Why taxes on carbon pollution are essential, what’s happening now, and how you can help

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 clearly.

Global warming not happening? Look again.
Global warming not happening? Look again.

Yet the transition from climate-damaging fossil fuels to energy efficiency renewable sunlight and wind energy is slow and halting. The biggest obstacle to clean energy is that the market prices of coal, oil and gas don’t include the true costs of carbon pollution. A robust and 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 content 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. View our spreadsheet to see how fast emissions will fall at different tax levels.
  • 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.
EPA power plant rule can't hold a candle to economy-wide CO2 charge.

EPA power plant rule can’t hold a candle to an economy-wide CO2 charge.

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British Columbia’s Carbon Tax Architects Speak

March 3, 2015 by James Handley Comments (1)

A new report from a British Columbia think tank reveals the inside story behind B.C.’s successful tax on CO2 pollution. “How to Adopt a Winning Carbon Price, Top Ten Takeaways from Interviews with the Architects of British Columbia’s Carbon Tax,” published by Clean Energy Canada, draws on extensive interviews with senior government officials, elected representatives and a broad range of experts who helped shape or respond to this groundbreaking policy.

BC C-TX RPT CVRBritish Columbia inaugurated its carbon tax on July 1, 2008 at a rate of $10 (Canadian) per metric ton (“tonne”) of carbon dioxide released from coal, oil and natural gas burned in the province. The tax incremented by $5/tonne annually, reaching its current level of $30 per tonne of CO2 in July 2012. At the current U.S.-Canadian dollar exchange rate (1.00/0.80), and converting from tonnes to short tons, the B.C. tax now equates to around $22 (U.S.) per ton of CO2.

In the half-dozen intervening years, fuel use and resultant CO2 emissions in British Columbia have fallen 16% while the rest of Canada’s emissions increased 3%. Revenue from the tax has funded more than a billion dollars worth of cuts in individual and business taxes annually, while a tax credit protects low-income households who might not benefit from the tax cuts.

Also since 2008, British Columbia’s GDP has grown slightly faster than the rest of Canada’s, according to a post last year by two Canadian academics and an industrialist, published by the World Bank. (The growth rates, 1.7% for B.C. and 1.3% for the rest of the country, cover the entire 2008-2013 period and thus reflect the financial crisis.) One nice surprise: even as the tax increased annually, public support rose from 54% in 2008 to 64% in 2012; the most recent poll shows 58% of voters support the policy.

CEC’s interviewees repeatedly cited strong leadership from Premier Gordon Campbell and a clear, well-coordinated information campaign by finance minister Carole Taylor. Building on public support for government action to curb climate disruption, Campbell and Taylor proposed a simple upstream tax pegged to the carbon content of coal, oil and natural gas, in February 2008. They promised that the tax would be revenue-neutral, with all proceeds returned to the public through tax cuts, credits and direct payments. Some interviewees reported that the term “revenue-neutral” led some citizens to mistakenly believe that they would get their own carbon tax payments returned. Of course, for the carbon tax to do its job of disincentivizing fossil fuel use, tax revenues must be returned without linkage to individuals’ fossil fuel consumption.

Campbell and Taylor chose to use the revenue to cut a range of other taxes; B.C. does not use the carbon levy to fund government programs. (In practice, B.C.’s carbon tax has been slightly revenue-negative because of administrative costs.) The revenue has allowed British Columbia to cut its corporate tax rates, which interviewees suggested was one reason B.C.’s economy grew faster than the rest of Canada. While revenue-neutrality was a selling point initially, Taylor suggested that it may no longer be as important to the public now that the carbon tax concept has proven successful.

In designing the program, Taylor resisted pressure to carve out exemptions and loopholes. Her insistence on applying the tax across-the-board to all CO2 emitters apparently solidified public perception that the tax would be fair and effective. Campbell’s government had authority to implement the tax administratively, without a vote by the legislature or a popular referendum. Campbell cast the tax as a simpler, more transparent and business-friendly alternative to cap-and-trade which had been advocated by the more leftist New Democrat Party. In the 2009 election, Campbell campaigned on his successfully-implemented carbon tax; NDP’s opposition to it reportedly helping swing the election toward Campbell.

The CEC report also suggests that the tax’s low starting price of $10 per metric ton boosted public acceptance; and, moreover, that announcing and sticking to a pre-announced annually-rising price trajectory helped households and businesses plan and adapt without undue hardship or disruption.

