Carbon Pricing: The Good, The Bad and The Ugly

Yes, Keep it in the Ground!  

Indigenous groups, environmental justice organizations and climate justice organizations are visibly and successfully confronting global warming directly. To cite just one example, in a stunning show of community organizing and popular will, the diverse, highly-visible “keep it in the ground” movement halted (at least temporarily) the Keystone XL pipeline which would have carried crude oil from Alberta’s “tar sands” across sacred indigenous lands, fragile ecosystems and vital drinking water aquifers to reach refineries in Texas for distribution to U.S. and global markets.[1] Extraction of “tar sands,” one of the dirtiest and most carbon-intensive fossil fuels, would damage or destroy much of Alberta’s Boreal Forest. Beyond its intrinsic value as a home to indigenous people and species, the Boreal Forest is a diverse ecosystem that sequesters millions of tons of carbon annually. [2]

To all appearances, mainstream scientific, environmental and policy organizations have been markedly less successful in organizing and spurring action to confront the climate threat. Beginning in 1979, the National Academy of Sciences issued lengthy, peer-reviewed surveys of global warming science. Early NAS reports estimated that continued fossil fuel burning would double atmospheric CO2 concentrations within a century, resulting in 2 deg C of warming. Based on painstaking studies of bubbles in ice cores that reveal CO2 concentrations in Earth’s paleoclimate history, scientists cautioned that 2 deg C of warming poses serious risk of catastrophically destabilizing Earth’s climate.[3] And they warned that even a stable 2 deg C warmer climate would be far beyond the range in which our species (and most ecoystsems on Earth) have evolved and adapted.[4]

Facing the stark realization that continued rapid exploitation of humanity’s chief energy source poses existential risks, some NAS study authors suggested aggressive pricing policy to attack the causes of climate change. In a 1983 NAS report, Yale economist Bill Nordhaus wrote,

“A significant reduction in the concentration of CO2 will require very stringent policies, such as hefty taxes on fossil fuels…”[5]

Alas, Nordhaus and other NAS collaborators deemed aggressive carbon pricing too radical and premature. Instead, their main policy recommendation was “further study.” That’s what has happened. Year after year, decade after decade, scientific studies continue to describe various aspects of the climate problem in ever more meticulous detail, but they largely temporize or abjure discussion of policy solutions. The scientific community’s hedged and often stilted warnings provided an opening for the well-funded climate science “doubt” industry to exploit. The “doubt industry” intones that stringent climate policies would be terribly costly, perhaps even destroying our economy, which the doubt industry asserts is inextricably and permanently tied to fossil fuel consumption. And they claim that nobody can prove that any climate policy is even needed.[6] Economists have pointed out that revenue from carbon pricing can be recycled to eliminate regressive distributional effects and mitigate economic distortions.[7] Despite such assurances, most U.S. politicians, even those concerned about climate have been only too happy to put off those hard choices.

Last fall, a year after the climate movement found itself effectively exiled from the Administration and Congress, a collection of environmental justice, climate justice and indigenous groups issued a “community resistance guide” authored by Tamra Gilbertson, claiming that all carbon pricing is a “false solution.”[8]  The “resistance guide” argues, citing substantial empirical evidence and academic research, that carbon pricing, even where enacted and implemented, has not produced the needed shift from fossil fuels to renewable energy and efficiency. (No argument there. We’re just nowhere near where we need to be to avoid climate catastrophe; time’s running out fast.[9])

But a close look reveals that much of the resistance guide’s well-founded critique is based on the flaws and complexities of indirect carbon pricing through cap & trade with offsets. (Hereinafter, abbreviated as “CTO.”)  I’ve spent a decade researching, writing and advocating simpler, more direct carbon pricing policies that offer fewer hiding places for gimmicks and exclusions and instead provide clear, briskly-rising price signals to investors, innovators and consumers. Instead of auctioning all pollution permits, [10] CTO policies tend to distribute many of them free to polluters in order to grease the skids for enactment.[11] That not only rewards past pollution, it cuts down on the revenue available to compensate disadvantaged communities. And as the guide articulates, the carbon offsets in CTO policies raise serious questions about indigenous rights and equally serious problems of monitoring, reporting and verification which have plagued the European Union’s Emissions Trading System.

Carbon Taxes Are Different Than Gimmicky Cap & Trade with Offsets.

In contrast, transparency, simplicity and an explicit revenue stream are key reasons why carbon taxes remain the most radical climate policy, even though they are grounded in mountains of peer-reviewed economic theory and analysis.[12] Thus, I was distressed that the resistance guide lumps explicit carbon taxes in with complex, gimmicky CTO policies that, as the guide points out, have not induced the robust carbon prices needed for aggressive emissions reductions.

The guide claims carbon taxes can “never” rise to levels high enough to reduce CO2 emissions to the degree needed. It’s true that carbon taxes, as enacted, and even most of those proposed, start too small and rise too slowly to hit consensus climate targets. And it’s true that economic models rarely seem to account for amplifying climate feedback; they discount or entirely exclude catastrophic scenarios so their damage estimates come out low.[13] Twelve years ago, in a widely-cited Scientific American article,  Princeton researchers Robert Sokalow and Steven Pacala described a path toward decarbonization broken down into 15 “carbon wedges” whose development and implementation would require a carbon price rising to $100 – $200 per ton within a decade.[14] Eight years ago, a few carbon tax bills were introduced by House Democrats and one brave Republican (Bob Inglis) that aimed that high. Now, I know of no legislative proposals that even come close.

