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FOR IMMEDIATE RELEASE
June 10, 2015

 

Sen. Sheldon Whitehouse (D-RI) will announce the re-introduction of his American Opportunity Carbon Fee Act (AOCFA) today at the American Enterprise Institute. In response, Carbon Tax Center director Charles Komanoff released the following statement:

“Today’s announcement by Sen. Whitehouse is the latest sign of the growing movement to tax carbon pollution in the U.S. It comes on the heels of the New York Times’ ringing endorsement of a U.S. carbon tax and two months after a Stanford poll revealed that two out of three Americans would support a revenue-neutral carbon tax.

“Notably, Sen. Whitehouse will announce the reintroduction of his economy-wide carbon tax at the right-leaning American Enterprise Institute and will be joined by a leading conservative carbon tax proponent. That’s a powerful display of the broadening appeal of taxing carbon pollution.

“We applaud Sen. Whitehouse for blazing the path forward in the Senate. In particular, we support his legislation’s coverage of all major greenhouse gases and its border tax adjustment provisions.

“However, we have concerns about the size and rate of increase of the AOCFA’s proposed carbon fee. It would be pegged to the ‘Social Cost of Carbon,’ which U.S. EPA currently estimates at $42 per ton of carbon dioxide. This figure grossly understates the large-scale climate risks that we face.

“The AOCFA would start taxing carbon pollution aggressively at $42/ton, but would raise this rate far too slowly in the following years — by only around $1/ton per year. A different approach that starts off modestly but then raises the rate briskly and predictably will avoid economic disruptions and better establish incentives for major emissions cuts.

“Staving off climate disaster will be a marathon, not a sprint. We should shape our climate policies with that in mind.”

The Carbon Tax Center was launched in 2007 to give voice to Americans who believe that taxing emissions of carbon dioxide — along with commensurate taxes on methane and other greenhouse gases — is imperative to reduce global warming.

This page reports on carbon taxes that have been enacted (and in one case, enacted and withdrawn) in:

• • European Union: Emissions Trading System
  • United Kingdom
  • Ireland
  • Australia
  • Chile
  • Sweden

Canada has its own page, where we summarize its nationwide carbon price and also report in detail on British Columbia’s carbon tax, the Western Hemisphere’s (if not the world’s) most comprehensive and transparent carbon tax.

European Union: Emissions Trading System

The European Union (EU) implemented a carbon cap-and-trade system in 2005. The EU Emissions Trading System (ETS) is the world’s first international emissions trading system, operating in all EU member countries plus Iceland, Norway, and Liechtenstein.

The EU ETS covers over 10,000 stationary emitters — mostly power stations and industrial plants. It also covers domestic and intra-EU air travel. In toto, the ETS covers around 40 percent of the EU’s greenhouse gas (GHG) emissions, making it the largest carbon cap-and-trade program in the world, covering approximately 1.5 billion metric tons of CO2 per year.

For much of its existence, the ETS was largely ineffectual because its emissions caps were too high and granted large numbers of free allowances to big polluters. Concern about carbon leakage — polluters from the EU potentially going elsewhere to do their polluting, hence, “leaking” carbon from the EU — drove the EU to implement free allowances as its primary method of allocation back in 2005. As a result, polluters obtained large numbers of allowances — in 2013, manufacturers received 80% of their allowances for free — and many were able to maintain a surplus.

Compounding the problem of giveaways, the EU grossly overestimated future CO2 emissions in setting the cap amounts, resulting in a too-high number of allowances. In the first phase of the EU ETS, from 2005-2007, only three member states had caps lower than baseline 2005 emissions levels. And with the 2008 financial crisis driving emissions down, the caps were rendered even more useless.

Background

In December 2019, the European Commission — the executive branch of the EU — introduced the European Green Deal, an ambitious climate policy package with the general goal of at least 50% GHG emissions reductions by 2030 and carbon neutrality by 2050. The European Green Deal represents the EU’s main legislative effort to meet its commitments under the Paris Climate Agreement. The Green Deal included the ETS as an integral part of its action plan.

In 2020, the EU expanded to a 55% reduction its commitment to reduce emissions 40% from 1990 levels by 2030 and. The ramp-up came in December 2020, following all-night negotations in which the EU committed to helping coal-heavy countries like Poland meet individual-country commitments.

The U.K.’s concurrent exit from the EU and ETS caused a substantial exit of low-carbon power producers, resulting in an increase in average carbon contents for the remaining EU power producers. It’s not yet clear how these changes will play out, as the U.K. has not announced plans to link with any other carbon trading systems.

How the ETS Works

The European Trading System implements an emissions cap for the overall volume of GHG that may be emitted by covered airlines, power plants and factories. Emitting companies purchase at auction — or receive — tradable allowances, the total number of which is capped at a level that steadily decreases each year. Since 2013, the emissions cap has applied to the EU as a whole, not individual countries. The current cap for 2021 on GHG emissions from these stationary installations is 1.57 billion tonnes per year, or roughly half of 2019 CO2 emissions for the entire European Union, including the U.K.

The price of a carbon allowance has roughly doubled in the past several years, reaching a high of nearly €43 in March 2021. BloombergNEF (New Energy Finance) projects that prices will hit €100 by 2030. The higher price levels enable the ETA to “arguably serve its purpose by making it too expensive for emitters of fossil fuels to continue business as usual,” as reported in early 2021 by Alessandro Vitelli of Montel News.

Since January 2019, the EU ETS has included a market stability reserve (MSR), which maintains any surplus of allowances, allowing for adjustments to the supply of allowances up for auction, if needed. Unallocated allowances are transferred to the reserve, which is operated under strict rules that bar meddling by the Commission or Member States.

Phases

The ETS’s 15-year tenure to 2020 may be divided into three phases.

• Phase 1, from 2005-2007, served as a pilot of “learning by doing.” During that phase, about 12,000 installations received permits to emit about 2.2 billion tons of CO2, nearly half of EU CO2 emissions at that time. Most allowances were given for free.
• In Phase 2, 2008-2012, the cap on allowances was reduced by 6.5% compared to 2005. Phase 2 aligned with the first commitment period of the Kyoto Protocol, when countries in the EU ETS had to fulfill commitments to reduce emissions by an average of 5% below 1990 levels. (The EU and its member countries ended up cutting emissions by 8% below 1990 levels.) Several countries held auctions.
• Phase 3, 2013-present, saw the application of a single, EU-wide cap on emissions instead of the previous system of national caps. Auctioning replaced free allocation as the default method of allowance allocation. Phase 3 also brought more sectors and gases under the EU ETS umbrella. During this phase, the EU-wide cap on stationary installations decreased by 1.74% each year.

For Phase 4, from 2021-2030, the Commission revised and strengthened the EU ETS in 2018. The overall number of emission allowances will now decrease at an annual rate of 2.2%, instead of 1.74%. However, significant amounts of free allowances remain, ostensibly to combat carbon leakage. The EU will still give 100% free allocation to sectors at the highest risk of relocating production outside the EU. For industries less likely to flee, free allocation will be phased out, from a maximum of 30% in 2026 to zero by 2030. Overall, the EU predicts 6 billion free allowances will be granted from 2021-2030.

Impact

The EU ETS’s specific targets are to reduce GHG emissions by 21% between 2005 and 2020, and by 43% by 2030.

