Saturday, March 04, 2017

The good politics of the carbon dividend idea

The conservative case for carbon dividends (and tax) has attracted a fair amount of attention, mostly positive. Sarah Duffy has a useful critique that I agree with in part, but I have to call out and disagree with this in particular:

There seems to also be a bit of bait-and-switch going on. This stance allows them to oppose any climate change policy that isn’t a carbon tax, supposedly because that is the most economically efficient solution. At the same time, they don’t need to worry about anyone calling their bluff and actually enacting it because they’ve hitched their horse to a policy antithetical to most Republicans: more taxes. It’s disingenuous to claim to recognize the urgency of climate change and simultaneously hold that the only acceptable solution is a carbon tax given that, as Brad Plumer recently noted, every GOP member of the House voted against such a policy only last June. So, the only climate change policy that could ever be acceptable to conservatives is a carbon tax, but all conservatives in office have already rejected the idea. Convenient, no?
Well, no, especially because this argument would've worked so well under previous political conditions and falls apart today. Let's run the tape backwards and look at prior times that a call for a carbon tax in lieu of regulations got prominence. Most recent was the runup to Clean Power Plan regulations that use complicated steps to ratchet down emissions, where some people opposed that plan as it reached fulfillment and argued for taxes instead. Prior to that was cap-and-trade legislation in Congress in 2010, another regulatory approach. Prior to that was the Supreme Court consideration in 2007 whether carbon dioxide should be considered a pollutant and regulated under the Clean Air Act.

In all those cases, arguing for a tax was (by some anyway) a disingenuous effort to stop momentum towards a regulatory solution. Duffy's argument then would've been fine, and I made a similar critique at the time.

In the current political situation, the momentum is towards a repeal of Obama's Clean Power Plan and American participation in the Paris Agreement, to be replaced with nothing. These conservatives are saying at least regarding the Clean Power Plan that you've got to replace it with something that gets the job done. The political effect is to make it more difficult to repeal CPP without replacement, the opposite of what Duffy says (and from what I've heard, the proponents are saying carbon dividend > carbon regulation > doing nothing, also contrary to her statement).

Duffy and everyone else is right that these conservative elder statesmen have limited political power today - but to the extent they're getting attention, they're doing something positive.

I agree with her other points on the limits of a carbon tax unless it's really high, but the carbon tax doesn't have to repeal all other government efforts. In particular, government subsidy of new energy research and early implementation could occur, tax subsidies could be left in place, and state regulation could continue.

12 comments:

Gingerbaker said...

Renewable energy subsidies would not be left in place - ending them would be the whole point of any carbon tax support by the Republicans.

E. Swanson said...

The recent plan for a carbon tax with dividend from the Climate Leadership Council (CLC) is a bad idea, IMHO. The problem I see is evident in this quote about the proposed tax:
"...introduced in 2019 at the rate of $40/ton CO2 and increase annually at the rate of inflation as measured by the Consumer Price Index (CPI) plus 2%".

What we experienced after the 1973 Arab/OPEC Oil Embargo and again after the 1979 Iranian Crisis was steeply increasing market prices along with a depressed economy, which was named "Stagflation" by the economists of the time. For younger readers, HERE's what happened to interest rates. Since energy from fossil fuels is the driving force for economic activity, a rising tax would lead to steadily increasing prices for everything in the market. Those increases would also impact the costs associated with building and deploying all renewable energy sources as well. Over time, the economy would adjust to a fixed tax, thus the need for a slowly increasing tax scheme. But, that would lead to a never ending upward spiral in market prices, which would be an unstable situation. In Control Systems engineering, this is called "Positive Feedback", a situation intentionally avoided to prevent system failure.

The effectiveness of the tax would be muted by the "dividend", as the periodic rebates would become an anticipated boon to the average consumer, who might simply continue to burn fossil fuels as before. Worse, the border adjustment application of the tax with rebates for exports would also include exports of fossil fuels, thus there would be no limit on corporate activities to extract those fuels for export. It would even be conceivable that our multinational corporations could increase exports, shifting supply produced within the US to exports to other nations without a carbon tax plan. Finally, there's no guarantee that our government would continue to provide the tax dividend, instead re-directing the revenue to other uses, such as increased military spending or other programs, including Social Security.