So on the face of it, it’s true that carbon taxes are too small and grow too slowly to have much chance of hitting the kind of climate targets that climate scientists conclude would avoid catastrophic scenarios.

We Need The Engagement of Environmental Justice, Climate Justice and Indigenous Environmental Groups to Enact Effective and Fair Carbon Taxation.

The resistance guide further asserts that carbon pricing, even with substantial revenue directed toward assisting frontline communities, can “never” compensate for the historical environmental harms and future climate damage that disadvantaged communities endure. So the guide jumps to the conclusion that environmental justice, climate justice and indigenous environmental groups should unite to resist carbon pricing on a global scale. That advice overlooks the fact that frontline communities stand to benefit first and perhaps most from policies that mitigate or avoid climate damage. And sticking to the “false solutions” line would leave EJ, CJ and IE groups protesting outside while policy advocates and policymakers develop carbon pricing proposals, work which must be undertaken now if we are to be ready when the political tide turns. And the “false solution’ rubric further ignores the robust body of economic analysis showing that regulatory programs, mandates and prohibitions create perverse incentives for other nations to free ride. Even quantity-based carbon pricing systems such as CTO lead to gaming. Only explicit carbon taxes with border tax adjustments offer potential to “go global” by aligning the incentives of nations to trade fairly and push for higher carbon taxes.

The choice between “Keep it in the Ground” and carbon pricing is a false dichotomy. Recent economic analysis suggests that supply side (“Keep it in the Ground”) and demand side (Carbon Pricing) can work well together.[15] The climate movement needs EJ, CJ and IE voices and organizations to keep the pressure on and to engage in designing carbon pricing policy — preferably in the form of transparent, upstream excise taxes on fossil fuel sources of carbon emissions – to assure aggressive prices and fair revenue distribution. Yes, CTO has proven problematic, as many of us warned. But if EJ, CJ and IE voices engage, transparent taxes on climate pollution offer a path to effective climate policy that embraces and enhances climate justice.

[1] “Keystone XL Pipeline Foes Rev Up Fight Again After Trump’s Rubber Stamp,” Inside Climate News (March 24, 2017). https://insideclimatenews.org/news/23032017/keystone-xl-pipeline-donald-trump-rex-tillerson-state-department-nebraska

[2] “Tar Sands Threaten World’s Largest Boreal Forest,” World Resources Institute (July 15, 2014). http://www.wri.org/blog/2014/07/tar-sands-threaten-world%E2%80%99s-largest-boreal-forest

[3] Elizabeth Kolbert, “The Climate of Man Part II,” The New Yorker (May 12, 2005).

[4] A quarter century of “further study” has changed those initial estimates only slightly.

[5] Naomi Oreskes & Erik Conway, Merchants of Doubt, (2010) p 179, citing “Climate Change,” Nierenberg, et al (1983).

[6]  Merchants of Doubt, p 169 et seq.

[7] Donald Marron & Adele Morris, “How To Use Carbon Tax Revenues,” Tax Policy Center (February 2016). https://www.brookings.edu/wp-content/uploads/2016/07/howtousecarbontaxrevenuemarronmorris.pdf

[8] “Carbon Pricing, A Critical Perspective for Community Resistance” (2017). http://www.ienearth.org/wp-content/uploads/2017/11/Carbon-Pricing-A-Critical-Perspective-for-Community-Resistance-Online-Version.pdf

[9] “Countries made only modest climate-change promises in Paris. They’re falling short anyway,” Washington Post (February 19, 2018).

[10] Obama’s draft budget projects cap-and-trade revenue, Scientific American (February 26, 2009).

[11] See e.g., Robert Stavins’ blog,“The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey” (May 27, 2009). http://www.robertstavinsblog.org/2009/05/27/the-wonderful-politics-of-cap-and-trade-a-closer-look-at-waxman-markey/

[12] See e.g., Ian Parry, Adele Morris, Roberton Williams, Implementing a US Carbon Tax: Challenges and Debates (2015).

[13] Martin Weitzman, “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change,” Review of Environmental Economics and Policy (2011). https://scholar.harvard.edu/files/weitzman/files/fattaileduncertaintyeconomics.pdf

[14] “A Plan to Keep Carbon In Check,” Scientific American (2006). https://cmi.princeton.edu/resources/pdfs/carbon_plan.pdf

[15] Fergus Green & Richard Denniss, “Cutting with both arms of the scissors: the economic and political case for restrictive supply-side climate policies,” (February 2018).  https://link.springer.com/content/pdf/10.1007%2Fs10584-018-2162-x.pdf

Book Review: “Confronting the Climate Challenge” by Lawrence Goulder and Marc Hafstead

Carbon tax advantages emerge from modeling of four climate policy options.

Careful, deliberate analysis of climate policy options and design choices might seem quixotic at a time when climate science is under siege from fossil fuel industry-funded front groups and the Trump Administration is aggressively rolling back climate policy and attempting to subsidize and revive the coal industry. Looking beyond current political obstacles, Lawrence Goulder (Director of the Stanford Energy and Environmental Policy Center) and Marc Hafstead (Director of the Carbon Pricing Initiative at Resources for the Future) offer a detailed quantitative comparison of four leading climate policy options, charting the deep, sometimes murky water of climate policy for the concerned public, climate policy advocates and policymakers.