Total EU emissions of greenhouse gases fell by 23 percent from 1990 to 2018, according to the European Commission. Emissions from ETS sectors alone fell 33% from 2005-2019.

Carbon leakage

In its Green Deal statement, the European Commission addressed the concern that countries across the world will continue to have “differences in levels of ambition,” by pledging to propose a carbon border adjustment mechanism as an alternative to the ETS’s carbon-leakage measures. As Inside Climate News explains carbon border adjustments:

Economists have long suggested that there’s a way to break that global impasse [on climate action] — and that’s to treat carbon like any other international trade dispute. Impose tariffs or quotas on imports from countries that have given their manufacturers an unfair advantage of uncontrolled carbon emissions.

In March 2021, the European Parliament adopted a resolution favoring a carbon border adjustment mechanism. The European Commission will propose legislation in June 2021.

United Kingdom

The United Kingdom — England, Scotland, Wales and Northern Ireland — has maintained a carbon tax since 2013. Technically, the tax is a “carbon price floor” (CPF) that functions as the minimum price that fossil fuel producers pay for emitting CO2. The CPF applies to energy-intensive industries only and is not economy-wide.

There have been several calls lately to tax carbon emissions in the U.K. at a higher rate and on a broader scale. Grantham Institute researchers Josh Burke and Esin Serin argued in a fascinating Feb. 2021 opinion piece that carbon pricing should be enacted not as a stand-alone but “as part of a significant and broad package of post-COVID fiscal reforms.”

History

As a result of the 2008 Climate Change Act — passed with overwhelming support across parties — the U.K. was required to drastically reduce its carbon output according to five-year carbon budgets. Unsurprisingly, the U.K. — birthplace of classical economics and home base of Sir Nicholas Stern, the renowned economist who in 2007 famously called climate change “the result of the greatest market failure the world has seen” — turned to carbon pricing to carry part of the load.

In 2009, the Department of Energy and Climate Change released a report, “Carbon Valuation in UK Policy Appraisal: A Revised Approach,” detailing reasons to adopt a carbon price. Witnesses at the 2009-2010 Environmental Audit Committee’s report on Carbon Budgets called for a carbon price floor, but the Labour government opposed the idea. Then in 2010, the Coalition government consulted on proposals for a CPF, and the measure was introduced in the 2011 Budget for implementation in 2013. The 2011 Budget framed the CPF as a way to “drive investment in the low-carbon power sector” and “support the long-term stability of the public finances.” The government also said the CPF “achieves the right balance between encouraging investment without undermining the competitiveness of UK industry.”

When the carbon floor was introduced, the Confederation of British Industry and Renewables Energy Association were supportive, but the measure also found criticism from several sides that argued it was, by turns, ineffective, expensive, and uncertain for investors. But the government framed the tax as the best move for consumers, stating that the “market-based approach to pricing carbon provides the most efficient and cost-effective policy framework to meet our environmental goals.”

Less than 10 years after implementing the CPF, the U.K. is halfway to meeting its goal of net zero greenhouse gas emissions by 2050. U.K. GHG emissions in 2020 were 51% below 1990 levels, putting the country mathematically on track to reach net zero by 2050.

30 Years of Falling Emissions

The first graph makes clear that this 2020 milestone is only slightly due to the COVID-19 pandemic. The 2020 decline in emissions, though severe, roughly 40 million tonnes, was no greater than that in 2014 (also 40 million tonnes) and was less than the 56 million tonne drop in 2009, during the severe recession. Emissions fell in almost every year from 1990.

 

The anticipated recovery from COVID-19 will, of course, provoke a partial rebound in emissions. The national government’s March 2021 Industrial Decarbonisation Strategy specifies that industrial emissions must fall by two-thirds before 2035 to enable the U.K. to meet its Dec. 2019 pledge — the first by a major economy in the world — to reach net-zero GHG emissions by 2050.

What accounts for the huge drop in U.K. greenhouse gas emissions from 1990 to 2019? Carbon Brief credits three changes for around 90% of the decline:

1. Electricity that doesn’t rely on coal – 43% of electricity was generated by renewables in 2020 (“renewables” does not include nuclear power, but it does include wind, hydro, solar, and bioenergy).
2. Cleaner industry and a shift away from carbon-intensive manufacturing.
3. A pared-down, cleaner fossil fuel supply industry.

It’s important to note, however, that a considerable amount of U.K. “renewable” electricity is generated by burning biomass, i.e. wood pellets. Inclusion of bioenergy as a renewable source of energy is at best contentious and more likely a scam, as journalist Michael Grunwald pointed out in his March, 2019 expose in Politico.

U.K. Carbon Pricing: Details

Initially priced at £16/tonne in 2013, the U.K.’s carbon price floor (CPF) was set to increase to every year, hitting £30/tonne by 2020 and £70/tonne in 2030, but was capped in 2015 at £18.08/tonne until 2021 (20.40 euros at the 2015 exchange rate). The CPF has impacted the generation fuel mix significantly; coals share fell from 41% in 2013 to less than 8% in 2017.

Brits sometimes call their CPF a “top up” tax since it was intended to top up European carbon pricing in the form of the EU emissions trading scheme (ETS). The U.K. finished its Brexit transition from the EU at the end of 2020, creating the need for a new, non-EU emissions trading scheme (ETS).

The U.K. announced in February 2021 that it would launch its own carbon trading scheme in May 2021. The U.K. government says their ETS replaced the UK’s participation in the EU ETS as of January 1, 2021, but the first U.K. ETS emissions auctions will not begin until May 19, 2021.

According to Auctioning Regulations released in February, bids will follow a minimum Auction Reserve Price (ARP) of £22/tonne when they begin in May, but the price will increase: “The government will consult on its intent to withdraw the ARP as part of the planned consultation to appropriately align the U.K. ETS cap with a net zero trajectory which will be launched later this year.”

The floor for the U.K. ETS was initially set to 15 pounds but raised to 22 pounds per tonne, perhaps following some form of the logic suggested by climate advocacy group Ember: “The EU ETS has averaged a price of around £22/t (€25/t) over the last two years, so it would make sense to set the U.K. carbon price floor to at least that level, especially with further reform to strengthen the EU ETS price due in the coming year.”

The U.K. government stated in the Autumn Budget 2017 that they were “confident that the Total Carbon Price, currently created by the combination of the EU Emissions Trading System [of 7.78] and the Carbon Price Support [of 20.40], is set at the right level, and will continue to target a similar total carbon price until unabated coal is no longer used.”

Ireland

(Thanks to Wesleyan University environmental studies major Nicholas J. Murphy for expanding this section in July 2015.)

Ireland enacted a carbon tax in 2010 under a coalition government of its Green Party, Fianna Fáil (one of Ireland’s two mainstay center-right parties) and the Progressive Democrats. Originally designed to provide a double dividend by offsetting income taxes, the revenue was re-allocated to satisfy the diktats of the Troika — the triumvirate of the European Commission (EC), International Monetary Fund (IMF) and European Central Bank (ECB) that administered the austerity policies on EU member nations bailed out during the 2008 debt crisis. (See OECD working paper on Ireland’s Carbon Tax and the Fiscal Crisis.)

