Friday, November 2, 2007

Carbon Taxes or Cap and Trade for Overnight Success?

A debate is raging over whether the next president of United States (we’ve given up on this president taking action) should propose carbon taxes or cap and trade. We need progress now. I will support whatever produces concrete reductions in CO2 emissions immediately and over the long term, meeting the necessary schedule. But carbon taxes are what will actually do the trick.

As far as I can tell, Cap and Trade doesn’t touch the 33% of emissions that come from the transportation sector because CaT is targeted at big industry and utilities. These big players will be forced to buy, trade, and sell for the right to emit. I don’t see how that touches you and me driving our cars (20% of America’s CO2 emissions).

A recent report by Robert Stavins of the Brookings Institute argues that Cap and Trade is less susceptible to political shenanigans and more likely to produce real outcomes. But that certainly hasn’t been the European experience. A New York Times article tells the story of an incinerator in China, financed by Europeans buying carbon credits. The Europeans paid a 100-fold markup on the cost of the reductions achieved by improving the Chinese plant, with plenty of middle men getting rich with little environmental advantage.

Carbon Taxes, on the other hand, will impact every person and sector of the economy. We will all be aware on a daily basis of the cost of our choices (drive or transit? lettuce from Chile or the one from the local farm? Insulate or turn down the thermostat?) and be able to make trade-offs based on our own priorities.

People respond quickly and immediately to price signals as I have learned from Zipcar (where people reduce the vehicle miles they travel by as much as 45% because they decide that it simply isn’t worth $8-$10/hour to go buy some ice cream or return the video). London and Stockholm’s congestion pricing schemes illustrate this reality more overtly. When they turned on congestion pricing, congestion dropped by 20-25% overnight -- literally, not metaphorically. And when Stockholm turned theirs off after the seven-month trial, it increased by 25% immediately, overnight in fact. And this is what we need, overnight success.

Stavins argues that CaT can deliver results, while carbon taxes might not. It'll take years for the investments in cleaner technologies and infrastructure to actually reduce emissions. We don't have time for these investments to be conceived, approved, drafted, built, run over schedule, etc. While we want these improvements in the long run, we need results today.

I recommend that we set the tax rate at whatever is the right price to deliver the desired reductions. We set the US CO2 emissions goal for each year and make a plan for the next decade. Then we set the price of the carbon tax. We review emissions quarterly. On schedule? We clearly have set the price right. Too much carbon still being produced? Raise the tax. Ahead of plan? Reduce the tax. We are already using a system similar to this today: the Federal Reserve changes interest rates periodically to meet money supply goals.

What about poor people and what about middle class people? Won’t this new tax be unsupportable? No. The increases in carbon taxes can be written off against income taxes. Carbon taxes can be tax neutral with respect to your annual tax outlay. But we will be focusing everyone’s behavior on the desired outcome: reduced CO2 emissions.

Given the timeframe we have in which to get worldwide CO2 emissions on a downward path (3 years?), we need to do something that works immediately. We no longer have time to for incentive plans or opt-in plans – that was Kyoto. We no longer have time to get the fine print just right or fret about the gray areas. We need to implement the tax now, monitor closely, and adjust as needed.


Chris Bradshaw said...

I agree with making any carbon charges readily apparent to the end users of it. And it should be revenue neutral.

Manufacturing costs of cars should also be taxed and, even if paid by manufacturers, be itemized on the car's sticker.

The tax will be more palatable if it covers specific costs to ameliorate GHG and any other costs related to carbon use.

Chris Bradshaw

Climate Chronicles said...

How about rationing? Contraction and convergence? Climate and economic justice? Check out, for a plan to get the UK to net zero carbon emissions by 2027. Also, take a look at my blog for a frank discussion of climate (none of this pointless bulb-screwing, 80%-by-2050 stuff) at



droom said...

