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Answering Krugman: Renewables Alone Won’t Stop Climate Disaster

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“Climate change just keeps getting scarier,” Paul Krugman rightly pointed out in his biweekly New York Times column yesterday. But fear not, he instructs. A “renewable-energy revolution” is brewing in America — one that won’t require threading a carbon tax through the climate-denying GOP Congressional majority.

This “remarkable technological progress in renewable energy,” which Krugman partly credits to Obama administration stimulus and tax breaks that helped wind and solar scale up and drive down costs, has “put the cost of renewable energy into a range where it’s competitive with fossil fuels.” The U.S. will soon be “leading the world” down the low-carbon path, promises Krugman, so long as the presidency, and Obama’s Clean Power Plan, stay out of Republican clutches.

Krugman-RenewablesLeaving aside the fact that the global renewables revolution already has a leader (hint: it’s Europe’s largest economy), there are many reasons to question Krugman’s implicit suggestion that the U.S. and the world can banish carbon fuels fast enough to avert catastrophic climate change without a serious carbon tax in the policy mix. Here are a few:

Demand matters (not just supply) — A renewables-only revolution leaves intact the demand side of the carbon equation. Yet human appetites for energy have proven so boundless that, absent robust prices on carbon emissions, energy demand will invariably outrun the output of even optimized solar and wind power systems — at least during the 50-year time horizon in which our climate fate will be decided.

There’s a new climate villain: cheap oil — With gasoline again going for two bucks a gallon, driving is up and fuel economy is down. Even the Obama administration’s vaunted CAFE standards can’t hold back such powerful price signals. Last year’s bump in U.S. cars’ and trucks’ emissions — the CO2 equivalent of nine good-size coal-fired power plants — will be just the beginning, unless we raise fuel taxes.

Scaling up wind and solar isn’t child’s play — To underscore the first point, take a look at the 100%-renewables plan drawn up for New York State (where both Krugman and I happen to live) by a crack team of physicists and engineers from Stanford. Their zero-carbon and zero-nuclear plan requires 17,000 giant offshore and land-based wind turbines to power just half of the state’s transportation, heating, industry and electricity. (The other half of the energy would come from masses of rooftop solar cells, solar PV and thermal plants, plus existing hydro dams.) Cutting that very tall order down to manageable size cries out for a carbon tax.

Tax breaks cost money — Fiscal-scolding isn’t our thing, but someone must pay for Krugman’s touted solar investment tax credits and wind production tax credits — not to mention ethanol mandates. Moreover, energy subsidies are notoriously hard to dislodge (notwithstanding Sen. Ted Cruz’s victory in yesterday’s Iowa Republican caucuses despite his attacks on ethanol subsidies). And it isn’t necessarily the wealthy who foot the bill, as we showed two years ago in our paper comparing carbon taxes with clean-energy subsidies.

We get that Krugman, an implacable foe of Republican know-nothingism since at least the 2000 elections, thinks it’s essential to keep a Democrat in the White House this November. We also appreciate his “tipping point” argument that “Once renewable energy becomes an obvious success and, yes, a powerful interest group, anti-environmentalism will start to lose its political grip.” And we don’t necessarily insist that every climate commentary begin and end with carbon taxes.

But Krugman, a Nobel laureate in economics, surely knows that in the race to eliminate fossil fuels, raising their prices will go much further than making renewables cheap. We hope his columns will again make this clear, soon.

Meet the New Climate Villain: Cheap Oil

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Paris climate negotiators wrangling over global temperature goals might want to spend a moment pondering cheap gasoline.

Fact: after years of steady gains, average gas mileage of new vehicle purchases in the U.S. is down almost a mile per gallon this year, according to data from the University of Michigan’s Transportation Research Institute.

Fact: Through September, total miles driven in the U.S. this year are up 3.5 percent ― the largest increase in decades.

One thing is driving both trends: cheap gasoline. The average price of gas sold in the U.S. over the past ten months is 25 percent below last year’s price — the steepest drop in at least 70 years. Americans are responding by driving more and dumping sedans for SUV’s and pickups.

graphic7Gasoline consumption is on track to rise nearly 3 percent this year. The additional carbon dioxide will be the equivalent of a full year’s emissions from nine coal-fired power plants. (My yardstick is 600 megawatts per plant, operating at 70% capacity factor. See note at end of post for link to calculations.) And that doesn’t count the substantial “upstream” emissions from refining crude oil into gasoline.

Or, if you prefer, the likely 2015 increase in U.S. CO2 emissions caused by cheap gasoline, an estimated 30-35 million metric tons, will equal the entire annual emissions from burning all fossil fuels for all purposes from Ecuador . . . or Denmark . . . or Ireland . . . or Switzerland (take your pick). [Figures are here; multiply by 44/12 to convert from C to CO2.]

Can we be sure this year’s increase in gasoline use is entirely due to the drop in price? Not completely. But the inference is strong.

First, gasoline usage is at least mildly price-sensitive. Based on gasoline’s long-run price-elasticity, a 25 percent drop in price would touch off a roughly 10 percent increase in usage. The entire jump in demand wouldn’t be seen overnight, of course; it would take a decade or so for the lower price to work its way through car buyers’ purchase decisions (as well as manufacturers’ design choices). The 3 percent uptick this year is in line with what one would expect in the initial year.

Second, U.S. gasoline consumption stayed within a fairly narrow band from 2008 to 2014. Prices at the pump held steady as well, except during the worst of the great recession. What’s different this year is the plunge in price.

U.S. miles driven are on course to rise 3.5% in 2015.

U.S. miles driven are on course to rise 3.5% in 2015.

This year’s jump in CO2 emissions is bad enough. What’s really worrisome is that cheap oil — hence, cheap gasoline — is going to be with us for awhile. So say the experts who prepare the government’s Annual Energy Outlook forecast. I recently compared the 2025 forecast gasoline price between the 2012 AEO, which preceded the price collapse, and the 2015 AEO, which reflects it. Correcting for inflation, the government is projecting a 29 percent lower price of gas in 2025 than it projected three years ago.

