By Mike Aucott[1]
The idea of putting a broadly-applied price on carbon dioxide emissions from combustion of fossil fuels from all major sectors of the U.S. economy is gaining traction. Several national organizations are actively supporting a carbon tax, including Citizens’ Climate Lobby[2], the Climate Leadership Council[3], the Carbon Tax Center[4], and PUTAPRICEONIT[5].
A number of nations and other jurisdictions already have some form of carbon pricing. A group of Princeton University students, the Princeton Student Climate Initiative[6], is exploring ways to strengthen New Jersey’s effort to cut greenhouse gas emissions, including development of a state-level carbon tax.
While state-level programs to price carbon could be effective, carbon pricing approaches will be more effective if they are national and, ideally, international in scope.
Very recently, a bipartisan group of Representatives and Senators in the U.S. Congress introduced H.R. 7173 (and a companion Senate bill), the Energy Innovation and Carbon Dividend Act (2018) in the last Congress. This bill put a price on fossil fuels based on the carbon dioxide their combustion would emit at the point where these fossil fuels enter the economy, starting at $15 per ton and increasing by $10 per year. The fee was linked to scheduled reductions expressed in the bill. These reductions reach 85% below the 2015 level by 2050. Clearly, the fee on carbon has to rise to the level where it begins to bite into carbon emissions. The idea is to start at a low level and increase it every year. There is little or no certainty on the trajectory of the interplay between a carbon fee and a given level of emissions reduction. For this reason, the proposed bill includes yearly monitoring of actual reductions vs. goals. If the goals aren’t being met, the fee goes up by $15 per ton in the next year.
The fees collected are returned to households, making the bill essentially revenue-neutral. Several studies have shown that the bottom two-thirds of the income distribution, on average, actually benefit from such a revenue-neutral approach that returns the collected fees (less administrative costs) to households. Low- and moderate-income people are likely to get more back in dividends than they spend on increased costs of carbon-containing fuels (Horowitz 2017; Nystrom 2014; Ummel 2016).
The bill’s sponsors plan to reintroduce it in 2019. Regardless of the bill’s ultimate success, clearly the concept of pricing carbon has transcended the hypothetical and is now part of the national discussion.
Why support a price on carbon? There are two obvious major reasons:
First, none of the efforts so far to limit the buildup of carbon dioxide in the atmosphere have worked. There have been gradual improvements in energy efficiency and carbon intensity of industry[7] and U.S. carbon dioxide emissions are lower today than they were in 2006. Unfortunately, these emissions rose again in 2018 (Plumer 2019). Humanity continues to dump carbon dioxide freely into the atmosphere, and the levels are building. We are unlikely to solve the immensely difficult problem without some form of carbon pricing, so let’s get on with it!
Second, of the various methods under consideration to cut back these emissions, a carbon tax is the simplest, fairest and most direct in that it would apply to all sources of carbon emissions.
Some of the reasons why this is so are listed below: (Much of this material has been adapted from essays available from the Carbon Tax Center and from the book, The Case for a Carbon Tax, by Shi-Ling Hsu, 2011.)
Some reasons why a carbon tax is the best approach
1) A carbon tax is more economically efficient than other approaches.
Other approaches include cap-and-trade (establishing an overall carbon emissions cap and emissions allowances, portions of the total allowed emission, that can be traded), and command-and-control (limiting carbon emissions from specific emission sources). Each of these two would target and control emissions from a subset of all emitting sources. A third approach, subsidies, would target for encouragement specific technologies or industries. Proponents of these other approaches often seem to believe that these approaches would not impose costs on anyone but the entities directly regulated. But in the long run, it is inevitable that virtually all of the costs of other approaches to cut carbon emissions will be passed on to consumers. However, because the imposition of costs would be selective, the course of the passing on of the costs could be torturous and rife with possibilities for poor investments and corruption.
But a carbon tax, levied on all fuels based on their carbon content, and ideally, including methane as well, would affect all processes and products that are made with the combustion of fossil fuels. It would send a clear and uniform price signal to a vast variety of carbon dioxide-emitting sources.
