The following is a copy of my submission to the group of Senators and Congressmen working on the design of carbon tax legislation in the USA. I figured they might want to use our experience here in Australia to produce a better one which should get an up or down vote in about 30 years. But hey, if you don’t play, you can hardly complain about the outcome. This input is to answer specific questions they raise on how to design a system.
Dear Congressman Waxman, Senator Whitehouse, Congressman Blumenauer, and Senator Schatz,
None of you are my elected representatives, but I thank you for your invitation to participate in the discussion on the formulation of a carbon tax as the economic instrument to assist in addressing CO2-e emissions in the United States. I chose to provide you some input because I have been working in the space you are now discussing for my entire career as an environmental engineer following the receipt of my degree (BS in Chemical Engineering in 1988 from Montana State University). My experience began with the completion of emissions inventories to address the Toxics Release Inventory (TRI) requirements on industry from 1987 legislation. I have published papers on the function of emissions trading programs, founded a start-up company to produce software for the completion of industrial emissions inventories, and I am currently the Technical Director of and led my current company to become the first engineering consultancy in Australia to be certified as carbon neutral under the National Carbon Offset Standard. We have been carbon neutral since 2008.
I want to provide answers to your specific questions, but prior to that, I want to take a position on a “carbon tax” as opposed to an “emissions trading market” as the economic instrument to achieve the outcome of internalising the cost of emissions of CO2-e. Having studied this issue in detail, and the practicalities of the implementation of these types of regulatory mechanisms, I have come to the following conclusion: An emissions trading system that is implemented using either a “cap and trade” model or a “baseline and credits” model is a more efficient long-term mechanism for driving reductions in CO2-e emissions. However, given the difficulties in educating people about how a trading mechanism works and the greater complexity of trading systems that means they are less transparent, more costly to setup initially and open to potential corruption of them, I believe that a simple, transparent carbon tax along the lines of the model you suggest is a better first step. At some point, conversion over to a more elegant solution involving trading of emissions credits may then be possible once the public is more inherently knowledgeable and accepting of a more complex but efficient solution.
With that as a background, I want to move on to your specific questions.
1. What is the appropriate price per ton for polluters to pay? The draft contains alternative prices of $15, $25 and $35 per ton for discussion purposes.
My guess on the record prior to its implementation in Australia was that the price should be A$23.50. It actually turned out to be A$23 on 1 July 2013, so I was pretty close. But was my number right? Well, here you are going to get a lot of debate based on where I draw the boundaries of my assessment of overall costs, what is and is not a cost, etc. and this is debated widely (and wildly) as in the background provided with your question. But I am going to stick with my original estimate not because I know its right, but because I don’t know that it isn’t. Environmentalists with an axe to grind will try to justify a price that is orders of magnitude higher, and people opposed to the tax (or trading system) at all will complain about whatever price is set, so the price set is not nearly as important as the reasoning for why you set it there. The economists’ work that has gone into your background seems to most closely support a $25 price, and that won’t make anyone happy so it’s probably good. It’s high enough that it provides a real incentive to reductions, but low enough after you cascade it through the economy that it will basically just be noise in the signal of prices of things like electricity.
Wherever you set it, be firm in sticking to it. Our experience here in Australia is that industry groups that were most opposed going to emissions trading (and helped bring down the government at the time) are now bitterly complaining about the carbon tax price when you can buy a ton of CO2-e on the market at about $2.50 at present. The answer to those people should be “tough, pay your tax. And next time I propose a better solution first, you might want to take me up on the deal.”
2. How much should the price per ton increase on an annual basis? The draft contains a range of increases from 2 percent to 8 percent per year for discussion purposes.
Experience would suggest that the price should be close to CPI, but adjusted upward based on how rapidly you want incentives to grow. I would say that a model that uses CPI+0.5% would provide a ramping up of incentive that would be sensitive to economic conditions in the US at the time, but also allow for more rapid take up of existing energy efficiency technologies along side the expansion of renewable energy sources.
3. What are the best ways to return the revenue to the American people? The discussion draft proposes putting the revenue toward the following goals, and solicits comments on how to best accomplish each: (1) mitigating energy costs for consumers, especially low-income consumers; (2) reducing the Federal deficit; (3) protecting jobs of workers at trade-vulnerable, energy intensive industries; (4) reducing the tax liability for individuals and businesses; and (5) investing in other activities to reduce carbon pollution and its effects.