When you run the lower price forecast through the price-elasticity for gasoline, you get this startling projection: in 2025, U.S. motorists will buy — and burn — nearly 13 percent more gasoline than would have been expected under the earlier (higher) price forecast. The associated increase in U.S. CO2 emissions in 2025 because gas will be cheaper is going to be huge: it equates to the annual output of 36 coal-fired power plants.

But let’s not stop there. Cheaper crude oil is bringing not just cheaper gas but cheaper diesel and cheaper jet fuel. I’ve run the reduced 2025 AEO price forecasts for all petroleum products through their respective price-elasticities, and the result is truly scary: Compared to projected 2025 emissions with the pre-plunge price trajectory, lower petroleum prices will result in 450 million metric tons of additional U.S. CO2 emissions in that year.

The increase will equal 8-9 percent of today’s U.S. CO2 emissions from all fossil-fuel burning. It will undo nearly all of the vaunted reductions in U.S. emissions since 2005. It will be the emissions equivalent of 100 additional coal-fired power plants. And that’s just for the U.S.

The antidote, of course, is a carbon tax — either a straight-up carbon tax or a hybrid one that surcharges petroleum products. A surcharge would reflect non-climate harms from oil consumption like traffic congestion, also place a charge on oil revenues’ corruption of governance in the U.S. and the Middle East.

Former U.S. Treasury Secretary Larry Summers wrote last January that cheap oil created a political opportunity for a carbon tax. We followed that here with First Tax Oil, Then Carbon. But to our knowledge no one has quantified how dire the need is — until now.

Cheap oil will make a mockery of just about every scenario to move the U.S. and other countries decisively off carbon fuels. Except scenarios based on carbon taxes.

Note: Calculations of increased oil consumption, resulting increase in CO2 emissions, and coal-plant equivalents, may be found in CTC’s carbon-tax spreadsheet model (Excel file).

What an Energy-Efficiency Hero Gets Wrong about Carbon Taxes

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It’s rare that critiques of carbon taxing are as quantitative as the post last month by David Goldstein on the Natural Resource Defense Council’s Searchlight blog.

Goldstein qualifies as a genuine energy-efficiency hero, in my book. He has spearheaded NRDC’s pioneering analyses of appliance engineering, manufacture and marketing since the 1970s and guided the council’s strategic interventions in utility governance and energy standard-setting in California and at the federal level. This in-the-trenches work has slashed power consumption and carbon emissions from refrigerators, air conditioners, light bulbs and building envelopes in all 50 states. Goldstein’s 2002 MacArthur Foundation “genius award” was richly deserved. (The Washington DC-based American Council for an Energy-Efficient Economy, ACEEE, merits a shout-out as well.)

Befitting his analytical bent, Goldstein’s critique sticks to the high road. No self-fulfilling taunts about carbon taxers’ naivete or the tax’s political infeasibility. His post does drag out a straw man, though, insisting up-front that “carbon emissions fees alone cannot solve the climate problem” — a position held by few carbon tax advocates. (We ourselves “recommend carbon taxes in addition to energy–efficiency standards.”) His criticism sharpens at the end: “In summary, carbon pollution fees, as a stand-alone policy, are incapable of doing much to solve the climate problem.”

Goldstein has certainly thrown down the gauntlet. He has four main arguments, which I’ll treat in order. Some math is involved, but it’s central to the issue.

Argument #1: Carbon Taxes Must Raise U.S. Energy Prices 44-Fold to Meet Our Carbon Targets

Let’s start with an assertion by Goldstein that is startling but accurate — mathematically:

If we wanted energy demand to drop by 85 percent [the minimum required for the U.S. to meet IPCC temperature-rise targets] due to price, the math behind elasticities shows that we would require a price increase of 44 times. This is an impossibility condition. (emphasis added)

Price-elasticity is how economists denote the extent to which a rise in price causes demand or usage of a good or service to diminish. Assuming, as Goldstein does for argument’s sake (and as we do in modeling carbon taxes), that the price-elasticities of the various forms in which energy is used in the U.S. have an average value of minus 0.5, then a doubling of energy prices, whether effected through a carbon tax or market fluctuations, will cause energy use over time to shrink by 29 percent. (See sidebar for calculations.) With two doublings in price, the shrinkage would be 50 percent.

Elasticity math. You can do it.

Elasticity math. You can do it.

Note that the second doubling in price produces less of a decrease in usage than the first, reflecting the famed Law of Diminishing Returns. Indeed, three doublings, increasing the price 8-fold, would only bring about an overall 65 percent drop in usage. To hit the 85 percent reduction target requires a 44-fold energy-price rise. Goldstein’s math is spot-on.

But not the use to which it is put. While an 85 percent reduction in energy use would indeed cure the United States’ carbon obligations (not to mention protect and conserve air, water and land), it far exceeds what’s required, thanks to the ongoing and parallel reduction in the carbon intensity of energy supply. This decarbonization of supply is prominent in energy and climate discourse, and has been evident in the electricity sector over the past decade. Measured as pounds of CO2 emitted per kWh generated, the emission rate for all electricity generated in the U.S. last year was 16 percent less than the rate in 2005. For that we can thank increased generation from lower-carbon natural gas and zero-carbon wind. (Solar electric generation, though growing very fast, started from a tiny base and wasn’t a notable factor in the decarbonization to date.) Energy efficiency has helped as well by reducing the need to fire up high-carbon coal plants.

A carbon emissions tax, which by its nature favors wind and solar over gas, and gas over coal, will help sustain and accelerate this encouraging supply-side trend. Indeed, the price-sensitivities built into CTC’s spreadsheet model imply that energy supply decarbonization will account for an estimated 53 percent of the overall projected CO2 reductions from any carbon tax. This means that reductions in emissions via demand, i.e., conservation and/or efficiency, that are Goldstein’s stock-in-trade need only accomplish a bit under half (47 percent) of the total task.

