Carbon Taxes First By Charles Komanoff & Dan Rosenblum Carbon Tax Center www.carbontax.org 2007

By Charles Komanoff

& Dan Rosenblum

Carbon Tax Center

www.carbontax.org

2007

Global Warming Is … Triggering a climate crisis that threatens massive and irreversible damage to our global environment, public health, world peace, national security and economic well-being. No longer seriously contested by anybody other than vested interests, their hired “experts” and indebted politicians. See An Inconvenient Truth and IPCC Fourth Assessment.

Triggering a climate crisis that threatens massive and irreversible damage to our global environment, public health, world peace, national security and economic well-being.

No longer seriously contested by anybody other than vested interests, their hired “experts” and indebted politicians.

See An Inconvenient Truth and IPCC Fourth Assessment.

Warmer Winters: 4.3 º F, 1971-2002 Winter (Dec-Jan-Feb) Mean Temp ( ºF) Source: Cameron Wake, UNH Boston is the new Philly; NYC is the new D.C. (winter temperatures.) 38 39 40 41 42 43 29 30 31 32 33 34 35 36 37 Latitude ( o N) o Boston New York Philadelphia Washington, DC

More Extreme Weather Cameron Wake, UNH Extreme Precipitation Events, Northeast US-Canada, 1949-2002

The Problem: Unsustainable CO 2 Emissions Worldwide World must reduce emissions ~80% by 2050, with big cuts starting now . Americans are emitting many times our share of CO 2 (next slide). Americans must reduce by >80%.

World must reduce emissions ~80% by 2050, with big cuts starting now .

Americans are emitting many times our share of CO 2 (next slide).

Americans must reduce by >80%.

Americans Emit in a Day What Others Emit in a Workweek

What about China? “ In an alliance of denial, China and the United States are using each other’s inaction as an excuse to do nothing.” – New York Times editorial, 4-20-07 U.S. China Lines X in 2009 U.S. China Lines X in 2009 U.S. China X

“ In an alliance of

denial, China and

the United States

are using each

other’s inaction as

an excuse to do

nothing.” – New

York Times

editorial, 4-20-07

Chemistry -> Responsibility Because CO2 stays “ resident” in the atmosphere for at least a century, the U.S. is responsible for more than 3x as much greenhouse gas as China. U.S. still has a 40-year lead. U.S. China Lines X in 2009 U.S. China Lines X in 2009 U.S. China X

Because CO2 stays

“ resident” in the

atmosphere for at

least a century, the

U.S. is responsible

for more than 3x as

much greenhouse

gas as China. U.S.

still has a 40-year

lead.

No More Free Dumping “Since the dawn of the industrial revolution, the atmosphere has served as a free dumping ground for carbon gases. If people and industries are made to pay heavily for the privilege, they will inevitably be driven to develop cleaner fuels, cars and factories.” — Avoiding Calamity on the Cheap , Nov. 3, 2006 New York Times editorial

“Since the dawn of the industrial revolution, the atmosphere has served as a free dumping ground for carbon gases. If people and industries are made to pay heavily for the privilege, they will inevitably be driven to develop cleaner fuels, cars and factories.”

— Avoiding Calamity on the Cheap , Nov. 3, 2006

New York Times editorial

Putting a Price on CO 2 Emissions High taxes on carbon emissions from coal, oil and natural gas will : Reduce fossil fuel use and CO 2 emissions Substitution of clean fuels and technology More efficient use of energy Provide a revenue stream to enable Progressive tax-shifting, or Rebate to all U.S. residents

High taxes on carbon emissions from coal, oil and natural gas will :

Reduce fossil fuel use and CO 2 emissions

Substitution of clean fuels and technology

More efficient use of energy

Provide a revenue stream to enable

Progressive tax-shifting, or

Rebate to all U.S. residents

Additional Benefits of a Carbon Tax Carbon tax receipts may also be used to finance Energy efficiency, further reducing use of fossil fuels and related emissions. Energy R&D. Will also reduce dependence on foreign oil, with major national security benefits. Economically, will keep dollars in USA instead of flowing overseas.

Carbon tax receipts may also be used to finance

Energy efficiency, further reducing use of fossil fuels and related emissions.

Energy R&D.

Will also reduce dependence on foreign oil, with major national security benefits.

Economically, will keep dollars in USA instead of flowing overseas.

Rely on “Market Forces”? Here Come Synfuels Only a carbon tax can subject CO 2 -intensive oil sands, oil shale, coal-into-oil, etc. to a climate- appropriate market test.

Only a carbon

tax can subject

CO 2 -intensive

oil sands,

oil shale,

coal-into-oil, etc.

to a climate-

appropriate

market test.

