Review: “Climate Change Policy Failures” by Howard A. Latin

Summary.  This post reviews the new book “Climate Change Policy Failures: Why Conventional Mitigation Approaches Cannot Succeed” by Prof. Howard A. Latin.  Prof. Latin begins by reviewing the past decade or more of legislative activity in the U. S. concerned with abating greenhouse gas (GHG) emissions, finding the drafts to be ineffective (none were enacted into law).  More generally, he characterizes the gradual approach to abatement currently prevalent both nationally and internationally as being “too little, too late”, and being “back-loaded” toward later decades.  This is ineffective because GHGs would continue to accumulate, building up ever higher levels in the atmosphere and worsening the warming of the planet.  Additionally, the book details the failures at the international level to agree on world-wide abatement policies, over more than two decades.

Instead, the book calls for innovative measures to “decarbonize” our energy economy by deploying replacement technologies, starting right away.  Prof. Latin suggests 1) setting up an independent Clean Technology Commission to select promising replacement technologies to pursue; 2) implementing a progressively increasing carbon tax to fund the investments identified by the Commission; 3) imposing economy-wide regulation of fossil fuel use in those industries responsible for most GHG emissions; and 4) requiring public disclosure of GHG emission rates by emission sources.

Prof. Latin has written a compelling book setting forth the reasons for immediate or early action to abate further emissions of GHGs, and has presented a comprehensive plan on how to go about this task.  “Climate Change Policy Failures” is strongly recommended to policymakers, to researchers and commentators, and to the interested public.

(Readers preferring not to delve into details may wish to pass directly to this reviewer’s Assessment, which appears below, following the exposition of the book’s features.)

 Introduction.

Many books have been published on global warming, including policy approaches to combating the worsening warming of the earth by man-made greenhouse gases (GHGs).

Howard A. Latin, Professor of Law at Rutgers University, has written a book on this topic, entitled “Climate Change Policy Failures: Why Conventional Mitigation Approaches Cannot Succeed” (“Policy Failures”; see Note 1).  The book presents a cogent argument on the urgency of embarking on mitigation efforts.  Setting forth this rationale in itself performs a valuable service.  His statement of the problem, while not original with the author, is all too frequently overlooked in reporting on global warming, and justifies the provocative title that Prof. Latin has chosen for his book.

The Case for Urgent Action

Prof. Latin cites several reports from late in the last decade attesting to the warming of the planet.  For example, the U. S. National Aeronautics and Space Administration reported that 2010 tied with 2005 as the hottest year in recorded human history (citing the New York Times), and that long-term warming is scientifically “unarguable” (citing many reports).

Current policy initiatives are characterized as “too little, too late”.

The U. S. has never enacted greenhouse gas legislation.  Policy Failures points out that, most recently, in 2009-2010, neither the Markey-Waxman bill in the House of Representatives, incorporating a watered-down cap-and-trade mechanism, nor the Senate’s Kerry-Lieberman bill, whose provisions resemble those of the Markey-Waxman bill, was enacted into law. [Presumably after this book went to press, however, the Obama administration issued regulations doubling the fuel efficiency of cars and imposing restrictions on emissions from new large electric generating plants.]  

Some regional climate agreements have been reached in the U. S. in recent years.  These include the Northeast states’ Regional Greenhouse Gas Initiative, the first (if modest) cap-and-trade regime enacted in the U. S., and the Western Climate Initiative (WCI) of seven western states and four Canadian provinces.  Unfortunately the book fails to note that WCI actually fell apart shortly after its formation, leaving only California and one Canadian province in a reduction program extending to 2050.  The book further mentions that the European Union (EU) has undertaken to reduce emissions with the same goal as the state of California.

Policy Failures makes the strong, and valid, point that policies such as these suffer “the same climate policy mistakes”, namely, that they are too gradual. Their stated goals are to reduce emissions over a multi-decade interval, mostly using cap-and-trade mechanisms.  Prof. Latin believes this “consensus approach will prove ‘too little, too late’ by deferring crucial GHG reductions too far into the future….[which] would consistently be back-loaded” to later decades (emphasis in original).

“Back-loading” is inappropriate because carbon dioxide (CO₂), the most prevalent GHG, persists in the atmosphere for centuries or longer (citing the Proceedings of the National Academy of Sciences).  Thus GHGs that continue to accumulate during the coming decades under gradual reduction policies irreversibly increase the total atmospheric concentration of GHGs.  “At best”, Policy Failures states, “the consensus emissions-reduction programs will only slow the growth of … atmospheric GHG[s] and related climate change risks to a minimal extent” (emphasis in original).  While this would “create an illusion of climate change mitigation progress”, it would actually “wast[e] irreplaceable time and resources that could [instead be used] to implement more promising…efforts”.

