Carbon tax should replace cap-and-trade — better emissions benefit, better economic benefit

In talking about how to eliminate carbon emissions, I’ve written about three general methods:

Ask for change
Encourage change
Force change

We’re well beyond asking, so encouragement seems the next step. (Psst: I’m a fan of force, given the urgency.)

Encouraging this kind of change —  eliminating carbon emissions — comes in a couple of forms. Some work more like mild requests, and others shade more toward serious pressure. We looked at one common “free-market” method — “cap and trade” — here, with help from an excellent League of Women Voters webpage.

Cap-and-trade essentially says, establish a cap (ceiling) on the thing you want to limit (carbon emissions), issue permits equal to the amount of total emissions you want to allow under the “cap,” require emitters to surrender permits when they create emissions, then let the emitters trade (buy and sell) these permits.

It’s the magic of the free market at work. Unfortunately, it’s the magic of an easily manipulated market as well. So let’s look at the other main method of “encouragement” — a direct tax on the thing you want to limit, in this case carbon.

How would a Carbon Tax limit carbon emissions?

Let’s start with what a carbon tax is and how it might be implemented. Then we’ll look at a recent study of a carbon tax that could replace the EPA cap-and-trade scheme, and the way it would be an improvement. (To jump directly to the results of that study — the “news” part of this piece — click here.)

According to the League of Women Voters, this is what a carbon tax looks like (my emphasis and some reparagraphing throughout):


As typically envisioned, a carbon tax would be imposed on fossil fuel suppliers at a rate that reflects the amount of carbon that will be emitted when the fuel is burned. The tax would be included in the price of the coal, oil and natural gas supplied to wholesale users and ultimately passed on to consumers in the price of electricity, gasoline and other energy-intensive products. Coal, which generates the greatest amount of carbon per unit of energy (BTU), would be taxed at a higher rate per BTU than oil or natural gas.

By raising the price of carbon-based energy, the tax would create incentives to reduce energy use, stimulate demand for more energy-efficient products, and promote a shift to cleaner fuels and renewable energy.

Note that last — “promote a shift to cleaner fuels [methane] and renewable energy [wind, solar, etc.].” You could do either or both, depending on how you designed the tax. For example, methane gets a “bye” when it comes to leakage under the current EPA “Clean Power Plan” (see here for details). It’s almost as if the EPA had written a Methane Plan.

But a carbon tax doesn’t have to give a pass to methane. If the tax accounted for rates of methane leakage — methane itself, before burning, is a much more powerful greenhouse gas than CO2 — it would price (and punish) methane fairly for all of its carbon emissions effects. After all, methane is a greenhouse hydrocarbon before burning (CH4), and it produces CO2 after burning. It leaks from all kinds of places — fracking fields, transmission lines, energy plants, liquid natural gas (LNG) facilities, etc.

If a carbon tax took all of that into account, it could eliminate as much carbon emissions from all sources as it wished to, instead of just favoring one source of emissions over another, as the current plan seems to do.

Carbon tax is “encouragement” with more forceful incentives

A carbon tax is market-based in that it creates market forces that “encourage” change. But because the tax itself translates directly to “price at the pump,” that market force packs a punch, depending on how much tax is applied and how fast you want change to be made.

In that sense, a carbon tax works exactly like a gas tax, only the best place to tax carbon is “upstream,” at the source of production, rather then “downstream,” at the pump. Upstream taxes affect everyone involved in the supply chain, not just the consumer. The LWV again:

A federal carbon tax would affect all sectors of the economy. Tax proponents suggest that it be levied at the wholesale stage as far “upstream” as practicable—namely at the point at which the fossil fuel passes from the producer (e.g., the coal mine, oil tanker, or natural gas wellhead) to the next entity in the supply chain. Electric power generators, for example, would pay the tax on the coal, oil, or natural gas they purchase and then pass the cost on to retail electric utilities “downstream,” which in turn would pass it along in the rates they charge their customers.

A carbon tax takes a bite out of everyone it touches. Make it touch everyone and its effect will be felt. Make it large enough and its bite will have a large effect. Do you want to simply slow emissions? Let the tax take a nibble. Do you want to eliminate emissions? Make each new bite take a chunk; then increase the size of the chunks.

Carbon emissions reduction under the REMI sample carbon tax proposal

CO2 emissions reduction under the modest REMI sample carbon tax proposal. A higher tax creates more change.

Taxes hurt, but that’s what market-based “incentive systems” have to do in order to work. They have to create pain so that behavior changes. Properly applied, a carbon tax could encourage the transition to an all-renewables energy sector in a hurry. No need for methane as an expensive and dangerous (methadone-style) halfway house.

