Commerce Robert Shapiro was asked about climate policy at a recent National Journal panel. Shapiro said that as EPA moves ahead with greenhouse gas regulations in the next year, he hopes complaints from industry will spur Congress to replace those cumbersome regulations with a more effective, broad-based carbon pollution tax.

That prospect gives a new dimension to yesterday’s DC Circuit decision to uphold EPA regulations. The decision is indeed a victory — not because EPA regulation of existing stationary sources can be effective long-term climate policy, but because the threat of their cost could help prod Congress to take the most efficient (and least bureaucratic) step to reduce carbon emissions: enact a substantial, gradually-rising carbon pollution tax.

Photo: Flickr — arbyreed

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Shortly after posting this commentary on June 27, I received e-mail comments from three well-known analysts of climate policy ― two resource and environmental economists and an attorney who has analyzed ways to regulate greenhouse gases under the Clean Air Act. We share some of that exchange below. ― James Handley, June 30.

Commenter 1: James – a nice piece, lots of important issues here. But I think you are mis-stating the stranded costs problem, and overstating the merits of a carbon tax.

You have compared myopic regulation – this year’s regulation can be treated as permanent until, oops, we have to change it again – with a long-term, gradually and predictably rising carbon tax. One could equally well have long-term, gradually and predictably tightening regulations, or a myopic carbon tax (it will never go above $21/ton until, oops, etc.).

James Handley: True; there are no guarantees that a carbon tax would keep rising. But a revenue stream (especially if committed to an important purpose in advance) seems to offer additional incentives to stay on course.

C-1: Stranded costs result from making long-term investments under the myopic approach to taxes OR regulation, not from regulation per se. A “read my lips – no carbon tax increase above today’s level” tax policy could induce large investments in incremental technologies, which would then be stranded when taxes were raised. (Or would lead to overwhelming political pressure not to raise the tax, in practice.)

JH: I agree.

C-1: A long-term schedule of predictably tightening future regulations would have the same salutary effect as a long-term schedule of predictably rising carbon taxes (and would be almost equally difficult to achieve, in realistic political terms).

JH : Yes, Joe Aldy [former Obama White House climate economist, now at Harvard Kennedy School] suggests a carbon intensity standard declining on a pre-announced schedule.

Richardson & Burtraw (Resources for the Future) have expressed doubt about whether the Clean Air Act offers such flexibility or allows more flexible options like utility-wide carbon intensity standards. (See Greenhouse Gas Regulation under the Clean Air Act: Structure, Effects, and Implications of a Knowable Pathway.) EPA said in a Notice of Proposed Rulemaking that it is not mandating fuel switching and does not contemplate it as a compliance option — which I think also means they’re contemplating rules that can be met without switching to renewables. So the “knowable pathway” probably comes down to plant-specific technology standards. And those are hard to ratchet down, especially predictably and smoothly. In practice, EPA tends to look at the technology available and set standards that can be met.

And technology mandates for coal power plants, especially existing ones, can only go so far. Retrofitted plants would be a lot more energy intensive. The thermodynamic minimum energy penalty (independent of process) for capturing and sequestering CO2 is roughly 1/3 of the energy output of a power plant. (I’ve read of research to use the vast waste heat from power plants to do the work of capturing, but nobody’s done it.)

So I don’t expect EPA technology mandates to offer anything like the flexibility and predictability of a tax. Nor do they offer revenue, create broad incentives to reduce energy demand or offer monetary incentives for innovation.

C-1: I think a carbon tax along the lines you propose would be great. But so would a well-planned, progressively tightening system of command-and-control regulation. The real advantages of a carbon tax, in terms of administrative simplicity, are important for many purposes, but it isn’t right for every situation and it shouldn’t be oversold.

JH: Having worked to prosecute polluters for 14 years at EPA, I have doubts about the Agency’s ability to effectively enforce declining technology-based emissions standards. I feel more confident that IRS can collect a carbon pollution tax.

Commenter 2: Excellent dialogue that inspires many thoughts, and two comments.

Despite many virtues, I am not convinced a carbon tax is administratively simpler. It could/should be, but won’t necessarily be simpler. Various exemptions and especially border tax adjustments or rebating revenues to energy intensive trade exposed industries could get complicated.

JH: Compared to the voluminous EPA Clean Air Act regs?

We like the Border Tax Adjustment (BTA) in Rep Stark’s bill, the Save Our Climate Act. It’s short, not complicated. And BTA’s strike me as vastly superior to rebates of carbon taxes to the Energy Intensive Trade-Exposed Industries. Rebates would enshrine dirty, inefficient practices and sacrifice revenue; BTA’s would protect domestic industry while offering a rising bounty for trading partners to enact their own carbon taxes.