The effect is arguably similar, since income taxes would have had to rise, absent the carbon tax revenues. Frank Convery, an economist at University College Dublin considered the foremost expert on Ireland’s carbon tax, writes enthusiastically:

Ireland is a pioneer in the implementation of a carbon tax. This has allowed us to avoid (more) increases in income tax which would have further reduced disposable income, increased labour costs and destroyed jobs. It is also facilitating us in meeting our very demanding legally binding obligations to reduce greenhouse gas emissions, and provides support for the creation of new jobs in improving energy efficiency and growing the low carbon economy.

Ireland’s carbon tax covers nearly all of the fossil fuels used by homes, offices, vehicles and farms, based on each fuel’s CO2 emissions. It began in 2010 at €15/ton and rose to €20/ton in 2012, where it remains today. Solid fuels (coal and peat) were added in 2013 at €10/ton after concerns from agricultural interests were resolved, and that price has since risen to match the €20 price on other fuels. The tax generates roughly €100 million in revenue per €5 of tax, meaning it currently draws about €400 million annually.

The carbon tax has been complemented by other environmental taxes based on vehicle fuel efficiency and domestic landfill waste, as New York Times environmental correspondent Elisabeth Rosenthal reported in Dec. 2012, in Carbon Taxes Make Ireland Even Greener:

Over the last three years, with its economy in tatters, Ireland embraced a novel strategy to help reduce its staggering deficit: charging households and businesses for the environmental damage they cause. The government imposed taxes on most of the fossil fuels used by homes, offices, vehicles and farms, based on each fuel’s carbon dioxide emissions, a move that immediately drove up prices for oil, natural gas and kerosene.

Household trash is weighed at the curb, and residents are billed for anything that is not being recycled. The Irish now pay purchase taxes on new cars and yearly registration fees that rise steeply in proportion to the vehicle’s emissions.

Environmentally and economically, the new taxes have delivered results. Long one of Europe’s highest per-capita producers of greenhouse gases, with levels nearing those of the United States, Ireland has seen its emissions drop more than 15 percent since 2008. Although much of that decline can be attributed to a recession, changes in behavior also played a major role, experts say, noting that the country’s emissions dropped 6.7 percent in 2011 even as the economy grew slightly.

Notably, the Irish carbon tax was designed to fill gaps left by the European Union Emissions Trading Scheme (EU ETS), which addresses only large polluting firms and accounts for only roughly 40% of emissions sources while being hampered by volatility. The case of Ireland demonstrates the potential for EU-wide cooperation in setting an effective harmonized price on carbon in preference to a piecemeal and volatile ETS.

The elements of Ireland’s carbon tax introduced in 2010 are specified in the Finance Act of 2010. (See Part 3 (Customs and Excise), Chapters 1 (Oil), 2 (Natural Gas), and 3 (Solid Fuels) for tax rates and other provisions.)

Ireland’s Vehicle Registration Tax is also partly emissions-based. A VRT Calculator on the Irish Tax & Customs website provides a means to estimate the amount of tax on a vehicle based on Make/Model/CO2 Emissions. Interestingly, the CO2-sensitive VRT has touched off a pronounced shift to diesel vehicles, which emit less CO₂ but more of other pollutants with localized health impacts. Changes to the tax rate in Budget 2013 are detailed here.

Finally, the law firm Arthur Cox offers these useful guides ([1] & [2]) to Ireland’s carbon tax.

 

Australia

The widespread wildfires devastating much of Australia in the Southern Hemisphere’s 2019-2020 summer have drawn worldwide news coverage and cast that country’s retrograde official climate stance in appropriately harsh light. CTC’s blog post, Australia’s Brief, Shining Carbon Tax distilled and updated the information below and also revealed the stunning detail that the two years in which Australia had a national carbon tax, 2012-2014, saw dramatic drops in CO2 emissions, both absolute and relative to GDP (see graphic directly below, at left). As of this mid-January writing, however, no other media had picked up this finding.

The Liberal Party government of PM Scott Morrison has come under withering attack for hewing to the climate-denying line of the Murdoch-dominated press that alternately blames the fires on arsonists and wildland “mismanagement” while hand-wringing that unilateral action to curb Australia’s emissions would have little or no discernible impact because the country accounts for only 1 percent of global CO2. The Daily Beast has reported that James Murdoch, the media baron’s younger son, was sharply critical of Fox News and News Corp’s “climate-change denial,” while Australian union organizer James Raynes posted the ironic tweet shown at right.

Our earlier coverage of Australia carbon taxing, though somewhat dated, is below. Be sure to read our Jan. 7 (2020) post.

Australia instituted a carbon tax on July 1, 2012 and repealed it two years later, on July 17, 2014. Both events were milestones. Though some countries, notably Sweden, have had longer-standing and stronger national carbon levies, Australia’s was the first explicit national tax on carbon emissions. The repeal was also precedent-setting, and predictably it has garnered far more global attention (and hand-wringing) than did the tax itself.

The tax level, $23 per tonne (metric ton), equated to $19.60 per U.S. ton of CO2, at the U.S.-Australian dollar exchange rate (1.00/0.94) in July 2014.

As recounted by Australian journalist Julia Baird in a 2014 NY Times op-ed, A Carbon Tax’s Ignoble End: Why Tony Abbott Axed Australia’s Carbon Tax, published a week after Australia’s Senate voted for repeal, the tax was a political stepchild, opposed by the country’s two major political parties, left-leaning Labor and center-right Liberal, and brokered by the Greens during a period of governmental stalemate in 2011-2012:

In 2010, the Labor prime minister, Julia Gillard, said she would look at carbon-pricing proposals, but also promised, “There will be no carbon tax under the government I lead.” Then, under pressure to form a minority government, she made a deal with the Greens and agreed to legislate a carbon price: a tax by any other name.

The heat, anger and vitriol directed at her as a leader — and as Australia’s first woman to be prime minister — coalesced around the promise and the tax. It grew strangely nasty: She was branded by a right-wing shockjock as “Ju-Liar,” a moniker she struggled to shake. The political cynicism surrounding the carbon tax certainly reduced Ms. Gillard’s political capital, but it was a perceived lack of conviction in the policy itself that damaged the pricing scheme’s credibility.

See also Australian ABC News’ superb Timeline of the tax’s torturous political path, posted in July 2014.

Predictably, the Times’ news dispatch, Environmentalists Decry Repeal of Australia’s Carbon Tax, cast the repeal as greens vs. economy, ignoring the reductions in carbon intensity in the power sector (which helped blunt the tax’s cost) as well as provisions that directed revenues to households to mitigate consumer impacts (see below).

Australia’s carbon tax also imposed climate-equivalent fees on methane, nitrous oxide and perfluorocarbons from aluminium smelting, and was collected from roughly 500 of the nation’s biggest emitters, according to the Big Pond Money blog. These included electricity generation, stationary energy producers, mining, business transport, waste and industrial processes; some (non-electric) industries were eligible to receive trade-exposure based assistance, according to the same source. Most if not all road transport fuel (i.e., petrol) was exempt. The tax level was indexed to inflation and rose from the initial $23.00 (Australian) per tonne to $24.15 per tonne in 2013 and $25.40 in 2014. Beginning July 1, 2015 the price was to be set by a cap-and-trade system linked to the EU ETS (whose price has fallen below $10/T CO2).  PolitiFact Australia compared the size and breadth of its carbon tax with others around the world, neatly refuting the Liberal Party’s pejorative characterization of the tax as “the world’s largest.”