Goulder and Hafstead analyze four diverse policy options:

  1. An explicit carbon tax on coal, oil and natural gas, reflecting the relative CO2 contributions generated by combustion of those fuels.
  2. Cap & trade. A quantity-based limit on total CO2 emissions. Tradeable permits are auctioned off, indirectly inducing a carbon price.
  3. A Clean Electricity Standard (CES) specifying the fraction of electricity generated from non-carbon sources.
  4. A higher gasoline tax.

For the two carbon pricing options, Goulder and Hafstaed emphasize the importance of “recycling” revenue in ways that cut the overall cost of climate policy. Their modeling confirms and quantifies findings of numerous previous studies: Using revenue from carbon pricing to cut other taxes, especially taxes that create large distortions by inducing inefficient allocation and movement of capital and labor or reduced output, can substantially reduce the net economic costs of climate policy.

Prof. Lawrence Goulder (Stanford)

In a seminal paper published in 1994, Prof. Goulder dubbed the potential for low or no-cost climate policy a “double dividend,” referring to the double benefits of more efficient taxation plus the benefits of reducing unpriced climate, environmental, and public health damage.[1] Goulder and Hafstead’s new analysis concludes that the strong “double dividend,” where net policy costs are zero or negative, is as rare as the economists’ proverbial “free lunch.” It would occur only if the distortions from the tax whose revenue is being replaced by carbon revenue are so large that reducing them overcomes the costs created by a carbon tax: a reduced tax base and interactions with other taxes. But the weak double dividend, where policy costs are reduced (but not overcome) by the efficiency benefits of revenue recycling is far more easily obtained.

Goulder and Hafstead’s E3 (energy-economy-environment, general equilibrium) model reveals the weak double dividend whenever carbon revenue is used to replace other distortionary taxes. By far the largest efficiency benefits arise from using carbon tax revenue to cut corporate income tax rates. Using carbon revenue to cut individual income tax rates produces modest efficiency benefits while cuts in employee payroll tax rates offer slightly smaller efficiency benefits. Returning revenue in lump sum fashion produces little or no efficiency benefit.

Alas, while Goulder and Hafstead were assiduously analyzing the benefits of recycling revenue from carbon pricing and (presumably) rushing to publish their results, Congress and the Trump Administration cut the marginal corporate income tax rate from 32% to 21%,[2] knocking much of the distortionary edge off U.S. corporate taxation. Nevertheless, given the robust economic literature suggesting a large excess burden[3] from taxes on capital compared to other taxes such as income and payroll taxes, their ranking of the relative benefits of various tax shifting proposals should stand, even if some of their quantitative results have been overtaken by events.

Marc Hafstead (Resources for the Future)

Goulder and Hafstead articulate and quantitatively illustrate the stark tradeoff between economic efficiency and distributional equity in the design of climate policies. They stress the need to account for both the regressive use-side impacts of carbon taxes, as well as their progressive source-side impacts. Their model includes both, providing a ranking of revenue options for distributional progressiveness which reverses the order of their ranking for economic efficiency. Lump sum rebates are most distributionally-progressive, followed closely by reduced employee payroll taxes and reduced individual income taxes. Finally, they find that reduced corporate income taxes are the least progressive option, though not necessarily regressive as commonly assumed. Goulder and Hafstead also analyze hybrid options: using a fraction of revenue to compensate households in the bottom two income quintiles while using the balance to reduce corporate income tax rates, similar to the carbon tax measure proposed by Rep. John Delaney (D-Md).[4] As expected, these hybrids produce intermediate effects, trading off some efficiency for distributional equity.

Goulder and Hafstead conclude that at low CO2 abatement levels, a Clean Electricity Standard (CES), which effectively sets a “floor” on the fraction of non-fossil fuel generated electricity,[5] can be cost-effective even when compared to carbon pricing mechanisms. But they point out that carbon pricing surpasses the efficiency of a CES as CO2 abatement goals become more stringent over time. One key reason is that unlike a carbon price, a CES does not provide a price signal to electricity consumers to encourage conservation and efficiency. In effect, a CES amounts to a tax on fossil fuel energy, plus a subsidy to non-carbon energy, leaving consumer electricity prices essentially unchanged. And, of course, a CES is limited to the electricity sector, leaving out the industrial and transportation sectors, creating distortions across the economy.

Finally, Goulder and Hafstead analyze the climate benefits of raising the gasoline tax. They conclude that while higher gasoline taxes do produce benefits that exceed their costs, especially when non-climate co-benefits are considered, higher gasoline taxes do not offer anywhere near the potential that economy-wide carbon pricing offers to reduce emissions. In fact, they conclude that while each of the other three policies could be designed to bring the U.S. close to meeting its commitments under the Paris Climate Accord, no conceivable increase in gasoline taxes could achieve that alone. Nevertheless, I might suggest modeling a gasoline (and diesel) surcharge added to an economy-wide carbon tax to compensate for the relatively low price elasticity in the transportation sector that makes it less responsive to carbon pricing than the rest of the economy.

