Nobel Laureates and Other Climate Experts to Paris Negotiators: Tax Carbon

A letter composed by the Carbon Tax Center calling for a carbon tax as the basis for international climate negotiations boasts of an impressive list of signatories: three Nobel Laureates in Economics, three former Cabinet Secretaries (one of whom, Steven Chu, also received the Nobel Prize in Physics), two Vice-Chairs of the Federal Reserve Board, and some other people that have done a few things in their lives, like teach Economics at Harvard.

What is perhaps most important to note about using carbon taxes as a basis for negotiating a climate treaty is that while international negotiations will always be fraught, a carbon tax treaty would at least look more like what international treaties look like: countries promising to observe some code of conduct -- human rights for prisoners of war, reducing trade barriers, and harmonizing taxation for border straddlers like me. It is much more intuitive for countries to agree to do something -- phase out subsidies and tax carbon -- than it is for countries to divvy up responsibility, a divisive exercise that led to the ill-fated Kyoto Protocol, which allowed China to triple its emissions over the time period since. The strength of such an approach is also, admittedly, a weakness: unless something is specified about the collected carbon tax proceeds, a carbon-taxing signatory would be free to somehow channel proceeds to affected fossil fuel stakeholders. But if the approach is paired with a commitment to phase out fossil fuel subsidies, then at least carbon tax proceeds are likely to be distributed in such a way as to decouple emissions from proceeds. Above all, one thing would be important about a carbon tax-based treaty: countries raise revenues, keep them, and spend them in a way that they control. That intrudes upon sovereignty concerns less than other approaches, and avoids some of the finger-pointing exercises that have plagued previous Conferences of Parties.

Alberta's Carbon Disappointment

Alberta Premier Rachel Notley announced Sunday that the province will adopt a climate policy that will replace its existing Specified Gas Emitters Regulation. Unfortunately, the new policy really does not do much more than the SGER. It appears to be a cap-and-trade program that replaces the intensity-based SGER trading program. Whereas SGER would give more permits to specified emitters (large ones) as long as they got more efficient, the new policy allocates emissions permits on the basis of output, but seems to institute a cap for each sector. (I will frequently use the words "seems" and "appears" because the plan does not completely spell out some implementation details) So the possibility of indefinitely rising emissions allowances disappears, but the initial allocation (which appears to re-set each year) is still based on productive and/or value-based efficiency (which one and when is not clear). The cap on Alberta's oil sands sector is 100 Mt, which is not a binding cap at all because current emissions are about 70 Mt. The plan does expand carbon pricing into consumer sectors, so that distributors of gasoline and heating fuels will have to have permits, too, and pass them down to end-consumers. That is a sensible step, making the carbon price as economy-wide as possible.

What is mysterious about the plan is what exactly the role of pricing is. The report refers to a ceiling price of $30 per tonne, which is consistent with a cap-and-trade program, but it also refers to price increases of 2% above inflation, "as long as emissions prices in Alberta do not significantly exceed those in comparable/competitor jurisdictions and as long as they are not above current estimates of the social cost of carbon." (p. 32 of the report). How do you increase the price if the price is determined by market trading? The mechanism seems to be that the province will reduce allocations "1-2% per year to reflect expected energy efficiency improvements." (p. 31 of the report OK, but that still seems like the province still just adjusting the cap.

In sum, this plan is a disappointment for those like myself, who were hoping for a bolder policy, especially in light of the Premier's remarks earlier this year expressing unhappiness with the SGER, and rejecting the National NDP Party's call for cap-and-trade. The plan still grandfathers a certain amount of emissions, and that is disappointing because the income effects of those freely-allocated permits will reduce the incentives to innovate. Worse still, the sector-specific caps will eliminate any market signals to re-order Alberta's economy in less carbon-intensive ways. In particular, if the oil sands sector still has 30 Mt to grow, there is no bite at all to this climate policy in terms of curbing oil sands emissions. Some of the money raised from the plan (how the plan raises the claimed $3 billion in revenue is unclear) will go towards reducing coal-fired generation and increasing renewable energy generation, but how it does it is ... you guessed it: unclear.

Party Before Country: The Democratic Congressional Campaign Committee Kills Moderate Republicans ... Because It Can (or thinks it can)

If you're a Democrat, and you blame the Republican Party for hyperpartisanship, maybe you should look a little closer to home. The Democratic Congressional Campaign Committee is partly to blame -- probably exactly half. The DCCC has been targeting Florida Republican Congressman Carlos Curbelo (FL-26) for all kinds of fabricated charges. Why? Because the DCCC thinks Florida's 26th district is a swing district, and they think they can win it.

