Guest commentary from Yoram Bauman
Everyone from Treasury Secretary Janet Yellen to Elon Musk thinks that putting a price on carbon is an important step in tackling climate change. Politically, however, carbon taxes and cap-and-trade systems face an uphill battle, in part because they could drive up the prices of household basics like gasoline and electricity. There are many worthy proposals for addressing this concern, mostly focused on the idea of using carbon pricing revenue to pay for things like per-capita dividends, green investments, or reductions in payroll taxes.
But what if you could put a price on carbon without driving up consumer prices? In California, for example, the impact of the cap-and-trade system on residential electric bills is reduced substantially by the semi-annual Climate Credits that households receive on their bills.
The purpose of this post is to invite feedback on and ask for help with an even more direct way to do this that might work in about 20 states, some cities, and perhaps in other countries as well. The gist is that many jurisdictions impose taxes on electricity consumption—sales taxes, gross receipts taxes, value-added taxes—and that replacing these existing taxes on electricity with a carbon tax on fossil-fuel generated electricity can come close to delivering a carbon tax “for free”.
Table 1 shows some preliminary numbers for 18 states (and two municipalities, New York City and Washington, DC) that have significant taxes on residential electricity. The table shows that in Alabama (for example) the existing 4% state sales tax on electricity is the rough equivalent of a $12 carbon tax on electricity. By “rough equivalent” I mean that in 2019 those two taxes would have generated about the same amount of state revenue and so would have had roughly the same impact on consumer prices.
| Alabama | 4.0% | $12 | Michigan | 4.0% | $10 | NY State | 2.0% | $19 | ||
| Arizona | 5.6% | $12 | Minnesota | 6.875% | $15 | North Carolina | 7.0% | $19 | ||
| Arkansas | 6.5% | $10 | Nebraska | 5.5% | $9 | Pennsylvania | 5.9% | $19 | ||
| Florida | 2.56% | $6 | New Jersey | 6.625% | $36 | Rhode Island | 4.0% | $18 | ||
| Georgia | 4.0% | $12 | New Mexico | 5.125% | $11 | South Dakota | 4.5% | $8 | ||
| Illinois | $0.33 | $9 | NYC (sales) | 4.5% | $31 | Washington DC | $0.70 | $13 | ||
| Indiana | 7.0% | $10 | NYC (util.) | 2.35% | $16 | Wisconsin | 5.0% | $10 |
Details and Caveats
- The main impact of carbon pricing in the electricity sector is changing utility behavior rather than changing consumer behavior, i.e., making renewables more attractive than fossil fuels rather than reducing the amount of electricity consumption. This situation is arguably unique to the electricity sector, so this tax-swap idea is probably not applicable in other sectors.
- These carbon prices—mostly in the range of $10-$20 per ton CO2—are modest but not insignificant. A $10 carbon tax is approximately 1 cent per kWh of coal-fired power, half that for natural gas, and nothing for non-fossil sources.
- The analysis above focuses on residential consumption of electricity but could be broadened to cover commercial consumption of electricity (and in rare cases even industrial consumption) as long as they also pay existing taxes on electricity that could be swapped out for a carbon tax. Note that many jurisdictions exempt entities like industrial consumers, schools, hospitals, and government agencies from existing electricity taxes; these same exemptions could be carried over to the carbon tax.
- In the short run, the carbon tax rate could be set to generate roughly the same amount of revenue as the sales tax or other existing tax that it’s replacing. In the long run, carbon tax revenue would decline as carbon emissions decline. It’s possible to reduce these losses—for example, by increasing the carbon tax rate over time, or by reinstating the existing sales tax after, say, 20 years—but there’s also a strong case for simply sunsetting taxes on electricity. For one thing, the push to “electrify everything” will be easier if electricity is cheaper. Perhaps more importantly, most states exempt grocery store food from sales tax because of regressivity concerns about impacts on low-income households, and taxes on residential electricity are even more regressive. The revenue loss from sunsetting taxes on residential electricity would be roughly one–third of the revenue loss from existing tax exemptions for groceries.
- The carbon tax would ideally be based on the carbon content of electricity consumed by each utility’s customers in the state (e.g., on data similar to what’s in these ESG reports) rather than on the carbon content of electricity generated in the state. As a result, the tax swap works best in states where electric utilities have similar carbon profiles. To the extent that they have different carbon profiles, there would be a net savings for customers of low-carbon electricity and a net cost for customers of high-carbon electricity.
- It might be possible to pursue similar ideas at the municipal level—where there are often extremely high taxes on electricity—but municipalities may be limited by state law regarding the types of taxes they can impose. Municipalities may also have a stronger reliance on this revenue than states.
How you can help: Do you have questions or concerns that aren’t addressed in the Details and Caveats? Can you think of a good analogy to help explain this idea? Do you live in any of the states listed above and if so do you want to help push this idea forward with legislators or NGOs or perhaps even (if applicable) with a ballot measure? (FYI I’ve been involved in ballot measure efforts in Washington State and Utah and am exploring “24/7” opportunities for 2024 ballot measure efforts in at least 7 states.) If you live outside the USA, can you say if there’s VAT or other taxes on your residential electricity bill and if so do you want to help explore this idea in your country? I’ll do my best to engage in the Comments section and I’m also available via email.
I’m probably missing something, but I can’t see how this proposal would have a meaningful impact on emissions.
Consumers would be in exactly the same position as they were before the change in the tax base, as your carbon tax would be calibrated to yield the same revenue as existing taxes. (I don’t agree with your assumption that “[t]he main impact of carbon pricing in the electricity sector is changing utility behavior rather than changing consumer behavior …”, but that’s another story.)
If you have a completely unregulated supply system, your proposed carbon tax would tilt the playing field slightly in favour of clean power, but I’m sceptical that $0.01/KWh would be enough to significantly affect investment decisions. If the power system is regulated to give producers a “fair” profit over cost, it would have no impact at all.
I’m in British Columbia, Canada, which was the first jurisdiction in North America to impose a carbon tax. It’s now up to C$40/tCO2e. There’s no carbon tax on my power bill, but there is on my gas bill, along with GST (aka VAT).
Generally, a higher consumer price for electricity is not a bad thing from a climate point of view, because it nudges people to use less energy, thus reducing emissions as long as there is still fossil electricity and reducing the necessary space and resource use for renewable electricity generation.
States and countries can reduce taxes on electricity though while at the same time putting a carbon tax on generation.
Another angle: In Belgium private households pay more per unit of electricity if they use more. The number of people in the household is factored in. The result was steady bills for the poor, but bigger bills for rich people with bigger houses.
Yoram, you lost me at:
Bad, bad, idea.
And in any event, it seems far from “even more direct” than the California approach… it sounds really convoluted.
At the State level, which you seem to be talking about, if there is a traditional regulated monopoly for electricity, you could simply apply a fossil fuel tax to the utility and prohibit them from raising retail rates to pay for it. Very direct way to get exactly the same result you are talking about for the consumer.
You are not really trying to protect consumers; it sounds like you are much more concerned with the utilities and their stockholders.
HB (1): “I’m probably missing something, but I can’t see how this proposal would have a meaningful impact on emissions. […] I’m sceptical that $0.01/KWh would be enough to significantly affect investment decisions”
Yes, because the effectiveness of carbon tax critically depends on whether the tax is high enough, and you can’t make it sufficiently high without making it mostly or 100% revenue neutral – with most or all taxes collected paid back to the people – in the simplest case with equal refund for each household, or more fair –
with the household refund adjusted for the number of people in the household – a 4-people family will use more energy than a single person (but nowhere close as 4 individual people – that’s why I’d go with per household rather than per capita).
And as I said before – it has be revenue-neutral and has to be seen as such, otherwise it would be rejected as “another tax grab”.
HB “[t]he main impact of carbon pricing in the electricity sector is changing utility behavior rather than changing consumer behavior …”, but that’s another story.”