Price-Elasticity Curve for Energy-Efficiency Hero post _ 2 Sept 2015The relevant math, then, is this: Thanks to supply decarbonization, the U.S. can limit its reduction in energy usage to 59 percent and still achieve the 85 percent CO2 reduction target. While a roughly 60 percent reduction in energy consumption is still a tall order, it’s far less fantastical than 85 percent. Assuming energy price-elasticities average minus 0.5, that 60 percent reduction in usage could be effected with a “mere” 6-fold rise in energy prices. No 44-fold rise required. (See calculations at end of this post.)

 

Argument #2: A Carbon Tax High Enough to Be Effective Would Distort the U.S. Economy

To his credit, Goldstein appears to have anticipated my rebuttal above. He posits a 5-fold increase in energy prices, slightly on the easy side of my 6-fold rise, which he then dismisses on three grounds. Each is problematic, however:

1. “Energy would be pushing a fourth of GDP” (vs. today’s share of ten percent or less), says Goldstein, and, thus, would gobble up too much economic activity. The idea of expensive energy colonizing the economy is definitely a concern in a last-gasp laissez-faire economy in which the costly energy arises through “extreme extraction” of oil from the Arctic, deep waters, and tar sands. But a carbon tax would have the opposite effect, obviating most energy exploration, extraction, conversion, transport and combustion, in accordance with the 60 percent decline in usage posited above. In short, a carbon tax will make our society and economy less energy- and fuel-intensive, not more (while the energy barons, with their wealth clipped, will wield less political power).

2. A 5- or 6-fold increase in energy prices “is not politically possible. Electricity at 50 cents a kilowatt hour?,” Goldstein asks rhetorically. “Gas at $12 a gallon?” Here, Goldstein presumes that a carbon tax would lead to those lofty prices overnight, rather than phasing in over decades. In the latter scenario, the impacts will be softened, yet the price signals guiding long-term investments will be loud and clear. The impacts will be tempered further as the improved efficiency of usage lets businesses and households heat, cool, light and move with fewer units of energy. (Ironically, it was Goldstein and his NRDC colleagues who coined the mantra that what matters is electricity bills and not rates. Note also that CTC is on record criticizing proposed carbon taxes that would start with abrupt energy price rises, on account of the likelihood of economic dislocation.)

3. The carbon tax required to boost energy prices 5- or 6-fold “would be potentially devastating to the poor,” Goldstein argues. Potentially yes, if the wealthy are allowed to siphon off the carbon tax revenues that could buffer U.S. households from the higher energy prices. But the carbon tax designs with the most adherents are those that either use the proceeds to reduce regressive job-killing payroll taxes or distribute them pro rata to households as “fee-and-dividends.” In fact, the need for a socially and economically just distribution of carbon tax revenues only underscores the urgency for environmental progressives to coalesce now behind carbon tax legislation that can safeguard the 90 percent rather than solidifying the advantages held by the top 10 or 1 percent.

Argument #3: Energy Demand is Price-Inelastic, So a Carbon Tax Won’t Affect It

Goldstein next revisits energy price-elasticity in an attempt to show that its actual value lies closer to a barely behavior-influencing (minus) 0.1 than the more robust (minus) 0.5 figure he granted earlier for argument’s sake. But curiously, he builds his case on a commodity that no end-user actually purchases: crude oil. Refineries consume crude, of course, but the businesses and households whose decisions determine aggregate demand consume petroleum products: The fuels whose price-elasticities need to be estimated empirically are gasoline, diesel fuel and jet fuel ― not crude oil.

Over the years there’s been no dearth of claims by representatives of Big Green groups that changes in the price of gasoline elicit little change in usage. Most of these claims are either mere assertions or rest on cursory and selective glances at the data. Perhaps this year’s surge in gasoline sales will finally put that notion to rest: U.S. gasoline sales in the first half of 2015 were 3 percent above 2014 sales — the biggest year-on-year increase in gasoline demand since the late 1970s (subject to the caveat that the comparison covers only six months in each year). The driving force behind this surge isn’t economic activity, since GDP for the first half of 2015 grew only at a middling rate of 2.8 percent; the reason is free-falling pump prices. (NB: The original version of this post had first-half 2015 sales growth at 3.3% over 2014; that figure has been changed to 3.0%, with revised data. The assertion that this is the biggest increase since the late seventies remains valid.)

Year-on-Year Changes in U.S. Gasoline Consumption for Energy-Efficiency Hero post _ 25 Sept 2015In any event, the way to estimate gasoline’s (or other fuels’) price-elasticity is with multivariate regression analysis. Here’s a summary of the estimation I performed for gasoline for CTC’s carbon-tax spreadsheet:

Using an approach suggested by retired energy economist Vince Taylor, who earned his PhD at M.I.T. from Nobel laureate Robert Solow in the 1960s, and whose insights animated my 1981 magnum opus on nuclear power cost escalation, I “regressed” the annual percentage changes in U.S. gasoline consumption from 1960 through 2014 on three independent variables: (i) the same year’s percentage change in economic activity (GDP); (ii) the same year’s percentage change in the average real retail price of gasoline; and (iii) the average percentage change in that price over the 10 years prior to the current year. The third variable was intended to reflect lags inherent in Americans’ responses to changing gasoline prices, insofar as automobile purchases and location choices that affect usage tend to change over years rather than weeks or months. The parameters may be referred to as income-elasticity, immediate price-elasticity, and lagged price-elasticity, respectively.

Two “models” best fitted the data, both statistically and conceptually. (All variables were statistically significant.)

  • One model yielded an income-elasticity of 0.47; an immediate price-elasticity of (minus) 0.12; and a lagged price-elasticity of (minus) 0.21. The sum of the immediate and lagged price-elasticities was (minus) 0.34.
  • The other model added a “dummy” variable to adjust for an arguably atypical six-year period covering 2002-2007. This variable was premised on the unusually high discounts/rebates offered for SUV’s during that period, as well as America’s post-9/11 paranoia and Iraq War-inspired triumphalism that may have contributed further to higher purchases and use of SUV’s. (SUV’s average more gas per mile than sedans, of course.) The regression results were, respectively: +0.46, -0.13, -0.24, and +1.4%, indicating an income-elasticity of 0.46; an immediate price-elasticity of (minus) 0.13; and a lagged price-elasticity of (minus) 0.24. The sum of the immediate and lagged price-elasticities was (minus) 0.37. (We ignored the dummy variable as transitory; its inclusion in the model was to filter out influences that could distort the elasticity estimates. May 2016 addendum: we repeated both regressions with 2015 data added. The only change was a slightly reduced income-elasticity in the three-variable model in the prior bullet, to 0.46, from 0.47.)
  • From the two sets of regressions, we rough-averaged the respective price-elasticity sums of (minus) 0.34 and (minus) 0.37. The result, a figure of (minus) 0.35, is the price-elasticity we use in our spreadsheet model to estimate the long-term responsiveness of gasoline demand to a carbon tax.