Unlike cap-and-trade, a carbon tax raises money that can be spent in a variety of ways

Best of all, the carbon tax raises money — potentially a lot of it — that can be used for any social purpose the implementers want:

A carbon tax could be revenue-neutral: all revenues could be rebated directly to every citizen (tax-and-dividend) or could be used to reduce existing taxes (tax-and-shift). Alternatively, revenues could be invested in development and deployment of new clean-energy technologies (tax-and-invest) and/or in energy efficiency programs (tax-and-caulk).

So what do to with the money?

“Revenue-neutral” proposals give the money back to consumers (but not to producers, suppliers, transporters, etc.). That is, consumers pay at the pump or through their electric bill, then get money back as an offset.

Often only part of the “hit” is felt by the consumer. The producers and others also take a hit to their bottom lines as well, especially at higher carbon tax rates, where it’s more difficult to pass all of the cost to the consumer without killing the consumer market. Therefore, the rebate to the consumer can be less than the total tax collected, which means more for the government to use elsewhere, as below.

▪ “Investment” proposals use the tax collected to stimulate new technologies or for other social purposes, like grow new industries.

And of course, these proposals can be combined.

How much money can or should be collected?

On the subject of how much money to raise, or how high the tax should be, here’s what the League has gathered from its own sources:

The carbon tax can be set to reflect what economists call the social cost of carbon (SCC), “the present value of additional economic damages now and in the future caused by an additional ton of carbon emissions.” Estimates of SCC vary widely, reflecting uncertainty about future climate change scenarios and disagreement as to how to value the impact of projected climate damages. Peer-reviewed estimates of SCC for 2005 have an average [mean] value of $12/metric ton of CO2.

About that SCC, here’s what the IPCC expressed as the range (pdf; see page 17):

Peer-reviewed estimates of the SCC for 2005 have an average value of US$43 per tonne of carbon [tC] (i.e., US$12 per tonne of carbon dioxide [tCO2]), but the range around this mean is large.

For example, in a survey of 100 estimates, the values ran from US$-10 per tonne of carbon [tC] (US$-3 per tonne of carbon dioxide [tCO2]) up to US$350 per tonne of carbon [tC] (US$95 per tonne of carbon dioxide [tCO2]) [20.6].

That’s a pretty wide range. (And be careful about the units of measure. Even though you’re measuring the same thing — carbon emissions by weight — it depends on what form you measure them as. You can measure emissions as “carbon” or as “CO2”. People measure both ways, but the numbers aren’t identical, though they translate into each other by a fixed percentage. There’s more carbon in a ton of “carbon” than in a ton of “CO2” for obvious reasons. Also, note that “tonne” and “metric ton” are the same thing.)

So at the low end of the cost range, the “social cost of carbon” (SCC) is:

$10 per tC (or $2.72 per tCO2) [my conversion has less rounding than theirs]

and at the high end it’s:

$350 per tC (or $95 per tCO2)

If we’re talking just about recovering the social cost, I’m inclined toward the higher number. The IPCC is known for underestimating consequences, and I think the social cost of carbon will prove be very high indeed.

The other way to decide on a level of tax is by the behavioral result you want. A smaller tax produces less change. A larger tax produces greater change. Here’s one proposal as outlined by the LWV:

The tax rate could also be designed to achieve a given stabilization target. An analysis of three energy-economic models estimates that a carbon price trajectory consistent with stabilizing atmospheric CO2 at 450 parts per million (ppm) would require that the price on emissions reach $25-$70/ton CO2 by 2020 and continue rising to $127-$230/ton CO2 by 2050.

You don’t want to go above 450 ppm under the loosest definition of “safe level of warming.” Michael Mann concludes, using the IPCC’s own numbers that 405 ppm is the most we can afford and still stay below +2°C warming above pre-industrial levels. Back to the LWV:

Each $10/ton CO2 charge would raise the price of gasoline by 10¢/gallon and the price of electricity by an average of roughly 0.66¢/kWh. It also would generate $55 billion in revenue and would reduce CO2 emissions by about 4 percent.

You can do the numbers from there. If those are the 4%-reduction numbers and you want 10% per year in CO2 emissions reduction (aggressive by what’s proposed; modest by what’s needed), you want a tax that adds $0.25/gallon to gas prices and $1.66/kWh to a carbon-generated electric bill. (And note — this adds exactly $0.00 to an electric bill from renewables. Incentives.)