But what a pyrrhic victory would it be, to wipe out one of the last of the remaining members of that most endangered species, the moderate Republican. Congressman Carlos Curbelo is an environmental hero. Curbelo was one of the eleven co-sponsors of the Gibson Resolution, the nonbinding but meaningful statement by House Republicans that climate change is really a problem, and needs addressing. It is perhaps an unfortunate thing that it takes political courage for a Republican to "come out" on climate change, but that doesn't make it less courageous. Curbelo came out early, as this Scientific American article points out.

These are precisely the kind of craven, Machiavellian shenanigans that have corrupted Washington. This is why Republicans are drawn to ignorant knaves like Donald Trump and Ben Carson. I would personally give Bernie Sanders more credit, but he draws upon the same, angry, anti-Washington sentiment that is also gaining ground in the Democratic party. The Party comes before your country.

Support, and vote for Curbelo if you live in Florida 26th. And call the office of Steve Israel, the chair of the DCCC, at 631-777-7391 or in DC at 202-225-3335, and let him know he is a schmuck.

Carbon Tax Time in Canada

Holy Loonie Toonie! It was clear that incumbent Canadian Prime Minister Stephen Harper was very nervous heading into yesterday's election, going so far as to enlist the help of Doug Ford, the brother of famously inebriate Toronto Mayor Rob Ford, and not exactly a teetotaler himself. The smart money was that a plurality would emerge from yesterday's federal election and the best bet, far from a sure bet, was that the Liberal Party would wind up holding the most seats. But Canadian voters stunned everybody by handing Justin Trudeau and the Liberal Party 184 seats out of 338, for a majority. This is parliamentary democracy, where caucus members toe the party line reliably. As leader of a majority party, Trudeau does not have to negotiate with Harper and the Conservatives, nor Thomas Mulcair and the NDP. Justin Trudeau has control over Canadian government policy.

Trudeau has clearly signaled a concern with climate change. Here is the first order of business for the Prime Minster-elect: enact a carbon tax. Do it in a way that will outflank the NDP and permanently put to rest their cap-and-trade dalliance: by enacting a carbon fee-and-dividend, collecting all revenues into a dedicated trust fund, and distribute every single tax dollar collected to Canadian households, on a per-person basis. This is the proposal championed by Citizens Climate Lobby Canada, and its sister American organization Citizens Climate Lobby.

A carbon fee-and-dividend makes economic sense for the United States, but the political prospects for enactment in Canada are far brighter. Not that Americans should give up on  carbon fee-and-dividend, but this moment in history is perfect for Canadian adoption. Here is why:

Canadians are ready for a carbon tax. Canadians have tired of being an international laggard on the climate change, and have expressed a clear desire for something on climate policy. But what policy? Apart from a basic suspicion of the NDP leadership's maturity levels, Canadian voters have questions about the cap-and-trade that Mulcair championed, especially after Alberta Premier Rachel Notley rejected it. How about just regulating greenhouse gases as a toxic substance under the Canadian Environmental Protection Act? That is plausible, and was the predicate for two past federal initiatives: the failed rolling-cap-and-trade scheme proposed by the previous Prime Minister, Paul Martin, and Harper's 2011 plan to phase out coal-fired generation in Canada over the next forty years. But how does Environmental Canada (the weak Canadian version of the U.S. Environmental Protection Agency) set a standard for greenhouse gas emitters in Canada? It had to lean heavily on the U.S. Environmental Protection Agency just to help establish the coal-fired generation phaseout, so my guess is that Environment Canada simply does not have the institutional capacity to figure out how to set standards for cement plants, refineries, steel mills, and pulp and paper mills. So what's left? Well, the Canada Revenue Agency is pretty good at what it does, and collecting a carbon tax is comfortably within its wheelhouse. Add to that the political dynamic that oil sands executives past and present favor a carbon tax, and it is starting to look like a political no-brainer.

Canadians are ready for at least a small wealth redistribution. No study of carbon fee-and-dividend has been done for Canada, but the results would be similar to that of the United States: that a carbon fee-and-dividend would effectuate a modest wealth redistribution from rich to poor. Not that we are talking about fleecing the rich. If the $30 per ton CO2 tax in effect in British Columbia were to apply nationally, emissions (576 Mt in 2013) would likely decrease by about 7% in response to what would be an 7% increase in fossil fuel price (a -1 elasticity), resulting in emissions of about 535 Mt of CO2, producing revenues of about $16 billion Cdn. Spread out over the 35.8 million Canadians, that would be about $450 for every man, woman, and child, or an average of $1,800 for a household of four. We know that wealthy Canadians consume more, poor Canadians less, so a lump-sum rebate, or "dividend," would wind up giving the poor back a little more than they pay out, the wealthy not so much. But the difference is small, a transfer payment from a rich family to a poor family on the order of a couple of hundred dollars. Still, in a political reality in which the poor are globally clamoring for greater equality, this is in the right direction, and really not much to complain about if you're a wealthy Canadian. Certainly wealthy British Columbians have moved on to more important things, like hockey.