Actually – I would argue that it has to be the same story – excluding the consumers from the scheme addresses only generation, but no energy efficiency by the users – gives them no incentive to save electricity. And consumers have to reduce their traditional use
– once low GHG sources won’t replace the coal, oil and gas immediately, and even when they do no type of energy generation is entirely GHG free
– and they need to make room for the NEW electricity-intensive applications – like charging your electrical vehicles.
Furthermore, ignoring consumer behaviour with respect to electricity would be inconsistent with a system of comprehensive carbon tax on all sources of emissions that we need. For instance, you can’t reduce the car emissions without changing user choices – there has to be a clear price signal to discourage consumers from driving longer distances and driving more GHG-emitting vehicles.
@1 (HB): Yes, the tax swap would leave consumers in the same situation they were in before, so any impact would be on the utilities (supply-side). Whether or not $0.01 per kWh ($10 per MWh) is enough to “significantly affect investment decisions” is a reasonable question, but in some states the tax could be higher, and in any case every little bit helps. (I’m not claiming that this going to deliver huge changes, but aren’t modest changes good?) As for market structure: in a competitive or deregulated market (where there’s a monopoly over the wires that deliver power but different electricity suppliers compete for customers) the carbon tax would provide an incentive to the different suppliers just like in any competitive market; in a non-competitive market (where each customer is tied to a given supplier) the suppliers are either customer-owned co-ops or municipal utilities, in which case they should have a built-in incentive to pursue least-cost power, or they’re Investor Owned Utilities, in which which case they’re regulated by a Public Utilities Commission or similar body in a way that is supposed to push them to pursue least-cost power. [PS. I’ve been working on carbon taxes for many years, including the lead-up to the BC carbon tax in 2008; until I started talking to folks about this proposal, nobody ever expressed to me any concerns about whether a carbon tax would reduce electricity-sector emissions.]
@2 (Dominik): You’re right that there’s some incentive effect from higher electricity prices, but consumer responsiveness (price elasticity) is pretty small, so the lost incentive effect is likely to be small when it comes to changing lightbulbs and other “intensive margin” activities. There are also “extensive margin” activities like adopting electric cars/heaters/stoves/etc, and here there’s a strong case that you want _lower_ electricity prices because that will make it easier to “electrify everything”.
@3 (Alex): Interesting. But even with the pricing structure in Belgium there might be a way to shift VAT or other taxes into carbon taxes.
@4 (zebra): Politically and legally I do not think it is easy to tax utilities and then prevent them from raising rates. (Otherwise states would have already done this!) As I understand it their contracts allow them to recover reasonable costs, including taxes. And in many states that I’ve looked at utilities also have a significant amount of political power: the joke in Idaho is that the state is named after Idaho Power, and there are similar jokes elsewhere. But if you’re not convinced then go prove me wrong!
Any carbon pricing does need to be aimed at changing energy industry behavior, not retail personal behavior. It has to be one tool amongst many. When energy supply is low emissions every consumer will have low emissions, even those who don’t care about climate and live extravagantly wasteful lifestyles. The effectiveness has to be there without reliance on the revenues generated; if it works then no-one will be paying it. We want no-one to be paying it.
I would go for a progressive pricing system – this year, just forewarning, no charge. Next year a small charge, but rising every year; by the time a clean energy project can be in place, the potential for complying and NOT having to pay should beat that of sticking with the old and dirty. They need to see it coming to dodge it with clean energy choices.
That “must not raise costs” bottom line is kinda shameful really; our ancestors that laid their lives and livelihoods on the line for OUR future were willing to sacrifice something for it. Now people living with historically unheard of abundance and excess won’t even pay a bit more for energy – and yet still use “but the poor” argument… not so the poor don’t pay anything but so they themselves don’t.
I think the “must not raise taxes” line is just a variant of that climate responsibility denier’s bottom line: “we will fix the climate problem only if that is cheaper, up front, without counting externalities like climate change, than NOT fixing it”. Sure, within such constraints governments can subsidise clean energy all they like, but only at the cost of other government spending.
Yoram Bauman #6,
Perhaps it’s because I’ve only had one cup of coffee, but I’m more confused than when I started.
You say: “As I understand it their contracts allow them to recover reasonable costs, including taxes.”
So if there is a carbon tax, and they can recover it by passing it on to the consumer, what is their incentive to reduce fossil fuel use?
Now, I’ve been a proponent of a generation-market with a very smart, common-carrier regulated grid, which neither ‘side’ seems to like. And your idea would operate there, as you say in your reply to HB. But again, it seems unnecessarily convoluted. All you are doing is subsidizing non-FF sources, which you can already do without changing the sales tax stuff.
Who exactly are you trying to win over with your approach? What interest group benefits enough to change the politics?
I have a hard time imagining any government “sunsetting” a tax. Take cigarettes as a case in point. As smoking rates went down over the decades, taxes continued to rise in order to cover the revenue shortfall. Once they get their mitts on your hard-earned euros, pounds, dollars etc there is no going back.
#1, HB–
Well, if I’m not mistaken in my unit conversion, the 2019 LCOE of utility solar PV was $0.032/KWh (lower bound), whereas combined cycle gas clocked in at $0.044/KWh, and that’s reportedly affecting investment decisions.
https://www.lazard.com/perspective/lcoe2019
Another case of a number that ‘sounds small’ but really isn’t, considered in context?
Thanks for the comments everyone!
@5 (Piotr): First, I’d emphasize that half a loaf is better than none. This is definitely a small step, but I think it’s in the right direction, and to dismiss it because “you can’t make it [the carbon tax rate] sufficiently high” strikes me as unwise. Second, I’d emphasize how little we know about how to pass successful carbon pricing policies (or even successful climate policies, period!); you write “it has be revenue-neutral and has to be seen as such” and that’s fine as your opinion, but I don’t think there’s much evidence to support that. FYI I was the founder and co-chair of the (revenue-neutral) I-732 ballot measure effort in WA in 2016, and we lost 41-59, in part because of opposition from the environmental left. Then they put a Green New Deal style policy (I-1631) on the ballot in 2018, with 10 times more money than we had and a giant coalition and great ballot language… and they lost 43-57. Bottom line, to quote Hollywood screenwriting legend William Goldman, is that “NOBODY KNOWS ANYTHING. Not one person in the entire [field] knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.”
@7 (Ken): Respectfully, I don’t think the question is what you would go for, I think the question is what we can pass. Dismissing policies that don’t raise taxes strikes me as unwise. Ditto for dismissing policies that do raise taxes; see again the William Goldman quote above :)
piotr:
Yes. Excluding consumers from a carbon tax overlooks the Tragedy of the Commons, in which aggregate disutility ensues from private utility maximization by every individual.
In the case of AGW, energy producers and consumers have historically both socialized our climate-change costs from the market price of fossil carbon. Nobody asks producers to pay, so they don’t ask their customers to, instead taking their profit by socializing their costs. As consumers, we each buy as much fossil carbon as our budgets for all goods and services allow, without accounting for our marginal climate-change costs.
Including some fraction of them in the market price of fossil carbon and everything made with it, theoretically should change our behavior. Charging a per-ton carbon fee to fuel producers, and importers of manufactured goods based on embodied carbon, forces them to internalize their proportional climate-change cost. OTOH, it’s essential that producers then be allowed to pass on as much of their increased cost as they dare on to consumers, who have carbon-neutral energy choices available on the otherwise-free market. We’ll start choosing those when we start paying for our own marginal carbon costs at the point of sale. New investment will then go to renewable energy R&D, production and infrastructure build-out, bringing RE prices down. Mission accomplished when the last fossil fuel producer exits the market, leaving the remaining fossil carbon safely in the ground.
piotr:
Well put. Economists, e.g. new US Treasury Secretary Janet Yellen, are in broad agreement about the ability of a well-designed carbon tax to drive the US economy to carbon-neutrality. As you note, the big issue is what to do with the revenue. That’s wholly within the realm of politics, as practiced in our imperfect republic. The per-household dividend adjustment seems more equitable, but also more politically salable. IANAP, however.
Yoram:
1. Thanks for both your continuing humor occupation and this thread.
2. Colorado has no sales tax on any energy service, but we do have an added RES = Renewable Energy Service fee that is of much more value to high income ratepayers. Passed narrowly in a (nation-first) referendum in 2004. Has some of the tax-like features you are looking for. Is currently under review – and I’ll bet your input would be welcome at our PUC.
