The Energy Collective Group

This group brings together the best thinkers on energy and climate. Join us for smart, insightful posts and conversations about where the energy industry is and where it is going.

9,853 Members

Post

When Politics Constraints Carbon Pricing, Part 3: Why Carbon Revenues are Just as Important as "Putting a Price on Carbon"

Summary:

  • Politics constraints carbon pricing efforts, making them fall short of the “optimal” climate policy envisioned by economists.
  • Careful attention to real-world political constraints can inform creative policy designs that improve climate and economic outcomes while increasing public support.
  • In particular, smart use of the revenues generated by a carbon tax could be just as (if not more) important than the carbon price itself.
  • Public opinion evidence indicates that the most popular use of carbon revenues is to invest in clean energy R&D and pursue additional emission-saving actions, like renewable energy deployment.
  • This “Tax and Invest” strategy also yields superior economic and environmental performance when compared to a politically-constrained carbon tax alone.

Full Spectrum: Energy Analysis and Commentary with Jesse Jenkins

When politics constraints efforts to put a price on carbon, making smart use of the revenues generated by a carbon tax (or cap and trade program) is just as important (if not more so) than the price on carbon itself, as I explain in this conclusion to a three-part series.

Economists widely consider putting a price on carbon to be the ideal, “economically optimal” climate change policy. Unfortunately, a variety of real-world political constraints mean carbon pricing rarely lives up to this ideal, as I explained in Part 1 of this series.

Indeed, by paying careful attention to these political constraints, policy makers can design creative climate policy that are both more likely to prove politically sustainable and yield better environmental and economic outcomes (see Part 2 for six tips on designing climate policy under political constraints).

Why carbon tax revenues are probably more important than the tax itself

In fact, as I hinted at at the end of my last column, the greatest potential for improved climate policy outcomes can be unlocked by making creative use of the revenues generated by a politically-constrained carbon price. 

How carbon revenues are used can impact both the political support for the carbon price itself and dramatically increase the amount of emissions abatement achievable at a given carbon price. It can also improve the overall economic performance of a politically constrained carbon pricing instrument. 

On the political front, a recent University of Michigan/Muhlenberg College poll, found that 61 percent of Americans oppose a carbon tax if the use of the revenues from such a tax are unspecified. Oppsition grows to 72 percent if the tax would “increase your energy costs by 10 percent per month.” It seems that people aren’t too keen on the idea of a new tax designed primarily to change their own behavior, and as usual, support drops when a specific price tag is attached to climate policies. 

Support for a carbon tax when the use of revenues is not specified

Support for a carbon tax that increases energy costs
Source: Amdur, Rabe and Borick, 2014

Political support changes dramatically when revenues are used creatively however. Voters apparently like to see carbon tax revenues used to actually try to solve the climate problem, with 60 percent of Americans surveyed — including 51 percent of Republicans and 54 percent of Independents — supporting a carbon tax if “revenues from the tax were used to fund research and development for renewable energy programs.” 

Support for a carbon tax with revenue used for research and development for renewable energy programs
Source: Amdur, Rabe and Borick, 2014

Barring that, respondents would like to see the money raised by a carbon tax sent back to them as rebates (56 percent overall, with only 43 percent support for this option amongst Republicans). Only 38 percent support a carbon tax used to reduce the deficit. 

These results are similar to several other public opinion polls and the results of other social values research I’ve seen, including polling on Canada’s ill-fated “Green Shift” carbon tax proposal. 

The Green Shift plan would have established a new carbon tax and offset the costs by reducing income taxes for consumers and businesses. It went down in flames in the 2008 election, bringing the Liberal Party and its leader Stephane Dion down with it. 

In the midst of the national debate on the Green Shift proposal, a poll commissioned for the Pembina Institute gave voters a set of options for how the revenues from the Liberal Party’s proposed carbon tax could be used. Importantly, spending the revenues on “renewable energy like wind and solar” garnered by far the largest share of support, with 47 percent of Canadians surveyed selecting that option. Only 11 per cent of respondents said carbon tax revenues should be used to cut income taxes—which might have raised some prescient alarm bells for Canada’s Liberals! 

Carefully planning how carbon pricing revenues are used can clearly impact public support for carbon pricing proposals—and could even mean the difference between a politically-constrained but viable carbon price and no carbon price at all (as in the case of Canada’s ill-fated Green Shift).

After posting parts 1 and 2 of this series, several people asked me what I thought about “revenue-neutral” carbon tax or “cap and dividend” proposals, both of which envision using revenues from a carbon tax to reduce other taxes or send rebates to households. My reading of the available evidence is that these proposals will likely boost public support for a carbon tax or cap (relative to using funds for general budget or deficit reduction purposes). That would allow a higher price on carbon to be established than if the use of revenues is unspecified. The evidence for this proposition is mixed however, with some polls (like the UMich/Mulhenberg poll) indicating stronger support for rebates, while experiences in Canada and Australia raise questions about the political efficacy of revenue neutral tax shift proposals…

That said, based on my research, the most promising strategy — politically, economically, and environmentally — is likely to be one that uses carbon tax revenues to fund a combination of clean energy R&D and to procure additional emissions abatement beyond that secured by the carbon price itself. Let’s call this the “Tax and Invest” strategy.

Tax and Invest: the most promising route to a politically sustainable, efficient, and environmentally effective carbon price?

Tax and Invest consistently polls well in public opinion research. Indeed, in every case I’m aware of where both options are posed to voters (including the two polls presented above), some form of Tax and Invest secures even greater support than variants of the revenue neutral rebate/dividend/tax shift class of proposals (if you have any evidence to the contrary, please provide links in the comments).

Additionally, investing in clean energy R&D and in procuring higher-cost emissions abatement opportunities not secured by the constrained carbon price alone can help drive down the costs of emissions abatement opportunities (while building stronger clean energy constituencies) relaxing the political constraints over time. Those dynamics can be critical to the long-term political sustainability of any climate policy, as discussed in Part 2 (for those interested in more, see these three papers).

While Tax and Invest may be the most promising route politically, the greatest advantage of this option is that it puts the revenues to work securing further emissions reductions, improving both the environmental efficacy and economic performance of the policy.

Using carbon revenues to reduce other economic “externalities” or market failures increases the economic efficiency of a carbon pricing policy, improving the welfare outcomes. Economists have often proposed using revenues to reduce other distortionary taxes, like income taxes. But there are two other options that both improve efficiency and environmental performance. Talk about a “double dividend!” 

First, as many economist have demonstrated, knowledge spillovers, asymmetric returns, and the non-rival nature of new knowledge lead to under-investment in technological innovation. These innovation-related market failures are not fully addressed by carbon pricing instruments alone, and they can impact the pace of clean energy innovation and reduce the economic performance of carbon pricing instruments, as demonstrated by MIT economist Daron Acemoglu and colleagues. Using revenues to reduce these clean energy innovation-related market failures could therefore improve the economic and environmental performance of carbon pricing instruments, particularly when they are politically constrained.

Second, since the carbon price is constrained and can’t reach the full social cost of carbon, additional climate-related externalities remain, associated with emissions that cost more to reduce than the emissions penalty imposed by the carbon price. Using revenues to procure additional emissions abatement beyond that secured by the carbon price itself would thus further reduce the economic distortions associated with these excess GHG emissions, once again improving both the net economic and environmental performance of the policy.

This opportunity to achieve much greater abatement than accomplished by a politically constrained carbon price alone is huge. 

