Republicans and Democrats Really Do Agree on Climate!

On July 29, 2018 an op-ed by the social psychologists Leaf Van Boven and David Sherman reported that majorities of both Republicans and Democrats agreed that “climate change is happening, threatens humans and is caused by human activity — and that reducing carbon emissions would mitigate the problem.”

They summarize the results of two national polls, in 2014 and 2016, that they administered (together with a third colleague; here we’re omitting some details of the way the experiments were carried out).  Important conclusions they present include:
 

·        “…most Republicans were in basic agreement with most Democrats and independents on this issue.”

·        Probably the “problem is not so much that Republicans are skeptical about climate change, but that Republicans are skeptical of Democrats — and that Democrats are skeptical of Republicans.”

·        In experiments with different input information, “Republicans supported climate policies that they [were told were] backed by Republicans and were neutral toward policies backed by Democrats. Democrats supported policies that they [were told were] backed by Democrats more than they supported policies backed by Republicans.”  This emphasizes that members of both parties succumbed to intensified tribalism on this issue.

·        “Among social psychology’s fundamental lessons is that people are profoundly affected by what other people think. In their desire to be upstanding members of their political tribe, people are pulled toward embracing the stances of their peers and loath to publicly disagree with them.”

·        The authors found “a consistent, if somewhat surprising, pattern: Political disagreement was substantially smaller when it came to Republican-backed policies.  In particular, there was very little distance between Republicans and Democrats when evaluating a Republican-proposed carbon tax.”

As a result, the authors surmise there may be bipartisan support for a plan proposed last year by six Republican economists and statesmen, former cabinet members and high-level officials in former Republican administrations.  This writer described this proposal in a previous post.  Its essence is a revenue-neutral carbon fee imposed on all fossil fuels (coal, petroleum and natural gas) in proportion to the amount of carbon dioxide each produces when burned.  It is revenue-neutral because all fee proceeds are distributed back to American taxpayers.   

A similar proposal has just been introduced in Congress by Republican Representative Carlos Curbelo.  The carbon fee is US$24/metric ton of carbon dioxide emitted, increasing with time.  The difference is that this proposal is not revenue-neutral, but uses the proceeds for highway construction, climate research and support to low income households.
 
The social psychology results described above are likely not outliers in public attitudes on climate change.  The Yale Program on Climate Change Communication (working with George Mason University‘s  Center for Climate Change Communication, and other research organizations) has been surveying American public opinion on this subject for many years.  In a report on May 8, 2018 they found:

·        “Most registered voters (73%) think global warming is happening, including 95% of liberal Democrats, 88% of moderate/conservative Democrats and 68% of liberal/moderate Republicans, but only 40% of conservative Republicans.

·        A majority of registered voters (59%) think global warming is caused mostly by human activities, including 84% of liberal Democrats, 70% of moderate/conservative Democrats, and 55% of liberal/moderate Republicans…, but only 26% of conservative Republicans.

·        A majority of registered voters (63%) are worried about global warming, including 88% of liberal Democrats, 76% of moderate/conservative Democrats, and 58% of liberal/moderate Republicans, but only 30% of conservative Republicans.”

·        Most registered voters support policies that would reduce use of fossil fuels and promote investing in renewable energy to replace the lost conventional energy.

Conclusion
 
Tribalistic outlooks separating Republicans and Democrats concerning global warming and its effects may be resolving, in favor of collective action to address the issue.  It is indeed critical to embark on meaningful policies at the federal level as soon as possible, in order to minimize the continuing rise in the global average temperature.  Popular attitudes and Congressional approaches are coalescing to promote political action.

© 2018 Henry Auer

Carbon Fee and Dividend Is Proposed by Conservative Economists

Background.  U. S. President Donald J. Trump has called global warming a hoax, and opposes policies that would combat its causes and effects.  He has assembled a cabinet whose members, as heads of departments that are relevant to this issue, hold opinions that are consistent with his.  They seek to reverse the policies of the Obama administration that mitigate global warming and its harms.

Carbon Fee and Dividend.  On February 8, 2017, three conservative economists who held high level positions in earlier Republican administrations published the op-ed “A Conservative Case for Climate Action” in the New York Times .  The authors are Martin S. Feldstein, formerly the chairman of the Council of Economic Advisers under President Ronald Reagan; Ted Halstead, the founder and chief executive of the Climate Leadership Council; and N. Gregory Mankiw, formerly the chairman under President George W. Bush. 

The op-ed is based on a more extensive paper made public the same day, by these writers and several other conservative or Republican economists.  Three other authors in this group, former Secretary of State under President George H. W. Bush, James A. Baker III;, former Secretary of State under President Ronald Reagan, George P. Shultz; and former secretary of the Treasury under President George Bush, Henry M. Paulson Jr. also discussed their plan.  They said that imposing an economy-wide tax on carbon emissions from burning fossil fuels is “a conservative climate solution” since it relies on free-market principles.

Importantly, and apparently in opposition to President Trump, the writers make clear their acceptance of “the very real dangers of global warming”.  They state that “this is the perfect time … to address the dangerous threat of climate change”, and support limiting emissions of the major greenhouse gas, carbon dioxide (CO₂).

