Book Review: “Paying for Pollution: Why a Carbon Tax is Good for America”

Is there a “middle way” to effective climate policy? A policy that makes sense regardless of whether you’re panicking over mass extinction or not quite sure the climate threat is serious? A policy whose cost-effectiveness[1] predominates over other policies so strongly that it appeals to both small government conservatives as well as environmental activists?

In his new book, “Paying for Pollution,” economics professor Gilbert E. Metcalf lucidly demonstrates why a well-designed carbon tax is that middle path. And, he shows why there are no good alternatives if we are serious about curbing our growing exposure to climate risk.

Prof. Gilbert E. Metcalf, Tufts University.

Metcalf certainly knows the features and pitfalls of the carbon pricing terrain. For two decades, he has focused on the role of tax policy to correct market failures. (A decade ago, after hearing his testimony encouraging the House Ways & Means Committee to propose a simple carbon tax or to simplify the behemoth cap-trade-offset bill emerging from the Energy & Commerce Committee, I had to resist the urge to stand up and applaud.) And he’s served in government, as Deputy Assistant Secretary for Environment and Energy at the U.S. Treasury from 2011-12.

Metcalf opens his book with a bird’s eye view of climate science, which through an economic lens, is telling us that we face serious and growing climate risk. That risk comes in the form of “known unknowns” such as more frequent and more damaging events like storms, floods, droughts and wildfires as well as “unknown unknowns” such as rapid methane release from Arctic permafrost and ocean clathrates. By analogy to Blaise Pascal’s famous theological wager about the existence of God, Metcalf suggests that even climate science skeptics would be wise to hedge their bets by supporting least-cost climate policy, for the same reasons they would buy fire insurance for their houses.

Metcalf introduces us to Ronald Coase, awarded a Nobel in 1991 for the insight that pollution rights can be allocated efficiently only if the parties hold explicit property rights, allowing them to negotiate. Next, we meet Arthur Pigou, who first observed that taxing pollution instead of beneficial activities can improve aggregate welfare by discouraging and reducing the unpriced costs of pollution. Pigou’s further insight was that the benefits of pollution taxes can offset much (sometimes all) of the economic drag normally associated with taxation.

Having neatly laid that groundwork, Metcalf turns to a real-world example: Sweden, which imposed a hefty $130/t CO2 tax in the early 90’s, using the revenue to reduce other taxes and equalize tax burdens. Sweden’s carbon tax has gradually but dramatically reduced its CO2 emissions, even as its economic growth has surged along a similar trajectory to that of the U.S.

Similarly, British Columbia imposed a revenue-neutral carbon tax in 2008 that has apparently reduced the province’s emissions while its economic growth exceeded the rest of Canada.

Paying For Pollution, Oxford Press (2019)

My favorite of Prof. Metcalf’s chapter titles is “Isn’t There a Better Way? (No, There Isn’t)” Here, Metcalf sets forth four criteria for climate policy. First, it should actually reduce emissions. Second, it should be cost-effective, delivering maximum efficacy per cost. Third, it should encourage innovation. And finally, it should be simple and transparent, to minimize administrative burdens and costs while limiting gaming and political meddling.

Metcalf walks us through real-word examples of alternatives to carbon pricing: regulations and subsidies. As examples of regulations, Metcalf examines performance standards and technology mandates EPA issued under the Clean Air Act. These encourage industry to comply by adopting the technology that EPA used to establish the standard; thus they don’t encourage much innovation. One example is the 1977 Clean Air Act mandate for power plants to install equipment to reduce sulfur emissions by 70 – 90%, regardless of the initial emissions rate. Congress chose this mandate to protect high sulfur eastern coal. Under the rule, dirty power plants that were burning high sulfur coal as well as cleaner ones that already had reduced emissions rates by burning low sulfur coal were forced to install scrubbers.[2] Metcalf points out estimates that it would cost roughly half as much to price sulfur dioxide emissions and let power plant operators choose whether to reduce emissions by installing scrubbers or buying western low-sulfur coal.

