See how a carbon tax works and why taxing carbon pollution must be the central policy to combat climate change:

Earth’s climate is changing in costly and painful ways. 2014 was the globe’s hottest year on record, and the dozen warmest have all come after 1997, as this graphic shows all too clearly.

Globe not warming? Look again.
Globe not warming? Look again. CO2 from fossil fuel-burning not the cause? Click here.

Yet the transition from climate-damaging fossil fuels to energy efficiency, renewable sunlight and wind energy is slow and halting. The Number One obstacle is that the market prices of coal, oil and gas don’t include the true costs of carbon pollution. A briskly rising U.S. carbon tax will transform energy investment, re-shape consumption, and sharply reduce the carbon emissions that are driving global warming.

  • A carbon tax is an “upstream” tax on the carbon contents of fossil fuels (coal, oil and natural gas) and biofuels.
  • A carbon tax is the most efficient means to instill crucial price signals that spur carbon-reducing investment. Download our spreadsheet (Excel file) to input your own tax levels and see how fast U.S. emissions will fall.
  • A carbon tax will raise fossil fuel prices — that’s the point. The impact on households can be softened through “dividends” (revenue distributions) and/or reducing other taxes that discourage hiring and investing (“tax-shifting or swapping”).
  • Carbon taxing is an antidote to rigged energy pricing that helps fossil fuels destabilize earth’s climate. Unlike cap-and-trade, carbon taxes don’t create complex and easily-gamed“carbon markets” with allowances, trading and offsets.

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Carbon Tax Convergence, as IMF and IPCC Chiefs Speak Out

October 8, 2015 by James Handley Comments (0)

“It is just the right moment to introduce carbon taxes,” declared IMF director Christine Lagarde yesterday at the joint annual meeting of the International Monetary Fund and World Bank in Lima, Peru. In a panel discussion that included World Bank President Jim Yong Kim and the celebrated climate economist Nicholas Stern, Lagarde urged governments to directly tax carbon emissions instead of relying on indirect measures such as emissions trading. “A lot of people would rather do emissions trading systems, but we believe that carbon taxation would be a lot better,” she said.

IMF Director Christine Lagarde

“It’s just the right moment to introduce carbon taxes.”  — IMF Director Christine Lagarde

Lagarde pointed out that in addition to their primary purpose of discouraging pollution, taxes on greenhouse gas emissions boost revenues ― a key consideration when many governments have depleted their reserves to weather the long weakness in the global economy. She explained,

Finance ministers are looking for revenues. That’s the fate of finance ministers. But it’s particularly the case at the moment because many have already used a lot of their fiscal buffers … and are always in need of some fiscal buffers in order to fight the next crisis.

Lagarde’s remarks came one day after another carbon tax proponent assumed the reins of the world’s most important climate body. Dr. Hoesung Lee, the new chair of the UN Intergovermental Panel on Climate Change (IPCC), has stressed the the need to price the “externalities” of carbon pollution. In an interview last month (published yesterday), Lee explained:

[When] my action affects other persons’ welfare, but I do not pay for these disadvantages… those are externalities. Climate change is a typical example … [T]he way to correct the externality problem is to have a price on certain activities that cause those externalities … a carbon tax.

Lee ranks a carbon tax as his ― and now, perhaps, the IPCC’s ― highest priority:

[I]f you ask me to choose the most important work in climate change issues, then I’ll choose carbon price. That’s because it is the driver to put us into the right track.

With their unequivocal endorsement of carbon taxes, Legarde and Lee add to the pressure on UN climate negotiators to end two decades of fruitless haggling over national level emissions limits and to focus explicitly on pricing carbon pollution instead.


With Warming’s Fingerprints All Over Latest Floods, Carbon Tax Is More Urgent Than Ever

October 6, 2015 by James Handley Comments (1)

“[W]e’re seeing once-in-a-thousand year flooding along the South Carolina coastline as a consequence of the extreme supply of moisture streaming in from Hurricane Joaquin,” climate scientist Michael Mann told the Washington Post. “There is an exponential relationship between sea surface temperature and the amount of moisture in the atmosphere above it. So record warm temperatures means record amounts of moisture.”

Fossil fuel prices don't reflect the damage they cause

Fossil fuel prices don’t reflect the damage they cause

This is hardly the first time this pattern has been identified. Identifying the cause isn’t enough. The economic and human consequences of superstorms like the one devastating South Carolina this week are deadly serious. It’s time for an equally serious strategy to arrest and subdue runaway climate change that’s driving them.

