Environmental Economics

Sightline Institute: The Future Is Carbon-Priced and the US is Getting Left Behind

The "conservative" carbon tax proposal seems like a long time ago:

A little over a year ago, 195 countries signed on to the historic Paris Climate Accord to limit global warming pollution. This year, the United States pointed a loaded gun at its own foot, and President Trump pulled the trigger, announcing he will withdraw from the agreement. But the rest of the world is moving ahead with carbon pricing programs that will give other countries a head start in the race to a clean energy economy. Notably, The United States’ neighbors to the north and south are adopting national carbon pricing programs in 2018, and the European Union and China are allying to become global leaders in the transition to a low-carbon economy. ...

In December 2015, 195 nations signed on to the Paris Climate Accord, agreeing to try to limit global warming to no more than 2 degrees—or maybe just 1.5 degrees!—celsius (3.6 or 2.7 degrees Fahrenheit, respectively). The signatory nations—accounting for more than 95 percent of the world’s GHG emissions—are drawing up plans, and many are already putting them into action.

Article 6 of the Paris Accord lays the groundwork for an international carbon pricing regime. Most countries want in: nearly 100 nations, accounting for 58 percent of global GHG emissions, submitted initial plans saying they are interested in participating in international carbon pricing to help them meet their pollution reduction goals.

Several are already implementing domestic or regional prices, as shown in the map above. Add an international program to existing progress, and a price could soon be in effect across much of the globe, covering about two-thirds of global emissions.

via www.sightline.org

"At what point do they start laughing at us as a country?" Er, now?

"Virginia governor calls for state carbon regulations"

Climate federalism:

Virginia Gov. Terry McAuliffe (D) signed an executive order on Tuesday directing regulators to formulate rules cracking down on electricity sector carbon emissions.

The order requires state officials to convene a working group on carbon emissions and issue a report by the end of the year on potential regulations to limit power plant greenhouse gases. 

Any final regulation, according to the order, should be “trading ready” in case the state decides to enter a regional carbon pollution trading program in the future. 

via thehill.com

Gov. McAuliffe is not up for reelection in 2017 but I read somewhere that another Democrat is likely to win. This makes me more optimistic that climate policy might survive the Trump Administration.

Message to enviros: chill on the carbon tax (and don't dismiss cap-and-trade so easily)

Charles Komanoff (of the Carbon Tax Center) at The Nation:

Carbon-tax haters can relax. The proposal for a national carbon tax released on February 8 by high-level Republicans, including über-GOP consigliere James Baker, isn’t going anywhere. Financially and ideologically, the American right is wedded to carbon fuels. Trumpism runs on and reeks of them. Predictably, not a single Republican in Congress, and no one in the White House, has uttered a single positive word about the new carbon-tax plan.

Nevertheless, the proposal’s intended audience may not be Beltway Republicans but rather those ordinary Americans, majorities in both parties, who say they want action on climate, and who therefore might yet figure in the political equation over climate policy. That group includes progressives. We should pay attention: Carbon taxes matter. ...

But progressives can’t just walk away from carbon taxes. Carbon taxes are the only policy tool that, by slashing demand in a rapid, predictable way, divests our economy from fossil fuels and enables governments, business, and consumers to make investments in the transition to clean energy. Carbon taxes also have the best chance of catching fire globally.

The carbon tax James Baker brought to the Trump White House on February 8 on behalf of the new Climate Leadership Council has a lot in common with I-732: The Council’s proposal is also avowedly revenue neutral. But rather than lowering an existing tax, it relies on a so-called tax-and-dividend model: As the state of Alaska does with oil revenues, revenues from the Council’s national carbon tax would be returned equally to all American households in quarterly “dividends” digitally deposited in Social Security accounts. The tax would start at $40 per ton of carbon dioxide.