Policy Failures cites an analogy by Prof. John Sterman of the Massachusetts Institute of Technology.  Imagine a bathtub containing atmospheric CO₂.  It continues to fill up higher as long as the faucet delivers more CO₂ than is removed by the drain.  The best we can hope for realistically in the foreseeable future is to stabilize the bathtub at a new, higher, level of CO₂ because emissions are essentially irreversible.  Natural processes that remove CO₂ are inadequate to pull all the added, man-made GHGs out of the atmosphere.  (The technology of carbon capture and storage, which would store excess CO₂ underground, is still in the experimental stage.)

The need for GHG-free replacement-technologies.

Instead of the gradual policies, Prof. Latin argues strongly that the U. S., and other emission-intensive nations of the world, need to “decarbonize” our energy economies, i.e., to develop ways of obtaining energy that eliminate the release of CO₂ and other GHGs into the atmosphere; this must be done “[n]ow, today, not tomorrow”.  Otherwise, under the “back-loaded” consensus approach, the world continues to emit GHGs and accumulate them in the atmosphere, leading to worsening global warming and its attendant climate harms.   In addition, Prof. Latin declares that rapid transition to carbon-free replacement technologies is the only way for developed countries to respond to the aspirations of developing or less affluent countries without continuing to degrade the climate in ways that adversely affect them. 

Economic strategies for reducing GHG emissions.

Cap-and-trade is one system for lowering emissions.  Under it, all major emitting facilities are allotted allowances that license the release of a fixed amount, say 1 ton, of GHGs.  An administrative agency decides allotments for each period.  Ideally the emitters would pay for the allowances, frequently by auction, but at the outset in many regimes these are distributed at no charge.  Markets are set up for trading allowances, thereby establishing a price for emissions.  In addition, inefficient sources can buy offsets from operations that consume GHGs (tree farms, for example).  The market price on carbon deters fossil fuel use and motivates research and deployment of replacement energy sources. 

There are many problems with a cap-and-trade regime that make it difficult to succeed.  Emissions continue to be sanctioned according to allotted allowances.  Large corporate emitters can influence allotments such that they are improperly allocated. A large new bureaucracy is needed to administer it.  The market can wind up not valuing emissions high enough to act as a deterrent to emitting GHGs.  Offsets are difficult to regulate and properly administer. 

A carbon tax or fee can be imposed directly, and the tax or fee used in a variety of ways.  The tax increases the price of the fuel, and of any article of commerce made using the fuel, thereby discouraging use of the fuel.  This provides an incentive to commercialize and deploy replacement energy sources. 

There are many possible ways that a carbon tax can be imposed and the revenue dispensed.  One system, offered by Dr. James Hansen, a respected climate scientist who has consistently warned of the perils of global warming for decades, is his fee-and-dividend plan (see Note 2).  The carbon fee would be collected at the source at which a fossil fuel enters the economy, and its revenue would be distributed to all members of the public in equal shares regardless of usage.  Thus there is an incentive to reduce consumption in order to benefit more from the dividend.  Surprisingly, Policy Failures devotes an inordinately large amount of space to criticizing Dr. Hansen’s fee-and-dividend plan in minute detail (see the Assessment below).

Prof. Latin concludes that neither cap-and-trade nor a free-standing carbon tax regime would successfully reduce fossil fuel use and carbon emissions.

International climate negotiations are stalemated.

Policy Failures reviews international climate negotiations since the creation of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992.  The UNFCCC includes all United Nations members, now numbering 193 nations.  UNFCCC negotiations led to the conclusion of the Kyoto Protocol in 1997, under which developed countries agreed to modest reductions in GHG emissions.  The term of the Protocol expires at the end of 2012.  Developing countries were excluded from its coverage.  The U. S., although it is a developed country, rejected the Protocol and so likewise does not fall under its terms.

In recent years the annual UNFCCC conferences in Copenhagen (2009), Cancun (2010) and Durban (2011) have sought without success to conclude a new agreement to follow the expiration of the Kyoto Protocol.  The main points of contention remain those that led to exclusion of developing countries from being bound by the Kyoto Protocol.

Developing countries argue that historically the developed countries have been responsible for most emissions already produced; their per capita emissions rate is much higher than for developing countries.  The continued economic growth of developing countries, on the other hand, necessarily implies a profound increase in their per capita emissions rate as their growth continues.   They contend that it is the developed countries that should take the initiative in reducing their emissions rates.  In their view fairness requires nothing less.  

