Guest Post – from Al Braden
Pricing carbon: Cap and Trade or Carbon Tax?
Pricing carbon is widely referred to as a means of combatting climate change. It’s talked about – but what does it mean?
It’s not a radical idea. In fact, the flip side – ‘not pricing carbon’ – is long recognized as the biggest market failure ever. Basically, it says all the pollution and climate impacts of burning fossil fuels are FREE! They are not to be measured or counted in our economy.
But how to get a handle on it? We could regulate it, tax it or trade vouchers for it.
The EPA’s Clean Power Plan is a first attempt to reduce greenhouse gas emissions by regulation. It is decades late and took a Supreme Court decision to even tell EPA that they were empowered to do it. Conservatives call it overreach and environmentalists call it timid. Clearly it is only a first step and not adequate to solve our climate crisis.
How do we get to the root of the matter?
If left and right aren’t happy with regulation, how do we get enough people to the table to solve the problem? The solutions most discussed are:
- Cap and Trade
- Carbon Tax
- Carbon Fee (Tax) and Dividend
All aim at reducing greenhouse gas emissions, but have different actions and very different political implications.
Cap and Trade
The U.S. Congress passed the American Clean Energy and Security Act in 2009 with supporters including Senator John McCain and President Obama. It was to be modeled on the European emissions trading program. It died in the Senate without even being brought up for discussion.
The concept was straightforward. The legislation would have set limits on greenhouse emissions. Those limits would be reduced over time to a desired goal. The failed U.S. bill had many moving parts – clean energy initiatives, grid modernization, electric vehicles, tropical forest conservation, etc., in addition to the cap and trade mechanism.
The enforcement mechanism would allocate tradable emission permits. Eighty five percent of the permits would be handed out to industries, which were already polluting and fifteen percent would be auctioned off to generate the funds for all the good things mentioned above.
Now think about that – Industries that were causing the worst pollution would be given the most marketable permits to pollute. The worse they’d been, the more they’d get! If they cleaned up their act, they could sell them to someone else to pollute.
This concept is upside down!
Instead of making pollution cost, it monetizes pollution by those who are doing the most of it!
Should the worst dirty outdated lignite burning coal plants in Texas get a whole fistful of valuable permits to trade while someone with an efficient CC gas plant gets a relative few and someone with a wind farm gets none?
The Europeans did implement this type of plan and their experience has been poor. From 2005 to 2007 they started a trial cap and trade system. Political fear of hurting their competitiveness in world trade prompted them to issue too many permits. That raised utility profits until the oversupply of permits caused their price to collapse. In 2007 they did a restart, handing out new permits good till 2013. That resulted in a fresh windfall for utilities. In 2013, they entered a new market phase where the permits had to be purchased by utilities and from a low beginning of about 6 Euros per tonne CO2. That market is slowly climbing to 8 Euros per tonne. You can read an excellent analysis of the European system and stranded fossil fuel assets by Lazard online.
Of course, not all environmental organizations have been so quick to toss out cap and trade in the wake of Europe’s troubles. The Environmental Defense Fund, for example, has long been a strong supporter of cap and trade, calling it, “the most environmentally and economically sensible approach to controlling greenhouse gas emissions, the primary driver of global warming.”
Others feel that the cap and trade system is complex to administer. It takes constant political will to keep the permit prices high enough – and the number of permits low enough – to affect positive change. It also is an insider game. Market participants can often beat the system. Also, very importantly, it is nearly invisible to the public. Public participation – and behavior change – in solving the climate crisis does not come from complex permits traded between utilities.
Carbon Tax
A Carbon Tax does just the opposite. It recognizes the serious consequences of greenhouse gas emissions – previously dubbed ‘externalities’ – and puts a significant and progressively rising tax on the use of any fuel or product based on its greenhouse gas emissions. Carbon dioxide (CO2) is the base unit of the tax, but other greenhouse emissions are taxed proportionately to their impact. Consequently, methane, which has a very high greenhouse effect, would be taxed much more than CO2 if emitted directly as in pipeline and industrial gas leaks. Methane that is burned would be taxed at the CO2 amount based on actual combustion emissions.
Such a tax would increase prices throughout the economy on all carbon intensive items and lead to both changes in customer behavior and innovation in order to avoid taxes wherever possible. In this way industry and the public is motivated to move away from fossil fuels.
You can imagine that if CO2 were taxed in today’s fossil fuel driven economy, a ginormous amount of money would be generated. The EPA shows 2013 total U.S. greenhouse gas emissions to be 6,673 million metric tons from all sources stated in CO2 equivalent:
From the Environmental Protection Agency
The EPA also calculates a Social Cost of CO2 in an attempt to, “estimate the climate benefits of rulemakings. The SC-CO2 is an estimate of the economic damages associated with a small increase in carbon dioxide (CO2) emissions, conventionally one metric ton, in a given year. This dollar figure also represents the value of damages avoided for a small emission reduction (i.e., the benefit of a CO2 reduction).