Earmarking all of the revenue to these dividends creates the political will to raise the tax every year, since the dividends rise in tandem with the tax rate. Ramping up the tax by $5 a year would shrink the use of carbon fuels so drastically that, by my calculations, US carbon emissions in 2030 would be 40 percent less than they were in 2005 (a standard baseline year).

Government policy revolves around trade-offs, and on balance James Baker’s carbon tax is worth supporting.

Yet this progress comes with a catch. The council would phase out much of the Environmental Protection Agency’s regulatory authority over greenhouse gases and would outright repeal President Obama’s Clean Power Plan to cut emissions from electricity generation. It would also immunize fossil-fuel companies from lawsuits for damages done by their products—lawsuits such as those bound to arise from the revelations that ExxonMobil and other companies knew for decades about the climate damages their products cause, and lied about it.

But government policy revolves around trade-offs, and on balance the council’s carbon tax is worth supporting. After all, well over 80 percent of the Clean Power Plan’s targeted reductions for 2030 were already achieved by the end of 2016. Thus trading away the Clean Power Plan for a tax that could scour fossil fuels from the entire economy is like swapping an aging ballplayer for the next superstar. ...

With Republicans tightly lashed to climate denial, the value of Baker’s carbon-tax proposal may be less as a gateway to legislation and more as a spur for progressives and other citizens to take a clear look at carbon pricing.

I agree that "progressives" need to get on board the carbon tax train. One hang up might be labeling this as a "conservative" approach. I'm not sure why this is being labeled a "conservative" carbon tax. If there is anything conservatives don't like these days, it is higher taxes. The "conservative" proposal for a carbon tax used to include revenue-neutral tax recycling -- lowering income taxes with an equal amount of carbon taxes raised. Now "conservatives" want to give the money back to the public as dividends. I guess both of these options differ from the "progressive" approach to the government keeping the revenue. Whatever, I don't think the ideological labels are helpful. 

One big quibble (er, a big quibble is probably not a quibble, it is more like a beef): "Carbon taxes are [not] the only policy tool that, by slashing demand in a rapid, predictable way, divests our economy from fossil fuels and enables governments, business, and consumers to make investments in the transition to clean energy." I added the bracketed term because cap-and-trade could do the exact same thing.

The Carbon Tax Center has six objections to cap-and-trade. The style is to compared an idealized textbook carbon tax with the sort of cap-and-trade that might actually be put in place by Congress (e.g., Waxman-Markey):  

1. Whereas carbon taxes lend predictability to energy prices, cap-and-trade systems aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
2. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we don’t have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
3. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
4. Carbon taxes aren’t easily subject to manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
5. Carbon taxes address emissions of carbon from every sector, whereas some cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.
6. Carbon tax revenues would most likely be returned to the public through dividends or progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.

I think the first five of these are easily debunked:

1. A price collar can limit the carbon permit price volatility. 
2. This is an assertion that assumes a carbon tax would not have lengthy negotiations. 
3. Markets are not all that difficult to understand and I need to see some empirical evidence that transparent and easily understandable leads to increased public support. 
4. I would predict that special interests would make try to make sure that there are loopholes so that they don't pay the flat tax rate. It is a bit naive to think otherwise. 
5. Why can't cap-and-trade cover every sector too? Answer: it can. 

Number 6 takes a little more discussion. Carbon permits in a cap-and-trade system can be auctioned off to collect just as much revenue as a carbon tax. I'm not sure why you would choose cap-and-trade over a carbon tax with full permit auctions since there would be no trading as firms would bid up to their marginal abatement cost. Cap-and-trade with freely distributed permits would provide polluters with an asset. Relatively clean firms will make money as they sell their permits. I'm not sure why the always-evil "lawyers and consultants" will make more money off a real-world cap-and-trade plan than a real world carbon tax. 

To summarize, two points:

1. The carbon tax with dividends is a great proposal. 
2. The cap-and-trade option should not be dismissed as easily as some would like to dismiss it.

If a conference is cancelled does that mean the climate is not changing?