Canadians will want some simple, clean, and straightforward. There is something small, simple and straightforward about a carbon fee-and-dividend. Dollars go into a trust fund, not unlike sovereign wealth funds like Alberta's Heritage Savings Trust Fund or Alaska's Permanent Fund, only the incoming dollars would go right back out, instead of invested. The amount of money for some industries would be large -- cement and coal-fired power plants -- but for most Canadian households, it would be a mostly manageable adjustment. Unlike the British Columbia carbon tax, the dividend would make net winners out of the poorest Canadians. Could political shenanigans hijack some of those carbon tax proceeds? Of course, that is always possible. But Justin Trudeau has a majority, and he doesn't have to deal with the opposition, the way that Democrats would have to work with Republicans in the U.S. Justin's in control. The only question is whether Canadians would punish the young Prime Minister for this. If he proceeds deliberately and with notice -- something Gordon Campbell did not do in British Columbia -- he will not be politically punished, but rewarded.

A carbon fee-and-dividend is small, self-contained, costs rich Canadian households a couple of hundred dollars a year, benefits poor Canadian households by a few hundred dollars a year, and reduces emissions. You want to mess with that? Step right up and announce your opposition to a small wealth redistribution or to climate policy.

Is Alberta Inching Toward a Provincial Carbon Tax?

The third significant climate change-newsworthy event of last Thursday (in addition to the Pope's address to Congress and President Xi Jinping's announcement that China would institute a cap-and-trade program) was an address by Alberta Premier Rachel Notley to the Montreal Chamber of Commerce, in which she clearly balked at toeing the federal party line on climate change: Thomas Mulcair's call for a national cap-and-trade system. "A national cap-and-trade program may not be our best road forward." Canadians are polite; that was was a rejection. Give 'em hell, Rachel!

I may turn out to be a fool, but I find myself wondering what Alberta, as a province could do, other than a real, British Columbia-style, old fashioned carbon tax. Former Canadian oil executive Dennis McConaghy blogged a month ago that Canadian oil producers should embrace a carbon tax. Privately, Alberta oil executives have long been open to a carbon tax. The late Rick Hyndman, the widely respected senior economist for the Canadian Association of Petroleum Producers, espoused a carbon tax. Rick even quietly worked for Liberal Prime Minister Paul Martin, designing an ultimately ill-fated convoluted cap-and-trade scheme with a price floor and a price ceiling. Hmm, a cap-and-trade with a price floor and a price ceiling ... is that a carbon tax? Rick only smiled when I asked him that question.

We know that a carbon tax would win political points from economists. We know from the British Columbia experience that a carbon tax would win political points from environmentalists. If the Alberta oil industry is aboard (it is), who's left? It is ironic that people have always thought a carbon tax was a political non-starter. In Alberta, it really seems as if there is no place left to go.

President Xi: Maybe a Carbon Tax Would be Better

Who would have thought that the first-ever Papal address of a joint session of Congress, calling for Congress to take action on climate change, would be the second most important news item of the day on climate change? That was the case for Thursday, September 14, when Chinese President Xi Jinping announced that China will commit to establishing a cap-and-trade program to reduce greenhouse gas emissions. The details of the program are still apparently under development, but the Chinese plan is hardly an impulse; regional pilot trading programs have been operative for years. The announcement was still considered a surprise; the New York Times reported just Monday that "There is little expectation that Mr. Xi will promise anything as drastic as he did last year."

The plan is meant to be an operationalization of a commitment by China back in November to peak its emissions in 2030, but it may have to wind up being a good bit better. The way that the Chinese Central Committee moves on policy, incrementally and cautiously (except maybe when rescuing stock markets), suggests that the Chinese are not nearly done with climate policy. The greater significance of the announcement is that it renders incredible the claims of climate skeptics inveighing against President Obama's cooperation with China on the grounds that China is simply sitting on its hands and waiting for the world to end.

The nature of climate commitments would seem to call for an emissions limit, and therefore a quantity instrument – like cap-and-trade, with an emissions cap – rather than a price instrument, like a carbon tax. But cap-and-trade brings problems with administration. The U.S., with its experience with sulfur dioxide trading, could probably set it up and run it competently, for about a billion dollars as a start-up cost. But other countries might not start up so smoothly. It has been pointed out that China has even more experience with corruption than Chicago. If emissions permit fraud can happen in the European Union Emissions Trading System, it seems pretty likely that we will see some permitting fraud and corruption cropping up with a Chinese cap-and-trade system.

