In defense of a carbon tax
Just before Thanksgiving, Grist political blogger David Roberts posted a sharp challenge to carbon-tax advocates, contending that we were, in effect, ascribing “magical” properties to carbon taxes. Roberts spelled out 10 drawbacks to carbon taxes, with this bottom line: Any carbon tax legislation that could make it through Congress would likely be feeble and regressive, and perhaps even counterproductive.
David is arguably the green community’s most astute blogger, particularly on environmental politics. His qualms about pushing for a U.S. carbon tax deserve to be taken seriously.
Read David’s original post. Here’s our point-by-point response. Let us know what you think.
Thank you, David, for elucidating your reservations about placing a carbon tax at the heart of U.S. climate policy.
Until now, your many Grist posts critiquing carbon taxes have focused on political infeasibility. Now you’ve presented your policy objections. Thanks for bringing your concerns out into the open.
No surprise: The Carbon Tax Center indeed views a U.S. carbon tax as the sine qua non of effective climate policy — provided it builds toward a substantial price that rises steadily and predictably over time. With a ramped-up tax, the initial carbon charge can be modest, giving businesses and families time to adapt, while still broadcasting a clear price signal to begin shifting millions of decisions toward less energy and emissions — big decisions that determine design of vehicles and transport and that set the pace and nature of investment in low- and non-carbon energy; as well as the full gamut of household-level decisions, many of which can’t and won’t be touched without a carbon tax. Almost as importantly, a robust carbon tax changes the culture by broadening the definition of pollution and valorizing conserving behaviors with monetary rewards.
Here are our counterpoints to your 10 points.
1. A carbon tax is conservative and progressive.
We don’t think of a carbon tax as a market mechanism; there’s no need to create a new market. It’s a price mechanism. Call it a market corrective if you wish, but the term “market” is both a misnomer and a turnoff for carbon tax adherents (actual and potential) who don’t identify with market ideology.
A carbon tax would correct existing markets that systematically under-reward virtually every action, every device, every innovation that reduces fossil fuel use because the prices of those fuels omit the costs of climate damage (not to mention most of the other harms from mining and burning coal, oil, and gas).
We don’t accept your suggestion that economists and policymakers need to “get the social cost of carbon right” in order to set a carbon tax. For one thing, no two economists will ever agree on that number. More importantly, every climate-aware person already lives with the knowledge that the social cost of carbon is enormous: The likely descent of human civilization into chaos in the face of wholesale climate disruption. Our job as advocates isn’t to fix the “right” price of carbon but to maximize the internalization of carbon’s societal costs into the prices of fossil fuels. (Could any politically viable carbon tax capture the entire social cost?)
And we emphatically reject the insinuation that we’re beholden to a purist belief that complementary measures to control and reduce carbon are irrelevant or harmful. Like you, we’re painfully aware of the multitude of ways in which market barriers like split incentives, inadequate information, and path-dependence impede innovation and buy-in for energy efficiency and renewables. Therefore, like you, we strongly support regulatory standards, especially those that address inefficiency in product and building design. Still, let’s be realistic about their limits:
- Standards and regs tend to motivate threshold-meeting behavior but no more.
- Standards and regs provide no incentive to conserve on usage — by right-sizing new homes, for example; or driving less; etc.
- We can’t expect standards and regs to address more than a subset of the thousands of types of machines, appliances, and vehicles that collectively consume the world’s energy.
- Standards don’t catch up to new products until they’ve been adopted widely — and have “locked in” energy waste (e.g., plug loads).
- Standards and regs generate zero revenue and thus can’t figure in tax or fiscal “deals.”
As you note, David, there is no pristine “free market” in energy or anything else. But so what? By itself a carbon tax won’t level the playing field, but it will lower the tilt. And as the tax rises, the tilt will diminish, allowing clean energy and a conservation ethic to compete with dirty energy and an ethic of waste.
2. “Revenue recycle” will help the tax to rise.
We think you’ve got the revenue matter backwards. Revenue treatment is important, of course, as befits any new tax that puts hundreds of billions a year in play. But rather than fund cleantech R&D and green infrastructure, we need to direct the revenue to support productive economic activity and offset the hit to poor and middle-income families’ disposable incomes. Doing so will help win the political buy-in to legislate periodic renewal of the annual rises in the tax that will drive the needed changes in behavior, infrastructure, and R&D far better than subsidies.
