This group brings together the best thinkers on energy and climate. Join us for smart, insightful posts and conversations about where the energy industry is and where it is going.

Post

A Carbon Tax is Not Feasible or Practical

carbon tax useful

In a prominent editorial this past Sunday, the New York Times once again advocated the adoption of a carbon tax. While the theory of a carbon tax makes perfect sense, its lack of practicality makes it the unicorn of energy politics. It is an imaginary creature of elegance and beauty that has little chance of walking the earth. It is true that greenhouse gas regulations and gasoline taxes are forms of carbon taxes and, as the Times reports, British Columbia has a carbon tax. But the space between the carbon tax as a policy idea and the reality of American politics is too vast to overcome. For better or worse, here in America we are in a period of tax policy paralysis that is unlikely to be surmounted anytime soon. If it is, it will be because the Republicans have achieved control of both the presidency and Congress–and the agenda will be to cut taxes, not to establish new ones. In my view, the focus of climate policy should not be to raise the price of fossil fuels, but to lower the price of renewable energy. Climate change is a critical public policy issue, but it will not be addressed by policies that have no chance of being adopted.

Advocates of carbon taxes are persistent and influential. According to the New York Times editorial:

In a welcome development, businesses are asking world leaders to do more to address climate change. This week, the top executives of six large European oil and gas companies called for a tax on carbon emissions. These companies — the BG Group, BP, Eni, Royal Dutch Shell, Statoil and Total — are not taking a bold environmental stand. They are being pragmatic. They want an efficient and predictable policy to limit greenhouse gas emissions because they realize something must be done.

The idea behind the carbon tax is that by raising the price of fossil fuels, one promotes energy efficiency and, as fossil fuels become more expensive, renewable energy technologies will become more competitive. I am certain this is true. But few elected officials are going to advocate higher fossil fuel prices. Moreover, higher energy prices cause people on the lower end of the economic ladder to pay a higher portion of their income on energy. This is because many of the ways we use energy cannot be reduced and poor people often do not have access to the technologies of renewable energy and energy efficiency. Gasoline for your car, heat for your home and electricity for the family refrigerator are often not discretionary but required prerequisites for participation in modern economic life. This is when the simple elegance of the carbon tax breaks down as the complexity of the real world intrudes on the logic of theory. In order to enact a tax we would need to devise ways to reduce its impact on poor people or energy-intensive businesses. The Times editorial discusses these policies, but energy stamps or similar subsidies are far from simple to implement, might stigmatize recipients and would become easy and obvious political targets.

Carbon tax advocates are correct when they assert that tax policy can have a massive impact on behavior, but I think they are approaching the issue backwards. After World War II we wanted to give the average person a greater stake in society and public policy promoted home ownership. Tax policy helped transform America from a nation of renters to a nation of homeowners, but we didn’t do it by taxing rent. We did it by making property tax and mortgage interest tax deductible. We also learned how to insure mortgages. In effect we lowered the price of ownership.

In my view, the most practical and equitable way to change energy consumption habits is to lower the price of renewable energy and energy efficiency. We should do it directly. It starts with basic research: government must fund national labs and university-based scientists to advance renewable energy, energy efficiency and energy storage technologies. We can then use tax policy to encourage the rapid commercialization of these technologies. Companies should be encouraged to take risks to get into the business through reduced corporate taxes. Finally, tax policy can be used to encourage consumers to adopt these technologies by lowering their price through tax credits and deductions. When wind and solar power receive favorable tax treatment, their utilization rises, and when these short-term tax policies expire, their utilization declines. Tax expenditures work as well as tax increases and they have the benefit of being politically attractive.

One reason that the carbon tax proposal persists despite its infeasibility is the dominance of economics in modern policy analysis. Politics, history, culture, management and sociology are cast aside. The thinking behind the tax proposal is that the full or true costs of carbon, including its environmental damage, is not included in its price. Include those costs in the price and the market will magically reduce consumption and the tax revenues collected from fossil fuel use can then be used to right the environmental wrongs caused by these fuels. If you assume away the centrality of energy to modern life and assume away politics and the drive for political power, the theory could lead to a practical public policy.

While one could imagine carbon taxes taking root in some jurisdictions, there is no way to ensure that they would be imposed everywhere. Since climate is a global issue, national carbon taxes are insufficient. China and India would need to go along, and given the urgency of their energy and development needs, it is difficult to imagine that they would agree to such a measure.