I’m surprised by all the worry about World Trade Organization rules. WTO’s trade-harmonization provisions were written to accommodate a consumption tax — the EU’s VAT. Why wouldn’t a simple, non-discriminatory carbon tax be similarly consistent with WTO? I wonder if the EU is blundering by asserting that its aviation tax is an environmental measure. That’s a harder standard in WTO. Taxing authority is clear. (As Chief Justice Roberts just said about the constitutionality of the health care mandate.)

C-2: I think a BTA will become more complicated when offended parties claim things like their renewable support programs or smooth roadway surfaces or color of roofing shingles contribute to mitigation efforts, and hence must be considered as part of a border tax adjustment calculation that is tied specifically to a carbon tax.

JH: Yikes. Metcalf & Weisbach proposed setting BTA’s using a default carbon intensity for five energy intensive commodities (steel, aluminum, chemicals, paper, cement) derived from average U.S. production practices. (See [Design of a Carbon Tax, Harvard Env’tl L. Rev, 2009, p. 540, et seq.) Carbon content for each imported (or exported) good would be calculated by summing the “carbon content” of those five.  An importer (or exporter) asserting that their goods’ carbon content is lower (or their competitors’ is higher) would have the burden of proof. (Is that when they’d point out their white roof, smooth road, etc?)

C-2: My other comment is that although EPA cannot raise revenue for the national government, I understand it could raise revenues for state governments. That is, a plausible scenario is that states administer implementation plans under the Clean Air Act that raise revenues through taxes or auctioned allowances. There are a lot of possible obstacles to that happening, especially political, but no single legal obstacle…so I understand. A real conservative might like that state’s rights aspect of CAA regulation.

 JH: That’s interesting. States enacting carbon taxes as their State Implementation Plans to meet their Clean Air Act requirements. Does that assume EPA chooses to set a National Ambient Air Quality Standard for CO2? In various Federal Register notices they’ve shown no stomach for NAAQs, despite Bill Snape’s (Center for Biological Diversity) efforts.

And 50 separate State Implementation Plans? What about the law of one price? All kinds of arbitrage and distortions there? And wouldn’t the international trade harmonization problems come up then, too?

C-2: 50 SIPs, not. For instance, the northeast states will try to submit a coordinated SIP around a strengthened RGGI [Regional Greenhouse Gas Initiative], with one price in that region. Given the flexibility of it, Pennsylvania might opt in, compared to less flexible options.

In sum, I would walk to Chicago to get a carbon tax in place, but I am increasingly dubious of the Faustian bargain some have suggested of sacrificing the Clean Air Act in exchange. I really agree with [C-1] about the virtues of the CAA. Let the CAA go slack or lag behind if the tax is doing the work. But I would be glad it is there as a backup. Nonetheless, I will walk with you to Chicago.

JH: I imagine we’d have a good time. Maybe Jim Hansen and Bill McKibben would join us.

C-2: I’ll carry a copy of the CAA as ballast in my backpack.

JH: It’s ~ 300 pages [the Clean Air Act statute]. But I meant the implementing regulations (in the Code of Federal Regulations) ~ 10x. I knew EPA lawyers who enforced just one part of the CAA regs (e.g. mobile source rules) for decades.

I much appreciate this discussion, your solidarity “walk to Chicago”… CAA as a backup to a carbon tax might be point where some bargaining could happen. It might also help address the concern about a carbon tax not rising or not rising fast enough.

Commenter 3: I agree 99% with [C-2]. However, the 1% is that it’s not so easy to let the CAA “go slack”. It grants a lot of discretion to EPA about how to act but not over whether to do so. Mass v. EPA and the recent DC circuit ruling illustrate that EPA can be compelled to start the regulatory process, and that it is hard to stop it w/o legislation. I understand that summary elides over a political shift in the middle. I also agree strongly with the result in both cases (though I think the tailoring rule should go down if a plaintiff with standing can be found).

The CAA isn’t written as a menu option. It’s a powerful statute that’s hard to stop. Usually that’s a good thing. But not always, especially when you have a better tool in place. The best solution would be a carbon price with a CAA tweaked to serve specifically as a backstop tool. But that’s a big political ask.

JH: I take your word on the difficulty of letting CAA go slack… yes, a fall-back would be terrific. Would industry prefer a carbon tax (because of flexibility and lower cost) even with EPA as a fall-back?