A better alternative would be a Chinese carbon tax. Who would complain if China had announced a plan to introduce a carbon tax, instead of a cap-and-trade program? There could be Sino-skeptical climate skeptics out there that would argue that a carbon tax would not necessarily constrain the quantity of emissions, but those people are not open to persuasion anyway. There could be environmentalists out there that worry that emissions reporting fraud could be a problem, but such an enforcement problem would be no worse, and significantly better, than they would be under a cap-and-trade program. Under cap-and-trade, it would be easy for a permit buyer to avoid asking questions about the validity of permits bought, especially if she could simply flip the permit to someone else in a robust-traded market. Under a carbon tax, there could be an angry Central Committee to face if emissions under-reporting were found. It is true that under both systems there is a danger of local government and emitter fraud. But if guaranteeing the absence of fraud in China is the condition for an international agreement on climate change, then we might as well just give up.

A Chinese carbon tax would also be a better base model on which to negotiate a climate treaty. The failure of the Kyoto Protocol itself is testament to the fraught politics created by divvying up emissions among signatory nations. What do international treaties look like? Unfortunately, American and European negotiators were overly taken with the Montreal Protocol, the cap-and-trade-like agreement to phase out the use of ozone-depleting substances. In the wake of the success of the Montreal Protocol to dramatically reduce the use of ozone-depleting substances worldwide, every international environmental problem started to look like a pollution problem nail that needed to be addressed with a cap-and-trade hammer. Result: Kyoto.

What do treaties really look like? Most are agreements in which every signatory party agrees to do something affirmative, and the signatories get to bicker over whether certain behaviors are or are not consistent with the treaty. They do not generally look like Kyoto or Montreal. Not only that, tax treaties are really quite common. The harmonization of tax collection throughout the world is imperfect, but a familiar task for trade and tax people. And with a carbon tax, there is at least there is the fact that carbon tax proceeds can be retained by each signatory taxing country.

If Tea Party extremists can force out a House Speaker, then a carbon tax treaty may not seem very plausible. But if opposition from the Tea Party is a really a deal-breaker for international climate negotiations, then we might as well give up.

Actually, What the Pope Thinks Matters

The Papal Encyclical Laudato Si of this past summer, and the address to Congress by Pope Francis yesterday (the first Pope to ever address a joint meeting of the U.S. Congress), prominently featured calls for action on immigration reform (calling himself a "son of immigrants"), poverty, and also climate change. Climate change is often talked about as problem to be solved by policy and economics, but a growing number of people have raised it as a moral imperative. Niskanen Center's Jerry Taylor wrote cogently about it yesterday. I think the world of Jerry, and am privileged to call him my friend, but when it comes to moral authority, the Pope has a higher perch.

The question has remained, however, whether the Pope will move people. On the Niskanen Center blog, David Bailey has argued persuasively that he will not. I disagree. I agree that the Pope inveighs quite heavily against what we have to believe is capitalism, and loses some of his moral authority in doing so. Note that at this point in history, with lingering public anger over the role of the finance industry over the Financial Crisis, wagging a finger at exuberant capitalists seems more credible than it has been in decades (see Republican Senator David Vitter's opposition to the deregulation of derivatives in the last spending bill). I do agree that with a few exceptions in Congress – John Boehner, who wept during his address, one of them – it does indeed seem as if the Pope will fail to move the needle, at least directly and immediately. Former Senator and Presidential candidate Rick Santorum remarked on the Papal Encyclical, "The Church has gotten it wrong a few times on science, and I think we're probably better off leaving science to the scientists…" We might elide the fact that Santorum has waded into climate science himself as a lawyer ("the idea that man, through the production of CO2 … is somehow responsible for climate change is, I think, just patently absurd."), lacking the training that Pope Francis had as a chemist, but the point is that politicians seem to believe they have their own moral authority.

But in the longer term, the Pope's calls will have a political effect. Politicians' beliefs are ultimately derived from, in addition to the beliefs of the Koch Brothers, the beliefs of their constituents. I believe that for the 1.2 billion Catholic voters in the world, the Pope's call for action on climate change will have substantial weight. Humans are evolved to take all kinds of action and belief cues from prestigious, high-ranking people within their most important social groups, and the Catholic Church remains an extremely important source of identification for many of the 1.2 billion. Climate change is an economic issue, a policy issue, but it also is a compelling moral issue. Harm imposed on others is both an externality and a moral wrong. Ultimately, the divergence between the Pope and the economists of the world rolling their eyes at his moral call may just be a matter of degree. No credible economist believes that the appropriate price of greenhouse gas emissions is zero. That is inefficient and immoral.

The Pope is not actually the first to invoke faith in support of action on climate change. The Evangelical Environmental Network has long advocated for action on climate change. That organization has recognized the need to pass on a clean environment to future generations. There is no reason for economic and moral compulsions to be rival motivators for action on climate change. On climate change, there really is no tension between economic efficiency and moral imperative.

Pope 1, Economics 1.