“Confronting the Climate Challenge” is written in somewhat technical language, but even to a lay reader, the book clearly illustrates economic concepts graphically and with salient examples. Goulder and Hafstead’s description of their E3 model and tabulations of results offer readers a look at how their general equilibrium model works, and gives a sense of the granularity of their analysis. The model divides the economy into roughly 40 industrial sectors; tabular results show the effects of various policy and revenue options on those industries. Graphical illustrations of distributional and regional costs and benefits flesh out the picture and remind us that design details can indeed matter just as much as policy choice.

The four relatively diverse policies chosen by the authors seem to be the most politically viable both on the state and federal level. With progress on climate policy stalled at the federal level, states are showing increased interest in carbon taxes, cap-and-trade systems, clean energy standards (including the Northeast States’ Regional Greenhouse Gas Initiative). Even the long-taboo subject of raising gasoline taxes has come up in the context of infrastructure funding.[6]

Goulder and Hafstead take pains to point out that well-designed cap-and-trade systems can price carbon pollution as efficiently as carbon taxes, though they do not mention carbon offsets, an almost ubiquitous design element of cap-and-trade systems that has thwarted their effectiveness as price-setting mechanisms. Similarly, the authors do not mention the effect of price volatility which tends to muddy price signals and cloud long term price expectations in cap-and-trade systems.

In their conclusion, Goulder and Hafstead mention that their modeling treats the rate of technological innovation as an exogenous variable. Thus, to the extent that carbon pricing induces or accelerates low- or non-carbon energy innovation, their estimates may understate the effectiveness of carbon pricing.

Goulder and Hafstead also mention the possibility of preempting some existing (presumably redundant) climate policies if carbon pricing were enacted, noting that this would produce additional efficiency benefits.[7] If Goulder and Hafstead’s carbon tax rates ($10, 20 and 30/tonne CO2 with a 4% annual increment) were more aggressive, the suggestion to preempt redundant policies might be more persuasive. They do not even attempt to model more aggressive carbon pricing (which if adopted globally) could offer a path to emissions reductions consistent with the IPCC’s 2 deg C target discussed in the book’s introduction.[8] Perhaps even more frustrating, Hafstead’s elegant and easy-to-use online carbon tax calculator[9] does not even allow carbon taxes that start higher than $50/ tonne or rise more briskly than 5% annually.

RFF Carbon Tax Calculator

Surely, if economy-wide carbon taxes with revenue recycling are indeed the most cost-effective and thus the most potent policy option, we should be encouraged to consider more aggressive options to reduce the risks of catastrophic scenarios including tipping points and amplifying feedback.[10]

NOTES:

[1] “Environmental Taxation and the Double Dividend: A Reader’s Guide,” Lawrence H. Goulder, NBER Working Paper No. 4896, October 1994. http://www.nber.org/papers/w4896

[2] “Final Version Of GOP Tax Bill Cuts Corporate Tax Rate To 21 Percent,” NPR, December 15, 2017. https://www.npr.org/2017/12/15/571257526/final-version-of-gop-tax-bill-cuts-corporate-tax-rate-to-21-percent

[3] The excess burden (or degree of distortion) is a measure of unintended behavior (and resultant economic) changes induced by a tax beyond its revenue-generating effect. Corporate income taxes are considered more distortionary than other taxes because (at least until recently) marginal tax rates on returns to capital have been relatively high, and business actors tend to have better information and ability to shift investments and business activities to avoid or reduce taxes. See e.g., “Excess Burden of Federal Taxes Imposes High Economic Cost,” Joint Economic Committee Report #110-8, June 2007.  https://www.jec.senate.gov/public/_cache/files/d99ac41c-bd86-4826-8623-ae68af9c3577/excess-burden-of-federal-taxes-imposes-high-economic-cost—june-2007.pdf

[4] “Tax Pollution, Not Profits Act,” https://delaney.house.gov/news/press-releases/delaney-files-carbon-tax-bill-revenues-used-to-lower-corporate-tax-rate-provide

[5] Some CES designs credit utilities that switch from coal to natural gas generation, recognizing the lower CO2 emissions from gas. See e.g., RFF analysis of Senator Bingaman’s 2012 CES proposal. http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-12-20.pdf

[6] One wonders if there would be any net environmental or climate benefit from increasing the gasoline tax in order to fund more fossil fuel and automobile infrastructure, a question not raised in the book.

[7] Goulder & Hafstead, p. 236.

[8] After noting that the IPCC goal of stabilizing warming below 2 deg C would require emissions reductions in the range of 40 – 70 % by mid-century and reduction of emissions to near zero by 2100, Goulder & Hafstead indicate that they only attempted to model carbon taxes that would reduce emissions 45% below their 2013 baseline by 2050. (Chapter 8, footnote 1, p. 326.)

[9] See “Introducing  the E3 Carbon Tax Calculator: Estimating Future CO2 Emissions and Revenues,” Marc Hafstead, Sept. 25, 2017. http://www.rff.org/blog/2017/introducing-e3-carbon-tax-calculator-estimating-future-co2-emissions-and-revenues

[10] See “National Climate Assessment,” U.S. Global Change Research Program, Washington, DC, November 2017. In particular, chapter 15, “Potential Surprises: Compound Extremes and Tipping Elements.” https://science2017.globalchange.gov/downloads/CSSR2017_FullReport.pdf 

Senators Whitehouse and Schatz offer Climate “Olive Branch” to Republicans Seeking Tax Reform

As Congress (perhaps furtively) begins to turn attention to tax reform, the Senate’s climate avatars Sheldon Whitehouse (D-RI) and Brian Schatz (D-HI) have updated their proposal to tax (and thereby discourage) carbon dioxide pollution,[i] the chief driver of global warming.

