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On When Politics Constraints Carbon Pricing, Part 3: Why Carbon Revenues are Just as Important as "Putting a Price on Carbon"

Hi Jeff,

Thanks! And thanks for following the series. 

These are great questions. I'll try to take them in turn:

1. I have indeed seen some excellent modeling of the distributional impacts of a cap and dividend proposal, which you can find from James Boyce and Matthew Riddle at UMass Amherst here. They model net impacts on households on each income decile and in each state and find "at least 60% of households receive net benefits: the dividends more than offset the impact of higher fossil fuel prices on their real incomes." So your intuition seems spot on. A equal per capita carbon dividend would be a progressive income shift.

Dallas Burtraw and colleagues at Resources for the Future modelled the distributional impacts of a variety of uses of revenues from a cap and trade program on the U.S. electricity sector only, which you may find helpful on this topic as well.

A tax shift (i.e. income tax cut) would be less directly progressive, as unless it is fully refundable, it would miss out on low-income non-tax payers, although for those it would benefit, it would be progressive if it was enacted as a tax cut in equal dollar terms for each income bracket. So a tax shift might end up more benefiting the middle class over lower incomes unless designed with some kind of low income payments or if tax credits were fully refundable. Note though that most real-world tax shift proposals I've seen (including BC's, Australia's now-dead tax, and the failed Canadian Green Shift) all include business income tax cuts as well to offset impacts to business and industry. That would make the tax less progressive overall, as business owners and shareholders tend to be higher income. 

2 & 3. If an effective public education campaign convinced a majority of Americans that they would end up ahead because of a cap/tax and dividend scheme, I'm sure it would increase public support versus a cap/tax with non-earmarked use of funds. That said, there are three things to consider: First, the gains for individuals would be minor and diffuse. Are citizens really going to want to see a carbon tax that forces changes in their behavior so that they can earn an extra $50 or $150 per household per year? Will they trust that the government is really going to give them their money back? If they can save another $50 by changing their habits, will they see that as a positive, or will they question why they are being forced to change their habits in the first place? I'm sure there's going to be a fair amount of skepticism to that proposal, even if the math works out in their favor on an annual basis. Second, the wealthier income brackets lose out, and it's sad to say, but in our current American version of "democracy," these income brackets have a disproportional impact on politics. Third, a real per capita dividend approach does nothing to blunt impacts on industry (all the revenues go to households as dividends). So the political economy constraints arising from industries with high asset specificity (as discussed in Part 1) will be fully unleashed in opposition to any cap/tax and dividend proposal. 

So in sum, I think using revenues for dividends increases somewhat the level of carbon price that is politically sustainable. But how far? Certainly the use of dividends does not free carbon pricing from political economy constraints! Far from it. So let's be optimistic and say that it doubles the public willingnes to pay for carbon pricing: so if we can see a WTP equivalent to a $2-8/ton of CO2 tax without dividends, then maybe we can increase that to $4-16/ton CO2. But the dividends do nothing to blunt industry opposition to the tax. Those constraints will surely further limit if not outright prevent the carbon price. So where do these dividends  leave us? My contention is that we'd still end up with a potentially feasible carbon tax that is far below the social cost of carbon. What do you think?

4. I think that if you could get it implemented, the dividends would probably make the carbon tax more durable over time. Maybe. Then again, getting rid of the tax entirely would always have some appeal. 

5. I think that there would be three keys to a politically sustainable tax and invest scheme: 1. keep the carbon tax low in the first place. A $5 per ton carbon tax would raise about $25 billion per year in the U.S. for example, but raise the cost of a gallon of gasoline by only about 5 cents and would have a very negligible impact on electricity prices. A modest tax is much less likely to become the focus of public ire. 2. Structure RD&D programs wisely. See the links in my comment to Joris below on how to do that, to minimize the changes of a major 'debacle' like Solyndra. And 3. invest in a way that really drives down the cost of clean energy over time. That reduces the "lift" that the carbon price itself has to accomplish and thus helps ensure the tax and stay low while finishing the job on the Co2 reduction side. All in all, I'm pretty confident you could make something like that work. What do you think?

Jesse

July 29, 2014    View Comment    

On When Politics Constraints Carbon Pricing, Part 3: Why Carbon Revenues are Just as Important as "Putting a Price on Carbon"

Dear Joris,

Thanks for following along through the full series, and for your comments. Let me try to answer some of your questions/comments here.

First, you seem skeptical that government funded RD&D programs can yield success and assert that "90% of money" is most likely to be wasted. I hope that a careful look at the history of American innovation and the role of government would temper your skepticism. I refer you to my 2010 collection of case studies, "Where Good Technologies Come From," which documents how everything from jet engines and nuclear power to biopharmacueticals, advances in agrosciences, and of course, the semiconductor, Internet and computers all come more or less direclty out of government-funded and, more often than not, government-led innovation initiatives. You may also wish to look at the role of government RD&D programs in developing most of the key technologies underlying the shale gas and oil revolutions now changing the North American energy landscape. In fact, it's very hard to come up with an example of an important 20th or early 21st century invention that does not trace back at one or more critical junctures to government-funded RD&D programs. So I do not at all share view that government R&D is a wasteful use of carbon revenues. Even if the "success rate" for project funding is 1 in 10 as you assert, that would be a remarkable impact on the energy landscape, and while you characterize that situation as "wasting" 9 out of 10 dollars, you also ignore the much larger societal returns that could be expected from those 1 in 10 successes. How do we quantify the returns on government investment in microchips? Or shale gas? Or jet engines? Or ... You get my point I hope. 