Clean-Energy Subsidies: A Limited Answer Selecting the “next best energy technology” by fiat has largely benefited lobbyists + special interests Oil shale, nuclear power, synfuels, ethanol, etc. Many new sources also emit CO 2 Renewable Energy Standards: helpful – but not enough

Selecting the “next best energy technology” by fiat has largely benefited lobbyists + special interests

Oil shale, nuclear power, synfuels, ethanol, etc.

Many new sources also emit CO 2

Renewable Energy Standards: helpful – but not enough

Efficiency Standards: Vital, but Not Enough Too slow Corporate resistance Inherently reactive Corporate gaming (e.g., “CAFE ” loophole that enabled SUV’s) Scattershot – impossible to regulate the hundreds of important energy-usage sectors 1-dimensional (e.g., CAFE doesn’t affect miles driven)

Too slow

Corporate resistance

Inherently reactive

Corporate gaming

(e.g., “CAFE ” loophole that enabled SUV’s)

Scattershot – impossible to regulate the hundreds of important energy-usage sectors

1-dimensional

(e.g., CAFE doesn’t affect miles driven)

More than Half of U.S. Oil Use Is Not Gasoline for Cars Cars Freight Heat, Power Other Air Paving RV’s

Example - Gas Use Decisions Gas Tax-Shift impacts: How high CAFE is set Mfg’er mpg decisions What car to buy Which car to drive How to drive VMT (miles traveled) Share (carpool) Chain trips Transit Walk/Bike Proximity CAFE impacts: Mfg’er mpg decisions What car to buy

Gas Tax-Shift impacts:

How high CAFE is set

Mfg’er mpg decisions

What car to buy

Which car to drive

How to drive

VMT (miles traveled)

Share (carpool)

Chain trips

Transit

Walk/Bike

Proximity

CAFE impacts:

Mfg’er mpg decisions

What car to buy

Dynamic Capitalism & CO2: I “ … specially equipped, privately owned jumbo jets – the kind that normally carry 300-400 passengers … recon- figured … for the enjoyment of, at most, a couple of dozen.” New York Times, 17-Oct-2006: For the Super-Rich, It’s Time to Upgrade the Old Jumbo Jet

“ … specially equipped,

privately owned jumbo

jets – the kind that

normally carry 300-400

passengers … recon-

figured … for the

enjoyment of, at most,

a couple of dozen.”

Dynamic Capitalism & CO2: II Backyard Blizzards : “ Snowmaking, since the mid-1960s the provenance of ski resorts and, more recently, some party planners, has gone domestic,” with 2-kW plug-in snowmakers that run ’round-the-clock. New York Times (Home Section) 15-Feb-2007: Not Enough Snow For You? Talk to Your Father

Backyard Blizzards :

“ Snowmaking, since the

mid-1960s the provenance

of ski resorts and, more

recently, some party

planners, has gone

domestic,” with 2-kW

plug-in snowmakers that

run ’round-the-clock.

Example - Electricity Utilities and other generators will Respond to price signal by substituting lower-carbon fuels Renewables Natural Gas Invest in efficiency on demand- and supply-side Consumers will Respond by using less Substituting low- or non-carbon energy

Utilities and other generators will

Respond to price signal by substituting lower-carbon fuels

Renewables

Natural Gas

Invest in efficiency on demand- and supply-side

Consumers will

Respond by using less

Substituting low- or non-carbon energy

Carbon Tax Proportions Fuels are taxed by their carbon content per btu

Fuels are taxed by their carbon content per btu

A “Starter” Carbon Tax-Shift $37 / ton of carbon = 10 ¢ / gallon of gasoline, jet fuel, etc. = 0.72 ¢ / kWh (U.S. retail average) Reduces U.S. CO 2 emissions ~ 4% Repeat 10 X (while standards and incentives also cut emissions)

$37 / ton of carbon =

10 ¢ / gallon of gasoline, jet fuel, etc. =

0.72 ¢ / kWh (U.S. retail average)

Reduces U.S. CO 2 emissions ~ 4%

Repeat 10 X (while standards and incentives also cut emissions)

Energy Use: Not Inelastic Gasoline usage grew only 3.5% from 2003 to 2006, while the economy grew 11%. Pump prices have risen < 50% since 2003 (adjusted for inflation) – not the doubling commonly believed. The modest growth in demand points to a “short-term price elasticity” of around 0.1, and 0.4 in the long term, for gasoline. Finding: Demand for gasoline (and other fuels) is at least somewhat price-sensitive.

Gasoline usage grew only 3.5% from 2003 to 2006, while the economy grew 11%.

Pump prices have risen < 50% since 2003 (adjusted for inflation) – not the doubling commonly believed.

