CarbonCarbonTaxes FirstTaxes First

By Charles KomanoffBy Charles Komanoff

& Dan Rosenblum& Dan Rosenblum

Carbon Tax CenterCarbon Tax Center

www.carbontax.orgwww.carbontax.org

20072007

Global Warming Is …Global Warming Is …

Triggering a Triggering a climate crisisclimate crisis that threatens that threatens massive and irreversible damage to our massive and irreversible damage to our global environment, public health, world global environment, public health, world peace, national security and economic well-peace, national security and economic well-being.being.

No longer seriously contested by anybody No longer seriously contested by anybody other than vested interests, their hired other than vested interests, their hired “experts” and indebted politicians. “experts” and indebted politicians.

See See An Inconvenient Truth An Inconvenient Truth andand IPCC Fourth IPCC Fourth Assessment.Assessment.

Warmer Winters: 4.3ºF, 1971-2002

38

39

40

41

42

43

29 30 31 32 33 34 35 36 37

Latit

ude

(o N)

o

Boston

New York

Philadelphia

Washington, DC

Winter (Dec-Jan-Feb) Mean Temp (ºF) Source: Cameron Wake, UNH

Boston is the new Philly; NYC is the new D.C. (winter temperatures.)

More Extreme WeatherMore Extreme Weather

Cameron Wake, UNH

Extreme Precipitation Events,Northeast US-Canada, 1949-2002

The Problem:The Problem:

Unsustainable COUnsustainable CO22

Emissions WorldwideEmissions Worldwide World must reduce emissions ~80% by 2050, with big World must reduce emissions ~80% by 2050, with big

cuts starting cuts starting nownow.. Americans are emitting many times our share of COAmericans are emitting many times our share of CO2 2

(next slide).(next slide). Americans must reduce by >80%.Americans must reduce by >80%.

Americans Emit in a Day Americans Emit in a Day What Others Emit in a WorkweekWhat Others Emit in a Workweek

0

4

8

12

16

20

CO2 metric tons per capita (2002)

USAnon-USA

What about China?What about China?

““In an alliance ofIn an alliance of

denial, China anddenial, China and

the United Statesthe United States

are using eachare using each

other’s inaction asother’s inaction as

an excuse to doan excuse to do

nothing.” nothing.” – – NewNew

York TimesYork Times

editorial, 4-20-07editorial, 4-20-07

U.S.

China

X

Chemistry Chemistry → → ResponsibilityResponsibility

Because CO2 staysBecause CO2 stays““resident” in theresident” in theatmosphere for atatmosphere for atleast a century, theleast a century, theU.S. is responsibleU.S. is responsiblefor more than 3x asfor more than 3x asmuch greenhousemuch greenhousegas as China. gas as China. U.S.U.S.still has a 40-yearstill has a 40-yearlead.lead.

U.S. China

X

No More Free DumpingNo More Free Dumping

““Since the dawn of the industrial revolution, Since the dawn of the industrial revolution,

the atmosphere has served as a free dumping the atmosphere has served as a free dumping

ground for carbon gases. If people and ground for carbon gases. If people and

industries are made to pay heavily for the industries are made to pay heavily for the

privilege, they will inevitably be driven to privilege, they will inevitably be driven to

develop cleaner fuels, cars and factories.”develop cleaner fuels, cars and factories.”

— — Avoiding Calamity on the CheapAvoiding Calamity on the Cheap, Nov. 3, 2006, Nov. 3, 2006

New York Times editorialNew York Times editorial

Putting a Price on COPutting a Price on CO22 Emissions Emissions

High taxes on carbon emissions from High taxes on carbon emissions from coal, oil and natural gas willcoal, oil and natural gas will::

Reduce fossil fuel use and COReduce fossil fuel use and CO22 emissions emissions Substitution of clean fuels and technologySubstitution of clean fuels and technology

More efficient use of energyMore efficient use of energy

Provide a revenue stream to enableProvide a revenue stream to enable Progressive tax-shifting, orProgressive tax-shifting, or

Rebate to all U.S. residentsRebate to all U.S. residents

Additional BenefitsAdditional Benefits of a Carbon Tax of a Carbon Tax

Carbon tax receipts may also be used to financeCarbon tax receipts may also be used to finance Energy efficiency, further reducing use of fossil fuels Energy efficiency, further reducing use of fossil fuels

and related emissions.and related emissions. Energy R&D.Energy R&D.