In the CTC carbon-tax model we specify higher price-elasticities for other energy-use sectors: (minus) 0.5 for diesel fuel, (minus) 0.6 for jet fuel, and (minus) 0.7 for electricity. We premise them on businesses’ greater capacity to respond to higher energy prices than drivers’, and on our gleanings from the extensive literature of price-elasticity.

The takeaway? The price-elasticities of U.S. energy usage, while not necessarily high (all are below one), are not only much greater than what Goldstein suggests; they’re large enough to establish beyond any doubt that taxing carbon emission will indeed reduce energy usage, rather than merely punishing consumers into paying more for the same amount of energy.

Argument #4: The Best Path to Carbon Reductions is Prescriptive Energy Policies

So what is the Goldstein-NRDC solution, if not carbon emissions pricing? Here’s Goldstein’s prescription:

This [pessimistic] analysis does not apply to actually implemented or proposed cap-and-trade plans, such as the one adopted by California pursuant to AB32 or the one proposed in the Waxman-Markey bill, both of which rely primarily on non-price energy policies. The overwhelming bulk of emissions savings come from (1) improved building and equipment efficiency standards, (2) integrated land use and transportation system planning that meets goals for travel reduction, (3) emissions standards on fuels and vehicles, (4) requirements for utilities to purchase and integrate renewable energy sources, (5) regulatory reforms that encourage utilities to rely primarily on energy efficiency, and (6) a host of other policies that are independent of energy prices. Numerals added; otherwise quoted verbatim.

That’s NRDC’s credo in a nutshell, and much of it is admirable — particularly #1, which I touted at the start of this post; also #4, which helped jump-start the U.S. wind-power industry (though perhaps no more than did the federal Production Tax Credit for wind electricity), and #5, an effort in which I participated peripherally as a utility reform advocate at the dawn of the “demand-side management” era several decades ago.

On the other hand, it can be argued that the vaunted CAFE standards (#3) were only able to be legislated in the mid-1970s and ramped up several times since then because of rising gasoline prices — somewhat mooting the standards and demonstrating the power of prices that Goldstein largely discounts. Moreover, Goldstein’s #2 is stunningly squishy (“planning that meets goals for travel reduction”); yes, Goldstein had to shoehorn his description but the fact is that NRDC’s standards-and-regulations approach, which has proven so potent in making appliances more efficient, is powerless to rein in the use of vehicles.

The Crux

And therein lies the fundamental difference between Goldstein’s (NRDC) and my (CTC) respective approaches. Miles-per-gallon rules reduce carbon emissions per vehicle-mile driven, but they do nothing to affect the other half of the formula that equally determines emissions: the number of vehicle-miles driven.

In contrast, a carbon tax effectively makes every action that reduces fossil fuel use less costly, by raising the rewards from using less fuel. Taxing carbon will open up multiple paths that will influence the literally billions of daily decisions that determine energy usage and, hence, carbon emissions.

In driving, a carbon tax will affect whether and how far and often to drive . . . which car to take on a family trip . . . how high an mpg rating to demand in the next lease or purchase . . . and, at the societal level, whether public transit investments “pencil out” and might be prioritized over wider highways, and whether hyper-efficient car designs pencil out in corporate boardrooms and venture-capital spreadsheets.

Second Sidebar for Energy-Efficiency Hero post _ 3 Sept 2015

The power of carbon-taxing, in a nutshell.

The same goes for other energy-use sectors. Costlier diesel fuel will not only stiffen legislators’ and regulators’ spines in promulgating truck mpg standards; they’ll incentivize local and regional provision over far-flung shipping of food, raw materials and consumer goods, thus cutting down on freight-miles and resultant emissions. Rising electric rates — at least during the decades until carbon fuels are eliminated — will not only strengthen NRDC’s and ACEEE’s case for ever more-efficient appliances; their price pressures will help restrain the size and number of appliances sold and also motivate consumers to use them more efficiently.

Costlier electricity and natural gas will likewise discourage developers from building, and families from insisting upon, gargantuan homes whose outsize volumes must be heated and cooled. Not to mention that a carbon tax provides an antidote to the oft-postulated “rebound effect” by which increased energy efficiency, by reducing the implicit price of energy services, can engender greater energy usage and inadvertently cancel some of the intended savings from those efficiencies. A carbon tax acts as a direct brake on that implicit price reduction and, thus, on the rebound effect.

The point is clear: No other policy can match a carbon tax’s reach, or its simplicity. As we wrote last year in comments we submitted to the Senate Finance Committee concerning energy subsidies and pricing:

The U.S. energy system is so diverse, our economic system so decentralized, and our species so varied and innovating that no subsidies regime, no matter how enlightened, and no system of rules and regulations, no matter how well-intentioned, can elicit the billions of carbon-reducing decisions and behaviors that a swift full-scale transition from carbon fuels requires. At the same time, nearly all of those decisions and behaviors share a common, crucial element: they are affected, and even shaped, by the relative prices of available or emerging energy sources, systems and choices. Yet those decisions cannot bend fully toward decarbonizing our economic system until the underlying prices reflect more of the climate damage that carbon fuels impose on our environment and society.