That said, I appreciate the need to discipline R&D programs well and to structure institutional incentives and program design to maximize the bang for every buck. Just because one big success can pay for many failures does not mean we want to court failure unecessarily. But we know plenty about how to structure R&D programs well (and poorly). For some good suggestions on how to get more bang for the buck, I refer you to the works of the Energy Innovation Reform Project, the Center for Clean Energy Innovation, the American Energy Innovation Council, and my own Congressional testimony based on my years of work at the Breakthrough Institute. These are solvabe problems.

Second, on the use of revenues to procure additional emissions abatement above and beyond that secured by a carbon tax: I don't think this needs to be done in a wasteful manner either (and I disagree with what seems to be a blanket dismissal of all renewable energy subsidy programs as well). For ideas on how to structure deployment subsidies for clean energy well, see this report I co-authored with analysts at the Brookings Institution, Breakhrough Institute, and World Resources Institute. Reverse auctions and other competitive price discovery mechanisms can harness market forces and ensure much more efficient outcomes than conventional subsidy programs. 

Finally, on why the tax shift and dividend proposals are not as popular as you might expect, my theory is this (and this is informed by the general results of the polling I've seen and discuss in the post as well some focus group work I saw on the original "Sky Trust" cap and dividend proposal): people generally dont like the idea of the government imposing a tax principally to change their own behavior. It feels like social engineering and they don't appreciate it. The idea that they "get their money back" may help blunt the initial sting of the tax, but that sting doesn't go away entirely, and the idea that the government is going to take money out of one pocket, shuffle it around in some way, and then put it back in your other pocket is a tough sell I think. Despite a growing mistrust of government in America, we still would generally prefer that the government stay out of our business, and if it must get involved -- that is, if we see there being a real problem that requires government intervention -- we prefer the idea that the government takes only as much revenues as necessary and uses the revenue to actually solve the problem. That's just one narrative, and I'm sure there are many responses. But I think that's the general reaction that undermines the support cap and dividend or tax shift advocates assume their proposals will garner. 

What do you think?

Jesse

July 29, 2014    View Comment    

On When Politics Constraints Carbon Pricing, Part 3: Why Carbon Revenues are Just as Important as "Putting a Price on Carbon"

Dear Bob,

Thanks for the comment. I actually considered writing about BC's carbon tax experience -- as well as other subnational examples like the Regional Greenhouse Gas Initiative in the Northeastern US and California's AB 32 -- but cut them for the sake of brevity, and focused only on national-level examples (my paper actually discusses the two subnational US examples however). 

That said, I have followed BC's carbon tax experience over the years. At $30/ton, it's one of the few policies (the only one really) in North America to reach anything close to what economist's estimate as the social cost of carbon (although still on the low end of those estimates, which range from roughly $15-150/ton and rise over time). 

Still, BC has extremely low carbon emissions from the electricity sector, which is dominated by hydropower, so the impact of BC's carbon tax per household is lower than in most other regions of North America. BC residents feel the impact mostly in gasoline costs, which have risen about 7 cents per liter.  BC consumes about 4.5 billion liters of transportation fuel per year, or about 975 liters per year per resident. So that's only on the order of $70 per person per year in higher fuel costs. Assuming transportation fuel cost increases represent two-thirds of the total impact on household costs, BC's apparent household WTP for climate policy is probably still right within (or at least not far off) the $80-200 per household per year range evident in the United States (as described in my paper). And that's before considering that BC's carbon tax includes a significant tax shift (cuts to personal and business tax income rates) to offset the initial cost increases due to the carbon tax. That's a very quick back of the envelope estimate, but I doubt I'm off by anything close to an order of magnitude. Thus, it looks to me that while BC's policy achieves a higher carbon price than in other jurisdictions, the political economy constraints there are no less stringent than elsewhere in North America. Total household initial costs are fairly low still, and that's likely critical to the political sustainability of BC's carbon tax policy. 