Introducing AOCFA at the American Enterprise Institute

Reaching across the partisan divide, Whitehouse and Schatz unveiled their “American Opportunity Carbon Fee Act”[ii] at a packed event hosted by the conservative American Enterprise Institute on July 26th.[iii] They touted both the climate benefits of a carbon price and the fiscal allure of $2.1 trillion in revenue that AOCFA would reap over a decade. The bill proposes to fund cuts in corporate income tax rates, rebate a portion of payroll taxes, fund a Social Security supplement for retirees, and provides block grants for states to help low-income and rural households and workers transitioning to new industries. At least from a revenue perspective, the bill represents an olive branch to conservatives and business interests who seek to reduce corporate tax rates, while also protecting low- and middle-income households from disproportionate impacts.

AOCFA is elegant, concise and easily-understood. It’s an upstream excise tax on the carbon content of fossil fuels, the simplest and most direct way to begin to correct the market distortion that now omits the present[iv] and future costs of climate pollution from fossil fuel prices, making them seem cheaper than they really are. The tax would start at $49/T CO2 and rise 2%/year above inflation.

Unfortunately, 2%/year is not nearly enough to continue driving down CO2 emissions after the initial effects of the tax ripple through the economy. Two percent is about the expected annual rate of economic growth in the U.S.[v] Although the U.S. economy is slowly becoming less carbon-intensive, it’s still a fair guess that 2% economic growth will lead to roughly 2% annual increases energy demand for many more years. In short, even if similar carbon pricing trajectories were adopted globally, AOCFA’s 2% price trajectory is far too anemic to achieve even the most modest climate goals and is nowhere near aggressive enough to avert catastrophe.

The Seven Percent (Climate) Solution?

But despair not! There’s a relatively easy fix for AOCFA. A recent analysis by the World Bank’s High-Level Commission on Carbon Prices offered the results of six different integrated assessment models in three scenarios[vi]. In order to meet the goal of holding global temperature rise under 2 degrees Celsius, the models suggest that a carbon price will need to rise to roughly $500/ton CO2 by 2050. An upward ramp of 7%/yr would get us there just in time. The plots below tell the story.

As you can see, if AOCFA’s price ramp were increased to 7%/year, carbon prices would reach the mid-range of the climate models’ price projections, roughly $500/ton CO2 by 2050, indicated by the orange curve. Hence, the 7% solution![vii] Upgrade AOCFA’s anemic 2% annual increment to a more robust 7%, then we’d be looking at serious climate policy, offering a ~50% chance of averting catastrophe.

NOTES:

[i] “Some Democrats See Tax Overhaul as a Path to Taxing Carbon,” (New York Times, 8/17/17). https://www.nytimes.com/2017/08/17/climate/carbon-tax-reform-climate-change.html

[ii] “American Opportunity Carbon Fee Act Introduced in Congress,” (press release, 7/27/17). https://www.whitehouse.senate.gov/news/release/american-opportunity-carbon-fee-act-introduced-in-congress

[iii] “Carbon taxes: A problem or a solution? Remarks from Sen. Sheldon Whitehouse (D-RI) and Sen. Brian Schatz (D-HI)” (AEI, 7/26/17). https://www.aei.org/events/carbon-taxes-a-problem-or-a-solution-remarks-from-sen-sheldon-whitehouse-d-ri-and-sen-brian-schatz-d-hi/

[iv] “Texas flood disaster: Harvey has unloaded 9 trillion gallons of water,” (Washington Post, 8/27/17). https://www.washingtonpost.com/news/capital-weather-gang/wp/2017/08/27/texas-flood-disaster-harvey-has-unloaded-9-trillion-tons-of-water/

[v] “Budget and Economic Outlook: 2017 to 2027,” (Congressional Budget Office, 1/24/17). https://www.cbo.gov/publication/52370

[vi] “Report of the High-Level Commission on Carbon Prices,” Carbon Pricing Leadership Coalition, Chaired by Joseph Stiglitz and Nicholas Stern, (World Bank, 5/29/17).
https://akira150501.files.wordpress.com/2017/06/a0878-carbonpricing_final_may29.pdf

[vii] Pace, Nicholas Meyer (author of “The Seven-Percent-Solution,” reminiscences of Dr. Watson, Sherlock Holmes’ fictional assistant).

Carbon Pricing Deal in 2017?

Just one day after Donald Trump, surrounded by coal miners, signed executive orders to roll back Obama Administration energy and climate rules, the Partnership for Responsible Growth convened a symposium at the conservative Hoover Institution (two blocks from the White House) delving into prospects for carbon pricing. George Shultz, President Reagan’s Secretary of State and professor emeritus at Stanford, opened the event urging swift action to reduce climate risk with a rising tax on carbon emissions.

Joe Aldy, Harvard economics professor

The first panel, discussing revenue, was led by Harvard economics professor and former Obama adviser Joe Aldy, who proposes a carbon tax to replace EPA regulations on coal-fired power plants. Aldy suggested that by funding cuts in business and payroll taxes, a carbon tax could spur economic growth; he also suggests a small fraction of revenue to fund much-needed clean energy research. He pointed out that British Columbia garnered popular support for its revenue-neutral carbon tax by initially sending revenue checks directly to households. Aldy expressed hope that mounting pressure to reform the U.S. tax code after three decades of stasis could offer a unique opportunity to interject carbon taxation.