Developed countries defend the need to include all nations in climate accords now by noting that widespread recognition of the climate conundrum became prevalent only in recent decades.  They feel that the developing countries, with their rapidly growing populations and economies, cannot realistically expect developed countries, whose populations and economies are more stable, to significantly reduce their living standards in order to grant developing countries more leeway with their emissions.

These fundamental differences persist to the present.  By the time of the Durban conference in 2011, all ambition to conclude a successor to the Kyoto Protocol had been abandoned; the only development was an intention to complete negotiation of a new treaty by 2015, with an expectation that it would then be implemented by 2020.  Prof. Latin reflects the opinion of many of not being sanguine about the success of this endeavor. 

Policy Failures laments that it is hard to see how climate negotiations that have been fruitless for the past decade can reach a meaningful agreement for the coming decades as called for by the Durban plan.

Policy Failures proposes four interacting mechanisms to stabilize GHGs.

Prof. Latin proposes that the only way out of an impasse so fundamental is to devise new policies recognizing both points of view.  Significantly, he states  “[s]uccessful climate change policies must accomplish two demanding goals concurrently: eliminating as much residual GHG pollution as feasible to stabilize …[GHGs]…, and promoting greater economic and social welfare in developing countries that otherwise will continue discharging more GHGs …every year”.  He laments that world leaders continue discussions on gradually lowering the rate of emissions rather than seeking the necessary stabilization of accumulated GHGs by early deployment of decarbonizing replacement technologies. 

Current policies, he feels, will achieve neither of these objectives.  Rather, Policy Failures proposes four program steps, starting in the U. S. 

1. Set up an independent scientific, technological and economics Clean Technology Commission (CTC), as a quasi-governmental body, to assess various replacement technologies and decarbonization methods.  It would identify, support development of, and assist in deploying the most promising replacement technologies, while striving to deflect political and corporate influence.

2. Implement a progressively increasing carbon tax whose revenues will be used to fund the activities of the CTC.  The tax, once assessed at an appropriate economic level, will motivate consumers to reduce their interim use of fossil fuels.  The tax revenue should not be applied to uses not related to renewable energy such as deficit reduction, income redistribution, or a rebate or “dividend”.

3. As a complement to the carbon tax, impose new regulations to reduce fossil fuel use in those sectors of the energy economy most responsible for high GHG emission rates, using federal regulatory authority.  These regulations should be stringent enough to induce those affected to invest in replacement technologies sooner rather than later.  Policy Failures recognizes the serious and difficult political obstacles that these regulations are likely to encounter. 

4. Require public disclosure of all GHG emission rates in the U. S.  Enhanced knowledge of emissions would provide incentives for the public to lower their use of fossil fuels.

Assessment

Prof. Latin has written a cogent, compelling book setting forth the reason for immediate or early action to abate further emissions of GHGs, and has presented a comprehensive plan on how to go about this task in the U. S., if not worldwide. In summary

1. The factor determining the extent of global warming is the cumulative atmospheric concentration of CO₂ and other GHGs, not the annual rate of emissions.  Humanity is ill-advised to seek gradually to reduce the emissions rate over a period of several decades, all the while continuing to accumulate more atmospheric GHGs. 

2. Policy Failures summarizes the inability at the international level to achieve even modest progress on a worldwide accord to address global warming.  It further reviews the failed legislative efforts domestically in the U. S. to regulate GHG emission rates. 

3. Prof. Latin seeks to stabilize the accumulated GHG concentration at as low a level as possible.  Accordingly, he offers a new private-public framework to develop replacement technologies as rapidly as possible and to fund the framework with a comprehensive progressive carbon tax.  This framework abandons the “back-loaded”, gradual approach that is common policy in various settings around the world.

Policy Failures represents an important contribution to the literature on abating GHG emissions.  That said, the book would have benefited from proposals aimed at incorporating developing countries into a program for stabilizing GHG emissions.  This failing is all the more unexpected in view of the detailed presentation of the current status of international climate negotiations.  The developed countries of the world are projected to have essentially constant annual rates of emission of GHGs in coming decades.  Developing countries including China and India, on the other hand, are projected to continue their development by burning ever-larger amounts of fossil fuels and emitting more and more GHGs each year.  Stabilizing the accumulated level of atmospheric GHGs must include these countries.  Proposals for deploying replacement technologies in these countries would have rounded out the book.  Prof. Latin defended himself against a similar concern expressed by a U. N. official, stating “I do not have a realistic, comprehensive political solution today and neither does anyone else.”