Strategic retreat or minimizing cost hassle?

With little warning or explanation, the Centers for Disease Control and Prevention recently canceled a major climate change conference that had been scheduled for next month in Atlanta.

The Climate and Health Summit, which had been in the works for months, was intended as a chance for public health officials around the country to learn more about the mounting evidence of the risks to human health posed by the changing climate. But CDC officials abruptly canceled the conference before President Trump’s inauguration, sending a terse email on Jan. 9 to those who had been scheduled to speak at the event. The message did not explain the reason behind the decision.

“Unfortunately, we are unable to hold the Summit in February 2017,” CDC officials wrote, adding that the agency is “currently exploring” whether it could reschedule the event later in the year.

In a statement on Monday, the CDC did not offer any further explanation about the reasons for the cancellation, which was first reported by E&E News. The agency said only that it began notifying registered participants on Dec. 22 that the meeting had been postponed. It also said it was considering options for rescheduling the even “while considering budget priorities for the fiscal year 2017.” Officials noted the “potential overlap” with an American Public Health Association conference planned on the same topic later this year.

APHA’s executive director, Georges Benjamin — who was scheduled to be a keynote speaker at the CDC summit next month — said agency officials decided to preemptively call off the event, rather than risk running afoul of an incoming president who has repeatedly called climate change a “hoax” and has nominated climate change skeptics to his Cabinet.

“They ran it up the flagpole and realized that it was so close to the inauguration, the chances of it being canceled were pretty real with the administration that was coming in,” said Benjamin, whose organization was one of the summit’s promoters. “Some might argue they should have said, ‘We’re going to do this and make them tell us no.’ But that was the decision they made. We should think of this as a strategic retreat.”

Just trying to survive the first wave of shock and awe so we can get back to economics.

"A Curious Plan to Fight Climate Change"

Curious and Curiouser:

When Patriot filed for bankruptcy in 2015 — its second time in three years — environmentalists and regulators were prepared for the company to figure out ways to shunt liabilities and maximize returns. But no one could have envisioned what happened next.

Patriot handed over millions of dollars of environmental obligations to a nonprofit company run by a man named Tom Clarke, who owned a chain of nursing homes and a tourist attraction that had fallen behind on its bills. Until that day in April, Mr. Clarke, 61, had never been in a coal mine.

Patriot sold not only the troubled Federal mine to Mr. Clarke, but also several other mines that were no longer in operation, including a sprawling surface mine carved from the top of a mountain in southern West Virginia. Mr. Clarke’s new company agreed to clean up the shuttered mines and reclaim the land that had been ravaged.

As part of the deal, the miners’ union invested $10 million in the Federal mine operation, which was supposed to keep producing coal for Mr. Clarke to sell. But the mine has struggled from low coal prices. ...

Why then, would someone like Mr. Clarke want to take over a troubled mine and the environmental obligations that Patriot Coal was seeking to get rid of? As improbable as it may seem, Mr. Clarke said the Patriot deal had played to his advantage — helping start his grand plan to remake coal mining into a greener industry.

He is not only reclaiming Patriot’s mines that are no longer in use. He has come up with a model, he said, for how the industry can keep producing coal, while reducing its impact on the climate.

The plan involves creating pollution credits by planting or preserving trees around the world to offset the carbon emitted from burning coal. For every ton of coal he sells, Mr. Clarke attaches some of the credits.

Mr. Clarke has had trouble, however, persuading buyers of his coal, like utilities and steel companies, to pay extra for the credits.

Mr. Clarke hoped electric utilities would be able to count his green-coal credits toward the carbon-emissions goals that the Obama administration has set for states in its Clean Power Plan, now before a federal court. But administration officials have effectively ruled that out. ...

Ultimately, Mr. Clarke hopes to offset all of the expected emissions from the coal he is producing with pollution credits. But right now, he is offsetting only 10 percent. That worries environmentalists. “It’s all I can afford,” he said.

