A Call for a Carbon Tax From Elon Musk...and Many Others

[RichardC]

As discussed in this week's edition of the Economist, it is widely understood that a carbon tax would by far be the most effective governmental response that could relatively costlessly (in terms of impact on growth) switch us over to sustainable, low carbon economy.

See: http://www.economist.com/news/leaders/21580146-world-will-one-day-adopt-carbon-taxbut-only-after-exhausting-all-alternatives-tepid

Climate-change policy in America, Europe and China
Tepid, timid
The world will one day adopt a carbon tax—but only after
exhausting all the alternatives

 

[Robert.Boston]

In an excellent blogpost, Prof. Severin Borenstein of UC Berkeley notes that trying to replace a missing carbon tax with subsidies for "good" things (green power, EVs, etc.) doesn't quite work:

The fundamental problem is not that green energy has positive spillovers — running your A/C on solar power doesn’t make others better off — but that brown energy has negative spillovers. Thus, when we subsidize green instead of taxing brown, we end up making electricity too cheap overall.[2] Green electricity subsidies also fail to account for how much GHG emissions they actually prevent. Is that wind turbine crowding out coal-fired generation, a gas-fired plant, or another wind turbine? The answer determines the value of the green power, but is not reflected in today’s subsidies.

 

[RichardC]

For comments and suggestions: Pollution Levy and Dividend - Methodology and Process

1. Set a significant, and annually increasing, price on GHG emissions (Co2, methane, etc., all calculated as CO2e (carbon dioxide equivalent)) including the emissions embedded in all imported goods and services. (For example, initially $50 per tonne, increasing annually by $20 per tonne, together with any required adjustment for inflation.)
2. Establish accounting and audit standards (for example, based on ISO 14064) and collection mechanisms (which could easily piggyback on the GST collection apparatus to capture and collect the pollution added by transport and further processing).
3. Calculate total annual estimated pollution levy for the first year.
4. Divide the total annual estimated pollution levy for the first year by the number of permanent residents of Canada to determine the annual per resident dividend for the first year.
5. One quarter of the annual per resident dividend will be distributed to each permanent resident at the beginning of each calendar quarter (Jan 1, April 1, July 1 and Oct 1) in advance of the collection of the levy.
6. The same process, at annually increasing pollution levy levels, would be applied for each successive year.
7. Any adjustment (surplus or deficit) required to dividend out the full amount of the pollution levy would be made to the dividend payments for the following year.
8. The steadily increasing prices (and the known amount of the increases in the future) would encourage investments in innovation, the substitution of non-emitting alternatives and conservation, and over time lead to the gradual replacement of carbon emitting energy sources with non-emitting alternatives.

 

[RichardC]

All taxes distort relative prices. Income taxes lower the price you receive for work; carbon taxes increase the price of carbon. My point was that, regardless of whether you believe in AGW, it's hard to maintain that it's better to have distorted incentives for labor than a disincentive to emit carbon.

As you note though, Derek, if a tax internalizes an externality, then it's actually improving the efficiency of the economy by aligning the "posted price" for each good with its full social cost. So, if there really are negative externalities caused by emitting carbon (as I believe, and as the vast majority of the scientific community believes), then a carbon tax is good -- even if there is not a compensating reduction in income taxes. The "tax swap" in the proposal is a double good.

Robert, absolutely correct. I would respectfully suggest that we may be substantially underestimating the costs that carbon emissions are actually imposing on the public. In this regard I refer to the May 2013 "Update of the Social Cost of Carbon for Regulatory Impact" prepared by the Working Group on Social Cost of Carbon of the United States Government with participation by: Council of Economic Advisers, Council on Environmental Quality, Department of Agriculture, Department of Commerce, Department of Energy, Department of Transportation, Environmental Protection Agency, National Economic Council, Office of Management and Budget, Office of Science and Technology Policy , and the Department of the Treasury

This report, using a 2.5% discount rate, set a 2010 price of $52 per metric ton of CO2, a 2015 price of $58 and a 2050 price of $98 per metric ton of CO2. See:
http://www.whitehouse.gov/sites/def...social_cost_of_carbon_for_ria_2013_update.pdf

At the current emissions rate of around 33 billion tonnes per year and a current price of $55 per tonne, this represents a tax on the global public on an order of approximately US $1.8 Trillion (or US $1,800 Billion) per year. I note that this is directionally consistent with the Stern report which estimated the social cost of CO2 to be on the order of $85 per tonne (or about US $2.8 Trillion (or US $2,800 Billion) per year). See:
http://webarchive.nationalarchives....easury.gov.uk/media/4/3/Executive_Summary.pdf