I sometimes think the push for a carbon tax comes out of an early 20th century environmentalist mindset that scolds people for consumption and living in evil, immoral cities: “Let’s punish people for using fossil fuels by assessing a penalty on its use. People should live at one with nature and get back to the land.” The problem is that since 2007, most of the world’s population has lived in cities. The proportion of urban dwellers continues to grow. Cities are economic and social magnets and it’s a good thing they are. There are simply too many people and too little nature for all of us to get back to the land–even if we wanted to or knew how to live off the land. Most people enjoy the modern, energy-intensive world we live in.

Sustainability advocates need to turn away from the anti-urban roots of the environmental movement and turn to a positive, enabling vision of a 21st century sustainable lifestyle. Instead of punishing people for consuming the “wrong” things let’s figure out a way to reward people for consuming the “right” things. Culture, entertainment, education, physical fitness, “wellness” and even “people watching” use few material resources and are attractive, positive elements of a sustainable urban society. People enjoy green spaces, green buildings and the intellectual, social and cultural engagement of the best 21st century cities. These cities can gradually implement renewable energy, modern waste management, water treatment and sustainable mass transit systems. This will enable people to enjoy a sustainable life style in a production system that minimizes rather than maximizes environmental impacts.

A carbon tax is a blunt and infeasible policy instrument. Why waste time and effort on an infeasible policy that will never happen? Why not devote time and effort to building a real partnership between the public and private sector to create a sustainable economy? Let’s fund the research, smart grids, and productive capacity needed to lower the cost and environmental impact of energy. Its time to give up on the carbon tax and do the real work that will transform the energy base of the world economy.

Phoo Credit: Is the Carbon Tax Unworkable?/shutterstock

Steven Cohen's picture

Thank Steven for the Post!

Energy Central contributors share their experience and insights for the benefit of other Members (like you). Please show them your appreciation by leaving a comment, 'liking' this post, or following this Member.

Discussions

Bob Meinetz's picture
Bob Meinetz on Jun 10, 2015 8:30 pm GMT

Steven, I’m completely confused by the premise of your article, which seems to contradict itself at every turn. If a carbon tax is a “blunt and infeasible policy instrument” you’ll have to explain to millions of BC residents why theirs, by all appearances, is a resounding success:

http://grist.org/climate-energy/what-we-can-learn-from-british-columbias...

You acknowledge BC’s tax, essentially admitting your title is wrong. Then you include the qualifier that realities of local politics make it “unlikely” in the U.S. – there has been a confirmed sighting of the unicorn, but it probably wouldn’t survive a border crossing.

It gets curiouser. You blame Republicans for those realities:

For better or worse, here in America we are in a period of tax policy paralysis that is unlikely to be surmounted anytime soon. If it is, it will be because the Republicans have achieved control of both the presidency and Congress–and the agenda will be to cut taxes, not to establish new ones. 

then go on to reveal you’re a Reagan-era “trickle down” conscript yourself:

Companies should be encouraged to take risks to get into the business through reduced corporate taxes

and bizarrely suggest the environmental movement is driven by backwards-looking, incapacitating city-hate:

Sustainability advocates need to turn away from the anti-urban roots of the environmental movement and turn to a positive, enabling vision of a 21st century sustainable lifestyle.

Yikes. At least I’m not confused about why I’m confused.

Edmund Kelly's picture
Edmund Kelly on Jun 10, 2015 4:15 pm GMT

This is a well argued case that points out the political reality of the problems with a carbon tax that make it unlikely to ever be adopted as policy in the US, or most of the developing world for that matter. Its cousin, cap and trade has also shown itself to be of little practical effect. Questioning this “status quo” policy position of clean energy advocacy causes instant backlash. There are many of us who want to get the world off fossil fuels and onto a more sustainable path, but do not see a path to success based on these long failing policy ideas. 

Keith Pickering's picture
Keith Pickering on Jun 10, 2015 9:54 pm GMT

>But few elected officials are going to advocate higher fossil fuel prices.

If we unelected a few of them, maybe the rest will get the idea.

>higher energy prices cause people on the lower end of the economic ladder to pay a higher portion of their income on energy.

A carbon tax does not necessarily mean higher energy prices. It only means high fossil energy prices. Nonfossil energy gets a pass. That’s the whole point. And if we structure the tax to be revenue-neutral — and every serious carbon tax proposal is — the poor get a break and would actually make money on the deal. 

>but energy stamps or similar subsidies are far from simple to implement, might stigmatize recipients and would become easy and obvious political targets. 

A fixed per-capita refund is very cheap and easy to implement and doesn’t stigmatize anyone. And since the poor use less energy per capita than average, they end up as winners, not losers.