Any plan must limit the total greenhouse gas emissions, if the goal of "stabilizing" climate is to actually result. Thus, a ton of CO2 emitted today is "worth" as much a ton emitted in years ahead, as both are counted toward that ultimate total. The traditional economic approach is to discount future costs assuming some inflation, which usually makes future costs in today's money appear small. I think the only way to meet the problem would be for government to limit production and imports, reducing the total at some fixed rate each year. Then, that total could be allocated with a rationing plan with a white market, so that all citizens might have a share and thus become aware that there would be less next year than this year. In this framework, the population could choose how to use those resources and plan their lives accordingly. US consumers make billions of choices about their fossil fuel use each year and direct allocation would immediately focus attention on the problem to be solved.

Of course, the way things appear to be headed lately, nothing will be done...

Jan Galkowski said...

The weird thing about opposition to climate-mitigating taxes us that WE ALREADY ARE paying taxes for adaptation to (mostly) climate change-derived impacts, to the tune of about $11 billion per annum in the U.S. come 2025. Attempts to assign responsibility for risk more fully to those whose properties are at risk, especially for repeated dips into the pool, were met by howls of protest, with people like Senator Warren championing their cause. And there's no risk allocation for Biggert-Waters where the federal fund reimburses towns and cities for restoring utilities and services to homes after they are rebuilt. And the worst thing is that, after homes and businesses are clobbered, people get paid for rebuilding right where they were before, as if nothing happened.

So, yeah, right, don't pay taxes, right, but don't dare take away the largesse shielding people's and businesses' properties from impacts.

Sorry, pisses me off.

-- Jan Galkowski.

Jan Galkowski said...

I of course was being heavily sarcastic in my closing comments in the above. - Jan

Brian Schmidt said...

GB - to my knowledge they're asking for regulatory relief. Subsidies aren't regulations. I'm interested if you have links demonstrating otherwise.

ES - we can always back off on price increases if they're too fast. And regardless, primary energy is a much smaller share of the economy than 40 years ago. And I don't agree with neverending price increases for energy - renewables and storage are trending the opposite way.

Fiscal effect of dividend is separated from the tax, so people will still have the incentive to conserve on GHGs. The rebates for exports are just creating a level playing ground, and they'd include a tariff on reimported goods. Alaska's Permanent Fund shows political stability in a dividend system.

Jan - mostly agree, but OTOH some properties flood because all the development in the watershed exposed them to flooding, and now because of climate change. So I have some sympathy for those people. My general rule though is that areas that flood often should either be uninhabited or should be protected from flooding. Areas that rarely flood may be fine just living with it.

Jan Galkowski said...

@Brian Schmidt,

I guess, but these people also experience "the benefits" of that development as well, if only the (former) appreciation of their home values.

As Robert Young has observed, Nature is telling us where we shouldn't build, and we aren't listening. See this presentation, and this one, which I heard in person.

Dr Young, at about 37:30 in the last video, addresses the question rationally, but he, if you pay attention, laughs at the proposal in the previous guest video at the suggestion of using evacuation as a concrete proposal to deal with large weather and storm events. Sure, this is the least expensive solution, but it is wholly inappropriate to the scale and size of the problem ... Suppose the event lasts weeks? How do you deal with the exposed populous, which leaves late, and then jams on the roads, in the most vulnerable situation, with the least amount of resources.

frederickguy.com said...

ES: but (1) US economy is less carbon intensive (CO2:GDP) than in 1970s, and (2) in 1970s the dividend was paid to the Saudi royal family & to Exxon, not to individual US citizens. So adverse effects would be far less.

Moreover, *any* mitigating action (absent technologies that don't exist) will, by bringing about a sudden reduction in fossil fuel use, be economically disruptive - pricing is one of the least costly tools in this sense.

But the real importance of supporting this is that it is vital to support Republicans who oppose the GOP-denial-Putin-nationalism axis. I won't burden this thread with more on that, but see https://frederickguy.com/2017/02/27/trump-putin-eu-climate/

Fred

Canman said...

The political class wants energy austerity, which will likely have only a marginal effect on CO2 levels. If CO2 levels really need to be cut, the thing that will determine how this is done is what technologies will make it possible. Civilization uses massive amounts of energy and anything that takes CO2 out of the air will require massive amounts of energy. I say that the best prospects for getting these massive amounts are with forth generation nuclear. The best use of scarce resources would be to find and develop the best designs -- even if it just means finding that they won't work.