A proper accounting of the costs should add to that estimate all of the various subsidies enjoyed by the fossil fuel industries. According to the International Energy Agency, the direct subsidies exceed $500 Billion per year. See:
http://www.iea.org/publications/freepublications/publication/English.pdf

A report released by the International Monetary Fund earlier this year estimated that total energy subsidies to the fossil fuel industry amount to US $1.9 Trillion. See:
http://www.imf.org/external/np/sec/pr/2013/pr1393.htm

Since this was based on a social cost of carbon of only US $25 per tonne, the use of the US $85 figure from the Stern report would result in a total cost of around US $4 Trillion per year. See:
http://grist.org/climate-energy/imf...n-a-year-and-thats-probably-an-underestimate/

So on this basis it is reasonable to estimate the "all in" cost of carbon emissions to be on the order of approximately US $100 per tonne. However, I would argue that this value is likely too low for the following reasons:

1. The very real risk that our actions could trigger unstoppable, runaway climate change from the release of methane and CO from melting the permafrost and undersea methane hydrates, in which case the costs could be an order of magnitude higher. This scenario was discussed in a recent paper in Nature. See: http://www.nature.com/nature/journal/v499/n7459/full/499401a.html as discussed at: http://www.wbcsd.org/Pages/eNews/eNewsDetails.aspx?ID=15785
2. The international injustice done by climate change, in that most of the harm is going to be suffered by those in less developed countries who had very little to do in causing the problem and are unable to cope with the consequences.
3. The intergenerational injustice done by climate change, in that most of the harm is going to be suffered by future generations who had not caused the problem, will receive little, if any, benefit from our waste of energy today, but will have to deal with the consequences and most of the costs.
4. The precautionary principle, which would argue that we need to stop performing this science experiment on our planet (where we are in the test tube, and don't have a Plan B).

To return to the economics, since GHG emissions are imposing a total cost on the order of $100 per tonne, in order for our economy to operate efficiently governments need to charge that amount per tonne of emissions in order for the economy to function efficiently and maximize the total welfare enjoyed by the public. It is not a tax, it is the pollution charge which is required to internalize the costs of the emissions.

 

[RichardC]

There is a new carbon pricing proposal for Washington state. See: http://seattletimes.com/html/localnews/2025255218_insleeclimate1xml.html

Inslee targets polluters with billion-dollar cap-and-trade plan

While the proposal is framed as a cap and trade model, the implementation of a minimum floor price should help Washington to avoid some of the problems which have bedevilled other cap and trade models. As noted in the article:

The state would set a floor price at auctions, and then companies would bid the prices up from there.Inslee would spend most of the money on state budget needs. The governor’s budget office estimates the program would generate $947 million in fiscal 2017.
Of that, Inslee would spend $400 million on transportation, $380 million on education and $163 million on tax rebates for low-income residents, low-income housing construction and possible tax credits for industries that may struggle with the higher energy costs. About $3.5 million would go to run the program.

 

[RichardC]

Further report on the positive environmental and economic impacts of the carbon tax in British Columbia.

See: http://www.sustainableprosperity.ca/article3964 and http://business.financialpost.com/2015/01/22/b-c-s-carbon-tax-shift-works/

B.C. brought in a carbon tax, fuel use dropped 16% while it rose 3% in the rest of Canada
We Canadians hesitate to pat ourselves on the back, even when we do something well. Like B.C.’s carbon tax shift. Around the world, prominent economic authorities, like the World Bank and OECD, and business and environmental leaders have called it one of the world’s best climate policies: an environmental and economic success. ...

Starting July 1, 2008, B.C. put a tax on fossil fuels (which cause greenhouse gas emissions). It started low and rose annually, reaching today’s $30/tonne (about 7 cents a litre of gas) in 2012. Revenue neutral by law, the proceeds from the carbon tax are matched by cuts in other taxes (like income tax). ...

The tax covers most types of fossil fuels. Since it came in, B.C.’s total use of those fuels has dropped by 16.1% (2008-13). By contrast, in the rest of Canada fuel use went up by 3% over that time. B.C.’s dramatic drop since the tax marks a big change from the previous eight years (2000-2008), when its fuel use was actually rising slightly compared to the rest of Canada’s. ...

Moreover, B.C. significantly outperformed the rest of Canada on each of the fuels covered by the carbon tax, including home heating oil and natural gas. This consistent result across all fuel types is strong evidence that the policy is working well. ...

As for the economy, B.C.’s GDP has slightly outperformed the rest of Canada’s since the carbon tax began. This makes sense. BC simply raised taxes on pollution and lowered them on income. Since 2008, the province has cut income taxes by almost $1 billion more than it has taken in carbon revenues – so taxpayers are ahead overall. B.C.’s personal and corporate income tax rates are now among the lowest in Canada, making it an attractive place to do business. ...

