Two Former Senators Back Carbon Fee With Full Rebate

Trent Lott, a former Republican senator, and John Breaux, a former Democratic senator, support a universal national price, or fee, on fossil fuels (coal, natural gas and petroleum), in an op-ed published June 21, 2018    Their proposal is based on the recent plan put forward by conservatives formerly holding high positions in earlier administrations (The Conservative Case For Carbon Dividends; by James A. Baker, III; Martin Feldstein; Ted Halstead; N. Gregory Mankiw; Henry M. Paulson, Jr.; George P. Shultz; Thomas Stephenson; and Rob Walton; the “Baker-Shultz plan”).

 
Emissions. When we talk about emissions in the context of global warming, it is important to remember that “emissions” actually refers to “the rate of greenhouse gas emissions per year”.  As long as the rate of emissions is greater than zero, greenhouse gases continue to increase in the earth’s atmosphere.  The long-term global average temperature is directly related to the total accumulated greenhouse gas burden of the atmosphere, not to an annual rate of emissions.  Therefore we have to lower the annual emission rate toward zero as fast as possible in order to minimize further temperature increases. 

In their op-ed Lott and Breaux write:

 
“Climate change is one of the great challenges of our generation…. [A] new approach is needed to address this urgent problem.

Both Democrats and Republicans can find [a] solution….

Congress should approve legislation to place a meaningful fee on carbon-dioxide emissions that ripples through all sectors of our economy, and return the revenues it generates to the American people in the form of cash payments. We must set it high enough to encourage a turn to cleaner energy sources and accelerate our transition to a low-carbon future….

The plan… calls for an initial fee of $40 on every ton of carbon-dioxide emissions…, raising it each year until we reach the necessary emissions reductions as [we] move to cleaner sources of energy. All revenue would then be disbursed to Americans. A family of four would receive approximately $2,000 a year.”

 

The authors then outline the advantages of the Baker-Shultz plan:

“… it would achieve far greater emissions reductions than all Obama-era climate regulations combined, which will appeal to Democrats and environmentalists. At the same time, this market-based solution would render carbon regulations unnecessary, which will appeal to Republicans and business interests.… 70 percent of Americans, including the most vulnerable, would come out ahead economically.” 

The writers cite survey support for taking action:

“A poll released [June 19, 2018] shows that 81 percent of likely voters … agree the government should take action to limit carbon emissions. And by a 2-to-1 margin, likely voters support taxing carbon emissions and rebating the money directly to the American people.”

Lott and Breaux conclude:

“We must put a meaningful price on carbon in America….  
To do so, we must set our politics aside for the greater good. America has done it before, time after time. We believe the country will do so again.”

British Columbia’s Carbon Fee Succeeds in Reducing Emission Rates.  While some skeptics may not agree with the Baker-Shultz plan, the actual experiment is already under way in British Columbia (BC), Canada.  It was set in place in 2008, beginning at a level of CA$10/ton of carbon dioxide (CO₂) and rising to CA$30/ton by 2012. 

The result has been positive, as the New York Times reported in March 2016.  The revenue from the carbon fee is being returned to BC residents and businesses in the form of tax credits in other fiscal categories.  As BC’s environment minister, Mary Polak, noted, “It performed better on all fronts than I think any of us expected”.   

A Duke University-University of Ottawa study cited in the article found that CO₂ emissions fell by 5 to 15% with “negligible effects on aggregate economic performance”.  The carbon fee raised gasoline prices, for example, by US$0.19/gallon, providing incentives to BC residents and businesses to drive less and undertake energy efficiency initiatives.  Polling shows that those opposed to the fee fell from 47% initially to 32% in 2015.  Experts realize, however, that in order to achieve meaningful goals of reducing emissions the carbon fee has to be still higher.  Indeed, as of 2018, BC is beginning to raise its fee again after staying unchanged since 2012.

Fuel-dependent carbon pricing.  In carbon pricing regimes the size of the price is tied directly to how much CO₂, the combustion product resulting when the fuel burns, is released.  Relative CO₂ yields are shown in the table below. 

                                 Relative Efficiency of Fossil Fuels

Fuel	CO2 released per unit of heat obtained, relative to natural gas
Natural gas	1.00
Petroleum (fuel oil, gasoline)	1.37-1.48
Coal	1.75-1.94

 

 

 

 

It is seen that coal releases almost twice as much CO₂ as natural gas when burned to yield the same amount of heat.  So in an industrial setting it may be expected that the price on coal, on a thermal basis, would be almost twice as high as that on natural gas.  For example the BC pricing regime uses information such as this to set fees.

© 2018 Henry Auer

 

 

 

 

 

 

 

 

 

 

The EU’s Emissions Trading Scheme Has Been Voted Down

Summary.  The European Union instituted its Emissions Trading Scheme, using a cap and trade mechanism, in 2005.  Since that time, the Scheme has gone through periods in which the number of allowances was too high, resulting in excessively low values for their price. 