Carbon Taxing Going Forward

Two carbon tax bills now before Congress — submitted by Reps. Jim McDermott (D-WA) and John Larson (D-CT) — ramp up the tax level steadily and predictably to reach triple digits (i.e., $100 per ton of CO2) a decade on. Our modeling suggests that either bill, by the end of its tenth year, will have reduced total U.S. carbon emissions from fossil fuel burning by more than 30 percent, vis-à-vis 2005 emissions — with the reductions rising as the tax level continues ramping up. As noted, a little more than half of the reductions will come about by sustaining and accelerating the ongoing decarbonization of the U.S. fuel mix, not just in electricity but by motivating increased electrification of sectors like driving that are now dominated by hydrocarbon fuels. The remainder will result from energy efficiency and conservation, i.e., reduced usage per unit of economic activity.

Such a carbon tax has myriad other advantages, including the ease with which it can be replicated globally, that no other approach can match. One unsung advantage is that taxing carbon harmonizes with other measures for reducing energy consumption and carbon emissions. My or other individuals’ energy-savings don’t undermine the tax’s effect on other economic actors ― whereas under cap-and-trade, autonomous energy-saving actions lower the price of the emission permits and thus attenuate the price signal. Likewise, a carbon tax reinforces the economic effectiveness of the appliance and vehicle and building efficiency standards so ably championed by David Goldstein and NRDC, just as those standards play an essential role in overcoming the market failures that are hard to counteract with price signals alone.

It’s 26 years and counting since my first carbon tax op-ed, and almost 9 years since I co-founded the Carbon Tax Center. We at CTC have long since abandoned the hope that NRDC or the other big green giant, the Environmental Defense Fund, would lead the charge for a U.S. carbon tax. We’re okay with that, but we ask our environmental colleagues to refrain from devising and attacking straw-man versions of carbon taxes.

We’ve never said that “carbon emissions fees alone can . . . solve the climate problem.” Rather, we believe that the climate problem can’t be solved without them.

Calculations for 9th paragraph in post: If decarbonization of supply is to account for 53% of the CO2 reduction, and reduction in usage for the other 47%, then K, the percentage change in usage needed to reduce CO2 by 85%, is calculated by the equation: K x K x .47/.53 = 0.15. That is solved by K = 0.41, which equates to a 59% reduction in usage. To effect such a reduction, assuming price-elasticity of -0.5, the factor increase in energy prices, M, is given by the equation: M^(-0.5) = 0.41. The solution is M = 5.95, denoting a 6-fold price rise.

Bipartisan Plaudits for Rep. Delaney’s “Tax Pollution, Not Profits Act”

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If any climate legislation could garner at least nominal bipartisan support, it might be Rep. John Delaney’s Tax Pollution, Not Profits Act. Delaney is in his second term representing Maryland’s 6th CD, which runs from the DC suburbs to the western end of the state. His proposal, introduced on Earth Day at the American Enterprise Institute in Washington, would tax carbon dioxide and CO2 equivalents from methane and other sources at a rate of $30 per metric ton, increasing annually at 4% above inflation. The measure includes border tax adjustments to protect energy-intensive domestic industry from unfair competition from nations that haven’t enacted carbon taxes.

Rep. Delaney

Rep. John Delaney (D-MD)

Delaney’s measure offers a sweetener to conservatives: a promise to apply roughly half of carbon tax revenues to reduce the top corporate income tax rate from 35% to 28%. The bill would also provide monthly payments to low- and middle-income households and fund job training, early retirement and health care benefits for coal workers. At least as critically, at the AEI unveiling, Delaney committed near-apostasy by suggesting that his carbon tax could substitute for the Obama administration’s Clean Power Plan, final regulations for which EPA issued last month.

The Carbon Tax Center assessed the Delaney proposal’s effectiveness using our 7-sector model. We project that in its third full year the measure’s $30 price would reduce U.S. CO2 emissions to 8% below emissions in the year before enactment. Unfortunately, its schedule of 4% annual real rises is too tepid to continue reducing emissions more than fractionally over the longer term. The low upward price trajectory is a shortcoming shared by the American Opportunity Carbon Fee Act, introduced by Senators Sheldon Whitehouse (D-RI) and Brian Schatz (D-HI) in June.

In contrast, carbon tax proposals introduced in this Congress by Rep. John Larson (D-CT) and Rep. James McDermott (D-WA) would rise briskly to exceed $100 per metric ton within a decade, which we estimate would reduce U.S. emissions below this year’s levels by more than one-fourth in that time (and by nearly a third below 2005 emissions).

In an online discussion forum hosted by OurEnergyPolicy.org, Rep. Delaney asked for comments on his proposal. Below, we group and summarize those comments. [Read more…]

Earth Institute Chief Trashes the Carbon Tax

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Steven Cohen, executive director of Columbia University’s prestigious Earth Institute, recently weighed in on the carbon-tax debate in the Huffington Post. The results are breathtaking – and not in a good way.

Cohen’s June 8 screed, “A Carbon Tax Is Not Feasible or Practical,” was a riposte to a New York Times editorial two days earlier endorsing a carbon tax as “one of the best policies available” to address global warming. The Times is wrong, says Cohen, as he proceeds to lay out a multi-count indictment. Among his anti-CT arguments are the following:

1. Carbon taxes are politically infeasible: Given the system’s deep hostility to tax hikes, “the space between the carbon tax as a policy idea and the reality of American politics is too vast to overcome. For better or worse, here in America we are in a period of tax policy paralysis that is unlikely to be surmounted anytime soon.”

2. Carbon taxes are unfair: They “cause people on the lower end of the economic ladder to pay a higher portion of their income on energy,” while corrective measures aimed at redistributing the costs “are far from simple to implement, might stigmatize recipients, and would become easy and obvious political targets.”

3. Contrary to The Times, carbon taxes are unequal to the problem of climate change because they would founder on the shoals of international politics: “China and India would need to go along, and given the urgency of their energy and development needs, it is difficult to imagine that they would agree to such a measure.”

4. Carbon taxes are anti-urban: “I sometimes think the push for a carbon tax comes out of an early 20th century environmentalist mindset that scolds people for consumption and living in evil, immoral cities.”

5. Finally, carbon taxes are unnecessary since tax breaks can be just as easily used to encourage alternative energy development: “Why waste time and effort on an infeasible policy that will never happen? Why not devote time and effort to building a real partnership between the public and private sector to create a sustainable economy?”