Their goals are fourfold, to be achieved by simultaneously putting in place four measures in their “ideal climate policy”. 

1.    To reduce the rate of carbon emissions, the authors propose a tax on carbon, suggesting a level of $40/ton of emitted CO₂ at the outset, and rising in successive years. The authors state this would send an economic signal both to consumers and to businesses to lower their use of carbon fuels.

2.    To help working class Americans the proceeds from collecting the tax would be distributed equally back to citizens as a quarterly dividend.  For example, in the first year, a family of four might receive $2,000.

3.    The plan would help promote economic expansion in the U. S.  It would protect international commerce by subsidizing exports to countries that don’t have similar policies, and placing tariffs on imports from such countries.  The higher carbon pricing would stimulate growth in renewable energy enterprises, and in energy efficiency, which provides growing job opportunities.

4.    The plan would provide regulatory certainty for businesses and investors, since it would eliminate the need for regulatory policies such as former President Obama’s Clean Power Plan (which is currently under court challenge) to achieve reductions in annual emission rates.
 

Analysis

The authors cite U. S. Treasury, Office of Tax Analysis, Working Paper 115, January 2017, as concluding that the dividend would wind up benefiting the bottom 70% of taxpayers, or about 223 million residents. That dividend compensates for having paid the carbon tax.  The Working Paper estimates that during the first year the tax would add about $0.36 per gallon of gasoline, for example.  This increase pales by comparison to the gyrations of the retail price for gasoline during the past few years. 

The tax has the effect, at the instant of purchasing a carbon-based fuel, of discouraging excessive use of the fuel because of the higher price.  The dividend, on the other hand, has the effect of expanding spending power at a time considerably removed from the time of the restraint in purchasing.  Stimulation of spending will have a beneficial effect on the national economy, offsetting the loss of spending due to collecting the carbon tax at purchase time.

The authors also find, upon analysis, that the carbon tax and dividend, at the starting value of $40/ton of emissions, would reduce the carbon emissions rate to half the rate from all the regulation-based reduction programs put together by President Obama’s administration.

Citizens Climate Lobby (CCL) is an organization whose principal goal has been to lobby Congress to enact a revenue-neutral plan, essentially identical to the one proposed by the authors of this op-ed.  CCL commissioned Regional Economic Models, Inc. (REMI) to analyze the effects of the CCL carbon fee and dividend plan.  After running a model, REMI found that after 20 years of operation the program is predicted to provide a) a 50% reduction in the CO₂ emission rate, b) about 2.8 million new jobs being created as a result of the stimulating effect of the dividend, and c) 230,000 fewer premature deaths among the population as a result of reductions in air pollution from disease-causing agents.

British Columbia, the Canadian province, has had a very similar regime in operation since 2008.  Instead of a direct dividend, British Columbia uses the revenue to abate other classes of taxation, including the corporate tax rate.  The effect broadly is comparable to that of a dividend, namely, reinjecting funds back into the provincial economy. 

The New York Times reported, on March 1, 2016 that the carbon tax rose from CA$10 in 2008 to CA$30 in 2012 (about US$22.20 in 2016), while emissions fell over that time from 5 to 15% even as there were minimal effects on overall economic activity.  The Times stated “a carbon tax is the most efficient, market-friendly instrument available in the quiver against climate change”.  The report also quoted Mary Polak, British Columbia’s environment minister, as saying the tax “performed better on all fronts than I think any of us expected”. 

Conclusion

Martin Feldstein James Baker and their colleagues have provided a useful and timely recommendation in their op-ed articles.  A carbon tax is far easier to administer than the other major mitigation regime, cap-and-trade (in force in California and proposed to the states as a possible measure under President Obama’s Clean Power Plan).  The dividend ensures that the overall effect of the carbon tax is revenue-neutral.  As seen from British Columbia’s experience, a carbon tax and dividend regime would clearly produce reductions in the rate of greenhouse gas emissions, and indirectly stimulate new enterprise creation, together with new jobs, in order to mitigate global warming and promote energy efficiency. 

It is time for President Trump and the conservative majorities in the U. S. Congress to recognize the reality of global warming and its dangers, and to enact meaningful federal legislation to minimize future emissions.

© 2017 Henry Auer

Enact a Carbon Tax, Not a Cap-and-Trade System

Summary.  The worldwide need to abate emissions of greenhouse gases is becoming more important with every passing year.  Nevertheless, the U. S. has never enacted federal legislation that would limit its emissions.   

This post describes a proposal for a cap-and-trade market mechanism to lower greenhouse gas emissions in the U. S., presented in a recent op-ed article.  Then cap-and-trade is compared with a direct tax or fee on carbon fuels. 

It is concluded that a carbon tax or fee is far more advantageous than a cap-and-trade mechanism, for its effectiveness, efficiency and freedom from the need to create a new bureaucracy to oversee its operation.  The revenues generated can be applied in a variety of ways that would be politically acceptable.  Adoption of a carbon tax or fee in the U. S. is strongly recommended. 