The model here is essential, because you want to make absolutely sure here that you get maximum buy-in from a public that doesn’t want to have to sift through a lot of details to understand it. We know that all costs applied in the form of the tax will be passed on to consumers (primarily of electricity). So what you want to do is make sure that the tax that is collected is redistributed to the people who will get the revenue from it in a clear form, either as a credit on their income taxes, or in a form such as the reduction of payroll taxes that each individual person can see easily and compare; my taxes went down this much to offset my electricity prices that went up that much. This should be very transparent, because I want each and every person to start internalising his or her decisions about energy use in particular. Someone may get back $300 a year from the carbon tax, and only pay $150 in additional energy costs because they practiced easy energy efficiency rules and made purchases with energy efficiency more in mind. Another person may get $300 back, but spend $600 more on energy every year because they choose to drive a massive SUV and don’t even care what their energy use is like. We need to engrain this in the mentality of every person, regardless of his or her economic status; you are free to live your life and use energy as you see fit but you have to pay for your inefficiency.
Do not let the money simply go into general revenue and come out as means tested welfare programs as was done in Australia, because here (already) people have lost the connection between what they get and what they pay, leading many to forget that they actually have control.
The best model I can think of for the US would be to collect $25 a ton for emissions, and return 75% of all money collected directly back to the population on a per capita (or better yet per household) basis. Then use 12.5% for supporting energy efficiency improvements in the national grid and to equip it for more micro generation and renewable input. The final 12.5% should be put into supporting R&D and commercialisation of renewables and energy efficiency technologies. In doing so, make sure that you design the programs such that the market and not government pick the winners and losers, as government has a particularly bad record of picking winners and losers where innovation is concerned.
Finally, don’t address trade exposed energy intensive industries in the context of this tax. I say this for two reasons. First, business will look after itself and we don’t need another federal program of money transfers to industry that will invariably be corrupted or put the government in a position of picking winners and losers. Second, there are existing means of dealing with economic system failures related to trade exposure of industries where costs will go up under a carbon tax. For instance, after the US has a pricing mechanism in place for the internalisation of CO2-e emissions costs and that causes your aluminium costs to go up, you use existing trade mechanisms to make any foreign aluminium producer that wants to sell its aluminium into the US to either pay the tax or be able to demonstrate in a transparent manner that the CO2-e emissions costs are included. Initially they won’t be and they will just have to pay the tax, but eventually they will also get on board with a similar program. And isn’t that the long term goal for the developing as well as developed economies.
4. How should the carbon fee program interact with state programs that address carbon pollution?
Where an entity already participates in a scientifically valid economic instrument to internalise the cost of CO2-e emissions (whether state, federal or international), they should be excluded from paying the tax for emissions from that source, regardless of what they pay to offset their emissions under that program. This is the way that you eventually get to the use of the more elegant instrument (carbon trading) for emissions reduction in place of the crude instrument (the carbon tax). Over time, companies will see that they can reduce their cost of compliance significantly through a trading system, and early adopters are rewarded. For instance, my company offsets its emissions at about A$2.00 a ton as compared to the A$23.00 per ton carbon tax. If we were a mandatory (rather than voluntary) participant in the system, that difference would be a huge incentive for us to do an emissions inventory, identify reductions, and participate in an emissions trading market.
Finally, let me share a bit of my experience as an environmental engineer that will illuminate why I think this issue is so important for the US not only as an existential environmental issue, but also as an economic one. In my experience, I have never seen a more effective piece of legislation at reducing emissions than the TRI requirements of the Superfund Amendments and Reauthorisation Act of 1987, and the act required no emissions reductions at all. What it said is that if you are large enough and you emit certain substances, you have to quantify all of your emissions of a list of toxics and simply inform your neighbours of what they are. This required us (in industry) to look at emissions sources we never examined before as significant, and in doing so, we identified and reduced millions of tons of toxic emissions (along with other associated emissions that were not toxic) because we could do so relatively easily, wanted to do so for our own public relations purposes, and often saved millions of dollars in the process. I personally invented a system for the reduction of VOC emissions from my employer at the time that saved them a few million dollars while I was doing the source testing to quantify the fugitive emissions from a previously unregulated area of their facilities. I wouldn’t have been on that factory roof to stumble across my invention unless the TRI regulations had required me to be up there.
We know that countries that signed up to the Kyoto Protocol can meet 80% of their targets through energy efficiency using technologies that have existed for 50 years. But what incentive do they have to examine their emissions or energy efficiency? A carbon tax will provide the incentive for all major energy users to have a first look at what their emissions actually are, and never in my experience as an environmental engineer have we had a first look at a problem area and not found a majority of the solution easily.