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Nordhaus Versus the Pope: Why Francis Is Right

September 28, 2015 By Daniel Lazare

The Yale climate economist William Nordhaus goes after Pope Francis in the current New York Review of Books on the question of how best to prevent global warming. But after landing a few solid punches, he collapses in a muddle all his own by obscuring the difference between carbon taxes and cap-and-trade.

Nordhaus zeroes in a number of passages in “On Care for Our Common Home,” the recent papal encyclical dealing with global warming, that, to his mind, show remarkable ignorance about the workings of modern economics. One passage calls on society “to reject a magical conception of the market, which would suggest that problems can be solved simply by an increase in the profits of companies or individuals,”while another takes aim at the profit motive:

The principle of the maximization of profits, frequently isolated from other considerations, reflects a misunderstanding of the very concept of the economy. As long as production is increased, little concern is given to whether it is the cost of future resources or the health of the environment; as long as the clearing of a forest increases production, no one calculates the losses entailed in the desertification of the land, the harm done to biodiversity or the increased pollution. In a word, businesses profit by calculating and paying only a fraction of the costs involved. ¶195.

To be sure, resource losses are chronically under-estimated. But Nordhaus maintains that the pope misses an important point, which is that the problem is not markets per se, but markets that are poorly designed and hence encourage the wrong kinds of activity.

Pope Francis addressing a joint session of Congress, Sept 24, 2015

“Markets can work miracles when they work properly,”Nordhaus writes, “but that power can be subverted and do the economic equivalent of the devil’s work when price signals are distorted.” The best way to correct such distortions is to see to it that social costs, or “externalities,” are incorporated in the price of a particular commodity or action. Only when economic actors are required to bear the full burden will they then find it profitable to seek out alternatives that are cheaper and cleaner. Otherwise, society finds itself in the strange position of subsidizing waste by allowing manufacturers to emit greenhouse gases and the like for free. As Nordhaus puts it:

Putting a low price on valuable environmental resources is a phenomenon that pervades modern society. Agricultural water is not scarce in California; it is underpriced. Flights are stacked up on runways because takeoffs and landings are underpriced. People wait for hours in traffic jams because road use is underpriced. People die premature deaths from small sulfur particles in the air because air pollution is underpriced. And the most perilous of all environmental problems, climate change, is taking place because virtually every country puts a price of zero on carbon dioxide emissions.

Nordhaus might have mentioned the entrenched political structures that foster such under-pricing in the first place. But let’s not quibble: his logic thus far is impeccable. He then goes off the rails, however, over a passage in the encyclical dealing with carbon-emission permits. According to the pope:

The strategy of buying and selling “carbon credits” can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors. ¶171.

Although Francis is probably talking about cap-and-trade, Nordhaus is not so sure since “carbon credits” is not a term that practitioners usually employ with regard to the trade in carbon emissions. So he argues that “this part of the encyclical is clearly a critique of market-based environmental approaches”— all such approaches, that is — a category that in his view includes both cap-and-trade and carbon taxes.

This leads to a fatal error: defending both without delineating the differences between the two. Nordhaus has argued in favor of carbon taxes in the past, and he concedes in his NYR article that such an approach “is simpler and avoids any of the potential corruption, market volatility, and distributional issues that might arise with cap-and-trade systems.” But since carbon taxing also fiddles with markets, he concludes: “It is unfortunate that he [the pope] does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause.”

Wrong. Cap-and-trade clearly is a market-based solution because it creates new arenas for the buying and selling of emission permits, complete with futures markets and financial derivatives. But a carbon tax is not. Instead of creating new ways of buying and selling, taxing carbon is a form of direct behavior modification not unlike a traffic fine or a golf-course fee. Instead of encouraging speculation, it does the opposite by making it crystal clear that economic actors will have to pay a set premium for every unit of carbon dioxide they emit.