>In my view, the most practical and equitable way to change energy consumption habits is to lower the price of renewable energy and energy efficiency.

So fossil-free nuclear gets the shaft again, even though it’s our current #1 fossil-free energy source? Brilliant. Meanwhile, energy efficiency, an idea that saves money in its own right and therefore needs not one penny of subsidy, an idea that has never reduced overall energy demand anywhere at any time in human history, gets unneeded millions? Brilliant again.

>One reason that the carbon tax proposal persists despite its infeasibility is the dominance of economics in modern policy analysis. 

The major reason the carbon tax proposal has not been enacted is the dominance of fossil fuel money and influence in the political process. 

Hops Gegangen's picture
Hops Gegangen on Jun 10, 2015 11:24 pm GMT

 

I thought city-dwellers were actually more energy efficient relative to rural areas because they don’t drive pickup trucks 50 miles to get groceries etc.

I think that, and the way the U.S. is set up to overweight the big rural states, is what dooms a federal carbon tax. 

But California already has one at the state level, and New England has a modest RGGI program.

But in recent years, the government has subsidized renewables and efficiency, and that has had some success.

Nathan Wilson's picture
Nathan Wilson on Jun 11, 2015 4:06 am GMT

Sounds like a job for Thorium: Energy Cheaper Than Coal!

Actually, even though in the US today, nothing is cheaper than fossil gas, there are lots of non-fossil-fuel-producing countries that can benefit from nuclear power today, particularly the developing nations that have low construction costs compared to the US.  

We just have to build more export-friendly reactors, such as the SMRs China is working on (the ACP100 100 MW light water reactor, and the walkaway-safe 105 MW HTR-PM helium-cooled TRISO pebble-bed reactor).  That would be much better than our strategy of exporting all of the coal that utilities can’t burn in the US (due to environmental restrictions).

Bruce McFarling's picture
Bruce McFarling on Jun 11, 2015 10:12 am GMT

“Instead of punishing people for consuming the “wrong” things let’s figure out a way to reward people for consuming the “right” things.”

So the secret sauce to solving the massive subsidy in kind to fossil fuels is to subsidy non-fossil sources of energy as much or more?

A carbon tax is not about “punishing people for consuming the ‘wrong’ things”. It is not a “sin tax”. It is a charge for using a scarce resource which is presently being given away for free, and therefore used as if it were in fact freely available, instead of being in fact scarce.

It is true that in the ergregiously corrupt politics of the United States, where some of the wealthiest corporations on the face of the earth benefit from the free riding involved in getting free use of a scarce resource, it is possible to spend enough money to make it politically impossible at present to do what must be done.

That will not change what must be done, so its US politics that is going to have to be changed. That fact that its by no means clear how to do so does not change the fact that its going to have to be the politics that give way, because the physical reality of the emissions actually going into the atmosphere and having actual effects is not going to stop happening just because our politics functions as if it is not happening.

 

Rick Engebretson's picture
Rick Engebretson on Jun 11, 2015 11:25 am GMT

It is essential to invest in University R&D, as this article proposes. It is long past time to invest in a new generation of innovators, new ideas. I think he is right about the urban/rural environmental issues, too.

Recently, my wife and I had a political argument. She, a Democrat, fits the Hillary target demographics but doesn’t like Hillary. I, a moderate Republican, fit the Bush target demographics but utterly despise the thought of yet another Bush “wartime President.” Hey, the political system is broken folks. Time to pass the torch to another generation in the intellectually fertile University environment.

Josh Nilsen's picture
Josh Nilsen on Jun 12, 2015 5:50 am GMT

Millenial generation here.  The robberbarons of the babyboomers took 99.99% of global wealth.  Sorry but there’s nothing left for us and we’re growing increasingly bitter from a decade of absolutely no wage growth.  Not to mention we’re 1 trillion dollars in student loan debt and we are still being told “go to school, it will work out”.

Yeah, it’s not working out.  We know the political system is broken, what can be done when SUPERPACS run rampant and monetary wealth is directly proportionate to voting power?

Unfortantely your generation is going to go down as fucking everything up so badly the US probably won’t be a superpower for much longer.  Republican based economics shifted wealth so disprotionately in 25 years, it is almost unthinkable to even look at.

Rick Engebretson's picture
Rick Engebretson on Jun 12, 2015 10:25 am GMT

Understandable and familiar perspective. Thanks for sharing.