CEC’s interviewees caution advocates not to oversell carbon taxes, pointing out that complementary policies are needed to reduce CO2 emissions. This is particularly true for a carbon tax at the provincial or state level, since concerns over business flight and border “leakage” make it impracticable to raise the tax to the triple-digit level at which a third or more of emissions would likely be eliminated. Not surprisingly, B.C.’s carbon tax architects also exhort advocates to gird for “vocal and not necessarily fact-based” opposition; organizing and informing supporters about the effectiveness and simplicity of carbon taxes was essential to B.C.’s success.

Clean Energy Canada’s concise, compelling 32-page report concludes with a chorus of encouragement: other jurisdictions should follow British Columbia’s carbon tax leadership and “prepare for a cleaner environment, an enhanced reputation, and a thriving clean technology sector.”

Why is Naomi Klein So Cool on a Carbon Tax?

February 13, 2015 by Daniel Lazare Comments (14)

(Daniel Lazare is a writer living in New York City; his books include The Frozen Republic, The Velvet Coup, and America’s Undeclared War.)

Naomi Klein is not exactly bubbling over with enthusiasm about a carbon tax, and since she has emerged as a leading voice on climate change, it’s worth exploring why. She barely mentions the topic in This Changes Everything: Capitalism vs. The Climate, her magnum opus on global warming, and was oddly dismissive in a recent interview with Grist. “I don’t think a carbon tax is a silver bullet,” she said, “but I think a progressively designed carbon tax is part of a slate of policies that we need to make this transition … [to] rapid renewables.” But then she went on to disparage the analysis that is at the core of the carbon-tax argument:

You know, I’ve been making these arguments around economics, but there is nothing more powerful than a values-based argument. We’re not going to win this as bean counters. We can’t beat the bean counters at their own game. We’re going to win this because this is an issue of values, human rights, right and wrong. We just have this brief period where we also have to have some nice stats that we can wield, but we shouldn’t lose sight of the fact that what actually moves people’s hearts are the arguments based on the value of life.

So on one hand we have economics, the stuff of “bean counters” and other bloodless sorts, while on the other we have values and morality. A carbon tax would be beneficial, but since we will never beat the economic analysts on their own turf, there’s no point even trying. Instead, we should concentrate on things that stir the soul, such as human rights.

Naomi Klein: Why is she so cool on taxing carbon pollution?

Naomi Klein: Why is she so cool on taxing carbon pollution?

Or so Klein maintains. But there’s something off-putting about such arguments. The distinction between economic analysis and morality, for instance, smacks of anti-intellectualism. Not only are head and heart separate and distinct in Klein’s world, but there’s no question as to which is on top. But her view of a carbon tax is also incorrect. It’s not for bean counters only. Like any real-world phenomenon, a carbon tax is multi-dimensional, which means that it has not only an economic component but a political and moral aspect as well.

How so? Everyone knows what the purpose of a carbon tax is. It’s to internalize the externalities, to take the growing costs associated with fossil fuels and bundle them into the price of such fuels so that the individuals using them have a more accurate idea of how much a specific activity truly costs. When drivers understand how expensive gasoline really is when all the attendant costs are taken into account, then they’ll treat it with the respect it deserves.

This is the sort of economic wonkery that no doubt leaves Klein cold. But it is not only an economic argument. Externalities include not only environmental and congestion costs and the like, but such items as the cost of insuring an uninterrupted flow of oil from the Persian Gulf. Expenditures like these aren’t trivial, needless to say. Indeed, one study published in Energy Policy puts them at a stunning $7 trillion for the years 1976-2007, not including the Iraq War, which, according to Joseph Stiglitz and Linda Bilmes, may wind up costing $3 trillion more.

This is a political externality as much as an economic one. If we agree, moreover, that the invasion of Iraq was fundamentally about oil, then there is another external cost to consider, that of lost lives. This includes not just the 4,500 U.S. servicemen killed since 2003, but a half million or more Iraqis. Klein, curiously enough, made no mention of the spiraling conflict in the Middle East in either This Changes Everything or her Grist interview, yet it’s as much a consequence of unconstrained fossil-fuel use as is global warming. But if we adjust fuel prices to reflect the growing human wastage that carbon addiction causes, then it becomes clear that a carbon tax is not just an economic or political instrument, but a moral one too.

Economics, politics, and morality are different ways of approaching the same problem. They are not antagonistic as Klein seems to think, but complementary and mutually supporting. Whether or not a carbon tax is a silver bullet, it’s a means of attacking over-reliance on fossil fuels on all fronts simultaneously. That doesn’t make it a magic wand that will wave all such problems away. But it’s one of those elegantly simple ideas – like one person-one vote or liberté, egalité, fraternité – that easily roll off the tongue yet are politically explosive. That’s their beauty since they require that society be turned upside down before such a basic principle can be implemented. And what can be more soul-stirring than that?

