Why taxes on carbon pollution are essential,
what’s happening now, and how you can help
An unrelenting string of extreme weather events, including Superstorm Sandy that devastated the New York area in 2012, and topped by Typhoon Haiyan, which reportedly packed the strongest storm winds ever recorded when it laid waste to Guiuan province in the Philippines this past fall, bring the message home: Earth’s climate is changing in costly and painful ways. Yet we’ve barely started transitioning from fossil fuels to renewable energy and efficiency. Many factors stand in the way, including this: the price signals are too weak. The prices of fossil fuels don’t come close to reflecting their true costs, which puts clean efficiency and renewables at a stark disadvantage. A robust and briskly rising U.S. carbon tax will reduce the emissions that are driving global warming and generate revenue to pay for cutting regressive taxes that thwart job-creation.
- A carbon tax is a direct tax on the carbon content of fossil fuels (coal, oil and natural gas).
- A carbon tax is the most economically efficient means to convey crucial price signals that spur carbon-reducing investment. Our spreadsheet shows how fast emissions will fall.
- Carbon taxes should be phased in so businesses and households have time to adapt.
- A carbon tax can be structured to soften the impacts of added costs by distributing tax revenues to households (“dividends”) or reducing other taxes (“tax-shifting”).
- Support for a carbon tax is growing among public officials; economists; scientists; policy experts; business, religious, and environmental leaders; and ordinary citizens.
Our Read These First page is a good place to learn about carbon taxing. Another is this recent point/counterpoint in Today’s General Counsel magazine between Carbon Tax Center director Charles Komanoff and a top fossil fuel industry lobbyist. And read our blog post directly below, summarizing the comments we submitted to the Senate Finance Committee on Jan. 31. They’re insightful, thought-provoking, and perhaps an opening to a new path for replacing ineffectual and costly energy subsidies with a carbon tax.
PS: CTC needs your financial support. Click here to donate. Thank you.
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01/31/2014 by Charles Komanoff
The Carbon Tax Center told the U.S. Senate Finance Committee today that an economy-wide tax on the carbon content of coal, oil and gas will cut U.S. CO2 emissions more than twice as fast as proposed clean-energy subsidies delivered as tax credits.
This finding leads a new 22-page analysis, “Design of Economic Instruments for Reducing U.S. Carbon Emissions,” that we submitted today to Senate Finance Committee Chair Max Baucus. Our analysis is in the form of “Comments” on a Committee “Discussion Draft” that proposes replacing 42 federal energy tax subsidies with either credits for “clean (low-carbon) electricity” production and “clean fuels,” but also asks for input on the merits of a tax on carbon pollution instead.
Our comments can be boiled down to this ringing conclusion: A carbon tax will do everything the clean-energy credits will do, and much more. While simplifying and rationalizing the current hodgepodge of energy subsidies is all to the good, only a carbon tax can course through our entire economy and reward energy efficiencies and conservation along with low-carbon production.
Moreover, with the right design, a carbon tax can protect lower-income families and energy-intensive U.S. industries alike, at no cost to the Treasury. In contrast, even the proposed streamlined clean-energy subsidies could cost taxpayers more than $30 billion a year.
Estimated CO2 reductions from a carbon tax are 2.4 times as great as those from clean-energy subsidies.
We performed our analysis using the Carbon Tax Center’s carbon tax spreadsheet model, which may be downloaded via this link. With the model, we estimated that the proposed subsidies would reduce U.S. carbon dioxide emissions by roughly 400 million metric tons a year, whereas an economy-wide carbon tax set at the same level as the subsidies would eliminate 960 million metric tons of emissions. (For comparison purposes, U.S. carbon dioxide emissions from burning fossil fuels totaled 5,221 million metric tons in 2012, the last year for which data are available.)
The Senate Finance Committee’s Dec. 18 statement, Baucus Unveils Proposal for Energy Tax Reform,” is available by clicking here. That two-page letter contains a link to the Committee staff’s 8-page discussion draft, which solicited comments on both the proposed subsidies realignment and on alternatives that would tax carbon emissions directly.
Our comments were submitted on behalf of the Citizens Climate Lobby and the Citizens Climate Education Corp. CCL/CCEC are the most visible and vociferous grassroots organizations advocating for a revenue-neutral U.S. carbon tax, and we are proud to stand with them. CCL chapters and members across the U.S. submitted their own comments backing a carbon tax as well.
Our hope is that the Senate Finance Committee’s discussion draft signals a new interest in carbon taxing among the tax-writing committees on Capitol Hill . . . and that CTC’s comments along with those from others will persuade incoming Committee Chair Sen. Ron Wyden (D-OR) to convene informational and/or legislative hearings this year on the optimal choice of economic instruments to reduce U.S. carbon emissions. (Longtime Committee Chair Baucus is leaving the Senate to serve as U.S. Ambassador to China.)