The SC-CO2 is meant to be a comprehensive estimate of climate change damages and includes changes in net agricultural productivity, human health, property damages from increased flood risk, and changes in energy system costs, such as reduced costs for heating and increased costs for air conditioning. However, given current modeling and data limitations, it does not include all-important damages. The IPCC Fifth Assessment report observed that SC-CO2 estimates omit various impacts that would likely increase damages.”
Here is their table, showing projected socials costs over various economic scenarios and years.
From the Environmental Protection Agency
Even making a simple calculation – using a mid value for 2015 of $36/metric ton – yields an amazing amount of money: $36 x 6,673,000,000 = $240,228,000,000.
Catch your breath – That says our climate, health and environmental damage in the U.S. alone has an economic cost of $240 BILLION PER YEAR!
And that figure is admittedly incomplete.
U.S. Gross Domestic Product in 2013 was $16,663 Billion.
In broad brush – $240B/$16,663B x 100 – our environmental costs (externalities) are at least 1.44% of our whole economy.
$240 Billion is a big number. Is EPA’s calculation reasonable?
A 2013 study by the Carbon Disclosure Project (CDP) shows many energy companies anticipate a carbon tax in that range and use those figures in long range planning. Here are some typical values:
BP $40
Conoco Phillips $8-46
Exxon Mobil $60
Royal Dutch Shell $40
Total $34
Large numbers of activists, economists, even large energy corporations, see a carbon tax as a way to lead a fast transition from fossil fuels to renewable energy in all sectors.
Liberals see it as a way of – at least modestly – capturing the real costs of greenhouse gas emissions. At least it puts some price on pollution – it’s no longer FREE. And it generates large sums of money to expedite the transition by investing in a renewable energy build out, smart grids, electric and/or hydrogen transportation, public health, job retraining, etc.
That’s the rub: What to do with all that money – $240 million a year’s worth?
Leading environmental activists like Naomi Klein call for the tax to be used for all the transition projects listed above – ASAP. We have no time to loose.
Conservative climate activists like former Congressman Bob Inglis espouse market driven solutions where the costs would drive innovation. To him, using the tax in government programs risks both growing the size of government and picking winners and losers.
How to bring both sides that passionately agree on the need to get off fossil fuels to one table? Decades of stalemate in the U.S. Congress attest to the difficulty of finding common ground. A generation or more has been lost in responding to the climate crisis and time is running out.
Carbon Fee and Dividend
That common ground that I see is a concept of Carbon Fee and Dividend put forth by the Citizens’ Climate Lobby (CCL).
Its advisory board members include people like Dr. James Hansen who put climate science on the map; George Shultz who has served Republican presidents from Eisenhower to Regan in critical economic and policy roles including Secretary of Labor, Secretary of Treasury and Secretary of State; former Congressman Bob Inglis who created the conservative climate advocacy group RepublicEN.org after being converted to the cause by his children; and Dr. Katharine Hayhoe, a leading climate scientist from Texas Tech who brings a strong Christian stewardship perspective to the table. These and other leaders convince me that we can develop a practical approach to the energy transition. It provides a space for all sides to move forward.
Here’s a quick sketch of the plan.
- Put a Fee on Carbon as above. Though Fee is an appropriate word as in “user (polluter) fee”, it won’t change anyone’s mind that insists it’s a tax. Let’s move on.
- The fee/tax starts at a low introductory rate of $15/ton so the market can adjust, then increases $10/ton/year to increase the rate of transition off fossil fuels.
- It is imposed at the well, mine or port of entry to make it simple to administer with existing administrative capacity.
- The port of entry tax provision captures the carbon effective cost of any imported products from countries that do not yet impose their own equivalent carbon tax. This critical element protects domestic goods from unfair competition and pushes competing countries to impose their own tax until a worldwide equilibrium is reached.
- All of the revenue is given back to households as a monthly dividend. This will make citizens budgets whole again to cover the tax. The important behavior change is to move away from carbon intensive goods. This could actually increase the effective family budget.
- It does not increase the size of government or require new government revenues. Funds that are needed for new infrastructure will come from either/or/both government programs voted separately and from private investments in innovation.
From the Citizens’ Climate Lobby
Much more is online at CitizensClimateLobby.org – or even better come to a CCL’s Regional Conference January 30th and 31st at the Ladybird Johnson Wildflower Center.
Citizens’ Climate Lobby actively lobbies all 435 members of Congress and 100 Senators. Much of the world is already on board with the need to act. And though I have many friends who say this will never get passed, I believe it could be rapidly adopted when the denial fence falls down.
As President Reagan might say, “Mr. Inhofe, Mr. Smith – tear down that wall!”
I believe we are seeing the last line of business-as-usual climate denial. People now actively discuss climate challenge in person and in the media. When the wall falls, the solution will be readily at hand, developed, refined and vetted by leading liberal and conservative climate activists. I hope you will join the carbon pricing effort and give it your best ideas and activism. Look online or join the CCL Conference at the Wildflower Center to learn more.