So while the pope may have gotten a good deal wrong, this is one thing he gets right. Not only does cap-and-trade promote speculation, but Francis is correct in pointing out that, in practice, it has done little to reduce emissions or encourage fundamental technological change. Setting a strict limit on greenhouse gases and then allowing investors to bid on emissions rights up to a certain level is music to the ears of neo-liberal economists for whom there can never be enough markets. But implementing such a program has proved a nightmare.

Due to heavy lobbying by corporations and politicians, the EU’s Emissions Trading System, the largest carbon market in the world, exempts 55 percent of greenhouse gas emissions, according to the Greek economist Andriana Vlachou. Since the system leaves it to individual member states to estimate their emissions, over-reporting has been rife. Offsets, the practice of allowing member states to reap credits by sponsoring carbon-capture projects such as new forests, have been especially problematic. As the Carbon Tax Center’s James Handley has pointed out, estimating savings from such projects is difficult, while verifying that developers are telling the truth about the benefits is even worse. Volatility is another problem. After the EU allocated too many permits, prices plunged so low in 2013 that officials had to take 900 million permits off the market. Since trading is electronic, hackers have meanwhile made off with millions.

It’s the sort of system that only a free-market Chicago economist could love – and, given the opportunities for corruption, maybe an old-school Chicago politician as well. By comparison, a carbon tax is the essence of simplicity. Administrative costs, which involve little more than calculating the carbon content of a given fossil fuel and then levying a charge “upstream,” are minimal. So are enforcement costs. There are no offsets, no complicated negotiations to determine each nation’s emissions quota, no wrestling with entrenched political interests to determine which industries are covered and which are not. While Vlachou reports the EU’s cap-and-trade program weighs especially heavily on poor electricity users, such consequences can be easily mitigated in the case of a carbon tax by earmarking revenues for social programs, investment in poor neighborhoods, or reducing income taxes for lower earners.

Nordhaus is not the only one to blur the difference between a carbon tax and tax-and-trade. Cass R. Sunstein, the Harvard law professor and recent Obama operative, recently made the same blunder in a column defending not only markets but consumerism and economists in general, who, he assures us, are “excellent technicians” and “pretty decent moralists” as well. The pope is not the only one who finds this difficult to swallow. Suspicion of market-based solutions may not be so unjustified after all.

What an Energy-Efficiency Hero Gets Wrong about Carbon Taxes

September 2, 2015 By Charles Komanoff

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

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

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

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

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

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

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

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

Elasticity math. You can do it.

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

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

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

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

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

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

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

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

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

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

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

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

In any event, the way to estimate gasoline’s (or other fuels’) price-elasticity is with multivariate regression analysis. Here’s a summary of the estimation I performed for gasoline for CTC’s carbon-tax spreadsheet:

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

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

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

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

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

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

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

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

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

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

The Crux

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

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

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

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

The power of carbon-taxing, in a nutshell.

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

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

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

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

Carbon Taxing Going Forward

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

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

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

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

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

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

August 12, 2015 By James Handley

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

Rep. John Delaney (D-MD)

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

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

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

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

“Clean Fuels” vs. Carbon Tax in the Pacific Northwest

August 5, 2015 By Matt Gordon

Even in ecologically-minded Washington and Oregon, states where voters want government action on climate change, a divide among environmentalists threatens to undermine progress on the issue. A Carbon Washington ballot initiative to create a statewide carbon tax is gaining momentum, as we wrote last month. Yet several environmental groups are attacking the proposal as politically infeasible and socially regressive.

Instead, state and regional groups like Climate Solutions and the Alliance for Jobs and Clean Energy are pushing “clean” fuels standards. Their proposal, patterned on regulations in California and British Columbia, would mandate a mere 10% drop in the carbon intensity of transportation fuels over 10 years ― a small fraction of the deep reductions needed.

The carbon tax sought by Carbon Washington would cut emissions 4-5 times as much as the proposed WA Clean Fuels Standard (Source: CTAM).