As a simplified example, consider what would be required to reduce annual U.S. energy-related CO2 emissions, now at roughly 5.3 billion tons, by 1 billion tons. In rough terms, this is what the Waxman–Markey bill aimed to accomplish by 2020. Assuming, for sake of example, a marginal abatement cost of $30 per ton of CO2 in 2020 (consistent with EIA estimates of emissions costs under Waxman-Markey) and a roughly linear abatement supply curve, we can infer that the average abatement cost across those 1 billion tons is roughly $15 per ton. 

If this abatement were accomplished by establishing a simple carbon price, that price would have to rise to equal the marginal cost of abatement (or the cost of achieving that last ton of CO2 reduction). This simple carbon price-only strategy would thus require a $30 per ton price to reduce CO2 by 1 billion tons. That’s obviously well in excess of apparent political constraints discussed in Part 1, which likely limit carbon prices in the U.S. to on the order of just $2 to $8 per ton of CO2.

In contrast, the same emissions mitigation level could be accomplished through direct procurement of clean energy adoption and emissions mitigation that costs on the order of $15 billion—i.e., 1 billion tons at an average cost of $15 per ton. By using reverse auctions, competitive procurement, and other market-based price discovery mechanisms, policy makers could maximize the economic efficiency of this additional emissions reduction. 

Most importantly, the requisite procurement of emissions abatement could be financed by spreading the $15 billion total abatement cost across the remaining 4.3 billion tons of U.S. emissions by establishing a carbon fee of just $3.50 per ton of CO2 in round terms. 

This Tax and Invest strategy could thus achieve 1 billion tons of emissions reduction at something on the order of one-eighth the carbon price necessary through a straight carbon tax approach—and it can do so by using revenues generated by a very modest carbon price that appears to be within the range of political constraints on carbon pricing in the United States.

(Note, in actuality, this proposal would require slightly less revenues on the one hand, as the carbon price itself achieves some abatement, reducing the amount needed for procuring abatement, which is not factored in here. On the other hand, I assume emissions are procured efficiently and that the markets are segmented such that you can achieve reductions at average rather than marginal costs. Subsidies or other policy mechanisms that are not efficiently designed or that use marginal pricing for the entire emissions market could increase the revenues required to achieve a given level of abatement. That said, even if revenues required double, the carbon price needed to raise sufficient funds would still be modest, on the order of just $7.00 per ton of CO2.)

Concluding the series: designing climate policy as if politics matters

To summarize this three part series: ignoring the very real political economy constraints facing climate policy and focusing solely on pursing an “economically efficient” (or what economists call the “first-best”) carbon pricing policy is likely to prove anything but optimal when such policy efforts collide with political constraints, as explained in Part 1

Policy makers, economists, advocates, and others should design policy as if politics matters. As real-world experience with climate policy making makes painfully clear, politics is almost always the binding constraint. We should all therefore pay closer attention to the political economy constraints on climate policy

In fact, there are likely to be any number of policy proposals that lie in the “opportunity space for improvement” in climate policy design discussed in Part 2. These creative climate policy options can exhibit superior economic efficiency, environmental efficacy, and political sustainability when compared to a traditional carbon tax-only approach. There thus remains a considerable space for creativity in climate policy design and implementation.

In particular, as discussed here in Part 3, a “Tax and Invest” strategy that devotes carbon revenues to clean energy R&D and additional emissions abatement appears to offer a powerful combination of improved political dynamics, enhanced economic efficiency, and much greater environmental performance than a constrained carbon price (or even a “revenue neutral” tax shift, rebate, or dividend approach). Paying as much attention to the use of carbon revenues as to the carbon price itself can thus yield substantial improvements in climate and economic outcomes. 

Note: this series is based largely on my paper, Jenkins (2014), “Political economy constraints on carbon pricing policies: What are the implications for economic efficiency, environmental efficacy, and climate policy design?Energy Policy (69): June 2014. Please email me if you’d like a copy and do not have access via ScienceDirect.

Content Discussion

Bob Meinetz's picture
Bob Meinetz on July 28, 2014

Jesse, this is exceptional work you’ve done – all accurately sourced, notated, and explained. That you, Schalk, and other younger posters on TEC are applying your talents and intellects to the search for solutions to these grave problems is encouraging.

Those of us with a few more tree rings are perhaps more wary of theoretical constructions, and view the incorporation of real-world experience as more essential to the process. On the topic of revenue-neutral taxes, I admit I was disappointed when instead of discussing recent empirical data on B.C.’s economy and gasoline consumption you concentrate on Canadian polls and political failures of six years ago. A lot has changed since then.

As real-world experience comes in typically models undergo a process of refinement. Variables are re-weighted, and in some cases new ones are added which had gone previously unforeseen. I think you’ve missed some of these variables and they’re important ones. Examples:

  • Willingess-to-pay surveys represent customer estimations of values. What evidence is there to suggest buying habits accurately reflect these estimates? It seems likely that respondents would view this question as relating to discretionary purchases, and not essentials like gasoline, utilities, etc.
  • In responses to the past two installments of your series, recurring themes are mistrust of government and the potential for fraud/diversion of funds to other uses. Complexity foments this mistrust by limiting accountability, and very few voters have any understanding of cap-and-trade is to begin with. Is their an assignable value to simplicity vs. complexity of public programs and its affect on public perception? If so, should it be included in the calculus?
  • To what extent does an income tax break or cash payout negate a perceived hit from taxation, especially when it follows in close proximity to the hit?

The success of B.C.’s carbon tax – a 16.1% reduction in gasoline consumption with no harm to its economy – could be the result of similar considerations which have largely been ignored to date. The strategy is getting good reviews from across the ideological spectrum, including this endorsement in The American Conservative, and a recent poll by the Pembina Institute showing 64% of business and community leaders believe the tax has been “a positive move”.

Given B.C.’s impressive results the question we should be asking is not “How can we construct a carbon mitigation strategy which will be workable and effective?”, but “What is it about B.C.’s program which might not translate to a similar effort in the U.S.?”

Jesse Jenkins's picture
Jesse Jenkins on July 28, 2014

Dear Bob,

Thanks for the comment. I actually considered writing about BC’s carbon tax experience — as well as other subnational examples like the Regional Greenhouse Gas Initiative in the Northeastern US and California’s AB 32 — but cut them for the sake of brevity, and focused only on national-level examples (my paper actually discusses the two subnational US examples however). 

That said, I have followed BC’s carbon tax experience over the years. At $30/ton, it’s one of the few policies (the only one really) in North America to reach anything close to what economist’s estimate as the social cost of carbon (although still on the low end of those estimates, which range from roughly $15-150/ton and rise over time). 

Still, BC has extremely low carbon emissions from the electricity sector, which is dominated by hydropower, so the impact of BC’s carbon tax per household is lower than in most other regions of North America. BC residents feel the impact mostly in gasoline costs, which have risen about 7 cents per liter. 
 
BC consumes about 4.5 billion liters of transportation fuel per year, or about 975 liters per year per resident. So that’s only on the order of $70 per person per year in higher fuel costs. Assuming transportation fuel cost increases represent two-thirds of the total impact on household costs, BC’s apparent household WTP for climate policy is probably still right within (or at least not far off) the $80-200 per household per year range evident in the United States (as described in my paper). And that’s before considering that BC’s carbon tax includes a significant tax shift (cuts to personal and business tax income rates) to offset the initial cost increases due to the carbon tax.
 
That’s a very quick back of the envelope estimate, but I doubt I’m off by anything close to an order of magnitude. Thus, it looks to me that while BC’s policy achieves a higher carbon price than in other jurisdictions, the political economy constraints there are no less stringent than elsewhere in North America. Total household initial costs are fairly low still, and that’s likely critical to the political sustainability of BC’s carbon tax policy. 
So you point to BC as the model for everwhere else. I’m not so sure. If you tried to implement the BC tax shift approach elsewhere, in regions with a higher carbon footprint per household, you’d wind up with a much lower and thus less effective carbon tax. And if you spend all of your revenues on tax rebates instead of investing in clean energy R&D and additional abatement, you will accomplish little else. 
 
