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FOR IMMEDIATE RELEASE
November 29, 2015

32 Leading U.S. Experts Urge Paris Climate Negotiators to Tax Carbon

Four Nobel Prize winners, three former cabinet secretaries, and two former vice-chairs of the Federal Reserve Board of Governors are among the open letter’s signers.

Thirty-two leading U.S. experts in economic, environmental and climate policy today released an open letter urging negotiators at the 2015 Paris Climate Conference to pursue national carbon taxes the most meaningful action to address climate change. The signers, assembled by the nonprofit Carbon Tax Center, outline how world leaders can tackle climate change without undermining economic prosperity.

The signers include Steven Chu, Nobel Prize-winning physicist and President Obama’s first Secretary of Energy; Robert Reich, President Bill Clinton’s Secretary of Labor; George P. Shultz, President Nixon’s Secretary of Labor and President Reagan’s Secretary of State; Nobel Prize-winning economists Joseph Stiglitz, Thomas Schelling and Kenneth Arrow; former Vice Chairs of the Federal Reserve System Board of Governors Alice Rivlin and Alan Blinder; Greg Mankiw, chair of President George W. Bush’s Council of Economic Advisers; and Jerry Taylor, president of the Niskanen Center.

View the letter and a complete list of signers here: https://www.carbontax.org/blogarchives/2015/11/29/a-call-to-paris-climate-negotiators-tax-carbon/

The letter states, “Taxing carbon pollution will spur everyone ― businesses, consumers and policymakers ― to reduce climate-damaging emissions, invest in efficient energy systems and develop low-carbon energy sources. This single policy change — explicitly using prices within existing markets to shift investment and behavior across all sectors — offers greater potential to combat global warming than any other policy, with minimal regulatory and enforcement costs.”

“We are seeing the beginning of a global transformation to sustainable, clean energy,” said Steven Chu. “A clear, rising carbon tax in as many countries as possible is the best way to accelerate this revolution.”

Signers endorse several measures to ensure that national taxes on greenhouse gas emissions can bolster both environmental quality and economic growth. That includes using some carbon tax revenue to offset “unfair burdens to lower-income households” and ending subsidies that “reward extraction and use of carbon-intensive energy sources.”

“Turning the Paris Conference into a true milestone for global climate policy will require negotiators to focus sharply on creating a price for carbon,” said Joseph Stiglitz.

Harvard University Economics Professor Martin Weitzman added, “Focusing on carbon prices could avoid the free-rider trap that has hung up past climate negotiations.” In contrast to the “volunteerism” embodied in cap-based approaches, such as the Kyoto Accord, national carbon taxes apply the universal discipline of price to “attack the critical externality of global warming,” Weitzman noted.

Read the full letter and complete list of signers here: https://www.carbontax.org/wp-content/uploads/2015/11/CTC_carbon_tax_sign_on_letter_28_Nov_2015_posted.pdf

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The Carbon Tax Center launched in January 2007 to give voice to Americans who believe that taxing emissions of carbon dioxide and other greenhouse gases is imperative to combat global warming. CTC is a clearinghouse for research, analysis and advocacy to establish a carbon tax as the centerpiece of U.S. policy to combat catastrophic climate change. It has been the leading NGO advocating for carbon taxing as the key to unlocking low- and non-carbon investment and innovation to drive the global energy system away from fossil fuels to renewable wind, sunlight and efficiency.

A Call to Paris Climate Negotiators: Tax Carbon.

On November 29, 2015, the eve of the UN climate summit in Paris, the Carbon Tax Center unveiled a letter signed by 32 notable individuals, urging Paris climate negotiators to focus on national carbon taxes, both for their intrinsic value and as a gateway to a global carbon price.

The group includes four Nobel Laureates, three former U.S. cabinet secretaries who served under four presidents (from both major political parties), two former vice-chairs of the Federal Reserve System’s board of governors, and three distinguished faculty members from Harvard University’s economics department. It also includes leading carbon tax advocates from across the political spectrum: Jerry Taylor of the Niskanen Center, Mark Reynolds of Citizens Climate Lobby, and Charles Komanoff of CTC.

The text of the letter is directly below, followed by the names of the signatories.

Released in Paris and New York, Sunday, November 29, 2015

Taxing carbon pollution will spur everyone ― businesses, consumers and policymakers ― to reduce climate-damaging emissions, invest in efficient energy systems and develop low-carbon energy sources.

This single policy change — explicitly using prices within existing markets to shift investment and behavior across all sectors — offers greater potential to combat global warming than any other policy, with minimal regulatory and enforcement costs.

We urge negotiators at the upcoming UN Climate Conference in Paris to pursue widespread implementation of national taxes on climate-damaging emissions.

We endorse these four principles for taxing carbon to fight climate change without undermining economic prosperity:

1. Carbon emissions should be taxed across fossil fuels in proportion to carbon content, with the tax imposed “upstream” in the distribution chain.
2. Carbon taxes should start low so individuals and institutions have time to adjust, but then rise substantially and briskly on a pre-set trajectory that imparts stable expectations to investors, consumers and governments.
3. Some carbon tax revenue should be used to offset unfair burdens to lower-income households.
4. Subsidies that reward extraction and use of carbon-intensive energy sources should be eliminated.