In May 2013, one of Australia’s major papers, the Age, reported that national electricity generation with highly polluting lignite coal had fallen 14% vs. the same year-earlier period in the tax’s inaugural nine months, with conventional coal-fired generation also falling, by nearly 5%. During the same period, renewable electric generation “soared” by 28% and electricity output from lower-carbon methane increased by 9.5%. While factors such as greater hydro-electricity availability, flooding of a major coal mine, and implementation of a 20% renewable-energy target probably contributed to the declines in coal use, the 2.4% reported drop in overall electricity generation suggests that the carbon tax played a part.

Overall, reported the Age in the same article, “the emissions intensity of the national electricity market has fallen 5.4 per cent since the carbon price was introduced [presumably over the nine months extending from July 2012 through March 2013], meaning carbon emissions from power generation is [sic] down 7.7 per cent, or 10 million tonnes, from the previous nine months.”

Similar statistics were reported earlier, in Jan. 2013, by “The Australian” newspaper. The “big change in the mix of power” was attributed to “much greater use of renewable energy from hydroelectricity from the Snowy Mountains and Tasmania, and also wind farms.” The same source also said that “The retreat of manufacturing has been a factor, with the closure of the Kurri Kurri aluminium smelter last year and cutbacks in other metals plants affecting industrial demand.” A consultant cited by The Australian added that “the spread of roof-top solar panels and of appliances that used less energy were reducing growth in household consumption” of electricity, while another consultant, pointing to reduced electricity generation and emissions, said that “changes of this scale are without precedent in the 120-year history of the electricity supply industry.”

According to “The Australian,” the power sector accounted for about half of Australia’s emissions and a larger share of the carbon tax, because some of the largest emitters have free permits.”

Use of the carbon tax revenues was complex. Some went to the Australian Renewable Energy Agency for project funding and other monies providing “a raft of other compensation and development funds focused on biodiversity, low carbon agriculture, small business grants and support for indigenous communities,” according to Big Pond Money. More than half of the revenue was said to be earmarked to support low and middle income households to cover the increase in prices that business will pass on to consumers. The government also acknowledged, according to Big Pond Money, that the carbon tax would take more from 3 million households than it would return, while 2 million households would be no worse off and 4 million households better off. A Household Assistance Estimator developed by the authorities was said to provide a means for families to estimate how they would fare financially under the carbon tax.

A later AP story hammered Australia’s carbon tax, asserting that “Voters have never stopped hating the tax and its effect on their electric bills” and predicting that it would doom the ruling Labor Party in the Sept. 8, 2013 elections. “Longtime Labor Party supporters — even people who have helped cut pollution by installing solar panels at home — have flocked to the opposition,” AP reported, in Australian Gov’t Faces Carbon Tax Backlash at Poll (Sept. 6, 2013). “The government estimated the tax would cost the average person less than AU$10 per week,” said AP, “but three months after it took effect, most Australians surveyed by policy think-tank Per Capita said it was costing them more than twice that much. But they also expressed confusion, with most blaming the tax for higher gas prices even though it is not levied on motor fuel purchases.” In an e-mail, cap-and-dividend proponent Peter Barnes blamed the tax’s unpopularity on the absence of “100% dividends, fully transparent and highly visible.” We don’t disagree.

Update (January 2015): In case anyone doubted the effectiveness of taxing carbon pollution, the following graph of power plant CO2 emissions published in Australia’s Guardian shows what has happened in the year since the tax was repealed. The vertical red line is the repeal date.

See also, Emissions for power sector jump as carbon tax ends (Sydney Morning Herald, 1/7/15).

Chile

In October 2014, Chile enacted the first climate pollution tax in South America. It’s a modest levy — a mere $5 per metric ton of CO2 — that applies to only 55% of emissions. Moreover, it doesn’t take effect until 2018. Still, it’s a positive first step. The NY Times reported these details:

Chile’s tax, which targets large factories and the electricity sector, will cover about 55 percent of the nation’s carbon emissions, according to Juan-Pablo Montero, a professor of economics at the Pontifical Catholic University of Chile, who informally advised the government in favor of the tax. At $5 per metric ton of carbon dioxide emitted, Chile’s tax is lower than the $8-per-metric-ton carbon price in the European Union’s carbon-trading system, which has often been criticized as too lax. But it is higher than a carbon tax introduced in Mexico in January.

“We all understand we need to go way beyond the $5 mark” in order to really reduce carbon emissions, Dr. Montero said. However, he added, “I think this still allows you to start building the institutions that you need in the future, when you start moving forward toward more ambitious goals.”

Chile’s tax was enacted as part of a broader tax reform and revenue measure, according to the Times:

Chile’s approval of a carbon tax owes much to its positioning inside a broader tax package, experts said. At the same time that it passed the carbon tax, the Chilean government raised corporate taxes substantially, in a bid to increase revenues for education and other projects. As a result, the carbon tax raised less debate within Chile than it might have otherwise, though electricity companies have objected.

Sweden

Sweden enacted a tax on carbon emissions in 1991. Currently, the tax is $150/T CO2, but no tax is applied to fuels used for electricity generation, and industries are required to pay only 50% of the tax (Johansson 2000). However, non-industrial consumers pay a separate tax on electricity. Fuels from renewable sources such as ethanol, methane, biofuels, peat, and waste are exempted (Osborn). As a result the tax led to heavy expansion of the use of biomass for heating and industry. The Swedish Ministry of Environment forecasted in 1997 that by 2000 the tax policy would have reduced CO2emissions in 2000 by 20 to 25% more than a conventional, regulatory-based policy package (Johansson 2000). On September 17, 2007, Sweden’s government announced that it will increase its carbon taxes to address climate change. Petrol prices will go up 17 öre per litre, with the increase in fuel tax calculated on the basis of a 6 öre tax increase per kilo of CO2 emitted. (The Local)

A new (July 2014) major report by the International Monetary Fund, “Getting Energy Prices Right,” briefly summarized Sweden’s carbon-fuels tax regime as follows:

In the early 1990s, Sweden introduced taxes on oil and natural gas to charge for carbon and (for oil) sulfur dioxide and on coal-related sulfur dioxide and industrial nitrogen oxide emissions. These reforms were part of a broader tax-shifting operation that also strengthened the value-added taxes while reducing taxes on labor and traditional energy taxes (on motor fuels and other oil products). (See Box 3.5, “Environmental Tax Shifting in Practice,” p. 41. The full report is behind a paywall and may be ordered via this link; Chapter 1 of the report, a summary, may be downloaded at no charge via this link.)

Sweden’s carbon tax history and current status were summarized intelligently in a 2013 blog post by “realmelo,” who appears to be a graduate student in economics in British Columbia. Click here for her/his useful, brief report.

Other Nations

(Note: See comment at bottom of page on the Vermont University Law School book, The Reality Of Carbon Taxes In The 21st Century.)

