About that carbon tax idea….

Eric Biber posted last week about the proposal from several heavyweight Republicans for a carbon tax, outlined in a Wall Street Journal op-ed. Much has been said about the merits and problems of a carbon tax, including on this blog, so I will try not to repeat those points here. However, I wanted to expand on Eric’s analysis of a couple key points, and add some speculation on the politics surrounding the issue.

At first glance, this proposal should be a source of hope in an otherwise bleak time for the future of climate change mitigation. However, these are not the first (nor surely will they be the last) conservatives to tout the virtues of a carbon tax. In fact, the idea has become somewhat of a refrain for businesses and Republicans who want to seem moderate on climate change as an issue. It allows them to admit climate change is a problem without calling for more of what they loathe: regulation. There seems to also be a bit of bait-and-switch going on. This stance allows them to oppose any climate change policy that isn’t a carbon tax, supposedly because that is the most economically efficient solution. At the same time, they don’t need to worry about anyone calling their bluff and actually enacting it because they’ve hitched their horse to a policy antithetical to most Republicans: more taxes. It’s disingenuous to claim to recognize the urgency of climate change and simultaneously hold that the only acceptable solution is a carbon tax given that, as Brad Plumer recently noted, every GOP member of the House voted against such a policy only last June. So, the only climate change policy that could ever be acceptable to conservatives is a carbon tax, but all conservatives in office have already rejected the idea. Convenient, no?

My qualms with the proposal come from the policy itself, too, however. As described by Eric, the strategy has four “pillars”: a carbon tax, a “carbon dividend,” a border adjustment, and a roll back of every other limit on carbon. Shultz and Baker claim that such a policy package could produce “larger reductions in greenhouse-gas emissions than all of President Obama’s climate policies.” But accurately setting the price of carbon to induce reductions is notoriously difficult, and there is a wide range of estimated societal costs per ton of carbon. Furthermore, apart from economic models, some evidence actually show carbon taxes to be less effective at reducing carbon emissions than traditional regulation. The Canadian province of British Columbia instituted a carbon tax in 2007, which has since increased to $30 per ton (about US$23 per ton). Yet the policy that will result in the highest reduction in carbon emissions by 2020 is actually Ontario’s ban on coal-fired power. That policy will reduce annual emissions by about 25 megatons, while the carbon tax will only reduce annual emissions by about 3-5 megatons. In fact, there are several traditional regulations making a larger dent in Canada’s emissions than the carbon tax.

True, the Shultz and Baker proposal calls for a starting tax almost twice as high as the British Columbia tax. But even if that doubles the impact, it’s still not enough. Which brings us to the most glaring problem with this proposal, pillar number four: eliminating all of EPA authority over carbon emissions. Shultz and Baker claim that the carbon tax would make such regulatory authority irrelevant or redundant. But our previous experiences in stimulating large-scale technological transformations beg to differ.

As my colleague Sean Hecht explained in his post on the subject, we recently filed an amicus brief in the D.C. Circuit documenting the greater efficacy of setting performance standards for industries compared to financial incentives alone when seeking to encourage uptake of new technologies. Here is an excerpt from that post providing the main argument:

[Our clients’] research demonstrates that regulation that requires plants to meet stringent emission control standards drives much of the technological innovation and use of cutting-edge technology in the pollution control sector.  It also demonstrates that as a technology matures and becomes available for implementation, the cost of implementing the technology decreases, and the cost continues to decrease with further commercial application over time.

The dynamics of technological innovation and commercialization counsel in favor of both financial incentives and required performance standards. The U.S. tried for over a decade to reduce smog pollution purely through financial mechanisms (tax credits, research funding, etc.), but polluting entities had no incentive to invest in expensive pollution control technology as long as they could still sell their product for a profit without doing so. Yes, fossil fuel producers will pay a tax on their product, but they are then free to pass that cost on to the consumer, who in turn recovers that cost from the dividend. Which party in this equation has an incentive to stop using fossil fuels?

