On April 30, WRI hosted a dynamic town hall discussion about key issues related to pricing carbon in the United States. Putting a price on carbon can provide a clear and consistent economic signal that can help shift market growth in the coming decades toward a climate-smart, low-carbon economy.
The new resource "Putting a Price on Carbon: A Handbook for U.S. Policymakers" was released. Find out more at www.wri.org/carbonpricing
Why price carbon? And why examine this question now? Well, past WRI analysis has shown that our 2020 and 2025 emissions reduction targets can be met with ambitious use of existing authorities.
But existing authorities will not be sufficient for the U.S. to meet its longer-term greenhouse gas emissions reduction goals
New legislation that explicitly prices carbon can play an important role in helping us meet those targets
But a carbon price is not just a climate policy – it’s an economic policy as well
Depending on how it is designed and what is done with the revenues, a carbon price can serve other policy goals, including: Promote economic growth by reducing taxes Support clean energy research and development Assist those affected by climate change and by the transition from high-carbon resources
We believe there are a wide range of benefits that could be provided by an effective, well-designed carbon price
What this paper does is provide a broad-based view of the carbon pricing landscape.
We envision that it will be a useful primer for those who are new to the conversation,
and serve as a refresher for those who have been deep in the weeds on this issue in the past
In short, we expect this paper to be useful in future debate on whether, when, and how to implement a national carbon price in the U.S.
Future WRI publications will build on the foundation laid by this Handbook, and will take a deeper dive into some of the more significant issues surrounding pricing carbon
[CLICK] We begin with a discussion of how a carbon price works, before moving to a brief history of carbon pricing policies in the US and around the world
We then take a look at the key design features and the choices facing policymakers
Among the most important design decision, of course, is how to spend the resulting revenue. We examine the advantages and disadvantages of many of the most commonly proposed revenue options
Lastly, we include a broad overview of the economic literature on carbon pricing
Most of the people in this room are likely already familiar with the concept of carbon pricing, so I’ll keep this relatively brief
In essence, emitters pay for the carbon pollution they are responsible for; the costs of emissions-intensive fuels and goods rise, and less emissions-intensive goods become more competitive
Low carbon innovation is encouraged, and emissions fall.
And as this graphic illustrates, there are other reasons besides climate to like a carbon pricing policy - the government takes in revenue, which can be put to productive use – by lowering distortionary taxes, reducing the deficit, or any of a number of other options.
The concept of increasing the price of something we want less of, in order to address an inefficiency in the market, is almost a century old. In 1920, English economist Arthur Pigou developed the concept of externalities – that is, costs or benefits that are not captured in the price of a good
In order to provide an incentive to reduce greenhouse gas emissions – whose costs are often not included in the price of fuels or carbon-intensive goods – many countries and sub-national regions have implemented a carbon pricing policy over the past 25 years
While it may seem exotic to some, nearly 40 countries and over 26 sub-national jurisdictions have implemented either a carbon tax or a cap-and-trade program, including seven pilot programs in China.
Together, these programs cover approximately 12 percent of global GHG emissions
In the U.S., 9 northeastern states participate in a cap-and-trade program that covers their power sector, and California now has an economy-wide cap-and-trade program in place
And there have been numerous proposals at the federal level, dating back to 2003 with McCain-Lieberman. Of course, in 2009 the Waxman-Markey cap-and-trade bill passed the House but did not come up for a vote in the Senate
New proposals, such as those from Senators Whitehouse and Schatz, continue to emerge. In fact, just last week Congressman Delaney announced a new carbon tax proposal at an American Enterprise Institute event.
All of this is to say, carbon prices are not a new phenomenon and are now well understood
And carbon pricing has broad support – a number of prominent conservatives such as George Shultz, Art Laffer, and Hank Paulsen support the idea, as do approximately 2/3 of the American public according to a recent Stanford University poll
When designing a carbon pricing policy, the first choice most decision-makers will face is: carbon tax or cap-and-trade?