France has no carbon price outside of the implicit price from its participation in the European Union’s Emission Trading System. In April 2016, however, Ségolène Royal, Minister of Environment, Energy and the Sea, issued a four-page declaration calling for the nations of Europe to adopt “a carbon component in the energy tax” of €22/tonne in 2016, with a price trajectory of €56/tonne in 2020 and €100/tonne in 2030. Converting from euros (at the 1.14 exchange rate of 4-April-2016) and metric tons, the price schedule equates to $23/ton today, $58/ton in 2020 and $103/ton in 2030. She wrote:

This measure is essential to encourage energy efficiency and the development of renewable energy in the transport and construction sectors, which have the largest potential for investment and job creation. This change can be made by revising directive 2003/96/CE restructuring the communal taxation framework for energy products and electricity, which has remained unchanged for several years. It may also be undertaken by Member States individually. It should also be based on the principle of fiscal neutrality to avoid increasing mandatory contributions and instead favour the transfer of taxation to fossil fuels. The context is favourable because the drop in the price of hydrocarbons and gas is significant enough so that the carbon component will not result in increasing the final bill including all taxes for consumers (including motorists). Thus, the introduction of the carbon component preserves purchasing power over the short term, but gives a clear signal of the need to quickly carry out energy retrofitting on housing, purchase clean vehicles and develop renewable energy (especially renewable heat and biogas).

Minister Royal’s statement also urged EU member states to “work for the establishment of the carbon price outside the European Union and unite countries that choose to act.”

The goal is not to impose a single worldwide price or a world CO2 market, but to bring together all committed countries and companies around common principles: ensure the carbon price is within the range of between $10-20/tonne before 2020 and $30-80/tonne in 2030; remove subsidies for fossil fuels; prepare for price convergence through networked carbon markets or mechanisms for rebalancing competition such as carbon inclusion mechanisms. The alliance may rely on the Carbon Pricing Leadership Coalition, on condition that it follows its road map and expands it to new countries.

Finland enacted a carbon tax in 1990, the first country to do so. While originally based only on carbon content, it was subsequently changed to a combination carbon/energy tax (U.S. EPA National Center for Environmental Economics). The current tax is €18.05 per tonne of CO2 (€66.2 per tonne of carbon) or $24.39 per tonne of CO2 ($89.39 per tonne of carbon) in U.S. dollars (using the August 17, 2007 exchange rate of USD 1.00= Euro 0.7405). Current taxes are summarized in a Ministry of the Environment fact sheet Environmentally Related Energy Taxation in Finland.

New Zealand made plans in 2005 to enact a carbon tax equivalent to $10.67 (of U.S.) per ton of carbon (based on conversion rate of USD 1.00 = NZD 0.71). The tax would have been revenue-neutral, with proceeds used to reduce other taxes (Hodgson 2005). However, a new government determined that the carbon tax would not cut emissions enough to justify the costs, and the tax was abandoned (Myer 2005). [CTC addendum: In Sept. 2007 the government unveiled a proposed emissions cap-and-trade scheme intended to cover all carbon emissions. The NZ Green Party’s preliminary assessment provides some details.]

The U.S. 2022 Inflation Reduction Act is intended to reduce carbon emissions in vehicular travel and other economic sectors through a broad range of energy incentives and subsidies led by measures to reduce the cost to manufacture and sell electric vehicles. This page links to coverage of the IRA and explores its likely implications for both carbon emissions and the project to enact economy-wide carbon taxes in the U.S.

Biden Administration Detailed Guide to the IRA

In December 2022 the White House released a 182-page guide to the energy and climate provisions of the Inflation Reduction Act. Building a Clean Energy Economy: A Guidebook to the Inflation Reduction Act’s Investments in Clean Energy and Climate Action is a 15 MB pdf.

Introduction

In a head-spinning 20-day legislative whirlwind from late July to mid-August, the Inflation Reduction Act of 2022 was unveiled by Senate Majority Leader Chuck Schumer and West Virginia Senator Joe Manchin, passed by the Senate and the House, approved by the Senate parliamentarian (and thus immunized against the filibuster), and signed by the President.

In the climate-policy firmament, the Inflation Reduction Act could be seen as an antithesis of carbon pricing. Rather than making dirty (fossil) energy costlier in the marketplace, it seeks to make clean energy cheaper by subsidizing low- or zero-carbon power sources. It also aims to leverage low-carbon electricity by paying vehicle and building owners to switch to electric power from combustion fuels that can’t themselves be decarbonized.

Nevertheless, the “IRA” stands as a landmark legislative achievement — the most ambitious as well as costliest federal initiative to reduce carbon and other greenhouse gas emissions. Moreover, the affirmative nature of the legislation — “upending the debilitating narratives of U.S. climate helplessness and Biden-Democratic Party haplessness,” as we wrote in early August in a post in The Nation (cross-posted here as well) — could some day open the door to federal legislation pricing carbon emissions.

What the Inflation Reduction Act Does

The IRA (download summary or full text) commits $370 billion in federal subsidies over the next decade to bring down the cost of “clean” (ultra low- or zero-carbon) energy and accelerate the electrification of U.S. vehicles, buildings and industry so that increasingly low-carbon power displaces carbon-spewing direct combustion of oil and gas. The designated spending pots are depicted in the New York Times graphic below.

Another section of the omnibus legislation authorizes the federal government to negotiate down prescription drug prices and expands subsidies for health insurance under the Affordable Care Act — measures intended to bolster and expand the Obama administration’s signature “Obamacare” legislation and  also situate climate legislation in a more popular context. And, in a potentially important precedent, the IRA sets in motion a greenhouse gas fee — not on CO2 but on “excess” methane emitted from oil and gas extraction and transportation infrastructure — to take effect in 2024.

Passage of the IRA ended a protracted period of U.S. backsliding from climate action. It also fulfills, if only as a first, albeit major, step, campaign commitments by Joe Biden and other national Democrats to tackle U.S. emissions and climate change. Its enactment was viewed as boosting the Democratic Party’s chances a retaining control of Congress in the 2022 midterms. [Post-election addendum: the Democrats did in fact surpass expectations in the Nov. 2022 voting, increasing their Senate majority by one and limiting their House losses to nine, though that was enough to flip control to the Republicans.]

This page presents and distills informed commentary on and analysis of the Inflation Reduction Act. We hope to soon tend to the legislation’s implications for advancing comprehensive, national-level U.S. carbon pricing.

A veteran journalist’s take: “It makes clean energy cheap.”

An excellent early entry point into the IRA is from the pen of veteran journalist Mark Hertsgaard. His Aug. 11, 2022 essay in The Nation, Does The Climate Bill Throw Environmental Justice Under The Bus?, touted the legislation as by far the biggest pro-climate policy by the U.S. or any other country, while making clear that it’s not enough by itself.

Mark’s piece is worth quoting at length, especially up front, where he said, Yes, the legislation is a big deal:

“It makes clean energy cheap, that’s the bottom line,” said Jesse Jenkins, an engineering professor at Princeton who conducted independent modeling of the spending. New federal money, often in the form of tax credits, will subsidize consumers who switch to electric vehicles or install heat pumps and other energy efficient household technologies. It will incentivize electric utility companies to shift from gas to renewables and oil and gas companies to minimize leaks of methane, an exceptionally potent greenhouse gas. It will pay to clean up America’s ports, a concentrated source of emissions that not only overheats the planet but poisons nearby communities, which tend to be disproportionately poor and people of color.