There are of course other subnational examples to keep an eye on. RGGI has seen substantial cuts (on the order of 40%) to electricity sector CO2 in the Northeast, although most of that is likely due to the ongoing shift from coal (and oil) to gas-fired plants in the region. That said, RGGI’s modest (just about $3/ton CO2) and politically sustained carbon price has also raised billions in revenues across the region that have been directed to energy efficiency programs, clean energy RD&D programs at places like NYSERDA and the Massachusetts Clean Energy Center, and other mitigation efforts. California is considering similar uses for the revenues generated by its AB32 cap and trade program, which took effect in 2012. 
 
Your comment also raises three great questions for further research. I don’t have a direct response for those here, but suffice to say, those are all important considerations. For now, I’ll just focus the conversation on the BC experience and what we can learn there. I personally see another example of a politically constrained carbon price, and not necessarily a model for widespread replication elsewhere…
Jesse
Bob Meinetz's picture
Bob Meinetz on July 28, 2014

Jesse, regarding

If you tried to implement the BC tax shift approach elsewhere, in regions with a higher carbon footprint per household, you’d wind up with a much lower and thus less effective carbon tax.

It wouldn’t be difficult to modify the tax to account for an area’s generation mix, so that after incorporating taxes on all fossils – coal, natural gas, and gasoline – the overall “hit” to households would be more or less the same, generating the same per capita revenues and rebates. Nonetheless, some discrepancy between areas with a high percentage of coal generation vs. gas, nuclear, or hydro is a good thing. It’s what will make clean energy more competitive – and thus more profitable for utilities and less burdensome on consumers.

The RGGI has been criticized for playing a carbon shell game which effectively exports emissions to other areas of the country or world, and I’ve seen estimates suggesting actual reductions in GHGs by 2020 will be less than 1%. This is the Achilles’ Heel of cap-and-trade – its complexity is a magnet for loopholes, exemptions, and other shenanigans.

And if you spend all of your revenues on tax rebates instead of investing in clean energy R&D and additional abatement, you will accomplish little else.

I don’t doubt that RGGI has raised billions in revenues and funded programs which have helped increase efficiency. What would be the effect of those $billions in the hands of homeowners, enabling them to make efficiency improvements to their homes and buy fuel-efficient cars? This point makes RNTs more saleable to conservatives: investment comes from the bottom up, puts spending in consumers’ hands, and capitalizes on an incentive to save money.

Jesse Parent's picture
Jesse Parent on July 29, 2014


If anything, I think this is a part of the sustainability / emissions / Ctax discussion that is unfortunately left out of general discussion. Good points here – and hopefully they can be built upon, as mentioned above.

  • In particular, smart use of the revenues generated by a carbon tax could be just as (if not more) important than the carbon price itself.
  • Public opinion evidence indicates that the most popular use of carbon revenues is to invest in clean energy R&D and pursue additional emission-saving actions, like renewable energy deployment.
Joris van Dorp's picture
Joris van Dorp on July 29, 2014

Great series of article Jesse,

I must say that I have doubts about the theory of using carbon tax revenues to fund renewables/efficiency R&D. I have some experience with government funded green R&D and am very dissappointed. Such programs are riddled with political and ideological contamination and are extremely wastefull. “Keeping the project alive as long as possible” is what motivates managers of such programs, and the public nature means there are many ways of achieving this. Particularly: physical constraints limiting the financial and/or technical potential of a particular new R&D program are simply ignored, because analysing this at the start of the program could ‘risk’ the program being cut before the available budget is consumed. I’ve seen this dynamic at work many times, although it is also found inside green R&D programs funded by the private sector.

I am very surprised that proposals to give carbon tax revenues back to the public through direct payment or reduced income taxes is so poorly recieved by the public. It strikes me that such a proposal is probably one of the best options, if the objective is to limit the negative effect of carbon taxing on consumer spending. What we want is for consumers to benefit financially from reducing their carbon footprint. Carbon tax and rebate does exactly that. Carbon tax and R&D spending does not.

Moreover, since the success-rate of all R&D is (far) less than 10% generally (i.e. 90% of all R&D fails to achieve any societal benefit), a carbon-tax-and-R&D-spending program will destroy 90% of the funds generated by the tax. Personally, I would be against this.

Second, the volume of revenues generated by a credible carbon tax would seem to far outstrip the needs of an efficient and results-driven green R&D program. Contrary to what is popularly thought, spending more on R&D does not mean coveted results will come faster and better. On the contrary, carefull allocation of funding and definition of plausible objectives is the primary cause of R&D success, not the volume of spending. So presumably, much of the revenue from the carbon tax would be spent in subsidizing the deployment of green technologies rather than supporting R&D. If so, than much of this spending will be a waste, just as most subsidisation of green technology today is a massive waste (Solar panels in cloudy Germany? Wind turbines in the countryside spoiling views and silence? Biomass mega-plantations in place of pristine tropical wilderness? New “CCS-ready” coal power plants burning ancient forest biomass instead of new nuclear? etc. etc. etc.)

So in the end I’m not happy with your conclusion, even while it seems to be the right conclusion. I was rather hoping that carbon tax and rebate/dividend would turn out the be the best choice, politically as well as economically. Perhaps the reason people don’t like the idea of tax and dividend is because they don’t realise that the average consumer would actually benefit financially from this, enabling him/her to invest in green technologies earlier and/or to a greater degree? Another question I have is why people believe the tax revenues should be spent on financing renewables (if that is what was proposed). Do they want this because they believe this would lower their energy bills? (It wouldn’t) Or do they want this because they believe renewables would solve climate change? (They wouldn’t) As always, while such polling is important and interesting, they always seem to raise more questions than they answer, in my opinion anyway.

 

Jeffrey Miller's picture
Jeffrey Miller on July 29, 2014

Great series Jesse – I learned a lot from reading it.

Your posts inspired a few questions which I’d like to get your thoughts on.

1. Under a tax and rebate scheme (let’s assume the proceeds from the tax are distributed equally to all legal residents), which you indicate polls worse than a tax + invest scheme, but better than a straight tax without earmarking the proceeds, what percent of the population would actually make money? This obviously depends on the distribution of per capita carbon emissions – both direct energy use as well as all the embedded emissions in the stuff people buy. I would expect that this distribution is highly skewed to the right. People who have large yachts, or multiple homes, or fly private planes use far more fossil fuels than does the typical person. If the distribution is skewed in this way, the average (implied) emission will be higher than the median emission. Since the rebate is based on the average (i.e. total emissions), it seems very likely that more than half the population will make a small profit from the rebate. I’d be interested in your thoughts on this, and whether you know of any quantitative estimates for the percent of rebate ‘winners’.

2. If it’s true that more than half the people will come out ahead from the tax + rebate scheme (because carbon emissions are skewed by large consumers), and if this were made known to people – perhaps by including it as part of the polling question – would it, in your view, incline people more favorably toward this option?

3. Along the same lines, if people were aware that they could affect the amount of tax they pay, and perhaps turn a profit from the rebate by changing their behavior (by for example buying more efficient cars and furnaces and installing better insulation), would this tend to incline them more favorably to this option?

4. How would people’s view of the tax + rebate scheme change if it were implemented? If, as I suspect, a majority of the population would make money, I would imagine the program would become more popular through time.

