Tax Carbon Pollution or Seize the Day?

There is a tide in the affairs of men, which taken at the flood, leads on to fortune.  Omitted, all the voyage of their life is bound in shallows and in miseries.  On such a full sea are we now afloat.  And we must take the current when it serves, or lose our ventures.”  William Shakespeare

One of the smart goals of the Copenhagen Consensus is a carbon tax.  Taxes are a blunt instrument – a procrustean solution to a protean problem.  A one size solution to diverse issues of air pollution and global warming, population and development, economies and environments.  These factors are all linked to emissions of CFC’s, carbon dioxide, methane, nitrous oxide and aerosols – as well as to environmental degradation.  Economic growth provides resources to address these factors – as well as to create resilient communities.  In as far as taxes are a brake on economic development – by increasing input costs – they may act to exacerbate problem in other areas.  This goal of taxing pollution is expended on in a Copenhagen Consensus energy perspective.

“Failing to tax the negative externalities from energy consumption, such as air pollution and greenhouse gas emissions, is a form of subsidy, arguably even larger than the pre-tax subsidies discussed above. The external costs of related to energy consumption can include: damages from climatic disruption; outdoor air pollution, such as sulphur dioxide and particulate matter; and congestion and traffic accidents from vehicle use. IMF(2014) discusses in great detail the myriad potential benefits from corrective energy taxes and offers extensive examples and recommendations on how to price energy efficiently.

For example, IMF (2014) reports that energy tax reforms can reduce worldwide deaths from outdoor, fossil fuel-related air pollution by 63% and reduce CO2 emissions by 23%.9 A fiscal system that “gets energy prices right” will bolster other energy-related SDGs, such as promoting renewable energy, correcting inefficient subsidies, promoting R&D, and inducing energy efficiency. Further, in developing countries corrective taxes can be progressive and provide revenue to help expand modern energy to the poorest households.

Several analytical challenges arise in estimating the global benefits and costs of internalizing the external costs of energy. First, the optimal corrective tax will vary significantly by region and sector depending on local air quality, traffic conditions, and existing energy mixes and policies, as IMF (2014) documents. Second, significant uncertainty underlies the “correct” monetization of the social cost of a ton of CO2 emissions (SCC), and the extent to which global benefits should motivate local policies is controversial. 10 Third, the outcomes of unilateral policies will be different than for policies that are coordinated internationally owing to the potential for emitting activities to shift towards relatively less regulated areas. Finally, the economic outcomes of pricing pollution depend importantly on what happens to the revenue raised. If corrective tax revenues are 9 IMF (2014), p. 7 10 Gayer and Viscusi (2014) discuss this issue in the U.S. context. 10 used to reduce other distortionary taxes rather than spent or distributed to households, the economic burden could be substantially lower.”

To look at the last point first – it is called a revenue neutral tax.  The tax is returned to consumers and so initially is not a net imposition.  It is I argue not a traditional Pigovian tax – intended to compensate the injured – but instead intended to cause a substitution of energy sources at some price point.  Ultimately if low carbon energy substitution occurred the revenue would dry up and a budget shortfall occur.  Consumers would be left with higher energy prices and no recompense.   There are existing taxes on fossil fuels and they illustrate the problem for revenues and compensation for higher costs.

‘Taxes on fossil fuels represent an important source of revenue for governments as they account for about 3% of government’s budgets in the United States, 5% in Japan, France and the United Kingdom and up to 10% in Germany, Spain and Italy. Among fossil fuel taxes, taxes on petroleum products account for about 50%- of which the major part is directly derived from motor fuel taxes. But these revenues may stagnate and even decline with the continuation of energy efficiency improvement and the switch from fossil fuels to renewables, which are presently subject to much lower -or none- direct tax rates. This trend potentially represents a huge hole in tax income from petroleum products. As a result, governments will probably have to adapt the tax system to this new environment, to maintain this crucial source of revenues.’ Leonardo Energy