The carbon tax sought by Carbon Washington would cut CO2 4-5 times as much as the proposed WA Clean Fuels Standard (Source: CTAM).

Their course is difficult to fathom. Carbon taxes would cut emissions more and cost less than clean fuels regulations. And dividing environmentalists in order to pursue a lesser policy makes no sense strategically. Here are three reasons why a clean fuels standard doesn’t stack up:

1. Clean fuels standards won’t be effective

A model used by the Washington State Department of Commerce allows us to compare projected emissions reductions from the clean fuels standard with the carbon tax proposed by Carbon Washington in a measure known as I-732. (The tax would start at $10/ton of CO2, rise to $25 in year two, then increase 3.5% annually plus inflation.)

The 10% clean fuels standard would lower overall Washington CO2 emissions only 4% by 2040, not even a quarter as much as the 18% reduction projected from the I-732 carbon tax.

The reason is simple: a clean fuels standard only attacks emissions from the supply side of one sector, albeit an important one, transportation. In contrast, a carbon tax works across the entire economy, influencing every carbon-related decision about both supply and demand in every sector ― manufacturing, heating, electricity, etc. This means that, while a clean fuels standard only affects the carbon content of liquid fuels, a carbon tax also incentivizes less fuel usage, period. This transforms economies, cutting pollution and congestion through a vast array of actions encompassing urban density, freight logistics, walking, cycling, transit, and more mindful decision making.

In short, the difference in emissions between a carbon tax and a clean fuels standard is the difference between a society that takes current levels of automobile dependence as a given, and one that seeks to support a myriad of ways to transition to something different.

2. Clean fuels standards are more expensive

The Oregon Environmental Council writes:

The Clean Fuels Program costs the state virtually nothing. The burden of responsibility for reducing pollution is placed on the oil industry.

This conspicuously ignores how the oil industry passes down its costs of compliance to consumers in the form of higher prices. The Oregon Department of Environmental Quality (DEQ) has said gas prices will rise between 4 and 19 cents per gallon. An industry lobby group, the Western States Petroleum Association, is garnering support to repeal clean fuels by highlighting this not-so-hidden price increase.

Consumers aren’t stupid, they generally realize more regulations mean higher prices. A carbon tax raises fossil fuel prices too, of course ― that’s the point; but the revenue it generates can be disbursed to consumers as income or sales tax cuts, or via a straight-up “dividend” check, as Oregon Climate has proposed. [Read more…]

Feeling the Heat: A Carbon Tax Gains Grassroots Momentum in Washington State

July 16, 2015 By Matt Gordon

Seattle on the summer solstice. Crowds line Fremont Avenue in anticipation of the annual parade of naked bicyclists. Carbon Washington co-director Kyle Murphy is giving a pep talk to a group of volunteers that includes idealistic college students, veteran environmentalists, and former Seattle Mayor Mike McGinn.

“You’re simply offering them the opportunity to participate in the democratic process. You don’t need to persuade anyone, just give them a chance to say yes.”

Seattle, June 2015: Petitioning for Carbon Washington.

I’m helping Carbon Washington (CW) collect signatures for Measure I-732, which would put a carbon tax on the state ballot in 2016. In general, people want to participate. Almost no one turns me down. I pass out multiple signature sheets as parade-goers fumble for pens. I’m talking to eight people at once, even while competing with the naked bikers for attention. A record-breaking drought is setting the stage for a long wildfire season, and climate change is already on everyone’s mind. In a single afternoon we collect more than 1,500 signatures.

The appeal of CW’s proposal is rooted in its overarching simplicity. Polluters pay, everyone else benefits. The measure would put a price on carbon emissions, forcing fossil fuel companies to internalize some of the social and environmental externalities of their business. The tax starts at $15 per ton of CO2, rises to $25 in year two, and then increases at 3.5% plus inflation annually. This long and steady increase will drive down CO2 emissions in the state.

