Carbon Taxes First

1. CarbonTaxes First Charles Komanoff & Dan Rosenblum Carbon Tax Center www.carbontax.org April 24, 2007

2. Global Warming Is … • Triggering a climate crisis that threatens massive and irreversible damage to our global environment, public health, world peace, national security and economic well-being. • No longer seriously contested by anybody other than vested interests, their hired “experts” and indebted politicians. • See An Inconvenient Truth and IPCC Fourth Assessment.

3. 43 Boston 42 N) New York 41 o Latitude ( Philadelphia 40 Washington, DC 39 38 29 30 31 32 33 34 35 36 37 o Warmer Winters: 4.3ºF, 1971-2002 Boston is the new Philly; NYC is the new D.C. (winter temps.) Cameron Wake, UNH Winter (Dec-Jan-Feb) Mean Temp (ºF)

4. More Extreme Weather Extreme Precipitation Events, % Increase 1949-2002 Cameron Wake, UNH

5. The Problem:Unsustainable CO2Emissions Worldwide • World must reduce emissions ~80% by 2050, with big cuts starting now. • Americans are emitting many times our share of CO2 (next slide). • Americans must reduce by >80%.

6. Americans Emit in a Day What Others Emit in a Workweek

7. China China Lines X in 2009 Lines X in 2009 U.S. U.S. “In an alliance of denial, China and the United States are using each other’s inaction as an excuse to do nothing.” – New York Times editorial, 4-20-07 What about China? China X U.S.

8. China China Lines X in 2009 Lines X in 2009 U.S. U.S. Because CO2 stays “resident” in the atmosphere for at least a century, one hundred years of fossil-fuel use drive climate responsi- bility. U.S. still has a 40-50-year lead. Chemistry → Responsibility X U.S. China

9. No More Free Dumping “Since the dawn of the industrial revolution, the atmosphere has served as a free dumping ground for carbon gases. If people and industries are made to pay heavily for the privilege, they will inevitably be driven to develop cleaner fuels, cars and factories.” — Avoiding Calamity on the Cheap, Nov. 3, 2006 New York Times editorial

10. Putting a Price on CO2 Emissions High taxes on carbon emissions from coal, oil and natural gas will: • Reduce fossil fuel use and CO2 emissions • Substitution of clean fuels and technology • More efficient use of energy • Provide a revenue stream to enable • Progressive tax-shifting, or • Rebate to all U.S. residents

11. Additional Benefits of a Carbon Tax • Carbon tax receipts may also be used to finance • Energy efficiency, further reducing use of fossil fuels and related emissions. • Energy R&D. • Will also reduce dependence on foreign oil, with major national security benefits. • Economically, will keep dollars in USA instead of flowing overseas.

12. Rely on “Market Forces”? Here Come Synfuels Only a carbon tax can subject CO2-intensive oil sands, oil shale, coal-into-oil, etc. to a climate- appropriate market test.

13. Clean-Energy Subsidies:A Limited Answer • Selecting the next best energy technology by fiat has largely benefited lobbyists + special interests • Oil shale, nuclear power, synfuels, ethanol, etc. • Many new sources also emit CO2 • Renewable Portfolio Standards: helpful – but not enough

14. Efficiency Standards:Vital, but Not Enough • Too slow • Corporate resistance • Inherently reactive • Corporate gaming • (e.g., “CAFE” loophole that enabled SUV’s) • Scattershot – impossible to regulate the hundreds of important energy-usage sectors • 1-dimensional • (e.g., CAFE doesn’t affect miles driven)

15. More than Half of U.S. Oil Use Is Not Gasoline for Cars Freight Cars Heat,Power Other Air Paving RV’s

16. Gas Tax-Shift impacts: How high CAFE is set Mfg’er mpg decisions What car to buy Which car to drive How to drive VMT (miles traveled) Share (carpool) Chain trips Transit Walk/Bike Proximity CAFE impacts: Mfg’er mpg decisions What car to buy Example - Gas Use Decisions

17. Dynamic Capitalism & CO2: I “ … specially equipped, privately owned jumbo jets – the kind that normally carry 300-400 passengers … recon- figured … for the enjoyment of, at most, a couple of dozen.” New York Times, 17-Oct-2006: For the Super-Rich, It’s Time to Upgrade the Old Jumbo Jet

18. Dynamic Capitalism & CO2: II Backyard Blizzards: “Snowmaking, since the mid-1960s the provenance of ski resorts and, more recently, some party planners, has gone domestic,” with 2-kW plug-in snowmakers that run ’round-the-clock. New York Times (Home Section) 15-Feb-2007: Not Enough Snow For You? Talk to Your Father

19. Example - Electricity • Utilities and other generators will • Respond to price signal by substituting lower-carbon fuels • Renewables • Natural Gas • Invest in efficiency on demand- and supply-side • Consumers will • Respond by using less • Substituting low- or non-carbon energy

20. Carbon Tax Proportions Fuels are taxed by their carbon content per btu

21. A “Starter” Carbon Tax-Shift • $37 / ton of carbon = • 10¢ / gallon of gasoline, jet fuel, etc. = • 0.72 ¢ / kWh (U.S. retail average) • Reduces U.S. CO2 emissions ~ 4% • Repeat 10 X (while standards and incentives also cut emissions)

22. Energy Use: Not Inelastic • Gasoline usage grew only 3.5% from 2003 to 2006, while the economy grew 11%. • Pump prices have risen < 50% since 2003 (adjusted for inflation) – not the doubling commonly believed. • The modest growth in demand points to a “short-term price elasticity” of around 0.1, and 0.4 in the long term. • Finding: Demand for gasoline (and other fuels) is at least somewhat price-sensitive.

