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.

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 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.
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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Arctic Oil vs. Carbon Tax? It’s Not Even Close.

May 20, 2015 by Charles Komanoff Comments (4)

It is true that the stroke of the presidential pen with which Barack Obama last week granted Shell Oil Corp. permission to drill off Alaska’s Arctic Coast cannot also put into force a U.S. carbon tax, without authorization by Congress. And it is all too possible that when climate reality eventually sweeps over the Capitol, the resulting carbon tax may be modest in scale and take a lot longer than a decade to reach the $100/ton level that would drive massive reductions in fossil fuel use and CO2 emissions.

All the same, it’s instructive to compare the capacity of Arctic drilling to supply oil with that of a robust carbon tax to quench the need for it. The outcome — the carbon tax wins — may not surprise. But the lopsidedness is startling: in just its tenth year, the carbon tax proposed last November by Rep. Jim McDermott (D-WA), starting at $12.50 per metric ton of carbon dioxide and rising annually by $12.50 as well, would be eliminating the need for oil at around a dozen times the rate at which Shell would be pulling the stuff from the Arctic.

Oil savings from a robust carbon tax dwarf oil "gains" from Arctic drilling.

Oil savings from a robust carbon tax dwarf oil “gains” from Arctic drilling.

Here are the numbers:

♦ Royal Dutch Shell’s Chukchi Sea project is projected by the U.S. Bureau of Ocean Energy Management to extract 4.3 billion barrels of crude over a 44-year period. (See Chukchi Sea Oil & Gas Lease Sale 193 Draft Second Supplemental Environmental Impact Statement, Volume 1 [pdf]; go to pp. 6 or 62 or 182 of 694.) This equates to daily production of 268,000 barrels. An estimated 2.2 trillion cubic feet of methane (natural gas) would be extracted as well; on a btu basis that equates to 360 million barrels of oil, or 23,000 barrels a day. Combined extraction of hydrocarbons is then around 290,000 barrels a day. (Note that we have not netted the energy expended to “discover,” extract and transport the oil.)

♦ For the carbon tax, we modeled McDermott’s Managed Carbon Price Act of 2014, setting the annual increases as the midpoint between the bill’s floor and ceiling prices. The price per U.S. (not metric) ton of CO2 in the tenth year, 2024, is $113.40. (Our model, which we’ll update soon, had the tax starting in 2015.) As indicated in the graph, the reductions in petroleum requirements would be substantial in every consuming sector. They sum to 3,486,000 barrels a day — 12 times the 290,000 bpd equivalent anticipated from Shell’s Arctic venture.

The estimated oil savings from the McDermott carbon tax amount to nearly one-fifth of U.S. oil consumption in both 2013 (the last data year in our model) and 2024 projected without a national carbon price. The biggest reduction in absolute terms is in what we call personal ground travel (chiefly driving), which dominates petroleum use. But on a proportional basis the savings would be greater in commercial sectors such as freight movement, oil refining, and construction, as the unmistakable price signal from the annually rising tax drives innovation enabling lower usage.

Still, the projected reduction in gasoline consumption for personal ground travel in 2024, 1.4 to 1.5 million barrels per day, commands attention. Can adding a mere $1.15 to the price of a gallon of gasoline — that’s the estimated per-gallon consumer impact of a $113.40/ton carbon tax — bring about a 17 percent shrinkage in gasoline use vis-à-vis business-as-usual consumption?

Yes, for two reasons.

First, unlike CAFÉ standards, which affect only the mileage efficiency of new vehicles, a rise in the price of gasoline touches every factor bearing on demand for the fuel: how often and far vehicles are driven, how mindfully (or not) they are driven, which vehicle goes on the road vs. which stays parked, and which vehicles are purchased — not to mention designed, manufactured and marketed. But that’s not all. Expectations of higher gasoline prices will impinge on long-term decisions made in purchasing homes, siting new facilities and designing communities, bending the outcomes toward energy-efficient proximity and away from energy-dependent sprawl.

Price signal gets lost when monthly price falls nearly as often as it rises.

Price signal gets lost when monthly price falls nearly as often as it rises.