I had a similar discussion with my grandfather in the 1970s. Japan dominated electronics, VietNam a disaster, rivers on fire, DDT wiping out eagles, OPEC shutting off the oil. My grandfather started farming with horses, saw 2 world wars, depression, dust bowl, deaf in one ear from an infection before penicillin, no electricity; I still don’t know how they did it, and with such civility and warmth.

My graduate school years at the University of Minnesota were quite rebellious. The old profs had been great, once upon a time. The most famous, Otto Schmitt invented the Schmitt trigger; look it up. But I cooked my own Biophysics stew; undergrad neurophysiology, advanced biochemistry, genetics, solid state physics, and of course computer programming with punch cards, and lots of Chemistry machine shop work. None of the faculty had a clue about any of it, and nobody could tie it all together or even read the thesis.

I was lucky. Got some support to push a dubious fiber optic computer network when little PCs were expensive typewriters. It was so dubious the “investors” took out a “life insurance” policy on me. Pushed liquid crystal displays, was aware of genetics capabilities, automation. Ronald Reagan invented Silicon Valley. Things changed.

Yes, the paper robberbarons are so rich they needed a bail-out. And life is rosy in Iraq and Baltimore. On TEC blog I am consistent; don’t borrow money to tear down energy infrastructure that works, and replace it with energy infrastructure that doesn’t work. Also, biology is currently giving you more energy resources than you or I know what to do with. We currently have a serious technology skills deficit.

Robert Hargraves's picture
Robert Hargraves on Jun 12, 2015 3:09 pm GMT

Nathan, thank you for supporting the book THORIUM: energy cheaper than coal. I’ve now joined up with ThorCon Power, an emerging venture that is about to produce new nuclear powre plants that actually deliver energy cheaper than coal.

The idea of more subslidies for wind and solar is economically impractical and is really counter to The Earth Institute goals of human development. Developing nations desparately need plentiful, affordable electricity for their peoples’ prosperity. 1400 GW of new, coal fired power plants are already planned. The only practical solution is energy cheaper than coal, providing the economic incentive for both developing and OECD nations to stop burning fossil fuels for energy.

ThorCon Power has a nearly complete design for a hybrid thorium/uranium molten salt reactor power plant than can be mass-produced. We can undercut coal-fired generation by a nearly a factor of two, both in capital investment and electricity cost per kilowatt-hour. Please visit thorconpower.com for proof.

Hops Gegangen's picture
Hops Gegangen on Jun 12, 2015 10:16 pm GMT

 

Josh, I have millenial-age children, and I often tell them that if they understood what is happening, they would be rioting in the streets. 

In my day, young people did you know….

Hops Gegangen's picture
Hops Gegangen on Jun 12, 2015 10:26 pm GMT

 

The civility and warmth comes from hardship; it’s the brats who are arrogant and self centered.

 

Nathan Wilson's picture
Nathan Wilson on Jun 13, 2015 6:19 am GMT

Wow, neat stuff being designed at Thorcon.  I love the shipyard module production, reactor-pump-heat-exchanger cans that return to the recycling facility, full passive safety, and guaranteed retention of hazardous isotopes during any accident (iodine, cesium, strontium).  And of course the cost is cheap enough to make synfuel that is competitive with gasoline.

And what engineer does not want a full-size (250 MW) prototype to play with!

Wilmot McCutchen's picture
Wilmot McCutchen on Jun 13, 2015 2:10 pm GMT

The power to tax is the power to destroy, and in the war on coal, the ultimate weapon is a carbon tax.  Corporate giants now are calling for a carbon tax.  Green zealots demand some kind of punishment for crimes against the environment, hoping “renewables” can provide baseload generation after coal collapses.  The coastal pundits like the idea of a carbon tax because they get to vent their loathing for the oblivious coal-burning rednecks of flyover country, and their elected representatives.  A chorus of angry beggars awaits a promised “dividend” from the carbon tax.

Kowtowing to this absurdity is prudent if you just want to know the cost of doing business.  Uncertainty over the economic impact of actually doing something real about global warming is a cloud over business-as-usual.  A neat solution, from the perspective of dominant companies, would be a carbon tax that cripples the second-tier players with higher costs, and which also provides an excuse for continuing to do nothing to develop new technology: we paid our tax, so we did our bit, and it’s up to the fderal government to do the R&D,  Whatever the carbon tax is, they can just roll it into a rate increase.

Revenue from a carbon tax will just go into the general fund.  Even if there’s a dedicated fund, that will get looted like Social Security to pay for bigger priorities, like more wars.  It won’t help technology development that might stop global warming.  Neither the multinational incumbents nor the candidates they support have any interest in new technology.  “We have all the technology we need” is their battlecry. 