Mr. Clarke says he has been absorbing the costs personally until he can persuade utilities and steel mills to agree to pay for credits. He is hoping that states, led by West Virginia, will allow utilities to pass through the costs of his credits to ratepayers. Those discussions are continuing, he said.

via www.nytimes.com

I think the economics is clear. A climate policy based on voluntary contributions (in this case green washing by electric utilities) will not provide enough funding to achieve the efficient amount of pollution reduction (or help Mr. Clarke make money). A carbon tax (or cap-and-trade) with an offset provision would provide the right incentives.

 

Remember when climate cap-and-trade was bipartisan?

I do and was reminded again this week:

Eight years ago, when Mr. Obama ran for president against Senator John McCain of Arizona, both men had essentially the same position on global warming: It is caused by humans, and Congress should enact legislation to cap greenhouse gas emissions and force polluters to buy and trade permits that would slowly lower overall emissions of climate-warming gases.

But in the summer of 2010, a cap-and-trade bill Mr. Obama had tried to push through Congress failed, blocked by senators from both parties. ...

By the fall of 2010, Tea Party “super PACs” supported by the billionaire brothers Charles G. and David H. Koch had seized on cap-and-trade as a political weapon, with attacks that helped Republicans take control of the House.

Polls showed that few Americans thought of climate change as a high public policy priority, and the percentage of voters who accepted the reality that it was caused by humans had tumbled.

In fact, some Republicans, including Senator Lamar Alexander of Tennessee, were willing to go forward with a more limited climate bill that would have restricted emissions only from power plants. But the president’s own party would not unify even around that, with Democrats from industrial and coal states digging in against him. ...

via www.nytimes.com

"Tax carbon, California — the rest of the nation will thank you"

Michael Wara, Adele Morris and Jerry Taylor:

California’s cap-and-trade program to restrict greenhouse gas emissions has hit a major political roadblock. Extending the current program beyond its 2020 expiration most likely requires new action on the part of the Legislature, and majority support looks dubious. And even a majority might not be enough. Many legal and policy analysts believe the state's cap-and-trade regime is functionally a tax, and that reauthorizing and extending it requires a two-thirds majority vote of legislators or voters. ...

That uncertainty depressed the emissions allowance market that defines the cap-and-trade program. Emissions are capped, and emitters need to purchase enough permits from a state-run auction or on the secondary market to cover their emissions. In the most recent auction of these permits, California sold only 11% of the available supply. The lack of demand to some degree showed that emissions were being successfully capped, but it also called into question the whole scheme and raised much less money for “green” projects than expected. On Aug. 16, the state will hold another allowance auction whose results are unlikely to be much better.

Cap and trade, as even this simplified description demonstrates, is a complex program. If California must pass new legislation with a two-thirds majority to extend its climate efforts anyway, policymakers should consider replacing it with a simple straight-up carbon tax. It would provide even more powerful market signals to encourage emissions reductions, serve broader fiscal purposes and thereby make for a better model for federal legislation.

A tax is simpler than cap and trade because it doesn’t involve allowance auctions, registries to keep track of who can sell and who must buy, market monitoring or carbon offsets. Emitters just pay a predictable (and gradually rising) fee for each ton of carbon dioxide they emit, not unlike the tax on a pack of cigarettes. Even a modest tax is likely to be more environmentally effective than the current approach because it is a direct and predictable incentive to lower emissions and use cleaner technology. Under cap and trade, California’s other clean energy regulations do much of the work to prod emitters to meet the cap; the trading system just picks up the slack. ...

Cap and trade has lowered emissions in California and it’s still a popular policy for many, but in Congress, it's increasingly viewed as complex, subject to manipulation and giveaways, and as an engine for the expansion of government. By contrast, a tax strategy is gaining traction.