Thomas F. Stephenson, partner Sequoia Capital

Thomas Stephenson of Sequoia Capital, concurred that a simple upstream carbon tax is the uncontested climate policy of choice. Differences of opinion, he noted, are mostly about revenue options. In addition to replacing regulations, Stephenson suggested that carbon taxes could replace a myriad of costly energy subsidies and mandates. He suggested that many conservative objections to a carbon tax could be overcome if the tax is truly revenue-neutral.

Bob Perkowitz, president ecoAmerica

Bob Perkowitz, president of eco-America, pointed out that states now face a $500 billion revenue shortfall. Consistent with conservative notions of federalism, Perkowitz suggested distributing carbon tax revenue to states via “block grants,” allowing spending decisions to be made on the state level.

Donald Marron, director of economic policy initiatives at the Urban Institute, stressed that a robustly-increasing carbon tax can be designed to meet any climate policy goal.

Donald Marron, Urban Institute

For example, Marron said, a modest tax starting at $25/T CO2, rising just 2% above inflation would easily achieve the Paris climate target while raising over $1 trillion in revenue over a decade. In the current Republican political environment, Marron suggested framing a carbon tax as a replacement for other taxes or as a source of funds to households, not as a source of revenue for government spending. He suggested that Republicans might feel more comfortable supporting proposals that “score” as truly revenue-neutral by the Joint Committee on Taxation and the Congressional Budget Office. Marron noted that block grants could be considered “spending,” but pointed out that the distinction between spending and “negative taxes” can become arbitrary.

Ted Halstead, Climate Leadership Council

During the question and answer period, Ted Halstead, founder of the newly-formed Climate Leadership Council, observed that FDR didn’t sell Social Security as a “payroll tax.” Similarly, he urged carbon tax supporters to emphasize near-term benefits. CLC’s proposal is framed as a “carbon dividend” to every household.

Maya MacGuineas, Committee for Responsible Federal Budget

Maya Macguineas, president of the Committee for a Responsible Federal Budget, opened the second panel on political prospects. She stressed that unlike other policies, carbon taxes address both fiscal and climate problems simultaneously.

Jerry Taylor, director of the libertarian Niskanen Center, is skeptical of the near-term political prospects for carbon taxes. Taylor finds it “unimaginable for Trump or Republicans to promote carbon tax… they will not fly into the teeth of big coal. Until [coal magnate] Bob Murray buys it, no [carbon tax].”

Jerry Taylor, Niskanen Center

Taylor pointed out that Rep. Scalise’s resolution condemning carbon taxes last year (supported by all but one House Republican), was a reaction to lobbying for a carbon tax. In Taylor’s assessment, “Republican leadership is just as adamant as Charles Koch.” Taylor pointed out the stark silence of Senators McCain and Graham, who formerly supported climate policy. Moreover, Taylor noted, “there is no evidence of the needed political capability at the White House. I would be stunned if either tax reform or infrastructure advance.”

Taylor cautioned against reading too much into reports that roughly 40 House Republicans and 10 Senate Republicans are uncomfortable with climate science denial. Taylor suggested that discomfort with denial does not necessarily lead to support for a carbon tax. Instead, Taylor suggested, climate-concerned Republicans might embrace Bill Gates’ “breakthrough” proposal for technology funding or proposals for geoengineering. Taylor concluded, “even if there were a political opening for carbon tax on the Hill this year, we would probably miss it because key advocates are not engaged.” But he offered a ray of hope: Perhaps an opportunity after the 2018 election — if we do the legwork now.

Adele Morris, Brookings Institution

Adele Morris, Climate and Energy Policy Director at the Brookings Institution, articulated three sets of reasons for carbon taxes. First: To slow unchecked climate risk. Second: To avoid a proliferation of complex, inefficient and mismatched state and local programs. And finally: To preempt the lengthy implementation and litigation associated with EPA’s sector-by-sector regulatory approach, which is not globally replicable and which could be revived by the next Democratic administration. Morris lamented the lack of engagement by environmental and climate organizations to support carbon taxes. Their past “distraction” by EPA’s regulatory approach was understandable, but is now moot. “There is no distraction now,” she quipped. Moreover, she pointed out that “any substantial carbon tax would beat the pants off” the climate effectiveness of the Clean Power Plan.

Bob Inglis, republicEn

Bob Inglis, former Congressman (R-SC) and founder of republicEn, offered assurance that “political orthodoxy is more fluid than it might appear.” As a case-in-point, Inglis recalled that he’d taken a beating from constituents and other Republicans for opposing the 2007 Iraq troop surge. Now, he noted, Trump and many Republicans, including Ron Paul, routinely criticize the entire Iraq war. Inglis urged carbon tax supporters to speak in terms of Republican values. He suggested that Trump could sell a carbon tax with border adjustments as way to “make China pay,” to avoid getting tangled by UN agreements and to “make American win again.”