Hi Robin

I heard you speak of an adjusting tax when you were in San Francisco. I had had similar thoughts. The Oil Independence Oakland task force of which I am a member is probably going to recommend an adjustable local carbon tax. We will probably recommend that revenues get channeled into Oil Independence projects with some earmarked for marginalized neighborhoods. One comment on the piece; I am not sure that it is fair to say the tax will be affordable for everyone because it can be deducted from income taxes. I constantly need to remind myself that many in this country do not make enough to get an income tax benefit from from the incremental modest deduction. One has to reach a certain threshold in the amount of itemized deductions before it makes fiscal sense to switch. Currently only 30% itemize. Anyway, would you like comment on what I am going to submit to the task force about a carbon tax?

Justin said...

A thought-provoking piece, for sure, and I agree with you. My own membership in Zipcar has had a similar effect on me as well - I recently sold the car, and now use Zipcar only when I really need it. I definitely think twice about driving when I have to pay that marginal cost.

One quibble though:

When they turned on congestion pricing, congestion dropped by 20-25% overnight .

In London, a smaller 5-10% drop in vehicle-miles resulted in a larger (~25%) drop in congestion. There is an exponential relationship between car use and congestion. The reduction in carbon emissions was probably somewhere in between.

So I'd draw a distinction between road pricing to reduce congestion, and road pricing to reduce emissions. London-style Congestion charging is a great way to make drivers feel the marginal congestion cost of their decisions, which cuts down on low-value driving, but it doesn't necessarily make them face the environmental costs of thir actions. What if we all drove hybrids whose engines turned off in a traffic jam? Congestion would be high, but emissions might be low.

So road pricing definitely helps cut down on low-value driving, like to the ice cream store, and helps reduce cars sitting in traffic. To the extent this helps reduce emissions, it's good for the environment too.

In my opinion, the "holy grail" of road pricing charges drivers directly for their carbon emissions, and for the wear and tear they cause on the road - a little sensor on the end of their tailpipe, and a GPS unit.

Anonymous said...

I'm not sure I understand the tradeoff between CO2 tax and income tax part - if you're going to pay the money anyway, what's the incentive to change habits?

Robin Chase said...

To climate chronicles: I will look at your blog. I too have been quite depressed by the focus on lightbulbs and 2050 goals. I've decided that these are process issues that individuals have to work through. Step 1. lightbulbs, step 2 etc. My hope is that we can push people through that process much more quickly than has been done to date.

Rationing does have some justice in it, but it sets up a whole other market potential that is fraught with possibilities for misbehavior. I'll admit that I haven't thought about it a lot.

Droom: Yes, many people don't pay taxes and for those people we should have funds that pay for improving their energy efficiency, maybe even tax credits! so they have incentive to file. At the end of the day, we need to push carbon credits through and address the small fraction of people for whom it has extreme negative effects. I'd be happy to comment on your proposal for City of Oakland.

Justin: Your point is well taken and I agree with you completely. See my posting on how we should be charging for vehicle transportation here.

Anonymous: What you are saying is true from a logical perspective. But our behavior isn't always driven by logic. My daily behavior will be focused on the on-going carbon tax, and how to minimize it. Which is totally different than the way I view my income tax bill. Income tax is largely experienced as a flat fee -- I'm not able to reduce it unless I earn less and I don't think about it until it is time to do my tax return. A carbon tax that I see applied to specific purchases differently, will surely affect my daily choices.

Robin Chase said...

oops, meant carbon TAXES, not carbon credits above.

dahveed said...

Hi Robin,

I'd like your and any one else's comments on this. Keep in mind that the task force's main goal is reduce oil consumption without increase carbon emissions and then secondarily to reduce carbon emissions and create green jobs. Below is my draft.

Local Carbon Tax

An opportunity exists for Oakland to play a leadership role in developing a carbon tax that includes transport fuels. Carbon taxes are now getting attention as a policy mechanism for reducing CO2 emissions on the national, state, and local levels. In 2006, Boulder Colorado became the first municipality to impose a carbon tax with the 60% passage of the Climate Action Plan tax. San Francisco recently proposed a carbon tax. Neither cover transport fuels.