Introduction.  The nations of the world are currently on a path of emitting greenhouse gases (GHGs) that risks putting humanity in great climatic peril by the end of this century.  A principal GHG is carbon dioxide (CO₂) emitted when we burn fossil fuels for energy.  Annual rates of emission while doing “business as usual” (which assumes no meaningful reductions) or only modest rate reductions lead to unacceptably high levels of total accumulated atmospheric GHGs.  It is this accumulated total (not the annual emissions rate) that determines the extent of global warming that we experience.  Thus, although it may sound virtuous to reduce annual emission rates, the new GHGs that are still emitted continue to accumulate to ever higher levels.  Only global emission rates approaching zero suffice to stabilize the global atmospheric GHG burden, leading to stabilization of global average temperature at some value higher than we have today.

The threat that GHGs posed to the world’s climate was already recognized in the 1990’s, and led to the United Nations-sponsored Kyoto Protocol that limits emissions among developed countries of the world. (Please find a Summary of Historical Developments in an earlier post.)  The U. S. never ratified the Kyoto Protocol, and has failed to pass federal legislation to limit GHG emissions on at least two more recent occasions (see the Summary).

Federal policy to lower GHG emissions can rely on market-driven mechanisms, among others.  One such mechanism, a direct fee imposed on fossil fuels based on the amount of CO₂ emitted per unit of energy obtained, has been supported by many prominent commentators and experts.  Among these, most recently, are four Administrators of the U. S. Environmental Protection Agency (EPA) appointed by Republican (i.e. the more conservative of the two American political parties) presidents (see the previous post). 

A second market approach is the cap-and-trade system.  Here we discuss a recent op-ed article calling for creation of a federal cap-and-trade mechanism.

Proposal to enact a federal cap-and-trade regime.  The New York Times published an op-ed article by Dirk Forrister (President and CEO of the International Emissions Trading Association) and Paul Bledsoe (Senior Fellow, Climate & Energy Program at the German Marshall Fund of the United States) promoting a national cap-and-trade program for the U. S.  “Cap-and-trade” refers to imposing an upper limit (the “cap”) to the amount of GHGs, especially CO₂, that a physical facility can emit in a year, and trading of emission allowances between efficient facilities left with excess allowances and inefficient facilities needing extra allowances.  Caps are to be lowered year by year to enforce increased efficiency and lower overall emissions.  The authors extol this market mechanism as being “widely recognized as a cheaper way to lower emissions. [Because President Obama has had to use a regulatory mechanism instead, c]onsumers will pay a higher price for electricity as a consequence.”

The authors cite China’s pilot cap-and-trade market being set up in the city of Shenzhen as an example.  It will cover over 800 individual emission sources, both industrial facilities and municipal buildings, that are responsible for 40% of Shenzhen’s emissions.  The authors state that six more pilot projects are planned in China in the coming year.  They state that currently 20% of GHG emissions around the world occur in carbon pricing systems (they do not indicate whether only cap-and-trade mechanisms are used). 

The op-ed dismisses enactment of a direct carbon tax by surmising, without supporting evidence, that “the tax would probably be small and would not guarantee the reduction in emissions needed.”  The example presented further below rebuts this contention.  Nevertheless, Forrister and Bledsoe correctly state that revenues obtained either from a tax or from a market mechanism could be rebated to taxpayers or used to offset other taxes; still other uses for this new revenue have been proposed by other analysts.  They provide a useful summary of the rancorous political environment in the U. S. Congress that has prevented past attempts to enact cap-and-trade legislation from succeeding. 

Analysis

We need to lower GHG emissions.  The need to abate GHG emissions becomes more apparent with each passing day.  Man-made increases in GHG concentrations in our planet’s atmosphere are directly responsible for increased long-term global average temperature.  Higher temperature contributes to the severity and frequency of extreme climate and weather events that are harmful to human society, inflicting major costs that, in most countries, are borne by the taxpaying public.  Forrister and Bledsoe state “[a]s the costs of adaptation rise… inaction will become an untenable political position.”

A carbon fee or tax.  The previous post presents the case offered by four Republican former EPA administrators for a fee imposed directly on fossil fuels.  (A carbon fee or tax can be considered primarily a way of reducing demand for fossil fuels.)  Here the alternative, a cap-and-trade market which operates by limiting the amount of emissions, and therefore of the fuel use that generates them, is proposed.  (Cap-and-trade may be considered to operate primarily by limiting the supply of fuel.)  A direct fee or tax on fossil fuels is far more efficient and effective in limiting GHG emissions than is cap-and-trade. 

A carbon tax is legislated at the outset and remains in effect indefinitely.  (Only politically motivated tinkering in later years would lead to changes in the size of the tax.)  Importantly, a carbon tax can be imposed on all fossil fuels at the point of extraction from the earth.  For this reason a carbon tax easily covers the entire fossil fuel-based energy economy, including fuel for transportation.  Typically it would start at a low, relatively painless level, and grow in size year by year until it reaches a significant amount.  The added cost of fuel serves as an economic deterrent to its use.  The fee motivates consumers to adopt energy-efficiency and to use renewable energy.

