The EU "Airline Tax" on Flights in and out of the EU

The charge that airlines will have to pay for flying in and out of the EU is not a "tax" at all, but the cost of airlines having to hold tradable emissions permits under the EU Emissions Trading System. Starting January 1, 2012, airlines will have to hold permits for the carbon dioxide their airplanes emit during the entire length of a flight that originates or terminates in the EU zone [see EU reg]. Since it has to pay for a permit that is traded on an open market, the price is not known. It is not a tax.

In my recent interview on Seattle Public Radio KUOW, I received a question from a caller who claimed to have had to pay a "carbon tax" of something like $600. That sounded high to me, as it did to host Steve Scher, but I should have done the back-of-the-envelope calculation and concluded she was nuts. Here is the simple arithmetic of the cost to an airline of flying in or out of the EU. Boeing reports that a 747-400 consumes about 5 gallons per mile, assuming a flight of about 3500 miles, about the distance from JFK airport to Heathrow. A direct flight from Seattle to Heathrow is longer, 4780 miles, but we'll assume that the fuel burn rate is about the same, even though it could well be longer because the plane would have to carry more fuel to fly the longer distance. The carbon content of jet fuel is 9.57 kg of CO2 per gallon, or 0.052746 tons per mile (5 x 9.57 x conversion factor for kg to short tons). Thus, a 4780-mile flight from Seattle to Heathrow would emit about 250 tons of CO2 for the flight. The 747-400 seats about 416 passengers in a 3-class configuration, so assuming that there are 350 passengers on board (a generous assumption given the fullness of flights these days), each passenger would account for about 0.72 tons of CO2. EUETS allowances have been trading at about 8 or 9 Euros lately, or about 11 US dollars. So the "tax" for this Seattle passenger going to visit family in the UK should really have been about eight or nine U.S. dollars. Of course, British Airways may mark up the cost a bit, but that is still two orders of magnitude off from her estimate of $600. And I suppose that the price of the EUETS permits are relatively low right now, and the Euro is taking it in the shorts, so maybe it is not a fair calculation to make right now. Perhaps, an estimate of fifteen or twenty U.S. dollars is more realistic over the long run. But on the other hand, even this estimate might be high; the EUETS might not cost passengers anything in 2012, because for the first year of the airlines' participation in EUETS, allowances equal to 97% of historical emissions will be allocated free, and 95% in 2013. There may not be any costs to pass on to passengers in 2012 and 2013!

So there you have it. For most passengers flying in and out of the EU, the cost of their airline having to comply with the EUETS will likely be close to zero for the first two years, and rising up to something on the order of fifteen or twenty dollars. Makes the threatened lawsuit by Chinese air carriers and the threatened US Congressional attempt to fine American carriers for complying with the EUETS mandate  seem more than a little hot-headed.

A Loss for All of Us

I try not to get personal or off-theme on this blog, but the passing of a fine person in the Canadian oil industry is reason for us to pause and reflect on a legacy that above all is best described as civility in the maelstrom of controversy. The loss of Rick Hyndman, formerly a senior economist with the Canadian Association of Petroleum Producers, is a loss not only to the varied stakeholders that have engaged with the Canadian oil industry, be they green, brown, or any other colour. Rick was exceptionally knowledgeable about the world oil business, savvy about Canada's role in that global industry, but in all of his dealings polite and respectful, even when, as he recalled six years ago, he was labeled a "climate criminal" by some green groups. The best of the greens, know better, though. In 2005, I headed up a panel on energy policy as part of a CIAJ conference, and invited Rick and now-Ecojustice legal advocate Karen Campbell. Rick accepted that invitation, as he did a more recent one from me, with the response that he "would be honoured to participate," a humbleness that masked his vast storehouse of knowledge and razor-sharp intellect. It was a highlight of my career to remember, as Rick and Karen had their lively and fruitful exchange during the conference, B.C. Supreme Court Justice Bruce Cohen, the eminent chair of the conference organizing committee, turning to me and whispering excitedly, "these guys are great!"

Without impugning Rick's views, positions, and work, I would like to say that they have for me served as a source of inspiration not only for substantive views, but a commitment to civilized and mutually respectful discourse. There was something utterly Canadian about Rick in that regard.

Why Not a Carbon Tax? Some thoughts from my students

I assigned parts of my book to my students in my climate change seminar, and challenged them to come up with arguments against a carbon tax, or at least some suggestions on how to implement a carbon tax. They rose to the challenge. Here are some of the best arguments:

A carbon tax needs to be part of comprehensive tax reform, not a stand-along policy. A carbon tax simply is not politically feasible at this point, except if it is offered as part of a comprehensive package of tax reforms aimed at lowering overall tax burden. Income taxation in Canada is too complicated, and in the US is inexcusably complex. A carbon tax to displace some income taxation would be a good thing.

A carbon tax only reinforces the idea that climate change is going to cost people money. There is considerable research now that suggests that people are choosing to discount the costs of climate change because they see it as an unambiguous cost. But if climate policy were more about developing exciting new breakthrough technologies such as fusion, then maybe people would be more willing to engage with the issue instead of pushing it into the "it's too depressing to think about" category.