Renewables, which means wind and solar, are unlikely to be up to the task. They have two big problems. First there's intermittency which means requirements for massive amounts of non-existent storage, and if any storage solution is found, it will almost surely require huge mounts of resources. The second problem is dispersal. Huge amounts of physical resources and landscape are required. Nuclear OTOH is incredibly energy dense and relatively dispatchable.

Renewable advocates like to talk about how they are in a revolution similar to that which happened with computers and personal electronics. But this is not true! With computers, the government funded a lot of research to develope chip technologies and then entrepreneurs went out and found markets for them and developed more technology. With renewables, crony capitalists are trying to use subsidies and mandates to ram them down the public's throat. Nuclear energy OTOH actually has the potential to be like the computer industry. Getting a forth generation design up and running could offer a resource for entrepreneurs. In fact some computer pioneers, such as Bill Gates, are pushing for this.

8c7793aa-15b2-11e5-898a-67ca934bd1df said...

Is your 'political class' something you attended in night school at your local community college, Canman?

Mal Adapted said...

Canman, like many lukewarmers, doesn't expect market forces to help determine how CO2 levels can be cut. He assumes that any current "problems" with renewables will persist, regardless of investment in R&D and buildout of carbon-neutral* energy. He apparently doesn't recognize the artificial market advantage fossil fuels currently enjoy over carbon-neutral sources, by externalizing the cost of AGW.

* carbon-neutral does not rule out, a priori, 'forth' generation nuclear.

Mal Adapted said...

E. Swanson: "The recent plan for a carbon tax with dividend from the Climate Leadership Council (CLC) is a bad idea, IMHO."

I haven't studied their proposal in detail, but on the surface it looks a lot like Jim Hansen's carbon-"fee"-and-dividend proposal of several years ago. Provisions like a border tax adjustment are crucial, but "Charge a carbon tax to FF producers, divide all the tax revenue equally among all personal income tax filers, send each of us a check periodically" has simplicity going for it, and it will reduce CO2 emissions even if not everyone responds as expected.

Admittedly, it's harder to create a good (i.e. effective and politically possible) carbon tax than a bad one, but that shouldn't rule the idea out. No policy with a realistic chance of getting through Congress (dog help us) will be perfect, but carbon-fee-and-dividend is a good starting point IMHO, and I'm encouraged to see Republicans proposing it.

E. Swanson said...

fredrickguy (and Brian) - Yes, the "carbon intensity" of the US economy has declined since the 70's oil price spikes. However, one reason for this has been the offshoring of energy intensive, polluting production. Chinese steel production is one example, as is the production of auto parts (including tires), is another. Then too, the switch from coal fired steam electric to combined cycle natural gas systems is another. And, our automobiles have become more efficient as well, though progress has stalled because consumers have been sold on SUV's and cross over designs, which exhibit worse aerodynamic drag, compared with typical sedan designs. Of course, WalMart doesn’t make anything, they just pass the stuff on to the consumers parking their cars and trucks in their lots.

However, the run up in world oil prices into 2008's peak shows, yet again, the importance of energy prices on economic activity. HERE's a graph I put together in which prices for imported oil are shown both in nominal form and after correction for inflation. There were fears in the middle 2000's that Peak Oil was in progress, but the high prices led to renewed efforts to extract oil from shale via fracking, resulting in recent increases in US oil production. It's been said that fracking only works when oil prices are relatively high and fracked wells deplete very rapidly, unlike conventional sources, such as those in Saudi Arabia, which have been producing for decades. As things stand, the US is importing 43% of the oil provided to refineries, while US NatGas liquids have increased and product exports exceed imports.

The US economy has shifted from more basic production of material commodities and goods to "service" activities. While this sounds great, those services depend on the existing transport system, which is almost entirely powered by oil. The apparently failure of the auto industry to produce high mileage vehicles (other than expensive electric ones) implies that higher consumer prices for oil will have a direct impact on service industries.

A few years ago, when gasoline prices were around $5 a gallon in some markets, there were many complaints and some politicians in Congress wanted to reduce the taxes on fuels. It's not clear to me that society could maintain the increasing carbon taxes as the need for real reductions (upwards of 80%) in carbon use approach. Arguably, Trump's election success is in part related to the claims of the Republican neoliberals that reducing taxes and free markets are a necessity. I think the world (especially the US) is in an extremely difficult situation and we may have only one shot at resolving the dilemma in time to minimize the worst impacts.