Emissions would fall more if Washington’s power wasn’t nearly all hydro. (Source: CTAM model)

The tax is revenue neutral to appeal to conservatives. It uses the expected $1.7 billion in annual revenue to overhaul Washington State’s notoriously regressive tax code. Most of the money goes to lower the state sales tax from 6.5% to 5.5%. The 3.5% annual increase in the carbon tax is designed to carefully offset the rising value of the sales tax reduction, so that the measure stays revenue-neutral for 40 years. Another $200 million a year is used to fund the Working Families Rebate – an extension of the federal Earned Income Tax Credit. These two pieces make I-732 the state’s most progressive tax legislation since groceries were exempted from sales taxes in 1977.

The third element of CW’s plan takes $200M to eliminate the state’s Business & Occupation tax on manufacturers. The intent is to make the state’s businesses more competitive and cushion any job losses due to the tax. The average manufacturer will pay in carbon taxes close to what it will gain from the elimination of the B&O tax. Unlike the B&O tax, however, carbon taxes do not increase as the business grows – as long as it can grow without increasing its carbon emissions.

Still, Carbon Washington faces high hurdles. A ballot initiative requires 246,372 signatures – 8% of the votes cast for governor in the most recent election. Since up to one-quarter of signatures fail the verification process, CW is aiming for 315,000. Successful initiatives, like a Michael Bloomberg-financed gun-control measure that passed in 2014, have needed to raise around a million dollars to reach that threshold. Carbon Washington is hoping to rely on an extensive volunteer network to do it for less than half the price. Still, more funding and volunteers are needed.

Measure I-732 steers revenues to households and manufacturers.

Assuming CW succeeds, it’ll have to defend its proposal on the ballot against the inevitable onslaught of Koch-funded interest groups. Some other environmental groups are skeptical that Washingtonians will vote for a proposal that openly uses the dreaded ‘T’ word. Climate Solutions, a regional organization, threw its weight behind Governor Jay Inslee’s cap-and-trade proposal. Despite attempts to appeal to Republicans, including a carve-out for the state’s only coal plant, that proposal failed to gain traction in the legislature. Climate Solutions isn’t backing CW’s proposal, afraid to lose what will surely be a big fight.

Yet if the conversations I had were any indication, Washingtonians are receptive. They have an example to their north, in British Columbia, of a successful and popular carbon tax, so oil industry scare tactics may prove less effective with voters. In polls, support varies between 30% and 60%, depending on how the issue is framed. Victory will be determined by whether enough voters can be educated about the proposal. By talking to voters and collecting signatures one at a time, Carbon Washington is getting a head start.

Here’s What’s New in CTC’s Carbon Tax Spreadsheet Model

June 27, 2015 By Charles Komanoff

We’ve just posted an update to our spreadsheet model — our powerful but easy-to-use tool for predicting future emissions and revenues from possible U.S. carbon taxes. We say taxes, plural, because the model accepts any carbon tax trajectory you feed it and spits out estimated nationwide emission reductions and revenue generation, year by year. Here’s a rundown of what’s new in the update.

1. A year of new data: The most obvious change is the addition of 2014 baseline data on energy use, CO2 emissions and emission intensity for each of the model’s seven sectors.

Our spreadsheet model lets you compare different carbon tax trajectories.

2. Smoothing the carbon tax impact: A new feature lets users smooth the impact of the tax to reflect real-world lags in households’ and businesses’ adaptation to more-expensive fossil fuels. (You get to set the adaptation “ceiling” rate; any excess gets carried over to future years.) This feature is helpful for trajectories like the Whitehouse-Schatz bill, whose rate starts with a bang at $45 per ton of carbon dioxide but then rises only slowly. Under our default setting, the reductions from the $45/ton initial charge are spread over four years rather than, unrealistically, assigned to the first year.

3. Future baseline is calibrated to official forecast: We tweaked a few model parameters to make our 2040 emissions forecast without a carbon tax match the analogous forecast in the Energy Information Administration’s “Annual Energy Outlook.” This allows for apples-to-apples comparisons with other models that are explicitly calibrated to the EIA/AEO forecast.