This is why we frame carbon tax revenue treatment in macroeconomic rather than energy-policy terms. (We say more about this at No. 3, next.)
3. “Revenue-neutral” helps keep the carbon tax rising.
Like many carbon tax advocates, though not all, we (Charles and James) personally have progressive perspectives. Outside the Carbon Tax Center we advocate for robust government investment in education, public transportation, health protection, housing, and a broad spectrum of social services and support nets. Yet we ardently want carbon taxes to be close to 100 percent revenue-neutral (with minor and transitory exceptions for assistance for displaced workers and communities), for two reasons:
First, as you have detailed in many posts over the years, it’s next to impossible politically to direct carbon tax revenues to “good things” (e.g., green tech, mass transit) without also opening the floodgates for bads like “clean” coal, next-generation reactor loan guarantees, and biofuel boondoggles. Better to hold the line and continue to fund R&D from established pots of money.
Second, the carbon tax is going to have to rise steeply and steadily over a long time period to provide strong, ongoing incentives to phase out and finish off fossil fuels. Returning essentially all of the revenues to American households — whether through reductions in taxes like payroll taxes that discourage hiring and are distributionally regressive, or monthly electronic “dividends,” or a combination — is essential to winning support for the rising carbon tax. Indeed, we want Americans to find these revenue return mechanisms so appealing that they will welcome ongoing rises in the carbon tax level so as to expand their size (and, ultimately, sustain them in the face of the declining carbon tax base as fossil fuel use dwindles, as we discuss in No. 6, below).
4. A strong enough carbon tax will indeed drive investment to clean energy.
We don’t dispute Mark Muro’s assertion in his “Carbon Tax Dreams” post that we’ll never usher in massive cleantech investment or otherwise shrink fossil fuel use and carbon emissions to near zero with just the price signals from a carbon tax that starts at a mere $15 to $20/ton and rises only 4 percent a year faster than inflation. The Carbon Tax Center’s carbon tax spreadsheet model [Excel] yields the same conclusion. So does a pocket calculator: Assuming 3 percent annual inflation, a tax rising 4 percent a year faster than inflation would take a decade to double in nominal terms, and almost two decades to double in real terms. That’s way too slow a ramp-up, considering that a carbon price of $40/ton of CO2 would add a mere 36 cents to a gallon of gasoline and 1.5 cents/kWh to the average U.S. retail electricity price.
We need a carbon tax that quickly gets to much higher rates than that. It doesn’t have to start like gangbusters; indeed, it shouldn’t, since families, businesses, and institutions all need (and deserve) time to adapt to the new reality of higher fuel and energy prices. A steady and steep ramp-up rate is far more important and beneficial than a high starting point.
These considerations make the ideal carbon tax close to that embodied in legislation introduced in 2009 by Rep. John Larson (D-Conn.). Larson’s carbon tax starts at $15/ton and rises each year by $10-$15, with the actual increment depending on whether emissions are being driven down fast enough. In the 10th year of a carbon tax, the CO2 price would be between $100 and $145 per ton of CO2 under the Larson bill, vs. $28-$37 per ton for Muro’s scenarios.
That threefold to fourfold difference in the respective 10th-year carbon price would start to narrow eventually, though not until the start of the fourth decade, in absolute terms — indicating how fundamentally different the Larson tax scenario is from Mark Muro’s. The corollary, David, is that while your boldfaced assertions that “pricing alone won’t generate enough [clean-energy] deployment to get us where we need to go” and “broad economy-wide pricing strategies alone induce only modest technology change and deployment” may well hold for the undersized and only gradually rising tax levels you cited in your post, they don’t necessarily apply to the kind of robust tax presented in Rep. Larson’s bill.