The book would also have presented a stronger case for action had it reviewed the relationship between extreme weather events and the warming of the planet.  Recent scientific analyses of past climate and extreme events have clearly demonstrated causative associations between them and global warming. Also, many internet and other sources are available providing data on the large economic damages and significant societal harms inflicted by the severe weather events of recent years.  Reference to these developments would have enhanced the book.

The book is exceptionally well supported by references in the endnotes.  These cite both internet pages as well as printed sources.

A lesser concern is that Policy Failures devotes a seemingly excessive amount of attention to criticizing and rebutting James Hansen’s “fee-and-dividend” proposal.  The book did not consider other carbon tax proposals in such negative detail.  It appears to this reviewer that perceived defects in Dr. Hansen’s proposal could have been discussed more briefly and more objectively.

In summary, Policy Failures is strongly recommended to policymakers dealing with global warming at both the national and international levels, to those dealing with this issue as researchers and commentators, and to the interested public.  Its important contribution is the case made for taking immediate, bold action rather than continuing with conventional, gradual approaches to mitigation.  Its particular proposal for taking action is also useful; it will certainly serve to stimulate discussion, and hopefully, lead to enacted policy.  

 

Notes

1. “Climate Change Policy Failures: Why Conventional Mitigation Approaches Cannot Succeed”, Howard A. Latin, 2012, World Scientific Publishing Co. Pte. Ltd., Singapore.
2. “Storms of my Grandchildren: The Truth about the Coming Climate Catastrophe and our Last Chance to Save Humanity”, James Hansen, 2009, Bloomsbury USA, New York.

© 2012 Henry Auer

Production Tax Credit for Wind Energy in the U. S.

Summary.  One way of reducing the rate of emission of carbon dioxide is to generate electric power from renewable sources, including wind energy.  In the U. S. renewable energy has been aided by a production tax credit since 1992, that Congress, in fits and starts, has repeatedly granted and taken away.  It is scheduled to expire again on Dec. 31, 2012.  In contrast, conventional fossil fuel energy sources have been steadily subsidized since the early 1900’s. 

Renewable energy, including wind energy, benefits the U. S. by relieving dependence on foreign energy sources, expanding economic activity, and lowering the annual rate of emission of carbon dioxide, the most prevalent greenhouse gas.  For these reasons the production tax credit should be renewed for an extended duration, in order to convey stability and predictability to the renewable energy industry.

 

Introduction.  The United States burns large amounts of fossil fuels in order to drive its economy, resulting in correspondingly large annual rates of emission of greenhouse gases such as carbon dioxide, CO₂.  CO₂ accumulates in the atmosphere because more is emitted than can be absorbed around the planet.  As a result long-term average global temperatures have been rising inexorably.  Increased temperatures are held responsible

for extreme weather events around the world, which lead to significant harms to our economic and societal wellbeing.

One way of reducing the rate of emission of CO₂ is to generate electric power from renewable sources.  Wind generation has been growing rapidly around the world, including the U. S., yet its share of energy production is still relatively small.  The U. S. enacted a Production Tax Credit (PTC) as part of the Energy Policy Act of 1992 in order to promote wind energy.  It subsidizes the sale of electricity produced by wind power.

The PTC has been allowed to expire and been reinstated repeatedly in recent years.  The current legislation granting the PTC expires Dec. 31, 2012.  However, Congress has not passed any new appropriations bills covering the current fiscal year that began Oct. 1, including the PTC.  Other significant fiscal difficulties arise in the U. S. by law on Jan. 1, 2013, so considering an extension of the PTC is greatly complicated by these additional crises.

The PTC subsidizes wind power generation by US$0.022 per kWh.  This adds up to about US$1 billion per year at the current level of wind generation (see below).  According to Vice Admiral (Ret.) Denny McGinn, the President and CEO of the American Council on Renewable Energy, the PTC has been a major factor in creating and expanding the wind energy industry in the U. S. since its inception.  Currently its extension is a topic of great controversy, mostly along party lines, in the Congress.  Those opposed generally are against promoting renewable energy and to expanding tax credits as a form of increased government spending.   Those supporting extension favor the PTC as a way of fostering expansion of the renewable energy industry.

Over the past decade the PTC has been allowed to expire, and then been reinstated, in repeated cycles, leading to an “off-again-on-again” pattern of funding.  This has led to insecurity and unpredictability facing investors and energy industrialists seeking to develop new wind energy facilities.  It should be noted that these entrepreneurs are part of the private market economy.  They need stability in their understanding of the financial environment surrounding their plans; it is difficult to plan for investment and construction of new wind facilities when the PTC is given and taken away in fits and starts. 