Personally, I’m in the Stop Now camp — Zero Carbon at the fastest possible rate — and I’ll explain why in detail in a coming series of pieces. But this gives you the broad strokes about a possible carbon tax, how it works and what it could do. James Hansen is all for a carbon tax, by the way, and he wants it levied internationally, also at the borders. I’ll have more on that as well.

The League page also has a section comparing the pros and cons of cap-and-trade vs. carbon tax (scroll down). It’s an excellent read, top to bottom.

And now the news …

New study: True revenue-neutral carbon tax “creates jobs, grows the economy, saves lives”

The news is that in the wake of the EPA’s new Methane Plan (sorry, “Clean Power Plan”), which includes cap-and-trade, people are studying the more-likely-to-succeed carbon tax. And here’s what they’re finding out.

The text below is the summary, from the good people at Scaling Green. The referenced study, from REMI, can be found here (pdf).

Keep the information in the first part of this piece in mind as you read; you now have enough information to evaluate it well. For example, the term “revenue-neutral” should be clear; if it isn’t, just glance up. First, the carbon tax proposal itself, from the study (pdf page 7; numbered page 6; my emphasis and paragraphing):

The carbon tax under study here supposes a tax rate of $10 per metric ton of carbon dioxide [tCO2, so the units are comparable with the above example] in 2016 and then increasing at a linear rate upward of $10 per year.

The tax would be at the point of extraction and entrance to the economy, but the interconnectivity of the energy supply chain would mean a significant amount (if not the whole weight) of the carbon tax would eventually make its way to end-use consumers in the residential, commercial, and industrial sectors of the economy.

This policy design would take 100% of the revenues and send them into a “fee-and-dividend” (FAD) system in which all proceeds would return to households in the form of monthly checks or direct deposits.

Using the information I provided above,  that should be perfectly clear. It’s also in line with the sample proposal discussed above.

Note that this is a modest plan — its emissions result is 3.3% reduction per year. As my own example above shows, you could easily scale it up to get 10% reduction/year and still add only $0.25/gallon to the price of gas. Heck, the Labor Day weekend might do that, if the gods of Exxon and Koch need a little end-of-summer folding cash.

What does this modest model carbon tax do for the economy?

And now the result of this proposal, from the Scaling Green summary:

A brand new study of a national, revenue-neutral carbon tax was released earlier today by the policy-neutral economic modelers Regional Economic Models, Inc. (REMI) and Synapse Energy Economics, Inc. The key findings are as follows.

■ Millions of jobs created. “National employment increases by 2.1 million jobs after 10 years, and 2.8 million after 20 years. This is more than a 1% increase in total US employment we don’t get without a carbon tax!”

■ Significantly greater economic output. “$70-$85 billion increase in GDP from 2020 on, with a cumulative increase in national GDP due to [a “Fee and Dividend,” revenue-neutral carbon tax] of $1.375 trillion.”

■ Enormous health benefits. “13,000 lives are saved annually after 10 years, with a cumulative 227,000 American lives saved over 20 years.”

■ Dramatic declines in fossil-fuel-plant pollution. For instance: “CO2 emissions decline 33% after only 10 years, and 52% after 20 relative to baseline.”

■ Thousands of dollars back to the average family. “The [revenue-neutral “Fee and Dividend” carbon tax] rebates return nearly $400 billion to households—or almost $300 per month for a family of four.”

■ Major boost to wind and solar power. “The carbon tax aids in retirements of coal plants and accelerates investments in wind, solar, and nuclear power…Nationally, wind and solar represent about 5% of 2014 generation and, by 2040, this grows to 37% in the alternative case.”

■ Power price increases level off and reverse starting in 2026. “Electricity…can switch out of carbon-intensive coal and natural gas and into zero-carbon nuclear, wind, and solar, which reduces the [price] impact in the 2020s and 2030s. All these have a negative effect, but the macroeconomic balance is positive, and it does generate revenues for the FAD and incentivize the significant reduction of national and regional level emissions.”

■ Employment and economic output increases in most economic sectors and regions. “Regional Gross Product is steady or rising in 8 of 9 regions,” with the only economic sectors impacted negatively being those that are highly fossil-fuel intensive (e.g., mining).

Remember, true “revenue-neutral” means that all of the taxes collected are returned to consumers, in this case, in the form of a dividend. Think of it like the Alaska Fund, which taxes oil companies and send the money collected to Alaska citizens. The above proposal is a true “dividend” plan.

The study concludes:

 “[T]here is no economic argument against Fee and Dividend. It creates jobs, grows the economy, saves lives, and makes Americans richer.”

I think we can all agree with that.


Twitter: @Gaius_Publius
Gaius Publi

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Gaius Publius is a professional writer living on the West Coast of the United States.

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