Carbon tax needs to stimulate market demand. The CLC’s approach guts climate regulation but doesn’t incentivize change.
It was disappointing to see the Climate Leadership Council’s (CLC) plan for dealing with the climate crisis. The group is made up of former senior members of recent Republican administrations, some with ties to the oil industry. When the group announced its formation, it seemed like the GOP had developed some conscience and understanding about pollution and that senior leaders were offering ideas to help. In reality, though, the plan looks like a bait and switch perpetrated by former high-level government officials and others who ought to know better.
Some of the former officials and founders of the CLC include James A. Baker, III, G.H.W. Bush’s Chief of Staff and Secretary of State, as well as George P. Schultz who was Secretary of the Treasury under Richard Nixon, and Secretary of State under Ronald Reagan.
Perhaps not surprisingly, of the eleven founding corporate members, four are oilcompanies including BP, ExxonMobil, Shell, and Total. General Motors is also listed as a founder. Disappointingly, former U.S. Energy Secretary in the Obama administration and Nobel Prize winner in Physics (1997), Steven Chu is listed as a founding member as are Stephen Hawking, Laurene Powell Jobs, and Lawrence Summers an economist and former Treasury Secretary under Bill Clinton and president of Harvard.
It’s too bad the group is so top heavy with oil companies and GOP heavyweights and others with little direct experience in climate science, alternative energy, or carbon abatement. I’d settle for more people who can look neutral on the topic. They could use some real-world expertise because without it they are engaging in the kind of wishful thinking that they should have lost when they gained an under standing of where Christmas presents come from.
In an ad that ran in the Wall Street Journal in June 2017, the group announced itself and its purpose offering a climate plan with four parts.
1. A gradually rising and revenue-neutral carbon tax;
2. Carbon dividend payments to all Americans, funded by 100% of the revenue;
3. The rollback of carbon regulations that are no longer necessary; and
4. Border carbon adjustments to level the playing field and promote American competitiveness.
Let’s take these individually using the group’s own descriptions as a basis for analysis.
I. A GRADUALLY INCREASING CARBON TAX
“The first pillar of a carbon dividends plan is a gradually increasing tax on carbon dioxide emissions, to be implemented at the refinery or the first point where fossil fuels enter the economy, meaning the mine, well or port. Economists are nearly unanimous in their belief that a carbon tax is the most efficient and effective way to reduce carbon emissions. A sensible carbon tax might begin at $40 a ton [of carbon dioxide produced] and increase steadily over time, sending a powerful signal to businesses and consumers, while generating revenue to reward Americans for decreasing their collective carbon footprint.”
Absolutely on target, even the dollar amount is in line with economic thinking about making the costs high enough to stimulate action. The CLC is right that a tax would be the most effective approach. That’s especially true if you use the money to incent entrepreneurship to find approaches to removing carbon from the air and water. Remember there’s too much of it out there already. It’s also important to keep the money out of consumers hands so that once it’s gone its gone — that’s what provides incentive to change energy habits. But this plan does something different and weird. It essentially refunds the taxes paid by consumers almost immediately meaning that there’s no real incentive for conserving. That’s the next point.
II. CARBON DIVIDENDS FOR ALL AMERICANS
“All the proceeds from this carbon tax would be returned to the American people on an equal and monthly basis via dividend checks, direct deposits or contributions to their individual retirement accounts. In the example above, a family of four would receive approximately $2,000 in carbon dividend payments in the first year. This amount would grow over time as the carbon tax rate increases, creating a positive feedback loop: the more the climate is protected, the greater the individual dividend payments to all Americans. The Social Security Administration should administer this program, with eligibility for dividends based on a valid social security number.”
Let’s do some math. My hybrid gets 49 mpg and the tank has a 15-gallon capacity. We drive it enough to need one tank per week. That’s 780 gallons per year and at 20 lbs. of CO2 per gallon of gas that means 15,600 pounds of CO2 or 7.8 tons. So, there’s a potential tax of $312 for that car but figure double for a non-hybrid if you’re doing mental math. In addition, there’s another car, an electric bill, and natural gas for cooking, the dryer, and heat and hot water all of which would contribute to the carbon load and a tax/rebate. So, the $2,000 estimate looks ballpark accurate.