NYT-CohenCareful readers will notice that the first two items are variations on a theme, which is to say the futility of relying on the U.S. political system to pass a well-crafted carbon-tax plan that discourages fossil fuels without burdening workers and the poor. The same can be said for number three, which is about the inability of a beggar-thy-neighbor international system to institute significant reform. Whether the fault lies with Washington, Beijing, or New Delhi, Cohen argues, the point remains that politicians of all nationalities are too selfish and shortsighted to deal intelligently with a carbon tax, so it’s best to forget the whole thing.

Charges four and five are different, so let’s tackle those first. [Read more…]

Why is Naomi Klein So Cool on a Carbon Tax?

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(Daniel Lazare is a writer living in New York City; his books include The Frozen Republic, The Velvet Coup, and America’s Undeclared War.)

Naomi Klein is not exactly bubbling over with enthusiasm about a carbon tax, and since she has emerged as a leading voice on climate change, it’s worth exploring why. She barely mentions the topic in This Changes Everything: Capitalism vs. The Climate, her magnum opus on global warming, and was oddly dismissive in a recent interview with Grist. “I don’t think a carbon tax is a silver bullet,” she said, “but I think a progressively designed carbon tax is part of a slate of policies that we need to make this transition … [to] rapid renewables.” But then she went on to disparage the analysis that is at the core of the carbon-tax argument:

You know, I’ve been making these arguments around economics, but there is nothing more powerful than a values-based argument. We’re not going to win this as bean counters. We can’t beat the bean counters at their own game. We’re going to win this because this is an issue of values, human rights, right and wrong. We just have this brief period where we also have to have some nice stats that we can wield, but we shouldn’t lose sight of the fact that what actually moves people’s hearts are the arguments based on the value of life.

So on one hand we have economics, the stuff of “bean counters” and other bloodless sorts, while on the other we have values and morality. A carbon tax would be beneficial, but since we will never beat the economic analysts on their own turf, there’s no point even trying. Instead, we should concentrate on things that stir the soul, such as human rights.

Naomi Klein: Why is she so cool on taxing carbon pollution?

Naomi Klein: Why is she so cool on taxing carbon pollution?

Or so Klein maintains. But there’s something off-putting about such arguments. The distinction between economic analysis and morality, for instance, smacks of anti-intellectualism. Not only are head and heart separate and distinct in Klein’s world, but there’s no question as to which is on top. But her view of a carbon tax is also incorrect. It’s not for bean counters only. Like any real-world phenomenon, a carbon tax is multi-dimensional, which means that it has not only an economic component but a political and moral aspect as well.

How so? Everyone knows what the purpose of a carbon tax is. It’s to internalize the externalities, to take the growing costs associated with fossil fuels and bundle them into the price of such fuels so that the individuals using them have a more accurate idea of how much a specific activity truly costs. When drivers understand how expensive gasoline really is when all the attendant costs are taken into account, then they’ll treat it with the respect it deserves.

This is the sort of economic wonkery that no doubt leaves Klein cold. But it is not only an economic argument. Externalities include not only environmental and congestion costs and the like, but such items as the cost of insuring an uninterrupted flow of oil from the Persian Gulf. Expenditures like these aren’t trivial, needless to say. Indeed, one study published in Energy Policy puts them at a stunning $7 trillion for the years 1976-2007, not including the Iraq War, which, according to Joseph Stiglitz and Linda Bilmes, may wind up costing $3 trillion more. [Read more…]

New Senate Bill Would Build “Polluter Pays” Principle into Climate Action

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(co-authored with CTC senior policy analyst James Handley)

Sheldon Whitehouse gained renown last year for his series of weekly “Time To Wake Up” speeches on the Senate floor addressing the climate crisis. Today, the Democratic Senator from Rhode Island took his climate leadership further as he introduced a comprehensive bill intended to end free dumping of climate pollution into the atmosphere. (Click here for video of the senator’s 80th speech, introducing his bill.)

Whitehouse calls his 30-page measure, which is co-sponsored by Democratic Senator Brian Schatz of Hawaii, the “American Opportunity Carbon Fee Act.” It builds squarely on the growing consensus that clean energy will rapidly and fully displace fossil fuels only when polluters are made to pay for causing climate damage. AOCFA would impose fees on both CO2 and non-CO2 greenhouse gases including fugitive methane from shale gas wells and coal mines. AOCFA also includes a border tax adjustment to impose equivalent climate pollution fees on imported goods from nations that have not enacted their own climate pollution fees. (Click here for background on border tax adjustments.)

AOCFA pegs its pollution fee to U.S. EPA’s estimate of the “social cost of carbon.” The fee would start at EPA’s current estimate of that cost, now $42 for each ton of carbon dioxide, and would rise by 2% annually in real terms. Emissions of methane and other greenhouse gases would be charged in proportion to their estimated per-unit global warming impacts relative to carbon dioxide.

The Senator’s office estimates that AOCFA would raise $2 trillion in revenue in its first ten years, money that would fund an “American Opportunity Trust Fund” to be returned to the American people in as many as nine different ways including tax cuts, dividends, infrastructure investments and debt relief. E&E News reporter Jean Chemnick wrote today that the bill “leaves open the question of how those revenues would be spent as an invitation for would-be Republican collaborators to negotiate.”

Sen. Whitehouse’s decision to link his bill’s climate pollution fees to the social cost of carbon could be problematic, however. Published estimates of the social cost of carbon vary from as little as $10 per equivalent ton of CO2 to over $300, depending on what is counted as climate damage, what discount rate is assumed to convert future losses to present terms, and how heavily if at all catastrophic risk scenarios are factored in. And while hitching the pollution fee to the EPA social-cost estimate may resonate with some stakeholders, it could limit the level of the carbon tax and, thus, its ability to drive down U.S. emissions rapidly enough, let alone global emissions. [Read more…]

Is the rift between Nordhaus and Stern evaporating with rising temperatures?

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Lead author of this joint post is Peter Howard, Economic Fellow at the Institute for Policy Integrity at New York University School of Law.