The correlation between breaks in appropriations for the PTC and the annual newly installed wind generation capacity is shown in the graphic below.

Annual installation of new wind generation capacity correlated with breaks in appropriation for the PTC.  The total affected wind generation capacity can be obtained by adding the heights of each bar.  The generation capacity for 2012 and 2013 are estimates based on the present status of the PTC.

Sources: American Wind Energy Association; U. S. Department of Energy, Energy Information Administration, as presented in The Guardian Oct. 17, 2012; http://www.guardian.co.uk/environment/blog/2012/oct/17/us-wind-power-mitt-romney-subsidy?newsfeed=true

 

The PTC lapsed in the years 2000, 2002 and 2004.  The effect of the lost support is evident in this graphic.  In each of those years the installation of new wind energy facilities fell by 73% or more (light green bars).  When reinstated, the PTC was implemented only for one- or two-year periods, rather than permanently or at least for an extended time.  In addition, the graphic shows a projected drop to no new wind capacity to be constructed in 2013, although it is likely that vestigial new construction will persist into 2013.  Adm. McGinn believes the wind industry would need a 3-5 year horizon for planning, and understands that PTC subsidies will not be, and indeed should not be, a permanent fixture in their industry.

 

Economic potential of the wind energy industry.  The expansion of the wind energy industry as a component of renewable energy has led to a work force estimated to have reached 85,000 jobs nationwide in 2008-9, according to the American Wind Energy Association (AWEA) as reported in the New York Times.   It has since fallen by 10,000 because of competition from China, and the growth of inexpensive natural gas.  In July, for example, the U. S. Commerce Department imposed tariffs on turbine towers originating in China, responding to a finding that the towers were priced in the U. S. at less than the cost of production in China.  In recent months, facing the unresolved expiration of the PTC, it is estimated that 1,700 layoffs have already occurred.  The American wind industry is composed of several hundred manufacturers, from multinational companies to small firms making specialty items needed in wind turbine installations.

 

According to AWEA 2.9% of the U. S. electricity demand was provided by wind energy in 2011. In Iowa and South Dakota, which have high potenetial wind energy resources, around 20% of the electricity demand is provided by wind. Nationally, the U.S. could provide 20%  of its electricity from wind power by 2030; this achievement is expected to provide 500,000 jobs to American workers.  In addition, currently 65% of the components in wind turbines are manufactured in the U. S., compared with only 25% before 2005; there are almost 500 companies distributed across 44 states engaged in manufacturing for the wind energy industry.  These data show that wind energy can make a significant impact on the American economy. 

 

Historical role of subsidies in the U. S. energy economy.  One group opposing extension of the PTC is the American Energy Alliance .  Its president, Thomas Pyle, concurred in calling the PTC a “boondoggle”, which it has been receiving for 20 years.  This opinion, however, is in flagrant disregard of the findings of recent studies of energy subsidies.  In the U. S., sources of energy have been recipients of federal subsidies since the 1800’s.  This includes the coal industry, the oil industry, and nuclear power.  Timelines for incentives from the federal government for energy sources over the past century are shown in the graphic below.  



Duration of U. S. government incentive support for fossil fuels, nuclear energy and renewable energy (includes wind, solar, hydropower, geothermal and biomass) from 1900.

Source: American Wind Energy Association using data from the U. S. Energy Information Agency, 2008.  http://awea.org/learnabout/publications/upload/Subsidies-Factsheet-May-2011.pdf

 

These subsidies have been especially instrumental during the early years in the development of each industry; yet after a century of growth in the oil and gas industry, it is still receiving federal subsidies (second gray bar; see the graphic above), and it benefits from a depletion tax credit as well (top gray bar).  The coal industry likewise has benefited from favorable tax treatment since about 1950 (third gray bar).  It is hard to argue that industries that are among the largest and most profitable in the American economy still require subsidies for their survival and growth.  Subsidies to the oil and gas industry are as much as 5 times larger than those for the entire renewable energy sector.  In 2007 the fossil fuel sector received US$ 5.450 billion in subsidies, whereas all renewable energy sources received only US$ 1.147 billion.

 

Analysis

 

Conventional energy sources, namely the various fossil fuels, continue to receive significant subsidies from the federal government, in spite of the fact that they are clearly mature industries.  The companies in question are massively large, and garner extremely large profits from their operations.  It is difficult to justify continuation of any subsidy or support in their favor.  The nuclear industry likewise continues to receive significant subsidy support after several decades of operation.  In this case, operations are usually regulated at the level of the states that the various nuclear-powered electric utilities serve.