 

Signed,

Frank Ackerman Kenneth J. Arrow Jim Barrett Alan S. Blinder Dallas Burtraw Steven Chu Richard N. Cooper Robert H. Frank Shi-Ling Hsu Charles Komanoff N. Gregory Mankiw

Donald B. Marron Jr. Aparna Mathur Warwick McKibbin Gilbert Metcalf Adele C. Morris Robert Reich John Reilly Mark Reynolds Alice M. Rivlin James Rydge Thomas C. Schelling

Robert J. Shapiro George P. Shultz Joseph Stiglitz Steven Stoft Chad Stone Jerry Taylor Richard Thaler Eric Toder Martin Weitzman Gary Yohe

(Institutional affiliations are for identification purposes only, and do not connote any organizational approval.)

Frank Ackerman, PhD
Principal Economist, Synapse Energy Economics

Kenneth J. Arrow, PhD
Nobel Prize in Economics, 1972
Joan Kenney Professor of Economics and Professor of Operations Research, Emeritus, Stanford University
Convening Lead Author, Intergovernmental Panel on Climate Change

Jim Barrett, PhD
Chief Economist, American Council for an Energy-Efficient Economy
Former Senior Economist, Joint Economic Committee

Alan S. Blinder, PhD
Gordon S. Rentschler Memorial Professor of Economics and Public Affairs, Princeton University
Vice Chairman, Board of Governors, Federal Reserve System, 1994-1996
Member, President’s Council of Economic Advisers, 1993-1994

Dallas Burtraw, PhD
Darius Gaskins Senior Fellow, Resources for the Future

Steven Chu, PhD
Nobel Prize in Physics, 1997
U.S. Secretary of Energy, 2009-2013
Elected to Royal Society, 2014
William R. Keenan, Jr. Professor of Physics, Professor of Molecular and Cellular Physiology, Stanford University

Richard N. Cooper, PhD
Maurits C. Boas Professor of International Economics, Harvard University
Deputy Assistant Secretary of State, 1977-1981
Former Senior Staff Economist, Council of Economic Advisers

Robert H. Frank, PhD
Henrietta Johnson Louis Professor of Management, Cornell University
Professor of Economics, Samuel Curtis Johnson Graduate School of Management, Cornell University

Shi-Ling Hsu, PhD
John W. Larson Professor of Law and Associate Dean, Florida State University College of Law

Charles Komanoff
Director, Carbon Tax Center

Gregory Mankiw, PhD
Robert M. Beren Professor of Economics, Harvard University
Chair, President’s Council of Economic Advisers, 2003-2005

Donald B. Marron Jr., PhD
Director of Economic Policy Initiatives, Urban Institute
Member, President’s Council of Economic Advisers, 2008-2009
Congressional Budget Office, Deputy Director 2005-2007, Acting Director 2006

Aparna Mathur, PhD
Resident Scholar in Economic Policy Studies, American Enterprise Institute

Warwick McKibbin, PhD
Non-resident Senior Fellow, The Brookings Institution
Professor of Economics, Australian National University and Centre for Applied Macroeconomic Analysis

Gilbert Metcalf, PhD
Professor of Economics, Tufts University
Deputy Assistant Treasury Secretary for Environment and Energy, 2011-2012

Adele C. Morris, PhD
Senior Fellow and Policy Director, Climate and Energy Economics, The Brookings Institution

Robert Reich, PhD
U.S. Secretary of Labor, 1993-1997
Chancellor’s Professor of Public Policy, Goldman School of Public Policy, University of California, Berkeley

John Reilly, PhD
Co-Director, MIT Joint Program on Science and Policy of Global Change
Senior Lecturer, MIT Sloan School of Management

Mark Reynolds
Executive Director, Citizens Climate Lobby

Alice M. Rivlin, PhD
Senior Fellow, The Brookings Institution
Visiting Professor, Georgetown University
Vice Chair, Board of Governors, Federal Reserve System, 1996-1999
Director, White House Office of Management and Budget, 1994-1996
Founding Director, Congressional Budget Office, 1975-1983

James Rydge, PhD
Lead Economist, Global Commission on Economy and Climate, New Climate Economy

Thomas C. Schelling, PhD
Nobel Prize in Economics, 2005
Lucius N. Littauer Professor of Political Economy, Harvard University (Emeritus)
Professor of Foreign Policy, National Security, Nuclear Strategy and Arms Control, School of Public Policy, University of Maryland

Robert J. Shapiro, PhD
Chairman, Sonecon
Under Secretary of Commerce for Economic Affairs 1997-2001
Senior Fellow, Georgetown University School of Business

George P. Shultz, PhD
Thomas W. and Susan B. Ford Distinguished Fellow at the Hoover Institution, Stanford University
Secretary of State, 1982-1989
Secretary of the Treasury, 1972-1974
Director, White House Office of Management and Budget, 1970-1972
Secretary of Labor, 1969-1970

Joseph Stiglitz, PhD
Nobel Prize in Economics, 2001
Elected to Royal Society, 2001
John Bates Clark Medal, 1979
Professor of Economics, Columbia University
Former Senior Vice President and Chief Economist, World Bank
Chair, President’s Council of Economic Advisers, 1995-1997

Steven Stoft, PhD
Convenor, Global Carbon Pricing Symposium, Economics of Energy & Environmental Policy
Founder and Director, Global Energy Policy Center

Chad Stone, PhD
Chief Economist, Center on Budget and Policy Priorities
Council of Economic Advisers, Chief Economist 1999-2000, Senior Economist 1996-1998

Jerry Taylor
President and Founder, Niskanen Center
Vice President, Emeritus, Cato Institute
Task Force Director Emeritus for Energy, Environment and Natural Resources, American Legislative Exchange Council

Richard Thaler, PhD
Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics, Booth School of Business, University of Chicago

Eric Toder, PhD
Institute Fellow, Urban Institute
Co-director, Urban-Brookings Tax Policy Center

Martin Weitzman, PhD
Ernest E. Monrad Professor of Economics, Harvard University

Gary Yohe, PhD
Huffington Professor of Economics and Environmental Studies, Wesleyan University
Senior Member, UN Intergovernmental Panel on Climate Change

(Institutional affiliations are for identification purposes only, and do not connote any organizational approval.)