In a vote on April 16, 2013 the European Parliament defeated a proposed measure continuing to allot allowances to the emissions sources among the EU’s member nations, largely for economic reasons.  If allotments are not revived, the ETS will cease operations.  This would terminate one of the first multinational efforts to mitigate greenhouse gas emissions.
 

The ETS exemplifies the administrative and political difficulties facing cap and trade regimes.  Valuing carbon emissions is better achieved with a carbon fee.

 

Introduction.  The original members of the European Union (EU) in 1997 acceded to the Kyoto Protocol, an international treaty to limit emissions of carbon dioxide (CO₂) and other greenhouse gases (GHGs).  The Protocol entered into force in 2005.  Even before this date the now expanded membership of the EU undertook to establish an Emissions Trading Scheme (ETS) to limit GHG emissions through 2020, using a cap and trade market mechanism.  In such regimes allowances, once granted, can be traded or auctioned in an open market; this fixes a monetary value for them.

In the initiation phase of the ETS the EU allowed each member nation independently to establish the number of allowances (each permits release of one metric ton of CO₂).  As a result, too many allowances were granted, and the ETS market wound up valuing the allowances at a very low price, even approaching EUR 0 in one year.  In the second phase (2008-2012) the number of allowances granted was reduced, and the ETS market valued allowances at reasonable levels.  In the third phase, beginning in 2013, the EU began centrally to determine the distribution of allowances.

Unfortunately, the EU cancelled its most recent auction   in March 2013 because bids received were “significantly” below the actual market rate.  In 2013, the start of Phase 3, about 40% of newly issued carbon emission allowances were being sold at auction for the first time.  The rest are still distributed at no charge.  The price had fallen to EUR3.73 (US$4.86) a metric ton early in the year.  The price had been about EUR 25 in 2008.

Longer term the ETS price for emission allowances has fallen drastically, by 90%, in the last five years.  This is due largely to a drop in demand for energy among EU countries because of recessionary conditions.  This has led to an oversupply of allowances.  The ETS began to reevaluate its allocation of allowances, in an attempt to rebalance the trading system and maintain a price on emissions.

Unfortunately the EU has now voted against its cap and trade regime.  The New York Times reported on April 17, 2013 that the European Parliament had voted not to lower the number of carbon dioxide emission allowances to be granted going forward.  The Times called the result “a potential death blow” to the cap and trade emissions regime.  Even so, emissions from the EU had fallen by 10% between 2007 and 2012, at least partly because of weak economic conditions.  The Parliament gave greater weight to the desire to keep energy costs down in view of the economy than to the overarching need for the world to limit its emissions of GHGs.  After the vote, the value of an allowance fell 40% to about EUR 3 per metric ton.  It is estimated that in order to have an effect on curtailing emissions, the price would have to be about EUR 30 per metric ton or higher. 

Analysis

This blog has long advocated in favor of a direct fee on carbon fuel consumption, rather than implementation of a cap and trade regime, to put a price on emissions of GHGs and thereby lower the annual rate of GHG emissions.  This latest development in the EU, the failure of its policymakers to continue the ETS, shows that a cap and trade regime may continually be subject to political interference.

As written in a recent post a cap and trade regime has many disadvantages in comparison to a carbon fee.  Some of these are apparent when considering the EU.  The factors include a) a need to account accurately for baseline emissions from each identified source prior to placing the regime in operation; b) a continued need for monitoring emissions from each source as the regime operates; c) a need for a  mechanism to allot allowances both at the outset and in subsequent periods of operation; d) a mechanism or rule for distributing allowances, including determining whether to grant or sell them; and e) setting up the administrative offices needed to operate the regime.  It is seen from this incomplete list that a cap and trade regime presents many challenges, requires an extensive bureaucratic structure, and includes many opportunities for mistakes to be made, or for influence, that defeat the objective of constraining emissions.

In contrast, a carbon fee is extraordinarily simple in its operating features and is easy to implement.  For example, a low rate could be established at the outset, which would increase annually to a level at which it would have a meaningful effect in reducing energy demand.  Experience has shown (not discussed here) that a carbon fee is easy to apply, has a broad if not universal reach, and achieves its objective according to its magnitude.  It is clear that the simplicity and effectiveness of a carbon fee offers major advantages over use of a cap and trade regime.

Many commentators have urged use of a carbon fee to mitigate emissions. 

 

In summary, the simplest, most direct, and most effective mechanism for reducing dependence on fossil fuels and mitigate emissions of GHGs is to apply a carbon fee.  The time to begin abating humanity’s emissions of CO₂, a major greenhouse gas, is now.  The longer we wait, the more firmly we cement our dependence on fossil fuels, and the more difficult it will be to achieve meaningful mitigation of global warming.

 © 2013 Henry Auer