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RFF Study: Young Generation Would Benefit Most From Climate and Fiscal Benefits of Carbon Tax

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A new paper, “Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts” by economists at the Washington, DC think-tank Resources for the Future, finds that a $30/ton tax on CO2 pollution would reduce U.S. emissions 16% by 2025. The report concludes that dedicating the carbon tax revenues, estimated at $200 billion each year, to “down payment” of the federal budget deficit offers greater economic-efficiency benefits than other revenue-return options. Moreover, according to RFF, using the carbon tax revenues to pay down the deficit would especially benefit the young, by curbing global warming and its associated future costs, and by reducing tax burdens of today’s young people far into the future.

Using a new intergenerational economic model, RFF economists examined different ways to use revenue generated by carbon taxes, revealing the impacts of those choices across the age spectrum of the U.S. population. They modeled four scenarios: three in which the carbon tax revenues are used to reduce taxes on 1) capital, 2) labor, and 3) sales of goods, and a fourth in which the revenues are returned in lump sum “dividends.” RFF found the differences in annual aggregate welfare among the four options to be relative small ― less than 3 percent. Interestingly, returning revenue as lump-sum dividends offers a slightly more progressive income distribution than a labor tax shift.

More striking differences are revealed across the age spectrum: people who are now too young to vote would benefit most from a carbon tax used to fund deficit reduction, according to RFF. The authors conclude: “[E]nacting such a policy [a carbon tax used to pay down the deficit] will be politically difficult unless current generations are altruistic” enough to act now to curb global warming and to pay down deficits, both of whose impacts will be greatest on the young. That’s an understatement.

Data Points

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

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

The rush to fuel efficiency is more of a trickle.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Photo: Veee Man, via Flickr.

Which Carbon Tax: Robust or Miniature?

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Not all carbon tax proposals are equal. Some would raise the level of the tax robustly enough over time to transform the energy supply and the ways everyone uses energy. Others envision miniature carbon taxes meant to generate revenue targeted for specific purposes. The Breakthrough Institute (BTI) advocates a miniature version: a $5/T CO2 tax to fund energy R&D that they insist will unleash cheap new sources of low-carbon energy to undercut fossil fuels. In contrast, the Carbon Tax Center finds that a briskly-rising economy-wide carbon price is needed for energy efficiency and renewable energy to displace the vast bulk of fossil fuels by mid-century. An excellent example is the measure proposed by Rep. John B. Larson (D-CT) in 2009 for a CO2 tax starting at $15/T, rising to more than $100/T over a decade, which we estimate would reduce U.S. CO2 emissions by one-third in that time.

The “robust” carbon tax met the “miniature” carbon tax at the BTI meeting last month in Sausalito, CA.  James Handley, the Carbon Tax Center’s Washington DC representative, discussed his paper, “Reaffirming the Case for a Briskly Rising Carbon Tax,” which responded to BTI’s draft (and not yet citable) paper, “Costs and Complexities of Carbon Pricing.” The BTI paper asserts that only a fully revenue-neutral carbon tax set at a socially-optimal price with full participation by other nations would be more effective than subsidies and regulations at reducing CO2 emissions. The paper points to the ineffectiveness of the low carbon prices induced by the European Union’s Emissions Trading Scheme and argues that the public won’t tolerate carbon prices rising to levels high enough to reduce emissions substantially. Because modest carbon taxes can’t deliver the needed emissions reductions, BTI argues that the carbon tax to shoot for is a small one funding targeted R&D that will unleash a technology breakthrough leading to abundant, cheap energy. (BTI supports “fourth generation” nuclear power, using fast breeder reactors as touted in the film “Pandora’s Promise.”)

In rebuttal, Handley argued that taxing CO2 pollution instead of productive activity such as work and investment is a climate policy offering enormous climate benefits at little or no cost. Successful carbon taxes in British Columbia and Sweden are proof that voters can be persuaded to embrace carbon taxes that reduce taxes on individual and business income, retail sales and payrolls. These taxes, along with Australia’s new carbon tax, demonstrate that well-designed carbon taxes can effectively reduce emissions quickly, at minimal cost, without stunting economic growth.

Handley further noted that the effectiveness of BTI’s proposal hinges on the ability (and willingness) of Congress and federal agencies to identify and fund nascent low-carbon energy technologies capable of breaking fossil fuels’ economic dominance. Yet a steadily-rising economy-wide carbon price can perform this task far more broadly and effectively, Handley argued, by encouraging every energy supplier and every energy user to look for ways to reduce emissions, spurring innovation across the entire spectrum of energy supply and use. He noted that diverting carbon tax revenues to R&D would preclude using carbon tax revenue to reduce other taxes, thus undercutting political support.

The Politics and Economics of Obama’s New Climate Program

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

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

Dr. Robert J. Shapiro

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

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

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

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

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

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

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

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

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