In the interim, we believe that our comments stand as the first broad quantification of the relative efficacy of a carbon tax vs. energy subsidies (even rationalized ones) to reduce emissions. As the figures in the table indicate, a carbon tax wins hands down.
CTC’s comments were researched and written by CTC director Charles Komanoff and CTC senior policy analyst James Handley. Support for their preparation and submittal was provided by the Alex C. Walker Educational and Charitable Foundation. We are grateful for their support.
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10/20/2013 by James Handley
A new paper, “Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts” by economists at the Washington, DC think-tank Resources for the Future, finds that a $30/ton tax on CO2 pollution would reduce U.S. emissions 16% by 2025. The report concludes that dedicating the carbon tax revenues, estimated at $200 billion each year, to “down payment” of the federal budget deficit offers greater economic-efficiency benefits than other revenue-return options. Moreover, according to RFF, using the carbon tax revenues to pay down the deficit would especially benefit the young, by curbing global warming and its associated future costs, and by reducing tax burdens of today’s young people far into the future.
Using a new intergenerational economic model, RFF economists examined different ways to use revenue generated by carbon taxes, revealing the impacts of those choices across the age spectrum of the U.S. population. They modeled four scenarios: three in which the carbon tax revenues are used to reduce taxes on 1) capital, 2) labor, and 3) sales of goods, and a fourth in which the revenues are returned in lump sum “dividends.” RFF found the differences in annual aggregate welfare among the four options to be relative small ― less than 3 percent. Interestingly, returning revenue as lump-sum dividends offers a slightly more progressive income distribution than a labor tax shift.
More striking differences are revealed across the age spectrum: people who are now too young to vote would benefit most from a carbon tax used to fund deficit reduction, according to RFF. The authors conclude: “[E]nacting such a policy [a carbon tax used to pay down the deficit] will be politically difficult unless current generations are altruistic” enough to act now to curb global warming and to pay down deficits, both of whose impacts will be greatest on the young. That’s an understatement.
07/7/2013 by James Handley
Not all carbon tax proposals are equal. Some would raise the level of the tax robustly enough over time to transform the energy supply and the ways everyone uses energy. Others envision miniature carbon taxes meant to generate revenue targeted for specific purposes. The Breakthrough Institute (BTI) advocates a miniature version: a $5/T CO2 tax to fund energy R&D that they insist will unleash cheap new sources of low-carbon energy to undercut fossil fuels. In contrast, the Carbon Tax Center finds that a briskly-rising economy-wide carbon price is needed for energy efficiency and renewable energy to displace the vast bulk of fossil fuels by mid-century. An excellent example is the measure proposed by Rep. John B. Larson (D-CT) in 2009 for a CO2 tax starting at $15/T, rising to more than $100/T over a decade, which we estimate would reduce U.S. CO2 emissions by one-third in that time.
The “robust” carbon tax met the “miniature” carbon tax at the BTI meeting last month in Sausalito, CA. James Handley, the Carbon Tax Center’s Washington DC representative, discussed his paper, “Reaffirming the Case for a Briskly Rising Carbon Tax,” which responded to BTI’s draft (and not yet citable) paper, “Costs and Complexities of Carbon Pricing.” The BTI paper asserts that only a fully revenue-neutral carbon tax set at a socially-optimal price with full participation by other nations would be more effective than subsidies and regulations at reducing CO2 emissions. The paper points to the ineffectiveness of the low carbon prices induced by the European Union’s Emissions Trading Scheme and argues that the public won’t tolerate carbon prices rising to levels high enough to reduce emissions substantially. Because modest carbon taxes can’t deliver the needed emissions reductions, BTI argues that the carbon tax to shoot for is a small one funding targeted R&D that will unleash a technology breakthrough leading to abundant, cheap energy. (BTI supports “fourth generation” nuclear power, using fast breeder reactors as touted in the film “Pandora’s Promise.”)
In rebuttal, Handley argued that taxing CO2 pollution instead of productive activity such as work and investment is a climate policy offering enormous climate benefits at little or no cost. Successful carbon taxes in British Columbia and Sweden are proof that voters can be persuaded to embrace carbon taxes that reduce taxes on individual and business income, retail sales and payrolls. These taxes, along with Australia’s new carbon tax, demonstrate that well-designed carbon taxes can effectively reduce emissions quickly, at minimal cost, without stunting economic growth.