5. Conversely, how much confidence should we have in the stability of people’s preference for the tax + invest option? I absolutely agree that we underinvest in research for the reasons that you indicate and think we should be devoting a lot more money to basic energy and energy efficiency research. That said, I also take Joris van Dorp’s point; it is easy for politicians to steer money into pet projects that are not really research related. Assuming that some fraction of the investment money will be spent this way, and that there will be a fair share of debacles (e.g. Solyndra) around which hostile politicians will make a lot of hay, do you think people would still continue to favor this option, as it is likely to play out in the real world?

Jesse Jenkins's picture
Jesse Jenkins on July 29, 2014

Dear Joris,

Thanks for following along through the full series, and for your comments. Let me try to answer some of your questions/comments here.

First, you seem skeptical that government funded RD&D programs can yield success and assert that “90% of money” is most likely to be wasted. I hope that a careful look at the history of American innovation and the role of government would temper your skepticism. I refer you to my 2010 collection of case studies, “Where Good Technologies Come From,” which documents how everything from jet engines and nuclear power to biopharmacueticals, advances in agrosciences, and of course, the semiconductor, Internet and computers all come more or less direclty out of government-funded and, more often than not, government-led innovation initiatives. You may also wish to look at the role of government RD&D programs in developing most of the key technologies underlying the shale gas and oil revolutions now changing the North American energy landscape. In fact, it’s very hard to come up with an example of an important 20th or early 21st century invention that does not trace back at one or more critical junctures to government-funded RD&D programs. So I do not at all share view that government R&D is a wasteful use of carbon revenues. Even if the “success rate” for project funding is 1 in 10 as you assert, that would be a remarkable impact on the energy landscape, and while you characterize that situation as “wasting” 9 out of 10 dollars, you also ignore the much larger societal returns that could be expected from those 1 in 10 successes. How do we quantify the returns on government investment in microchips? Or shale gas? Or jet engines? Or … You get my point I hope. 

That said, I appreciate the need to discipline R&D programs well and to structure institutional incentives and program design to maximize the bang for every buck. Just because one big success can pay for many failures does not mean we want to court failure unecessarily. But we know plenty about how to structure R&D programs well (and poorly). For some good suggestions on how to get more bang for the buck, I refer you to the works of the Energy Innovation Reform Project, the Center for Clean Energy Innovation, the American Energy Innovation Council, and my own Congressional testimony based on my years of work at the Breakthrough Institute. These are solvabe problems.

Second, on the use of revenues to procure additional emissions abatement above and beyond that secured by a carbon tax: I don’t think this needs to be done in a wasteful manner either (and I disagree with what seems to be a blanket dismissal of all renewable energy subsidy programs as well). For ideas on how to structure deployment subsidies for clean energy well, see this report I co-authored with analysts at the Brookings Institution, Breakhrough Institute, and World Resources Institute. Reverse auctions and other competitive price discovery mechanisms can harness market forces and ensure much more efficient outcomes than conventional subsidy programs. 

Finally, on why the tax shift and dividend proposals are not as popular as you might expect, my theory is this (and this is informed by the general results of the polling I’ve seen and discuss in the post as well some focus group work I saw on the original “Sky Trust” cap and dividend proposal): people generally dont like the idea of the government imposing a tax principally to change their own behavior. It feels like social engineering and they don’t appreciate it. The idea that they “get their money back” may help blunt the initial sting of the tax, but that sting doesn’t go away entirely, and the idea that the government is going to take money out of one pocket, shuffle it around in some way, and then put it back in your other pocket is a tough sell I think. Despite a growing mistrust of government in America, we still would generally prefer that the government stay out of our business, and if it must get involved — that is, if we see there being a real problem that requires government intervention — we prefer the idea that the government takes only as much revenues as necessary and uses the revenue to actually solve the problem. That’s just one narrative, and I’m sure there are many responses. But I think that’s the general reaction that undermines the support cap and dividend or tax shift advocates assume their proposals will garner. 

What do you think?

Jesse

Jesse Jenkins's picture
Jesse Jenkins on July 29, 2014

Hi Jeff,

Thanks! And thanks for following the series. 

These are great questions. I’ll try to take them in turn:

1. I have indeed seen some excellent modeling of the distributional impacts of a cap and dividend proposal, which you can find from James Boyce and Matthew Riddle at UMass Amherst here. They model net impacts on households on each income decile and in each state and find “at least 60% of households receive net benefits: the dividends more than offset the impact of higher fossil fuel prices on their real incomes.” So your intuition seems spot on. A equal per capita carbon dividend would be a progressive income shift.

Dallas Burtraw and colleagues at Resources for the Future modelled the distributional impacts of a variety of uses of revenues from a cap and trade program on the U.S. electricity sector only, which you may find helpful on this topic as well.

A tax shift (i.e. income tax cut) would be less directly progressive, as unless it is fully refundable, it would miss out on low-income non-tax payers, although for those it would benefit, it would be progressive if it was enacted as a tax cut in equal dollar terms for each income bracket. So a tax shift might end up more benefiting the middle class over lower incomes unless designed with some kind of low income payments or if tax credits were fully refundable. Note though that most real-world tax shift proposals I’ve seen (including BC’s, Australia’s now-dead tax, and the failed Canadian Green Shift) all include business income tax cuts as well to offset impacts to business and industry. That would make the tax less progressive overall, as business owners and shareholders tend to be higher income. 

2 & 3. If an effective public education campaign convinced a majority of Americans that they would end up ahead because of a cap/tax and dividend scheme, I’m sure it would increase public support versus a cap/tax with non-earmarked use of funds. That said, there are three things to consider: First, the gains for individuals would be minor and diffuse. Are citizens really going to want to see a carbon tax that forces changes in their behavior so that they can earn an extra $50 or $150 per household per year? Will they trust that the government is really going to give them their money back? If they can save another $50 by changing their habits, will they see that as a positive, or will they question why they are being forced to change their habits in the first place? I’m sure there’s going to be a fair amount of skepticism to that proposal, even if the math works out in their favor on an annual basis. Second, the wealthier income brackets lose out, and it’s sad to say, but in our current American version of “democracy,” these income brackets have a disproportional impact on politics. Third, a real per capita dividend approach does nothing to blunt impacts on industry (all the revenues go to households as dividends). So the political economy constraints arising from industries with high asset specificity (as discussed in Part 1) will be fully unleashed in opposition to any cap/tax and dividend proposal. 

So in sum, I think using revenues for dividends increases somewhat the level of carbon price that is politically sustainable. But how far? Certainly the use of dividends does not free carbon pricing from political economy constraints! Far from it. So let’s be optimistic and say that it doubles the public willingnes to pay for carbon pricing: so if we can see a WTP equivalent to a $2-8/ton of CO2 tax without dividends, then maybe we can increase that to $4-16/ton CO2. But the dividends do nothing to blunt industry opposition to the tax. Those constraints will surely further limit if not outright prevent the carbon price. So where do these dividends  leave us? My contention is that we’d still end up with a potentially feasible carbon tax that is far below the social cost of carbon. What do you think?

4. I think that if you could get it implemented, the dividends would probably make the carbon tax more durable over time. Maybe. Then again, getting rid of the tax entirely would always have some appeal. 

5. I think that there would be three keys to a politically sustainable tax and invest scheme: 1. keep the carbon tax low in the first place. A $5 per ton carbon tax would raise about $25 billion per year in the U.S. for example, but raise the cost of a gallon of gasoline by only about 5 cents and would have a very negligible impact on electricity prices. A modest tax is much less likely to become the focus of public ire. 2. Structure RD&D programs wisely. See the links in my comment to Joris below on how to do that, to minimize the changes of a major ‘debacle’ like Solyndra. And 3. invest in a way that really drives down the cost of clean energy over time. That reduces the “lift” that the carbon price itself has to accomplish and thus helps ensure the tax and stay low while finishing the job on the Co2 reduction side. All in all, I’m pretty confident you could make something like that work. What do you think?