The modest growth in demand points to a “short-term price elasticity” of around 0.1, and 0.4 in the long term, for gasoline.

Finding: Demand for gasoline (and other fuels) is at least somewhat price-sensitive.

Elasticity (long-run) Assumptions Gasoline: ­ 0.4 Electricity Residential (37%) - 0.5 Commercial / Industrial (63%) - 1.0 Fuel-switching Leverage: 1.2 x “ Other” – midway betw Gasoline/Elect. U.S. CO2 Reductions

Gasoline: ­ 0.4

Electricity

Residential (37%) - 0.5

Commercial / Industrial (63%) - 1.0

Fuel-switching Leverage: 1.2 x

“ Other” – midway betw Gasoline/Elect.

Starter Tax – Why Ramp Up? Win broad consensus Implement ASAP Help people and businesses adapt Empirical validation of efficacy Mid-course corrections Establish long-term price trajectory Complement w/ investment in EE and renewables

Win broad consensus

Implement ASAP

Help people and businesses adapt

Empirical validation of efficacy

Mid-course corrections

Establish long-term price trajectory

Complement w/ investment in EE and renewables

USA After “Starter Tax x 10” CO 2 emissions down by a third Oil use down by ~5 million barrels/day Energy Coal-fired generation reduced Wind and other renewable generation increased Incandescents / halogens out , CFL’s + LED’s in Transportation and Land-Use SUVs out , sedans in Costlier air and highway travel creates market pull for 300-mph intercity rail Urban trips by bicycle up 10x, to 10% Urban revitalization

CO 2 emissions down by a third

Oil use down by ~5 million barrels/day

Energy

Coal-fired generation reduced

Wind and other renewable generation increased

Incandescents / halogens out , CFL’s + LED’s in

Transportation and Land-Use

SUVs out , sedans in

Costlier air and highway travel creates market pull for 300-mph intercity rail

Urban trips by bicycle up 10x, to 10%

Urban revitalization

The Wealthy Will Pay More

“Progressive” Use of Carbon Tax Revenues EITHER Distribute pro rata to 320 million Americans (~ $1,500 each, per year) OR Tax Shift out of regressive taxes (green bar at right assumes 2.5%/yr drops in emissions (net of +1.5%/y income, - 4%/y price)

EITHER

Distribute pro rata to 320 million Americans (~ $1,500 each, per year)

OR

Tax Shift out of regressive taxes (green bar at right assumes 2.5%/yr drops in emissions (net of +1.5%/y income, - 4%/y price)

Two Fossil Fuel Subsidies By Taxpayers: Relatively Small By Climate: Enormous

Existing Carbon Taxes (1 st -year Starter Tax shown for comparison) Per ton of car-bon

Politics? Concerns about carbon tax-shifting Contrary to Americans’ sense of entitlement to “cheap energy” Anti-tax ideology of past 25 years Elected officials wary of another defeat Clinton’s 1993 Btu tax Rep. John Anderson’s “50-50” program (1980 presidential campaign)

Concerns about carbon tax-shifting

Contrary to Americans’ sense of entitlement to “cheap energy”

Anti-tax ideology of past 25 years

Elected officials wary of another defeat

Clinton’s 1993 Btu tax

Rep. John Anderson’s “50-50” program (1980 presidential campaign)

But: Growing Support for Taxing Carbon Emissions Opinion leaders Al Gore Scientists such as James Hansen (NASA) NY Times op-ed columnists Brooks, Friedman, Kristof, Krugman & Tierney Conservatives including Gregory Mankiw, Bush chief Economic Advisor, 2003-2005 CEO’s of Dynegy & FPL Group

Opinion leaders

Al Gore

Scientists such as James Hansen (NASA)

NY Times op-ed columnists Brooks, Friedman, Kristof, Krugman & Tierney

Conservatives including Gregory Mankiw, Bush chief Economic Advisor, 2003-2005

CEO’s of Dynegy & FPL Group

Some Support in Opinion Polls Feb. 2006 New York Times poll 55% would support increased tax on gasoline if it reduced dependence on foreign oil. 59% would support if the increased tax would curb energy consumption and global warming. Oct. 2006 M.I.T. survey Over three years, 50% increase in respondents’ willingness to pay more for electricity to reduce global warming.

Feb. 2006 New York Times poll

55% would support increased tax on gasoline if it reduced dependence on foreign oil.

59% would support if the increased tax would curb energy consumption and global warming.

Oct. 2006 M.I.T. survey

Over three years, 50% increase in respondents’ willingness to pay more for electricity to reduce global warming.