A carbon tax is simple to administer.  It has led, for example, to striking increases in efficiency and decreases in fuel use when it is applied as a tax on gasoline fuel for motor vehicles. The graphic below

Source: 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 that per capita use of fuel for driving 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. In Great Britain, on the other hand, the gas tax is about US$3.95 per U. S. gallon and very low fuel use per capita (but it is seen from the graphic that a similar increase in efficiency can be obtained for as low as about US$2.20 per U. S. gallon).

A cap-and-trade market, on the other hand, requires establishment of cumbersome new bureaucracies to operate.  It further needs to create a new trading market, usually including an auction facility, to buy and sell emission allowances.  Another bureaucracy is needed to work with “offsets”, the buying or selling of emission allowances based on emission credits beyond the actual jurisdiction of the region or nation involved.  Like any commodity market, this one is susceptible to abuse and manipulation by third party traders seeking profits but who are not directly connected with the energy economy.

Consider the example of Shenzhen, cited in the op-ed of Forrister and Bledsoe.  For each of the more than 800 facilities covered, officials must evaluate, and then verify, the GHGs emitted annually in order to be able to issue the correct number of emission allowances.  (Note that there is an incentive for a facility to overstate emissions in order to earn more allowances.)   Officials must account for allowances returned at the end of the year, and must verify that the current emission level for each facility agrees with the number of returned allowances.  Then in each succeeding year the allowances for each facility are reduced, and the cycle of measuring and verifying emissions, and matching those results with allowances, must be repeated.  Third party speculators, who are neither energy officials nor facility representatives, can enter the market for allowances and trade them in search of profit (or garnering losses) without regard for the underlying energy policy, potentially leading to windfalls or market crashes.

In addition, it may be difficult to work out a way to issue allowances for transportation fuel, since vehicles are not fixed emission sources, and are far more numerous than fixed facilities.

The European Union’s cap-and-trade market.  An example of a cap-and-trade regime which failed is found with the Emissions Trading System (ETS) of the European Union (EU).  The ETS was set up as the EU entered under the Kyoto Protocol in 2005.  It covers at least 11,000 individual emission sources across the EU.  At the outset, allowances were determined by each EU nation independently.  Allowances were granted, in certain cases, in excess of need or previous national experience.  The auction market in the initial years established early prices as high as almost €30 per tonne of CO₂ equivalents (tonne, a metric ton) in the middle of 2006, which then fell, for a variety of reasons including the onset of the recession, to about €0/tonne one year later.  As the allocation mechanism improved prices recovered, but by 2012 they were again low, less than €4/tonne, because recessionary conditions across the EU led to a surplus of available allowances.  The EU Parliament voted in April 2013 not to lower the number of allowances, thus essentially generating a “potential death blow” to the ETS.  The Parliament relented a few months later.  This example shows how cap-and-trade is susceptible to political interference, preventing attainment of its objectives. 

(Update Aug. 22, 2013) California’s cap-and-trade program also exemplifies the bureaucratic and operational difficulties identified above.  In its fourth quarterly auction of allowances, the price for the largest emitters was US$12.22 per metric ton of CO₂-equivalent, about 12.7% lower than the previous sale.  An impression of the complex bureaucracy that administers the program may be seen in the state’s Quarterly Auction 4 Summary Results Report.  It refers to setting auction pricing and verifying eligibility of participants in the auction. 

“ARB staff and the Market Monitor carefully evaluated the bids, and determined that the auction process and procedures complied with the requirements of the Cap-and-Trade Regulation….

‘The Market Monitor found that the auction was cleared consistent with the auction clearing rules…[and] confirmed the clearing price and clearing quantities….’”

This document provides further details of the auction that reflect the intensive administrative effort needed to conduct it. 

California’s Cap-and-Trade system covers 359 individual entities whose emissions are higher than the cutoff of 25,000 metric tons per year.  (Link here and then click on the link “Updated List of Covered Entities”.)  Emissions and allowances for each must be monitored and verified.

Conclusion 

It is highly recommended that the U. S. enact a national tax on the carbon in fossil fuels, beginning at a low level and increasing annually.  Its operation is highly effective and very efficient.  It is easily extended to include the entire fossil fuel economy in its operation.  It readily constrains the use fossil fuels by reducing demand on the part of consumers.

Cap-and-trade is shown here to be cumbersome, requiring an extensive bureaucracy operating throughout the lifetime of such a program.  The ETS of the EU has been ineffective.  Cap-and-trade is susceptible of abuse and likely would not cover the transportation segment of the energy economy.

With either mechanism, the revenues obtained can be rebated to taxpayers, or can be used to offset other taxes.  Other possible uses include reducing the national debt or supporting research, development and deployment of innovative renewable energy technologies.  Allocating the funds in ways such as these should ease the political barriers to enactment in the U. S.

© 2013 Henry Auer

Four Republicans Propose a Fee on U. S. Carbon Sources

Summary.  Four former Administrators of the U. S. Environmental Protection Agency, all of whom served under Republican presidents, are urging the members of the U. S. Congress to overcome partisan divisions and pass meaningful legislation to combat global warming.  They state that science clearly shows the planet is warming, and point out that further inaction is harmful because the window of time remaining for action is shrinking.  They observe that President Obama’s Climate Action Plan is noteworthy and should be endorsed by the Congress.  Additionally they propose a fee on use of carbon fuels as an effective means for abating the rate of emissions and consequent worsening of global warming.  Here, we present an example of the effectiveness of a tax on gasoline fuel in reducing consumption.