Photo by Ed Kashi, courtesy of Grist.

First Tax Oil, Then Carbon

January 22, 2015 by Charles Komanoff Comments (4)

Low oil prices and cheap gasoline bring a host of positives and negatives, as befits petroleum’s dual nature as a bestower of motion and light but also smog, traffic and climate change. This clash has bedeviled energy and climate policy for decades. Now we have a golden opportunity to resolve it.

Heading the good things is inexpensive oil’s boost to the economy. Cheap gas gives consumers more money to spend, and that means more jobs and better wages. Geopolitically, low oil prices are a scourge on several bad actors on the world stage, from Russia to Iran. And as drilling gets less profitable, thousands of fragile places might be left alone.

But when oil is cheap, the world gears up to use more of it, which accelerates climate change. For all we rightfully target coal, burning oil releases almost as much climate pollution. Boeing and Airbus are reportedly apprehensive that their latest fuel-efficient aircraft may go begging. And of course the faster oil usage rises, the more quickly the price rebounds, teeing up the next recession.

A refundable oil tax can pave the way for a full-fledged carbon tax.

A refundable oil tax can pave the way for a full-fledged carbon tax.

What’s needed is a way to safeguard the benefits of low oil prices while fending off the downsides. The trick to this feat, which should unite all sides of our fractured body politic, is to let consumers collect a tax on oil. Or rather, have government collect the tax at ports and wellheads and distribute the revenues to consumers each month, the same way Alaska distributes the revenues from its wildly popular tax on its oil flows.

Yes, we take Sarah Palin nationwide, taxing oil and disbursing the dollars — all of them — to U.S. households, the same “dividend” for each.

Because the tax dollars stay in circulation, the amount of money families have to spend doesn’t fall and the windfall to the economy persists. Most families of limited means will come out ahead because on average they spend fewer dollars on oil than they will receive in their monthly revenue check. Economic inequality eases a little, at no cost to economic activity.

Why have the tax at all, then? Answer: to simulate high fuel prices, preserving incentives to get more fuel-efficient. In this way, motorists will keep buying high-mileage cars and driving them somewhat less, manufacturers will build ever-more efficient vehicles and aircraft, and cities and counties will keep broadening their transit infrastructure. The same goes for freight movement ― goods produced nearby will be advantaged, boosting local agriculture and domestic jobs.

How high an oil tax are we talking about? Fifty dollars a barrel, which is less than the drop in price so far, is a good starting point for discussion. It could be phased in with a $20 per barrel levy now, rising by $10 a barrel a year for three years to reach $50 in 2018.

The startup tax of $20 a barrel equates to half a buck for a gallon of gas or diesel. Not chump change, yet even with the tax, prices of motor fuels will be lower than they were in September. And the knowledge that the tax will rise should ward off the natural tendency to splurge. We’ll be less tempted to go back to buying guzzlers, and the psychological and physical infrastructure that for a century made it second-nature to use ever more oil will start to relinquish its hold.

How large will that monthly dividend check be? If adults get full shares and children half, and allowing for conservation, a 4-person household will get $120 a month in the first year. Most families will find that the extra money more than offsets the costlier gas, airfares and prices of shipped goods. Some may even relish the annual increases in the tax that will augment the incentive to conserve.

This program resembles one advanced recently by former Treasury Secretary Lawrence Summers to let oil’s “price swoon” pave the way to a carbon tax. Others singing this tune include the Economist magazine, with an editorial noting that “cheaper energy brings the chance to inject some coherence into the world’s energy policies.” We agree except on one key point: the price plunge — and the corresponding cushion to offset the tax — is far less pronounced in electricity and natural gas than in petroleum products.

To be sure, a revenue-neutral carbon tax that distributes the proceeds via monthly dividend checks comes with a built-in cushion. But the American public needs to be persuaded. A refundable oil tax can provide proof of concept. After three years of tangible dividends, Americans might be ready to extend the oil tax to the other carbon-based fuels in proportion to their carbon content.

The monthly revenue check, an abstraction no longer, could be the ticket to Congress’s finally taxing carbon fuels for their climate damage and putting America, and the world, on a climate-safe course.

Economist Steven Stoft, author of “Carbonomics,” aided in the conceptualization and writing of this post.