[Read more…]

CTC Applauds Reintroduction of Climate Bill, Cautions on Carbon Pricing

FOR IMMEDIATE RELEASE
June 10, 2015

CTC Applauds Reintroduction of Climate Bill, Cautions on Carbon Pricing

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.

Don’t Anchor a Carbon Tax to the Social Cost of Carbon

June 8, 2015 By James Handley

Editor’s note: Yesterday the world’s most influential newspaper finally did what CTC and other carbon tax proponents have sought for years: publish a ringing endorsement of a U.S. carbon tax. With its editorial, The Case for a Carbon Tax, the New York Times joins the growing community of opinion leaders, policy experts and, yes, elected officials who not only recognize the power of carbon taxes to quickly and equitably reduce emissions but also sense the emergence of a political critical mass that can enact fees into law. This heartening development signals that it’s not too soon to focus on the design of a U.S. carbon tax, especially its magnitude and rate of increase, as CTC senior policy analyst James Handley does in this post.

Which is the more effective way to set a tax on carbon pollution?

A. Start aggressively, then raise the rate slowly (“sprint”).

B. Start modestly, then raise the rate briskly and predictably (“marathon”).

You probably guessed that if the goal is to instill incentives that will bring about big emission reductions fast enough to avoid runaway global warming, the answer is B, the marathon. Yet a leading U.S. Senate advocate of legislative action on climate seems to be starting off like a sprinter, perhaps because his legislation is pegged to estimates of the Social Cost of Carbon that don’t account for the possibility that climate change will turn out to be catastrophically costly.

More on that senator in a moment — after this tutorial:

The Social Cost of Carbon (SCC) is a construct to quantify in monetary terms the damage caused by each additional ton of CO2 added to the atmosphere. While the SCC may sound arcane or academic, estimating its magnitude has real world implications: governments are pegging climate-related regulatory decisions to SCC estimates. A low SCC can make all but the lowest-cost clean-energy policies pencil out as expensive; higher estimates justify more rapid and aggressive measures, since moving too slowly to reduce emissions shows up as a mistake whose costs accumulate at a frightening pace.

Ice Shelf on eastern edge of Edgeoya, Norway. Waterfall. (20090812) (Strcorarius parasiticus)

Ice Shelf Melting in Eastern Norway (Paul Hoogeveen, Flickr)

Calculating the damage from a ton of CO2 turns on a host of assumptions that span wide ranges. Not surprisingly, estimates of the SCC reported in the peer-reviewed economics literature range from as little as $10 per ton of CO2 to over $400. A profoundly important modeling choice is how heavily to weigh the risks of climate-induced catastrophes. High-risk climate scenarios with nearly infinite costs, such as rapid release of methane from arctic permafrost or sudden sliding of vast ice masses into the ocean, “misbehave” in the equations used for conventional cost-benefit analysis, leading some modelers to omit them altogether.

One widely-used model assumes that economic growth rates will not be affected by climate change, thereby predicting that half of the world’s economic activity would continue after a whopping 18 degrees C of global warming. Other models dilute the high-risk scenarios by assigning them arbitrarily low probabilities that suppress their impact when their costs are averaged in with low-risk scenarios. A further problem in estimating the SCC is the bias toward high “discount rates” that telescope future impacts down to seemingly manageable proportions.

Amidst fraught debate and widely-divergent estimates, the Interagency Working Group has settled on $42 per ton of CO2 as the “official” U.S. government social cost of carbon. While that’s an improvement over past practice that omitted climate costs entirely — tacitly, an SCC equal to zero — the $42 figure grossly understates the large-scale global risks that dominate concern over global warming and climate change. [Read more…]

Harvard Economist Charts Escape From Kyoto

May 5, 2015 By James Handley

[T]he quantity-based Kyoto-type approach [to UN climate negotiations] has pretty much broken down, leaving the world with a highly non-optimal patchwork of sporadic regional volunteerism that does not address centrally how to correct the critical externality of global warming. — Harvard economist Martin Weitzman.