By doing all this and more, the Inflation Reduction Act will create 9 million jobs over the next decade in clean energy, clean manufacturing, and natural infrastructure (e.g., forests and parks), according to the Blue Green Alliance. The bill’s backers further assert that it will reduce annual US emissions by 40 percent from 2005 levels by 2030, a claim supported by three independent analyses that is further examined below. If achieved, that reduction would approach the 50 to 52 percent reduction that scientists say is needed to limit global temperature rise to 1.5 degrees Celsius above pre-industrial levels.

(We at Carbon Tax Center are less sanguine about 2030, in part because we question the apparent modeling assumption that the U.S. was already on track for a 30 percent reduction by 2030; U.S. 2021 emissions were only 14 percent below the 2005 baseline figure, not 20 percent, a figure calculated with 2020 emissions, an obvious aberration due to temporary Covid-related economic and energy contractions, yet one advanced by a high-profile NY Times climate columnist in May and repeated a month later in a NYT editorial. Note also that the bill’s backers didn’t credit the IRA with reducing U.S. emissions by 40 percent; rather, they pointed to the bill as a big assist to accomplish that job, tacking a high single-digit reduction onto that putative 30 percent “business-as-usual” reduction level.)

That’s another reason this bill is a big deal: It gives the United States much-needed credibility to urge other countries to slash their own emissions. The U.S. has taken many big steps on climate over the years, just mostly in the wrong direction. Instead of cutting emissions, it boosted them through subsidies and lax regulations. It has repeatedly cast doubt on whether there is even a problem, with the last president calling climate change “a hoax” to applause from fellow Republicans. At international conferences dating back to the Earth Summit in 1992, the same script has played out again and again: Other big emitters that don’t want to cut back hide behind the U.S. refusal to do so. If the Inflation Reduction Act becomes law, that dodge will no longer be credible.

Hertsgaard put G.O.P. climate obstructionism in a harsh light, asking “How much longer will the Republican Party be given a pass on its climate wrecking?” Here’s his answer:

Until Manchin’s surprise announcement that he was ready to support a climate bill after all, both wings of the movement, along with 99 percent of press coverage, was giving him all the blame for blocking climate progress on Capitol Hill. This was understandable, but bizarre given that his vote only mattered because Republican senators have been in lockstep opposition to climate action since, well, forever. Republicans in Washington have opposed real climate action for more than 30 years … Yet they never pay a political price for it. News coverage and political adversaries treat the GOP’s opposition as unchangeable as gravity. Thus Republicans get away with scorning Democrats’ ideas for combating the climate crisis, even as they offer no credible plans of their own. (emphasis added)

“No more hiding behind a free pass,” Hertsgaard wrote, as he called on climate activists to challenge climate-do-nothing Republicans, not a single one of whom voted for the IRA, in midterm campaigning. Alongside parallel challenges to regain reproductive autonomy and stop deranged 2020 election conspiracy-mongering, the Democrats’ newfound climate voice just might give them a fighting chance to hold Congress in November. [Note addendum above, reporting the Democrats’ greater-than–expected electoral strength in the 2022 midterms.]

Perhaps the most intriguing part of Hertsgaard’s article was his discussion of the IRA’s environmental justice implications. He gave EJ advocates, from environmental justice godfather Robert Bullard to the upstart Climate Justice Alliance (whom we called out on our Carbon Pricing and Environmental Justice page), plenty of space to decry the provisions nominally authorizing more drilling and other fossil fuel extraction, which historically has disproportionately damaged BIPOC communities. But Hertsgaard also spotlighted the assertion by the consultancy Energy Innovation (one of the three bullish “independent analysts” of the IRA noted earlier) that “the bill’s clean energy measures will yield 24 times more emissions reductions than its fossil fuel provisions will increase emissions.” [Addendum, Sept 2023: Energy Innovation subsequently raised its 24-to-1 emissions ratio to 28-to-1; details here.]

This claim, even if only half-valid, could be catalytic, as Hertsgaard explains:

That 24-to-1 ratio hints at why the bill’s environmental justice impacts might be less destructive than predicted. The fundamental strategy behind this bill is to make clean energy dramatically cheaper — so much cheaper that fossil fuels are squeezed out of existence, not by government fiat but by the workings of the marketplace.

Let’s go ahead and say what Hertsgaard only hinted: Environmental justice stands to win enormously under the Inflation Reduction Act. Not just from the millions of new jobs. Not just from its down payment against climate pollution that disproportionately threatens communities of color from the US to the Global South. And not just from “the good things in it,” per Prof. Bullard, “that are greatly needed by low-income, people of color and environmental justice communities — such as incentives for clean energy technologies, electric vehicles, school buses and transit; helping families who are energy insecure with their electric bills; retrofits and tax credits to assist with making homes more energy efficient; and targeted investments to address legacy pollution and environmental ‘hot-spots’ created by racial redlining.”

All these matter greatly. But the big EJ payoff from the IRA will come from reducing the “need” to extract and process fossil fuels, by strangling the source: demand.

The omission of this point by the many EJ activists and allies whom Hertsgaard interviewed or cited — not just Bullard and the Climate Justice Alliance but also Greenpeace USA co-director Ebony Martin and Erich Pica of Friends of the Earth — raises an intriguing question: If it is true that climate justice campaigners downplay or ignore policy legislation that, at least on paper, seems destined to reduce extractive and exploitative pressures on communities of color, is it because they regard connections between demand and extraction as tenuous or even chimerical? Or is it because their movement is built on solidarity (see for example the 1991 founding Principles of Environmental Justice) and thus they cannot countenance sacrifice by a few (if indeed it’s only “a few”) for the benefit of the many communities that will be spared because the large-scale restructuring of energy demand will allow the plague of extraction or exploitation to pass over them?

Fabulous Weeds: The Jesse Jenkins Interview by David Roberts

Our heading references “The interview” because this podcast conversation achieved cult status among climate and energy policy types. We say “Weeds” because the 72-minute podcast went deep into the workings of the IRA. And we say “Fabulous” because Jenkins’ command of the intricacies of the legislation and their implications — for U.S. energy supply and use, for emissions and climate, and for the surrounding politics — is nothing short of brilliant. In this conversation the weeds sway and sing.

Roberts, a veteran political + energy + climate journalist whom we have followed closely (and occasionally tangled with) for more than a decade, posted his conversation with Jenkins, an assistant professor of mechanical engineering at Princeton, on Aug. 19 as Diving further into the Inflation Reduction Act: Part Two.

Among the topics covered and the points made:

• The IRA greatly liberalizes companies’ and non-profit organizations’ ability to sell clean electricity tax credits earned from renewable investments, thus expanding capital pools to finance clean power.
• New zero- or low-carbon generating facilities located in transitioning fossil fuel communities and on Indigenous lands receive extra tax credits. The same applies to electric vehicle and battery component manufacturing plants.
• Unionized manufacture likewise receives greater tax advantages, as do vehicles and batteries manufactured with especially high domestic content.
• Wind and solar projects are guaranteed tax credits for an entire decade (to 2032), thus removing an habitual source of uncertainty that had helped bottle up clean energy supply. The time horizon is lengthened even further as long as the U.S. falls short of 75% electricity decarbonization from today’s level.

This brief list barely scratches the surface of the details enumerated by Jenkins. “It’s like a roulette wheel that just happened to settle out at a decent place at just the right moment,” enthuses Roberts, marveling not just that Manchin climbed aboard the legislative train at all but that seemingly every smart nudge ever dreamed up by Congressional Democrats and their staff made it into the bill that got passed.