Automobile fuel efficiency (“Corporate Average Fuel Efficiency” or “CAFÉ”) standards might seem reasonably cost-effective, but because Congress included an exemption for light trucks, CAFÉ standards encouraged a perverse boom in gas-guzzling SUV sales. And the mandate for more efficient vehicles without a price on carbon has created a rebound effect. People drive their more efficient cars more miles, eroding net emissions reductions. Metcalf cites a study by Resources for the Future concluding that the average cost of reducing a ton of CO2 emissions via CAFÉ standards is about $85/ton, while a carbon tax would do the job for only $12/ton.[3]

Other alternatives to carbon pricing include subsidies and mandates. State-imposed Renewable Portfolio Standards (RPS’s) require utilities to generate a specified fraction of electricity from renewable sources. Metcalf points out that these rules do not encourage consumers to conserve electricity. A new study found that to reduce carbon emissions from electricity generation by 10%, an RPS program costs six times what carbon tax would.[4]

The federal government offers subsidies in the form of Production Tax Credits (PTC’s) to generators of wind and solar power. But by putting more power on the grid, the PTC reduces electricity prices, thereby increasing demand. Subsidies for hybrid cars mostly benefit the wealthy; with or without the subsidy they are the market for expensive hybrids. And policy interactions can create perverse incentives. Because CAFÉ imposes average fuel efficiency on each manufacturer’s fleet, selling an efficient hybrid in one place allows that manufacturer to sell an additional gas guzzler somewhere else.

On the “innovation” criterion, Metcalf points out the deep body of research concluding that zero-carbon energy R&D in both the public and private sector are woefully underfunded in terms of cost vs social benefits. By predictably increasing the cost of fossil fuels, whose prices now undercut cleaner alternatives, a carbon tax would provide incentives for private investment in clean energy R&D. Metcalf suggests the revenue from eliminating fossil fuel subsidies as a source of funds for public investment in clean energy R&D.

Having demonstrated the advantages of carbon pricing over regulations, subsidies and mandates, Metcalf proceeds to compare quantity-based carbon pricing mechanisms (caps) with price-based mechanisms (taxes).  In theory, Metcalf concedes, a cap-and-trade system can price carbon just as efficiently as a carbon tax. But in practice, the results of cap-and-trade have not been impressive. Both the California system and the European Union’s “Emissions Trading Scheme” have been plagued by price volatility and carbon prices too low to have much effect on demand or innovation. To stabilize prices, “collars” have been added to both systems. When triggered, an upper price limit effectively releases the emissions cap by issuing more allowances. And a price floor obligates the government to buy back allowances in order to prop up market prices. Thus, a cap-and-trade system with a price collar operates like a tax with a lot of needless complexity that increases opportunities for fraud and abuse. Metcalf also points out that only a carbon tax continues to prod further reductions even when standards, regulations and mandates have been met.

Metcalf next tackles the thorny question of revenue. He begins by citing an authoritative study issued by the Treasury Department in the waning days of the Obama Administration, concluding that the incidence of a carbon tax is distributionally-progressive. High income households would pay proportionally more carbon taxes than low and moderate-income households all the way up to the 95th percentile of income. Within the top 5%, the distribution becomes regressive, presumably because that top 5% are constrained by some other variable, like time. (Maybe one can only take so many globe-trotting flights in a day.)

US Treasury Analysis: Carbon Tax Incidence is Not Regressive

When revenue from a carbon tax is returned via equal lump sum rebates (a.k.a., “dividends”) the net distributional effect becomes even more progressive. Another option is to use the revenue to reduce the top marginal corporate income tax rate. Not surprisingly, this option is regressive, but would have offered large efficiency benefits. Alas, Congress cut the corporate income tax rate in 2017 (without paying for the expenditure, thus substantially increasing the deficit) seriously blunting the efficiency argument for using carbon tax revenue to further cut corporate income taxes. Perhaps surprisingly, Metcalf’s book does not mention his proposal from a decade ago to use carbon tax revenue to rebate payroll taxes, an option that he showed would be distributionally-progressive and which was incorporated into a bill introduced by Rep. John Larson (D-CT).

Metcalf overviews “best practices” for carbon tax design. His touchstones are administrative simplicity, low compliance costs, broad coverage (avoiding exemptions) and a substantial enough price signal to actually reduce (and continue to reduce) greenhouse gas pollution. For simplicity, a carbon tax should be imposed at the narrowest point in the respective supply chains of coal, oil and natural gas – where there are fewest taxpaying entities. Metcalf suggests including some non-CO2 greenhouse gases, including fluorocarbon refrigerants. But he concludes that to discourage fugitive methane emissions from oil and gas wells and gas distribution systems, technology-based regulations make more sense than a tax. Metcalf invokes the standard free trade based arguments for border tax adjustments which would exempt exports from carbon taxes to avoid putting them at a competitive disadvantage,[5] while imposing carbon taxes on energy-intensive imports in order to avoid favoring imports.