Carbon taxes and cap-and-trade are not the only options, but they are the most popular
Both provide economic incentives to reduce emissions and minimize compliance costs,
and both face many of the same design and revenue decisions
The primary difference between the two is that a carbon tax provides price certainty into the future,
while cap-and-trade offers emissions certainty
After deciding on a program type, there are a number of key questions that will need to be addressed. These include:
Which greenhouse gases should be included – just CO2, all of them, or some subset?
Which sectors should be covered? Is reducing the emissions from a specific sector worth the economic and administrative burden of including it in the program?
Should the price be applied upstream, where the emissions enter the economy, or downstream where they are produced?
What is the initial price or cap level, and how should it increase or decrease, respectively, over time?
Should there be some form of border adjustment, to address competitiveness concerns?
How should the policy be monitored and enforced?
What complementary policies are needed to ensure that the climate and other policy goals are achieved?
We can find a few examples of these design principles in practice in North America.
These include RGGI in the northeastern US –
a cap-and-trade program that covers CO2 from the power sector, with most revenues going toward saving households and businesses money by improving energy efficiency
And British Columbia, which has a carbon tax that is now approximately $25 US.
The tax is applied upstream and covers nearly ¾ of all GHGs in the province, and most revenues have gone toward reducing personal and corporate tax rates
As the examples of RGGI and BC illustrate, revenues can be used to accomplish various objectives
They can be used to promote economic growth,
offset any adverse impacts of the carbon price,
or as investments in adapting to climate change, among many other options
And the amount of revenue can be substantial –
even at a relatively low price of $15 per metric ton of GHG emissions, a carbon tax or cap and trade program would raise approximately $100 billion
One possible use of revenue is a so-called revenue neutral tax swap, where the government reduces other taxes by the amount of revenue it brings in from a carbon price
This option is popular with many economists, because it is a way to reduce taxes on things we want more of, like capital and labor…
while discouraging things we want less of – namely, harmful GHG emissions
So why not raise money by taxing destructive instead of productive activities?
For example, carbon price revenues can be used to reduce the personal income, corporate income, or the payroll tax
Another option is to simply send every household a check with an equal portion of carbon price revenues
This has the advantage of
being relatively simple to administer,
and returns all (or nearly all) revenue back to consumers
And it ensures that the poor – who are hit hardest by a carbon price because they spend the highest percentage of their incomes on energy – are not negatively impacted
Of course, these are not the only commonly cited proposals for revenue use, and a carbon tax can achieve various other policy objectives
reducing budget deficits, which can obviate the need for future tax increases;
providing transition assistance for affected regions or groups, to help those hardest hit by a carbon price;
research and development for low-carbon technologies, which can help achieve deeper reductions more cost-effectively;
or investing in adaptation measures, to help deal with the impacts of climate change
Importantly, different uses of revenue are of interest to different stakeholders from across the political spectrum
What does the literature say about the economic impacts of a carbon price, putting aside the environmental benefits?
First, we should point out that the vast majority of economists support such a policy
When the question was put to a panel of distinguished economists – including Democrats, Republicans, and Independents – the vast majority of them agreed or strongly agreed that a carbon tax was a more sensible way of raising revenue than labor income taxes
There are many, many economic studies on carbon pricing (including by a number of people in this room), but most of them are in agreement on several core findings:
First, in the short-run, there will be winners and losers from such a policy
But a well-designed policy can offset most or all of any negative impacts on economic growth and employment
Of course, there is no free lunch – there are trade-offs, such as choosing between using revenue in ways that maximize economic growth, and ensuring that the overall incidence of the carbon price does not fall disproportionately on the poor
[CLICK] It is clear that a carbon price can achieve a multitude of objectives, not least of which is reducing greenhouse gas emissions
And crafting a well-designed carbon price involves a number of important decisions that can help bring additional stakeholders into the discussion
And finally, a quick note that this is not the last time you’ll hear from us on this issue
Our goal is to promote dialogue on why and how to implement a carbon price
To that end, in the coming months we will publish issue briefs tackling several key issues, including:
a deeper dive into the economic incentives to reduce emissions;
how a carbon price could affect some regions more than others, and how to address those disparities;
and how a carbon price can drive innovation in lower-emitting technologies
Getting Serious About Carbon Pricing: Putting a Price on Carbon #priceoncarbon
GETTING SERIOUS ABOUT
April 30, 2015 Washington, DC
MICHAEL OBEITER WWW.WRI.ORG/CARBONPRICING
PUTTING A PRICE ON CARBON:
A Handbook for U.S. Policymakers
WHY PRICE CARBON?