If putting a price on carbon is such an economically bad idea, why is it being recommended by the Canadian Council of Chief Executives, the World Bank, and the CEOs of major oil companies?”

 

[abasile]

Thanks for sharing. I think that BC (and not WA state) has the right approach. A "revenue neutral" carbon tax is advantageous because it will not present an overall drag on the economy. It actually provides a nice opportunity for many to reduce their net taxes owed as they endeavor to use less fuel. Avoiding a "tax and spend" approach should be helpful in developing a broader base of support that includes some conservative-leaning citizens.

 

[ThosEM]

This entire thread is great stuff that makes fascinating reading and gives an excellent overview. Thanks to all for the efforts to collect all these citations in one place. I was especially fascinated with the efforts to attach a defensible cost to the emission of CO2 or other pollutants.

Names may not matter much, but I think it could be more effective to refer to the carbon (or other pollution) tax as an "atmospheric user fee". That could make clear the tie-in to public costs for maintaining the commons and dealing with the consequences of its abuse.

Robert, absolutely correct. I would respectfully suggest that we may be substantially underestimating the costs that carbon emissions are actually imposing on the public. In this regard I refer to the May 2013 "Update of the Social Cost of Carbon for Regulatory Impact" prepared by the Working Group on Social Cost of Carbon of the United States Government with participation by: Council of Economic Advisers, Council on Environmental Quality, Department of Agriculture, Department of Commerce, Department of Energy, Department of Transportation, Environmental Protection Agency, National Economic Council, Office of Management and Budget, Office of Science and Technology Policy , and the Department of the Treasury

This report, using a 2.5% discount rate, set a 2010 price of $52 per metric ton of CO2, a 2015 price of $58 and a 2050 price of $98 per metric ton of CO2. See:
http://www.whitehouse.gov/sites/def...social_cost_of_carbon_for_ria_2013_update.pdf

At the current emissions rate of around 33 billion tonnes per year and a current price of $55 per tonne, this represents a tax on the global public on an order of approximately US $1.8 Trillion (or US $1,800 Billion) per year. I note that this is directionally consistent with the Stern report which estimated the social cost of CO2 to be on the order of $85 per tonne (or about US $2.8 Trillion (or US $2,800 Billion) per year). See:
http://webarchive.nationalarchives....easury.gov.uk/media/4/3/Executive_Summary.pdf

A proper accounting of the costs should add to that estimate all of the various subsidies enjoyed by the fossil fuel industries. According to the International Energy Agency, the direct subsidies exceed $500 Billion per year. See:
http://www.iea.org/publications/freepublications/publication/English.pdf

A report released by the International Monetary Fund earlier this year estimated that total energy subsidies to the fossil fuel industry amount to US $1.9 Trillion. See:
http://www.imf.org/external/np/sec/pr/2013/pr1393.htm

Since this was based on a social cost of carbon of only US $25 per tonne, the use of the US $85 figure from the Stern report would result in a total cost of around US $4 Trillion per year. See:
http://grist.org/climate-energy/imf...n-a-year-and-thats-probably-an-underestimate/

So on this basis it is reasonable to estimate the "all in" cost of carbon emissions to be on the order of approximately US $100 per tonne. However, I would argue that this value is likely too low for the following reasons:

1. The very real risk that our actions could trigger unstoppable, runaway climate change from the release of methane and CO from melting the permafrost and undersea methane hydrates, in which case the costs could be an order of magnitude higher. This scenario was discussed in a recent paper in Nature. See: http://www.nature.com/nature/journal/v499/n7459/full/499401a.html as discussed at: http://www.wbcsd.org/Pages/eNews/eNewsDetails.aspx?ID=15785
2. The international injustice done by climate change, in that most of the harm is going to be suffered by those in less developed countries who had very little to do in causing the problem and are unable to cope with the consequences.
3. The intergenerational injustice done by climate change, in that most of the harm is going to be suffered by future generations who had not caused the problem, will receive little, if any, benefit from our waste of energy today, but will have to deal with the consequences and most of the costs.
4. The precautionary principle, which would argue that we need to stop performing this science experiment on our planet (where we are in the test tube, and don't have a Plan B).

To return to the economics, since GHG emissions are imposing a total cost on the order of $100 per tonne, in order for our economy to operate efficiently governments need to charge that amount per tonne of emissions in order for the economy to function efficiently and maximize the total welfare enjoyed by the public. It is not a tax, it is the pollution charge which is required to internalize the costs of the emissions.