An important aspect of economic efficiency is the avoidance of excessive formation of capital that can become “stranded.” Because the price signal from a steadily increasing tax would start small, and build over time, it should offer a clear picture to would-be investors of whether an approach would pay off. Excessive capital asset formation is a risk when the government picks winners by subsidizing certain industries. For example, recently, before the poor net energy of ethanol produced from corn was widely understood, ethanol production enjoyed large subsidies. A number of ethanol production plants were built that today appear likely to have a poor economic future. If these plants become of little value, they will be stranded assets; capital that is lost to the economic system.
Because it would send a direct and immediate price signal to all users of fossil fuels, a carbon tax is less likely than other approaches to lead to stranded assets.
2) A carbon tax would not interfere with other regulatory instruments or jurisdictions.
Besides the other major types of carbon control that have been tried, as discussed above, additional methods of cutting carbon emissions and developing renewable sources of energy are likely to be developed.
A carbon tax could co-exist with these other approaches without causing conflicts or confusions.
3) A carbon tax would be relatively easy to administer.
Levying a tax is something that governments have traditionally done. Administrative agencies are already in place that collect taxes. Taxation processes could be adapted to include a tax on the carbon content of fuels, and should include a tax, weighted by global warming potential, on direct releases of unburned fuel (e.g. methane leaks, oil spills) to the environment. Implementing a carbon tax would essentially require only the setting of tax levels and establishment of a phase-in schedule.
4) A carbon tax will encourage innovation across all sectors of the economy.
As discussed above, a carbon tax will send a steady and predictable price signal to all users of fossil fuels. Every user will have an incentive to cut carbon emissions by becoming more efficient in use of these fuels.
The power of the market to stimulate innovation will apply not just to a few large regulated entities, such as would be the case with a cap-and-trade program and with a command-and-control system, but to all users of fossil fuels.
5) A carbon tax appears more amenable to international coordination than other pricing mechanisms.
. So far, efforts at such coordination have been stymied by opposing positions of important nations. For example, China and India have balked at the idea of establishing a cap on carbon emissions that would apply to them. But, there seems no reason why they might not impose carbon taxes of their own. Another aspect of international coordination that could be problematic is the incentive to nations without carbon pricing to become “free riders.” If, for example, goods manufactured in the U.S. rise in cost because fuel costs increase due to a carbon tax (or other carbon pricing mechanism), goods produced in countries that do not have such a tax could enjoy a competitive advantage. However, such inequalities could be adjusted with border tax adjustments. Although legal thinking is still evolving on the issue, it appears that such adjustments, e.g., fees levied on imports from nations without a carbon tax, would be legal under the rules of the General Agreement on Trade and Tariffs. Also, adjustments based on a carbon tax appear much more likely to be acceptable under World Trade Organization than adjustments based on a cap-and-trade program (Hsu 2011).
6) A carbon tax will raise revenue.
(This is also true with a cap-and-trade program that auctions its allowances, with the important difference that fluctuations in the prices of cap-and-trade allowances make it impossible to predict, and count on, those revenues.)
This revenue could be used to offset other taxes, such as payroll taxes, or could be refunded directly in some manner, and thus could make a carbon tax system revenue-neutral. Much of the recent support of a carbon tax has focused on a revenue-neutral approach. And with a fully refunded fee, the revenue-raising aspect is irrelevant. The recently introduced Energy Innovation and Carbon Dividend Act (see above) would set up a revenue-neutral program by returning fees collected directly to households.
Given the palpable need for reform of the current tax code, a carbon tax could be the centerpiece of a new approach to taxation that would have many advantages over the current system. If revenue neutrality was not insisted upon, some of the revenues of a carbon tax could be used for other purposes, such as reducing budget deficits, subsidizing research and development of low-carbon and renewable energy sources, and developing capabilities to adapt to climate change.
What about the cost of a carbon tax?
Despite the arguments of proponents of cap-and-trade, command-and control, and subsidy programs that these approaches would affect only the regulated, or supported, entities, it is certain that virtually all of the costs would eventually be passed on to consumers in some form, such as in higher electricity rates. Subsidy programs are not immune; the money spent has to come from somewhere. But, especially at the outset, costs of these other approaches are not as apparent, and can be hidden or disguised enough to make them seem innocuous.
A carbon tax, however, is up front and unmistakable. Yes, it is a cost. Yes, it will raise the price of gas, of heating oil, of food, of products and processes that are made with or otherwise involved with the combustion of fossil fuels, which includes just about everything in the 21stcentury industrialized world.