Jesse

Arthur Yip's picture
Arthur Yip on July 29, 2014

Some comments about BC carbon tax to complement your research:

Carbon tax impact: half comes from transportation fuel and another half comes from home heating – in 2011, 52% of BC households used an average of 84 GJ/yr of natural gas for heating (http://www.statcan.gc.ca/pub/11-526-s/2013002/part-partie1-eng.htm) and the current carbon tax on natgas is $1.49 / GJ so that’s $125 per residential household. A significant portion of transportation fuel use must be commercial/industry – probably ~50% – and perhaps average 2 people/household, totalling an average of $62 for heating and $70 for transportation, which roughly adds up to $125/household, as estimated here: http://www.naviusresearch.com/data/resources/BC%20Carbon%20Tax%20Full%20Study.pdf

Low-income and rural households get extra compensation (on the order of $200/yr each), in addition to income and corporate tax cuts

It seems that the current obstacle with BC carbon tax from going higher is industrial/commercial competitiveness / first mover pain / carbon leakage – is this part of WTP or growing pains?

 

Some interesting questions:

What are the WTP of firms and industry?

How does WTP change with returned revenue?

What about the wider effects of the pricing signal that stimulates conservation, efficiency, substitutes, private investment, and private innovation on all fronts/sectors/parts of the economy?

Also what do you think about how a carbon price will be needed to keep the price of fossil fuels high to mitigate rebound when we eventually successfully reduce demand on coal/oil/gas?

And finally, what do you think about Bob Inglis’s idea:

“Instead of telling Congress in his State of the Union address last winter that climate change is “a fact,” Obama could have pitched a carbon tax, turning the speech into a live television negotiation with House Speaker John Boehner (R-Ohio).

 

“He might have gestured to his right, which is where Democrats sit in the chamber, and he could have said, ‘We’re willing to vote to price carbon dioxide,'” Inglis said. “And he could have gestured to his left and said, where Republicans sit, ‘I understand that you need it to be revenue neutral, so here’s the deal. We’ll supply the votes for pricing carbon, and you get to pick the corresponding tax cuts.’ And then he could have turned to John Boehner and said, ‘John, deal?'”

http://climatecolab.org/community/-/blogs/climate-colab-webinar-how-could-a-national-price-on-carbon-be-implemented-in-the-united-states-?_33_redirect=http%3A%2F%2Fclimatecolab.org%2Fcommunity%3Fp_p_id%3D33%26p_p_lifecycle%3D0%26p_p_state%3Dnormal%26p_p_mode%3Dview%26p_p_col_id%3Dcolumn-3%26p_p_col_count%3D1

http://climatecolab.org/resources/-/wiki/Main/U.S.+Carbon+Price

Jeffrey Miller's picture
Jeffrey Miller on July 29, 2014

Jesse, Thanks for your detailed responses – they are quite informative. I find most of your points persuasive. To your larger points, if we had an even moderately functional government, I think your proposal could work politically. There is always a chance that we could get one some day. My main concern is whether your proposal is a sufficient policy response to deal with a problem of this magnitude; as you noted, the difference between the social and the private cost of carbon is ever growing and there are serious concerns that if we push the climate system too hard, we might be in for some nasty, possibly civilization ending surprises. Twenty five billion is roughly three times the NSF budget and on the same order as the NIH budget. So it’s not a negligible amount of money, but I wouldn’t expect miracles even if the money is spent wisely – we’re still waiting on the cure for cancer. Overall, I am reasonably persuaded by your basic argument – that we shouldn’t just naively push for the optimal approach, but instead work on the approaches which are politically possible. In that sense, a modest tax with the proceeds invested in research, seems very reasonable. It would certainly be a great start.

Joris van Dorp's picture
Joris van Dorp on July 30, 2014

Thanks for this Jesse, your content-rich and referenced comment is much appreciated.

I need to clear up that I agree strongly that pretty much all major innovations shaping our modern world have come from public funded R&D(and D,= Deployment!), but that fact stands apart from my assertion that R&D in general has a low success-rate. Part of the reason why public funded R&D was and is so important – in my opinion – is the very fact that most R&D (especially cutting-edge) does not lead to practical results (in the sense that it does not achieve it’s objective and/or does not yield a positive return on investment.)

I made that assertion partly because I sense that science-outsiders (making up the bulk of the voting public I suppose) often seem to believe that human technological capability is infinite in principle, if only enough R&D were performed. R&D is seen as a way to realise anything we want, as opposed to merely anything which does not break fundamental laws of physics.

When having such a perspective on science and R&D, the science-outsiders tend to believe that more spending on R&D will solve any problem. While scientists view R&D as a way to achieve improvements of technology toward theoretical maxima defined by physical laws, science outsiders view R&D as a way to improve technologies so that they will overcome any and all constraints.

“Solar power is too expensive? Nomatter, R&D will make it the cheapest option soon.”

“Wind power is too expensive? Nomatter, R&D will make it cheap.”

“Wind and solar power not viable without cheap electricity storage? No need for concern, since more R&D will give us all the cheap storage we need.”

“‘Oil is running out? Nomatter, R&D will allow us to run cars on water. In fact, the Big Bad Oil Companies are ‘hiding the technology’ of how to run cars on water…….”

And so on.

R&D then is seen as a cure-all and a reason to delay urgent decisions.

Calling for ‘more research’ is one of the main thrusts of the anti-climate-science lobby in order to increase doubt and delay action on climate change. And the anti-nuclear lobby of course is also always calling for more R&D to ‘make nuclear power safer’ in order to delay the deployment of nuclear power technologies. As most insiders will agree though, for all intents and purposes, the co2 emissions problem has already been R&D-ed to death, as has the safety of nuclear power. Just like it is time to address co2 now (or rather yesterday) it is also time to deploy nuclear now (or rather yesterday).

Taxing carbon and funneling the money to R&D will not – in my opinion – expand humanity’s technological options with respect to climate change to any significant degree. That is not to say that R&D is useless or should not be funded (I support doubling or tripling science (and education) funding in my country). It is just to say that we should never rely on R&D to solve our problems for us. Solving problems is done principally by solving them, not by researching them, at least not when the problems and solutions are already clear.

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

Thanks for the great links Arthur. So if the average initial household cost of the carbon tax in BC is just $125 per household per year, AND the policy rebates back an even greater amount ($277 annually per household) in income tax cuts and direct payments, that’s actually a remarkable testament to how little the rebates seem to impact household willingness to pay and political durability of a carbon price. $125/year is right in the middle of the $80-200/household per year range evidenced in the WTP research I surveyed in my paper. If you translated that $125/year to the average U.S. household, which emits ~34 metric tons of CO2 per year, that would be equivalent to support for a carbon price of just $3.68 per ton of CO2 in the U.S. So it seems like BC’s much higher carbon price is much more a function of the low carbon footprint per household in BC (due to very low CO2 from the power sector there) than it is the income tax cuts and rebates. (Although one could pessimisticly read the BC case as evidence that you need to more than fully offset the annual costs for an average household just to secure even that modest a WTP…). What do you think we can learn from the BC example Arthur? 

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

Forget my back of the envelop calculations: Arthur Yip in the comments above provides a link to this analysis of the household impact of BC’s carbon tax. They find that it costs the average household just $125 per year initially, which is more than offset by income tax cuts and direct payments (worth $277/year for the average household). See my discussion with him above…

Bob Meinetz's picture
Bob Meinetz on July 30, 2014

Arthur, thanks for much useful information.