The political task of enacting carbon taxes ­― and maintaining those in place ― has proven so daunting that questions of the tax’s appropriate level have gotten short shrift. Carbon tax advocates do not often discuss: How high is the optimal carbon tax? Along what trajectory should it increase over time? What, if anything, can climate science tell us about the right carbon tax to aim for?

Prof. William D. Nordhaus, Yale University

Prof. William D. Nordhaus, Yale University

In the academic realm, the distinguished Yale economist and public intellectual William Nordhaus has taken a leading role in the discussion. Nordhaus first modeled energy-economy interactions in the 1970s, and since the early 1990s successive versions of his Dynamic Integrated model of Climate and the Economy, or DICE model, have been used to estimate costs and benefits of carbon mitigation strategies in one prestigious report after another ― most recently in the Fifth Assessment Report by the UN Intergovernmental Panel on Climate Change (IPCC).

Given Nordhaus’s concerns over global warming, reflected in his ongoing repudiations of climate change denialists as well as his impatience with cap-and-trade schemes, it has been jarring for some to see him advocate for a relatively low carbon tax. In his 2008 book, A Question of Balance, which relied on the 2007 version of DICE, Nordhaus proposed a year-2005 starting price of just $8 (U.S.) per short ton of CO2 (from his Table 5-4, adjusted to 2012 dollars and recalibrated from metric to short tons and from C to CO2), which would then take two decades to double and another 30 years to double again.

Nicholas Stern (Baron Stern of Brentford)

Nicholas Stern (Baron Stern of Brentford)

In contrast, the Carbon Tax Center and its allies at the Citizens Climate Lobby have long advocated a steeper, stepwise ramp-up, with an initial price of around $10 per ton of CO2 followed by annual increases of the same magnitude for at least a decade and perhaps much longer. This policy recommendation is more in line with the views of Nicholas Stern ― lead author of the Stern Review on the Economics of Climate Change (2006) ― who argues that strong climate policies are necessary immediately to forestall large future damages from global warming. In the past, Nordhaus (along with several other economists) disregarded these findings based on the low discount rate assumed in the report.

Recently, however, this difference in opinion between the Nordhaus and Stern camps with regards to policy (though not discount rate assumptions) has lessened. Using the latest version of the Nordhaus model, DICE-2013, Nordhaus finds an optimal initial (2015) carbon price of approximately $21 per short ton of CO2 in 2012 U.S. dollars (a near tripling from DICE-2007). Moreover, the optimal tax according to Nordhaus rises more rapidly over time as compared to DICE-2007.[1] A tax of this amount would restrict the average global temperature increase to approximately 3 degrees Celsius above pre-industrial levels.[2]

As economist-columnist Paul Krugman noted in his review of Nordhaus’s 2013 book, The Climate Casino, in the NY Review of Books, even Nordhaus seems surprised by his finding that both the international consensus of a 2 °C limit and the carbon tax necessary to achieve it are nearly economically rational.[3] And given that DICE-2013 fails to account for climate tipping points (as Nordhaus himself notes), an even lower temperature limit and higher carbon tax are justifiable.

Stern has now taken this recent scholarship a step further. In a June paper co-authored with economist Simon Dietz, Stern demonstrates that the DICE framework can support an even stronger mitigation effort than the latest Nordhaus specification of the model.Their paper, “Endogenous growth, convexity of damages and climate risk: how Nordhaus’ framework supports deep cuts in carbon emissions” (co-published by the Centre for Climate Change Economics and Policy as Working Paper No. 180, and by the Grantham Research Institute on Climate Change and the Environment as Working Paper No. 159), is not a rehash of the Stern-Nordhaus dispute over discounting. Rather, the paper accepts Nordhaus’s choice of discount rate for argument’s sake but modifies the 2010 edition of Nordhaus’s model in three critical ways.

First, whereas DICE-2010 counts only economic costs from climate damage to current consumption (e.g., decreased agricultural productivity, loss of coastal habitation, etc.), Dietz and Stern contend that climate change will also erode the ability to generate new wealth by inhibiting the accumulation of physical capital and impeding overall learning in the economy, i.e., the accumulation of technological and intellectual capital; both of which are key drivers of economic productivity and growth.

Second, Dietz and Stern conclude that Nordhaus’s model specification of the climate “damage function” ― the function that translates increases in temperatures into declines in GDP ― also needs to be modified to reflect possible climate tipping points such as those emphasized in the recent IPCC report, “Climate Change 2013: The Physical Science Basis.” Dietz and Stern note that, as presently constituted, the DICE-2010 model leads to the unrealistic result that nearly three-quarters of world economic output would survive an average global temperature increase of 12 °C (22 °F). Nordhaus himself notes this anomaly for DICE-2013 in his latest book, and states that climate tipping points and the large damages associated with them could potentially occur with temperature increases as low as 3 °C.

Third, Dietz and Stern update the DICE model’s “climate sensitivity” parameter, which relates atmospheric levels of greenhouse gases to expected temperature increases and other climate impacts. These updates reflect recent findings from climate models, including the higher probabilities assigned to climate tipping points such as methane emissions triggered by melting permafrost. This change would bring DICE in line with the latest versions of other Integrated Assessment Models, such as Richard Tol’s FUND model and Chris Hope’s PAGE model.

Dietz and Stern’s modifications to the DICE model are mathematically sophisticated and not for the uninitiated. But the bottom line is this: even leaving Nordhaus’s higher discount rate untouched, the three changes to DICE-2010 result in a two- to seven-fold increase in the optimal price assigned to a ton of carbon emissions in 2015, according to Dietz and Stern, and a temperature limit of 1.5 to 2 degrees Celsius. Their paper’s conclusive statement with respect to price and temperature is worth stating in full:

As a guide, we find that these models suggest the carbon price in a setting of globally coordinated policy, such as a cap-and-trade regime or a system of harmonised domestic carbon taxes, should be in the range $32-103 [per metric ton of CO2] (2012 prices) in 2015. It must be remembered that the DICE model lacks adjustment costs, so the high end of the range should be interpreted cautiously. On the other hand and potentially of great importance, we have . . . omitted important risks in relation to the distribution of damages, which could give higher carbon prices. Within two decades the carbon price should rise in real terms to $82-260/tCO2. Doing so would, according to the model, keep the expected atmospheric stock of carbon dioxide to a maximum of c. 425-500 ppm and the expected increase in global mean temperature to c. 1.5-2 °C above pre-industrial.