Will also reduce dependence on foreign oil, with Will also reduce dependence on foreign oil, with major national security benefits.major national security benefits.

Economically, will keep dollars in USA instead of Economically, will keep dollars in USA instead of flowing overseas. flowing overseas.

Rely on “Market Forces”? Rely on “Market Forces”? Here Come SynfuelsHere Come Synfuels

Only a carbon Only a carbon tax can subject tax can subject COCO22-intensive -intensive oil sands, oil sands, oil shale,oil shale,coal-into-oil, etc.coal-into-oil, etc.to a climate-to a climate-appropriate appropriate market test.market test.

Clean-Energy Subsidies:Clean-Energy Subsidies:A Limited AnswerA Limited Answer

Selecting the “next best energy technology” Selecting the “next best energy technology”

by fiat has largely benefited lobbyists + by fiat has largely benefited lobbyists +

special interestsspecial interests Oil shale, nuclear power, synfuels, ethanol, etc. Oil shale, nuclear power, synfuels, ethanol, etc.

Many new sources also emit COMany new sources also emit CO22

Renewable Energy Standards: helpful Renewable Energy Standards: helpful –– but but not enoughnot enough

Efficiency Standards:Efficiency Standards:Vital, but Not EnoughVital, but Not Enough

Too slowToo slow Corporate resistanceCorporate resistance Inherently reactiveInherently reactive

Corporate gaming Corporate gaming (e.g., “CAFE(e.g., “CAFE” loophole that enabled SUV’s)” loophole that enabled SUV’s)

Scattershot – impossible to regulate the Scattershot – impossible to regulate the hundreds of important energy-usage sectorshundreds of important energy-usage sectors

1-dimensional1-dimensional (e.g., CAFE doesn’t affect miles driven)(e.g., CAFE doesn’t affect miles driven)

More than Half of U.S. Oil Use Is Not Gasoline for Cars

CarsFreight

Heat, Power

OtherAir

PavingRV’s

Example - Gas Use DecisionsExample - Gas Use DecisionsGas Tax-Shift impacts:Gas Tax-Shift impacts: How high CAFE is setHow high CAFE is set Mfg’er mpg decisionsMfg’er mpg decisions What car to buyWhat car to buy Which car to driveWhich car to drive How to driveHow to drive

VMT (miles traveled)VMT (miles traveled) Share (carpool)Share (carpool) Chain tripsChain trips TransitTransit Walk/BikeWalk/Bike ProximityProximity

CAFE impacts:CAFE impacts: Mfg’er mpg decisionsMfg’er mpg decisions What car to buyWhat car to buy

Dynamic Capitalism & CO2: IDynamic Capitalism & CO2: I“ … “ … specially equipped,specially equipped,privately owned jumboprivately owned jumbojets – the kind thatjets – the kind thatnormally carry 300-400normally carry 300-400passengers … recon-passengers … recon-figured … for the figured … for the enjoyment of, at most,enjoyment of, at most,a couple of dozen.”a couple of dozen.”

New York Times, 17-Oct-2006: For the Super-

Rich, It’s Time to Upgrade the Old Jumbo Jet

Dynamic Capitalism & CO2: IIDynamic Capitalism & CO2: IIBackyard BlizzardsBackyard Blizzards: :

““Snowmaking, since theSnowmaking, since the

mid-1960s the provenancemid-1960s the provenance

of ski resorts and, moreof ski resorts and, more

recently, some partyrecently, some party

planners, has goneplanners, has gone

domestic,” with 2-kWdomestic,” with 2-kW

plug-in snowmakers thatplug-in snowmakers that

run ’round-the-clock.run ’round-the-clock.