 

Development of renewable energy is viewed as having several favorable effects on the American economy.  First, it would contribute to increasing the independence of the U. S. from relying on foreign sources of energy, and from having to use dollar resources to buy fossil fuels from abroad.  Second, it would relieve dependence on fossil fuels overall.  Third, development of all forms of renewable energy would contribute to the U. S. economy by providing new job opportunities in various skilled vocations, thus expanding our economic activity.  Fourth, expansion of renewable energy leads to economies of scale that would make electricity from these sources be fully competitive with conventional, fossil fuel-powered, electricity.  This effect is in fact already operating; wind energy generation is considered to be comparable in cost to conventional electricity.  Finally, widespread adoption of renewable energy would contribute to reducing the annual rate of emission of greenhouse gases.

 

For all these reasons it is important that the renewable energy production tax credit be reinstated for an extended period.  The historical persistence of subsidy support for the conventional fossil fuel industries provides an excellent precedent for the PTC.  Since fossil fuels have long been profoundly successful industries, their subsidies are no longer needed.  The PTC could readily be funded by reducing or eliminating these historical subsidies.  The availability of the PTC would promote expansion of renewable energy, with all its advantages.  Implementing the PTC for a multi-year interval would convey stability and predictability to entrepreneurs and industrialists who seek to develop renewable energy resources.  

 

© 2012 Henry Auer

The Case for a Carbon Tax

Summary.  Increased burning of fossil fuels, producing higher rates of emission of greenhouse gases, generates worsening patterns of extreme weather events that affect human wellbeing.  In response to this trend, policies are being proposed to abate emissions.  This post summarizes two recent newspaper articles proposing use of a carbon tax, or a more limited gasoline tax, for lowering emissions.  It is judged that a carbon tax is simpler and more effective than establishing a cap-and-trade regime for limiting emissions.

 

Introduction.  Humanity’s rate of use of fossil fuels for energy has grown to high levels in recent decades, and is projected to continue increasing for the indefinite future.  As a result, the annual rate of emission of carbon dioxide (CO₂), the main greenhouse gas, as well as other greenhouse gases such as methane, has likewise been increasing.  Most CO₂, once it enters the atmosphere, remains there indefinitely for a century or longer, for there is no naturally occurring mechanism that removes it. 

Climate scientists hold greenhouse gases responsible for the recent long-term increase in the world-wide average temperature.  In turn, the warmer planet harbors an increased potential for more, and more intense, extreme weather and climate events such as rainfall and resulting floods, heat waves and resulting droughts, and wildfires.  These events have catastrophic effects on human populations, and inflict serious economic harms.

These considerations lead climate scientists and economists to develop mitigating policies intended to slow the growth in the rate of emissions.  This would have the effect of lowering the rate of increase in the CO₂ content of the atmosphere.  It must be noted that, because CO₂ remains resident in the atmosphere for a century or longer, its atmospheric concentration cannot be reduced within reasonable time frames; even if emissions ceased entirely, the result would be merely to stabilize the CO₂ concentration at the new, higher level.  One policy intended to abate the rate of emission of CO₂ is to impose an economic hurdle to use of fossil fuels.  This post describes recent opinion articles proposing use of a carbon tax or a gas tax to accomplish this.

Two Economics Commentators have recently come out in support of a carbon tax.  Robert Frank, professor of economics at Cornell, commenting in the New York Times, advocates a carbon tax for the following reasons.  First, he summarized some of the adverse weather events in the U. S. mentioned above in the Introduction, emphasizing that climate scientists today believe that man-made greenhouse gases building up in the atmosphere contribute to the causes of these events.  Dr. Frank cites a global climate model study by Sokolov and coworkers that concludes that the global average temperature in 2045 has a median probability of increasing by 1.85ºC (3.3ºF), and by 5.1ºC (9.2ºF) by 2095, beyond the present level, which has itself already increased about 0.7ºC (1.3ºF) above the temperature that prevailed before humans began burning fossil fuels.  These predictions, based on Sokolov’s current more comprehensive model, are higher than earlier ones by his group and by others.

Dr. Frank then suggests gradually imposing a carbon tax in the U. S., citing an earlier recommendation by the U. N. Intergovernmental Panel on Climate Change for a tax of US$80/metric ton (1.1 U. S. tons) of emitted carbon, which works out to about 70 US cents per U. S. gallon of gasoline.  However, in view of the more dire temperature rise situation currently foreseen he also suggests a tax that could be as high as US$300/metric ton, translating to a rise in the price of gasoline of about US$3.00/U. S. gallon.  Many countries around the world already have taxes on fuel about this high, and, he notes, nations have adapted by developing more efficient cars.