Although carbon tax bills introduced by Democrats haven’t yet attracted Republican support, a number of Republicans express off-the-record openness to a deal that taxes carbon and also supplants EPA regulations, reduces other taxes and offsets impacts on low-income citizens, for example via expansions in the earned income tax credit or targeted rebates. But those Republicans also fear the political consequences of stepping forward before the right political moment. California’s leadership could help foster that moment.

via www.latimes.com

Ah, the "right political moment." 

Why are carbon prices so low?

Meredith Fowlie (Time to unleash the carbon markets):

This preference for using prescriptive policies –rather than market mechanisms- to coordinate abatement helps explain why carbon prices are so low.   Some simple graphs summarize the basics behind this cause and effect.

In the cartoon graph below, each colored block represents a different abatement activity (e.g. coal-to-gas fuel switching, renewable energy investments,  energy  efficiency improvements, etc.). Think Sesame Street meets the McKinsey curve. The width of the block measures achievable emissions reductions. The height of the blocks measures the cost per ton of emissions reduced.

In this cartoon cap-and-trade story, suppose baseline emissions are 200 and policy makers are seeking a 25% reduction. If we rely entirely on a permit market to get us there, we’d allocate 150 permits and let the market figure out where the 50 units of abatement will come from. An efficient market would drive investment in  the lowest cost options:  A  + B + 1/2 C. The total abatement cost incurred to meet the target would be  (20 x $10) + (20 x $20) + (10X$50) = $1100. The market clearing price (and the marginal abatement cost/ton) would be $50.

Now imagine that, in addition to the permit market, complimentary measures are introduced to mandate deployment of options D  and E.  These mandates take us 80% of the way towards meeting the emissions target.  The role of the carbon market has been seriously diminished –  we need only  10 more units of abatement to hit the target.

Under this scenario, the carbon market will incentivize investment in 10 units of A. The permit price drops to $10.  The total cost of meeting the emissions  target rises to  10 x $10 + 20 x $100 + 20 x $150 = $5100. And we wring our hands about low carbon prices and broken carbon markets.

Of course, this cartoon picture omits lots of real-world complexities (see this important EI paper for a more detailed analysis of California’s abatement supply and allowance demand). But it illustrates two real-world considerations. First, when complementary measures mandate relatively expensive abatement options, the carbon price we observe in the market will not reflect the marginal cost of reducing emissions. Second, a reliance on complementary measures to reduce emissions can significantly drive up the costs of hitting a given emissions target.

In California and in Europe, there is growing evidence that low allowance prices in the carbon market belie much higher abatement costs associated with complimentary policies.  For example, this paper estimates that the California Solar Initiative delivered emissions reductions at a cost of $130 – $196 per metric ton of CO2.  California’s  LCFS credit price (which reflects the marginal incentive to reduce a ton of MCO2e)  is currently averaging around $120 per metric ton CO2. In Europe, researchers estimate that the implicit costs of renewable energy targets per metric ton of CO2 are on the order of hundreds of euros for solar (and wind in some locations).

Urban Dictionary word of the day: Behaving British

Definition:

The act of doing something you know you'll regret immediately after.

 

"I always knew it was a terrible idea to vote 'leave', I guess I was just behaving British."

And seriously, how will this affect the EU ETS? Did they ever think of that? No, the big stupidheads. 

 

The Conservative Bias in Economics?

Mark Thoma on "the conservative bias in economics":

I have a new column:

Yes, Nick Kristof, There Is a Conservative Bias in Economics: Nicholas Kristof recent reignited the debate over liberal bias in academia with his claim that “universities risk becoming liberal echo chambers and hostile environments for conservatives.” He does single out my profession, economics, as being better than most social science departments in representing conservative viewpoints: 

“Economists remain influential. I wonder if that isn’t partly because there is a critical mass of Republican economists who battle the Democratic economists and thus tether the discipline to the American mainstream.” 