Ironically, it was a South Carolinian — Congressman Bob Inglis — who courageously championed the most effective response a half-dozen years ago. Inglis’s “Raise Wages, Cut Carbon Act of 2009” proposed a rising tax on carbon pollution. Consistent with conservative thinking, Inglis’s carbon tax was revenue-neutral, with all revenue dedicated to cutting payroll taxes. Nevertheless, he lost his seat in the 2010 anti-tax and anti-science “wave” election that brought the Tea Party stranglehold to the House.

The economics behind Inglis’ proposal are rock solid. Fossil fuels are far more costly than their “sticker” price when the full consequences — like flood damage — are counted. That message got shouted down in 2010.

Inglis, who now runs RepublicEN, may be too modest and politic to say “I told you so” to the voters who spurned him. But we can.

Photo: The Weather Channel


China Commits to Cap & Trade

by James Handley Comments (0)

China’s announcement last month that it will begin implementing a national cap-and-trade system for greenhouse gas emissions in 2017 is welcome news. Not only because it signals (again) that the world’s largest emitter may be starting to tackle global warming (and conventional air pollution), but because it tosses another shovelful of dirt on a longtime U.S. excuse for inaction.

Reports on China’s announcement nevertheless raised concern about whether China (or any government) can implement and enforce such a complex, opaque system. A decade in, the European Union’s Emissions Trading Scheme has proven only weakly effective. The EU has struggled to remedy numerous design and implementation flaws including a too-loose cap that has failed to induce a significant, persistent and rising carbon price, as well as international offsets that hold down carbon prices and whose environmental benefits remain maddeningly difficult to monitor and verify.

Moreover, the opacity of permit-based trading systems appears well-suited to China’s particularly corrupt form of “crony capitalism.” And another possible motivation for China’s choice of cap-and-trade over a transparent and easier-to-administer carbon tax is Beijing’s history of profiteering from questionable carbon offsets; these could expand if China can link with lucrative carbon markets in the west.

If China does proceed with cap-and-trade, it would be wise to build in a price floor to assure a clear minimum carbon price ― a “patch” that the EU has thus far failed to enact.


Nordhaus Versus the Pope: Why Francis Is Right

September 28, 2015 by Daniel Lazare Comments (1)

The Yale climate economist William Nordhaus goes after Pope Francis in the current New York Review of Books on the question of how best to prevent global warming. But after landing a few solid punches, he collapses in a muddle all his own by obscuring the difference between carbon taxes and cap-and-trade.

Nordhaus zeroes in a number of passages in “On Care for Our Common Home,” the recent papal encyclical dealing with global warming, that, to his mind, show remarkable ignorance about the workings of modern economics. One passage calls on society “to reject a magical conception of the market, which would suggest that problems can be solved simply by an increase in the profits of companies or individuals,”while another takes aim at the profit motive:

The principle of the maximization of profits, frequently isolated from other considerations, reflects a misunderstanding of the very concept of the economy. As long as production is increased, little concern is given to whether it is the cost of future resources or the health of the environment; as long as the clearing of a forest increases production, no one calculates the losses entailed in the desertification of the land, the harm done to biodiversity or the increased pollution. In a word, businesses profit by calculating and paying only a fraction of the costs involved. ¶195.

To be sure, resource losses are chronically under-estimated. But Nordhaus maintains that the pope misses an important point, which is that the problem is not markets per se, but markets that are poorly designed and hence encourage the wrong kinds of activity.

Pope Francis addressing a joint session of Congress, Sept 24, 2015

Pope Francis addressing a joint session of Congress, Sept 24, 2015

“Markets can work miracles when they work properly,”Nordhaus writes, “but that power can be subverted and do the economic equivalent of the devil’s work when price signals are distorted.” The best way to correct such distortions is to see to it that social costs, or “externalities,” are incorporated in the price of a particular commodity or action. Only when economic actors are required to bear the full burden will they then find it profitable to seek out alternatives that are cheaper and cleaner. Otherwise, society finds itself in the strange position of subsidizing waste by allowing manufacturers to emit greenhouse gases and the like for free. As Nordhaus puts it:

Putting a low price on valuable environmental resources is a phenomenon that pervades modern society. Agricultural water is not scarce in California; it is underpriced. Flights are stacked up on runways because takeoffs and landings are underpriced. People wait for hours in traffic jams because road use is underpriced. People die premature deaths from small sulfur particles in the air because air pollution is underpriced. And the most perilous of all environmental problems, climate change, is taking place because virtually every country puts a price of zero on carbon dioxide emissions.