The realities of technological innovation also point to the potentially regressive nature of a carbon tax, particularly in its application to the transportation sector. British Columbia’s carbon tax increased the cost of gas there by the equivalent of about US$0.16 per gallon. Again, even recognizing that the tax proposed by Schultz and Baker would be higher, it would only be about double. To be generous, let’s imagine that the carbon tax increased gas prices by $0.50 per gallon. Would this be enough to change consumer’s driving habits at all? Definitely. Would this be enough to convince someone to ditch their conventional car for a $40,000 electric car and a $2,000 charging station? I doubt it. At least, not most middle- and working-class Americans. So we find ourselves in somewhat of a catch-22: technologies generally get cheaper as they diffuse through the market, but most Americans can’t afford electric cars, and the cars won’t get cheaper until more people buy them…. Here is where a regulation would step in. (Case in point: California regulations have succeeded in increasing the production of and thus decreasing the cost of electric cars already.)

Which brings me to Eric’s first point, and the possibly grim implications of that fourth pillar: exactly which regulations count as falling under “EPA’s authority over carbon emissions”? The answer to that question would determine the extent to which a carbon tax could successfully reduce emissions. The level of taxation that would prompt Americans to voluntarily reduce their fossil fuel consumption by 85% would never gain popular or political support. By pairing a carbon tax with a complete elimination of EPA’s authority to prod the economy past the 30-40% reduction mark, this policy would immobilize future policymakers and the nation.

As someone under thirty, the threats of climate change to disrupt daily life and economic stability are extremely real for me. If we are only looking for a way to modestly reduce emissions over the next fifteen years, then yes, the plan outlined by Mr. Shultz and Mr. Baker is a perfectly reasonable alternative to direct regulation. But the world will need to cut its greenhouse gas emissions to almost nothing by 2050 to avoid catastrophic shifts in climate, and that will require attacking the problem from all sides. Taking such a large category of policy options off the table, as Shultz and Baker suggest, is extremely short-sighted.

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Reader Comments

10 Replies to “About that carbon tax idea….”

  1. Is there a decent way to estimate the effective cost in terms of dollars per ton of Ontario’s decision to eliminate coal-fired electrical generation? I’m trying to understand whether Ontario’s regulation is more efficient or just tighter….

    1. Good question.. But as is probably evident from my rudimentary math in this post, I’m not an economist, and I suspect estimating the per-ton cost of that regulation would be a taxing (pun intended) exercise. But I would be interested to know if anyone has done that math!

  2. YES, but …
    Even though I have a few (many…) years more than you, I totally share your sense of disconnection between the urgency to act seriously and the fact most countries are still thinking like if we were only getting out of the RIO earth summit of 1992… (I have a kid who will also have to manage this legacy).

    But then, why the word “will” in your sentence: But the world will need to cut its greenhouse gas emissions to almost nothing by 2050 to avoid catastrophic shifts in climate ?

    I am always amazed how, most of the time, people preocupied with the urgency to act still talk – and write – at the future… There is no way we will meet the 2020, 2030, 2050 goals if we don’t change now our way to conceive development. Especially with the infrastructure investments. New pipelines (Keystone, Dakota, and Energy East, which would be the worst) are the most evident examples. They will lock our economic development into the past century for at least 30 more years. But it is true for almost every transport and energy infrastructures we are developping TODAY. Same for all urban planning we are conceiving today.

    (please sorry for the grammar errors, English not my language)

    Salutations du Québec : )

  3. The article raises several issues that require clarification.

    1. Speculation on political motives: This is not uncommon and a reflection usually of the framing of the authors e.g., businesses can’t be trusted. There are generally 3 options to deal with global climate change: 1) the REVENUE NEUTRAL carbon tax (capitalization is used because most opinion pieces tend to conflate a carbon tax and a revenue neutral carbon tax) ; (2) the other carbon pricing policy–cap and trade; and (3) traditional regulation. There is one that provides a framework that is consistent with what businesses need in their operations: predictabiiity in carbon costs and limited risk of administrative arbitrariness. It also fits one of conservatives/businesses preferences–no growth in government.