Yet this apparent weakness of a carbon tax is its fundamental strength.
A carbon tax will put a price on carbon that is readily apparent and will propagate to every corner of the fossil fuel-using system. Unfortunately, the directness of a carbon tax plays into the naiveté and reactive aspects of human nature, and often stimulates knee-jerk negative reactions.
For example, carbon taxes are typically and summarily branded as “regressive.” In fact any tax on consumption of essentials is capable of being regressive, because people with lesser incomes usually spend comparatively more of their money on essentials than the wealthy. Payroll taxes, for example, are regressive. Property taxes and sales taxes are regressive. The regressive aspect of sales taxes is ameliorated to a degree by the exemptions of food and clothing. It is by no means clear that a carbon tax would be more regressive than other ways of controlling carbon emissions. And, there are many ways of minimizing the effects of a carbon tax on those least able to pay for it, for example, by a flat distribution of pro-rata shares of the revenue to households, as proposed in the above-mentioned Energy Innovation and Carbon Dividend Act.
It must be stressed that the cost of a carbon tax is a cost on a pollutant that is already on its way to imposing a huge cost on all of humanity: the cost of potentially catastrophic climate change that cannot be remediated.
The costs of a carbon tax can be avoided by conserving fuel use and by developing ways to produce energy without using fossil fuels.
A carbon tax, more so than other approaches of controlling carbon emissions because of its directness and broadness, can unleash the innovative forces of the market. And, to the extent that the costs of a carbon tax are avoided through greater energy efficiency and through the development of low- and zero-carbon energy sources, the threat of irreversible climate change will be lessened.
Recommendation 27: New Jersey residents, like those in other states, should primarily focus on building political will for a steadily-increasing, revenue-neutral carbon fee and dividend program. Focusing only on state-level actions is too narrow.
While residents of New Jersey can be proud of what the State has done so far to boost the development of renewable power sources, to conserve energy, and to limit carbon dioxide emissions through programs such as the Regional Greenhouse Gas Initiative, it is clear that national and international efforts are necessary.
A push by State residents and the New Jersey Congressional delegation could help enact strong national legislation that would implement a price on carbon. People could start this push by carefully reviewing the Energy Innovation and Carbon Dividend Act so that they are in a position to provide useful input, perhaps including strong support, when this bill is reintroduced in 2019.
End Notes
[1] Editor’s note: We’re so happy to welcome Mike to this Series. As mentioned in an End Note in Part 1, he was one of the earliest to urge action on climate change in New Jersey, going back a long time. We remind readers, as also mentioned in Part 1, not all contributors necessarily agree with each other on everything. But all ideas need to be credible and meet the test of the Series: “What We’re Not Hearing at New Jersey Climate Change Forums.” (Matt Polsky)
[2] Citizens’ Climate Lobby, https://citizensclimatelobby.org accessed 12/23/18
[3] Climate Leadership Council, https://www.clcouncil.org accessed 12/23/18
[4] Carbon Tax Center, https://www.carbontax.org accessed 12/23/18
[5] #PUTAPRICEONIT, https://theclimatesolution.com accessed 12/23/18
[6] Princeton Student Climate Initiative, https://psci.princeton.edu/ accessed 12/23/18
[7] A significant portion of emissions reductions are due to the shifting of many power plants’ fuel from coal to natural gas, which releases less carbon to produce a given amount of energy. Of course, natural gas is a fossil fuel, and building in infrastructure such as more pipeline capacity that will encourage its use far into the future could seriously hamper or nullify efforts to move to low- and zero-carbon sources.
References
Energy Innovation and Carbon Dividend Act. (2018) https://www.congress.gov/bill/115th-congress/house-bill/7173 accessed 12/23/18
Horowitz, John, Julie-Anne Cronin, Hannah Hawkins, Laura Konda, and Alex Yuskavage. (2017) Methodology for Analyzing a Carbon Tax. Office of Tax Analysis Working Paper 115. U.S. Department of the Treasury. Washington, DC. https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-115.pdf accessed 1/5/2019
Hsu, Shi-Ling. (2011) The Case for a Carbon Tax. Island Press. Washington, D.C.