New York Times (Home Section) 15-Feb-2007:

Not Enough Snow For You? Talk to Your Father

Example - ElectricityExample - Electricity Utilities and other generators willUtilities and other generators will

Respond to price signal by substituting lower-Respond to price signal by substituting lower-carbon fuelscarbon fuels

RenewablesRenewables Natural GasNatural Gas

Invest in efficiency on demand- and Invest in efficiency on demand- and supply-sidesupply-side

Consumers willConsumers will Respond by using lessRespond by using less Substituting low- or non-carbon energySubstituting low- or non-carbon energy

Carbon Tax ProportionsCarbon Tax Proportions

0

1

2

Relative taxrate per btu

Gas

Oil

Coal

Fuels are Fuels are

taxed by taxed by

their their

carbon carbon

content content

per btuper btu

A “Starter” Carbon Tax-ShiftA “Starter” Carbon Tax-Shift

$37 / ton of carbon =$37 / ton of carbon =

1010¢ / gallon of gasoline, jet fuel, etc. =¢ / gallon of gasoline, jet fuel, etc. =

0.72 ¢ / kWh (U.S. retail average)0.72 ¢ / kWh (U.S. retail average)

Reduces U.S. COReduces U.S. CO22 emissions ~ 4% emissions ~ 4%

Repeat 10 XRepeat 10 X (while standards and incentives (while standards and incentives

also cut emissions)also cut emissions)

Energy Use: Energy Use: NotNot Inelastic Inelastic Gasoline usage grew only 3.5% from 2003 to Gasoline usage grew only 3.5% from 2003 to

2006, while the economy grew 11%.2006, while the economy grew 11%.

Pump prices have risen < 50% since 2003 Pump prices have risen < 50% since 2003 (adjusted for inflation) – not the doubling (adjusted for inflation) – not the doubling commonly believed.commonly believed.

The modest growth in demand points to a “short-The modest growth in demand points to a “short-term price elasticity” of around 0.1, and 0.4 in the term price elasticity” of around 0.1, and 0.4 in the long term, for gasoline.long term, for gasoline.

Finding: Demand for gasoline (and other fuels) is Finding: Demand for gasoline (and other fuels) is at least somewhat price-sensitive.at least somewhat price-sensitive.

Elasticity (long-run) AssumptionsElasticity (long-run) Assumptions

Gasoline: Gasoline: 0.4 0.4 Electricity Electricity

Residential (37%) Residential (37%) - 0.5- 0.5 Commercial / Industrial Commercial / Industrial

(63%) (63%) - 1.0- 1.0 Fuel-switching Fuel-switching

Leverage: Leverage: 1.2 x1.2 x

““Other” – midway Other” – midway betw Gasoline/Elect.betw Gasoline/Elect.

ElectricityGasolineOther

ElectricityGasolineOther

U.S. CO2

Reductions

Starter Tax Starter Tax – Why Ramp Up?– Why Ramp Up?

Win broad consensusWin broad consensus

Implement ASAPImplement ASAP

Help people and businesses adaptHelp people and businesses adapt

Empirical validation of efficacyEmpirical validation of efficacy

Mid-course correctionsMid-course corrections

Establish long-term price trajectoryEstablish long-term price trajectory

Complement w/ investment in EE and renewablesComplement w/ investment in EE and renewables

USA After “Starter Tax x 10”USA After “Starter Tax x 10” COCO22 emissions down by a third emissions down by a third Oil use down by ~5 million barrels/dayOil use down by ~5 million barrels/day EnergyEnergy

Coal-fired generation reducedCoal-fired generation reduced Wind and other renewable generation increasedWind and other renewable generation increased Incandescents / halogens Incandescents / halogens outout, CFL’s + LED’s , CFL’s + LED’s inin

Transportation and Land-UseTransportation and Land-Use SUVs SUVs outout, sedans , sedans inin Costlier air and highway travel creates market pull Costlier air and highway travel creates market pull

for 300-mph intercity railfor 300-mph intercity rail Urban trips by bicycle up 10x, to 10%Urban trips by bicycle up 10x, to 10% Urban revitalizationUrban revitalization

The Wealthy Will Pay More

““Progressive” Use ofProgressive” Use of Carbon Tax Revenues Carbon Tax Revenues

EITHEREITHER DistributeDistribute pro rata to 320 pro rata to 320

million Americans (~ million Americans (~ $1,500 each, per year)$1,500 each, per year)