3. The city of Aspen charges almost 4 times much per kWh for high kWh use (i.e. rich) customers. See
https://www.cityofaspen.com/DocumentCenter/View/68/Electric-and-Water-Rate-Ordinances-2017-PDF?bidId=
4. Aspen is partially supplied by a very forward-thinking rural co-op that seems to be a national leader in rate reform. See:
https://www.holycross.com/wp-content/uploads/2018/12/Electric-Service-Tariffs-Rules-and-Regulations-12.17.2018.pdf
5. I think any climate-oriented tax can be spread fairly across all income groups – and can have a long-term beneficial impact on especially low-income payers of that tax. Your equity effort is greatly appreciated.
Ron
“I’m not claiming that this going to deliver huge changes, but aren’t modest changes good?”
Twenty years ago modest changes would have been unambiguously good. Now I’m not so sure, because we’re running out of time.
“…nobody ever expressed to me any concerns about whether a carbon tax would reduce electricity-sector emissions.”
Just to be clear, I’m not arguing that a carbon tax wouldn’t reduce electricity-sector emissions (unless, of course, the grid is already emissions free). But an important part of the transmission mechanism from tax to lower emissions is via the impact of higher prices on demand. I don’t see how it’s helpful to introduce a carbon tax and then handicap its effectiveness.
“in a competitive or deregulated market … the carbon tax would provide an incentive to the different suppliers just like in any competitive market”
Yes, I agree.
” or they’re Investor Owned Utilities, in which which case they’re regulated by a Public Utilities Commission or similar body in a way that is supposed to push them to pursue least-cost power”
Good point.
Yoram Bauman(11): “First, I’d emphasize that half a loaf is better than none.”
But that’s not the choice we are talking about: our choice is between your half a loaf (addressing only the electric utilities) and my 4 loafs (utilities AND consumers of electricity, PLUS the non-electrical sources of GHG emissions,
which in the US make up the remaining 3 “loafs”).
YB: “to dismiss it because “you can’t make it [the carbon tax rate] sufficiently high” strikes me as unwise.”
Then everybody talking about carbon taxes, including a guy who Nobel Memorial Prize in Economic Sciences for them, are “unwise”. In my province, we have a carbon tax $20/tonne of CO2 eq (2020) – adding 4.5c/l of gas. I see no effect
on people’s use of their cars. I live next to a school, so as a proxy for it I watch if people switch off their engines when they wait 20-30 min for their kids. If the prices of gas were biting them, they would have switched them off. They don’t. Even though on the school’s wall are “No idling zone” signs.
On the other hand, when some years ago the oil prices were sky-high – many people switched their heating from oil furnaces to the electric. Today the trend is away from electric (with oil and gas prices low, and our electricity rates poised to skyrocket due to the cost overrun on the major hydro being completed).
So we will have the _utility_ providing low-GHG electricity, and people switching their home heating …. away from the electric, and not moving to the electric cars. And creating a death spiral for our renewable energy generation – the less demand is for the electricity, the highest the cost for unit electricity to cover all the capital and operating costs, the bigger the incentive to switch _away_ even more from electricity and to the fossil fuels.
And without HIGH ENOUGH carbon tax making electric heating and driving cheaper than fossil-fuel heating and driving – you can’t reverse this. And politically you can’t get through such high carbon taxes without making them entirely, or at least mostly, revenue-neutral.
More on that in the next post.
Yoram Bauman (11) “ you write “it has be revenue-neutral and has to be seen as such” and that’s fine as your opinion, but I don’t think there’s much evidence to support that
You could look to the North for the evidence – WA borders both with British Columbia and Canada, both of which have the provincal, and the federal, revenue-neutral carbon tax. Here is some info on the much longer running BC program. And HB (#1) is from BC, so perhaps can tell us whether he thinks their provincial carbon tax works and whether it could have been pushed through _without_ revenue-neutrality.
YB(11): FYI I was the founder and co-chair of the (revenue-neutral) I-732 ballot measure effort in WA in 2016, and we lost 41-59, in part because of opposition from the environmental left.
Sorry to hear it, but I don’t share your pessimisms about unknowability of the outcome of a political process:
“NOBODY KNOWS ANYTHING. Not one person in the entire [field] knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one”). After all, wouldn’t this apply to anything including your current proposals? ;-)
So rather than discouragement, I would take your loss as a teaching moment – a chance to make future actions – “better educated”. Hopefully, we can learn what went wrong with your proposition, and from B.C. and Canada what went right (as well as wrong, since both are works in progress and can be improved).
While I don’t know about the circumstance of your loss, I can’t say it is entirely unexpected, for the revenue-neutrality is the necessary, but not sufficient condition of the success. One can have the superior argument and still lose the vote. For instance:
1. if your scheme is not really carbon neutral, but you plan to divert some of the money toward other, even worthy, goals (say, like supporting green technology)
2. if you don’t make OBVIOUS to the voters that most of them will get back MORE money than they paid in (the richer have higher-than average GHG emissions, but the refund per household is the same). So this way those who use more than their fair share of resources support those that use less. This also addresses to some extent the social justice expectations – the poorer people typically use less and emit less – so they will net benefit from the taxes. And if it is not enough, you might tweak the refund formula to increase the refund to the poorest. I would also increase the refund rate to larger households. And would not tax the carbon tax, it’s just mean … ;-)
3. you can deal OK with p. 1 and 2, and still loose if your opponents succeed in portraying your revenue-neutral carbon tax as “ yet another tax-grab the hardworking people of [enter your jurisdiction here] cannot afford. In your case – in addition to usual suspect you had to fight also environmentalists. But to make you feel better one can loose the messaging war even with a major party behind you – the Liberal Party in Canada adopted the revenue neutral carbon tax as centerpiece of their strategy in 2008 elections, and …. lost badly to the Conservatives who managed portray it as “revenue grab”: e.g.:
“ The people aren’t stupid … All this is a revenue grab to finance his own programs” [the future Prime Minister] Harper said.”
Let’s stop for a moment and deconstruct this line, as it is quite representative of the counter-arguments one will face. We have:
a) pandering to the voters (nobody wants to be stupid by not being able to see what only “stupid” people can’t see)
b) portraying the other party as contemptuous to the voters (they consider voters “stupid“)
c) “revenue-neutral” becomes “revenue grab”
d) and using all money from carbon tax to cut to the voters taxes is morphed into
the Liberal Party using the freshy-grabbed taxpayer money to fund …” their own programs“.
And the difficulty with countering the lie is that the lie is short – explaining why it is a lie – takes much more time. And who has the time for _that_ – media and public are interested mainly in zappy one-liners.
Another mistake may have been that Liberals in 2008 proposed to make the tax revenue neutral via reducing other taxes. But most of people won’t connect a % drop in their tax rates with the tax they have to pay each time they are at the pump.
The second time around, the Liberals won, probably in part because they said that their federal tax will refund the money straight back to the people, with most households getting back more than they paid. And they were better in messaging.
So while the win is not easy given the strength of the fossil fuel lobby and political parties doing their bidding, and the vulnerability of the people to manipulation, it is not impossible, as the British Columbia and fed. Canada have shown. So I would not extrapolate your loss into a rule, but rather learn from it:
Do you have any insights on why your carbon-neutral proposal may have failed at the ballot box? Was it something I suggested above, or something else at play?
@8 (zebra): Regulated utilities generally have an obligation to pursue least-cost power, so if there’s a carbon tax then that may have an impact on whether renewables are least-cost compared to fossil fuels. As for who I’m trying to win over… well, just about everyone! I’m hoping that this is a reasonable policy from the perspective of utilities, utility customers, taxpayers, etc.
@9 (Tom): I think you’re being overly skeptical. For example, most states exempt grocery store food from sales tax, and where I live in Utah the state legislature has regularly cut taxes.
@10 (Kevin): Good point. IMHO a penny per kWh ($10 per MWh) is a reasonably big deal in the electricity world.