Nystrom, Scott and Patrick Luckow. (2014) The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax. Regional Economic Models, Inc., Washington, DC and Synapse Energy Economics, Inc., Cambridge, MA, https://citizensclimatelobby.org/wp-content/uploads/2014/06/REMI-carbon-tax-report-62141.pdf accessed 1/5/2019
Plumer, Brad (2019 January 8) U.S. Carbon Emissions Surged in 2018 Even as Coal Plants Closed. The New York Times. https://www.nytimes.com/2019/01/08/climate/greenhouse-gas-emissions-increase.html?action=click&module=Well&pgtype=Homepage§ion=Climate%20and%20Environment accessed 1/16/19
Ummel, Kevin. (2016) Impact of CCL’s Proposed Carbon Fee and Dividend Policy: A High-resolution Analysis of the Financial Effect on U.S. Households. International Institute for Applied Systems Analysis (IIASA). https://11bup83sxdss1xze1i3lpol4-wpengine.netdna-ssl.com/wp-content/uploads/2016/02/Household-Impact-Study-Ummel.pdf accessed 1/5/2019
Matt Polsky has done an encyclopedic assessment of “what we’re not talking about” regarding climate change in New Jersey, so far in four separate parts, and including recommendations suggesting a much greater focus on curbing carbon emissions. It’s certainly true that NJ has been a leader in solar and in reducing emissions in the power sector; and with the election of Phil Murphy as Governor the state now seems poised to do something major about offshore wind.
But there’s still a lot more that could be done.
In Part 5 of the series, Mike Aucott argues for NJ to advocate for a national fee-and-dividend program. While he acknowledges that a state-level program might be worthwhile, he argues it’s more important for New Jerseyans to advocate for a national (or even international) system of carbon pricing: “While state-level programs to price carbon could be effective, carbon pricing approaches will be more effective if they are national and, ideally, international in scope.”
Personally, I don’t believe that a fee-and-dividend approach is sufficient, at any level, but it most certainly would be a step in the right direction. New Jersey should do both: implement a state program and advocate for more effective global policies regarding carbon pricing.
The Princeton Student Climate Initiative, which Aucott references, has actually put out a couple of fairly detailed documents, one advocating for a “Pollution Fee and Dividend Policy in New Jersey” and another reporting on the results of a well-attended stakeholder forum addressing the question of “What policies should New Jersey consider in the next 10 to 20 years to mitigate climate change while protecting vulnerable communities?”
Together these reports reflect what is likely the most thorough analysis of these options for NJ to date. The Executive Summary of the Fee and Dividend proposal notes that “A carbon fee and dividend policy presents a simple, efficient solution to carbon emissions, while promoting the economic welfare of many New Jersey citizens and businesses. It has a proven track record: previous carbon fee policies have significantly reduced emissions without hurting the economy in British Columbia, Canada; Denmark; Ireland; and Boulder, Colorado. This policy places a fee on emissions-generating fuels, making carbon pollution more expensive and adjusting the market to reflect the social costs of carbon. This encourages actors across the economy to reduce their emissions. The vast majority of the money collected under the fee will be returned to households and vulnerable businesses through dividends to help adapt to the increases in energy costs, ensuring that this policy does not significantly harm low and moderate-income families. In addition, a portion of the collected fees may be used for investment in programs with significant emissions-reduction potential and adaptation to the threats posed by carbon emissions, climate change, and a changing energy economy.”
Unfortunately the claim that this policy “presents a simple, efficient solution to carbon emissions” is mainly wishful thinking: it’s far from simple or efficient, and it’s far from being “a solution.” It relies on the very market mechanisms that created the problem in the first place, and suggests that with a few tweaks it can be done painlessly and in a way that actually helps reduce inequality and socio-economic and environmental injustice. This is misleading. It’s one approach that ought to be tried on a state and local level, but it’s not likely to be easy to implement, or sufficient to have the impact that’s really needed.