Canada’s Federal Carbon Pricing Program

Unless noted, tax rates on this page are in Canadian dollars and metric tons. Multiply by 0.68 to convert to U.S. short-ton terms, based on the 0.75 January 2023 U.S.-Canada exchange rate.

Canada first implemented a carbon pricing scheme in 2016 with the Pan-Canadian Framework on Clean Growth and Climate Change, a federal program taxing emissions in a bid to aggressively pursue the country’s Paris climate goals.

Passage of the country’s Greenhouse Gas Pollution Pricing Act in 2018 authorized Canada to implement a national carbon price, which we describe below. As of March 2021, that price stood at CA$30 per metric ton (“tonne”) of CO2 equivalent. Factoring in the 0.80 Canada-U.S. dollar exchange rate at that time and the 0.907 weight ratio between a U.S. “short” ton and a metric ton, that tax level equated to a little under $22 (US) per short ton.

The tax rate was raised to CA$50 per tonne in April 2022, and to CA$65 per tonne of greenhouse gas (GHG) emissions on January 1, 2023. Annual increases thereafter are intended to bring the tax rate to CA$170 per tonne by 2030. The current (2023) price equates to a bit over $44 (US) per short ton.

Canada’s federal carbon charge operates under the Greenhouse Gas Pollution Pricing Act (GGPPA), which provides for two main mechanisms:

1. A federal fuel charge on fossil fuel distributors, producers, and certain users.
2. An output-based pricing system (OBPS) that regulates large industrial emitters.

This hybrid–and complex–pricing system can be seen as an attempt to knit together disparate carbon-pricing sentiments and situations among Canada’s ten provinces and three territories. British Columbia has had a provincial carbon tax since 2008 (see below), while Quebec introduced a carbon cap-and-trade program in 2013. At the other extreme, the UCP government in Alberta, the locus of Canada’s fossil-fuel industry and home of massive, carbon-intensive oil-sands mining, stands adamantly opposed to carbon pricing in any form.

Who Is Subject to the Federal Tax

A province or territory that doesn’t create its own strong carbon pricing system is subject to the GGPPA program and must implement both of the above mechanisms.

There are several ways for a territory or province to implement its own program, mainly price-based systems and cap-and-trade schemas. A jurisdiction choosing either system must decrease emissions in line with Canada’s target. Whatever model a province chooses, it is revenue-neutral on the federal level–revenues generated under the system stay in the province or territory where they originate.

1: Federal Fuel Charge

A province that fails to adopt its own strong carbon pricing policy is, by law, subject to the federal fuel charge. As of March 2021, 6 of 13 provinces and territories were using the federal “backstop” fuel charge: Alberta, Manitoba, Ontario, Saskatchewan, Nunavut, and Yukon. At the mandated increase rate, the tax was to reach $65/tonne in 2023 — around $44/ton in U.S. terms — which it did, in fact. To support Canada’s pursuit of its Paris goals, the charge will rise rapidly thereafter, reaching $170/tonne in 2030. The stipulated 2023-2030 increase rate averages $15/tonne per year, equivalent to a compound growth rate of 15 percent a year.

Province/Territory	Carbon Pricing
Alberta	Federal
British Columbia	BC carbon tax
Manitoba	Federal
New Brunswick	Output-based pricing system
Newfoundland and Labrador	Provincial carbon tax
Nova Scotia	Cap and trade
Ontario	Federal
Prince Edward Island	Carbon levy
Quebec	Cap and trade
Saskatchewan	Federal
Northwest Territories	Carbon tax
Nunavut	Federal
Yukon	Federal

The fuel charge applies to fuel producers and distributors in backstop jurisdictions that supply any of 21 designated fossil fuels, including diesel, gasoline, and natural gas.

Overall, 90% of revenue raised from the federal fuel charge is to be returned to households in the provinces where the money was collected. In 2020, Parliament’s budget office found that most households in these provinces would get more money back in annual rebates than they paid under the carbon pricing scheme. Between 2022 and 2030, the price of gasoline is projected to rise by 27.6 cents per liter — equivalent to a hefty $1.04 (Canadian) per gallon.

2: Output-Based Pricing System (OBPS)

The GGPPA’s Output-Based Pricing System is intended to put a direct price on industrial carbon pollution without the double exposure from levying the federal fuel charge on them. The OBPS applies in backstop jurisdictions and regulates industrial polluters emitting over 50,000 tons or more of annual greenhouse gas emissions (roughly equivalent to a 6-megawatt coal-fired power plant operating all year at full power). Under the OBPS, these facilities must meet emissions standards by either 1) reducing them outright, 2) paying a carbon tax on excess emissions, or 3) remitting for offset credits or retirement surplus credits.