Carbon dioxide accumulates in the atmosphere, once emitted, and remains for very long times without being removed by natural processes or human technology.  Therefore it is necessary to reduce the rate of emissions in order to keep the accumulated level as low as possible, and limit the harms wrought by excessive global warming.  The fee on carbon use proposed by the Administrators goes a long way to accomplishing this goal.

 

Introduction.  Over the past few decades the United States has never enacted a legislated national energy policy to combat global warming.  Since the late 1990’s plans operating around the world at the international, multinational and national levels to curb the release of greenhouse gases (GHGs) have been implemented.  Prominent among these was the Kyoto Protocol, an international agreement among industrialized countries negotiated under the United Nations.  These programs have been undertaken recognizing that human activity is responsible for the accumulation of GHGs and that the world’s nations must work together to mitigate the rate of emissions and the total accumulated level of GHGs in the atmosphere.  The U. S. Senate, in contrast, rejected American participation in the Kyoto Protocol.  Only in recent years have certain American states, individually or by interstate regional agreements, embarked on policies to reduce GHG emission rates.  (Please find a Summary of Historical Developments in the previous post.)

In the absence of Congressional action, President Obama presented his Climate Action Plan in June 2013.  It contains a large number of specific initiatives grouped as cutting carbon pollution, protecting the country from the impacts of global warming, and working internationally to fight global warming.  Some of the policies can be implemented by executive action, whereas others require budgetary action by the Congress.

This post describes a proposal for a fee on carbon sources set forth by four prominent Republicans (i.e., members of the more conservative of the two U. S. political parties) with strong credentials in setting environmental policy.

Four Republicans, all former Administrators of the U. S. Environmental Protection Agency (EPA), propose a fee on carbon-containing sources of energy.  They all were appointed by Republican presidents.  Their proposal appeared in the New York Times on August 2, 2013.  The former Administrators are William D. Ruckelshaus, who served from the founding of the EPA in 1970 under Republican President Richard Nixon to 1973, and again from 1983 to 1985; Lee M. Thomas, who served from 1985 to 1989; William K. Reilly, who served from 1989 to 1993; and Christine Todd Whitman, who served from 2001 to 2003.

The Administrators write:

“…we have a message that transcends political affiliation: the United States must move now on substantive steps to curb climate change, at home and internationally.

“There is no longer any credible scientific debate about the basic facts: our world continues to warm….

“The costs of inaction are undeniable. The lines of scientific evidence grow only stronger and more numerous. And the window of time remaining to act is growing smaller: delay could mean that warming becomes ‘locked in.’

“…President Obama’s June climate action plan lays out achievable actions that would deliver real progress….

“Rather than argue against his proposals, our leaders in Congress should endorse them and start the overdue debate about what bigger steps are needed and how to achieve them — domestically and internationally.”

The Administrators declare that the most effective way to reduce greenhouse gas emissions is to use market-based approaches, such as a fee on carbon, to provide the incentives to migrate away from use of carbon-based fuels.  As alluded to in the quotes above, they recognize that the present political climate in the U. S. Congress makes this an unrealistic policy to promote.  They support the administrative and legislative policies promoted by President Obama in his energy policy speech as a meaningful strategy in the absence of Congressional action.

The Administrators conclude

“More will be required…we must continue efforts to reduce the climate-altering pollutants that threaten our planet. The only uncertainty about our warming world is how bad the changes will get, and how soon. What is most clear is that there is no time to waste.”

 

Analysis

It is highly significant in the U. S. policy setting that four Republican Administrators of the EPA, serving under the Republican presidents Richard Nixon, Ronald Reagan, George H. W. Bush and George W. Bush, have come together to urge taking strong legislative action to combat global warming.  They understand the indisputable scientific imperative that global warming constitutes a major threat to the wellbeing of the planet.  They recognize the need to “transcend” political differences.  They urge immediate action because “the window of time remaining to act is growing smaller”.   Finally, they realize that President Obama’s announced policy, while making worthy steps to combat global warming, still requires the forceful action that a legislated policy, such as a fee on carbon, would generate.

Climate scientists have shown incontrovertibly that a) atmospheric concentrations of greenhouse gases, especially carbon dioxide (CO₂), have been rapidly increasing since the start of the industrial revolution; b) the growth in CO₂ levels is due to mankind’s burning of fossil fuels for energy; and c) the greenhouse effect from these greenhouse gases produces increases in the long-term global average temperature, as well as drastic decreases in the number of extreme cold days coupled with profound increases in the number of extreme hot days.  These temperature extremes lead to extreme weather and climate events that are harmful to those who are affected by them.

CO₂ is a waste product whose costs are not reflected in the purchase price that we pay when we use fossil fuels.  Our purchases compensate fuel companies for the costs involved in extracting and marketing fuels, and include profit accruing to them for their efforts.  But the costs of dealing with its waste, namely CO₂, are not included; the cost of this waste constitutes an “externality” that fuel companies do not charge us for.  On the other hand, there are examples in our daily life where we, the consumers, are directly charged for the costs of waste that we generate.  These include garbage removal and disposal, and waste water treatment.  Our use of fossil fuels should follow the models given by examples such as these.  A fee on carbon use would accomplish this.