A carbon tax could be accomplished anyway by focusing on co-pollutants instead of carbon dioxide. Focusing on climate change is that it detracts from the other problems from polluting industries, particularly stemming from coal-fired power plants. The irony is that we just focused on reducing pollution, we would almost certainly reduce greenhouse gas emissions as well.

It is kind of interesting that all of the suggestions I get, and all of the critiques that I get about a carbon tax somehow tie into psychology. Be it "people just don't like taxes," or "people have trouble understanding climate change," or anything else, it all comes back to some cognitive gap when it comes to climate change or taxes.

Canada's Carbon Capture and Storage Mandate, part III -- command-and-control

I derive most of my funding, at this point, from Carbon Management Canada, a research unit funded by provincial and federal government to advance the development of upstream fossil fuel technologies, including most prominently at this point, carbon capture and storage technology. This is the third post, however, criticizing the federal government's mandate of carbon capture and storage technology for coal-fired power plants.

I remain skeptical of carbon capture and storage (CCS) technology. However, if Canada were to push technology CCS along, this clumsy command-and-control initiative is absolutely the wrong way to do it. If any coal-fired power plants actually take the federal government up on the regulation and install CCS, it will be committing considerable expense to a specific CCS technology. If Canada will be asked to contribute more emissions reductions in the future -- as it almost certainly will -- the firms that installed CCS technology will be saddled with an expensive piece of equipment that will have become obsolete. And this equipment will become obsolete quickly: the proposed standard only requires a 30% carbon dioxide removal efficiency. What will the owners of these plants with CCS do if Canada is pressured by its trading partners to further reduce emissions from its electricity generating sector? They will eat costs, and Canada will eat crow. This is the classic example of how command-and-control regulation hurts regulated businesses.

What every CCS advocate will tell you is that while government assistance for CCS research, development, and deployment is nice, there is one thing that is absolutely necessary for CCS to thrive: a carbon price. As the U.S. Interagency Task Force of Carbon Capture and Storage concluded in its commissioned report:

The lack of comprehensive climate change legislation is the key barrier to CCS deployment. Without a carbon price and appropriate financial incentives for new technologies, there is no stable framework for investment in low-carbon technologies such as CCS. Significant Federal incentives for early deployment of CCS are in place, including RD&D efforts to push CCS technology development, and market-pull mechanisms such as tax credits and loan guarantees. However, many of these projects are being planned by the private sector in anticipation of requirements to reduce GHG emissions, and the foremost economic challenge to these projects is ongoing policy uncertainty regarding the value of GHG emissions reductions.

It is ironic that the Canadian federal government, while trying to spare Canadian businesses any costs whatsoever, is actually harming them. This cuts against a grain of economic thinking that posits that cost savings at any time can only benefit a business. But it is not a good thing to try and insulate Canadian businesses from a geo-political environment in which greenhouse gas reductions will be pursued with much more seriousness. Some far-sighted businesses may anticipate the future foreign pressures that will be visited upon Canada to undertake more emissions, and those businesses may plan accordingly. But for a private business, that is a risky proposition to justify to shareholders. Capital expenditures, some of them very expensive and therefore sticky, will have to be made in a highly uncertain regulatory environment, and some businesses that might otherwise heed signals may wind up just taking in current policy as an indicator of future policy. The danger is that this kid gloves approach will lull some Canadian businesses to invest capital in a climate policy environment that errantly assumes regulatory life will always be this easy.

Canada's Carbon Capture and Storage Mandate, part II

The Canadian federal government's first baby-step on curbing greenhouse gas emissions, first blogged about by me in August, the setting of a performance standard of 375 tonnes CO2/Gwh for Canada's 53 coal-fired electricity generating units promises little. There are several "flexibilities" (Environment Canada's term) built into the proposed regulation: they don't apply to existing units until they are "old" -- 45 years old and at the end of a power purchasing contract. Existing units are otherwise grandfathered. Also, "new" units built before 2015 are not subject to the performance standard.

How many units are we talking about? In the analysis for the regulation, Environment Canada says that 35 units -- 66% of the total number of units currently in operation will become "old" by 2025. That's a long ways away. How many are old now? Environment Canada projects that 21 plants will be retired by 2015, but 15 of those are slated for retirement as a result of Ontario's provincial mandate to phase out coal-fired units, so it's not as if the federal government can take credit for it. So presumably 6 units become "old" by 2015, and another 14 become old in the decade following. The rest are grandfathered.

Tyler Cowen's Marginal Reservations About a Carbon Tax

A Twitter discussion broke out last week on carbon taxes. The question was, "do all serious economists favor a carbon tax?" Mostly the answer was yes. Tyler Cowen, on his Marginal Revolution blog, also favors a carbon tax, but posted some of his reservations. They are worth addressing (they are covered in my new book).