Nordhaus might have mentioned the entrenched political structures that foster such under-pricing in the first place. But let’s not quibble: his logic thus far is impeccable. He then goes off the rails, however, over a passage in the encyclical dealing with carbon-emission permits. According to the pope:

The strategy of buying and selling “carbon credits” can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors. ¶171.

Although Francis is probably talking about cap-and-trade, Nordhaus is not so sure since “carbon credits” is not a term that practitioners usually employ with regard to the trade in carbon emissions. So he argues that “this part of the encyclical is clearly a critique of market-based environmental approaches”— all such approaches, that is — a category that in his view includes both cap-and-trade and carbon taxes.

This leads to a fatal error: defending both without delineating the differences between the two. Nordhaus has argued in favor of carbon taxes in the past, and he concedes in his NYR article that such an approach “is simpler and avoids any of the potential corruption, market volatility, and distributional issues that might arise with cap-and-trade systems.” But since carbon taxing also fiddles with markets, he concludes: “It is unfortunate that he [the pope] does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause.”

Wrong. Cap-and-trade clearly is a market-based solution because it creates new arenas for the buying and selling of emission permits, complete with futures markets and financial derivatives. But a carbon tax is not. Instead of creating new ways of buying and selling, taxing carbon is a form of direct behavior modification not unlike a traffic fine or a golf-course fee. Instead of encouraging speculation, it does the opposite by making it crystal clear that economic actors will have to pay a set premium for every unit of carbon dioxide they emit.

So while the pope may have gotten a good deal wrong, this is one thing he gets right. Not only does cap-and-trade promote speculation, but Francis is correct in pointing out that, in practice, it has done little to reduce emissions or encourage fundamental technological change. Setting a strict limit on greenhouse gases and then allowing investors to bid on emissions rights up to a certain level is music to the ears of neo-liberal economists for whom there can never be enough markets. But implementing such a program has proved a nightmare.

Due to heavy lobbying by corporations and politicians, the EU’s Emissions Trading System, the largest carbon market in the world, exempts 55 percent of greenhouse gas emissions, according to the Greek economist Andriana Vlachou. Since the system leaves it to individual member states to estimate their emissions, over-reporting has been rife. Offsets, the practice of allowing member states to reap credits by sponsoring carbon-capture projects such as new forests, have been especially problematic. As the Carbon Tax Center’s James Handley has pointed out, estimating savings from such projects is difficult, while verifying that developers are telling the truth about the benefits is even worse. Volatility is another problem. After the EU allocated too many permits, prices plunged so low in 2013 that officials had to take 900 million permits off the market. Since trading is electronic, hackers have meanwhile made off with millions.

It’s the sort of system that only a free-market Chicago economist could love – and, given the opportunities for corruption, maybe an old-school Chicago politician as well. By comparison, a carbon tax is the essence of simplicity. Administrative costs, which involve little more than calculating the carbon content of a given fossil fuel and then levying a charge “upstream,” are minimal. So are enforcement costs. There are no offsets, no complicated negotiations to determine each nation’s emissions quota, no wrestling with entrenched political interests to determine which industries are covered and which are not. While Vlachou reports the EU’s cap-and-trade program weighs especially heavily on poor electricity users, such consequences can be easily mitigated in the case of a carbon tax by earmarking revenues for social programs, investment in poor neighborhoods, or reducing income taxes for lower earners.

Nordhaus is not the only one to blur the difference between a carbon tax and tax-and-trade. Cass R. Sunstein, the Harvard law professor and recent Obama operative, recently made the same blunder in a column defending not only markets but consumerism and economists in general, who, he assures us, are “excellent technicians” and “pretty decent moralists” as well. The pope is not the only one who finds this difficult to swallow. Suspicion of market-based solutions may not be so unjustified after all.


Pope Francis’s Embrace of Our Environment: Live-Tweeting at the U.N.

September 25, 2015 by Charles Komanoff Comments (0)

The following passages, transmitted by the New York Times via Twitter (@nytimes), capture Pope Francis’s call this morning to world leaders and humanity to place ourselves within, not above, the natural world; to care for Earth rather than destroy it; and to recognize for all living things a “Right of the Environment.”

Francis Screenshot 1

Francis Screenshot 2

Francis Screenshot 3

Francis Screenshot 4

Francis Screenshot 5