Dr. Frank cites two beneficial economic effects of a carbon tax.  First, it would contribute to reducing the U. S. fiscal deficit, which is highly desirable.  In addition, phasing in the tax gradually only after the present economic distress in the U. S. had passed would provide a timed incentive to make energy use in all its aspects more efficient even before the tax took effect, thus contributing overall to a reduced rate of emitting greenhouse gases.  The U. S. could contribute to a worldwide increase in energy efficiency by imposing carbon-based tariffs on imports.  This, for example, would provide incentives for foreign emitters of large amounts of greenhouse gases to develop efficiencies in their own lands.

Dr. Frank concludes “If the recent meteorological chaos drives home the threat of climate change and prompts action, it may ultimately be a blessing in disguise.”

Eduardo Porter, an economics columnist with the New York Times supports a more limited carbon tax in the form of a gas tax.  Mr. Porter noted that President Obama’s administration has ruled that motor vehicle fleet average gas efficiency has to reach 54.5 miles per U. S. gallon by 2025, almost doubling the present efficiency.  (In a previous action his administration had set a standard of 36.6 miles per U. S. gallon by 2017.)  The administration foresees that by 2025 these standards should result in a reduction of fuel use by 12 billion gallons, with a concomitant lowering of greenhouse gas emissions when burned.

But Mr. Porter has several concerns with the use of vehicle efficiency standards to lower use of fossil fuels for transportation.  First, he states that the engineering, production and societal costs to attain such efficiency may be excessive, representing an ineffective use of productive resources.  This is so even accounting for the reduction in harms inflicted by lowered incidence of weather extremes, and better health such as lower incidence of asthma, according to economists.  Second, he warns that more efficient vehicles may have the “perverse incentive” of inducing drivers to travel more, not less, because the expense per distance traveled will be lower.  In other words, vehicle efficiency standards do not change behavior toward reducing use of fossil fuels.  Further, they only take effect as people move from older, less efficient cars to newer, efficient ones, a process that stretches out over the decade or more needed for the fleet standard to be put in place.

Instead, Mr. Porter favors a gas tax.  First, a gas tax directly affects drivers’ behavior right away, even with their existing vehicles.  They would travel less, and when they decide to buy new cars, they would opt for more efficient ones which in turn provides the incentive to manufacturers to optimize efficiency.  This effect has already been observed when gas prices rose in the past for brief episodes.  Second, any inequity in imposing a gas tax can be reversed by offering tax credits at income tax time, say, to people with lower incomes; behavior at the pump is affected by the price tag staring drivers in the face rather than by the distant, subconscious, expectation of a return of the tax at a later time.  Third, the gas tax spurs car makers to make the most efficient vehicles they think drivers would buy in response to the newly imposed gas tax.  Mr. Porter cites a currently circulating analysis by Prof. Christopher Knittel, an energy economist at the Massachusetts Institute of Technology, that found that if a gas tax had been imposed in the 1980’s, after the Arab oil embargo, gas mileage could have improved by 60% by now.  Instead, car makers have emphasized increasing size, weight and power. 

Tom Friedman, a foreign affairs columnist for the New York Times, has repeatedly called for a tax on carbon as the most direct way to lower consumption of fossil fuels, in order to minimize the growth of greenhouse gases in the atmosphere and to reduce U. S. importation of petroleum from abroad.  Others at the New York Times espousing a carbon tax, both conservatives and liberals, are David Brooks, Nicholas Kristof and Bob Herbert.

In 2011, Profs. Daniel Esty (Commissioner of Energy and Environmental Protection for the state of Connecticut) and Michael Porter published an op-ed article in the New York Times espousing a carbon tax.

Analysis

Cap-and-Trade Mechanisms to Lower CO₂ Emissions. Two principal economic mechanisms have been devised to lower the rate of emissions of greenhouse gases, including CO₂.  One is the cap-and-trade mechanism.  In this regime the government jurisdiction (region, nation or state) administratively establishes how many emission allowances, usually worth the right to emit 1 ton of CO₂, for example, that each fixed point source of emissions (e.g., a power plant) is allowed.  These are granted or sold to the source.  Accordingly, cap-and-trade requires initially establishing the emissions rate for each source, which relies on reporting from the sources without bias.  The total of all allowances constitutes the “cap”.  Allowances have value, because a source that succeeds in reducing its emission rate can “trade” them on an open market to other sources whose emission rate exceeds their allowances.  Cap-and-trade is intended to lower overall emission rates with time, as the administering government lowers the cap each year; this would result in increasing the price  of each allowance.  The result is to lower emissions, while reflecting the price of the allowances by an increased cost for generating power or using energy, which is passed on to consumers.