By contrast, with regard to emissions reductions, the stakeholder report notes the following: “Overall, most group members supported regulations or multi-faceted approaches more than market-based approaches like cap-and-trade or carbon fee and dividend. With market-based policies, many were concerned about equity toward environmental justice communities, as well as certainty of emissions reductions. Stakeholders noted that the Regional Greenhouse Gas Initiative (RGGI) is going forward, but advocated for more research before implementing a similar cap-and-trade program for transportation. Additionally, while a state-level carbon fee and dividend might be more politically feasible with conservatives, the group was concerned that a low price would not significantly reduce emissions, while still costing consumers up front and potentially causing leakage to other states.”
Another report that Aucott cites is the 2014 REMI analysis of “The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax.” This analysis assumes that “carbon tax would begin in 2016 with a rate of $10 per metric ton of carbon dioxide and escalate in a linear manner at $10 per year” for the next two decades (rising, therefore, to $200 a metric ton by 2035). The tax would be imposed at the point of extraction, but because producers would pass it along to consumers, the effect would be felt by everyone in the energy supply chain. Under model proposed, however, “Every dollar—100% of proceeds—from the carbon tax would enter into a ‘fee-and-dividend’ (F&D) system that refunds the money to all American households with checks or direct deposits on a monthly basis.” The study estimates that the refund would amount to about $300 a month for a family of four by 2025.
The study concludes that “A $10 per metric ton carbon tax starting in 2016 and increasing at $10 per year would have a large influence on future carbon dioxide emissions, engendering a 33% decrease from baseline emissions by 2025 and a 52% decrease from baseline in 2035.” But apart from the inconvenient fact that we did not start the carbon tax in 2016, and almost certainly won’t this year, this assessment seems wildly over-optimistic.
Richard Rosen, a founding member of the Tellus Institute and a major contributor to the Great Transition Initiative, has recently written a paper showing just how limited a solution carbon fees and taxes are really likely to be. With thirty years of experience in energy sector resource planning and management, he has a pretty good sense of what will work in practice and what won’t. A fee or tax of less than $100 a ton—which is pretty much the high end of any proposed scheme, and that’s only after several years of incremental increases—will still have a relatively minimal impact on prices, and if the revenues are redistributed back to the citizens to help offset the rising cost of fossil fuels they will likely be even less effective in reducing emissions. His “educated guess” is that a tax at less than $100 a ton will result in less than a 10% reduction in emissions, and even that will likely take many years to occur.
Rosen concludes “Thus, the first priority for governments to accomplish the other 90% of CO2 emissions reductions needed is to develop a comprehensive set of regulatory and legal mandates that cover the need for changes in energy-consuming technologies in all sectors of the economy, and a time table for their implementation.”
Moreover, even if the world were to achieve “a 52% decrease from baseline in 2035,” this would be far from sufficient. We need to reach net carbon neutrality in the next 12-15 years, and actually begin to draw down carbon from the atmosphere, if we are to have any hope of restoring the climate we’ve known for the last ten thousand years.
There is also the other side of the coin, which is that the economy needs not only penalties for the harm that is being done, but also “carrots” or incentives for cleaner solutions. Our organization, Possible Planet (www.PossiblePlanet.org) works on this at two levels, proposing a global carbon reward that is connected to the risk of climate disaster (the Global 4C policy, set out at http://www.Global4C.org), and offering innovative financing solutions to encourage the capital investment needed to switch to greater efficiency and cleaner long-term outcomes.
These solutions, including Property Assessed Clean Energy (PACE) and similar concepts (described, e.g., at http://www.RegenerativeFinancing.org), are still market mechanisms and may therefore also have only a limited and uneven impact compared to governmental regulation. Nonetheless, they are worth doing, and have an advantage over the mainly psychological effect of carbon taxation, in that they not only raise the awareness of alternative options but also provide some of the means needed to adopt them. Like Rosen, we are “all for rapidly phasing in a low carbon tax at the $50 to $100 per ton level for CO2 in rich countries in order to raise awareness of the broader need to [invest larger] sums of money to mitigate climate change.”
So we really need to be looking at the goals to be achieved—ultimately, a restored climate and a thriving and prosperous economy operating within all of the critical planetary boundaries—before we can really determine what mechanisms will work. We may need dozens of different policy and practical measures to come close to achieving the most critical goals. In a forthcoming piece I hope to discuss a few of these, and urge NJ to develop a more comprehensive strategy as our state’s response to the challenge of global warming.
