Tuesday, August 2, 2016

A Short Primer on Carbon Pricing

"Democrats believe that carbon dioxide, methane, and other greenhouse gases should be priced to reflect their negative externalities, and to accelerate the transition to a clean energy economy and help meet our climate goals." --The 2016 Democratic Party Platform

Carbon pricing is now a part of the Democratic Party Platform, one hard fought for by Bill McKibben, as Bernie Sanders' representative on the platform committee.

Now that it is part of the platform, and our stated goal, it is ESSENTIAL that all of us understand the different types of carbon prices. The Democratic "establishment" has, in the past, tended to favor a cap and trade.  There are reasons why we may not want them to push for a cap and trade, but instead a tax.  Please, please, please, learn about the different forms of carbon pricing and their strengths and weaknesses.  We must be sure to see a solid, strong carbon price implemented, not a weak one that simply drives profit for corporations.  To get that, we must be informed!

I present my own understanding of the carbon pricing below, but urge you to read more, because, as I point out below, I am utterly biased toward a revenue neutral carbon fee and dividend.

Economists generally favor carbon pricing because it "internalizes" the costs of carbon.  In other words, it means that a consumer of carbon is no longer paying an artificially cheap price, pushing its environmental, health and economic costs onto others.  Imagine that you owned a house, but someone you never met had to pay for your heat.  You would likely never look at the thermostat with caution.  You have externalized your heating costs onto them, a person who has no control over the decisions that drive those costs.  Climate costs are like that.  We burn coal, oil and gas without considering the costs of sea level rise, extreme weather, increases in vector borne diseases, ocean acidification, and more.  By adding a cost to the carbon, we "internalize" those costs.  We are now much more likely to find creative ways to avoid paying those costs, much like we would put on a sweater first before turning up the thermostat.  Our decisions become more efficient, reflecting an economist's ideal and we are preserving resources necessary for our children, the ideal of anyone concerned about climate impacts.

Any carbon price automatically raises three questions:  (1) how do we collect the price (2) how much should we collect and (3) who gets the money once it is collected, given it is we, ourselves that would have borne the averted externalized costs?

(1)  Collecting the price.  A carbon price can generally be collected in either one of two ways: (a) cap and trade, also referred to as carbon markets OR (b) a tax, also called a fee. Cap and trade systems create "licenses to emit," a bit like hunting licenses.  You can hunt for two deer, for instance.  Or, emit X amount of tonnes of carbon.  The amount of licenses are limited to the amount of carbon we think is appropriate, as we taper down to none by our target date of zero emissions.  On the other hand, a tax/fee simply places a price per tonne of carbon dioxide and charges miners, drillers and importers of carbon that amount per tonne of carbon that enters our economy.  This would be as if we charged hunters a flat rate per deer hunted.  A price is picked that is projected to drive the transition to our target date of zero emissions.

(2)  Assessing the fee.  Many attempts have been made to determine the true social cost of carbon.  The answers, predictably, vary widely.  While we have a very high level of certainty that the future will be warmer, we have only projected ranges of the exact amount of warming, and even broader ideas of possible impacts to physical and living systems, including our food and water.  Moreover, if we could internalize the true costs of carbon, in full, we would likely collapse our economy.  In fact, the whole point of putting a price on carbon is to avoid the kind of social collapse that those impacts will actually bring.  Instead, most carbon pricing mechanisms aim to charge an amount that will get us to our goal of zero emissions by 2050.  (Or some compromise that is more politically viable, but less effective).  

Cap and trade attempts to deal with this by giving out only the allowed amount of licenses to emit, and letting the corporations bid and compete, thereby setting the market price by free market forces.  Taxes use large economic models to project the impacts of a particular fee and set it at that cost which will drive us to zero emissions by 2050.

(3)  Distributing the collected funds. The funds either (a) can be used by the government for some purpose (related to climate or other), in which case it is said to be "revenue raising" or (b) the funds can be returned to the citizenry 100%, in which case it is said to be "revenue neutral."  Most revenue neutral carbon prices return the funds by a direct dividend, monthly or quarterly, to all citizens or by reducing other taxes in equal amount in combination with tax credits for the poor.

(4)  General Pros and Cons.  We can make some generalizations about the strengths and weaknesses of each of these different pricing mechanisms.

(a) Cap and trade.  STRENGTHS:  Cap and trade is favored by many economists because a market sets the real price.  At the same time, many energy experts prefer it because it sets a hard limit on emissions that correlate to the scientific projections of when we must get to zero emissions.  WEAKNESSES:  It is often difficult to implement, creating administrative costs to give out and monitor the licenses to emit and the sales and purchases of those licenses.  Many cap and trade systems also have "offsets" which allow a corporation to emit more if they also capture and store some, defeating the purpose of the licenses in the first pace.  Many cap and trade systems have been criticized for failing to cut emissions but allowing companies to make more money off of markets.

(b)  Tax/Fee.  STRENGTHS:  This is easy to administer and has great transparency.  Harder to manipulate for corporate gain.  WEAKNESSES:  I am biased.  There are none.  :)  In reality, any preference held by economists and environmentalists for a carbon market is lost when one considers that the true cost of carbon is so much more than that required to aim for zero emissions by 2050, that true cost becomes irrelevant.  A carbon tax is transparent, easy (and therefore less expensive) to administer.