The carbon tax rate and its rate of increase are rivaled only by broad coverage as a crucial design elements to assure effectiveness at reducing emissions. Metcalf suggests skipping over the controversy and uncertainty[6] surrounding how to estimate the “social cost of carbon,” instead just choosing a future emissions target and periodically adjusting the tax rate along the way to stay on track.

In a chapter titled “Objections to a Carbon Tax,” Metcalf debunks the myth that carbon taxes will hurt the economy or “kill” jobs. Citing standard macro-economic models, Metcalf assures us that economic growth will overwhelm whatever small economic drag might be created by carbon taxes. And that analysis does not include the much larger benefits of reducing future climate damage. Metcalf agrees that transition assistance is needed for coal miners and other fossil fuel workers displaced by the transition to low or zero-carbon energy, but he is quick to attribute the lion’s share of coal job losses to the shale-gas boom that has driven natural gas down to prices that encourage utilities to replace coal-fired generation with gas. He points out that the transition to a low carbon economy will create far more jobs in renewable energy than are lost in fossil fuel related sectors.

Metcalf also deftly dispatches the argument that a carbon tax imposed by the U.S. wouldn’t matter. He points out that border tax adjustments offer a prod to other nations to enact their own carbon taxes, and he assures readers that leadership by the world’s largest economy really does matter, perhaps especially on climate policy.

In his final chapter, Metcalf offers a passing glance at the elephant in the room – political resistance to carbon taxes.[7] He recalls the two principles of President Reagan’s 1984 speech which spurred Congress to enact comprehensive tax reform two years later. First, the reform had to be revenue neutral, and second, it had to lower tax rates by broadening the tax base and cutting out loopholes. Metcalf suggests that in order to sidestep the politically-charged debate over the “size of government,” carbon taxes should also be revenue-neutral.[8]

Metcalf says his biggest worry about climate policy is not that we will not enact it, but rather that we will choose inefficient policies. Noticeably absent from Metcalf’s carefully-balanced map of the “middle way” to a carbon tax is an appeal to the environmental left. Judging by reports about the “Green New Deal,” progressives seem to be jumping on the bandwagon for a range of inefficient and possibly ineffective regulations, subsidies and mandates. Some advocates have even gone so far as to explicitly exclude carbon taxes.[9] Maybe Metcalf is right to be worried.

FOOTNOTES:

[1] Readers (like me) who are more concerned about effective climate policy than about efficient (low-cost) policy can safely substitute the word “effective” in the many instances where Metcalf points out the efficiency of carbon taxes. My assumption is that in a world where climate policy is constrained by political ambition, the most efficient policy is also the most effective. Of course, we climate hawks still have our work cut out to ensure and maintain an aggressively-rising carbon price, but the efficiency advantage of a carbon tax will pay off at any given level of political ambition.

[2] Metcalf notes that Congress eliminated this perverse provision in the 1990 Clean Air Act Amendments.

[3] Krupnick et al, 2010.

[4] Reguant, 2018.

[5] In “Can We Price Carbon?”(2018) political scientist Barry Rabe points out the popularity of ad-valorem severance taxes imposed at the point of fossil fuel production in states including Alaska, North Dakota, Wyoming, Oklahoma, Texas and California. Rabe points out that these severance taxes could easily be converted to carbon taxes by changing their basis from the dollar value of the fuel to its carbon content. Either way, their burden would continue to fall largely on out-of-state fuel consumers while funding popular programs in the states imposing them. For instance, Texas endows its Permanent University Fund with revenue from oil & gas severance taxes. This suggests that a carbon tax without a border tax adjustment to return tax revenue to producers of fuel for export might be more politically popular than a standard WTO consumption-based tax.

[6] Metcalf cites MIT economist Robert Pindyck, who has called the models used to estimate climate damage and the social cost of carbon “close to useless,” but who nevertheless argues forcefully for a carbon tax despite uncertainty about the “optimal” rate.

[7] For a terrific political science overview of carbon pricing successes and failures, see “Can We Price Carbon?” (2018) by Barry Rabe, which I’ve reviewed here.

[8] In a footnote, Metcalf concedes that by consistently approving increases in military spending and in 2017 by enacting tax corporate tax reductions that substantially increased the deficit (and overwhelmingly benefit the wealthiest households), Republicans have given fodder to liberals who question the good faith of Republican insistence on “small government” and their avowed aversion to deficits. Nevertheless, Metcalf insists that “this debate should have nothing to do with climate policy.”