OROR Tax ShiftTax Shift out of regressive out of regressive

taxes (green bar at right taxes (green bar at right assumes 2.5%/yr drops in assumes 2.5%/yr drops in emissions (net of +1.5%/y emissions (net of +1.5%/y income, - 4%/y price)income, - 4%/y price)

0

100

200

300

400

500

Tax Revenues$Billions (2004)

Salestaxes

Soc Sec(workers)

Carbon(10 yrs)

Two Fossil Fuel SubsidiesTwo Fossil Fuel SubsidiesBy Taxpayers: Relatively SmallBy Taxpayers: Relatively Small

By Climate: EnormousBy Climate: Enormous

0

100

200

300

400

500

600

Annual U.S. Subsidies, $ billions

FF Industry TaxBreaks (taxpreferences,agency support,lease discounts)

CO2 Damages toClimate, est'd @$1/gallon of gas($370 per ton ofcarbon)

Existing Carbon TaxesExisting Carbon Taxes(1(1stst-year Starter Tax shown for comparison)-year Starter Tax shown for comparison)

$0

$10

$20

$30

$40

$50

Sweden EU #1 EU #2 Boulder "Starter"

Per tonof car-bon

Politics?Politics? Concerns about carbon tax-shiftingConcerns about carbon tax-shifting

Contrary to Americans’ sense of Contrary to Americans’ sense of entitlement to “cheap energy”entitlement to “cheap energy”

Anti-tax ideology of past 25 yearsAnti-tax ideology of past 25 years Elected officials wary of another Elected officials wary of another

defeatdefeatClinton’s 1993 Btu taxClinton’s 1993 Btu taxRep. John Anderson’s “50-50” Rep. John Anderson’s “50-50”

program (1980 presidential campaign)program (1980 presidential campaign)

But: Growing Support for But: Growing Support for Taxing Carbon EmissionsTaxing Carbon Emissions

Opinion leadersOpinion leaders Al GoreAl Gore Scientists such as James Hansen (NASA)Scientists such as James Hansen (NASA) NY Times op-ed columnists Brooks, NY Times op-ed columnists Brooks,

Friedman, Kristof, Krugman & TierneyFriedman, Kristof, Krugman & Tierney Conservatives including Gregory Mankiw, Conservatives including Gregory Mankiw,

Bush chief Economic Advisor, 2003-2005Bush chief Economic Advisor, 2003-2005 CEO’s of Dynegy & FPL GroupCEO’s of Dynegy & FPL Group

Some Support in Opinion PollsSome Support in Opinion Polls

Feb. 2006 New York Times pollFeb. 2006 New York Times poll 55% would support increased tax on gasoline if 55% would support increased tax on gasoline if

it reduced dependence on foreign oil.it reduced dependence on foreign oil. 59% would support if the increased tax would 59% would support if the increased tax would

curb energy consumption and global warming.curb energy consumption and global warming.

Oct. 2006 M.I.T. surveyOct. 2006 M.I.T. survey Over three years, 50% increase in respondents’ Over three years, 50% increase in respondents’

willingness to pay more for electricity to willingness to pay more for electricity to reduce global warming.reduce global warming.

Carbon Tax v. Cap-and-TradeCarbon Tax v. Cap-and-Trade

Cap-and-trade is alternative vehicle for “putting a Cap-and-trade is alternative vehicle for “putting a price” on carbonprice” on carbon

Proposed by US CAP Proposed by US CAP –– coalition of large coalition of large environmental groups and large corporationsenvironmental groups and large corporations

Emissions are capped at a level determined through Emissions are capped at a level determined through the political processthe political process

Allowances/permits to emit COAllowances/permits to emit CO22 up to the cap are up to the cap are distributed or auctioneddistributed or auctioned

Market participants can buy or sell as necessaryMarket participants can buy or sell as necessary

Cap v. Tax: Predictable PricesCap v. Tax: Predictable Prices

Carbon taxes provide predictable prices Carbon taxes provide predictable prices necessary to encourage investment innecessary to encourage investment in less carbon-intensive technologyless carbon-intensive technology carbon-reducing energy efficiencycarbon-reducing energy efficiency carbon-replacing renewable energycarbon-replacing renewable energy

Cap-and-trade aggravates price volatility Cap-and-trade aggravates price volatility that discourages beneficial investmentsthat discourages beneficial investments

Are We Over-Valuing Cap-and-Are We Over-Valuing Cap-and-Trade’s “Emissions Certainty”?Trade’s “Emissions Certainty”?