New Senate Bill Would Build “Polluter Pays” Principle into Climate Action

November 19, 2014 by Charles Komanoff Comments (4)

(co-authored with CTC senior policy analyst James Handley)

Sheldon Whitehouse gained renown last year for his series of weekly “Time To Wake Up” speeches on the Senate floor addressing the climate crisis. Today, the Democratic Senator from Rhode Island took his climate leadership further as he introduced a comprehensive bill intended to end free dumping of climate pollution into the atmosphere. (Click here for video of the senator’s 80th speech, introducing his bill.)

Whitehouse calls his 30-page measure, which is co-sponsored by Democratic Senator Brian Schatz of Hawaii, the “American Opportunity Carbon Fee Act.” It builds squarely on the growing consensus that clean energy will rapidly and fully displace fossil fuels only when polluters are made to pay for causing climate damage. AOCFA would impose fees on both CO2 and non-CO2 greenhouse gases including fugitive methane from shale gas wells and coal mines. AOCFA also includes a border tax adjustment to impose equivalent climate pollution fees on imported goods from nations that have not enacted their own climate pollution fees. (Click here for background on border tax adjustments.)

AOCFA pegs its pollution fee to U.S. EPA’s estimate of the “social cost of carbon.” The fee would start at EPA’s current estimate of that cost, now $42 for each ton of carbon dioxide, and would rise by 2% annually in real terms. Emissions of methane and other greenhouse gases would be charged in proportion to their estimated per-unit global warming impacts relative to carbon dioxide.

The Senator’s office estimates that AOCFA would raise $2 billion in revenue in its first ten years, money that would fund an “American Opportunity Trust Fund” to be returned to the American people in as many as nine different ways including tax cuts, dividends, infrastructure investments and debt relief. E&E News reporter Jean Chemnick wrote today that the bill “leaves open the question of how those revenues would be spent as an invitation for would-be Republican collaborators to negotiate.”

Sen. Whitehouse’s decision to link his bill’s climate pollution fees to the social cost of carbon could be problematic, however. Published estimates of the social cost of carbon vary from as little as $10 per equivalent ton of CO2 to over $300, depending on what is counted as climate damage, what discount rate is assumed to convert future losses to present terms, and how heavily if at all catastrophic risk scenarios are factored in. And while hitching the pollution fee to the EPA social-cost estimate may resonate with some stakeholders, it could limit the level of the carbon tax and, thus, its ability to drive down U.S. emissions rapidly enough, let alone global emissions. Read more…

25% by 2025 Can’t Happen Without a Carbon Price

November 12, 2014 by Charles Komanoff Comments (3)

Today’s welcome announcement of a surprise U.S.-China agreement to curb greenhouse gas emissions almost certainly commits the United States to a national carbon price. Non-pricing measures, such as the EPA Clean Power Plan to cut power plant emissions and the ramp-up of auto fuel economy standards now underway, won’t be nearly enough by themselves to meet the new U.S. target of 25% lower emissions by 2025 vis-a-vis a 2005 baseline, according to calculations by the Carbon Tax Center.

This could be terrific news for carbon tax proponents, since it would finally require climate-concerned organizations and officials to put carbon pricing — preferably in the form of a revenue-neutral carbon tax — at the heart of their climate agenda. On the other hand, given the new Congressional ascendancy of the climate-deaf Republican Party, the 25% target could prove to be just another climate goal scuttled by U.S. political resistance.

Let’s start with the carbon emission numbers, which we’ve broken down between emissions from electricity generation, which account for around 40% of U.S. CO2 pollution, and emissions from the various “non-electric” sectors like automobiles, goods movement, air travel, industry and heating, which account for the other 60%. This division is useful for at least two reasons: there’s much greater maneuverability in electricity due to the relative ease of substituting clean sources like solar and wind for dirty coal and gas, and the U.S. already has an emissions goal for the electricity sector: the 30% reduction by 2030 (from 2005) embodied in the Clean Power Plan announced by President Obama this past June.

Non-electric-sector emissions will need to drop sharply to meet the 25% 2005-2025 reduction goal.

Non-electric-sector emissions will need to drop sharply to meet the 25% 2005-2025 reduction goal.

The key numbers are shown in the graphic. A 2025 target equaling 75% of actual 2005 CO2 emissions of 5,855 million tonnes (metric tons) from all U.S. sources equates to 4,391 million tonnes. With that figure established, let’s switch our reference frame to current (2013) emissions, which were 5,317 million tonnes. (All figures are from CTC’s carbon tax model, and some may differ from recently released official U.S. emission figures, but only slightly.)

The difference between 2013 emissions (5,317 million tonnes) and 2025-targeted emissions (4,391 million tonnes) is 926 million tonnes. That’s a 17.4% drop over just a dozen years. The questions are: where in the U.S. economy will these reductions take place, and how will they come about? Read more…