Getting Serious About Carbon Pricing: Putting a Price on Carbon #pric…

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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

These include:

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

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Getting Serious About Carbon Pricing: Putting a Price on Carbon #priceoncarbon

World Resources Institute (WRI)

Getting Serious About Carbon Pricing: Putting a Price on Carbon #priceoncarbon