I believe WTP polling suffers from a negative bias about paying extra for anything, but particularly another tax. How would consumers respond to a 5% rise in gasoline prices, compared to the same expense labeled a “tax”? A better metric are satisfaction polls, which take the overall perception of the tax into account. Included is the satisfaction from making a contribution to the environment (although that’s easy to overestimate: this study shows the environment was a primary purchase consideration for only 27% of Toyota Prius buyers). Most importantly, overall satisfaction is a metric with distinct advantages for political candidates, and a 2012 poll showed 64% public approval.

In response to

what … will be needed to keep the price of fossil fuels high to mitigate rebound when we eventually successfully reduce demand on coal/oil/gas?

You raise the tax. There’s no theoretical limit to how high such a tax could go as behaviors change, but all of the factors you cite: industrial/commercial competitiveness / first mover pain / carbon leakage / growing pains are potential obstacles, and at this stage of the game it makes sense to tread lightly.

Here, a recent article in the Guardian contrasting B.C.’s tax with Australia’s ill-fated, revenue-positive one.

Bob Meinetz's picture
Bob Meinetz on July 30, 2014

Thanks for heads up, response above

Jesse Jenkins's picture
Jesse Jenkins on July 30, 2014

Apropos of our discussion here: Rep. Chris Van Hollen is apparently taking another go at introducing a “cap-and-dividend” bill in the House. UMass-Amhert’s James K. Boyce makes the case in the NYTimes today. 

Bob Meinetz's picture
Bob Meinetz on July 31, 2014

Jesse, Van Hollen introduced a similar bill in 2009. It was referred to the House Energy and Commerce Committee, where it died. No surprise – chair Fred Upton has a solid pro-fossil voting record. We can expect the same result this time around.

It appears that Van Hollen was trying to create some kind of cap-and-trade/revenue-neutral hybrid, but the end product doesn’t make a lot of sense. Exporters are effectively exempt from the tax, so coal exports would likely soar; simplicity – one of the B.C. law’s best features – is mucked up with permits, auctions, exemptions, a cap, and convoluted rules like

If the auction price for carbon permits increases by more than 100 percent above the average auction price for carbon permits during the preceding two years (or, if before the third year for which auctions are conducted, the average auction price for carbon permits during the preceding auctions), the Secretary shall auction as many additional carbon permits as are necessary to stabilize the auction price, not to exceed 8 percent of the total amount of carbon permits otherwise available at that auction…

It doesn’t have to (or should) be this complicated. With some well-crafted legislation, RNT’s will stand a chance in a committee awash in fossil fuel influence.

Rick Engebretson's picture
Rick Engebretson on July 31, 2014

Even if a carbon tax had a net zero benefit to so called “clean energy” development R&D I would support it. But in my long advocacy of traditional conservation and environment all I see is negative development.

Protecting traditional environmental concerns of soil, water, food quality, habitat, forests has been replaced by well funded non-solutions. Now that stimulus debt is exhausted, new promises emerge in carbon taxes.

I have been quite alone on TEC, and elsewhere, advocating water, forest concerns, and trying to put corn ethanol in context. When treasured national forests are burning and shooting in the world’s fuel supply regions seems unstoppable I don’t see how we can afford any more “clean energy” leadership.

We desperately need sustainable energy solutions, not sustainable government bureaucracy.

Bas Gresnigt's picture
Bas Gresnigt on August 2, 2014

Jesse,
Good article.
Our experience in Netherlands with car fuel show how difficult a CO2 tax is.
~61% of our car gas price is tax (in addition to other car taxes).

Nearly all experts agree already decades that cars create far more damage than this tax, and other car taxes, deliver to compensate the costs they cause:
– major health damage due to particulate matter, the noise,  etc.
– costs of police, etc.
– costs of disabled due to accidents
etc.
Discussion is whether car taxes should be doubled or quadrupled, in order to reach break even.
While it concerns only compensation of demonstrated damage to our own people.

Yet, it shows to be nearly impossible to increase that tax substantially…
So the non-car driving part of the population continues to subsidize the car driving part.

CO2 does not deliver immediate demonstrated damage. Stronger, experts say NL may profit from the higher temperatures; more favorable climate. While the sea level rise is taken care for by our dike raising program, and we can sell more know how regarding water defenses to more countries, etc.

So how can involved politicians sell a tax rise with the CO2 argument, if they even do not succeed with the real damage compensation argument for car fuel taxes?

How to answer the argument that other, big countries emit far more CO2 and didn’t even bother to target Kyoto CO2 reductions? (NL may reach the -20% in ~2025)

Btw
I belong to that subsidized car driving group.

Joris van Dorp's picture
Joris van Dorp on August 1, 2014

FWIW, I agree with this Jesse.

Concerning Solyndra, this ‘debacle’ is contrasted by a vast majority of successes. I read somewhere that the Solyndra bankrupcy concerned only 2% of the funds invested in green energy firms under the particular stimulus program at the time. In other words, 98% of this funding program did not end in a bankrupcy like Solyndra’s. So while the Solyndra bankruptcy was of course a dissappointment, it should not overshadow the resounding success of the stimulus program that it was a part of. Opponents of Obama would seem to have exagerated the meaning of Solyndra case in order to fight him politically.

I can’t seem to find the document which supports my above assertions. Perhaps someone else read it at the time and can provide the link?

Jesse Jenkins's picture
Jesse Jenkins on August 1, 2014

Thanks for clarifying your position Joris.

Engineer- Poet's picture
Engineer- Poet on August 2, 2014

Some of us have just said everything we wanted to say.

https://duckduckgo.com/?q=ethanol+site%3Aergosphere.blogspot.com

Rick Engebretson's picture
Rick Engebretson on August 2, 2014

Very interesting. Yes, you’ve been there, too. Thanks.

Robert Bernal's picture
Robert Bernal on August 2, 2014

It may take a few steps.

It would seem that the tax and invest approach would be even more acceptable if the “invest” part was clearly identified and agreed upon. This, obviously poses challenges in the form public disagreement. Many could agree “only” with the expendature towards molten salt reactors… and others “only” towards the cheapest way to convert ocean wind into fuels. Of course, most enviromentally conscious people could rally just to continue with the 20% solar/80% fossil fuels approach (because they are not educated on the need for non fossil fueled backup). The benefit of a 95% fossil free infrastructure via nuclear and renewables/storage needs to be presented to the public such that they can realize the cost differences and safety. Once a “winner” is chosen, we could “look forward with eager anticipation” into its carbon tax funded development.

I assume that this proceedure will “never” initialize (due to disagreements on best way to transition from FF’s) unless we already set the ball in motion, thus I wonder if a “preliminary” (and very minimal) tax should be inacted just for this purpose of raising awareness to the level required to base subsequent expendatures on an actual scientifically sound solution capable of (almost) completely transitioning from the fossil fueled infrastructure.

Lewis Perelman's picture
Lewis Perelman on August 3, 2014

Jesse, first: Excellent piece of work.

I’m reading these comments from the bottom up, so what I raise here may have come up later. However, I feel prompted to follow up on this point now: “That said, I have followed BC’s carbon tax experience over the years. At $30/ton, it’s one of the few policies (the only one really) in North America to reach anything close to what economist’s estimate as the social cost of carbon (although still on the low end of those estimates, which range from roughly $15-150/ton and rise over time).”

Keep in mind that the “social cost of carbon” means global — as in “global warming” or whatnot — not in BC or even Canada. And therein lies the rub in carbon tax or other so-called “climate protection” schemes.