@12 (Mal Adapted): In an ideal world you would certainly want a carbon tax that provides consumers with an incentive to conserve, plus dividends or tax cuts or other such allocation of carbon tax revenue to provide offsetting benefits to those consumers. Cutting sales taxes on electricity leaves out the incentive for consumers, and you’re right that there’s an environmental cost there. But there’s also an environmental benefit because keeping electricity prices low makes it easier to “electrify everything”. In other words, with lower electricity prices I’m less likely to get energy-efficient appliances but more likely to get an EV. So overall I’m arguing that this is a small step in a good direction.
@13 (Ronal): Thanks for the kind words! And for the info about Colorado: it looks like they have a 2% RESA surcharge that funds renewables. Turning that into a carbon tax would produce a pretty modest carbon tax (about 0.2 cents per kWh) but every bit helps and it definitely seems like it would be a good fit. The Aspen info is interesting too. Can you email me at yoram [at] standupeconomist.com to chat more about how to engage with the PUC and otherwise explore ideas for Colorado?
@14 (HB): I’m skeptical of the “we’re running out of time” argument. Yes it would be good to be able to implement a broader and deeper carbon tax now, but small steps in a good direction still seem good to me. As for whether “the impact of higher prices on demand” is important, I’d say that (1) a carbon tax that only affects utilities (and not consumers) is still better than nothing; (2) there’s the “electrify everything” argument that higher consumer prices is a double-edged sword if you’re trying to promote EVs etc; and (3) ultimately the importance of higher consumer prices is an empirical question. For an anecdotal take on this, compare residential electricity sales and revenue in Idaho versus Connecticut: compared to Idaho, Connecticut has a population that is almost exactly 2x, residential electricity prices that are almost exactly 2x, and residential electricity consumption that is almost exactly 1.5x (i.e., 0.75x per capita). That suggests that _doubling_ electricity prices (in this case, from 10 to 20 cents per kWh) achieves maybe a 25% reduction in residential electricity consumption. IMHO that’s pretty unimpressive, both in absolute terms and relative to the impact on the utility side. (In order to increase electricity prices from 10 to 20 cents per kWh you’d need a carbon tax of about $100 per ton CO2 with an all-coal grid, more otherwise. The impacts of a carbon tax that big on utility fuel-switching would be _huge_.)
I suggest that any utility carbon tax be based on changes in carbon emissions, rather than the amount of emissions. It could be based on a standardized expected decline nationally – that is, there would be a tax when not reducing emissions by, for example, one percent per year. Growth in the number of customers should be taken into account. Like some carbon tax ideas, companies making greater reductions would get tax rebates, effectively paid for by companies that do little to lessen emissions. This should prompt utilities to reduce emissions more than a tax on total output. Because the variability is greater, the elasticity is greater. Perhaps more important, it would lessen opposition by people in high emission areas because they start from the same base as everyone else.
P 15: In my province, we have a carbon tax $20/tonne of CO2 eq (2020) – adding 4.5c/l of gas. I see no effect
BPL: It should be at least $150/tonne.
One factor to consider in any such law is the abruptness or dislocation it could cause.
That would argue for starting with a small tax (say $8 per ton), but encoded in law that the tax will steadily increase every year after that, say by $2 per ton. [or pick different starting values and increments]
That provides a very strong incentive to shift to renewable in long-range planning, while avoiding shorter term disruptions.
And apply it to gasoline and other fuels as well. If the initial tax is $0.50 per gallon people will take notice, but it won’t be crippling (especially if they get a flat per capita dividend from it). At the same time, if people know, for a certainty, that the gas tax will be $5 per gallon after a decade, and still increasing, they will think twice or three times about buying a new ICE car — in addition to the escalating cost, it will have no resell value, no matter the size of the dividend they are getting to offset that.
@13 (Ronal): Thanks for the email, I look forward to continuing the discussion about Colorado!
@ 15/16 (Piotr): There are lots of pieces you can read about the I-732 campaign in WA in 2016; here’s a good one to start with. My take is that I-732 failed because (1) climate action is hard, (2) taxes are hard, (3) the measure, which was the first carbon tax ballot measure in the U.S., had some modest legal shortcomings, i.e., it wasn’t perfect and we learned a lot by doing; and (4) much of the environmental left decided to oppose it in the hopes (unfulfilled) of passing a Green New Deal two years later. Beyond that: BC’s revenue-neutral carbon tax, which was passed in 2008 (and partly inspired by a book I co-authored in 1998 called Tax Shift), was implemented by Premier Gordon Campbell and his right-of-center (Liberal) party; it was opposed by the left-of-center (NDP) party, which campaigned on an “axe the tax” platform in the next election; and after the NDP got power they scheduled (and are implementing) non-revenue-neutral increases to the carbon tax. My bottom line, however, is this: Revenue-neutrality is a theory, not a theorem, and if you think you can pass a good carbon tax policy (or any kind of good climate policy) then BLESS YOU, GO DO IT. I’m working on policies that I think could actually pass in the legislature or on the ballot around the U.S., and I encourage you to do the same wherever you are.
@18 (thomas): Interesting idea, and I’ve thought of other (somewhat related) options too, such as trying to make the carbon tax revenue-neutral _for each utility’s customers_ by creating utility-specific carbon tax rates. I don’t know whether these are viable options legally or politically, but I will keep them in mind. Thank you!
thomas marvell (18) “I suggest that any utility carbon tax be based on changes in carbon emissions, rather than the amount of emissions.”
So the hydro or wind – will be paying carbon taxes (because they can’t further CHANGE their GHG emissions) while coal plants by tweaking them slightly – would not? In other word, your scheme will penalize those who already have done the right thing and reward those who dragged the feet.
In a sense, it is similar to the international treaties (Kyoto, Paris), in which the targets are the cuts from the country’s own emissions at some point (1990, 2005). BUT AT LEAST there – one can argue by using CHANGES in their own emissions – takes into account things that a given country has a limited influence on (climate, geography) – so it would be unfair to expect the same PER CAPITA emissions in cold, sparsely populated country, as in the country with a moderate climate and short transportation routes.
But EVEN at the country level – it is only a part of the story- because the % reductions comparing to 1990 or 2005 – in addition to climate and geography – ALSO reward the “optional” emissions – it was not the climate or geography that made the North Americans to CHOOSE living in larger houses in suburbs, longer commuting to work, doing so in private cars, and choosing less efficient cars and trucks do so.
Yet all these CHOICES inflated their reference emissions in 1990 or 2005, thus making meeting their _future reduction targets_ EASIER and CHEAPER than those of, say, Europe – where the “optional emissions” were cut much closer to the bone ALREADY BEFORE 1990 or 2005: it takes less effort and money to pick the low-hanging fruit than the high-hanging one.
But at least _countries_ can justify using changes in their own Emission as their target by pointing that they accounting for different geography and climate –
no such benefit when applied to the electric utilities – their GHG emissions/MWh depend primarily on the technology they chose, NOT on different geography or climate than those of their utility competitors (particularly within a regional grid).
As for your need to account in the “growth in the number of customers” – it is ALREADY implicitly addressed in the traditional option (“tax per GHG emitted”) – if utility has to pay a higher tax because it supplies more customers – then this larger carbon tax is subtracted from the … larger electricity sales, and therefore tax/GHG emitted – is roughly the same without the need to track the number of customers and adjust individually formula to each of the utilities individually, as in your scheme.
To sum it up
– the administration of your tax would be much less straightforward – thus more open to distortion, tax-avoiding loopholes, and political lobbying for preferential treatments,
– and most importantly – would reward the historically bad players/technologies at the expense of the good ones
– and by doing so would SLOW the changes.
And I am not still sure sure what the upside of your approach would be…
An important saying about politics, is that it is the art of the possible. So if this is possible, whereas another proposal that is unlikely to survive the political process but would be better for the climate is likely to go down in flames, pursuing the possible may be the best one can do. This is really just a restructuring of how each utility is taxed so that it alters the utility beancounter calculus such that renewables are favored more than in the status quo. So it sounds to me like a well thought out climate BB. (Alluding to the argument that we don’t have a silver bullet for climate, but will have to fire many BB’s each of which make a modest contribution.) And we may have to fight this war one BB at a time!