Global warming induces extremes of weather and climate that adversely affect human wellbeing and socioeconomic state as a result of the calamities that result.  The Administrators point out that at a time in the near future which cannot be predicted with certainty, the Earth’s climate system could reach a point at which greenhouse warming creates reinforcing effects that promote even more warming.  This underlies their caution that warming could become “locked in”.  In addition, climate scientists point out that the longer we wait to begin meaningful abatement measures, the more intensive, and expensive, such measures will necessarily be to make up for lost opportunities.

In reaction to such unpredictable events governments and other social structures are called on to spend vast amounts of money to repair damage and restore facilities.  They also react by undertaking extensive preventive infrastructure projects that were unforeseen before devastation struck.  It thus makes economic and sociological sense to minimize the effects of global warming by combating its causes, i.e., by migrating away from use of fossil fuels as fast as possible.

The Administrators recommend a market-based mechanism for accomplishing this, and suggest a fee on use of carbon fuels for this purpose.  A carbon fee is highly efficient and effective in reducing use of fossil fuels.  It is simple to administer, and leads, for example, to striking increases in efficiency and decreases in fuel use when it is applied as a tax on gasoline fuel for motor vehicles. 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 that per capita use of fuel for driving 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. In Great Britain, on the other hand, the gas tax is about US$3.95 per U. S. gallon (but it is seen from the graphic that a similar increase in efficiency can be obtained at a much lower tax level of about US$2.20 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.  

 

Conclusion

 

Former EPA Administrators Ruckelshaus, Thomas, Reilly and Whitman all served in the administrations of Republican presidents.  They have come together to urge the members of the U. S. Congress to move beyond partisan posturing and unite behind meaningful legislation to combat global warming.  They point out that the science underlying global warming is incontrovertible, that the time for significant action is shortening, and that legislative action is required, for example to set up a fee for use of fossil fuels.  Their sentiments are reasoned and convincing, and should be acted upon as soon as possible. 

The status of the global climate worsens with each day of inaction.  That loss cannot be recovered at a later date because CO₂ emissions, on the time scale in question, remain in the atmosphere and accumulate higher and higher.  We in the U. S., independently and in concert with other major greenhouse gas emitters, must act as soon as possible to keep the accumulated CO₂ level as low as possible going forward.

© 2013 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

Choose a Carbon Fee, Not a Cap and Trade Regime

Summary.   Burning fossil fuels generates carbon dioxide as waste whose socioeconomic costs to humanity are not accounted for in the price of the fuel.   Reducing our dependence on fossil fuel use and mitigation of emission of greenhouse gases have led to valuing carbon either by a fee or use of a cap and trade mechanism; the additional value would limit consumption.  A carbon fee is easy to implement legislatively or administratively, and has been effective in reducing demand for fossil fuels.  Cap and trade regimes are in place in many jurisdictions around the world.  They are administratively complex and bureaucratically onerous, and can be unsuccessful in curbing fossil fuel use.  This post expands on these factors, and concludes that lowering the use of fossil fuels is best accomplished by imposing a fee on carbon.

 

Introduction. 

Human activity generates waste.  Significantly, as we burn more and more fossil fuels to produce the energy that powers modern life, we emit more and more carbon dioxide into the atmosphere.  This substance, an important greenhouse gas, is being released as the waste product of our energy economy.

 

It is imperative to treat manmade carbon dioxide as a cost-bearing waste product because of the harmful effects of the global warming that it produces.  These harms carry enormous costs with them.  Properly accounting for these costs would make it more acceptable to make the investments needed to reduce greenhouse gas emissions.
 

Policy directed toward reducing dependence on fossil fuels and mitigating greenhouse gas (GHG) emissions has long grappled with the alternative policies of imposing a carbon fee on fossil fuels and creating a cap and trade regime.  These may be viewed as policies that affect, respectively, the demand for, and the supply of, fossil fuels.  A carbon fee levies an added cost on fossil fuels directly.  The fee is passed through directly to the consumer, affecting demand. Cap and trade mechanisms, on the other hand, place upper limits on the emission of carbon dioxide (CO₂). 

This post reviews examples of both mitigation mechanisms.  Upon consideration we support the use of a carbon fee in preference to a cap and trade mechanism for mitigation.

A carbon fee is imposed on fossil fuels directly in accordance with the amount of CO₂ produced when burned.  The fee is imposed and collected at, or close to, the source of the fuel.  The value of the fee is then passed along as the fuel is transformed (petroleum to gasoline, for example), and/or transported (all fuels), and is ultimately paid by the consumer.  The level of the fee is set by policymakers, and typically is envisioned to start low and rise periodically until it reaches an intended level.  It is seen that a carbon fee is conceptually and operationally easy to implement.  Clearly the fee operates to constrain demand.