Carbon Tax: Several provinces, including Quebec and British Columbia, have created their own carbon tax systems to fulfill OBPS.

Remitting for Offset Credits or Retirement Surplus Credits: The offset credit system was just getting started as of March 2021, when the federal government published draft regulations proposing a framework to operate the greenhouse gas offset system contemplated by the GGPPA. With this system, the OBPS creates a financial incentive for energy-inefficient facilities to reduce emissions while encouraging efficient ones to improve. If a facility emits less than its annual limit of carbon dioxide, it earns surplus credits that it can sell to other facilities. If it emits more than its annual limit, it must pay for each extra ton of GHG. For this, a facility has 2 options: 1) pay the carbon price to the government, or 2) remit compliance units.

The offset credit system would contain three elements: 1) these operational regulations, 2) federal offset protocols for running the offset program, and 3) a credit and tracking system to keep track of the trading of surplus credits.

Federal Carbon Tax Revenue

The federal government in Ottawa predicted that carbon pricing would generate around $2.3 billion in its first year fiscal year, 2019. According to the Greenhouse Gas Pricing Report for 2019, the program actually brought in $2.63 billion, exceeding the projected amount. For the 2019 year’s carbon tax credits, the government paid out $2.196 billion, leaving a difference in actual revenue of $435.9 million. Of that, the government pledged to pay back $225.4 million in tax credits. The overage meant that the federal government owed families in three of the taxed provinces — Ontario, Manitoba, and New Brunswick — over $200 million. (New Brunswick is no longer part of the federal program and uses its own carbon pricing system.)

Legal Challenges

Canada’s Supreme Court confirmed in March 2021 that the federal carbon tax is constitutional. The question was whether the federal government has the authority to force provinces to either join their program or create their own carbon pricing scheme satisfying the federal minimum standards.

The case combined three appeals related to the GGPPA: appeals courts in Ontario and Saskatchewan ruled in 2019 that the tax was constitutional — holding that Ottawa had jurisdiction to regulate greenhouse gases as a matter of national concern — but in February 2020, the Alberta Court of Appeal held to the contrary.

The three provinces argued that the federal tax program oversteps into provincial jurisdiction. In March 2021, after reserving judgment 6 months earlier, the Court held 6-3 that the tax was constitutional, ruling that Parliament has jurisdiction to enact the tax because they may “act in appropriate cases, where there is a matter of genuine national concern and where the recognition of that matter is consistent with the division of powers.” The Court noted that “influencing behavior is a valid purpose for a regulatory charge.” The decision will be watched beyond Canada’s borders and could influence other nations’ climate change action plans — especially in the United States, where the federal and state governments interact in a form of cooperative federalism similar to Canada’s.

At nearly the same time, Ontario’s Superior court struck down Ontario Premier Doug Ford’s requirement that gas stations in the province slap anti-carbon tax stickers on their fuel pumps. Ford had criticized the carbon pricing scheme as a “tax grab” and forced gas stations in the province to place a large sticker warning motorists, “The federal carbon tax will cost you,” or face a penalty up to $10,000. The law was struck down as a free speech violation, leaving gas stations free to keep the stickers or tear them off.

Meanwhile, in an infamous milestone, Canada’s Conservatives became the world’s second major political party to officially deny that human-caused climate change threatens the global environment, voting down a motion in March 2021 to recognize the climate crisis as real, as reported by The Guardian. Of course, the first such organization is the Republican Party in the United States, which has effectively held that position since 2010, and with increasing ferocity.

Missing the Mark

Reuters reported in Dec. 2020 that Canada, the world’s 11th largest emitter, based on 2019 data (see chart here), “has missed every one of its emissions targets.” The country isn’t on track to hit its Paris Agreement target to reduce 2030 carbon emissions by 30% below 2005 levels, to 513 megatons of CO2 equivalent. The UN Environmental Program’s UNEP’s Emissions Gap Report 2020 found that Canada would miss that target, based on recent emission trends. But the UNEP revised that finding in September 2020, saying that that the pricing measures proposed by the federal government “will allow the country to meet and exceed its target.” Canada’s Parliamentary Budget Officer estimated in 2019 that a $102/tonne tax in 2030 would be required to hit that target, but Prime Minister Justin Trudeau’s proposal of $170/tonne in 2030 would far exceed that number.

The budget office warned that emissions reduction policy depends on economic growth and oil and natural gas prices: with faster real GDP growth and higher prices, a higher tax would be needed to hit the Paris target; with slower growth and lower prices, the goal would be (relatively) easily met.

Regional carbon pricing in Canada

Of Canada’s ten provinces, four had carbon pricing schemes in place before the Pan-Canadian Framework was introduced. Now, 7 provinces have their own carbon pricing systems.

British Columbia implemented its own carbon tax in 2008, and Manitoba did the same in 2012. Quebec had a carbon tax from 2007 to 2012 but shifted to a cap-and-trade system in 2012. As of February 2021, Quebec’s current tax rate is $22.40/tonne of emissions.

In 2017, Ontario implemented its own cap-and-trade program, and Alberta adopted a carbon tax program. However, Alberta–a highly carbon-dependent province–abandoned its program in 2019 and is now subject to the federal carbon tax.

British Columbia

British Columbia is Canada’s third largest province, with an estimated 2020 population of 5.1 million. It is also the fastest growing (excluding sparsely populated Prince Edward Island and Yukon Territory), with a nearly 11 percent population rise from 2016 to 2020, vs. 8 percent for the country as a whole.

