Tuesday, 23 August 2011

Canada Turns to Carbon Capture and Storage. Why?

In a speech on Friday, August 19, Canadian Environment Minister Peter Kent announced that the federal government was going to implement carbon dioxide emissions standards on coal-fired power plants. The standard is a performance standard, which requires coal-fired power plants to emit carbon dioxide at a rate not to exceed 375 tons of CO2 per Gigawatt-hour of electricity generated. At this time, this rate is unattainable by coal-fired power plants without carbon capture and storage (CCS). The timeline is not very ambitious: it requires owners of existing coal-fired power plants to ramp up to CCS by 2025, requiring owners to produce all kinds of documentation, plans, corporate resolutions, economic and technical analyses, showing a sincere intent to actually implement it by 2025, not just a say-so that carbon capture and storage will be installed. Whether these reporting requirements will actually sniff out those plants just playing along to get a 14-year reprieve is anybody's guess.

The curious thing is why is the Conservative Canadian Prime Minister is taking this course. Ideologically, it doesn't make sense -- I found it ironic that the late NDP leader Jack Layton (who passed away this past weekend) was stumping for a cap-and-trade system while the Prime Minister, the purported economist, has been moving towards something command-and-control all along. Politically, it doesn't make sense -- oil sands executives in the PM's home province, crucial to the PM's political fortunes, have called (if a bit weakly) for a carbon tax, in part to help raise money to pay for carbon capture and storage. Economically, it doesn't really make sense, since a carbon tax would be a fairly innocuous way of penalizing the oil sands for its emissions, one that most oil sands companies can easily absorb. Politically (again), it isn't consistent with Canada's behavior vis-a-vis the United States, with which it wants to harmonize climate policy, but this regulation puts Canada ahead of the United States in terms of what the US is likely to do with its own carbon dioxide regulations under the Clean Air Act

So what's up?

Monday, 22 August 2011

The Politics of Carbon Pricing

Barry Rabe and Christopher Borick have come out with a new paper on the politics of carbon pricing in the United States and Canada. They acknowledge the large body of work of economists that have largely concluded that carbon taxes are generally the best approach, for a number of reasons. Rabe and Borick's analysis suggests that although people would actually be willing to pay some sort of a "user fee" that scales with carbon dioxide emissions, they still do not accept the concept of a carbon tax. Whether that is because of the politics of climate change or the politics of energy taxation, they stop short of guessing, but they observe that despite the unfavorable politics of carbon taxation, people actually do pay a large variety of fees, charges, and taxes that are already embedded in fossil fuel extractions and transfers, that have the effect of a carbon tax. Moving forward, Rabe and Borick seem to be suggesting that various jurisdictions will "slouch" towards carbon taxation, essentially accomplishing by stealth what cannot be accomplished in an open political process.

I get quite cynical at times, and get discouraged about whether people deserve the democracy with which they have been endowed, and hard-won in the distant past. As a descriptive matter, Rabe and Borick may be right, but I still believe that the best way forward on pricing carbon is to be transparent. Among other benefits, a public discussion on carbon pricing and climate policy may not necessarily soar to rhetorical heights, but it will never be very good if governments do the right thing and then try to hide it from their constituents. Per my forthcoming book, I think the framing problem with carbon taxes can be overcome, and not just by renaming a carbon tax a "fee," a "charge," or something else. I think the problem that carbon taxes have, that it shares with other public finance problems, is a lack of a proper accounting in the costs and benefits of different policies. Start by making every climate policy ask what it will cost and what it will accomplish.

Wednesday, 10 August 2011

A Suggestion for the Deficit Supercommittee: Carbon Taxes

Introduce a carbon tax, but offset it with income tax decreases. Wouldn't that be something for Republicans to take back to their supposedly over-taxed constituents? Lower income taxes?

The six Republicans that will be on the "Deficit Supercommittee," the Joint Select Committee on Deficit Reduction, have been named -- three by House Speaker John Boehner (Reps. Fred Upton, Jeb Hensarling, and Dave Camp) and three by Senate Minority Leader Mitch McConnell (Sens. Rob Kyl, Rob Portman, and Patrick Toomey). They will join the three Democrats that have been named so far (Sens. John Kerry, Max Baucus, and co-chair Patty Murray). The committee is charged with presenting recommendations for cutting at least $1.5 trillion over ten years. If the committee cannot agree, or if Congress fails to adopt its recommendations, in their entirety (no amendments allowed), then a series of automatic "trigger cuts" will take place, imposing deep cuts to military spending (to supposedly incentivize Republican cooperation) and to nonmilitary programs, including Medicare (to supposedly incentivize Democratic cooperation). Many hands have already been wrung about how hopeless the task, and how the committee members named thus far do not inspire confidence. Politico has pointed out that all six have signed Grover Norquist's anti-tax pledge. New revenues would appear to be out of the question.