Second, the predictability of the price rises can offset and even neutralize some of the price volatility that historically has obscured the long-term trend toward higher gasoline prices. As the graphic (from my downloadable gasoline price-and-use spreadsheet) indicates, over the past dozen years prices at the pump have fallen month to month nearly as often as they’ve risen. This has bred fatalism among consumers and blunted what might otherwise have become a stampede toward vehicle technologies and designs that can move people with ever less gasoline. A steadily rising carbon tax can counteract that.

To be sure, these qualitative arguments don’t prove that a McDermott-like carbon tax will remove three to four million barrels a day of petroleum demand from the U.S. economy. However, they do suggest that it could trigger a cascade of mutually reinforcing changes in the societal structures that determine our energy use, leading to the impressive reductions indicated in our model.

“Shell No” activists aren’t just fighting for climate. May 2015 photo by Greenpeace.

Current politics keeps the comparison posed here in the realm of the hypothetical. Nevertheless it’s unsettling that one stroke of the pen portends so much damage for so little oil, when another could, under a different politics, prevent that damage many times over.

What should be clear is that a robust carbon tax won’t merely aid the climate. By systematically dismantling so-called “demand” for fuels, a carbon tax will protect earth’s fragile habitats, landscapes and communities.

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Harvard Economist Charts Escape From Kyoto

May 5, 2015 by James Handley Comments (2)

[T]he quantity-based Kyoto-type approach [to UN climate negotiations] has pretty much broken down, leaving the world with a highly non-optimal patchwork of sporadic regional volunteerism that does not address centrally how to correct the critical externality of global warming.  — Harvard economist Martin Weitzman.

Which is simpler: negotiating one price, or 190 emissions caps?

The Kyoto Protocol is broken. What can replace it? Professor Weitzman, considered one of the world’s most influential economists, proposes a game change: Instead of squabbling over the quantity of fossil fuels each nation may burn, negotiate a single carbon price all can adhere to.

Weitzman is best known for modelling the economics of catastrophic climate change. In a ground-breaking 2009 paper, he demonstrated that conventional cost-benefit analysis under-weights the risk of catastrophic scenarios. In two new papers, he scrutinizes the Kyoto Protocol’s quantity-based structure through the lens of game theory. He calls Kyoto’s attempt to set and divvy up a global emissions cap “the ultimate… top-down worldwide treaty.” That’s not a compliment. Observing that Kyoto hasn’t come close to its goal of “an internationally harmonized binding system of emissions caps,” Weitzman shows why: the Kyoto framework induces each nation to game the system by attempting to maximize the efforts required of others while minimizing its own.

Weitzman lays out three criteria for an effective global emissions reduction system:

1. It should induce cost-effective emissions reductions.

2. It should allow negotiators to focus on negotiating one central and highly salient parameter.

3. It should align negotiators’ incentives toward internalizing climate costs.

On the first criterion, Weitzman points out that while a carbon tax is more easily administered and more transparent than a cap-and-trade system, a carbon cap or a tax can both achieve cost-effective emissions reductions.

On the second, Weitzman builds on Nobel-laureate Thomas Schelling’s pioneering game theory analysis establishing the importance of a clear focal point in negotiations. Kyoto’s quantity-based approach assigning different binding emissions quotas to each nation has no focal point. In contrast, a price-based negotiation offers a single focal point for all parties.

And building on the seminal work of Ronald Coase, Weitzman stresses the importance of minimizing transactions costs. Coase showed that parties that might otherwise negotiate an agreement can be deterred by the high costs of getting to yes. Weitzman points out that any quantity-based structure such as Kyoto necessarily multiplies transaction costs: “It is easier to negotiate one price than n quantities — especially when the one price can be interpreted as ‘fair’ in terms of equality of effort,” he writes.

The bulk of Weitzman’s analysis focuses on his third and most important criterion: the need to negotiate a structure that counteracts parties’ national self-interests and aligns their incentives toward reducing emissions. He writes:

This ‘countervailing force’ property is inherently built into a price-based harmonized system of emissions charges, but it is absent from a quantity-based international cap-and-trade system… A Kyoto-type quantity-based international system fails because no one has an incentive to internalize the externality and everyone has the self-interested incentive to free ride. What remains is essentially an erratic pattern of altruistic individual volunteerism that is far from a socially optimal resolution of the problem.