[9]  See Grist, “Is the Green New Deal the Only Way Forward?” (December 10, 2018), quoting Evan Weber, “We’ve seen that carbon taxes are not winning elections, and they’re not winning at the ballot.”

Fast Thaw — What Are Arctic Lakes Telling Us?

If donning a wetsuit and diving into an Arctic lake to get a look at underwater craters boiling up methane gas sounds like an exciting adventure, let me introduce you to Katey Walter Anthony,[1] who did just that in an Alaska lake last summer. Last week, Dr. Anthony took a break from the meeting of the American Geophysical Union here in Washington, to offer a short briefing where she explained what she found.[2]

Dr. Katey Walter Anthony (National Geographic)

A bit of background: Methane (“natural gas”) like carbon dioxide, is a greenhouse gas. Greenhouse gases block infra-red radiation, reducing the amount of heat escaping from earth’s surface into space: Global warming. Methane is a more potent greenhouse gas than carbon dioxide, but it breaks down much faster.

Dr. Anthony has been studying the dynamics of Arctic lakes for a couple of decades. Thermokarst lakes form when arctic soil begins to thaw, leaving voids where ice crystals have melted, causing the soil to subside. Last year, native Alaskan groups contacted Dr. Anthony seeking her help finding methane seeps which they hope to use as fuel in their remote villages.[3] As lake bottoms thaw due to a warming climate, partially-decayed plants and animals, until now locked in permafrost, are starting to thaw and resume their decay, releasing carbon dioxide and methane. Increasing release of carbon dioxide and methane from thawing permafrost is one of about half a dozen amplifying climate feedback mechanisms that scientists have documented and begun to quantify.[4]

But what Dr. Anthony found at a lake that she named Esieh, just above the Arctic Circle, is even more troubling. She spotted the telltale signs of methane release — photos show that the lake doesn’t freeze over. And when she and her team arrived to set up camp, they were greeted by a steady eruption of grapefruit-sized bubbles rising to the lake surface. Carbon dating reveals that the gas is fossil methane, not the product of decaying material in permafrost, but gas from deeper geologic formations. Dr. Anthony surmises that as permafrost melts, it unseals fissures and crevices that connect to geologic gas deposits.

It’s not clear yet whether Esieh Lake is an anomaly, or part of a larger pattern of thermokarst lakes with underground connections to geologic methane, which would have ominous implications for earth’s climate. What we do know, as Dr. Walter put it, is that “these lakes speed up permafrost thaw. It’s acceleration.” And that the amplifying effects of releasing fossil methane at an accelerating rate are not included in current climate models.[5]

Footnotes: 

[1] “Katey Walter Anthony, 2009 Emerging Explorer,” National Geographic, https://www.nationalgeographic.org/find-explorers/katey-walter-anthony

[2] Thanks to Rafe Pomerance who arranged the briefing and invited me. Rafe’s long history as a champion of climate policy was reported by Nathaniel Rich in the New York Times last August: https://www.nytimes.com/interactive/2018/08/01/magazine/climate-change-losing-earth.html

[3] “Acrtic Caldroun,” Washington Post (9/22/18) by Chris Mooney with (splendid) photos by Jonathan Newton. https://www.washingtonpost.com/graphics/2018/national/arctic-lakes-are-bubbling-and-hissing-with-dangerous-greenhouse-gases/

[4] See, National Climate Assessment (2017), Chapter 15, “Surprises, Tipping Points and Compound Extremes.” https://science2017.globalchange.gov/chapter/15/, and
“The Study of Earth as an Integrated System,” NASA (2017),  https://climate.nasa.gov/nasa_science/science/.

[5] KW Anthony et al, “21st-century modeled permafrost carbon emissions accelerated by abrupt thaw beneath lakes,” Nature Communications,  August 15, 2018.  https://www.nature.com/articles/s41467-018-05738-9

 

 

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, ,

 

Trump: Deal-maker for a Carbon Tax Swap?