Boulder’s Climate Action Plan tax is an excise tax upon electricity consumption for residential, commercial, or industrial customers that provides an exemption for voluntary purchases of utility provided wind power. The tax rate is highest for residential customers at $0.0022 per kilowatt hour (kWh) or 4.5 times higher than commercial rates and 10 times higher than industrial rates. Officials in Boulder estimate the tax will add $2 a month to the average household's bill and between $5 and $35 for businesses. Revenues will be used for public-education campaigns to make people aware of energy-efficiency rebates, incentives and to fund energy audits for businesses and homeowners. Funds will also be used to provide residents with easier access to energy-efficient products, such as compact fluorescent light bulbs. (See the text of Boulder’s ballot measure).

San Francisco plans a ballot measure that would increase the city's 5 percent commercial utilities tax to encourage energy-saving steps by hotels, offices and other nonresidential buildings. The tax would be revenue neutral; the initiative would also decrease the 1.5 percent payroll tax on for-profit businesses in San Francisco. Berkeley is also considering a carbon tax. While the form of such a tax is undetermined, a climate tax will be proposed in concept for community input in Berkeley’s soon-to-be-released Climate Action Plan.

Oakland should work with the Transport and Land Use Coalition, the Metropolitan Transportation Commission, the City of Berkeley, and other interested municipalities on a regional gas tax; a regional effort would reduce boundary issues (e.g., people driving to Berkeley to avoid Oakland’s gas tax) than Oakland going it alone. Oakland should aim for a comprehensive carbon tax based on CO2 emissions or energy content that includes gasoline, oil, natural gas, and fossil fuel-fired electricity consumption by residential, commercial, and industrial customers. Such a carbon would tax lead behavior changes; people and organizations use price signals to make decisions and develop daily routines. Higher gasoline prices reduce driving. Higher prices for fossil fuel generated electricity decrease its use and increase the development of green energy. While such as tax is regressive, a significant portion of revenues could be targeted towards energy independence projects (e.g., energy efficiency upgrades) that reduce energy costs in poorer communities. To the extent that a consensus cannot be attained for a comprehensive regional tax, Oakland could potentially work with neighboring municipalities such as Berkeley to develop a common tax and enact its own ordinance to fill holes.

The task force recommends that Oakland investigate the feasibility of setting tax rates to that which is necessary to yield the recommended 3% oil consumption reduction per year (as mandated by the Oil Depletion Protocol). The actual gas tax rate would be adjusted on an quarterly basis to maximize the likelihood of achieving annual oil consumption reductions of at least 3% at the lowest net cost to society as determined by a panel of experts and/or the Oakland Oil and Energy Team recommended below. If oil consumption is on schedule, clearly the price is right. If too much oil is still being consumed, the tax rate would be raised. If oil consumption reductions are ahead of plan, the tax rate could be reduced. As Robin Chase of GoLoco notes “we are already using a system similar to this today: the Federal Reserve changes interest rates periodically to meet money supply goals”. Oakland should consider advocating for such an approach in regional gas tax discussions (with appropriate regional adjusting mechanism) and also advocate for such an approach to be used nationally for taxing CO2 emissions enough to meet stringent CO2 emission reduction targets.

Jamie said...

Hi Robin

When discussing 'cap and trade' markets, I think you need to make a much clearer distinction between the European Trading Scheme (EU ETS) currently in operation in Europe which allows CDM and UNFCCC credits to be bought instead of actual homegrown reductions, and a *pure* cap and trade market, which would transform markets and make carbon the absolute bottom line. I'd be interested to read another of your posts (I'm now subscribed) where you reference explicitly contraction and convergence, and the notion of Tradable Energy Quotas. A very good roadmap is the one Adam identified Zero Carbon Britain, but he got the url wrong; it's .com not .org.

The problem with carbon taxes is that it doesn't let us take the necessary international perspective (unless we somehow confer an international body with the ability to set global taxation policy). Looking at the issue in terms of an international cap-and-trade market where each country is ultimately given equal permits to emit on a per capita basis, is very effective at actually working out the numbers. I fear that a fragmented approach of radical carbon taxation by a number of national governments would amount to spiralling protectionism, and lead to collapsing markets. We need an internationally-formulated policy that uses market efficiencies to drive reductions.