23. Elasticity (long-run) Assumptions U.S. CO2 • Gasoline: ­ 0.4 • Electricity • Residential (37%) - 0.5 • Commercial / Industrial (63%) - 1.0 • Fuel-switching Leverage: 1.2 x • “Other” – midway bet. Gasoline/Elect. Reductions

24. Starter Tax – Why Ramp Up? • Win broad consensus • Implement ASAP • Help people and businesses adapt • Empirical validation of efficacy • Mid-course corrections • Establish long-term price trajectory • Complement w/ investment in EE and renewables

25. USA After “Starter Tax x 10” • CO2 emissions down by a third • Oil use down by ~5 million barrels/day • Energy • Coal-fired generation reduced • Wind and other renewable generation increased • Incandescents / halogens out, CFL’s + LED’s in • Transportation and Land-Use • SUVs out, sedans in • Costlier air and highway travel creates market pull for 300-mph intercity rail • Urban trips by bicycle up 10x, to 10% • Urban revitalization

26. The Wealthy Will Pay More

27. “Progressive” Use of Carbon Tax Revenues EITHER • Distribute pro rata to 320 million Americans (~ $1,500 each, per year) OR • Tax Shift out of regressive taxes (green bar at right assumes 2.5%/yr drops in emissions (net of +1.5%/y income, - 4%/y price)

28. Two Fossil Fuel SubsidiesBy Taxpayers: Relatively SmallBy Climate: Enormous

29. Existing Carbon Taxes(1st-year Starter Tax shown for comparison) Per ton of car-bon

30. Politics? • Concerns about carbon tax-shifting • Contrary to Americans’ sense of entitlement to “cheap energy” • Anti-tax ideology of past 25 years • Elected officials wary of another defeat • Clinton’s 1993 Btu tax • Rep. John Anderson’s “50-50” program (1980 presidential campaign)

31. But: Growing Support for Taxing Carbon Emissions • Opinion leaders • Al Gore • Scientists such as James Hansen (NASA) • NY Times op-ed columnists Brooks, Friedman, Kristof, Krugman & Tierney • Conservatives including Gregory Mankiw, Bush chief Economic Advisor, 2003-2005 • CEO’s of Dynegy & FPL Group

32. Some Support in Opinion Polls • Feb. 2006 New York Times poll • 55% would support increased tax on gasoline if it reduced dependence on foreign oil. • 59% would support if the increased tax would curb energy consumption and global warming. • Oct. 2006 M.I.T. survey • Over three years, 50% increase in respondents’ willingness to pay more for electricity to reduce global warming.

33. Carbon Tax v. Cap-and-Trade • Cap-and-trade is alternative vehicle for “putting a price” on carbon • Proposed by US CAP – coalition of large environmental groups and large corporations • Emissions are capped at a level determined through the political process • Allowances/permits to emit CO2 up to the cap are distributed or auctioned • Market participants can buy or sell as necessary

34. Cap v. Tax: Predictable Prices • Carbon taxes provide predictable prices necessary to encourage investment in • less carbon-intensive technology • carbon-reducing energy efficiency • carbon-replacing renewable energy • Cap-and-trade aggravates price volatility that discourages beneficial investments

35. Are We Over-Valuing Cap-and-Trade’s “Emissions Certainty”? • “Safety-valve” would authorize auctioning additional allowances if allowance prices exceed predetermined level • Emissions cap could be politically fragile without public support • No magic emissions level (except as low as possible)

36. Tax v. Cap: Timing • C&T design and implementation: complicated, contentious, prolonged • Level of cap • Timing • Allowance allocations • Certification procedures • Offsets • Penalties • Permit banking • Inevitable requests for exemptions • Tax can be in place promptly with quick results

37. Tax v. Cap: Equity • Cap-and-trade • Practice has been to allocate based on past use • Rewards polluters with windfall • Perverse incentive to pollute more now to increase base for allocations • Allowances can be auctioned off to highest bidders • Proposed in RGGI program • Proceeds used to provide public benefits • Lawyers and consultants are other big winners • Carbon tax would be revenue-neutral

38. Tax v. Cap: Understandability • Carbon taxes provide direct, transparent and understandable price signals to consumers • Perceived political liability, but essential to transform societal climate-awareness • Cap-and-trade is complicated and opaque • Perceived political asset, but limits public participation and could backfire

39. Tax v. Cap: Comprehensiveness • Carbon taxes address emissions from every sector • All users must respond to price of carbon • Most current cap-and-trade programs, as proposed, only target the electricity industry • Only 40% of emissions • If allowances are allocated, polluters with sufficient allowances have less incentive to reduce emissions

40. Keys to Political Success • Progressive Tax-Shifting • Not a tax increase • Carbon tax revenues used to reduce regressive payroll and sales taxes • Provisions to Protect Low-Income Families • Reductions in payroll/sales taxes will offset all or a portion of the carbon tax • Other measures to reduce low-income energy use • Message: Taxing pollution instead of productive work

41. Principles Tax-shifting – not a tax increase Full-cost pricing Polluter pays Responds to concerns about Climate crisis Inequitable taxes Security / Oil dependence Basing economy on vulnerable energy Summary www.carbontax.org