Environmental Economics

Editorializing Europe's carbon market

NY Times:

The European Union became a pioneer in tackling climate change by starting the first major cap-and-trade system designed to reduce carbon-dioxide emissions by putting a price on them. But analysts are increasingly worried that technical mistakes, Europe’s prolonged recession and the failure of policy makers to strengthen the system is undermining its effectiveness.

Like all such systems, Europe’s program caps the overall emissions that power plants, steel mills and other industries can put into atmosphere. The cap, which is regulated through permits, declines every year, forcing businesses to become more efficient or buy permits from another firm or on the open market.

Recently, the price of permits has collapsed to less than 4 euros (around $5.25) per ton of carbon, down from nearly 30 euros in 2008. This is troubling because the low price discourages emitters investing in climate-friendly technologies and fuels. ...

In addition to its trading scheme, Europe has made real progress in dealing with climate change through policies encouraging energy efficiency and renewable sources of power like wind and solar. But nothing would do more to drive down emissions than putting a meaningful price on them, either through a carbon tax or through a cap-and-trade system. Europe’s job is to put that system on a sounder footing to make sure it doesn’t undo the real progress it has made.

I like the way the editorial ends, with a carbon tax and cap-and-trade as substitutes with plusses and minuses. And actually, a quick review of the regulating prices vs. quantities literature suggests that hybrid approaches might be preferred (e.g., cap-and-trade with a trigger price). It is only the naive who think a carbon tax would magically avoid implementation problems. And note, permit auctions can generate government revenue. 

Call me a faction

David Warsh:

... last week ... former Secretary of State George Shultz and Nobel Laureate Gary Becker, of the University of Chicago, proposed to replace the bewildering  patchwork of existing energy taxes and subsidies (think ethanol!) that has grown up over the years with a single carbon tax levied on all forms of energy, with the idea of “leveling the playing field” among fuels of all sorts, by charging for the amount of atmospheric carbon they emit.

Instead of putting a huge new source of funds at the government’s disposal, however, Shultz and Becker say that the measure should be “revenue neutral,” meaning that whatever sums are realized beyond what the government currently nets should be paid into an account held separate from all the rest, and earmarked to be returned to individual taxpayers.  The aim would be to curb greenhouse gas emissions, nothing more. ...

The real problem has to do with how the issue is to be framed.  Many factions, conservative and liberal alike, see carbon taxation as a means to the end of dealing with US budget problems – as a new source of revenues ...

What is this "huge new source of funds" that would be "at the government’s disposal"? Is this sort of like the "huge new source of funds" (i.e., government budget surplus) that emerged around the turn of the century? The surplus that we debated about what to do with? And then decided to both cut taxes and increase government spending (keeping the bond market liquid) and then the surplus went away?

Oh! That "huge new source of funds"!

In terms of microeconomic efficiency, a revenue neutral carbon tax is appealing because it replaces an inefficient tax on something good (labor) with an efficient tax on something bad (pollution). So, if all we care about is efficiency then revenue neutrality is great. But if we also care about the level of government debt we might consider a carbon tax that is less than revenue neutral. 

I spit the bait*

Some members of Congress thought that the public would know a bit about how to estimate the social cost of carbon ignoring the vast amount of work that the EPA has been doing (and public funds expended in doing so). I decided not to submit formal comments (an easy decision since it involved zero effort) by April 12 but I did think some more about the questions raised. In terms of #1 and #2, see my SCC link above. In terms of #3, why are we considering returning revenue to the American people? Isn't the government spending more than tax revenue right now? In terms of #4, whatever the federal government does will be inadequate so why not let the states have their fun?

*I feel very stupid** for thinking that a request for public comments was sincere.

**Very, very stupid.

Stand-Up Economist: "If carbon taxes are so great... "

Yoram Bauman:

A good question on Friday from a student at Westminster College:

If revenue-neutral carbon taxes are such a great idea, why has only British Columbia adopted this policy?

I gave what I thought was a decent answer in class, but wanted to put some more thoughts down in writing:

1) People prefer the devil they know to the devil they don’t. ...

2) People don’t (yet) accept that climate change is a serious problem. ...

3) Economists think about the world differently than “normal people”. ...

4) There will be winners and losers. ...

Go read the Standupeconomist.com to get the details.

Me? I think that carbon taxes are a great way to raise government revenue too (especially with a large and growing government debt). So, why hasn't anyone adopted this idea? As far as I can tell there are no good reasons. Here are some bad reasons:

1. Because people like to spend borrowed money
2. Because people would rather not repay borrowed money
3. Some politicians have convinced the public that a tax is a bad thing
4. Some politicians have convinced the public that everyone other than oneself is on the government dole and those government benefits should be cut

The Stand-Up Economist makes fun of anti-carbon tax economics

Yoram Bauman:

The National Association of Manufacturers just released a scathing report on carbon taxes (the full report was produced—unfortunately—with the assistance of my friends at NERA), but in reality all their analysis shows is that paying down the Federal debt is the poison pill of economic policy: as long as the economy is struggling to recover, connecting debt payments to any policy will make that policy look terrible.