So you point to BC as the model for everwhere else. I'm not so sure. If you tried to implement the BC tax shift approach elsewhere, in regions with a higher carbon footprint per household, you'd wind up with a much lower and thus less effective carbon tax. And if you spend all of your revenues on tax rebates instead of investing in clean energy R&D and additional abatement, you will accomplish little else.  There are of course other subnational examples to keep an eye on. RGGI has seen substantial cuts (on the order of 40%) to electricity sector CO2 in the Northeast, although most of that is likely due to the ongoing shift from coal (and oil) to gas-fired plants in the region. That said, RGGI's modest (just about $3/ton CO2) and politically sustained carbon price has also raised billions in revenues across the region that have been directed to energy efficiency programs, clean energy RD&D programs at places like NYSERDA and the Massachusetts Clean Energy Center, and other mitigation efforts. California is considering similar uses for the revenues generated by its AB32 cap and trade program, which took effect in 2012.  Your comment also raises three great questions for further research. I don't have a direct response for those here, but suffice to say, those are all important considerations. For now, I'll just focus the conversation on the BC experience and what we can learn there. I personally see another example of a politically constrained carbon price, and not necessarily a model for widespread replication elsewhere...
Jesse
July 28, 2014    View Comment    

On Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

Hi Peter,

How would this option 3 differ from the status quo? What measures would you suggest to make it a reality? And why are you confident it will lead to substantial emissions reductions? 

I'm not totally clear what you are suggesting so it is hard to respond. Thanks. 

Jesse

July 26, 2014    View Comment    

On Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

Good suggestion. Ill edit accordingly. All figures in the article are dollars per metric ton of co2.

July 26, 2014    View Comment    

On Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

Hi Marchant,

The inside-baseball dynamics on the Hill clearly play in here too. I've seen enough legislative efforts to know how that works and I don't mean to neglect those factors. In my view, however, they are the secondary constraints. If the primary political economy constraints are not attended it, the chances of having any requisite support on the Hill will be slim. In contrast, if the primary political constraints are attended to and not violated, the inside baseball can progress and a viable  Hill strategy, as you discuss here, can be developed.

Jesse

July 24, 2014    View Comment    

On Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

The influence of money in politics is clearly another manifestation of the political obstancles arising from entrenched commercial interests. However, you write: "Jim Hansen has proposed the best system of Carbon Tax that I know of called Tax and Dividend but despite it being an election winner for any party that proposes it (who could resist getting a dividend in their bank account every month from 'the man'), no party would dare anger their financial masters by proposing it." I will discuss this proposal in more detail in Part 3, but I just wanted to clarify, there not great evidence that this is such a political winner. The dividends do soften public opposition (from voters) to carbon pricing (relative to using revenues for general budget purposes) but two things to keep in mind: 1) it's not a dividend "from the man," it's a refund from taxes we would each pay ourselves. As a per capita dividend, it would be a progressive redistribution of carbon revenues, but it's still something we all have to pay, and the initial hit to our pockets is where the public opposition arises. 2) the dividends do nothing to blunt industrial opposition to the proposal, as they don't get any money back. This is a key difference between the cap and dividend proposals (100% of revenues go back to citizens via equal per person dividends) and other "tax shift" propoposals which would use revenues to reduce income and usually corporate taxes as well (as in BC and Australia). Anyway, stay tuned for Part 3. How the revenues from a carbon pricing policy are used can be more important than the price itself, but I'm not convinced rebates, dividends, or tax shifts are the best use for such funds. See part 3 on what I see as a much superior proposal, politically, environmentally, and economically...

July 24, 2014    View Comment    

On When Politics Constraints Carbon Pricing, Part 2: 6 Tips for Improving Climate Change Policy

Thanks for following the series Joris. 

July 24, 2014    View Comment    

On Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

Actually, part 2 got quite long, so I split it up into two more. Part 2 goes up Thursday AM, but it only touches on the revenue neutral proposal briefly. Part 3 will deal with it -- and alternative uses for revenue that appear to perform even better politically, economically, and environmentally -- in much more detail. Stay tuned for Part 3 on Monday!

July 23, 2014    View Comment    

On Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

Bob, stay tuned for part 2...

July 23, 2014    View Comment    

On Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

Hi Schalk and thanks for the comment,

"Skepticism" of climate change is indeed one factor in public opposition to strong carbon pricing policies. However, I personally believe the role skeptics play in climate policy debates is a bit overblown. The more fundamental economic interests are more powerful I believe, and I think the public opinion evidence would support that interpretation, as in most nations I've looked at, and particularly in the United States, we see strong majorities believe that climate change represents a problem to be addressed, but fairly weak support for expenditures or costs associated with confronting that challenge. Yes, there are more skeptics among the conservative portions of the US (and other) populations. I'd recommend the "Six Americas" series of studies for more on that. But I also think that this expression of skepticism may also be a case of "motivated cognition" - that is, if the idea of confronting climate change creates cognitive dissonance with your beliefs, worldview, or personal interests, one has a strong motivation to develop a rationale and understanding of the problem that reduces or eliminates that cognitive dissonance. This can easily manifest as skepticism of the underlying science or risk. Anyway, the role of "skeptics" in climate politics is a very interesting topic, and one I'd love to hear more informed views on from those who may have spent time researching this topic. Cheers,

Jesse

July 21, 2014    View Comment    

On Why Does Politics Keep Getting in the Way of Pricing Carbon? - Part 1

Indeed! Stay tuned for part 2...

July 21, 2014    View Comment