Technically sophisticated people know that non-hydro renewables presently provide only 6.8% of US electricity and can’t possibly scale to replace coal for baseload generation.  Also that “Clean Coal” via chemical CO2 capture and underground storage (CCS) won’t work at utility scale.

Peter Lang's picture
Peter Lang on Jun 19, 2015 12:20 am GMT

The main reason why carbon pricing is highly unlikely to succeed is as follows;

For carbon pricing to succeed, it will have to achieve about 80% ‘participation rate’.  That means 80% of all human caused GHG emissions must be covered by the global carbon pricing system, the system must be economically rational.  That means near no leakage between countries, industries, emissions sources and types of GHG emissions.  Furthermore, the carbon price must be maintained uniformly across the globe for 100 years or whatever it takes to stop human caused GHG emissions throughout the world.  The price must be increased uniformly across the world every year or few years.  

To achieve this all nation states must see it is in their interest to remain fully committed to the scheme at all times – therefore there will be no more nations seeking self interest forever – no President Putins, no more Greece, no more ISIS, no more Iran, etc.

The reason 80% participation is required is that this is about the minimum participation rate that would avoid the cost penalty for participants being near acceptable.  At 80% participation rate the cost penalty for participants would be 50%.  At 50% penetration the cost penalty for participants would be 250%:  

The high participation rate is highly unlikely to be achieved.  All negotiators know the situation and will not sign up unless they can see that their nation will benefit.  This chart (a replot of output from the Nordhaus DICE-2013R model; i.e. the most widely used and accepted model of carbon pricing costs and benefits) shows that carbon pricing would cause a large economic for all this century – see the red line here

Even that is likely to be highly optimistic.

This explains what I believe are the real world reasons why carbon pricing will not succeed.

Jim Stack's picture
Jim Stack on Jun 19, 2015 12:24 am GMT

A Carbon tax is way over due. A methane tax and Fracking tax are also needed. We also have to stop the subsidies to COAL, NG and Nuclear. It’s clear they are the biggest cause of the problems we have today.

Peter Lang's picture
Peter Lang on Jun 19, 2015 12:30 am GMT

I agree 100%.  Unless each individual nation states believes it will benefit in the short and medium term, it will not particpate.  See my comment above which explains the cost to participants of joining a scheme without near 100% participation in a scheme that maintains the carbon price in a way that is accepted by all particpants as fair and equally for all particpants.

Peter Lang's picture
Peter Lang on Jun 22, 2015 1:36 pm GMT

Steven Chhen you said:

 In my view, the focus of climate policy should not be to raise the price of fossil fuels, but to lower the price of renewable energy. “

Why do you attempt to pick a winnner, i.e. renewables?  Why not just make a totally objective and unbiased statement?

I agree that the way forward is to reduce the cost of energy technologies.  But I do not agree with picking winners.

I’d arguue the way forward is to remove regulatory impediments that are distorting markets and raising the scost of energy.

William Eacho's picture
William Eacho on Apr 9, 2016 1:20 pm GMT

Overly simplistic perspective from someone who has simply not studied the opportunity as others have. The impact on poor households of higher energy prices can easily be offset with a simple per capita tax credit or dividend, using just a portion of the revenues. Studies at RFF show that just 15% of the revenue offsets 20% of the population’s costs, 30% offsets 40%, etc. Other revenue could be put to uses like reducing our excessively uncompetitive corporate tax rate…half the revenue of a $35 fee on carbon could reduce it from 35% to 25%, making US companies more competitive and driving net GDP growth per most economic studies. A border tax adjustment would force all our trading partners to match us on energy intensive, trade exposed goods, thus enhancing the competitiveness of US manufacturers since we have access to low carbon energy resources. As such spreads, countries will quickly choose to join that “carbon tax club” and collect it domestically as they will see doing so can enhance growth and provide domestic revenues. Combined with diplomatic pressure, 80% of the global trade economy would participate within a couple years as no country wants to see its exporters paying a tax to another country when they could collect it at home. And it can be done in compliance with WTO rules.

Get Published - Build a Following

The Energy Central Power Industry Network is based on one core idea - power industry professionals helping each other and advancing the industry by sharing and learning from each other.

If you have an experience or insight to share or have learned something from a conference or seminar, your peers and colleagues on Energy Central want to hear about it. It's also easy to share a link to an article you've liked or an industry resource that you think would be helpful.

                 Learn more about posting on Energy Central »