In other words, it’s a recipe for cooking the books on carbon taxes:

1. Pre-heat the oven with debt-crisis rhetoric. The interest rate for Federal borrowing is incredibly low, but don’t let that stop you from arguing that “[debt reduction] is appealing because this could reduce the interest rate for Federal borrowing”.
2. Mix carbon taxes with debt reduction and tax cuts. Make sure to front-load the debt reduction: “Until 2023, all of the net carbon tax revenues would be used to lower the Federal debt.” Worried that this goes against what just about any economist would recommend at a time when “families [are] struggling to get by as the national unemployment rate hovers just under 8 percent” (emphasis in original)? Simply add a caveat: “We [at NERA] make no suggestion that this particular combination is desirable, politically likely, or that it will produce the best overall policy outcomes.”
3. Cook until burned. “A carbon tax would have a net negative effect on consumption, investment and jobs”.
4. Top with bittersweet glaze. “Factoring in lost revenue from reduced economic activity, the net revenue from a carbon tax available for deficit/debt reduction and lower tax rates is relatively small.” As an added bonus—call-back!—a weakened economy will presumably raise the interest rate for Federal borrowing, so what comes out of the oven will be perfectly circular.

Yum, yum… Boy, that’s rich!

via standupeconomist.com

Daily demand and supply: ethanol (i.e., theory of 17th best)

Don't be frightened when you get to the parts where it says "Congress set out to create" and "lawmakers assumed." This stuff happens all the time and we need to just get accustomed to it:

Nearly 10 percent of the nation’s ethanol plants have stopped production over the past year, in part because the drought that has ravaged much of the nation’s crops pushed commodity prices so high that ethanol has become too expensive to produce.

A dip in gasoline consumption has compounded the industry’s problem by reducing the demand for ethanol.

The situation has left the fate of dozens of ethanol plants hanging in the balance and has unsettled communities that once prospered from this biofuel. ...

Congress set out to create an ethanol industry that would produce enough to make up 10 percent of every gallon of gas pumped into a car, but the lawmakers assumed that demand for fuel would grow. Instead, it has shrunk to 8.7 million barrels a day from 9.7 million in 2007, said Larry Goldstein, an economist and a director of the Energy Policy Research Foundation. And with corporate average fuel economy rules now in place to double the number of miles that the average car gets per gallon by 2025, “you know we’re on a trend,” he added.

via www.nytimes.com

A single policy that would provide incentives for ethanol production AND increased fuel economy would be a carbon tax (or cap-and-trade).

Replace the sequester with a carbon tax

Thomas L. Friedman:

Shrinking the tax deduction for charity is on the table. Shrinking Social Security, Medicare and Medicaid for the poor are on the table. But a carbon tax that could close the deficit and clean the air, weaken petro-dictators, strengthen the dollar, drive clean-tech innovation and still leave some money to lower corporate and income taxes is off the table. So the solutions that are lose-lose and divisive are on the table, while the solution that is win-win-win-win-win — and has both liberal and conservative supporters — is off the table.

Writing in this newspaper in support of a carbon tax back in 2007, N. Gregory Mankiw, the Harvard economist, who was a senior adviser to President George W. Bush and to Mitt Romney, argued that “the idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them ‘Pigovian taxes.’ Using a Pigovian tax to address global warming is also an old idea. It was proposed as far back as 1992 by Martin S. Feldstein on the editorial page of The Wall Street Journal. ... Those vying for elected office, however, are reluctant to sign on to this agenda. Their political consultants are no fans of taxes, Pigovian or otherwise. Republican consultants advise using the word ‘tax’ only if followed immediately by the word ‘cut.’ Democratic consultants recommend the word ‘tax’ be followed by ‘on the rich.’ ” ...

According to the Center for Climate and Electricity Policy at the nonpartisan Resources for the Future, a tax of $25 per ton of carbon-dioxide emitted — through the combustion of fossil fuels used in electricity production, commercial and residential heating and transportation — “would raise approximately $125 billion annually.” This $125 billion “could allow federal personal income tax reductions of about 15 percent or corporate income tax reductions of about 70 percent, if all carbon tax revenues were used to replace current tax revenues. Alternatively, the federal deficit could be reduced by approximately $1.25 trillion over 10 years” — roughly what we are trying to do through the foolish sequester. Such a tax would add about 21 cents per gallon of gasoline and about 1.2 cents per kilowatt-hour of electricity. It could be phased in gradually as the economy improves.

via www.nytimes.com

Help design the US's new carbon tax!