1. Other countries won’t follow suit and then we are doing something with almost zero effectiveness. 
This is true but perhaps the more relevant questions is, is a carbon worse than the alternatives? It so happens that a carbon tax will have greater pollution reduction co-benefits than the alternatives. Then, a second-order set of questions is, does a carbon tax permit, under international trade rules, sanctions against counties that don't follow suit? The answer is maybe, but a carbon tax is legally a better base form which to take trade actions than alternatives like cap-and-trade.

2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse. Yes, possibly, see #1, and plus, this may be overstated.... see Leveling the Playing Field, by Trevor Houser and others.

3. There is Jim Manzi’s point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers.  Denmark remains far more dependent on fossil fuels than most people realize and for all their efforts they’ve done no better than stop the growth of carbon emissions; see Robert Bryce’s Power Hungry, which is in any case a useful contrarian book for considering this topic. I think that reducing greenhouse gas emissions will not require so much game-changers but much smaller, less noticeable increments in conservation and efficiency, most notably in Sweden. Sweden may not have perfected nuclear energy, but it has a much more innovative environment for conservation. Kristianstad, an  80,000-person city has reduced its carbon footprint to virtually zero. Obviously, not every city can do this, but some can, which is better than none. http://www.nytimes.com/2010/12/11/science/earth/11fossil.html?ref=beyondfossilfuels

4. Especially for large segments of the transportation sector, there simply aren’t plausible substitutes for carbon on the horizon. Except conservation. There is a paper by Hammar, Lofgren and Sterner that found that not only do low gas prices beget high consumption, but high consumption begets low gas prices. The explanation is a political economy one -- once people get used to high consumption, and once an infrastructure gets build around low gas prices, people demand low gas prices. But that's not a reason to keep gas prices low. As Herb Stein once told Richard Nixon, "If something can't go on forever, it won't"

5. A tax on energy is a sectoral tax on the relatively productive sector of the economy — making stuff — and it will shift more talent into finance and other less productive sectors. See #2.

6. Oil in particular will become so expensive in any case that a politically plausible tax won’t add much value (careful readers will note that this argument is in tension with some of those listed above). You can't both argue that a carbon tax is harmful and that is won't have any effect.

7. A carbon tax won’t work its magic until significant parts of the energy and alternative energy sector are deregulated.  No more NIMBY!  But in the meantime perhaps we can’t proceed with the tax and expect to get anywhere.  Had we had today’s level of regulation and litigation from the get-go, we never could have built today’s energy infrastructure, which I find a deeply troubling point. Again true, but the point is, is a carbon tax better than the alternatives? At least a carbon tax is the least regulatory of all the options, including cap-and-trade, which still must monitor emissions trading.


8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax. Somewhat true, but generally overstated -- see recent work by Metcalf, Fullerton, and others, which show that for *some* lower-income people, their income is derived from governmental benefits that are indexed to inflation, and would therefore grow with price increases brought on by a carbon tax. Also, work by Sarah West and Rob Williams studied gas prices and substitution, and found that even very modest revenue recycling would remove regressive effects.

9. Jim Hamilton’s work suggests that oil price shocks have nastier economic consequences than many people realize.  But a carbon tax could be big enough to constitute an oil price shock? A $30 per ton CO2 tax amounts to about $0.25 per gallon.

9b. A more prosperous economy may, for political and budgetary reasons, lead to more subsidies for alternative energy, and those subsidies may do more good than would the tax.  Maybe we won’t adopt green energy until it’s really quite cheap, in which case let’s just focus on the subsidies. There a case for limited R&D subsidies because fossil fuel industries already have a much greater market share than renewables, so renewables need some R&D subsidies just to keep up. See work by Acemoglu et al, and by David Popp. But who believes that subsidies are really, on the merits, a great idea? If carbon is what we are worried about, shouldn't we just price carbon instead of trying to lower the price of everything else?

10. The actual application of such a tax will involve lots of rent-seeking, privileges, exemptions, inefficiencies, and regulatory arbitrage. More than subsidies? More than cap-and-trade? The Waxman-Markey bill doled out $378 billion in allowances given away to industries that were at the table. It was virtually co-written with the Edison Electric Institute.

On Jon Huntsman

Last night, during the Republican presidential candidates debate, former Utah Governor Jon Huntsman said this:

"When you make comments that fly in the face of 98 out of 100 climate scientists, to call into question the science of evolution, all I am saying is that in order for the Republican Party to win, we can't run from science. By making comments that basically don't reflect the reality of the situation, we turn people off."

I have been asked what it would take for carbon taxes to become a reality. What it will take is for a legion of sensible Republicans to say what Jon Huntsman has said. Arnold Schwarzenegger, John McCain, Lindsey Graham, Bob Inglis, and Lamar Alexander are all Republicans that have at some point acknowledged climate change. Some versions of Mitt Romney have also done so, although other versions of Romney are more equivocal. I am not going to call Jon Huntsman's statement "courageous," because that should be reserved for statements that are less popular than Huntsman's position. If just a small number of distinguished Republicans are willing to lead the party and play ball on climate change, then carbon taxes will be seen as the most palatable policy option. This will especially be true in the foreseeable future, in which government balance sheets will be under scrutiny, and not just from Standard and Poor's.