—Jonathan Cloud
Jonathan, in your response you provide no evidence for your statement that the estimate of a greater than 50% reduction of carbon emissions by 2035 that I cite (the REMI report) is “wildly over-optimistic” other than the “educated guess” of Rich Rosen. And what does Rosen think would accomplish the needed reductions? His solution is the timeworn idea of implementing “a comprehensive set of regulatory and legal mandates that cover the need for changes in energy-consuming technologies.” This strategy has led to some improvements in energy efficiency (of autos and appliances, for example) and has helped solar and wind contribute to what now amounts to a total of about three percent of U.S. total energy supply. But this strategy hasn’t put us on a path to protect us from the worst impacts of climate change. In the U.S. and globally, fossil fuel use is as robust as ever. U.S.carbon dioxide emissions increased in 2018, and global carbon dioxide emissions continue to grow. This is primarily because the waste product of fossil fuel combustion, carbon dioxide, continues to be dumped into the atmosphere for free, and so fossil fuels are unfairly cheap.
It’s time to fix this problem – essentially a market failure – by putting a price on the carbon content of fuels that rises to the point where it starts to limit the harm of carbon dioxide emissions by significantly and increasingly cutting these emissions. And this must be done in such a way that it doesn’t harm low- and moderate-income people. H.R. 7173, the “Energy Innovation and Carbon Dividend Act, introduced in the last Congress, offers the hope of accomplishing these twin goals – major emission reductions without harm to the economy. A version of this bill is very likely to be reintroduced this year. H.R. 7173 includes a schedule that would lead to an 85% reduction of carbon emissions by 2050. No legislative proposal that I’m aware of among Rosen’s hoped-for “comprehensive set of legal and regulatory mandates” comes close to this. Further, H.R. 7173 includes border tax provisions that would protect U.S. industry from high-carbon dioxide-emitting foreign competition.
I agree with you that we probably need dozens of different policy and practical measures. But, regarding carbon pricing, rather than echoing what Rosen admits is an educated guess that this approach can’t be effective, I encourage you and others to take a hard look at the nuts and bolts of H.R. 7173 so that you’ll be in a position to offer explicit (and I hope constructive!) criticism or to put your support behind passage of a similar bill when, as seems likely, it is reintroduced this year.
Mike Aucott
Very nicely done!
A quick comment and a quick question:
I don’t agree with this almost religious belief that a carbon tax must be deficit neutral. (The proposed taxes are mislabeled as revenue neutral as they significantly raise revenues – they just redistribute the revenues back to people.)
It’s based upon an effort to placate Republicans. Proponents must believe that Republicans truly care about shrinking government when the experience of the last 15 or 20 years is that they only care about those issues as a way to constrain Democrats from implementing programs to help people. Polling I’ve seen also shows that the public prefers the money to be spent on public goods such as clean energy and better public services than on programs that give the money back to taxpayers.
My question relates to the border adjustment component. I have always felt that this is potentially the strongest argument for a carbon tax given that the US ‘only’ contributes about 15% of current planetary CO2 emissions , and so constraining the emissions of the rest of the world should be our first priority. Has anyone seen any kind of detailed analysis of the potential impact of border adjustment arrangements on greenhouse gas emission reductions in other countries?
Herb
Author of A Climate Vocabulary of the Future
@HerbSimmens
Herb,
Regarding your comment: It is true that returning the revenue to households means that a “revenue-neutral” carbon tax bill would not actually be a tax in the traditional sense of the word, and therefore this approach could appeal to some who are philosophically opposed to new taxes, including many Republicans. However, this is not the only reason for this type of provision. Returning the revenue to households would minimize and might virtually eliminate the regressive nature of pricing carbon. It means that low- and middle-income people would be protected from the extra costs of fuels that carbon pricing would engender. Some studies, including the Horowitz and Ummel reports that I cite, have shown that poor and middle income people would on average get more money back in dividends than the fees would cost them.
Regarding your question: I agree that a border tax component is potentially the strongest argument for a carbon tax. Shi-ling Hsu, in his book The Case for a Carbon Tax, discusses the plausibility that border tax adjustments could minimize unfair international competition from “free-riders” at some length in a section titled “International Coordination.” Hsu is a lawyer familiar with international law and this is the closest thing to an analysis of this concept that I have seen.
Mike Aucott