Tuesday, December 04, 2012

A modest carbon tax has modest carbon reduction results

Been meaning to highlight Brad Plumer's post on a paper about the effect of a carbon tax on emissions (full paper here).  A tax of $20/ton, with an inflation-adjusted 4% annual increase, knocks emissions down 14% by 2020, and a larger number in 2050 if you believe economic projections that far in the future.

I include my caveat about 2050 because economics modeling is far harder than climate modeling.  In particular I can't tell what assumptions they make about the cost of renewables in the future, which seems like a game-changer to me.

Still this seems a reasonable argument that a carbon tax has only modest benefits.  By all means we should do it, but also use the funding for renewables, and pursue stricter regulation.  One aspect that surprised me is how much money this tax would raise, over a trillion dollars in the next decade.  That can really help with deficit reduction and maintaining social welfare programs as well as renewable energy funding.

UPDATE:  I really should've mentioned that an annual 4% real increase is not enough in their model to drive large decreases in emissions.  The implication is that if you choose a small initial tax then you need a higher annual increase.  The California cap's minimum price is even smaller than this study ($10/ton), and has a 5% annual increase.  Still it's just part of the pricing system, with emission allowances hopefully functioning as the real control on the amount, together with regulation.


Jay Alt said...

The current sales pitch to conservatives is to offset the carbon tax with reductions in other taxes. In which case no new money nor new programs would result. That would make it just about an ideal exercise in tax cutting for them. Some folks may not be think'in far enough ahead. So additional rhetoric and rhetoric are needed.

carrot eater said...

this is an obvious point, but sometimes some supporters of carbon pricing dance around it... the price signal has to be big enough to actually make a difference.

Tom Curtis said...

carrot eater, the price signal has to be large, but the cost need not be. With a fee and dividend structure, the costs will be less than total administration costs plus the actual cost of converting to low or zero carbon energy sources. These costs will stay in the system because:

1) Administrative costs must come out of the fee of general revenue, reducing the effective value of the dividend returned; and

2) Energy generated by renewable (or other low/zero carbon sources) will not attract a fee, and hence not contribute to the dividend. The difference in cost between generating electricity using fossil fuels and the renewable will therefore remain in the system.

The total cost will be less than the two factors above because leaving it to the market to decide distribution will result in the additional costs being filtered in in the most efficient way. Other than differences in administrative costs, this market efficiency, represents the only cost gain relative to a a purely regulatory approach.

In any event, the total cost of a fee and dividend Carbon Tax will be about that of the difference energy generation costs between a fossil fuel and a zero carbon economy, which in the end, may be small (or even negative).

David B. Benson said...

The carbon tax revenue ought to be used to mitigate.

Plant a lotta trees and irrigate.

ScruffyDan said...

For a carbon tax to have a large enough effect it cannot be small. That is a one important reason why I favour revenue neutrality. Otherwise the tax burden of the carbon tax simple becomes to large for most people.

Mark Jaccard (who has advised the BC government for our carbon tax) has estimated that in order to reduce emissions enough the tax will have to go as high as $200 per tonne or higher.

I still think this is a preferable approach to regulatory measures (even cap and trade) but I understand the sticker shock that such a policy would carry.

Tom Fiddaman said...

The other conclusion one could draw is that the tax should be big rather than small.

For that to work, you need some revenue recycling, and that has to be fairly flat in order to avoid regressive effects.

The long run efficiency gain over regulation is likely to be pretty big, because it's so hard to access many of the potential emissions reductions via regulation. How do you regulate the choice between driving a hybrid and telecommuting, for example?

Graydon said...

Shifting the whole structure of corporate taxation on to emissions taxation (everything, not just carbon) with some things (dimethyl mercury...) flatly forbidden would, so far as I can tell, have all the benefits of consumption taxation and few of the drawbacks. (Provided you kept all the manufacturing from fleeing.)

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Tom Curtis said...

Graydon, using a carbon tax to replace ordinary taxes is a mistake. By design, a carbon tax is supposed to have a decreasing revenue base over time. If it works correctly, within a few years carbon tax income lost due to decreased carbon dependence in the economy must be replaced once again with ordinary tax measures. The change of taxation basis will deliver two large disruptions to the economy, once as you shift to a carbon tax, and again when you revert to a combination of income, company and regular indirect taxes.

Instead of being viewed as an alternative revenue stream, the carbon tax should always be part of a fee and dividend structure so that it is revenue neutral, and replaces no other source of government income. Only so will it minimize economic disruption.

If we are serious about having it implemented, however, we must explore other dividend structures than a flat rate dividend to all citizens. The pseudo-conservatives of the Republican Party would never accept so rational an arrangement.

Graydon said...

Tom --

Not talking about "a carbon tax". Talking about emissions taxes, generally and comprehensively.

Carbon is a very important emission, but it's far from the only one, and it's increasingly clear that treating the environment as an open dump is a very bad idea. (Eg., the risk of wiping out bees due to a particular sort of pesticide bio-accumulating; the excess deaths due to particulate air pollution; the possibility that the autism rate in children is driven by pollutants; etc.)

Regulation is difficult; every single one has to be fought through a legislative process stacked against it, even when it's obviously utterly necessary. (CFCs, say.)

Make emissions the basis of taxation and there's built-in pressure to increase the price as emission rates drop, which provides an economy-wide incentive to shift to a closed-loop, rather than open-resource-loop, economy; any particular emission will get more expensive on a per-gram basis forever.

BillD said...

Isn't the differeence in price beween energy from fossil fuels and from renewables important? As renewables gain an advantage, wouldn't all or most new energy come from renewables? Then the main issue might be the cost of borrowing and how quickly old plants can be replaced by new sources. Perhaps this also makes assumptions about our success in storing energy from wind and solar.

John said...

I think the best selling point to conservatives is the generation of another trillion+ dollar fund to confiscate and turn over to Wall Street.

John Puma

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Brian said...

You could get a stable source of revenue from a carbon tax even with declining emissions just by increasing the tax per ton. I suppose that might not work easily after we've cut emissions by 90%, but I would be very happy to have that problem.

I think it's inescapable that to the extent you don't target carbon revenues for mitigation and renewables research, then you have to have much higher revenues. A revenue neutral carbon tax/cap has to be a lot higher than one that redirects some revenue to address mitigation. To me it's just a matter of what's politically feasible.

Jeffrey Davis said...

I'm this close (-> || ) to opposing mitigation at all. Just sweep the planet clean of us and be done with it.

Jeffrey Davis said...

addendum to my post above:


"Don't think it won't happen just because it hasn't happened yet ..."

a_ray_in_dilbert_space said...

Jeffrey Davis,
Were the consequences of global warming to fall on the heads of the current generation, which has cause the problem, that would be one thing. However, the true suffering will be borne by future generations who had no hand in the problem's creation and who will never know the luxury and decadence we have lived in.

It is for those innocents we fight.

Hank Roberts said...

> the true suffering

Well, it's our choice whether to take on the suffering now, or leave it to the next several generations.

Just as it's our choice whether to take on the benefits now, or to leave them to the next several generations.

Go see _Lincoln_ and think on it.

Hank Roberts said...