Handley further noted that the effectiveness of BTI’s proposal hinges on the ability (and willingness) of Congress and federal agencies to identify and fund nascent low-carbon energy technologies capable of breaking fossil fuels’ economic dominance. Yet a steadily-rising economy-wide carbon price can perform this task far more broadly and effectively, Handley argued, by encouraging every energy supplier and every energy user to look for ways to reduce emissions, spurring innovation across the entire spectrum of energy supply and use. He noted that diverting carbon tax revenues to R&D would preclude using carbon tax revenue to reduce other taxes, thus undercutting political support.
03/15/2013 by James Handley
“Viva Emissions Trading!” could have been the title for the World Bank’s oddly anachronistic, “Pricing Carbon To Achieve Mitigation” event at the bank’s Washington, DC headquarters Wednesday. Fortunately, after nearly two hours of genuflection at the altar of emissions-trading, Min Zhu, Deputy Managing Director of the International Monetary Fund, took to the podium to commit the apostasy of calling for simple carbon taxes.
The opening panel featured officials from South Africa, South Korea, and China extolling “market mechanisms,” especially trading. In almost apologetic terms, the South African official described his nation’s carbon tax, assuring the audience that South Africa doesn’t intend to be left out of carbon markets. The South Korean official’s presentation indicated that the country has allocated 100% of carbon allowances in the first phase of its trading system but hopes to begin auctioning a small percentage of allowances in later phases, which will garner revenue. The Chinese official deflected a question about news reports that his country plans a carbon tax, emphasizing that China is establishing emissions trading so it can link with the European Union’s Emissions Trading Scheme (ETS). But, he said, carbon taxes are an “interesting alternative” that could play a role in the future in some sectors.
In a later panel, an EU official trotted out the oft-repeated ETS “success story” that always seems to overlook its problematic volatility followed by extreme price decline. She admitted the ETS might need “some adjustments.” Finally, after three panels of babble about linked carbon markets, offsets, monitoring, reporting, verification, etc., it was Min Zhu’s turn to deliver the closing remarks.
The IMF Deputy Managing Director struck a welcome new note, suggesting that the EU’s “collapsing carbon price” might be “cause for concern” and calling instead for a “crystal-clear, stable, credible carbon price” across sectors. Zhu recommended adding price ceilings and floors to emissions trading systems in order dampen volatility. He praised the IMF’s new compilation by Ian Parry et al., “Fiscal Policy to Mitigate Climate Change,” which emphasizes the revenue potential of simple, direct carbon taxes.
Zhu also urged policy-makers to pursue broad, inclusive carbon pricing with consistent price signals and to refrain from allocating allowances, effectively giving away revenue. Continuing his revenue theme, Zhu closed by suggesting systematic review and overhaul of national tax policies to add environmental taxes, especially carbon taxes.
Thank goodness someone near the top of global financial governance recognizes the importance of simplicity and transparency in climate policy.
01/29/2013 by James Handley
Two new autopsies of the failed 2008-10 effort to pass comprehensive climate legislation are deservedly generating buzz: the commentary includes posts in Grist by David Roberts (3 posts), Bill McKibben, Eric Pooley, and Joe Romm, in Time by Michael Grunwald and a Washington Post interview by Brad Plumer.
Hiding The Price Allowed Heritage Foundation To Exaggerate the Cost of Cap & Trade
The heftier of the two reports, weighing in at 145 pages, is by Harvard Poli Sci Professor Theda Skocpol. Her exhaustive but riveting narrative, “Countering Extremism, Engaging Americans in the Fight against Global Warming,” is a pointed rebuke to complaints by Big Green leaders like EDF’s Fred Krupp and NRDC’s Dan Lashof that President Obama’s decision to tee up health care reform first spelled doom for cap-and-trade legislation.
Skocpol contrasts the extensive grassroots network built to educate the public and support health care reform with green groups’ obsessive insider-dealing to win backing for cap-and-trade from fossil fuel interests. She cites a May 2009 Rasmussen poll conducted on the eve of the House vote on the 1400-page Waxman-Markey cap-and-trade bill showing that more than three-quarters of respondents had no idea what cap-and-trade meant. [Skocpol, p 53].
Skocpol concludes that:
[G]lobal warming reformers must mobilize broad, popularly rooted support for carbon-capping measures that have something concrete to offer not just to big corporate players, but also to ordinary American citizens and to local and state groups. Another legislative effort based on insider bargains and pay-offs is not likely to be successful – given conservative capacities to mobilize grassroots opposition, plus the level of distrust that most Americans now have about complex insider bargains in Washington DC. [p 113]
The other post-mortem, “The Too Polite Revolution, Why the Recent Campaign to Pass Comprehensive Climate Legislation in the United States Failed,” is by journalists Petra Bartosiewicz and Marissa Miley. Their report offers juicy details from the months of heated back-room negotiations by the Big Green-led US Climate Action Partnership (USCAP) to win support from the polluters whose emissions would be “capped” by Waxman-Markey. Like Skocpol, who relied heavily on Bartosiewicz and Miley’s interviews and research, they urge greens who want effective climate policy to start by building, or tapping into, a strong grassroots movement.