• Pricing carbon can be a core element of
U.S. long-term climate change strategy
• A carbon price can also serve other
–Promote economic growth
–Support clean energy
• Putting a Price on Carbon provides
an overview of carbon pricing
–Refresher and reference work
• Future work from WRI will build on
• Basics of Pricing Carbon
• A Brief History of
• Key Design Features
• Uses of Carbon Pricing
• Economic Effects of a
CARBON PRICING PROGRAMS AROUND THE
CARBON PRICING IN THE UNITED STATES
• McCain/Lieberman (2003)
• Waxman/Markey (2009)
• Whitehouse/Schatz (2014)
• Delaney (2015)
• …and many more
PROGRAM TYPE: CARBON TAX VS CAP-AND-TRADE
• Both incentivize emissions reductions
• Similar design and revenue decisions
• Carbon tax offers administrative
simplicity and price certainty
• Cap-and-trade offers emissions
CARBON PRICE DESIGN: KEY QUESTIONS
• Which gases?
• Which sectors?
• Where to impose the regulation?
• What price or cap level and trajectory?
• Include a border tax adjustment?
• How to monitor and enforce?
• What complementary policies?
CARBON PRICE DESIGN: EXAMPLES
• Regional Greenhouse Gas Initiative
– Electricity CO2
– Most revenues go to energy efficiency
– $2.9 billion in lifetime savings to 3.7 million
• British Columbia Carbon Tax
– Started at C$10, now C$30
– Covers ~3/4 of GHGs
– Most revenues used to reduce taxes
• Revenue can be used to accomplish
– Promote economic growth
– Offset adverse impacts
– Investment in climate change protections
• Substantial revenue opportunity
– $15 / tonne price could generate ~$100 billion
REVENUE NEUTRAL TAX SWAPS
• Taxes on labor/capital discourage
productive activity we want more of
• A carbon tax discourages activity we want
• Why not tax destructive instead of
– For example, use revenues to reduce income or
LUMP SUM DIVIDEND
• Send every household a check
• Key advantages:
–Revenue neutral (or nearly neutral)
–Ensures low-income taxpayers are not
ADDITIONAL REVENUE USES
• Various other policy objectives:
– Deficit reduction
– Transition assistance
– R&D for low-carbon technologies
– Climate change adaptation
• Different uses of revenue are of interest to
ECONOMISTS OVERWHELMINGLY SUPPORT A
results?SurveyID=SV_8oABK2TolkGluV7; weighted by confidence
revenue with a
instead of labor
ECONOMIC IMPACT STUDIES
• Winners and losers in short run
• Smart use of revenue can offset
• Trade-offs exist between revenue
• A carbon price can be the
cornerstone of long-run U.S.
climate policy AND achieve
multiple additional objectives
• Designing a carbon pricing
policy involves a number of
important decisions that can
• WRI aims to promote dialogue on why and
how to implement a carbon price
• WRI will delve deeper into key issues:
– Basic economics and incentives underlying a
– Regional disparities and how to address them
– How a carbon price can drive innovation
Keep an eye on www.wri.org/carbonpricing for new research
PUTTING A PRICE ON CARBON:
A HANDBOOK FOR U.S. POLICYMAKERS
GETTING SERIOUS ABOUT
April 30, 2015 Washington, DC