Weitzman continues:

An internationally harmonized domestically collected carbon price is different. If the price were imposed on me alone, I would wish it to be as low as possible so as to limit my abatement costs. But when the price is uniformly imposed, it embodies a countervailing force that internalizes the externality for me. Countervailing my desire for the price to be low (in order to limit my abatement costs) is my desire for the price to be high so that other nations will restrict their emissions, thereby increasing my benefit from worldwide total carbon abatement. A binding uniform price of carbon emissions has a built-in self-enforcing mechanism that countervails free riding.

To illustrate, Weitzman hypothesizes a World Climate Assembly in which each nation gets a population-weighted vote for its desired level of a universal carbon price, and each nation gets to keep its carbon-price revenue (generated either by a tax or by auctioning permits under a cap). In this model, a nation with a typical (average) per-capita carbon intensity has no incentives for free-riding. The reason: “Each agent’s extra cost from a higher international emissions price is counterbalanced by that agent’s extra benefit from inducing all other agents to simultaneously lower their emissions via the higher international price.”

Of course, nations with above-average carbon intensities will have an incentive to keep the carbon price low. But that will be at least partially offset by their governments’ retention of carbon revenue, enabling them to mitigate the economic losses to high-carbon industries and households. Weitzman contrasts the clarity of negotiating an explicit price-based structure that internalizes revenue to each nation with the daunting complexity of negotiating a globalized, linked cap-and-trade system with unpredictable and opaque cross-border revenue flows.

Recent experiments by behavioral economist Axel Ockenfels at the University of Cologne appear to validate Weitzman’s mathematical assertions. Ockenfels has found that when negotiators know that all parties will be required to meet the same price level, they opt for a price that balances their self-interest in minimizing effort against the benefits they will receive from the other parties’ efforts. These negotiators weren’t free-riding any more, they were negotiating toward a socially-optimal price for the carbon externality.

As the UN prepares for its twenty-first round of negotiations under the Kyoto Protocol in December, we hope participants will heed Professor Weitzman’s clarion call for a simplifying and incentive-aligning “game change” to a price-based negotiation as a path out of climate deadlock.

[Photo by unfccc / CC]

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A Carbon Tax Can Carry Earth Day’s Legacy

April 22, 2015 by Charles Komanoff Comments (0)

In 1970 I was teaching math in a New York City suburb. On Earth Day I stood at a highway off-ramp with members of the high school ecology club. One of their signs read, “The Earth is a Closed Garage.” Another said, “Make Polluters Pay.”

There’s been some progress since then. Breathing New York’s air, once equated to smoking two packs of cigarettes a day, is many times safer. Wind turbines now provide five percent of the nation’s power, and electricity produced with solar cells rose ten-fold in the past three years. Driving has flatlined nationwide over the past decade, partly because Americans are strapped but also because the intoxication with cars is wearing off.

That’s great news for the environment, but it’s not nearly enough for climate. CO2 levels are still rising inexorably. Ditto global temperatures, polar ice melting and extreme weather. Emissions need to be cut radically even as seven-and-a-half billion people strive for prosperity.

For that to happen, prices of fossil fuels have to reflect the climate costs of carbon pollution. The way to do this, of course, is with carbon taxes:

To demystify carbon taxes and showcase their appeal, we’re rolling out the Carbon Tax Center’s first video. It explains how a carbon tax will transform investment, re-shape consumption and sharply reduce carbon emissions. As the video shows, no other policy can match its reach or simplicity. No other policy can be replicated globally, from China to Chile to Chad.

A carbon tax is no mere “technical fix.” It’s both a symbol and a means for us to respect nature and each other.

The central messages on Earth Day 1970 were to abide by nature’s limits and make polluters pay. On this Earth Day, let’s spread the word about a carbon tax. Let’s educate and organize so that the U.S. and other nations make taxing carbon the central policy to combat catastrophic climate change and sustain the Earth we love.