Thus cap-and-trade uses market forces to, on the one hand, induce conservation behavior by consumers, and on the other hand, to induce efficiencies in generation of energy.  A further complication, though, is the right usually built in to cap-and-trade regimes to “offset” excess demand for allowances by “importing” allowances from outside the territory of the regime; these also must be monitored effectively by those administering the regime.

Cap-and-trade, it can be seen carries several difficulties and inefficiencies.  Its administration is very complex: there is the need to allot allowances and lower them each year; market mechanisms must be established; and offsets must be monitored.  Additionally, the market for allowances establishes third-party traders having no interest in global warming, but only in trading an object (allowances) for profit among themselves, potentially leading to market abuses and speculation. 

The European Union established a cap-and-trade in the last decade, but it was initially judged a failure because it wound up issuing more allowances than necessary, leading to a collapse of the market.  On the other hand, the American regimes in California, and in the Northeast Regional Greenhouse Gas Initiative, are operating cap-and-trade regimes at various stages of progress.

A Carbon Tax or a Gas Tax.  The second principal mechanism for lowering emission rates is imposition of a tax on all forms CO₂ emissions, frequently including other greenhouse gases, or a more limited tax on gasoline only.  A carbon tax impacts all sources of energy and economic activity that depend on fossil fuels.  A gasoline tax is more restricted to limiting use of fossil fuels for personal and commercial transportation.

Administratively a carbon tax is far simpler than setting up a cap-and-trade regime.  It too is based on economic behavior, affecting the demand side of the market, as opposed to the supply side impacted by cap-and-trade.  Typically a carbon tax is imposed gradually, beginning at a low level and increasing annually to an economically meaningful level.  A political “sweetener” for a carbon tax could be a rebate to needy taxpayers to compensate for the increased year-long expense arising from the tax, as noted above. 

This writer believes that a carbon tax is preferable over a cap-and-trade regime for its simplicity, efficiency and effectiveness. 

Mr. Porter’s article above cites U. S. government studies on the overall “social cost of carbon”, per ton of CO₂ emitted.  This arises from harms due to extreme weather and climate events, and adverse effects on health and nutrition from global warming.  These calculations are subject to great uncertainties, but economists place the cost at between US$5 to 68, and increasing even more as time passes.  It thus behooves all societies, including our own, to take active measures to lower emissions, striving to attain zero emissions as soon as possible in order to minimize the harms from extreme events.

Gas taxes are very effective in affecting drivers’ travel habits.  The graphic below

Sources: New York Times presenting data from the U. S. Department of Energy and the World Bank; http://www.nytimes.com/interactive/2012/09/11/business/Fuel-Taxes-and-Consumption.html?ref=business

 

shows per capita use of fuel for driving in developed countries decreases as the size of the gas tax increases.  The U. S. has the lowest gas tax correlated with the highest amount of fuel used per capita. It is seen that most of the benefit appears to be attained at a tax level of about US$2.20 per gallon (although other factors not apparent from the graphic may also be in play.)  As an example, in Great Britain, according to Mr. Porter, the gas tax is about US$3.95 per U. S. gallon.  Ford, the American car maker, sells a model of its+ compact Focus there whose efficiency is 72 miles per U. S. gallon.  A Focus model sold in the U. S. gets only 33 miles per U. S. gallon.  Clearly, automakers currently have the technology and capability to mass produce fuel efficient cars.  While further research can be devoted to enhancing efficiency, this shows that the state of technology today is sufficient to garner significant improvements today.
 

Conclusion.  Frank and Porter have proposed imposing a carbon tax or a gasoline tax to abate further increases in the rate of emission of greenhouse gases.  A carbon tax is judged to be more straightforward, efficient and effective than implementing a cap-and-trade regime for reducing emissions.  No government bureaucracies need to be created, and the simplest of motives driving economic activity by individuals have an immediate effect on behavior.  Where deemed necessary, tax rebates could be devised to ease the tax burden on people with low incomes.  A carbon tax additionally would have positive effects on American society, for it would contribute to resolving our severe fiscal problems.  Policymakers should give serious consideration to this mechanism for abating greenhouse gas emissions.

© 2012 Henry Auer