Both reports applaud legislation proposed in 2009 by Senators Cantwell (D-WA) and Collins (R-ME) to “cap” U.S. CO2 emissions by requiring polluters to bid on a declining supply of pollution allowances. But unlike Waxman-Markey’s attempt to pay off polluters, Cantwell-Collins would initially return 75% of auction revenue to households in the form of pro rata monthly “dividend” payments. (The fraction of revenue returned to households would decline as the “cap” tightened.) Skocpol concludes that, in contrast to cap-and-trade, “Citizens could understand and trust this policy.” [p 125]
Skocpol acknowledges the overwhelming preference of economists for an even more transparent and straightforward approach: a straight tax on carbon pollution. Yet she nevertheless dismisses efforts to include a carbon tax in fiscal and tax reform as the “latest quixotic DC quest for an insider bargain on climate change.” [p 113] She points out that, immediately following Obama’s re-election, the entire House GOP leadership signed the “no climate tax pledge” of the Koch brothers-backed Americans for Prosperity. She concedes that a carbon tax might find its way into fiscal or tax reform legislation; but citing Congress’ failure in 1993 to enact a “BTU tax” (which broke down in squabbling over exemptions), she concludes that a carbon tax would pass only if:
a lot of moderate Congressional Democrats got exceptions for their favorite regional fossil-fuel industries and were convinced that revenues from this tax are vital to reducing the deficit without eliminating or squeezing other federal programs they want to preserve… [I]f a carbon tax happens this way, it will look corrupt and not be very understandable to most ordinary American citizens – and so it will be easily ridiculed and demonized by rightwing advocates and media figures who have already demonstrated their ability to rouse populist opposition and stoke public fears about complex, opaque insider measures. [p 112]
At this point, you may be tempted to tear up Skocpol’s paper in frustration. We certainly were. In dismissing prospects for building a carbon tax into comprehensive tax reform, Skocpol has rejected the possibility that a transparent, understandable proposal can spark the public education and movement-building that she herself forcefully advocates. In contrast to the opacity and complexity of cap-and-trade – a policy practically built for back-room dealing – a simple, transparent economy-wide tax on carbon pollution can be explained as a way to offset fossil fuels’ artificial advantage over energy efficiency and renewable energy. Moreover, if the alternative to a carbon tax is higher taxes on productive activity such as work and investment, might not the public, and even some Republicans, be supportive?
Skocpol is also critical of efforts (by NRDC and others) to bypass Congress via EPA regulation of greenhouse gases. While we at the Carbon Tax Center have pointed out the limited effectiveness of such regulatory steps, she points out that they also face substantial political obstacles:
Some anti-global warming reformers fantasize that the second Obama administration can act freely through the EPA without worrying about Congress or national popular support… Even bold regulatory steps by the EPA – such as using its authority under the Clean Air Act to crack down on existing coal-fired electric-generating plants – are likely to be blocked or undercut as long as GOP radicals have major leverage in Congress.
Where do these bleak diagnoses leave us? Still reeling from Hurricane Sandy, the not-too-distant memory of Hurricane Katrina, 332 consecutive months of above-average global temperatures, and a worldwide pattern of chaotic, extreme weather, voters seem to be refocusing on global warming. President Obama placed climate high on his inaugural agenda, but within days press secretary Jay Carney repeated his post-election disclaimer: the Administration has no intention of proposing a carbon tax. The Sierra Club and 350.org are organizing (yet another) climate demonstration in Washington DC on February 17 to demand Obama disapprove the Keystone XL pipeline. Yet they don’t demand a tax on carbon pollution but instead resort to the fuzzy euphemism for cap-and-trade, “put a price on carbon.”
Both Skocpol’s and Bartosiewicz & Miley’s post-mortems conclude that cap-and-trade was killed by a collision with intransigent Republicans, abetted by the folly of Big Green’s attempt to buy off polluters. They call for a broad movement to support a cap on greenhouse gas emissions and suggest it could be built on distribution of auction revenue to the public via a “dividend.” But their autopsies overlook another insidious poison: the duplicity inherent in advocating an emissions “cap” while denying that unless revenue return is included in the legislation, cap-and-trade is a hidden, volatile and regressive tax collected and securitized by Wall Street traders.
The real lesson of the Waxman-Markey debacle is that cutting deals with polluters while hiding the price doesn’t work. How about, instead, a genuine public education and organizing effort with a full-throated call from the environmental community for a substantial, briskly-rising tax on carbon pollution, with no exemptions?