But the extent to which conservative ideology is represented within the profession is much larger than a simple tally of the number of conservatives versus liberals indicates. ...

via economistsview.typepad.com

The article is mainly about macroeconomics but with a few minor edits it works just fine here. Here is some more at the Fiscal Times with my edits in [brackets] (except for the [who] in paragraph 4):

The great majority of economists, Democrats and Republicans alike, believe in the ability of markets to perform the “magic” of coordinating the desires and productive activity of millions and millions of people without the need for a central authority to guide them, and to provide the correct incentives for innovative, robust economic growth. Thus, in order to make the case that there is a role for government, one must first provide a strong case that there is a significant market failure that results in a departure from the assumptions needed for markets to work their magic, and then explain how government policy can improve upon the outcome.   

That is done all the time within the profession. Although economists believe in markets in general, they are continuously identifying instances of market failure and then designing government policy responses that can make these markets work better. In fact, the standard model used in [microeconomics] incorporates a particular market failure that plagues a broad swath of markets – [negative externalities] – into the basic theoretical framework. This model, along with supporting empirical evidence, provides a basis for the use of [pollution taxes or permit markets] to improve the performance of the [economy]. 

But even though economist have made a strong case for government intervention and regulation in many cases, and for the use of [pollution taxes and permit markets] to [correct negative externalities], the public debate tends to fall back on simple Economics 101, keep the government out of the way discourse.

This has been attributed to “economics writers [who] present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections.” But I think it goes beyond economics writers who shape public opinion with standard Economics 101 arguments they remember from their principles of economics classes. 

There is a substantial and influential block of mostly conservative economists who always stand ready to defend the idea that markets work best when they are left alone. They will acknowledge that market imperfections exist, but they argue that given enough time market forces will fix the problem. If government tries to help through regulation or more direct measures, it will undermine these forces and make things worse. 

Even when there is broad based agreement that government action can improve the performance of the economy, as there is with [pollution taxes and permit markets], conservative economists argue that the [EPA] should [deregulate polluting business firms]. When it comes to [pollution taxes or permit markets], which [have] a solid theoretical and empirical foundation, they argue that government incompetence will cause more harm than good. Better to do nothing at all unless it’s tax cuts for the wealthy – somehow the government will get that right. 

The result is that Republican policymakers in Congress, or economics writers with a conservative outlook, can appeal to academic arguments to support their ideological, small government, tax-cutting, deregulation agenda. This leaves the public thoroughly confused even when there is substantial agreement within the economics profession, and gives political cover to Republicans in Congress who stand in the way of government taking an active in overcoming market failures [snip]. 

The conservative viewpoint is accorded significant weight despite the fact that it is often a minority viewpoint. There is strong evidence that the minimum wage has much smaller effects on employment than the simple competitive model implies, social insurance deters work far less than the models predict, taxes on the wealthy do not harm economic growth, monopoly power is distorting markets, wages do not always rise with productivity, [the benefits of environmental regulation are greater than the costs], etc., but it’s hard to overcome the cover conservative voices provide as they are echoed loudly in the right wing media. 

Republican economists may help to “tether the discipline to the American mainstream” due to their ability to shape what the public believes, but it ought to be the other way around. What is needed is for public opinion to be tethered to the mainstream of economics. 

Is the Republican argument liberal or conservative? I'd say neither. I'm tempted to add [ultra] or something like that to conservative in this excerpt because the argument is straight from the conservative economist Milton Friedman. Here is what I wrote a year ago yesterday:

I pulled my copy of Free to Choose off the shelf and read the section on the environment in the "Who Protects the Consumer?" chapter (pp. 203-208). Rather than a description of Coasian free market environmentalism, it is a description of mainstream Pigouvian environmental economics. For example, on page 207:

Most economists agree that a far better way to control pollution than the present method of specific regulation and supervision is to introduce market discipline by imposing effluent charges. 

Mainstream economists tend to be in favor of imposing market discipline with pollution taxes or permit markets relative to the "idea that markets work best when they are left alone."