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Carbon Tax Polling Milestone: 2/3 Support if Revenue-Neutral

April 15, 2015 by Charles Komanoff Comments (12)

For more years than I care to count, the Carbon Tax Center beseeched pollsters to take Americans’ temperature on revenue-neutral carbon taxes. Time and again we explained that polling about carbon taxes had to incorporate the option of returning revenues to households ― as most carbon tax bills would do. Otherwise, the tax came off as all stick and no carrot, and about as appealing to most folks as a cold shower.

Finally, a Stanford University-Resources for the Future poll asked that question. The results, released today, show that two-thirds of Americans support making corporations pay a price for carbon pollution, provided the revenues are redistributed, i.e., made revenue-neutral. The poll’s finding is the most powerful indication yet that the public is warming to carbon taxation as the premier policy for combating climate change.

Poll-Graphic-Pie-Chart-AltStanford and RFF commissioned the polling firm SSRS to interview 1,023 U.S. adults on climate-related issues in January. Two findings from the poll — that Americans of Hispanic descent are particularly climate-concerned, and that half of Republicans would favor a presidential candidate who supports fighting climate change — led to front-page New York Times stories. (Click here for the story on Hispanics and here for the story on Republicans.) The full poll was made publicly available today at a briefing at the National Press Club in Washington.

The poll was supervised by RFF university fellow Jon Krosnick, who has been polling Americans on climate change for two decades as head of Stanford’s Political Psychology Research Group. Its section on carbon taxation included these two questions: Read more…

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Climate Idealism Can’t Hold a Candle to Collective Action

March 30, 2015 by Charles Komanoff Comments (20)

Why do Copenhageners ride bicycles? The key reason, says Yale economist and best-selling author (“Irrational Exuberance”) Robert J. Shiller, is that Danes are idealists who resolved, after the oil crisis of the 1970s, “to make a personal commitment to ride bicycles rather than drive, out of moral principle, even if that was inconvenient for them.”

“The sight of so many others riding bikes motivated the city’s inhabitants and appears to have improved the moral atmosphere enough,” Shiller wrote in yesterday’s New York Times, that the share of working inhabitants of Copenhagen who bike has reached 50 percent.

From “Copenhagen: City of Cyclists” (2010), a report by the City of Copenhagen.

From “Copenhagen: City of Cyclists” (2010), a report by the City of Copenhagen.

In much the same way, Shiller argues, “asking people to volunteer to save our climate by taking many small, individual actions” may be a more effective way to bring down carbon emissions than trying to enact overarching national or global policies such as carbon emission caps or taxes.

Goodness. Rarely do smart people so badly mangle both the historical record and basic economics. I say “people” because Shiller attributes his column’s main points to a new book, “Climate Shock: The Economic Consequences of a Hotter Planet” by Gernot Wagner of the Environmental Defense Fund and Martin L. Weitzman, a Harvard economist. And I say “smart” because the three stand at the top of their profession. Shiller won the Economics Nobel in 2013, Weitzman is a leading light in the economics of climate change, and Wagner is highly regarded young economist.

But mangle they have (I haven’t seen the Wagner-Weitzman book but assume that Shiller represents it fairly).

Let’s start with the history, which is fairly well known to anyone versed in cycling advocacy, as I’ve been since the 1980s, when I spearheaded the revival of New York City’s bike-advocacy group Transportation Alternatives (as recounted here.) Copenhagen’s 40-year bicycle upsurge, and indeed much of the uptake of cycling across Denmark, Germany and the Netherlands, came about not through mass idealism but from deliberate public policies to help cities avoid the damages of pervasive automobile use while reducing oil dependence.

If idealism played a part at the outset it was a social idealism that instructed government to undertake integrated policies ­― stiff gas taxes and car ownership fees; generously funded public transit; elimination of free curbside parking; provision of safe and abundant bicycle routes ― that enabled Copenhageners to do what they evidently desired all along: to use bikes safely and naturally.

The telltale is in the graphic. Only one in eleven Copenhageners who cycle have environment and climate in mind. The majority do it because it’s faster than other ways to travel, and around a third of cyclists say they ride because it’s healthy, inexpensive and convenient ― belying Shiller’s meme of Danes idealistically choosing bikes despite their inconvenience vis-à-vis cars. Read more…

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