My main criticism would be that by my way of thinking, coal is dying anyway, and the next main battle will be against natural gas. With that in mind, I would tax Natural gas for more than just its carbon content, i.e. by a greater amount. This could be justified, because we know natural gas has substantial rates of leakage and therefore its climate effects are considerably higher than its carbon content alone would suggest. But, more than that, my motivation for doing so is to subtly tilt the coming natural gas versus renewables battlefield.
Re: 22 Piotr
At present non-carbon power is minor, except a few places with (long-time) hydo power. Most utilities are in nearly the same boat. Also, one could use the percent change in emissions, rather than the absolute change, as a (modest) part of the formula for taxation. That would benefit utilities that now emit less carbon than others because a given drop in emissions would be greater percent drop for utilities that already had low emissions.
The aim is the lessen emissions, no matter where utilities start from. We have to start from where we are now. Out of fairness you might want to tax utilities less if they made efforts to cut emissions in the past, but we should look to the future.
About measurement problems, if one can measure carbon use, one can calculate change. On the other hand, errors in carbon-emissions data would exacerbate errors in the change of emissions.
As I said, the political realities are that high-carbon-emission jurisdictions are going to fight a carbon tax based on actual carbon use. That is the main reason for my suggestion.
thomas marvell (24) “ At present non-carbon power is minor, except a few places with (long-time) hydo power. Most utilities are in nearly the same boat.”
Doesn’t work EITHER way:
– if they were exactly in the same boat – then there is nothing to be gained
by using changes in emission instead $/GHG emitted tax. If you the rational for your proposal was to make a smooth transition – then you can do it as easily with the $/GHG emitted tax – you start lower and then increase it gradually year after year until you hit the target $/GHG value. And it has the value of consistency and universality – since the same target $/GHG will be applied to non-electricity emissions.
– if they are not exactly in the same boat – then my argument of penalizing the good and rewarding the bad – and is WITHOUT FAIR and TRANSPARENT FIX to it (see below)
tm(24) We have to start from where we are now. Out of fairness you might want to tax utilities less if they made efforts to cut emissions in the past, but we should look to the future.
And the $/ton of GHG tax does it automatically, while your % change tax does not – either you throw the good guys (those who became lesss polluting before) under the bus OR you have to make a system non-universal, and less-transparent system, with the need to either manually adjust the tax rate for EACH utility or – by using the same % change across the board – opening to challenges and requests for loopholes from those who, by not being in the same boat”, are unfairly disadvantaged by your single % rule. And what about with new entrants – they don’t have previous emissions, so how are you going to judge their % change?
tm(24) the political realities are that high-carbon-emission jurisdictions are going to fight a carbon tax based on actual carbon use
No, they will be fighting ANY carbon tax, because it would cut into their existing business model in which the income is privatized and the costs are socialized.
But I guess if they are forced to pay for their pollution – the bad players will prefer your solutions since it penalizes their already less polluting competition, and if you want to fix it by manual reductions to the good guys, you muddy the system and open it to the distortion by lobbying and finding tax loopholes. Lobbyist love to fish in muddy waters.
So what you propose to open a Pandora box, and I still can see a single ADVANTAGE of doing things your way.
Yoram Bauman (21) “ Revenue-neutrality is a theory, not a theorem”
In what sense it is a “theory”?
– If you use it in a logical sense – then “revenue-neutrality” is not a “theory”, but a concept that has a very specific definition – “a system where all collected money is paid back”.
– If you use it in a dismissive sense as something inherently unlikely, as creationists would in “evolution is only a a theory” – then I don’t agree
since ~ revenue-neutral carbon taxes ARE ALREADY – in BC and, federally, in Canada.
And “revenue-neutrality” has inherent higher probability of being passed than the “non-neutral” tax where the government keeps the tax. That revenue neutral carbon tax was introduced by the centrist Liberal Party and opposed by both the right and the left – proves only that politics trump good policies –
– because carbon taxes use market efficiency to achieve the reductions in CO2 emissions at the lowest cost – for any true conservative this should be the preferred way to reduce GHG emissions rather than
– the government imposing hard cuts for everybody, thus distorting the market – since the same % reductions in some companies may be more expensive the others,
– or the cap-and-trade schemes, which by assigning the initial allowances, allows governments, not markets, will pick winners and losers.
For this reason the nestor of Canadian right, Preston Manning, became a pariah, when he said that he favours carbon tax. The rest of the conservatives
choose getting to power over their ideals – they succeeded in 2008, and tried to succeed again in 2019, by portraying revenue-neutral carbon tax by Liberals, as “another tax grab”.
And the same political opportunism applies was shown by the left – where as you point – prov. NDP run against the revenue-neutral carbon tax (“axe the tax”) EVEN THOUGH they must have known that for their voters (on average less wealthy) – revenue neutral meant TAX REDUCTION – since they would get back more than they paid.
But the political cynicism of the Left and the Right, is not an excuse to abandon a good policy.
Omega Centauri (23) An important saying about politics, is that it is the art of the possible.
Fortunately, in the revenue-neutral carbon tax we have a solution that is saleable to the voter and more effective in tackling the GHG emissions than the two other alternatives:
There are basically three options to cut emissions:
1. Government imposed cuts across the board to major emitters. It misses a big part of emissions (consumer emissions) and does it least cost-efficiently. Say, it orders a 10% emissions cut, and 10% cut in X – costs 100, and 10% in Y – costs 200: then the mandated 10% cut in (X+Y) – costs 300. ALL of which is passed onto consumers.
AND all small and private emissions (e.g. driving the car or using oil furnace) are NOT included, and, therefore, unchanged making the need to the cuts by large emitters – much deeper.
2. Cap and trade – X cuts 20%, Y cuts 0%, but buys 10% cut from X: so the same 10% cut in (X+Y) costs now 200, instead of 300. Everything else the same (the cost of 200 is passed onto consumers, no cuts of the private consumption).
3. Carbon tax we put a tax of $ per GHG, onto ALL (thus not longer missing small and private emissions). How big a tas should be? A recently referred here paper from Potsdam institute put it at: “$100 per tonne in 2020”.
Let’s go with this number for now: 100$/t may switch us from gas to electric, from coal or gas to renewables or nuclear, from single-person car rides to car-pooling or public transport. etc…
But to make this tax politically “possible” – it HAS TO BE to be revenue-neutral – all the collected taxes have to be refunded equally (e.g. per household), so in effect those consumers who produce more GHG than average subsidize those who produce less than the average. Those “subsidized” may then use their positive balance to offset the costs of switching to the lower GHG products:
Some of the switches come at no or little of such costs:
– carpooling is practically free,
– public transport if anything might be (per rider) cheaper (the economics of scale).
– solar and wind are not that far of the current (i.e. before carbon tax) costs of electricity from fossil fuels, etc
Others would be on the spectrum between 0$ and 100$ (for anything above $100 the tax won’t make you switch to low GHG technologies).
For a typical family the “switch cost” would come at the lower end of 0-100 $/tonne of CO2, and if your got the “net refund” (you paid less in carbon taxes than your refund based on the assumption of the average consumption).
In other words, what we have here is a carbon tax “amplifier” – we can apply the max price impact to the product (here: 100$/tonne CO2) at the FRACTION of that price felt by the consumer.
And since the main argument against the GHG reductions is “ we can’t afford it “, the revenue-neutral tax cut, if properly set and EXPLAINED, is the most “possible”, because the least expensive per ton of GHG, of the three options.
And as such is in the best position of the three to beat the fourth, and the most politically “possible”: “ Do nothing, after us, Deluge!“
Any kind of carbon pricing will probably be too weak to effectively drive the change needed. It’s somewhat unfair also, since it allows the wealthy to push most of the pain onto everyone else even though their consumption is by far the lowest-hanging fruit.
A better alternative would be carbon rationing. It would be less stressful on the poorest people, who are already living on the edge, and be borne mostly by the prosperous, who account for most of the carbon use.