Given that Nordhaus finds an even stricter temperature limit using DICE-2013 than DICE-2010 (i.e., approximately 3 degrees Celsius instead of 3.5 degrees Celsius), even more ambitious temperature limits and carbon taxes are economically rational.

The results of both Nordhaus (2013) and Simon and Dietz (2014) demonstrate that the DICE model supports ambitious climate policies ― potentially even the temperature limit agreed upon under the Copenhagen Accord. Thus, while Nordhaus and Stern may differ on whether a carbon tax should be imposed as a ramp or a steep hill, and on the appropriate discount rate for converting anticipated future damages to present terms, this debate is progressively less relevant as the steepness of this ramp increases with model sophistication and the further delay of a carbon tax. If steps are not taken soon to achieve optimal greenhouse gas emission reductions, the slight distinction between their respective optimal climate plans will likely grow even smaller – mooting any remaining disagreement over the tax’s appropriate level.

[1] Figure 14 in the DICE-2013 Manual. In a recent update of DICE-2013 (i.e. DICE-2013R), Nordhaus finds an optimal initial CO2 price of approximately $19 per short ton of CO2 (in 2012 USD); this is a 239% increase from DICE-2007.

[2] Figure 8 in the DICE-2013 Manual. Dietz and Stern (2014) find that the optimal mitigation path in DICE-2010 implies a temperature increase of up to 3.5 °C above pre-industrial temperatures. DICE-2013R seems to fall somewhere between DICE-2010 and DICE-2013 in terms of the optimal temperature increase.

[3] Krugman (2014) states that the “the optimal climate policy if done right would limit the temperature rise to 2.3 °C [above pre-industrial levels].”

Photos courtesy of Yale University and Wikipedia, respectively.

On the Latest Distraction from Carbon-Taxing: “Carbon Budgets”

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Over the Fourth of July holiday, Lorna Salzman forwarded me half-a-dozen emails about “global carbon budgets” that had been posted to an informal list-serve of U.S. and U.K. climate advotes. Lorna and I have been friends and colleagues since 1974; she may have been the first person to take seriously my interest in carbon taxing, circa 2003, and her encouragement had a lot to do with my starting the Carbon Tax Center several years later and more recently to my ramping up my involvement in CTC. This morning I posted the following response.

I have four points:

1. I’m flat-out befuddled by the interest from some in this group in “carbon budgets,” whether national, global or whatnot. I think they’re a dead end politically as well as a dodge scientifically.

The author, 40 miles from his lower-Manhattan home (2012 photo).

The author, 40 miles from his lower-Manhattan home (2012 photo).

Why a dead end? Because nations cannot and will not agree on who should be allowed to consume and emit how much carbon pollution. Because devilish “details” like offshoring will inevitably confound any negotiations. Ditto, population growth, which will require continual dynamic adjustments to national shares.

Why a dodge? Because every link in the emissions-to-catastrophe chain is riven with uncertainty. We don’t know with great precision what level of emissions will lead to any level of warming. We don’t know what level of warming will be catastrophic. There isn’t even agreement on what “catastrophe” is.

What we can agree on is that (i) any feasible level of emission reduction is insufficient, and (ii) deeper reductions are better than shallow ones. These facts are irreconcilable with carbon budgets.

2. A carbon tax must be at the center of any effective policy to rein in emissions. It’s folly to think that regulations (even enlightened ones) and/or clean-energy subsidies (even efficient ones) and/or public-sector mobilization such as by the Allies to win World War II can ever push back comprehensively against the massive tide of cheap fossil fuels (that is: cheap sans a price for their climate damage). [Read more…]

Movement-building

Translating the compelling logic of economics into actual climate policy is no small endeavor. It takes years of political organizing and movement-building.

At the heart of this effort is the Citizens’ Climate Lobby, which since 2009 has been building political will for taxing climate pollution by educating and activating voters across the country and engaging elected officials. CCL has grown almost exponentially and has placed hundreds of pro-carbon tax op-eds in local and national newspapers and met with hundreds of elected officials, particularly members of Congress. CCL holds an annual conference and lobby day in Washington, DC. We encourage you to get involved with this effective and convivial group.

Another impressive organization, Get America Working, advocates climate policy that also cuts unemployment by shifting taxes off labor and onto pollution, particularly climate pollution.

We ourselves (Carbon Tax Center) have held several conferences and briefings engaging thought-leaders, environmental and climate activists, and political figures. The most ambitious, our 2010 Wesleyan Conference, attracted some 500 students, activists and citizens to a three-day event kicked off by scientist James Hansen and writer-activist Bill McKibben.

Since 2012, we’ve participated in a series of meetings in Washington, DC organized by our colleagues in the Pricing Carbon Initiative, to discuss and create a political path to include a substantial and briskly-rising carbon tax in broader tax reform. We’ve also cultivated ongoing relationships with environmental  justice groups including the trailblazing EJ organization WEACT for Environmental Justice, based in West Harlem in New York City.  EJ leaders know that climate damage is already hitting disadvantaged people hardest, and that effective climate policy can and must directly benefit front-line communities through fair and transparent revenue distribution as well as mitigating and avoiding the worst effects of global warming.

As well, CTC has built a network of contacts, supporters and allies within the mainstream environmental movement. Friends of the Earth has demonstrated particular leadership by championing the use of tax policy to advance environmental goals. Taxpayers for Common Sense is another ally in the effort to eliminate costly and wasteful energy subsidies and replace them with taxes on dirty energy. Note also, that thanks in part to the efforts of Progressive Democrats of America, the House Progressive Budget includes a substantial carbon tax as a source of revenue to balance the budget without austerity cuts in social programs and benefits.

For more information, see our Supporters pages.