Politics of clean energy subsidies vs. carbon taxes

For carbon tax proponents, the podcast’s signal moment comes just before the close, at the one hour, six minute mark, when Roberts asks Jenkins how durable he thinks the IRA policies and programs in the Inflation Reduction Act will be “in the nightmare scenario in which [climate-uncaring] Republicans pull off a trifecta in 2022 and 2024″ and gain power.

Jenkins’ answer, which we’ve put in the graphic at left, is worth pondering. And unlike Roberts, who has the same outlook, Jenkins seems to state his with no animus against carbon pricing, which makes his view even more important.

“Over the next decade there will be hundreds of billions of new tax revenues tied to these [clean-energy] facilities,” says Jenkins, “and dozens and dozens of new factories, there will be over a million new jobs in manufacturing and a million more in installation and construction and maintenance … and they will be spread all over the country and they will be … driven specifically into energy communities that have traditionally been tied to the fossil energy economy, and so their affiliation with and self-interested ties to the fossil economy may not be eliminated but will certainly be complicated over time.”

“Moreover, [the IRA] will deliver very near-term salient environmental health benefits, particularly to environmental justice communities … that will be felt in the short term way before we can see any signal in the climate chaos that is unfolding around us. [Which makes the legislation] more economically durable, instead of delivering a backlash that has to be defended against,” in the case of a carbon emissions price.

If you try to repeal any of the provisions of the IRA, Jenkins says, “You’re going to have billion-dollar companies lined up to fight you because they’re making money off of this [and you’ll have] local elected officials pissed off because you’re jeopardizing investments in their districts. It’s just not a good idea,” he concludes, to try to roll back the legislation.

“A constituent creation machine,” Roberts calls the Inflation Reduction Act, “shooting money out every which way.”

We find Jenkins’ (and Roberts’) viewpoint cogent, though more as a defense of the IRA than a final nail in the carbon-tax coffin. We hope to say more on this score soon, in this space.

Red States’ IRA Windfall

It shouldn’t be surprising that investment in green-energy infrastructure is concentrated in Republican-leaning states and counties. Solar arrays and, especially, wind farms are land-intensive and, as Republicans never tire of pointing out, the area of U.S. counties that voted for Trump over Biden in 2020 was triple the area that went for Biden. Manufacturing too is more prevalent in rural areas, relative to population, than urban.

Still, it’s startling how much of new investment in green energy is taking place in what is considered “red” voting territory. An August 2023 preliminary analysis by the Treasury Department reports that more than 80 percent of IRA-related investments are in areas with below-average college graduation rates. Around 65 percent are in areas with above-average poverty rates, and the same share, 65 percent, are in areas with below-average  employment levels. Even more striking is that almost 90% of the announced investments are in counties with below-average weekly wages. (Percentages are based on 2021 data; hat tip to New York Times columnist David Brooks, who featured these figures in his Sept 7, 2023 column, The American Renaissance is Already at Hand.)

This is pork-barrel politics with a twist, or, at least a wide purview. The Biden administration’s hope is that the anticipated surge in green energy and reductions in carbon emissions will resonate with climate-concerned urban and suburban voters while the job benefits for red-leaning areas will entice some vote switches there. (The Treasury Dept. should also express its data in absolute terms to allow a sense of the strength of the employment effects.) Some cutting-edge political commentators disparage this, of course, based on anecdotal plus polling evidence that the IRA has yet to register with the electorate. Even so, the IRA facts on the ground, which will only grow with the passage of time, should help to inoculate the legislation against Republican roll-back efforts.

Lording It Over Carbon Pricers

We were taken aback that veteran climate writer (formerly NY Times, now Energy Innovation) Justin Gillis didn’t just badger carbon tax proponents to get aboard the “Make Clean Energy Cheap” train but also blamed our ilk for “the most epic wrong turn in the history of climate policy,” one that, in his telling, delayed passage of the Inflation Adjustment Act for decades.

Goodness! Whatever happened to magnanimity in victory? Not to mention historical accuracy. Fact is, climate policy hit a dozen-year wall after 2010 not because carbon taxers held sway in climate discourse — believe me, we did not — but because Tea-Party Republicans took over Congress. As for the 1990s, climate policy’s failure to lift was more because climate dangers appeared hypothetical, a mere speck on the horizon, than because of the long shadow cast by Clinton’s failed 1993 Btu tax.

Even in the in-between decade of 2000-2010, carbon taxing never got a real shot in Congress. The big green groups, seeking to duplicate the success of the 1990 Clean Air Act Amendments creating the SO2 trading system, and determined to “hide the price” rather than level with Americans over the true costs of cheap fuels, insisted on the convoluted, Wall Street-tinged, devilishly complex cap-and-trade approach, only to see it crash and burn under its immense weight. The rightward, xenophobic cultural shifts that arose after 9/11 hurt as well, as did eight years of oil-allegiant George W. Bush and Dick Cheney.

Moreover, it is only fairly recently that zero-carbon energy became readily available at prices low enough to allow them to scale rapidly and massively without subsidies that would blow up the national debt (remember that bugaboo?). Arguably, the wind and solar sectors also had to be granted time to edge far enough into the mainstream that an industrial policy built on subsidizing them into ubiquity wouldn’t meet with widespread ridicule.

All of which is to say that what started as Build Back Better and eventually became the Inflation Reduction Act probably couldn’t have come into fruition until now. Sure, David Roberts — he of the Jesse Jenkins podcast celebrating the IRA — presaged the theory behind that legislation in mid-2020, with his Standards-Investment-Justice formulation (which we dutifully praised at the time in our post, If the Democrats Run the Table in November). But it’s a hell of a stretch to argue, as Gillis did on Twitter, that something like the IRA could have been conceived and enacted a lot sooner if not for people “who chased the will-o-the-wisp of a carbon tax for 30 years.”

As for Recalculating on Climate, Lydia DePillis’ NY Times commentary Gillis was touting, the less said the better. Not for the first time, it conflates nominal carbon pricing proponent Bill Nordhaus with climate-damage modeler Bill Nordhaus whose blinders about global climate chaos’s prospective toll on ecosystem services and economic productivity contributed greatly to the economic profession’s persistent lowballing of the likely costs of unchecked fossil fuel emissions.

The second headline of DePillis’s piece, “They underestimated the impact of global warming, and their preferred policy solution floundered in the United States,” is true enough. But while it was perhaps inevitable that a piece of this sort would lead with Nordhaus, winner of the 2018 Nobel Memorial Prize in Economic Sciences, it was off-pitch to place him at the center of carbon tax advocacy. To its credit, the article granted space for Columbia Business School climate economist Gernot Wagner to point out that Nordhaus’s proposed “optimal carbon price” of just $43 per metric ton in 2020 was and is a “woeful underestimate of the true cost.”

(For CTC’s brief and partly laudatory commentary on Nordhaus’s 2018 Nobel, see our post, From Sweden, A Deeper Dive Into Last Weeks’ Economics Nobels. For a deeper and more critical look, see our 2017 post, Showing the Cost Side of the Climate Equation in a New Light.)

Perils of Making Clean Energy Cheap

“The [IRA] is designed to make clean energy cheaper which means mak[ing] energy and energy technologies cheaper for everyone.” That’s Princeton energy savant Jesse Jenkins, speaking with podcaster David Roberts just after the Inflation Reduction Act was signed into law in August 2022 (quote excerpted from earlier graphic).