This morning, at the historic Willard Hotel in Washington DC, where on a November morning in 1861 Julia Ward Howe penned the Battle Hymn of the Republic, Harvard economics professor and former Obama climate adviser Joseph Aldy issued a clarion call of his own. At a moment of palpable despair, Aldy urged climate policy analysts, advocates and policymakers to consider “The Great Swap,” a carbon tax to advance Republicans’ especially President-elect Trump’s avowed goals of reducing taxes that hold back U.S. economic growth, while also reducing regulatory burdens. Aldy suggested that if Trump wants to live up to his reputation as a deal-maker, he will not pass up the opportunity for a carbon tax to help fund tax reform and eliminate EPA greenhouse gas regulations, goals that Republicans have long espoused. He noted that a carbon tax would also provide businesses with climate policy certainty while cost-effectively avoiding the international repercussions of U.S. repudiation of the Paris climate agreement.

Aldy opens his glossy 38-page paper,[1] citing the robust economic consensus that a carbon tax would reduce CO2 emissions at far lower cost than the current unstable patchwork of regulations and subsidies. Aldy, who advised President Obama whose signature climate achievement was EPA’s Clean Power Plan, pointedly suggests that EPA’s sector-by-sector approach is grossly inadequate to meet long term climate goals and would achieve its near-term goals at unnecessarily high cost. In his remarks, Aldy went further: He suggested that Congress “repeal and replace” the Clean Power Plan with a carbon tax. Moreover, Aldy noted that a modest carbon tax, starting at $25/T CO2 rising 5% annually in real terms, would generate revenue of $100 – 200 billion that could be used to reduce individual and corporate income taxes without increasing the deficit.

Discussing design options, Aldy’s paper cites the growing body of economics literature showing that a carbon tax “swap” can be distributionally-progressive (e.g., by using revenue to cut payroll taxes[2]) and growth-inducing (e.g., by cutting corporate income taxes[3]) or both (by allocating some revenue for each[4]). He suggests that every five years Congress should adjust the carbon tax rate and its annual percentage increase based on emissions data supplied by EPA, tax revenue and economic data from the Treasury Department and data on other countries’ emissions reductions from the State Department. Aldy concludes by pointing out that a carbon tax with “border tax adjustments” to impose equivalent carbon taxes on imported goods would protect the competitive position of U.S. businesses, even energy-intensive industry.[5] He further notes that border adjustments offer leverage for the U.S. to induce similar policies by our major trading partners.[6]

The economic and political case Aldy presented was hardly new to those who have studied climate policy, but he did manage to articulate a plausible scenario in what appears now to be a dire political situation for climate policy.

Following Aldy’s presentation, Hannah Hess of E & E News moderated a panel discussion featuring John Larsen of Johns Hopkins University and the Rhodium Group, Jerry Taylor of the Libertarian Niskanen Center, Todd Wooten of the Senate Finance Committee and Catrina Rorke of R Street Institute. Taylor registered skepticism, quipping, “Business wants certainty? Here it is: no more federal greenhouse gas involvement.” And Wooton opined that Congress will not “repeal and replace” the Clean Power plan, it will just “repeal, ASAP.” For her part, Rorke called on Republicans not to stand aside on climate policy the way they have left health policy to Democrats. She urged them to enact conservative “free market” climate policy to avoid further alienating young voters who understand and accept climate science.

While Professor Aldy’s proposal assumes a decidedly rosy scenario, maybe it is not beyond the pale to hope that Mr. Trump and at least some Republicans get past their climate science aversion to advance policy that comports with their stated principles, advances their tax reform and regulatory relief goals and could even help the U.S. lead on low-carbon innovation and technology.

[1] Joseph Aldy, “Long Term Carbon Policy: The Great Swap,” Progressive Policy Institute, 2016.

[2] Gilbert Metcalf, “A Green Employment Tax Swap: Using A Carbon Tax to Finance Payroll Tax Relief,” Brookings Institution, 2007. Rep. Bob Inglis (R-SC) proposed a carbon tax for payroll tax swap in his “Raise Wages, Cut Carbon Act of 2009,” HR 2380, 111th Congress.

[3] Donald Marron and Eric Toder, “Carbon Taxes and Corporate Tax Reform,” 2013.

[4] The “Tax Pollution, Not Profits Act” by Rep. John Delaney, HR 2202 (2015), would apply half of carbon tax revenue to reduce the corporate income tax rate, with the other half returned in lump sum to low and moderate income households and to fund transition assistance and early retirement for displaced coal workers.

[5] Jennifer Hillman, “Changing Climate for Carbon Taxes: Who’s Afraid of the WTO?,” German Marshall Fund, Climate Advisors, American Action Forum, 2013.

[6] Id.