We do take seriously Frank Ackerman’s caveat in the paper you cited [PDF], that “Price incentives alone cannot be relied on to spark the creation of new low-carbon technologies.” But recall that Ackerman, writing in 2008, was in part responding to an IMF report [PDF] published earlier that year whose year-2100 climate “targets” could have come from the Koch brothers playbook: a CO2 concentration of 550 ppm, annual declines in emissions of only 0.6 percent till then, and a carbon tax starting at around $1/ton of CO2 and rising by just 67 cents a year. We suspect Ackerman might have a more sanguine view of the “market pull” of a carbon tax whose rate, like Larson’s, is a full order of magnitude greater than what the IMF envisioned.
Our bottom line, then, is that we don’t believe that a small carbon tax used for subsidies and/or R&D would provide anything close to the sustained broad market pull toward innovation that is required to address the climate crisis, and that could result from a substantial and briskly rising carbon tax. In our view, starting with as close to 100 percent revenue return as possible is the best way to build growing political will for a robust and effective carbon tax, i.e., one with sustained, predictable, and sizeable increases from each year to the next. There, the market pull (including long-term price expectations) should suffice to elicit cleantech innovation and revolution. In that case, however, “revenue return” is mandatory — ethically, to offset households’ higher energy costs, and politically, to forge and maintain the constituency to keep the tax level rising.
5. Tax regressivity is an anathema … but curable.
No argument here, David, though we spin this issue a bit differently. We agree that (i) putting revenue use aside, a carbon tax has a greater proportional impact as household income declines, and (ii) progressive revenue treatment such as a revenue swap on payroll taxes, or pro rata dividends, or low-income support, can mitigate and eliminate the regressivity.
The Carbon Tax Center insists on such progressive treatment, though we concede that a final bill may be less than scrupulous on this score. (We also question the extent to which Waxman-Markey would have solved this problem, but we’ll save that discussion for another time.)
6. The eventual decline in revenue is a non-problem.
“The fact that a carbon tax is intended to phase itself out over time,” as you put it well, David, belongs in the class of problems that at this juncture should matter only to extreme policy wonks. The Larson Bill, which we discussed under point No. 4 above, and which certainly falls on the “aggressive” end of the carbon tax rate spectrum, doesn’t reach max revenue until year 18, when the annual intake is projected to plateau at just under $800 billion. (Note: That figure, which is drawn from our modeling of the Larson bill assuming annual rises of $12.50/ton, may change with revisions to the model now underway.) Long before then, there should be ongoing discussions about how to replace that revenue stream as it slowly and predictably shrinks. Indeed, given the amounts in question, we would expect those discussions to be a central feature of public policy in future decades.
7. EPA regulation of climate pollution may not measure up to its regulation of public-health pollution.
This issue should be straightforward. Greens should hold the line on health-and-safety rules pertaining to the energy sector — emission limits governing pollutants like NOx and mercury (e.g., Mercury and Air Toxics Standards); mining and combustion waste (aka Coal Combustion Residuals); fugitive emissions like methane; and “macro” regs like the Cross-State Air Pollution Rule. But prospective EPA rules directed at CO2 emissions may be another matter.
Based on the authoritative 2011 paper [PDF] by Burtraw et al. for Resources for the Future, new EPA regs will at best reduce greenhouse gas emissions (GHGs) in 2020 by only 13 percent (vs. 2005). Further reductions would be harder to come by, given that “a regulatory approach is likely to lead to less innovation … than would occur under a flexible incentive-based program” such as a carbon tax. Moreover, unlike a carbon tax, GHG regulations would generate zero revenue.
Symbols matter, and EPA authority on public-health pollution is vital. But EPA regulation of CO2 may be less valuable than you presume, David. (That EPA uses a $26/ton social cost of carbon in its analyses doesn’t mean that its regulations would bring the same reductions as would result from a $26/ton price.)
8. A robust carbon tax will do far more for clean energy than direct subsidies.
See No. 4, above, for our argument that a strongly rising carbon tax will drive investment to clean energy. In the limited space available here, we add that phasing out clean-energy subsidies would build political momentum to get rid of subsidies for fossil fuels and other forms of dirty energy.
9. Certainty in emission reductions is overrated.
That “no one can be sure in advance how much [a carbon tax] will reduce emissions” may well be the number one canard about carbon taxes. After all, what’s the use of knowing now how fast emissions will shrink, when we know that they have to shrink as fast as possible, which means faster than any carbon tax and/or other possible measures can deliver?