B.C.’s straightforward and transparent carbon tax was North America’s first carbon pricing program. It began in 2008 at a rate of $10/tonne. The tax increased for four years by $5/tonne annually, reaching a 2012 level of $30, and stood at that level until April 1, 2019, when it was raised to its current price of $40/tonne. The provincial government announced in Spring 2020 that the rate would remain at that level until further notice due to the COVID-19 crisis.

The province’s Climate Action Tax Credit, which returns the carbon tax revenues to households, was increased for the July 2020 – June 2021 year to a maximum annual amount of $174.50 for an adult, their spouse, or their first child in a single-parent family, and a maximum of $51.25 for each additional child.

Residents of B.C. are eligible for the quarterly-issued, non-taxable credit if they are age 19 or older, have a spouse or common-law partner, or are a parent living with their child. The amount a family receives depends on the size of the family and their adjusted net income. The province also paid an additional one-time enhanced payment to families in July 2020 due to COVID-19 with increased maximum credit amounts of $218 per eligible and $64 per additional child.

A 2014 Mother Jones article by journalist Chris Mooney (now at the Washington Post), British Columbia Enacted the Most Significant Carbon Tax in the Western Hemisphere. What Happened Next Is It Worked., still stands as the most digestible yet comprehensive story on B.C.’s carbon tax. Among its findings (all as of early 2014):

• The tax has brought in some $5 billion in revenue, with more than $3 billion returned in the form of business tax cuts, along with over $1 billion in personal tax breaks, and nearly $1 billion in low-income tax credits (to protect those for whom rising fuel costs could mean the greatest economic hardship).
• “Polls have shown anywhere from 55 to 65 percent support for the tax,” according to Stewart Elgie, director of the University of Ottawa’s Institute of the Environment, who added, “It would be hard to find any tax that the majority of people say they like, but the majority of people say they like this tax.”
• “Since its passage, gasoline use in British Columbia has declined seven times as much as might be expected from an equivalent rise in the market price of gas, according to a study by two researchers at the University of Ottawa. That’s apparently because the tax hasn’t just had an economic effect: It has also helped change the culture of energy use in BC.”

Emission Reductions from British Columbia’s carbon tax 

Much of the emissions reductions data in this section is from our 2015 report, British Columbia’s Carbon Tax: By The Numbers.

 

From inception of the carbon tax in 2008 to 2015, British Columbia’s per capita emissions of carbon dioxide and other taxed greenhouse gases declined, continuing a downward trend that began in 2004. Averaged across the period with the tax, 2008 through 2013, B.C.’s per capita emissions from fossil fuel combustion covered by the tax were nearly 13 percent below the average in the pre-tax period under examination (2000-2007), as shown in the graphic directly below.

The 12.9% decrease in British Columbia’s per capita emissions in 2008-2013 compared to 2000-2007 was three-and-a-half times as pronounced as the 3.7% per capita decline for the rest of Canada. This suggests that the carbon tax caused emissions in the province to be appreciably less than they would have been without the carbon tax.

These figures come with an important caveat: They exclude emissions from electricity production ― a minor emissions category for British Columbia, which draws most of its electricity from abundant (and zero-carbon) hydro-electricity, but a major emissions source for much of Canada. This sector accounted for just 2 percent of total emissions from fossil-fuel combustion in British Columbia in 2013, but for nearly 20 percent in the rest of the country. More importantly, that sector constitutes most of the “low-hanging fruit” for reducing carbon emissions, since electricity generation affords more opportunities for quickly and easily substituting low-carbon supply than any other major sector. Eliminating it from our analysis allowed us to compare changes in emissions over time on an equal basis between B.C. and the rest of the country.

In terms of total emissions (not per capita), British Columbia emissions of CO2 and other greenhouse gases covered by the carbon tax (but excluding the electricity sector) averaged 6.1% less in 2008-2013 than in 2000-2007. (The reduction was 6.7% when electricity emissions are counted.) The 6.1% contraction is roughly what would be expected from a small carbon tax such as British Columbia’s.

B.C.’s carbon tax does not appear to have impeded economic activity in the province. Although GDP in British Columbia grew more slowly during 2008-2013, the period with the carbon tax, than in 2000-2007, the same was true for the rest of Canada. From 2008 to 2013, GDP growth in British Columbia slightly outpaced growth in the rest of the country, with a compound annual average of 1.55% per year in British Columbia, vs. 1.48% outside of the province.

Nevertheless, GHG emissions have increased of late in British Columbia, with 2017 emissions a mere 0.5 percent less than 2007 levels. The upward trend can be attributed to three factors: 1) an 8 percent rise in oil and gas production since 2007, 2) sizeable population growth as noted earlier, and 3) the hold in the carbon tax level since 2012. This points to the necessity of raising the tax, currently at $40/tonne, to force polluters’ hand. The provincial government is planning to do so, reaching $80/tonne in 2024.

In July 2012, on the occasion of the fourth (and final) annual increase in the B.C. carbon tax, the Toronto-based Financial Post newspaper wrote of 4 key reasons why BC’s carbon tax is working. (The Post drew its text from the June 2012 report by Sustainable Prosperity, British Columbia’s Carbon Tax Shift: The First Four Years.)