25
What do you mean, there is nothing to be gained? Utilities have an incentive to act if they reduce their taxes by emitting less carbon. At least that is the theory behind any carbon tax. If they pass the expenses (which include any carbon tax) to the customers, then no carbon tax would work. This all depends on the local utilities regulators, prompted I hope by public pressure to reduce emissions and to cut electric bills.
New entrances would get a free pass the first year, not a major problem, except that they would have an incentive to put out a lot of emissions in the first year. Anyway, new entrances are rare in the utility business.
The utilities will look for loopholes no matter what system is used.
Again, it seems politically unlikely that a carbon tax based on total emissions, rather than changes in emissions, will ever become law.
Yoram Bauman:
My sympathies. I confess I didn’t pay much attention to that campaign, so I can’t analyze why it was rejected by Washington voters. Even if it won at the ballot box, I wouldn’t expect a carbon tax to actually reduce emissions without an enforceable border adjustment tariff, because otherwise we’d merely offshore our emissions along with our manufacturing. AFAICT, the Commerce Clause of our Constitution, not to mention the sheer porosity of interstate borders, makes the BAT practical only at our national border. And I trust the US still wields enough global buying power to motivate our trading partners to reduce their own national emissions. That’s why I’m more interested in a US national carbon fee and dividend with border adjustment tariff, than in carbon tax proposals at the state level.
YB:
Heh. I certainly don’t understand politics well enough to get CF&D-BAT through the US Congress. I can only advocate what makes economic sense to me. I agree that perfect is the enemy of good. Nor do I want any carbon-tax legislation to foreclose other feasible collective decarbonization options, at every scale of government. Above all, I agree with Omega Centauri:
Somehow, I remain optimistic the war to cap the trend of GMST can be won by mid-century. Not as soon as I wish, but soon enough to avoid multiple orders of magnitude more tragedy. Good luck to you, Mr. Bauman.
I agree with HB — “…we’re running out of time.” HB (14)
I disagree with the idea that some “broader and deeper carbon tax” Yoram Bauman (17) would be preferred … but it’s a start.
It’s not a start. It’s a way to keep on burning fossil fuels very much as we have.
Carbon taxes or cap-and-trade systems implicitly assume the best way to control carbon emissions is by tweaking the market. They also implicitly assume the notion that there is some kind of carbon budget we can slowly work toward. We are fast approaching the point where we need to discuss rationing and government directed mandates to reduce the production of petroleum, natural gas, and what remains of coal use.
Electric utilities are a classic example of a natural monopoly. I believe it far preferable that electric utilities were treated as the natural monopoly they are and regulated by broad and deep government control, and preferable that electric utilities were a government service like the U.S. Postal Service. Instead the U.S. privatized electric utilities, loosened their regulation, and created a market for electricity. Just to complicate matters the government required utility companies to treat intermittent electric power sources as essentially equivalent to the continuous sources. The market provided solutions like Enron, the 2003 east coast blackout, California’s ongoing PSE&G woes, and most recently the Texas power disaster. So much for the market and market based solutions, including tax tweaks to nudge consumers in the ‘right’ direction and fund as yet undetermined subsidies to further adjust the market.
@19 (BPL): A $20 carbon tax isn’t huge, but it’s not nothing either. See for example the “Frugal Cars or Frugal Drivers” paper about the $30 BC carbon tax that found that the carbon tax reduced fuel demand per capita by 7% and increased the fuel economy of the vehicle fleet by 4%. Modest impacts, to be sure, but not nothing. And if you know how to get a legislature to implement a $150 carbon tax then bless you, go do it!
@20 (James): Good points that it’s better to phase in a carbon tax over time, and that broader is better. Unfortunately, even small steps are hard politically.
@23 (Omega): Good point about politics being the art of the possible. As for coal dying, well, that might take longer than you think. There’s still a lot of coal in the U.S. grid, and marginal costs are low for plants that have already been built.
@22/24/25 (Piotr, thomas): I’m not picking sides here, but I will offer up an argument in favor of thomas’s suggestion, which is that some politicians have pledged not to increase net taxes, either at all or (as with President Biden I think) for those making less than $400k a year. If you take that kind of constraint seriously then you might need to establish an incentive system that is all carrots and no sticks, which I think is what basically what thomas is suggesting with @18.
Jeremy Grimm #31,
“Electric utilities are a classic example of a natural monopoly.”
Wrong.
The distribution and interconnection…the transmission lines, and the hookups for generators and consumers…are a natural monopoly.
But generation is not at all a natural monopoly. That’s like saying magazines are a natural monopoly because they are all delivered by the post office.
Technology has come a long, long way from the beginning of the 20th century, and it is now possible to establish a true free market for generation by establishing the grid (wires and hookups) as a highly regulated common carrier. (It could be government run, but that’s not necessary if there is effective regulation.)
The problems with Texas is that there isn’t a true free market.
I’m sure you know that your idea of nationalizing the entire national electrical sector like France did…true Socialism…is never going to happen in the US. But establishing standards for grids is certainly possible.
And I agree with you that tweaks like that suggested by Yoram are not useful, primarily because 60% of consumers have no choice at all, and the utility monopolies well just pass on the tax to the consumer while still using fossil fuels.
#32, YB–
But not as low as the costs of building AND operating new wind or solar, in many cases:
https://www.lazard.com/perspective/levelized-cost-of-energy-and-levelized-cost-of-storage-2020/
$41/MWh just to operate a fully-depreciated coal plant.
$26-54 for wind, $29-42 for utility-scale solar.
@26/27 (Piotr): You’re being a bit too strident for my taste, so I will simply close the discussion by saying something I’ve said earlier: if you know how to make climate action a reality then bless you, go do it!
@28 (Tom D): I don’t know quite what you mean by carbon rationing, unless it’s “cap without trade”. Regardless, the political challenges remain. You write that carbon pricing “will probably be too weak to effectively drive the change needed”, but half a loaf is better than none, especially because IMHO it’s quite likely that we will not be able to “drive the change needed”: we have not hit past targets and IMHO are unlikely to hit stringent future targets.
@30 (Mal Adapted) Thanks for the good wishes! As for a Border Adjustment Tax, I think you’re right that you couldn’t implement one at the state level. But that doesn’t mean you can’t reduce emissions with statewide policy. For one thing, some 3/4 of emissions are not related to manufacturing (see this Sankey diagram I made for the U.S.) so even if you exempt manufacturing you’re covering a lot. Moreover, there’s more than one way to skin the cat: what we did with I-732 was include manufacturing emissions in the carbon tax but eliminate the existing business tax paid by manufacturers in WA (called the B&O tax). It didn’t work perfectly for various reasons we can get into if you like, but overall our estimate was that the aggregate carbon tax liabilities of the manufacturing sector were roughly equal to their aggregate B&O tax liabilities.
@31 (Jeremy G): You want electric utilities to be “a government service like the U.S. Postal Service”. There are in fact many co-op and municipal utilities in the U.S.; at least one state (Nebraska) has 100% public power. They do not have a stellar record in terms of reducing CO2 emissions.
@34 (Kevin Mc): All the more reason to give them an extra financial incentive to move away from fossil fuels!
Tom Doehne @28
“Any kind of carbon pricing will probably be too weak to effectively drive the change needed. ”
I disagree. Carbon taxes are pigovian taxes, and such taxes are known to work. For example New Zealand has a moderately high tax on tobacco and its driven use of tobacco right down from around 35% of the population to 15% despite tobacco being horrendously physically addictive. The introduction of vaping recently should get it near zero. We have alternatives to fossil fuels so I would argue you could get use of fossil fuels to zero if the tax was set quite high.
Although obviously a tax wont efficiently solve every problem we face with the climate issue so ,you need some other things. Carbon tax and dividend is obviously not going to be as effective, but its one of the most politically viable versions and maybe the best thing we have. Economists generally prefer carbon tax to cap and trade.
“A better alternative would be carbon rationing. ”
Yes in theory, except it doesn’t sound even remotely politically viable. Can you really see a political party doing this? They would probably loose too much public support across all classes of people because nobody likes rationing.