Walt Minnick, Partnership for Responsible Growth

Walt Minnick, another former congressman (D-Id) and a co-founder of the Partnership for Responsible Growth, urged framing carbon taxes as “carbon-funded tax cuts.” Minnick suggested that the costs of delaying climate policy are large and seem to be growing exponentially. “We cannot afford to wait 4 to 8 more years,” he said. At the same time, he stressed, the U.S. faces growing and unsustainable deficits. In over 100 meetings with members of Congress, he said only two have expressed willingness to continue increasing spending without some means to pay for it. He pointed out that the House’s Border Adjustment Tax is “taking on heavy water,” and noted that there is little stomach in Congress for cutting the business interest deduction or the home mortgage deduction. Other revenue options, such as imposing a new value added tax, are even less palatable. In short: Congress will need ways close budget gaps; a carbon tax offers a way. His focus, Walt said, is on enacting a rising price on carbon; in that effort, all revenue options should be on the table.

Phil Sharp, former Congressman, RFF CEO

Phil Sharp, former Congressman (D-In) and CEO of Resources for the Future, stressed the unique opportunity to interject carbon taxes into tax reform. Sharp is confident that tax reform will (eventually) advance and feels that it offers by far the best vehicle for a carbon tax.

The panel’s moderator, Jessica Tuchman Matthews, whose illustrious career includes directing the Carnegie Endowment for International Peace, serving on the Council on Foreign Relations, as well as a stint on the Washington Post editorial board, succinctly summed up the panel’s comments:

Jessica T. Matthews

1. A carbon tax must be bipartisan.
2. The vehicle is tax reform.
3. Advocates must mobilize.

In response, Jerry Taylor suggested another “vehicle” for a carbon tax could be to fund infrastructure. Ted Halstead also disputed the tax reform “vehicle.” He noted that to be effective, a carbon tax must not only put a substantial price on carbon emissions, it must continue to rise over time. To build ongoing support for that rising price, Halstead urges linking a carbon tax to a “dividend,” distributing revenue directly to each household.

Congratulations and thanks to the Partnership for Responsible Growth, the Hoover Institution, moderator Alice Hill and all the panelists for continuing and advancing this vital policy conversation.

(Link to video, courtesy of  Hoover Institution.)

Economists Unanimously Applaud Bipartisan Carbon Tax Proposal

A modest, steadily-rising carbon tax as proposed a month ago by the Climate Leadership Council would be more effective and globally-replicable than existing greenhouse gas regulations. That was the unanimous conclusion of three energy economists and one oceanographer turned climate lobbyist who spoke at a forum yesterday at the Johns Hopkins School of Advanced International Studies in Washington DC. Moreover, the panel stressed, both climate activists and legislators seeking to improve the efficiency and fairness of the tax code have good reasons to seriously consider such a replacement strategy.

Danny Richter, legislative director of Citizens’ Climate Lobby suggested that a revenue-neutral carbon tax can help depoliticize climate policy. In conversations on Capitol Hill, Richter said some Republicans seem to be looking for issues where they can show independence from the Trump administration and instead align themselves with science. Richter thinks climate policy may be their golden opportunity. Richter pointed out House Resolution 424, sponsored by 16 Republicans, calling for “American ingenuity, innovation and exceptionalism to create and support… to study and address the causes and effects of measured changes to our global and regional climates…” Richter said CCL is seeking support from another two dozen Republicans to create an effective, conservative pro-climate voting bloc in the House.

Marc Hafstead, a research fellow at Resources for the Future, discussed the results of the macro-economic model he developed with pioneering climate economist Lawrence Goulder. The model compares effectiveness and economic effects of climate policies. Hafstead reported that CLC’s proposed tax of $40/T CO2 rising 2% annually would easily surpass the emissions reductions from EPA’s Clean Power Plan. He seemed to prefer a more modest starting price of $20/T CO2 with a more aggressive 4% annual ramp-up, but he concluded that either carbon tax proposal would easily out-perform EPA regulations. CLC’s proposal to return carbon tax revenue as a lump-sum “dividend” is distributionally-progressive (benefitting low income households the most) but Hafstead pointed out that it is more costly in the aggregate (as measured by GDP) than using revenue to cut other taxes that slow economic growth. Hafstead finds that cutting the top corporate income tax rate, a long-standing Republican policy goal, is the most efficient revenue option. Hafstead concluded by underscoring the dual benefits of reducing climate risk by taxing carbon while simultaneously spurring growth by cutting distortionary taxes.

Adele Morris is a Senior Fellow at the Brookings Institution who served at the State Department as a climate negotiator in 2000. Morris congratulated the Climate Leadership Council for re-starting and focusing the conversation about how to design and implement a carbon tax which she finds more interesting than tiresome debate about “hoaxes” and whether climate policy is needed at all. Morris stressed that the substantial, growing revenue stream from a modestly-rising carbon tax offers attractive options for embedding it in broader tax reform. And she emphasized that a carbon tax would maximize U.S. leverage in climate negotiations; a price instrument would facilitate transparent comparison of national ambition in those negotiations. She observed that it’s relatively easy to compare prices, but it’s complicated to negotiate and verify achievement of quantity-based targets. Morris responded to critics of carbon taxes who assert that carbon taxes aren’t efficient unless the price is set optimally. She pointed out that because the incremental damage from carbon emissions increases non-linearly over time, the potential cost of excess abatement is likely to be tiny compared to the benefits of getting ahead of that ominous upward-curving climate damage function. Morris’ top-line message: a carbon tax will be much more cost effective, transparent, replicable than regulations.