As Bjorn Lomborg continually (and annoyingly to some) points out, the marginal benefits delivered by such local/regional initiatives in BC (or California or the UK or wherever) in terms of quantitative reduction of the projected future impacts of AGW are tiny compared to the local costs of such would-be “mitigation.” And that is even without factoring in the diluting effect of “leakage” of emissions to other places.

The persistent dilemma is that such local initiatives can be effective in attaining their espoused objective only if they are matched by equivalent measures implemented everywhere else in the world. But as historical experience, abundant political science analyses, your own assessment, and maybe just common sense all indicate: the prospects of that happening are effectively nil.

So, per your observation, the residents of BC are paying a not too burdensome cost to achieve virtually zero tangible benefit, so far as climate is concerned. This outcome seems confounding if presented on one of the quantitative graphs you have used in your essay. How to explain the gap?

A hint comes from a longstanding practice in financial accounting. There, it was noticed that the purchase price of a corporate acquisition often was greater than the net asset value of the acquired company. Accountants labelled the difference between the tangible value of a company’s assets and what someone was willing to pay for it “goodwill.” The term really reflects that how people feel about what they are buying is expressed in the price they are willing to pay for it.

So the gap between what residents are paying for would-be climate protection measures in BC and the tiny tangible results may similarly be labelled “goodfeel.” That is, a significant number of voters in BC or California, or the RGGI region tax themselves modestly (conveniently) in return for feeling good that they are doing their part to “save the planet.” Generally the negative externalities of such policies — such as in lost jobs and economic benefits — fall on others, often elsewhere.

No doubt the higher level of public acceptance shown for something like your tax and invest strategy contains its own goodfeel element. But unlike futile attempts at behavior modification, it offers at least the potential to deliver some tangible results that could make a significant difference, and that moreover do not require global consent to be achieved.


Bob Meinetz's picture
Bob Meinetz on August 3, 2014

Lewis, using that same logic can I assume that you don’t contribute to charity, or vote? The effect of these individual actions on worthwhile causes or politics is far less than that of BC’s carbon tax on climate.

Yet most of us do them anyway. Call them ‘goodfeel’ or whatever you like – we don’t mind that our contribution constitutes only our share of a much larger responsibility. The fact is that the U.S., with 5% of the world’s population, consumes one-fourth of the world’s energy. Moreover, most of the current CO2 surplus is leftover from our growth of decades ago – so one could argue we each have the responsibility of five Indians or Chinese to lower our per capita emissions.

The negative externalities you cite sound a lot like the corporate hue and cry which accompanies any environmental regulation. As you can see from the chart below, the actual impact of these regulations has historically been anywhere from one-half to one-tenth of that forecast by industry, and with significant benefits for enivornmental and human health.

 

What’s also significant is the impact global warming is already having on the world’s poor. The World Health Organization estimates that 150,000 people die every year from the effects of climate change, so while some in the U.S. decry the pervasive “doom and gloom” of climate activists, people much less equipped to deal with climate change are dying from those effects – not in the year 2100, but right now.

I have to think that you don’t understand what a revenue-neutral tax is, otherwise you would realize that “social cost of carbon” doesn’t factor into it. It’s a disincentive – that’s all – and nothing has to add up at the end of the day. The biggest obstacle we face in addressing climate change isn’t technological – it’s insistence on waiting for others to go first, or for the responsibility of carbon reductions to be meted out in some kind of mythological, universal concept of “fairness”.

If we demand that non-existent standard as a prerequisite to action, we truly are doomed.

Robert Bernal's picture
Robert Bernal on August 3, 2014

I would hope that a “tax and invest” approach is enacted which would actually help to build better renewable energy automation processes AND pumped hydro, much cheaper batteries, etc. Then we could probably have a planet to (continue to) care for on the local level.

Lewis Perelman's picture
Lewis Perelman on August 3, 2014

Bob, your analogies are flawed. 

First, voting turnout in recent US elections has been going down. (See http://j.mp/1okQPTf.) There are several reasons for that but evidently many people have concluded that their votes don’t have the effect they want. In fact, gerrymandering and other, more technically sophisticated party tactics are aimed at limiting if not eliminating the impact that voters’ choices have.

As for charities, many still return mainly googfeel in return for donations. However, a new generation of wealthy entrepreneurs, starting with Bill Gates, have brought venture capital discipline to their philanthropic efforts, scrupulously steering their investments to efforts that can demonstrate measurable, positive results. Indeed, taking responsibility for achieving results may be the first requirement of what has been called “catalytic philanthropy.”

Getting to your table, most of the items addressed local, confined problems with measures that could be demonstrated to yield immediate, tangible benefits. The phasing out of CFCs via the Montreal Protocol did address a global problem. But CFCs and the products that used them represented a tiny portion of the overall global economy. As BTI analysts have pointed out, the phase-out was feasible because a cost-effective replacement was available.

Nevertheless, after several decades the Montreal Protocol has been only partially effective. Developing countries have resisted accepting the economic penalty compliance would impose on their economies. As successive attempts were made to tighten compliance with the Protocol, fewer countries were willing to sign on. On top of that, the main replacement for CFCs turned out to be a potent greenhouse gas. So the ‘solution’ to the CFC problem wound up compounding another problem, further diluting the Protocol’s net benefits.

Arguing about who has “guilt” or responsibilty for the AGW problem is exactly was has stalemated global negotiations for over two decades. Such aruments do not lead to solutions.

I think Jesse has amply demonstrated that the revenue neutral tax is another one of those academic theories that don’t work in the real world. The evidence he cites shows that it lacks the popular support proponents expect. One reason for that may be that it requires a high degree of public trust that the tax will not be deceptive or “gamed.” The reality is that public trust in government and other institutions more broadly hovers near historic lows. That skepticism, sadly, has been well earned.

What columnist Michael Gerson reported recently about the keys to former UK Prime Minister Tony Blair’s success in reviving the moribund Labour Party seems pertinent to all this:

“No political philosophy today,” [Blair] argued in his Philip Gould Lecture, “will achieve support unless it focuses on individual empowerment, not collective control.”

But Blair ultimately credits the emergence of New Labour not to “a cast of policy but a cast of mind.” He describes this as “an analysis of the world shaped by reality, not ideology, not by delusionary thoughts based on how we want the world to be, but by hard-headed examination of the world as it actually is.”
 

Robert Bernal's picture
Robert Bernal on August 3, 2014

Somebody showed me a link to BC’s revenue neutral structure and it seems that only the rich will “suffer” very modestly. I personally want a “tax and invest” structure where like 50% of the funds go to development of automated processes (required for cheaper “everything RE”) and the other 48% back to the public as rebates for electric cars, after car batteries come down in price. Also, restrictive laws against advanced nuclear and lots of pumped hydro needs to be done away with.

We won’t have a planet unless we start actually doing something beyond just 20% renewables and setting examples.

Bob Meinetz's picture
Bob Meinetz on August 4, 2014

Lewis, I’m glad you appreciate hard-headed examinations of the world as it actually is. So it may surprise you to learn that BC’s revenue-neutral tax isn’t academic, it is working in the real world, it does enjoy popular support, and it isn’t burdensome on BC’s economy. I think if you had a better understanding of how it functions you would see that simplicity is what makes it resistant to fraud, and an important element of its success (The Evidence Mounts, The Economist 7/31/14).

I wish my philanthropic efforts could have the same effect as those of Bill Gates, but there’s the minor issue of me not having $76 billion at my disposal to play with. I also don’t have any guarantee that the next election will have a majority turnout, or my district will be drawn perfectly representationally. Are these the bars you’re setting for philanthropy, or voting, to have any purpose?