    The author notes that a carbon tax is “…supposedly the most efficient solution.” It is. The research and analysis documents this. Regulation is more costly. Cap and trade — EU ETS and RGGI — have limited or no causality between cap/allowances and declining emissions so its efficiency is low. [Note: the emissions decline in New England and Europe were overwhelmingly caused by economic factors (recession and structural shifts), energy changes (natural gas and renewables price declines) and “complementary” renewables/efficiency programs that conflict with and undermine cap and trade by creating more space under the cap for covered industries to pollute.]

    I doubt the author thinks that cap and trade and full regulation of all sectors/sub-sectors of the economy have a better chance of political support than a revenue neutral carbon tax.

    2. The author states:

    ” It’s disingenuous to claim to recognize the urgency of climate change and simultaneously hold that the only acceptable solution is a carbon tax given that, as Brad Plumer recently noted, every GOP member of the House voted against such a policy only last June. So, the only climate change policy that could ever be acceptable to conservatives is a carbon tax, but all conservatives in office have already rejected the idea.”

    Here is a mix of conflation and selective facts. Plumer frequently conflates things usually to come out skeptical of a carbon tax. In the comment above and in Plumer’s Vox writing there is a conflation of two different things: a carbon tax and a revenue neutral carbon tax. Baker/Shultz are not proposing a carbon tax where the government keeps all the revenues and spends it on federal programs so that is a red herring. Such a proposal has no political future.

    Plumer selects one house resolution vote (before the election) to cite and it makes no mention of revenue neutrality. There has not been an actual vote on a bill on the revenue neutral carbon tax–hence it hasn’t been rejected.

    Neither the author nor Plumer note the establishment of the Climate Solutions Caucus (with significant impetus from the Citizens’ Climate Lobby). This bi-partisan Caucus–equal numbers from each party and growing steadily–indicates that some Republicans have gone public in recognition of human-caused climate change. The extensive lobbying over 4 years of all offices on the Hill has revealed that there are many Republicans receptive to the revenue neutral carbon policy. They are not going public until there is an opportunity for the “jail break” that will give them cover and minimize the risk of getting “primary’d”.

    Plumer has also written misleading conclusions about the global lack of will for a higher carbon price and in one article he circles a table showing most are at $15 or less. If he had separated out cap and trade and the carbon taxes around the world he would have said cap and trade is almost all under $10 and taxes have had higher rates (British Columbia at $30 and rising, Scandinavia). There is a valid reason for low prices: countries have not put in place border adjustments to address unfair competition from free riders. The inability of regulatory programs and sub-national cap and trade (RGGI and California) and carbon tax policies to make border adjustments means that full national carbon pricing is the only option for the U.S. to provide the carrot-stick for other countries to reciprocate with their own carbon tax.

    3. Accurately setting a carbon price is notoriously hard: “Accurately” is one of the words that deniers use (author is not a denier, of course) . Their argument goes: “We don’t know enough/have accurate information so more data/research are needed before anything is done.” While there are uncertainties this is not an issue. There is a considerable body of analysis and general acceptance that a carbon tax should at least get to $40/ton and continue up based on the impact on emissions trajectory. Oil companies internal carbon pricing now ranges from $40 to $80.

    4. Regulation is better than a carbon tax?: No. The author cites regulation of coal plants in Alberta vs. the BC carbon tax. Irrelevant. This is an example of piecemeal coal plant regulation compared to the systemic nature of the carbon tax which affects all decisions related to energy and products. An apples and oranges comparison. The author may not be aware that Alberta just adopted a carbon tax. Such a tax, as it rises, will make all coal power plants uneconomic so the regulatory approach and its limited sector impact is unnecessary. The BC tax is systemic, not piecemeal. The author should also know that BC has limited/no coal generation; it is about 95% hydropower so the BC and Alberta electricity systems are also apples and oranges and the author’s emissions comparison lacks merit.