The political benefits of making clean energy cheap are clear: It creates large, diverse constituencies strong enough not just to enact the subsidies but to maintain them through shifting political winds. Moreover, monetary firepower from the clean-energy subsidies can help counter NIMBY pressure to block the new wind farms, solar arrays and transmission lines needed to generate the clean power and to help bring into being the supply chains (mines, factories, etc.) needed to crank out the hundreds of millions of vehicles and appliances needed to replace the incumbent ones that run on fossil fuel combustion.

That’s the political logic and the vision behind the IRA, which Jenkins and Roberts depict so alluringly. But it comes with a potentially large downside: more total energy consumption, not less. That’s because the artificial lowering of energy prices — artificial because the wind and solar facilities and allied infrastructure will be heavily subsidized — will militate against efficiency investments and choices.

How? The subsidies that make the IRA work politically will tend to weaken the micro-economic case for virtually every conservation investment, from HVAC upgrades and moderately sized homes to increased residential density and less-car-dependent street designs. That’s due to longer payback periods and worsened benefit-cost ratios stemming from the reduced monetary value of the saved energy.

In addition to lesser conservation investment, conservation behaviors such as driving less, re-using more and just plain lowering consumption will similarly be buffeted by the powerful tide of cheaper energy. And while it’s true that carbon- and climate-mindful behavior has never gained much of a foothold in the U.S., cheap energy will further discourage it.

The IRA’s bending of consumption curves toward more overall energy use rather than less might not matter much if complete grid decarbonization could be accomplished quickly and with little ecosystem and community disruption. After all, why fret about energy overuse if (i) all of the energy is electric, and (ii) all of the electricity is ultra-low or zero carbon, and (iii) installing and deploying those seemingly benign electricity sources and the devices that use them (EV’s, heat pumps, etc.) don’t unduly damage nature and communities?

The answer is that none of those three conditions will be met anytime soon. And the day on which all three obtain is way out on the horizon, if at all.

The Methane Fee

The Inflation Reduction Act includes a fee on “excess” methane emissions from oil and gas extraction and processing. The fee looks to be impactful not only on future methane emissions but as a potential stepping stone to possible carbon emission fees.

The text box at right, courtesy of the Akin Gump law firm, contains key details but little context. We hope soon to add metrics indicating the fee’s “bite” including projected revenue and estimated impact on emissions.

The Transmission Trap

The vast buildout of renewable capacity that the Inflation Reduction Act is intended to catalyze won’t happen without two enormous, complementary developments: easier and quicker siting of wind, solar and battery installations; and accelerated construction of large-scale electric transmission lines to connect those installations to power grids and also better interconnect the nation’s disparate power grids to each other.

Underscoring transmission’s critical importance, in September 2022, just a month after the IRA was signed into law, the law’s most prominent modeler and proponent, Jesse Jenkins (see his interview with journalist David Roberts, above), acknowledged in an elaborate slide deck that failure to accelerate the historical rate of U.S. transmission buildout would cancel 80 percent of its emission reductions he projected for 2030.

Jenkins’ key chart on the consequences of stalled transmission capacity growth is copied at left, with our embellishments. The takeaway: subsidizing green energy, even via the enlightened, innovative paths in the Inflation Reduction Act, is no panacea. Enacting a U.S. robust carbon tax is hard, obviously, but attacking climate change without carbon pricing has its own pitfalls, and they’re not incidental.

The focus of progressive U.S. climate policy has moved decisively since late 2018 to a Green New Deal — an ambitious everything-it-will-take climate policy built around a massive public investment program leading to the creation of millions of new jobs converting the American economy to a clean-energy system.

The Green New Deal idea burst into public awareness in November 2018 with a sit-in in House Democratic Leader (now Speaker) Nancy Pelosi’s Washington office by millenial organizations including the Sunrise Movement and Justice Democrats.

A subsequent Green New Deal resolution sponsored by Rep. Alexandria Ocasio-Cortez  (D-NY) and Sen. Edward Markey (D-MA) attracted more than 90 cosponsors in the House and a dozen in the Senate, including presidential candidates Bernie Sanders, Kirsten Gillibrand, Kamala Harris, Elizabeth Warren, Cory Booker, and Amy Klobuchar. (Gillibrand and Harris later terminated their candidacies.)

The substance of the Green New Deal is a work in progress. The Ocasio-Cortez/Markey resolution is more a statement of goals and principles than a policy document. Current political realities afford advocates time to work out how to achieve those goals. In the meantime, the widespread endorsements garnered by the Green New Deal  should be read as support of the general approach rather than for a specific set of policies.

Even at this early stage, the Green New Deal approach appears to offer two clear advantages over other climate policy ideas including stand-alone carbon pricing:

1. It gets the scale of the problem right. Climate policy poses a world-historical threat to human society, and half-measures like renewable tax credits and LED lightbulbs are never going to meet that challenge.
2. Linking climate mitigation to job creation directly addresses public concern about the economic impact of climate policy by drawing attention to the vast economic benefits from tackling the issue in the right way.

A fabulous resource: The American Prospect Dec. 2019 issue

The progressive-leaning, policy-wonkish but politically attuned American Prospect magazine devoted its December 2019 issue to the Green New Deal. No fewer than 18 leading economists, policy veterans and public officials including WA state governor Jay Inslee and luminaries Jeffrey Sachs, Buz Paaswell, Robert Pollin, Jeffrey Faux, Derrick Jackson, Jim Boyce, Bill McKibben and the magazine’s longtime co-editors Harold Meyerson and Robert Kuttner expound on subjects from carbon dividends and restoring Americans’ trust in government programs to remediating front-line communities and “How the first New Deal remade America.” The entire issue looks like a must-read.

Other resources 

• A Green New Deal, a report by Data for Progress, is one of the earliest and clearest explanations of the concept.
• H. Res. 109, the Green New Deal resolution introduced on Feb. 7, 2019 by Rep. Ocasio-Cortez.  (Sen. Markey’s S. Res. 59 is identical.)
• David Roberts of Vox has covered the Green New Deal extensively. A trio of his posts provide a good introduction:
  • The always helpful Vox Explainer
  • A reply to the critics
  • An interview with Senate sponsor Edward Markey

Carbon Taxes and the Green New Deal

We at the Carbon Tax Center are excited by the vision of a Green New Deal and the energy with which its proponents and adherents are advancing it. We are intrigued by the vast potential synergies of combining the price signaling of carbon taxing and the societal mobilization implicit in the Green New Deal.

In particular, we believe a carbon tax can and should be a key part of any Green New Deal package. In early 2019 CTC policy associate Bob Narus wrote two blog posts on the nexus between a carbon tax and the Green New Deal concept:

• In Carbon Tax Advocates Should Embrace a Green New Deal, posted in March. He notes that a carbon tax has been a tough sell, and even a robust tax will no longer achieve the massive emission reductions the IPCC says we need, unless coupled with direct clean-energy investments.
• Green New Dealers Should Embrace a Carbon Tax, Bob’s complementary post from April, explains why the ambitious goals of a Green New Deal will likely be out of reach without a carbon tax to provide the powerful price pull.

The Carbon Tax Center will continue to cover the Green New Deal movement as it progresses.