Thanks to rjs for the pointer:

Today, Representative Henry A. Waxman, Senator Sheldon Whitehouse, Representative Earl Blumenauer, and Senator Brian Schatz released draft carbon-pricing legislation and solicited feedback on it from stakeholders and the public.  The legislation would establish the polluter pays principle for dangerous carbon pollution, requiring large emitters to pay for the pollution they emit.

The “discussion draft” released today contains a new and straightforward approach to putting a price on carbon pollution.  The nation’s largest polluters would have to pay a fee for each ton of pollution they release.  The legislation assigns responsibility for the assessment and collection of the carbon fees based upon the expertise that has already been developed by EPA and the Treasury Department.  Under the discussion draft, EPA’s database of reported emissions would determine the amount of pollution subject to the fee.  The Treasury Department would be responsible for the collection and handling of the fees. ...

The Members and Senators are soliciting comments on the discussion draft from stakeholders and the public.  Although comments on any aspect of the draft are welcome, the Lawmakers are specifically requesting feedback on the following questions:

1. What is the appropriate price per ton for polluters to pay?  The draft contains alternative prices of $15, $25, and $35 per ton for discussion purposes.
2. How much should the price per ton increase on an annual basis?  The draft contains a range of increases from 2% to 8% per year for discussion purposes.
3. What are the best ways to return the revenue to the American people?  The discussion draft proposes putting the revenue toward the following goals, and solicits comments on how to best accomplish each:  (1) mitigating energy costs for consumers, especially low-income consumers; (2) reducing the Federal deficit; (3) protecting jobs of workers at trade-vulnerable, energy intensive industries; (4) reducing the tax liability for individuals and businesses; and (5) investing in other activities to reduce carbon pollution and its effects.
4. How should the carbon fee program interact with state programs that address carbon pollution?

All comments are welcome and can be submitted by email to cutcarbon@mail.house.gov.  The Lawmakers are requesting that comments be submitted no later than April 12, 2013.

via www.whitehouse.senate.gov

Dang. I'll probably lose an afternoon working on my comments but here is the short version:

1. $25 per ton, isn't that the consensus estimate for the social cost of carbon?
2. the price per ton should rise at the rate of the social cost of carbon
3. some combination of (1) and (2) -- if the tax is set to be equal to the social cost of carbon then there is no need for further incentives (right?)
4. I haven't the foggiest ... to be continued.

Also, if you haven't thought of it yet, sending comments is a great activity for your environmental and resource economics students. I'll inform mine on Monday that they'll be doing this. 

A carbon tax in a congressional budget proposal?

From the Congressional Progressive Caucus "Back to Work" Budget (I love these Hollywood titles on legislative proposals!):

We can no longer afford to ignore our responsibility to future generations to address climate change before it is irreversible. The Back to Work Budget would impose on polluters a $25 per ton price on carbon dioxide (increasing at 5.6% a year), rebating 25% of all revenues as refundable credits to protect low income families. The Energy Information Administration found that a similar proposal would result in carbon emissions reductions of 26% below 2005 levels by 2020. This would go a long way toward setting the United States on a path to avoid increasingly extreme and destructive weather, particularly when combined with air pollution controls measures under the Clean Air Act and enhanced energy efficiency. 

The Economic Policy Institute says that:

Net of this rebate, carbon pricing would raise over $1.1 trillion of revenue over FY2014–2023.

What's not to like?

Question of the day

What would you do with additional tax revenues this week?

Jack Lew, the White House nominee for Treasury secretary, says President Obama’s second-term vow to confront climate change will not lead to proposals to tax carbon dioxide emissions.

“The administration has not proposed a carbon tax, nor is it planning to do so,” Lew said in written responses to Sen. Orrin Hatch (R-Utah), the top Republican on the Senate Finance Committee, which will vote on Lew’s nomination Tuesday.

Carbon taxes or fees are generating new interest among climate advocates and some liberal lawmakers, especially amid debates about how to curb the deficit and overhaul the tax code. ...

Hatch used his written questions to bash the idea of a carbon tax. He cited Obama’s vow in his second inaugural address to confront climate change, adding, “a carbon tax is one of the options that President Obama could pursue.”

“Given the enormous tax increase that would result from a carbon tax, how would you advise the president to use carbon tax revenues? What would your highest priorities be?” Hatch asked.

Lew declined to get into the idea, offering his one sentence vow and leaving it at that.

via thehill.com

The White House nominee for Treasury secretary apparently has no idea.