Carbon Tax v. Cap-and-Trade Cap-and-trade is alternative vehicle for “putting a price” on carbon Proposed by US CAP – coalition of large environmental groups and large corporations Emissions are capped at a level determined through the political process Allowances/permits to emit CO 2 up to the cap are distributed or auctioned Market participants can buy or sell as necessary

Cap-and-trade is alternative vehicle for “putting a price” on carbon

Proposed by US CAP – coalition of large environmental groups and large corporations

Emissions are capped at a level determined through the political process

Allowances/permits to emit CO 2 up to the cap are distributed or auctioned

Market participants can buy or sell as necessary

Cap v. Tax: Predictable Prices Carbon taxes provide predictable prices necessary to encourage investment in less carbon-intensive technology carbon-reducing energy efficiency carbon-replacing renewable energy Cap-and-trade aggravates price volatility that discourages beneficial investments

Carbon taxes provide predictable prices necessary to encourage investment in

less carbon-intensive technology

carbon-reducing energy efficiency

carbon-replacing renewable energy

Cap-and-trade aggravates price volatility that discourages beneficial investments

Are We Over-Valuing Cap-and-Trade’s “Emissions Certainty”? “Safety-valve” would authorize auctioning additional allowances if allowance prices exceed predetermined level Emissions cap could be politically fragile without public support No magic emissions level (except as low as possible)

“Safety-valve” would authorize auctioning additional allowances if allowance prices exceed predetermined level

Emissions cap could be politically fragile without public support

No magic emissions level (except as low as possible)

Tax v. Cap: Timing C&T design and implementation: complicated, contentious, prolonged Level of cap Timing Allowance allocations Certification procedures Offsets Penalties Permit banking Inevitable requests for exemptions Tax can be in place promptly with quick results

C&T design and implementation: complicated, contentious, prolonged

Level of cap

Timing

Allowance allocations

Certification procedures

Offsets

Penalties

Permit banking

Inevitable requests for exemptions

Tax can be in place promptly with quick results

Tax v. Cap: Equity Cap-and-trade Practice has been to allocate based on past use Rewards polluters with windfall Perverse incentive to pollute more now to increase base for allocations Allowances can be auctioned off to highest bidders Proposed in RGGI program Proceeds used to provide public benefits Lawyers and consultants are other big winners Carbon tax would be revenue-neutral

Cap-and-trade

Practice has been to allocate based on past use

Rewards polluters with windfall

Perverse incentive to pollute more now to increase base for allocations

Allowances can be auctioned off to highest bidders

Proposed in RGGI program

Proceeds used to provide public benefits

Lawyers and consultants are other big winners

Carbon tax would be revenue-neutral

Tax v. Cap: Understandability Carbon taxes provide direct, transparent and understandable price signals to consumers Perceived political liability, but essential to transform societal climate-awareness Cap-and-trade is complicated and opaque Perceived political asset, but limits public participation and could backfire

Carbon taxes provide direct, transparent and understandable price signals to consumers

Perceived political liability, but essential to transform societal climate-awareness

Cap-and-trade is complicated and opaque

Perceived political asset, but limits public participation and could backfire

Tax v. Cap: Comprehensiveness Carbon taxes address emissions from every sector All users must respond to price of carbon Most current cap-and-trade programs, as proposed, only target the electricity industry Only 40% of emissions If allowances are allocated, polluters with sufficient allowances have less incentive to reduce emissions

Carbon taxes address emissions from every sector

All users must respond to price of carbon

Most current cap-and-trade programs, as proposed, only target the electricity industry

Only 40% of emissions

If allowances are allocated, polluters with sufficient allowances have less incentive to reduce emissions

Keys to Political Success Progressive Tax-Shifting Not a tax increase Carbon tax revenues used to reduce regressive payroll and sales taxes Provisions to Protect Low-Income Families Reductions in payroll/sales taxes will offset all or a portion of the carbon tax Other measures to reduce low-income energy use Message: Taxing pollution instead of productive work

Progressive Tax-Shifting

Not a tax increase

Carbon tax revenues used to reduce regressive payroll and sales taxes

Provisions to Protect Low-Income Families

Reductions in payroll/sales taxes will offset all or a portion of the carbon tax

Other measures to reduce low-income energy use

Message: Taxing pollution instead of productive work

Summary Principles Tax-shifting – not a tax increase Full-cost pricing Polluter pays Responds to concerns about Climate crisis Inequitable taxes Security / Oil dependence Basing economy on vulnerable energy www.carbontax.org

Principles

Tax-shifting – not a tax increase

Full-cost pricing

Polluter pays

Responds to concerns about

Climate crisis

Inequitable taxes

Security / Oil dependence

Basing economy on vulnerable energy