Which is simpler: negotiating one price, or 190 emissions caps?

The Kyoto Protocol is broken. What can replace it? Professor Weitzman, considered one of the world’s most influential economists, proposes a game change: Instead of squabbling over the quantity of fossil fuels each nation may burn, negotiate a single carbon price all can adhere to.

Weitzman is best known for modelling the economics of catastrophic climate change. In a ground-breaking 2009 paper, he demonstrated that conventional cost-benefit analysis under-weights the risk of catastrophic scenarios. In two new papers, he scrutinizes the Kyoto Protocol’s quantity-based structure through the lens of game theory. He calls Kyoto’s attempt to set and divvy up a global emissions cap “the ultimate… top-down worldwide treaty.” That’s not a compliment. Observing that Kyoto hasn’t come close to its goal of “an internationally harmonized binding system of emissions caps,” Weitzman shows why: the Kyoto framework induces each nation to game the system by attempting to maximize the efforts required of others while minimizing its own.

Weitzman lays out three criteria for an effective global emissions reduction system:

1. It should induce cost-effective emissions reductions.

2. It should allow negotiators to focus on negotiating one central and highly salient parameter.

3. It should align negotiators’ incentives toward internalizing climate costs.

On the first criterion, Weitzman points out that while a carbon tax is more easily administered and more transparent than a cap-and-trade system, a carbon cap or a tax can both achieve cost-effective emissions reductions.

On the second, Weitzman builds on Nobel-laureate Thomas Schelling’s pioneering game theory analysis establishing the importance of a clear focal point in negotiations. Kyoto’s quantity-based approach assigning different binding emissions quotas to each nation has no focal point. In contrast, a price-based negotiation offers a single focal point for all parties.

And building on the seminal work of Ronald Coase, Weitzman stresses the importance of minimizing transactions costs. Coase showed that parties that might otherwise negotiate an agreement can be deterred by the high costs of getting to yes. Weitzman points out that any quantity-based structure such as Kyoto necessarily multiplies transaction costs: “It is easier to negotiate one price than n quantities — especially when the one price can be interpreted as ‘fair’ in terms of equality of effort,” he writes.

The bulk of Weitzman’s analysis focuses on his third and most important criterion: the need to negotiate a structure that counteracts parties’ national self-interests and aligns their incentives toward reducing emissions. [Read more…]

British Columbia’s Carbon Tax Architects Speak

March 3, 2015 By James Handley

A new report from a British Columbia think tank reveals the inside story behind B.C.’s successful tax on CO2 pollution. “How to Adopt a Winning Carbon Price, Top Ten Takeaways from Interviews with the Architects of British Columbia’s Carbon Tax,” published by Clean Energy Canada, draws on extensive interviews with senior government officials, elected representatives and a broad range of experts who helped shape or respond to this groundbreaking policy.

British Columbia inaugurated its carbon tax on July 1, 2008 at a rate of $10 (Canadian) per metric ton (“tonne”) of carbon dioxide released from coal, oil and natural gas burned in the province. The tax incremented by $5/tonne annually, reaching its current level of $30 per tonne of CO2 in July 2012. At the current U.S.-Canadian dollar exchange rate (1.00/0.80), and converting from tonnes to short tons, the B.C. tax now equates to around $22 (U.S.) per ton of CO2.

In the tax’s initial four years (2008 to 2012), CO2 emissions from fuel combustion in British Columbia fell 5% — or 9% per capita, considering the province’s 4.5% population growth over that span. [NB: These figures are revised downward from the original version of this post; see editor’s note at end.] During the same period, emissions from the rest of Canada increased slightly. Revenue from the tax has funded more than a billion dollars worth of cuts in individual and business taxes annually, while a tax credit protects low-income households who might not benefit from the tax cuts. [Read more…]