But the important question is why rebate at all? What incentive is provided when you tax and rebate in quick succession? How is society benefitted? Shouldn’t we use the money collected to fix the climate problem or at least fix the roads?
III. BORDER CARBON ADJUSTMENTS
“Border adjustments for the carbon content of both imports and exports would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt carbon pricing of their own. Exports to countries without comparable carbon pricing systems would receive rebates for carbon taxes paid, while imports from such countries would face fees on the carbon content of their products. Proceeds from such fees would benefit the American people in the form of larger carbon dividends. Other trade remedies could also be used to encourage our trading partners to adopt comparable carbon pricing.”
This seems backwards. If the US can’t impose a carbon tax on its exports who can? Certainly, some exports would suffer from competition by products from other countries without the same tax but who are they? They all signed up to the Paris Climate Agreement, they’d all be in favor if this and would likely simply implement the same program so as to keep international trade in balance.
The whole point of the Paris Climate Agreement, which the US has backed away from, was to get all nations to take responsibility for their carbon footprints. If we can’t tax exports then we should be able to make up the tax on imports forcing the other side to deal with competitiveness issues. One of the things we shouldn’t do is give any nation that trades with us a free ride, which this initiative says it wants to avoid.
IV. SIGNIFICANT REGULATORY ROLLBACK
“The final pillar is the elimination of regulations that are no longer necessary upon the enactment of a rising carbon tax whose longevity is secured by the popularity of dividends. Much of the EPA’s regulatory authority over carbon dioxide emissions would be phased out, including an outright repeal of the Clean Power Plan. Robust carbon taxes would also make possible an end to federal and state tort liability for emitters. To build and sustain a bipartisan consensus for a regulatory rollback of this magnitude, the initial carbon tax rate should be set to exceed the emissions reductions of current regulations.”
If the dividends are a giveback to the American people, this is a pure give back to the fossil fuel industry. The outright repeal of the Clean Power Plan is a sham. Without emissions regulations, power companies burning coal could continue to do so and simply pay the tax passing it on to rate payers in higher fees.
The Obama administration developed the plan as a device for getting the dirtiest electricity producers, coal fired power plants as well as other polluters, out of the business hopefully replaced by alternatives or relatively cleaner natural gas. This approach is dishonest because it is part of a bigger scheme to cheat the American people by bribing them with their own money while sneaking in this regulatory rollback. All is not lost though.
Climate in the balance
Even with proven fossil fuel resources in the ground, you might not make a profit if it becomes impossible to burn them because they pollute too much. In such a situation, you’d likely move to have a going out of business sale. You wouldn’t try to conserve you’d flood the market with product and accept whatever the market would pay for your product. Whatever that is would be more than you’d get by leaving the reserves in the ground or letting them be extracted much slower to make things like synthetic rubber. The Climate Leadership Council makes that possible.
Even if you assume this plan works as advertised, you need to realize two things. First, the planet is running out of fossil fuels, especially petroleum. Second, we’re at a point where it isn’t enough to slow the release of carbon emissions, which is what this plan essentially hopes to do. There’s already too much carbon in the atmosphere and oceans so we need to find ways to take it out and keep it out.
As structured, the plan amounts to a pass through that puts no real penalty on carbon emissions. People would receive dividend payments each month almost as fast as they pay out the tax, ensuring they are not left with a budgetary deficit. If this month’s dividend check comes from last month’s carbon use there is no pain and no incentive to even buy a smaller car.
This emphasis on burning fossil fuels is also short sighted since they also provide convenient starting materials for making modern materials like carbon fibers, synthetics, rubber, and plastics. If we burn through fossil fuels they won’t be available for making materials.
The good news in all of this is that the free market is moving aggressively to eliminate fossil fuel use by introducing low cost, long range electric vehicles and by rapidly introducing alternative power generation using solar, wind, and geothermal generation. Natural gas is already outcompeting coal for power generation and grid parity makes alternatives another choice. So, the Climate Leadership Council might have developed a plan to make fossil fuels great again, but luckily the marketplace is in no hurry to make it so.