• Drop in Fuel Consumption: “The carbon tax has contributed substantial environmental benefits to British Columbia (BC). Since the tax took effect in 2008, British Columbians’ use of petroleum fuels (subject to the tax) has dropped by 15.1% — and by 16.4% compared to the rest of Canada. BC’s greenhouse gas emissions have shown a similarly substantial decline (although that analysis is based on one year’s less data).”
• Growth Unaffected: “BC’s GDP growth has outpaced the rest of Canada’s (by a small amount) since the carbon tax came into effect – suggesting that it has not adversely affected the province’s economy, as some had predicted. This finding fits with evidence from seven other countries that have had similar carbon tax shifts in place for over a decade, resulting in neutral or slightly positive effects on GDP.”
• Revenue-Neutral: “The BC government has kept its promise to make the tax shift ‘revenue neutral’, meaning no net increase in taxes. In fact, to date it has returned far more in tax cuts (by over $300 million) than it has received in carbon tax revenue – resulting in a net benefit for taxpayers. BC’s personal and corporate income tax rates are now the lowest in Canada, due to the carbon tax shift.”
• Greenhouse Gas Emissions Declining: “From 2008 to 2010, BC’s per capita GHG emissions declined by 9.9% — a substantial reduction. During this period, BC’s reductions outpaced those in the rest of Canada by more than 5%.”

The New York Times, Toronto Globe & Mail, and The Guardian reported on the tax’s success in 2012 and 2014:

• July 2012 NY Times op-ed, The Most Sensible Tax of All, by economist Yoram Bauman, then a fellow at the Sightline Institute in Seattle, and Shi-Ling Hsu, law professor at Florida State University and former law professor at the University of British Columbia, and author of “The Case for a Carbon Tax” (Island Press, 2011). (Bauman later became the spearhead of Carbon Washington and its Measure I-732 Carbon Tax initiative.)
• July 2014 Toronto Globe & Mail op-ed, The shocking truth about B.C.’s carbon tax: it works.
• July 2014 op-ed in the Guardian, A carbon tax that’s good for business?, that cogently compares B.C.’s successful revenue-neutral carbon tax with Australia’s short-lived revenue-raising one.

A pair of exposes in Bloomberg Green in late 2020 and 2021 revealing the sale of “meaningless carbon credits to corporate clients [by] the Nature Conservancy” highlight the fragility of offsets as a carbon-reducing policy. Click here to be directed to our discussion of the Bloomberg story, which appears at the bottom of this (long) page.

A May 2022 NYT Climate story provides a solid overview of carbon offsets’ seductive but mostly false promise, though it has its own clunker. Click here to go straight to our synopsis.

In theory, carbon offsets facilitate low-cost emissions reductions. In practice, they’ve done anything but.

Carbon “offsets,” a feature of most cap-and-trade systems, build on the uncontroversial idea of minimizing the cost to reduce emissions of carbon dioxide and other greenhouse gases. Offsets give CO2 emitters facing carbon caps a cost-minimizing choice: they can reduce their own (domestic) emissions through the usual means: investing in or incentivizing energy efficiency and use of lower-carbon fuels; or they can buy carbon offsets that pay for actions elsewhere — typically in less-developed countries — that reduce or avoid emissions, supposedly achieving the same net reduction.

Ideally, carbon offsets finance low-carbon energy projects (e.g., wind farms and solar arrays) or projects to reduce emissions from deforestation. Reflecting this duality, the United Nations Environment Programme administers two offset programs: the “Clean Development Mechanism” (CDM) and the “Reducing Emissions from Deforestation and Forest Degradation” (REDD) program.

The European Union’s Emissions Trading System, the world’s largest cap-and-trade system, covering about 45% of greenhouse gas emissions from 31 countries, utilizes both CDM and REDD offsets. Similarly, California’s AB-32 carbon cap-and-trade program, which started in 2013, includes offsets from five categories: U.S. Forest Projects,  Livestock Projects, Ozone Depleting Substances Projects, Urban Forest Projects and Mine Methane Capture. Emitters can use offsets to meet up to 8% of their compliance obligations, but since California’s cap declines 2% per year, offsets could represent a large fraction of total emissions reductions under the cap for some time.

Why, and how, offsets have proven hard to evaluate and easy to game.

Offsets were a major feature of the Waxman-Markey cap-and-trade bill that passed the House in 2009, and parallel Senate proposals in 2010. They were packaged into those bills as “cost control” measures to moderate the rise in energy price from steadily tightening the cap on CO2 emission permits. Offsets appealed to both polluters and potential recipients of offset funding, in effect providing political “grease” to smooth passage. But in 2008, a year before Waxman-Markey came to a vote, close analysis suggested that many intended offset projects wouldn’t actually result in emissions reductions. This raised concerns that a large supply of unverifiable offsets would undermine the emissions certainty claimed for cap-and-trade.

Later in 2008, the nonpartisan Government Accountability Office assessed the EU’s offset program under its Emissions Trading System. GAO found that over-allocation of allowances and offsets had resulted in “a price collapse.” As a result, Phase I of the ETS had “uncertain” effects on emissions in the capped countries while funding offsets of doubtful value, though GAO did hold out hope that reforms could make the system work.

Instead, the picture grew darker. GAO’s 2011 follow-up, “Options for Addressing Challenges to Carbon Offset Quality,” reported that in 2009, 81 million tons of offset credits — an estimated 59% of the ETS’s CDM offsets for that year — went to Chinese refrigerant factories to incinerate HFC-23, a chemical byproduct of refrigerant manufacturing whose per-pound greenhouse gas potency is 11,700 times that of CO2. According to GAO, the Chinese had constructed 19 new refrigerant manufacturing plants for the sole purpose of destroying the greenhouse gas byproduct in order to receive offset credits and the associated payments. According to estimates by Stanford professor Michael Wara, whereas installing equipment to capture and destroy HFC-23 at all of the facilities covered by the CDM would have cost just $100 million, these same projects were expected to generate $4.7 billion in CDM offset credits.