Noah Kaufman, a climate economist at the World Resources Institute, recently served at the White House Council on Environmental Quality. Kaufman suggested that carbon taxes may not need to rise to the high levels that standard economic modeling predicts. Observing the brisk pace of recent energy technology innovation, Kaufman suggested that even a modest carbon price could spur even more rapid low-carbon energy innovation and implementation. He also pointed out that the carbon tax in British Columbia has been more effective than standard models predicted. He speculated that the high visibility of the carbon tax led to greater behavior change than equivalent price changes normally do. Finally, Kaufman pointed out that a modest carbon tax such as the CLC proposal could obviate the Clean Power Plan. He expects that even a modest federal carbon tax would reduce emissions enough that states would be in compliance with the EPA rule. That suggests a possible compromise, perhaps avoiding a conflict over repealing the CPP that environmental organizations struggled to promulgate.

Recommended Reading:

Climate Solutions Caucus expands to 24, Citizens’ Climate Lobby (February 10, 2017).

Macroeconomic Analysis of Federal Carbon Taxes, Marc Hafstead, Lawrence H. Goulder, Raymond J. Kopp, Roberton C. Williams III (Resources for the Future, June 2016).

Options for Reducing the Deficit (Option 42: Carbon Tax), Congressional Budget Office (December 8, 2016).

Methodology for Analyzing a Carbon Tax, John Horowitz, Julie-Anne Cronin, Hannah Hawkins, Laura Konda, and Alex Yuskavage (Department of the Treasury, January 2017).

How To Use Carbon Tax Revenues, Donald B. Marron, Adele C. Morris (Tax Policy Center, 2016).

Republican-Proposed “Carbon Dividend” Is a Great Sign of Progress, Noah Kaufman (World Resources Institute, February 10, 2017).

Putting a Price on Carbon: Ensuring Equity, ,

Why Trump Should Embrace a Carbon Tax

Brookings Energy Economist Adele C. Morris
Adele Morris, Climate and Energy Economics policy director, Brookings Institution

 

Brookings economist Adele Morris and R St Institute’s Catrina Rorke shined like diamonds as they made the case for truth-in-energy pricing at Cato Institute yesterday. Morris argued that a carbon tax could help Trump and Republicans advance their stated goals of tax & regulatory reform and fund transition assistance to coal country.

catrina
Catrina Rorke, Energy Policy Director, R St. Institute

Rorke pointed out that industrial policy propping up fossil fuels distorts markets and cheats us of technological innovation. Cato hosts Robert Bradley & Peter Russo seemed to inch away from Cato’s longstanding denialist stance, coming out as “lukewarmers” who at least admit global warming, but claim it may be beneficial. Tell that to folks battling scorching heat and raging fires in Australia and Oklahoma.

Yes, Tax Carbon. Ditch “Revenue-Neutral” Shibboleth

My response to “Progressives Need to Get Over Themselves and Support This GOP-Backed Carbon-Tax Plan” by Charles Komanoff (The Nation):

Mr. Komanoff blames environmental and environmental justice advocates for the failure of Washington State’s carbon tax ballot initiative, I-732. But the story is more nuanced.* Advocates of I-732 turned down a late offer from environmental and EJ groups to collaborate if carbon tax revenue were used for forestry management (in a state devastated by wildfires), water projects (to mitigate drought) and assistance for front-line communities. Credible polling showed their proposal was far more popular. But instead of collaborating, I-732 advocates stuck to their revenue-neutral approach intended to win support from Republicans and businesses. That support did not materialize.

Komanoff chides environmental advocates who don’t fully trust economists who assert that the “almost magic wand” of a rising price on CO2 pollution will transform the global economy from fossil dependence toward renewables and efficiency if only the tax level rises high enough. That’s a big IF. As Mark Jaccard and colleagues at Simon Frazer University in Vancouver have shown, carbon pricing tends to reach a political resistance point at a relatively low price. British Columbia’s revenue-neutral carbon tax rose briskly from $CN10/tonne CO2 to $30 where it is stuck. Yes, the new Baker/Shultz Carbon Leadership Council proposal is a welcome sign. But its proposed tax of $40/T CO2 would rise only 2%/year, nothing like the more aggressive $5/year Mr. Komanoff espouses and nowhere near the trajectory needed to reduce emissions 80% by 2050.

Elected Republicans have shown no interest in carbon taxes, revenue-neutral or otherwise. And even where carbon taxes have been enacted, they have not risen to levels or been comprehensive enough to induce the scale of energy transformation needed. Why blame environmental, EJ and climate activists for pressing to spend carbon revenue in ways that are popular and enhance the effect of its price signal? Let’s ditch the “revenue-neutral” shibboleth and start discussing constructive ways to spend (at least some) carbon tax revenue that can unite the climate, environmental and EJ movements. We don’t need more divisiveness and finger-pointing as we face Republican denialists and “lukewarmers” in all three branches of federal government.

* Both factions seemed to put their revenue preferences ahead of the larger goal: a rising price on CO2 pollution. On that score, I-732 was certainly worth enacting. See analysis by Sightline Institute.

Further Reading:

How To Use Carbon Tax Revenues, Donald B. Marron, Adele C. Morris (Tax Policy Center, 2016).

Putting a Price on Carbon: Ensuring Equity, ,