Under cap-and-trade major emitting facilities are allotted allowances each of which licenses the release of a fixed amount, say 1 ton, of CO₂ and other GHGs.  An administrative agency determines the total number of allowances (the cap) and the allotments for each period.  The cap is reduced year by year, thus constraining fuel consumption.  Ideally the emitters would pay for the allowances, frequently through an auction, but at the outset in many regimes they are distributed at no charge.  In any case, as the program matures markets are ultimately set up to auction annual allowances, and for trading them, thereby establishing a price for emissions.  The market price on carbon established in this market deters fossil fuel use. 

There are many problems with a cap-and-trade regime that make it difficult to succeed.  For example, if the supply of allowances is too high or the market demand is too low, their price will fall and the objective of reducing the rate of emissions of CO₂ will be discouraged.  For these and other reasons discussed below, operation of a cap and trade regime is complex, if not cumbersome.  A cap and trade regime may be intricate and top-heavy to administer.

Both cap and trade and a carbon fee assign a monetary value to the waste stream that emissions of CO₂ and other greenhouse gases represent.  This has not been done historically; CO₂ has not been considered to be a waste product of our energy economy whose disposal had to be priced into the cost of the fossil fuels.
 

Examples of using a carbon tax.

In Australia, Prime Minister Julia Gillard’s government enacted a carbon fee program in 2011.  Initially the carbon fee is US$23.15 per ton of carbon; much of the revenue is to be applied as compensation to businesses and consumers (“cap and rebate”).  After six months of operation, the electricity generation segment of Australia’s energy economy reduced its carbon emissions rate by 8.6%.  Emissions were 7.5 million tonnes lower in the second half of 2012 than for the same period in 2011.  This arose from a decrease in demand and an increase in residential rooftop solar panel use and increased energy-efficiency.   Some coal-burning facilities ceased operating, while more power came from increased hydroelectric generation.  The long-term goal is to reduce emissions by 33 million tonnes per year by 2020.

Gasoline fees are very effective in affecting drivers’ travel habits.  The graphic below, characterizing how per capita fuel use reflects the size of the gasoline fee,

 

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 that per capita use of fuel for driving in developed countries decreases as the amount of the gas fee increases.  The U. S. has the lowest gas fee, which is correlated with the highest amount of fuel used per capita (horizontal scale). As the gas fee increases (vertical scale), it is seen that most of the benefit appears to be attained by a fee level of about US$2.20 per U. S. gallon.  In Great Britain, where the gas fee is even higher, Ford, the American car maker, sells a model of its compact Focus whose efficiency is 72 miles per U. S. gallon.  In contrast, a Focus model sold in the U. S. gets only 33 miles per U. S. gallon.  Clearly, automakers already have the technology and capability to mass produce highly fuel efficient cars.  This shows that the current state of technology is sufficient to garner significant improvements today.

Gasoline prices affect consumption.   In the U. S. the price of gasoline has fluctuated considerably in recent years for reasons that do not include imposition of a carbon fee.  The Washington Post reported on April 17, 2012 that higher gas prices had led to reduced consumption, and to a move toward the purchase of more fuel-efficient vehicles.

A review of various studies of the interrelationship between price and consumption concluded that “we can be reasonably assured that a rise in gas fees, all else being equal, will cause consumption to decrease”. 

Examples of using cap and trade.

In the U. S. the Regional Greenhouse Gas Initiative (RGGI) encompasses nine northeastern states.  RGGI controls only for emissions from fossil fuel plants that generate electricity, and affects only larger power plants.  RGGI created a CO₂ cap and trade program, with the goal first of stabilizing and subsequently reducing the overall emissions from these plants.  Each state’s base emission amount was established at the outset, and is remaining fixed at that level from 2009 through 2014.  Starting in 2015, the allowances for each state are to be reduced by 2.5% per year, so that by 2018 the emissions will be 10% below the starting level.  Auctions for emission allowances occur quarterly.  RGGI estimates that the auction price increases the cost of electricity to the consumer by only 0.4% to 1%.

In its 19th auction, almost 38 million CO₂ allowances were sold, garnering about US$106 million, or US$2.80 per allowance.  The cumulative amount from all auctions is about US$1.2 billion.  The proceeds are used to rebate portions of electricity bills to consumers, invest in the region’s renewable energy economy, including job training for environmental jobs, and similar objectives.  RGGI has already invested in improvements that will produce significant reductions of CO₂ emissions and save the need for generating major amounts of electricity, as well as the thermal energy needed to drive the generators.

European Union (EU). Even before the entry into force of the Kyoto Protocol in 2005, the European Commission established its greenhouse gas emissions trading scheme (ETS) using a cap and trade market mechanism. As an accord intended to govern the operations of 27 sovereign nations, each country had to enact laws codifying the applicability of the ETS structure within its borders.

It covers at least 11,000 individual emission sources across the EU. The ETS is being implemented in three phases.

Phase 1, operating from 2005 to 2007, was characterized as a learning phase, and included such features as

• The level of the emissions cap was determined largely by each nation independently;
• It included only power plants with a capacity greater than 20 MW, and other industrial facilities; these represented 42% of emissions; and
• Allocations of emission allowances relied primarily on recent historical records; they were offered at no cost.