Turning to global warming – if immediate, tangible benefits and complete efficacy are your requirements for making any effort to address it, we might as well throw in a pony for each of the Earth’s 7 billion inhabitants. It’s a perspective, least of all, which represents a “hard-headed examination of the world as it actually is”.

Lewis Perelman's picture
Lewis Perelman on August 3, 2014

Adding to my earlier reply to this…

Contrary to the suggestion that the externalities of decarbonization schemes are trivial, there is the glaring example of the biofuels juggernaut. Biofuels programs, justified as replacements for fossil fuels, have driven up food prices — pushing millions of poor people toward starvation — and promoted deforestation. Overall, researchers have found that biofuels do more harm than good. Yet the powerful lobby of biofuel farmers and producers, profiting handsomely from biofuel mandates and subsidies, will not easily allow them to be dismantled.

Bob Meinetz's picture
Bob Meinetz on August 3, 2014

Lewis, I agree that biofuels are a colossal waste of resources, but of course it’s fallacious to conclude from your example that all decarbonization schemes share similar externalities. If anything, it demonstrates how any scheme which presents an opportunity for profit is corruptible (included in that subset are campaigns, financed by fossil fuel interests, whose purpose is to portray carbon taxes as ineffective).

With a revenue-neutral carbon tax, everyone profits except those selling or burning excessive amounts of fossil fuels. That’s exactly the point.

 

Lewis Perelman's picture
Lewis Perelman on August 4, 2014

Joris, I am more sympathetic with your caution about the government role in technology innovation than Jesse and a number of his colleagues are. My recent ebook, Energy Innovation, explains at much greater length that there are multiple social limits to innovation that conventional government programs often either ignore or even compound. The result is that many such government activities cost more — even doing more harm — and accomplish less than their proponents admit or sometimes recognize.

The book also outlines my “Plan B” to navigate those hurdles and accelerate the breakthrough innovations needed by restructuring processes and using resources more efficiently, even without more public funding.

I have some more to say about this in response to Jesse below.

Lewis Perelman's picture
Lewis Perelman on August 6, 2014

Jesse, first let me emphasize that we agree that accelerating technology innovation is a far more effective, and politically feasible way to manage not only climate concerns but a thicket of other economic, environmental, and social problems that entangle our existing, largely fossil-fuel-dependent energy systems. 

But more caution about the government role is justified than what you suggest.

I starting writing an explanation of why too much enthusiasm for government-as-innovator is unwarranted. After a while it got too long to be just a passing comment here. So I will try to post the whole thing elsewhere, hopefully soon.

As a preview — no need to jump on these now — here are some key points:

1. Many of the advocates for expanded government activity stand to benefit from it, directly or indirectly. They are not impartial.

2. The government role is neither necessary nor sufficient.

3. Govenment activities often follow rather than lead private initiatives.

4. The failures of government efforts are not harmless.

5. Successes often come with collateral damage.

6. Objectively scoring the total impact of government activity, positive and negative, is not easy or obvious.

Stay tuned for the full version.

Lewis Perelman's picture
Lewis Perelman on August 7, 2014

I just came across this testimony Bjorn Lomborg gave recently at a US Senate subcommittee hearing that complements Jenkins’ thesis: Examining The Effects of Unchecked Climate Change on Communities and the Economy.

 

Lewis Perelman's picture
Lewis Perelman on August 7, 2014

This column paints a less rosy picture of BC’s climate protection policies: http://j.mp/1sC46vK.

Putting aside its evident ideological slant, it raises some ineresting questions.

If carbon pricing works as claimed — that is, internalizing the social cost of carbon and then letting the market work — should it not replace mandates, subsidies, and other market interventions that were supposedly needed to level a playing field tilted because fossil fuels are not priced fairly?

Looking at the same situation another way: Should not the net costs and benefits of BCs carbon tax scheme be assessed as part of the portfolio of climate protection policies established by the same parties?

 

Bob Meinetz's picture
Bob Meinetz on August 7, 2014

Lewis, I didn’t realize climate protection was an ideological concern. Certainly neither EPA founder Richard Nixon nor national park founder and preservationist Teddy Roosevelt thought environmental protections were, but with today’s reactionary Tea Party mindset taking hold both gentlemen are probably rolling over in their graves.

The link you provide is to a website with such a mindset, where the guiding philosophy is that free markets solve all problems. Unfortunately that theory has failed miserably with environmental ones, so we have Nixon’s EPA and hopefully a revenue-neutral carbon tax. As sore reminders of this failure both have become nemises of the far right, but conservatives who are not too busy getting their dander up to actually read the article will notice the carbon tax has nothing to do with the price of BC hydro electricity (if anything, it would make it more valuable).

Carbon pricing should and will replace subsidies but it’s going to take a while, and climate change marches inexorably on. Subsidies have had mixed results. They’ve encouraged massive spending on energy sources which will never make a significant contribution (wind, solar), but also brought the price of electric cars down by a factor of four. The real problem is that a field which appears level to one interest looks hopelessly askew to another. If it’s going to work, it’s going have to be no subsidies for anyone, which will be a tough sell to the fossil industry. It’s fighting for its own share tooth and nail.

Lewis Perelman's picture
Lewis Perelman on August 7, 2014

Bob, I was hoping that “putting aside” would divert just the sort of comments you started with. However your last paragraph offered an answer to the question.

Too simple though. 

Re discussion here of public preferences and willingness to pay, without referenda on every proposal, it’s evident that the public doesn’t get to choose among particular policies. They vote for parties or particular candidates to represent general preferences. In elections, voters approve or reject the overall acceptability of the program — the portfolio of policies — a party/candidate represents.

If as the column suggests the portfolio of the incumbent regime imposes overall more costs than benefits, I suggest the evaluation of any particular policy should reflect that. In practice, that is the way the electorate is going to evaluate it — especially in parliamentary governments.

Related to that, the viability of any carbon tax scheme depends on its continuity. As noted by Jesse and others here, Australia’s carbon tax was finished when the party that imposed it was rejected as a whole and replaced.

The column also suggested a spillover effect of policies across jurisdictions. The author suggests that the viability of one policy adopted in BC was negatively affected by policies in California to which it was connected.

There’s an analogy in healthcare: A patient with multiple conditions often has to take several medications, each prescribed by a different doctor for a particular illness. Medications often interact in ways that may block effectivenss of some or even have toxic effects. Only recently has an increased effort been made to coordinate care to make sure that all the treatments the patient receives work together to heal rather than to harm. We don’t congratulate the doctor for prescribing the pill that cured the patient’s skin rash but that, in combination with another medication, destroyed his liver.

Lewis Perelman's picture
Lewis Perelman on August 8, 2014

You raise an important issue. The distribution of investments across a portfolio of alternatives makes a big difference. Yet there is no analytical, provably correct way to do it. Venture capitalists know it comes down to gut feel. But in the public sector, allocations are skewed by intense political pressures.

I discuss this problem in more detail in my book, Energy Innovation.

Get Published - Build a Following

The Energy Central Power Industry Network is based on one core idea - power industry professionals helping each other and advancing the industry by sharing and learning from each other.

We are always happy to have new members join us in that mission. If you have the knowledge to share, it is easy to post on Energy Central. Once your post is approved, it will be published on our website (with more than 100,000 users/month) and may also be published in one of our newsletters (which have between 10,000 and 60,000 circulation).

If you have an experience or insight to share or have learned something from a conference or seminar, your peers and colleagues on Energy Central want to hear about it. It's also easy to share a link to an article you've liked or an industry resource that you think would be helpful.

                 Learn more about posting on Energy Central »