Piotr @28.
Thanks for the discussion. I want to comment on:
And since the main argument against the GHG reductions is “ we can’t afford it “, the revenue-neutral tax cut, if properly set and EXPLAINED, is the most “possible”, because the least expensive per ton of GHG, of the three options.
The problem here comes with the word EXPLAINED. As we’ve seen time and time again political campaigns are often won by gross distortion of the effects of a given policy. Seems few voters are savy enough to refer back to the explanation. Or has been said in similar context “if you’re splaining you’re losing”
Yoram:
IIRC one of the biggest things keeping coal plants running are longterm supply contracts. In many cases the utility is paying more per KWhour from existing coal than they would from newbuild wind or solar, but the power purchase contract has many years left on it. So money has to be found to compensate the plant owners. Now by my way of seeing things, if say a coal plant that has ten years left on its contract is replaced by a natural gas plant with an expected lifetime of greater than twenty years, then lifetime carbon emissions of the replacement will exceed those of the remaining lifetime of the coal plant. And this is before correcting for the effects of fugitive methane. So such a change is actually climate harmful on net. We want to avoid any longterm commitments to natural gas, as these will be hard to unwind.
thomas marvell (29) “ What do you mean, there is nothing to be gained? Utilities have an incentive to act if they reduce their taxes by emitting less carbon. At least that is the theory behind any carbon tax.”
It would make discussion more efficient if we read the entire the sentence we respond to – I wroter (25) “if they were exactly in the same boat – then there is nothing to be gained by using changes in emission instead $/GHG emitted tax”
From this the “nothing to be gained” obviously does not apply to the … carbon tax in general (which you seem to be “explaining” to me above), BUT TO YOUR
specific VERSION of that tax: tm (18) “ I suggest that any utility carbon tax be based on changes in carbon emissions, rather than the amount of emissions
You justify choosing your scheme by saying that under it “ [utilities] start from the same base“.
I questioned it pointing that it penalizes the good guys (those who reduced the GHG emission before carb.tax was introduced) and rewards the bad guy (those who didn’t do diddly-squat), because it leaves the bad guys with a much more forgiving starting point – and since the low hanging fruit is always cheaper to get – you give the bad guys competitive advantage over the good guys, whose high hanging fruit is much more expensive to get at.
– You answered by saying that: “ At present non-carbon power is minor […] Most utilities are in nearly the same boat.”
which … nullified the only supposed advantage of your scheme, because:
– if utilities “are in the same boat”, then you DON’T need your scheme to allow them to “start from the same base” because they are already there. Hence my:
P(25): “if they were exactly in the same boat – then there is nothing to be gained
by using changes in emission instead $/GHG emitted tax”
So to sum it up – if at the start of YOUR form of carbon tax:
a) all utilities WERE in the same boat – then we DON’T NEED your scheme (to give them equal start since they ALREADY HAVE IT)
or
b) if theyr weren’t, i.e. some utilities were more green BEFORE your scheme, then your scheme will make them go bankrupt, since their % reductions would be much harder and costlier to do than those of the bad guys – the last 10% reduction is much costlier than the first 10%.
So the only advantage of your scheme over regular (per emission) carbon tax – is either not needed (if all utilities are in the same boat) or harmful (penalizing the good guys in favour of the bad guys). Other downsides of your scheme over regular carbon tax, I have discussed in detail in (25).
Yoram Bauman (32):
1. “Good point about politics being the art of the possible.”
2. “[BC had $20/tonne tax, but] if you know how to get a legislature to implement a $150 carbon tax then bless you, go do it!”
3. “I will offer up an argument in favor of thomas’s suggestion, which is that some politicians have pledged not to increase net taxes”
I think I can hit all your three birds with a single stone: “revenue-neutral”:
In rev.-neutral tax – you pay proportionally to your GHG emissions, but get a refund EQUAL to _average_ carbon tax paid. Which means that:
– half or more households will see a net GAIN – say, a household using 20% GHGs less than average. out of 20$/tonne tax – you get net GAIN of 4$. If BPL raises it to gross tax 150$/tonne – the net GAIN grows to … 30$.
– and the impact on those that use more than average would not be nearly as dramatic as $150/tonne would suggests – if you use 20% more than average – your effective pay, after the refund, net 30$, NOT the gross 150$/tonne.
So most of the voters would financially BENEFIT from the high carbon taxes, while the more affluent minority, yes, would lose some money, but only a fraction of the sticker value of “150$/tonne”. And if they really don’t like it – they are financially in better position to reduce their emissions (buying a Tesla, home heating AC efficiency, fly coach, etc)
So this should address all your three counter-arguments:
1. 150$/tonne revenue-neutral tax should be “politically possible”
2. in fact, 150$/tonne revenue-neutral, should be MORE “possible” than a $20/tonne revenue-neutral, not even mentioning a 20$ non-refundable.
3. it would meet the “no new taxes” promises, since it _is_ “revenue-neutral” (if only the governments avoid the temptation to tax the tax… ;-)).
And it is better than Thomas alternative, as:
a) it applies to every GHG producer, not only to the 1/4 of GHG emissions from electricity utilities,
b) does not penalize the good and rewards the bad, as Thomas does (where the good who cut their GHGs PRIOR to the tax introduction, are penalized by having much lower emission reference level, and therefore much more expensive FUTURE reductions than those who before tax did nothing),
c) in fact, in the rev. neutral emission tax, the bad (those who use more than average) in effect PAY the good (those who use less)
d) finally, by benefitting more than half of people, AND reducing the net impact of the tax on the rest (in my example from Gross 150$ to net 30$) – you can get the tax to high enough values to switch technologies and alter lifestyle choices, while Thomas scheme could withstand only a fraction of that tax height (in his scheme a 150$ tax corresponds to a net 150$ decrease in profits to the utility).
Which means that revenue-neutral tax can be set up high ENOUGH to justify GHG cuts, at the fraction of the financial disruption Thomas and non-refundable carbon pricing schemes would have, and by doing so being MUCH more “politically possible” than Thomas and non-refundable schemes are.
Yoram Bauman:
Well, the biggest reason it didn’t work is that it was voted down. I’m afraid we’ll never know how well it would have achieved its economic goals if it had passed. All we can do is to try something else, in a country with 74 million intransigent Trumpists 8^(.
@33 (zebra): “Texas isn’t a true free market.” I have run across only two truly free markets — the market for widgets and the market for framuses. The economist Kenneth Arrow defined four defining characteristics of a perfectly competitive market — efficient market. I believe that is what you intend in your reference to a “true free market”. Widgets and framuses show up in examples used for explaining markets. If you believe in true free markets I suppose a carbon tax would be an anathema to you.
@35 (Yorum Bauman): I made no effort to suggest or argue for a solution to the runaway consumption of what remains of fossil fuels or the accompanying problems of CO2 emissions. I suggested that electric utilities like health care do not have efficient market solutions — solutions that maximize human welfare. The problem of reducing CO2 emissions was never a problem with a market solution, and at this juncture playing with adjustments to the energy market mechanisms is like the proverbial rearranging of deck chairs on the Titanic. Market solutions are neither the only nor the best solutions for problems like reducing CO2 emissions. Nevertheless, a market based framing of the problem has been strongly imposed by the powers that be. Within that frame I suppose any sort of carbon tax has merits over a cap and trade scheme because it avoids speculation, although it does present some problems of fairness as considered in your post. I believe no matter how carefully and well you craft a carbon tax you will fail in building an effective market mechanism for controlling CO2 emissions. I believe the climate science community made a mistake when they constructed a CO2 budget for politicians to play with. In doing so they implicitly accepted a market framing for solutions. Mandates and rationing could effectively control a nation’s CO2 emissions. But as many comments have already observed those actions are not politically possible in the U.S. I fear humankind is in for a very rough ride.
Jeremy Grimm #42,
“If you believe in true free markets I suppose a carbon tax would be an anathema to you.”
True free markets have two characteristics:
1. Competition.
2. Internalized costs.
So, no, a carbon tax is an obvious way to internalize costs, and is perfectly consistent with a true free market.