In Phase 2 (2008-2012), features that expanded on those of Phase 1 included:

• The level of the emissions cap conformed to the limits of the Kyoto Protocol; and
• Limits on emissions from air travel were to begin in 2012.

Phase 3 (2013-2020) departs from the earlier phases in important ways:

• National emissions caps were to be replaced by a single EU-wide cap; they decrease by 1.74% per year starting in 2010 with the objective of delivering 21% reduction referenced to 2005 by 2020;
• 90% of the allowances will be sold by auction rather than being distributed free of cost.

The performance of the ETS is shown below in the graphic.  Emissions allowances in a cap-and-trade regime were already in use in the EU prior to 2005. In Phase 1 it turns out that for a variety of reasons the auction market in these initial years established early prices as high as almost EUR30 (about US$39.20 at that time) per tonne of CO₂ equivalents (blue and lavender lines; tonne, a metric ton), which then fell to EUR0/tonne toward the end of Phase 1 (orange line; see the graphic).

 

CO₂ price evolution in the EU from 2003 to 2009.  Each period’s price performance is color coded as shown.  The pale aqua line represents futures trading for (the lower number of) allowances to be granted beginning at the start of Phase 2.  The EU-wide number of allowances for Phase 2 was 11.8% lower than for Phase 1.  Once Phase 2 began in 2008, the actual allowance price and the futures trading for 2009 allowances followed essentially identical paths.

Source: Estimations of carbon price in Europe, Nicole Dellero (2008)  http://ec.europa.eu/energy/nuclear/forum/opportunities/doc/competitiveness/2008-10-24/areva--co2prices.pdf.

 

The fall of the allowance price to EUR0/tonne in 2007 has been attributed both to a glut of allowances and to the impending economic slowdown preceding the world financial crisis of the coming years.  Of course, with allowances having no penalty value, emission sources were free to continue “business-as-usual”, rather than to curtail them.  On the other hand, when allowances had a significant price, businesses were able to pass along corresponding price increases to customers, which resulted in windfall profits.

The ETS had to cancel 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 are being sold at auction for the first time.  The rest are still distributed at no charge.  The price had fallen by 5.6% to EUR3.73 (US$4.86) a metric ton, and reached a low on Jan. 31, 2013 of EUR3.42. 

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

The state of California enacted its Global Warming Solutions Act in 2006, establishing mitigation goals through 2020.  The governor at the time, Arnold Schwarzenegger, extended the Act by executive order declaring further stringent mitigation objectives through 2050.  These actions are significant, because California constitutes about 1/6 of the U. S. economy in view of its large size and population.  The Act is also significant because in the U. S. it is the only economy-wide mitigation plan.  Inititally it covers most fixed point sources of emission, including electric generation plants and industrial facilities, beginning now (2012-3).  It will extend to refining and sale of transportation fuels (i.e., distributed sources) in 2015.  The mechanisms for undertaking its mitigation goals include a cap and trade system as well as continuing and expanding California’s historic, successful energy efficiency programs.  State officials and advisors are undertaking to learn lessons from the experience of the European Union’s ETS, seeking to avoid its mistakes.

The state established a rigorous survey of emissions from every potential covered installation in order to allocate emission allowances.  In its first auctions California sold 23.1 million allowances at US$10.09 each, in Nov. 2012, and another 12.9 million allowances at US$13.62 each at the second auction in Feb. 2013.  This works out to revenue from the first two auctions of US$409 million.

 

Analysis

Two major mechanisms have been devised to abate the emission of CO₂, a major greenhouse gas, (aside from the important contribution of increasing the efficiency of energy usage).  One, a cap and trade regime, operates primarily by capping the supply of energy.  (Of course the auction price imposed on allowances has the effect of raising the price of the energy purchased by the consumer, so cap and trade may also have elements of lowering energy demand as well.)  The second, a carbon fee applied in proportion to the amount of CO₂ emitted when the fossil fuel is burned, directly limits demand by raising the price paid for energy.

A cap and trade regime has many disadvantages in comparison to a carbon fee.  Some of these are apparent when considering the case of the European Union.  The factors, many of which are interrelated, 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; e) monitoring use of energy offsets by those installations unable to comply with emissions limits; and f) creating and maintaining the new administrative and bureaucratic 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 that defeat the objective of constraining emissions.

In contrast, a carbon fee is extraordinarily simple in its operating features and is easy to implement.  A tax rate is established at the outset, covering most or all sources of CO₂ emissions.  In order to achieve its objectives, it would be optimal to start with an insignificant tax rate, and then have the rate increase annually to a level at which it would have a meaningful effect in reducing energy demand.  The example cited in the gasoline fee graphic above provides ample evidence 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.  One of the most consistent over time has been Tom Friedman, columnist for the New York Times, most recently in this article.   His writing and that of others have considered the many uses to which the revenues from pricing carbon could be applied.  This post will not address that discussion; most alternatives are worthy ones.

 
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 CO₂ accumulates in the atmosphere, exacerbating global warming and its damaging effects on human life and welfare.  The simplest, most direct, and highly effective mechanism for reducing dependence on fossil fuels and mitigate emissions of GHGs is to apply a carbon fee.
 

© 2013 Henry Auer