In 2011, EU officials finally acted to eliminate this perverse incentive, announcing plans to stop accepting offset credit for HFC-23. The Chinese government responded by threatening to vent HFC-23 straight to the atmosphere.

Similarly, a detailed analysis of offset projects to destroy HFC-23 and SF6 (sulfur hexaflouride) in Russia and the Ukraine published in July 2015 by the Stockholm Environmental Institute concluded:

[A]ll projects abating HFC-23 and SF₆ under the Kyoto Protocol’s Joint Implementation mechanism in Russia increased waste gas generation to unprecedented levels once they could generate credits from producing more waste gas. Our results suggest that perverse incentives can substantially undermine the environmental integrity of project-based mechanisms and that adequate regulatory oversight is crucial. (emphasis added)

Poor information creates vast opportunities for manipulation.

While the HFC-23 sagas seem almost comical and are probably the most costly and egregious example of abuse of offsets, they illustrate a problem common to offsets — asymmetric information. Purveyors of offset projects know a good deal more about their “products” than do far-away “buyers.” And unlike the highly leveraged mortgages that were sliced and repackaged into intangible derivatives that helped crash global financial markets in 2008, offsets start out as intangibles.

GAO and other analysts of carbon offset markets group these information deficiencies into three categories: Additionality, Measurement, and Verification. They also raise concerns about the permanence of sequestration projects like forests that can later be burned as fuel, relinquishing the climate benefits that were bought with offset credits.

Additionality is the issue of what would have happened if offset payments hadn’t funded the project? GAO identified many projects that got a boost from offsets, but with no clear sense as to whether they would have been built anyway without the added incentive of offset credits. Asking “What is the baseline” is inherently counterfactual, and thus untestable and unanswerable. It’s been a challenge for the UN and EU ETS to even write rules about how to review projects (which vary widely in concept, location, quality and cost), while the offset “industry” and large purveyors of offsets, particularly China, have clamored for ever more streamlined UN approvals.

A 2016 report prepared for the EU Directorate-General for Climate Action, How Additional is the Clean Development Mechanism, concluded that “the vast majority of ‘clean development’ projects [financed by carbon credits] likely fail to actually reduce emissions,” as Inside Climate News summarized in an April 2017 story. “Given the inherent shortcomings of crediting mechanisms, we recommend focusing climate mitigation efforts on forms of carbon pricing that do not rely extensively on credits,” the report said.

Measurement is the accounting problem of determining how much CO2 was avoided by this project or process or by preserving this forest. GAO found measurements of offset efficacy to be neither consistent nor transparent, even after a decade of effort by the UN.

Verification concerns the actors who check on offset projects’ completion, operation and maintenance. GAO reported that “Project developers and offset buyers may have few incentives to report information accurately or to investigate offset quality.” Everyone in the offset business — from project developers to offset sellers and buyers — wants offset values set as high as possible. GAO argues that strong, independent oversight is needed, but its report raises serious doubts about whether oversight can ever be sufficient, especially given administrative costs.

The 2011 GAO report confirmed critics’ fears that the global offset system places new hurdles in the path of energy-efficiency and other decarbonizing measures, in the form of perverse incentives under the CDM program:

[A]n offset program may create disincentives for policies that reduce emissions. For example, under an offset program that allows international projects, U.S. firms might pay for energy efficiency upgrades to coal-fired power plants in other nations. According to our previous work [GAO’s 2008 report on the EU ETS], this may create disincentives for these nations to implement their own energy efficiency standards or similar policies, since doing so would cut off the revenue stream created by the offset program.

For example, some wind and hydroelectric power projects established in China were reviewed and subsequently rejected by the CDM’s administrative board amid concerns that China intentionally lowered its wind power subsidies so that these projects would qualify for CDM funding. In addition, our review of the literature suggests that in some cases an offset program may unintentionally provide incentives for firms to maintain or increase emissions so that they may later generate offsets by decreasing them. This potential problem is illustrated by the CDM’s experience with industrial gas projects involving the waste gas HFC-23, a byproduct of refrigerant production. Because destroying HFC-23 can be worth several times the value of the refrigerant, plants may have had an incentive to increase or maintain production in order to earn offsets for destroying the resulting emissions. (emphasis added)

Acknowledging that even the best oversight and management can’t assure high offset quality, GAO suggested limiting the fraction of CO2 reductions that offsets would be permitted to provide under national cap-and-trade programs:

[T]he emissions reduction program would ensure that only a fixed percentage of the emissions permits could be affected by any problems with offset quality. All existing emissions reduction programs we reviewed use this option. In the EU ETS, regulated entities are able to use CDM credits for 12 percent of their emissions cap, on average, through 2012. In contrast, a draft Senate bill [the “American Power Act”] would have allowed a greater number of offsets into the program—approximately 42 percent of the emissions cap during the first year of the program. These percentages are based on the total emissions cap, not the required emissions reduction. As a result, such limits could mean that regulated entities could use offsets for all of their required emissions reductions, assuming a sufficient supply of offsets was available.