And “competition” covers multiple factors. There has to be a relatively “level playing field” between buyers and sellers. That requires strong government regulation, like there is in Europe. But that regulation does not involve the government deciding who buys what from whom.
The point is, you have to have condition 1 first. Then, a carbon tax or other action to minimize/eliminate externalities from fossil fuels works just fine. And while none of this is easy politically, weakening and destroying the traditional utility monopoly structure is at least a possible first step.
“Texas isn’t a true free market”
That sounds correct for several reasons. The Texas ERCOT market isnt a free market because it doesn’t allow power to be imported. This is inflexible but also exclusionary and arbitrary and goes right against the idea of an open market structure. This is also one key reason for their recent power crisis.
However the term true free market is unhelpful because opinions differ on what the term free means. A more useful term would be a “properly functioning market.” Imo this needs a few key attributes 1) anti monopoly laws. 2) government health and safety laws 3)criminal law 4) property law 5) anti collusion laws 6) low barriers for new entrants, so open markets 7) no or minimal trade protectionism 8) transparency of information 9) taxes and subsidies permitted 10) participants should be on a level playing field. There are other things but this is the basics. I cant find Kenneth Arrows defining characteristics of free markets and I don’t have a lot of faith in these neoliberal economists anyway. They lack commonsense.
Omega Centauri (37): “ [My] problem here comes with the word EXPLAINED.”
That’s why capitalized it. And that’s why I went into so much into details about it. For whether this tax gets even a chance to prove itself – depends on whether you can get to through to the voter with your EXPLANATION how it will benefit them.
In Canada, in the 2008 election it wasn’t effectively explained, and so it was killed by the “we can’t afford yet another tax grab” narrative by the Conservatives.
Yet, in 2019, it succeeded:
1. it was better explained:
– stating that every dollar paid in, will be paid back to the Canadians. In fact, they SWEETENED the deal, with carbon taxes on fuel paid by businesses, and levy on large emitters was not, at least fully, refunded – the Liberals added some of it to increase the refund how household ABOVE their own neutrality.
– it was offered a lump-sum benefit to a household, not a nebulous lowering of % rates other taxes
– they calculated how big sum it will be and how does it compare to what a typical household will pay in:
https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/putting-price-on-carbon-pollution/technical-briefing.html
– the claims of “another tax grab” were challenged quickly and more effectively than in 2008.
2. Plus the tables were turned onto the Conservatives with a question: “What is your CO2 emission plan?” The Conservatives could not go with “nothing, we don’t believe in climate change”, but instead kept telling that they keep working on a climate plan. After a while it became a butt of jokes as something as real as
a unicorn.
And even though Liberals won in 2019, but this outcome was still far from obvious – because of the people’s allergic reaction to the word “tax”, and because the lie is easier than explaining why it is a lie, particularly when due to social polarization many even won’t listen to you, and because of what you described as “if you’re splaining you’re losing“. Still, it has shown that it is politically “possible”.
So to sum up: to even have a chance to succeed, FIRST you need to get the carbon tax right:
– revenue neutral (or even sweetened as seen above)
– transparent way to refund it
– addressing some inequalities (higher % pay-back for rural and for households with more kids)
AND THEN you stand behind it, EXPLAINING it and calling the opponent on their lies:
– They: “it’s just another tax grab”
– Me: “So you read: “revenue-neutral” and portray it to the voters as a “tax grab”?”
or:
– “So you see that (most, 80%?) of households getting back MORE money BACK than they paid in, and you call it, with a straight face: “tax grab the Canadians cannot afford”?
and of course the classic:
– “So what’s your plan and who will pay for it?”
If you can’t convince people with something that will GIVE them extra money then how on Earth are you going to convince them with alternatives that demand sacrifices from everybody.
And it would have to be “everybody” – because despite what some people on RC think – targeting ONLY big industrial emitters, the rich countries or the rich people – is not enough to bring us anywhere close to 70-80 % reductions we would need just to stabilize CO2 conc., not mentioning the net-zero we need to stabilize the temps. and reduce the risk of positive feedbacks.
Some people really dislike the very thought of taxes. I’ve heard it suggested that a carbon tax and dividend be called a carbon fee and dividend or alternatively a carbon levy and dividend. Would that help in convincing the public, or would it be open to attack as just being a word that conceals a tax?
nigelj (46). One may try, but it didn’t work in fed. elections in Canada where in 2008 it was called “The Green Shift” – yet the Conservatives, and media, called it immediately carbon tax, AND implied that the Liberals want to deceive Canadians. on On the other hand, referring to “tax-shift” didn’t hurt the provincial tax in B.C.. And in 2019 the carbon tax won without finding alternative name, but with Liberals using “revenue-neutral carbon tax”, as frequently as they could.
Now if there was a way to _incorporate revenue-neutrality/dividend/refund into the name itself, so the opponents COULDN’T SHORTEN it to “carbon tax” – it would be great.
n 46,
I like “fee and dividend.”
@46 (nigelj): The WA ballot measure I worked on (I-732) featured the word “tax” prominently, and some folks blamed that word for the fact that it ended up with only 41% Yes in Nov 2016. Two years later the environmental left put a Green New Deal measure (I-1631) on the ballot and it had “fee” instead of “tax” and other supposed attractive language… and it ended up with 43% Yes in Nov 2018. Of course that was in the face of $30m in opposition funding (versus $15m in support). Bottom line: I’m skeptical that language choice matters all that much IF opponents have access to financial/media resources.
PS. Here’s the actual ballot summary that voters saw on their ballots (note that these were written by the Sec of State):
Initiative Measure No. 732 concerns taxes. This measure would impose a carbon emission tax on certain fossil fuels and fossil-fuel-generated electricity, reduce the sales tax by one percentage point and increase a low-income exemption, and reduce certain manufacturing taxes. Should this measure be enacted into law? (41% Yes in Nov 2016)
Initiative Measure No. 1631 concerns pollution. This measure would charge pollution fees on sources of greenhouse gas pollutants and use the revenue to reduce pollution, promote clean energy, and address climate impacts, under oversight of a public board. Should this measure be enacted into law? (43% Yes in Nov 2018)
Re: two initiative measures in Yoram Bauman (49)
1. Measure No. 1631 – was NOT revenue neutral – since revenue was to be used to fund programs, so the opposition had fairly portrayed it as tax grab – and the argument, “but is is good tax grab” is hard to sell, particularly that most of the benefits won’t be obviously attributable to the tax what you pay at the gas station. “Pain now and to me” rarely is outweighed by “benefits later and not necessarily to me but for the greater good ”
This approach also limits the effectiveness of the tax since EVEN if you convinced people to a 20$/tonne tax, good luck if to be effective it needs to be 100$ or 150$ /per tonne.
2. The earlier proposition 732 – although it lists taxes reduced, but reading it it is UNCLEAR whether every dollar collected will by paid back in form of reduced other taxes, or not. And by not making it the most important selling point of the tax – you leave an opening which WILL be used by the opponents to make it into: “just another tax grab that hard-working people of [enter your jurisdiction here] cannot afford”) and to kill your proposition.
I still have to meet a voter who wants to have their taxes higher, so the only way to sell it is to SHOW them that most of them will get a NET TAX CUT (as their dividend will be larger than their fee/tax).
3. Finally, I much prefer a dividend that is lump-sum payment to every household – than the prop732’s dividend to be paid to:
– raise low-income exception – WHICH DOES NOT help the poorest (those who were already below it) and depending how this exception works -possibly also those of low-middle income above the raised level.
– a 1% drop in sales taxes – in absolute terms it benefits more the rich people since they are buying more than the poor
– manufacturing tax cut – doesn’t go to the ind. voters/taxpayers
On the other hand if we pay same divided per household – we avoid these problems:
– everybody can SEE how big is the dividend,
– the benefits are distributed more fairly and have those who use less energy getting higher NET benefit, at the expense of those with oversized consumption (the cut to the sales tax flattens this difference, since while the rich are paying more carbon tax, they will also save more money on the reduction in sales tax).