““Safety-valve” would authorize auctioning Safety-valve” would authorize auctioning additional allowances if allowance prices additional allowances if allowance prices exceed predetermined levelexceed predetermined level

Emissions cap could be politically fragile Emissions cap could be politically fragile without public support without public support

No magic emissions level (except as low as No magic emissions level (except as low as possible)possible)

Tax v. Cap: TimingTax v. Cap: Timing C&T design and implementation: complicated, C&T design and implementation: complicated,

contentious, prolongedcontentious, prolonged Level of capLevel of cap TimingTiming Allowance allocationsAllowance allocations Certification proceduresCertification procedures OffsetsOffsets PenaltiesPenalties Permit bankingPermit banking Inevitable requests for exemptionsInevitable requests for exemptions

Tax can be in place promptly with quick resultsTax can be in place promptly with quick results

Tax v. Cap: EquityTax v. Cap: Equity Cap-and-tradeCap-and-trade

Practice has been to allocate based on past usePractice has been to allocate based on past use Rewards polluters with windfallRewards polluters with windfall Perverse incentive to pollute more now to increase base Perverse incentive to pollute more now to increase base

for allocations for allocations Allowances can be auctioned off to highest Allowances can be auctioned off to highest

biddersbidders Proposed in RGGI programProposed in RGGI program Proceeds used to provide public benefitsProceeds used to provide public benefits

Lawyers and consultants are other big winnersLawyers and consultants are other big winners Carbon tax would be revenue-neutralCarbon tax would be revenue-neutral

Tax v. Cap: UnderstandabilityTax v. Cap: Understandability

Carbon taxes provide direct, transparent and Carbon taxes provide direct, transparent and

understandable price signals to consumersunderstandable price signals to consumers

Perceived political liability, but essential to Perceived political liability, but essential to

transform societal climate-awarenesstransform societal climate-awareness

Cap-and-trade is complicated and opaqueCap-and-trade is complicated and opaque

Perceived political asset, but limits public Perceived political asset, but limits public

participation and could backfireparticipation and could backfire

Tax v. Cap: ComprehensivenessTax v. Cap: Comprehensiveness

Carbon taxes address emissions from every Carbon taxes address emissions from every sectorsector All users must respond to price of carbonAll users must respond to price of carbon

Most current cap-and-trade programs, as Most current cap-and-trade programs, as proposed, only target the electricity industryproposed, only target the electricity industry Only 40% of emissionsOnly 40% of emissions If allowances are allocated, polluters with If allowances are allocated, polluters with

sufficient allowances have less incentive to sufficient allowances have less incentive to reduce emissionsreduce emissions

Keys to Political SuccessKeys to Political Success Progressive Tax-ShiftingProgressive Tax-Shifting

Not a tax increaseNot a tax increase Carbon tax revenues used to reduce regressive Carbon tax revenues used to reduce regressive

payroll and sales taxespayroll and sales taxes Provisions to Protect Low-Income FamiliesProvisions to Protect Low-Income Families

Reductions in payroll/sales taxes will offset all Reductions in payroll/sales taxes will offset all or a portion of the carbon taxor a portion of the carbon tax

Other measures to reduce low-income energy useOther measures to reduce low-income energy use Message: Taxing pollution instead of Message: Taxing pollution instead of

productive work productive work

SummarySummary PrinciplesPrinciples

Tax-shifting Tax-shifting – – notnot a tax a tax increaseincrease

Full-cost pricingFull-cost pricing Polluter paysPolluter pays

Responds to concerns aboutResponds to concerns about Climate crisisClimate crisis Inequitable taxesInequitable taxes Security / Oil dependenceSecurity / Oil dependence Basing economy on Basing economy on

vulnerable energyvulnerable energy www.carbontax.org