The climate calamity is many orders of magnitude more dire and global than the acid rain problem. So can we please stop grafting the acid rain model onto climate? The declining sulfur cap in the 1990 Clean Air Act Amendments was intelligently tailored to estimates by limnologists of Northeast U.S. lakes’ remaining capacity to withstand acid rain emissions. But we’ve already overshot the 350 ppm target for climate sustainability; atmospheric CO2 is at 390 ppm and rising. There’s no safe level for CO2 emissions now or in the foreseeable future. Any target — 17 percent less by 2020, 40 percent less by 2030, 80 percent less by 2050 — is no more than a talisman.
What happens, you ask, if the carbon tax isn’t reducing emissions enough? In some proposals, the tax would rise automatically, in others Congress would have to raise it. But either way it’s crucial to structure revenue return so that a majority of Americans come out ahead and will back increases in the carbon tax rate. (See points Nos. 2 and 3, above.) Built-in, recurring increases will not only obviate the need to return to Congress constantly; they will instill transformative price signals in America’s energy systems, infrastructure, land use, and culture that, collectively, will move us from fossil fuels to clean energy.
10. Summation: Climate advocates’ job is to maximize political incentives for a robust carbon tax.
All political incentives push toward climate inaction, period, and not just toward a poorly designed carbon tax. We can either give up … or we can keep working to break the impasse — primarily by building support from below, but also by choosing policy strategically. Since giving up isn’t an option, let’s start by reviewing what we’ve established about carbon taxing thus far:
- Carbon taxing has potential appeal on both sides of the political aisle. (Point No. 1)
- “Revenue recycle” can build the constituency to enable the tax to rise. (Nos. 2 and 3)
- A high enough carbon tax will spur investment in clean energy, without subsidies. (Nos. 4 and 8)
- Tax regressivity is anathema, but curable. (No. 5)
- Eventual revenue decline isn’t a problem. (No. 6)
- EPA regulation of climate pollution isn’t in the same league as a serious carbon tax. (No. 7)
- Emission-reduction certainty is overrated. (No. 9)
To these assertions, let’s add this:
- The ballpark magnitude of revenue from a carbon tax is knowable in advance — giving a carbon tax salience in fiscal and tax reform.
Unlike revenue from selling tradeable emission permits, which would be subject to the extreme price volatility that has characterized every carbon cap-and-trade system, the revenue from a carbon tax is sufficiently predictable to serve as a building block for tax overhaul. (Lags in responding to the price signal make this particularly true in the tax’s initial years, which happen to be the most politically germane.)
Earlier, under point No. 4, we referenced the carbon tax proposed by Rep. John Larson, which our modeling [Excel] suggests would reduce U.S. emissions by 30 percent within a decade while stimulating employment and economic activity. The Larson bill also includes border tax adjustments to protect domestic energy-intensive industries and to nudge U.S. trading partners to enact their own carbon taxes, leading to a global carbon price.
The Larson bill could be said to be patterned on the British Columbia carbon tax, which went into effect in 2008 at a rate of roughly $9 per ton of CO2 and was incremented annually to its current (2012) level of approximately $27. On every criterion — climate, macroeconomic, distributional, political — the tax appears thus far to be a resounding success. Consider:
- British Columbia’s carbon tax funds reductions in payroll, income, sales, and corporate income taxes [PDF].
- British Columbia has experienced strong economic growth and reductions in CO2 emissions [PDF], both absolute and relative to the rest of Canada.
- The British Columbia political party that instituted the tax was retained in power in the next election.
To be sure, there are big differences between British Columbia and the 50 U.S. states, including hydro-rich B.C.’s effective exemption of electricity from its tax. Nevertheless, these lessons are ours for the taking: First, it may be better to square up to the political pain of raising the carbon price than to hide it; and second, a tax with transparent and ironclad revenue recycling can build the political appetite for raising the tax level to the point where deep carbon cuts actually take place.
In sum: A carbon tax isn’t the whole answer, yet a transparent, briskly rising carbon tax will spur the development of many answers large and small that add up to a cultural transformation. Taxing carbon aligns everyone on the side of reducing emissions as fast and as far as possible. In reach, transparency, and affordability, no other policy tool comes close.