    The author should have compared the Alberta regulatory approach with the Alberta carbon tax policy. The latter will not require any of the regulatory “dead weight” costs and will affect all decisions beyond just the coal plant investments to the whole economy.

    5. The opinion is mainly about power sector/regulation: That is not going to do it. Sector approaches like the Clean Power Plan won’t get us there. Neither will automobile regulations. There will be a reduction in regulation and continuation of some regulation. The regulation that will continue to be required relates to those circumstances where there are non-market impediments to businesses and households responding to rising prices such as the principal-agent problem of renters and owners of rental property.

    6. Lack of understanding of basic economics and behavior of the firm and consumers: The following statement displays “economic illiteracy” in the words of Charles Komanoff.

    “Yes, fossil fuel producers will pay a tax on their product, but they are then free to pass that cost on to the consumer, who in turn recovers that cost from the dividend. Which party in this equation has an incentive to stop using fossil fuels?”

    When prices go up things happen: firms and consumers substitute, consume less to varying degrees depending upon whether or not the firm can pass through costs and to what degree. There is a significant body of economic literature on different sectors (food, paper, wood products, oil, etc.) ability to pass through costs based upon degree of competition and market power. Household consumers reduce or substitute for goods in the short- and long-term that continue to rise in cost. They don’t take their dividend and pour it all into the rising carbon -based products. There is a large body of literature on price-demand elasticity that shows this behavior.

    7. EPA Authority on Carbon: Political trade-off is part of the process. What, if anything are the advocates of regulation ready to trade-off?

    The following comment is made:

    “The level of taxation that would prompt Americans to voluntarily reduce their fossil fuel consumption by 85% would never gain popular or political support.”

    Why not if the dividend covered the increasing costs of fuel/products for 2/3 of households? What is the politically viable regulatory alternative for 85% reduction and its impact on low- and middle-income households? The author might note that clean energy regulations/subsidies (renewables, energy efficiency and auto subsidies) are extremely regressive (see Borenstein, et al).

    The ball could be in Progressives’ court. Will they put climate first or hang on to the regulatory approach and demand revenues for government clean energy and community programs which are adverse in terms of equity?

    1. HI Robert,

      Thank you for your thoughtful comments. I’m happy to address and clarify these points, but given the length I think it’s better for me to email you directly.

      Thanks for reading.

  4. Public-sector research, development and dissemination also play important roles in accelerating adoption of low-carbon alternatives. They can make these alternatives easier, cheaper and less risky to adopt. The public sector can develop practices and technologies that the private sector would not find attractive. Public efforts can tolerate long time frames and risk of failure that make early-stage R&D inhospitable terrain for the private sector. Public R&D also does not require the barriers to copying by competitors that the private sector needs to protect its ability to recover its development costs. Indeed, being copied makes public R&D more successful. Public RD & D can reduce the cost of low carbon alternatives, making a carbon tax more effective, so less tax is needed. Using some of the revenue from a carbon tax to fund this work makes sense.

    R&D, regulation and taxing can work synergistically, lowering the cost of transitioning to a low-carbon society and increasing the pace of the transition.

  5. There is no scientific proof that carbon taxes actually mitigate climate change (they don’t). Climate advocates have never cared one bit whether their ignorant mitigation scams actually work or not (they hate truth). Climate clowns do not care that their incompetence hurts ordinary citizens so long as they had plenty of other people’s money to waste. Now their funds are running low, good riddance.

    We have a new day of truth and integrity in America, the flagrant public lies about climate mitigation have been exposed. The EPA is abandoning its carbon dioxide regulations, there will not be any carbon taxes. We all know this true so get use to it.

    1. bqrq, please keep your comments civil (meaning, among other things, free of ad hominem attacks and gratuitous personal insults).

      1. Professor Hecht,
        Thanks for your admonishment, I will endeavor to keep my comments civil. Sometimes I become animated and write words that are somewhat less than cordial. Have a good day.

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About Sarah

Sarah Duffy is a Shapiro Fellow in Environmental Law and Policy at UCLA School of Law. Her research interests include water conservation, state-level climate change poli…

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