In other words, offsets could have overwhelmed the Waxman-Markey bill’s cap (which only declined a few percentage points each year) for decades — precisely what Prof. Wara predicted before the bill passed the House in 2009.

Proponents of AB-32, California’s cap-trade-offset program, assure us that offsets won’t overwhelm its emissions cap. Yet the intrinsic problems of offset quality will require extensive and aggressive oversight.

Conclusion

There’s no doubt that funding is needed for low-carbon energy and good forest practices in developing countries. Unfortunately, real-world experience makes offset markets a questionable funding source at best. Offsets drive down allowance prices in carbon markets, weakening incentives for decarbonization, while their uncertain quality undermines the certainty of emissions caps. A price floor, such as the $10/ton floor specified in California’s AB-32 program, can prevent a total collapse of allowance prices. Yet a simple, direct carbon tax offers an even clearer and more predictable price signals to CO2 emitters while creating far fewer opportunities for manipulation, fraud and crime.

The Nature Conservancy’s Offsets Program, Unmasked

Bloomberg Green’s Ben Elgin tore the mask off the Nature Conservancy’s offsets program with a December 2020 story documenting how the conservancy “became a dealer of meaningless carbon offsets.” Here are the opening paragraphs:

At first glance, big corporations appear to be protecting great swaths of U.S. forests in the fight against climate change.

JPMorgan Chase & Co. has paid almost $1 million to preserve forestland in eastern Pennsylvania.

Forty miles away, Walt Disney Co. has spent hundreds of thousands to keep the city of Bethlehem, Pa., from aggressively harvesting a forest that surrounds its reservoirs.

Across the state line in New York, investment giant BlackRock Inc. has paid thousands to the city of Albany to refrain from cutting trees around its reservoirs.

JPMorgan, Disney, and BlackRock tout these projects as an important mechanism for slashing their own large carbon footprints. By funding the preservation of carbon-absorbing forests, the companies say, they’re offsetting the carbon-producing impact of their global operations. But in all of those cases, the land was never threatened; the trees were already part of well-preserved forests.

Rather than dramatically change their operations — JPMorgan executives continue to jet around the globe, Disney’s cruise ships still burn oil, and BlackRock’s office buildings gobble up electricity — the corporations are working with the Nature Conservancy, the world’s largest environmental group, to employ far-fetched logic to help absolve them of their climate sins. By taking credit for saving well-protected land, these companies are reducing nowhere near the pollution that they claim.

In an April 2021 follow-up, Elgin and Bloomberg reported that the Nature Conservancy is conducting an internal review of its portfolio of carbon-offset projects, which includes more than 20 such projects on forested lands mostly in the U.S.

As both articles reported, the purchasers of offsets obtain carbon credits which they use to claim reductions in their publicly reported emissions, while the conservancy receives income from the sales. Yet the trees that are “preserved” under these arrangements are “in no danger of destruction.”

In its follow-up, Bloomberg noted that “Selling credits for well-protected trees potentially undermines the sustainability efforts of some of the world’s biggest companies. Each carbon offset is supposed to represent the reduction of one ton of planet-warming emissions that would have otherwise spewed into the atmosphere without intervention. Around the world, a wide variety of offset projects do everything from protect mangrove forests to destroy heat-trapping gases from landfills and coal mines. But offset payments channeled to already safe ecosystems don’t fundamentally change the amount of carbon dioxide in the atmosphere.” (emphasis added)

While the conservancy didn’t provide specific answers to Bloomberg’s questions, it said in a statement that it aims to meet the highest standards with its carbon projects and that its internal review will be led by scientists and a “team of experts with deep project knowledge.”

A solid though flawed look at carbon offsets by the New York Times’ climate desk

“Climate Offsets Make You Feel Good, but Do They Do Good?” was the headline of a New York Times May 18, 2022 explainer on carbon offsets. (That was the print-edition headline; the digital edition was titled “Do Airline Climate Offsets Really Work? Here’s the Good News, and the Bad.”)

The article’s subhead telegraphs its answer, “Carbon credits could eventually play an important role in fighting climate change, but right now a few dollars’ worth won’t change much.” That’s pretty much our position, though we’re somewhat less sanguine on the “eventually” part. The reasons — “additionality,” fragility and outright scams — are well summarized in the Times story. Ditto the larger problem of distraction, as Times climate reporter Maggie Astor wrote:

Part of the appeal of carbon offsets is the notion that it’s possible to meaningfully combat climate change while living our lives and structuring our society in the same way we always have. For that reason, some experts see carbon offsets as actively damaging, inasmuch as they give people cover to avoid reducing emissions at the source.

We couldn’t say it better, ourselves. Which made doubly shocking what Astor added, just two paragraphs down:

While individual activities do have environmental costs, and flying is one of the costliest, climate change is overwhelmingly driven by the actions of the fossil fuel industry.

That statement is false and unfortunate. It’s false because the main driver of climate change is demand for the energy services provided by fossil fuels — air travel, driving (these days in ever more monstrous trucks), operating supersized homes in spread-out suburbs, and so forth — and not the activities of the fossil fuel companies, whose direct emissions pale in comparison to emissions caused by using the products they manufacture and sell.

And the statement is unfortunate because it contributes to the comforting but strategically unwise choice — by now, an article of (misplaced) faith in the climate movement — to target the fossil fuel industry rather than do the hard work for carbon taxes and allied policies that go straight at the demand for fossil fuels in the first place.