(c) Revenue Raising Prices.  STRENGTHS:  Money can be used to strengthen subsidies for carbon free energy and infrastructure necessary for its use.  Money can also be used for other important government programs.  WEAKNESSES:  People have less incentive to continue the program because they do not easily see where the money is going.  The poorest pay in carbon price, but do not have income to cover additional costs.

(d) Revenue Neutral by reducing income taxes.  STRENGTHS:  Politically more viable.  Conservatives seek to cut taxes.  Many conservative economists like this because it shifts us from taxing something that is beneficial (work) to something harmful (carbon).  WEAKNESSES:  The poorest pay in carbon price, but do not receive back as much as those that pay higher income taxes.  This can be alleviated with a tax credit for those in the lower income tax brackets.

(5)  Revenue Neutral by dividend.  STRENGTHS:  Politically more viable.  People receive a dividend monthly, making it nearly repeal proof.  Poorest among us get back more in the dividend than they pay in the fee because they have lower consumption.  Transparent.  Trustworthy.  WEAKNESSES:  I'm biased.  It has none.  :)  

Specific Carbon Pricing Policies Enacted or Proposed:
• Citizens' Climate Lobby's Revenue Neutral Carbon Fee and Dividend (RNCFAD).  This is a fee collected on all carbon-emitting products that enter the economy at point of well, mine or port. It is revenue neutral; all fees collected are returned to all citizens in equal amounts.  Because none of the money collected is retained by the government, it is said to be “revenue neutral.”  Citizens' Climate Lobby is one popular version, that starts at $15/ton the first year and adds $10/year thereafter.  Studies project that the bottom 2/3 of earners, who have smaller homes, fewer boats, RVs, and other luxury items, receive back more in the dividend than they pay out in the fee.  The top 1/3 of earners pay out more in the fee than they receive back in the dividend.  Emissions are projected to drop 33% in ten years solely due to the RNCFAD and 52% in twenty years.  Projections also show that 2.1 million jobs will be added in 10 years and 2.8 million jobs in 20 years.  The economy will grow as a direct result of the RNCFAD.
➢ The average family of four receives $47/mo in the first year, $288/mo after 10 years, and $396/mo after 20 years.
➢ Gas prices go up 15 cents/gallon in the first year, and 10 cents/gallon each year thereafter
➢ The price on carbon will reduce direct fossil fuel use and also derivatives like plastics

(Note:  This bill also includes a “border adjustment” which places the fee on any imported products only if the product comes from a country without a comparable price on carbon.  This creates an incentive to importing countries to implement a price on carbon rather than pay into US coffers).

• Cap and Trade.    In the 2008 presidential election, both Obama and McCain favored a cap and trade.  Currently, there are two carbon markets enacted.  California enacted a cap and trade in 2015 covering sources responsible for approximately 85% of California’s GHG emissions. It aims for an 80% reduction from 1990 levels by 2050.  Because it cannot implement a border adjustment as a single state within the US, "leakage" of emissions is an issue.  The Regional Greenhouse Gas Initiative (RGGI) includes nine northeastern states all in a carbon market since 2009.  It has been marred by issues of lax caps, but has seen cuts primarily responsible by a shift from coal to gas.

• Congressman VanHollen Bill (Healthy Climate and Family Security Act of 2014).  Rep. VanHollen introduced a cap and trade bill that sets limits on emissions and auctions off the rights to those emissions. This bill closes the offset loop holes.  In addition, it adds a dividend.  Like the RNCFAD, 100% of the proceeds of the auctions are returned to each person.  The advantage of this bill over the RNCFAD is that it sets carbon limits according to the scientific projections of what is required to remain under 2 degrees celsius change.  The drawback is a more costly and complicated mechanism of implementation.

• British Columbia's Tax Swap.  Favored by many conservatives, this bill places a fee on all carbon emitting products and is revenue neutral just like the RNCFAD.  However, money is not returned equally to all citizens.  Money collected is returned by reducing income taxes in amounts equal to the fee collected.  People who do not pay income taxes receive nothing back.  People who pay little in tax see little in returned money.  The wealthiest, with the greatest taxes, receive the most back.

BC uses a tax swap along with a tax credit for the poorest citizens. It started at $9/tonne in 2008 and up $5 each year. It cut fuel usage 16% while surrounding Canada went up 3%. Criticized for exporting usage (no border adjustment)

• Revenue Raising Approaches.  (1) The Boxer-Sanders bill rebated 60% to citizens, retaining 40% for subsidies and deficit reduction.  (2) Congressman Delaney, of Maryland's Tax Pollution, Not Profits Act.  This is a carbon tax swap-dividend hybrid.  It is not 100% revenue neutral.  It retains a portion of the money to retrain or fund retirement of coal workers.  Those at or near the poverty level receive a rebate, with those at the poorer end recieving more.  The primary return of the funds is in reducing the corporate tax rate from 35% to 28%.  This bill was heralded by EAI, conservative think tank and Bob Inglis as a very significant development in that a Democrat was putting corporate tax cuts on the table, making this a big step forward in seeking a bipartisan solutions to carbon emissions.   (3)Schatz/Whitehouse's American Opportunity Carbon Fee Act was introduced shortly thereafter and is very similar to Delaney's Tax Pollution, Not Profits Act, differing in allotments of rebates and tax cuts and rates of increasing taxation.

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