I can't solve the problem (I think it is a problem) of getting Republicans to agree to new revenues. I wish there were a way to persuade Republicans to abandon ethanol subsidies, subsidies for oil exploration, and the Bush tax cuts for the rich. But I don't see that happening. What I do see as a possibility is that revenues might be introduced in a new way -- carbon taxes -- that might be viewed as less offensive. The seeds of a possible compromise might involve a new carbon tax, coupled with further income tax reductions. The latter is certain to be a condition of accepting a carbon tax; if there are any Republicans that would accept a straight carbon tax, they are laying low for now. I am convinced that there are Republicans that accept the need for new revenues; they are just too shy to come out of the closet right now. If Tom Coburn can acknowledge the need for increased revenues from reducing what he calls "special giveaways," then there are many more out there who also feel the need to increase revenues. At any rate, I am accepting without agreeing that new revenues would have be offset by more tax cuts. In principal a revenue-neutral carbon tax -- one that recycles the proceeds so that no new net revenue is taken in -- should not be an affront to even Norquist, who at least in 2006 reportedly supported the idea of increasing gasoline tax in exchange for reducing other taxes. That should make the six Republicans feel a little freer of the bonds of their pledge to Norquist.

A carbon tax coupled with income tax cuts can nevertheless be surprisingly tricky to set up. Treasury won't know until tax returns are in and all carbon tax proceeds are processed, exactly how much of each was collected. In other words, there is no way to guarantee that carbon tax proceeds will be completely offset by income tax breaks. In fact, since there is no way of knowing the baseline counterfactual -- how much income tax proceeds would have been collected without tax breaks -- it is impossible to know if there will be a one-for-one offset.

But so what? What if the American public, the Supercommittee, and at least a majority of both chambers can accept a little uncertainty about revenues? That is going to be the case anyway, as income tax revenues are hard to predict ex ante in any case. The Supercommittee just has to agree, and get a majority of the House and Senate to agree, that in reasonable scenarios, the proceeds from a carbon tax would be about the same as the reduction in proceeds from a further tax cut. It could and should take into account that carbon tax proceeds would likely decline over time, as people and firms and the entire economy adjust to higher prices. Initially, carbon tax proceeds should be more than income tax reductions. Over a ten-year period, it would be reasonable to expect carbon tax proceeds to be greater than income tax reductions over the first five years, and the reverse to be true over the last five years.

One thing I don't know is whether Republicans could stand the United States not being an international pariah for inaction on climate change.

Monday, 8 August 2011

Why We Hate Consumption Taxes, Part II

Building on my last post on why the British Columbia provincial HST is in trouble, I wonder, even when some environmental regulation is accepted as being necessary, why environmental taxes are so disfavored. Among the federal political parties in Canada, we have the anomalous situation of the governing Conservative Party favoring some sort of a command-and-control approach to climate change regulation, while the last-century-liberalism NDP favors a cap-and-trade approach. Neither party is being honest, of course; the Prime Minister will hand out opaque sweetheart deals on a sector-by-sector basis, producing no emissions reductions, and stricken NDP leader Jack Layton promises that a cap-and-trade program will not raise energy prices which, of course, would therefore produce no emissions reductions. And the party that has championed a carbon tax, the Liberals, swooned to their lowest Parliamentary representation in recent history in the recent election.

Why is "tax" a dirty word? In my forthcoming book on carbon taxes, I argue that people harbor certain psychological biases in evaluating policy instruments. First, people have demonstrated a propensity to "do no harm" not only in their private lives, but in choosing policy instruments. The "do no harm" phenomenon, most thoroughly studied by Jonathan Baron, suggests that people prefer to allow more harm to occur by omission than they would permit to allow by an affirmative act or policy. So, for example, a Baron and Ilana Ritov study showed that there was a policy bias in favor of letting children die of the flu than for allowing children to die from a vaccination policy. How does this make taxes unpopular? I argue in my book that an environmental tax more obviously harms people than any other policy instrument. More than any other policy instrument, a voter can imagine and visualize somebody that would be harmed by an environmental tax -- it is often themselves that they can see being harmed by a tax! By contrast, a command-and-control-style regulation very effectively conceals from voters the true cost of regulation. People tend to harbor the illusion that imposition of a regulatory costs will stay where it is imposed, an illusion that Jack Layton either harbors himself or actively perpetuates for political gain.

Second, people also harbor an "identifiability bias" in favor of harming people that are less tangible, less noticeable, and less identifiable. George Loewenstein has most extensively studied this, finding that even a tiny increment of information -- the addition of an id number, without a name, face or any other identifying information -- tended to elicit more sympathy from research subjects than those without an id number. How does this cast a shadow over environmental taxes? Environmental taxes harm identifiable people, as opposed to other instruments, that harm unidentifiable people. Command-and-control, and even cap-and-trade, impose amorphous costs on people and firms that do not exist as clearly in most peoples' minds.

Finally, the famous endowment effect, pioneered by Daniel Kahneman, Jack Knetsch, and Richard Thaler, seemed to indicate that people had a much higher valuation for goods that they already had, as opposed to goods that they didn't have. Some economists have expressed this people having a higher willingness to accept than they have a willingness to pay, but from my perspective, I think it demonstrates that people have a status quo bias -- phraseology not original to me, but most useful for me purposes. And the connection to taxes? At bottom, the endowment effect is a reluctance to trade, and a tax, more than any other policy instrument -- signals a trade. The trade could well be a beneficial one, as many environmental taxes can be demonstrated to produce much more benefit than cost, but it is a trade nonetheless, and people don't like trading away from their current situation. Again, what is so glaringly obvious about an environmental tax is that improving the environmental will cost. The fact that the cost is less than the benefit is a calculation that is a second-order calculation that is dominated by the fact of the cost.