It is for instance technically a piece of cake to build a 320kW, 250km/hr top speed, 0 to 100km in 4.2 seconds electric supercar with off the shelf parts.   Tesla has done a high end version.  Making it cost competitive and practical relies on improvement in battery technologies and multi-fuel range extenders that are in the commercialisation phase.  Widespread adoption – and it can be built in a number of configurations and even 3-D printed in micro-factories – would reduce gasoline tax revenues substantially and create a budget hole.  There is then no revenue to compensate for higher prices.  Further increasing taxes to encourage energy substitution amplifies the problem.  The real market solution is to respond to rising prices as oil become scarcer with cost competitive alternatives.  Standard economic theories of ‘economic substitution’ and ‘creative destruction’ apply.  This has the potential to eliminate some 13% of global greenhouse gas emissions.

Here’s the view on energy taxes – as commissioned by the US government – from the US National Academies Committee on Health, Environmental, and Other External Costs and Benefits of Energy Production and Consumption.

“Modern civilization is heavily dependent on energy from sources such as coal, petroleum, and natural gas. Yet, despite energy’s many benefits, most of which are reflected in energy market prices, the production, distribution, and use of energy also cause negative effects. Beneficial or negative effects that are not reflected in energy market prices are termed “external effects” by economists. In the absence of government intervention, external effects associated with energy production and use are generally not taken into account in decision making.

When prices do not adequately reflect them, the monetary value assigned to benefits or adverse effects (referred to as damages) are “hidden” in the sense that government and other decision makers, such as electric utility managers, may not recognize the full costs of their actions. When market failures like this occur, there may be a case for government interventions in the form of regulations, taxes, fees, tradable permits, or other instruments that will motivate such recognition.”

So we know what the benefits of energy are – roughly equivalent to actual expenditures.  The potential for additional benefits in the developing world seem quite large.  Indeed the benefits of electricity availability seems likely to exceed the costs by a large margin – regardless of the technology used.

energy expenditures

SourceLeonardo Energy

We know what the sources of energy are.  For the most part coal, oil, gas, nuclear and hydro.  Here we run into the problem of legacy generation.  Existing oil, gas and coal plants will continue to form the base of generating capacity for decades into the future.

energy sources

Source:  IEA Workshop on High Efficiency, Low Emissions Coal Technology Roadmap Date: 29 November 2011

We can gain some insight into the costs of high penetration of renewables – using existing technology – from the US National Renewable Energy Laboratory’s (NREL) 2015 Energy Futures report.  The capacity mix includes wind, photovoltaic, concentrated solar, hydro, geothermal and biomass.  Although relatively inexpensive for electricity generation – there are practical limits to deployment of hydro, geothermal and biomass generation.

NREL mix

Source: NREL

Costs were modelled for the 80% scenario.  They are broadly similar to other recent projections.

retail energy costs

Source: NREL

The current average supply cost in the US is $12.50/MWh.  Retail prices have increased substantially over the past decade.  The cost of the 80% penetration scenario in real 2010 dollars would double or triple current retail prices.  The seems a profound impact on both cost of living and manufacturing productivity – even before consideration of carbon leakage to lower cost nations.  It may be that international coordination of carbon pricing – if it is to include developing nations – may be not just unlikely but unethical.

Here we can see an inconsistency in the Copenhagen Consensus analysis.  Doubling the share of “renewable energy in the global energy mix would return less than a dollar for every dollar spent. Until the issues of intermittency and storage are resolved through RD&D, this target is excessively costly.”  Copenhagen Consensus

Looking at disaggregated externalities – rather than lumping them together – reveals alternative means of addressing these concerns.  The externalities of fossil fuels are warming from carbon dioxide and health impacts of nitrous oxide, sulphur dioxide and black carbon particulate emissions.  The question to be asked is how best to address these and what the costs are.

From an analysis from Richard Tol (shown below) it appears that the benefits of ‘global warming’ exceed costs for most of this century – although I use this example advisably.  This calculation – and its ilk – is based on an assumption that appears to be scientifically unsupported.  That climate has been predicted in a credible way.

“In sum, a strategy must recognise what is possible. In climate research and modelling, we should recognise that we are dealing with a coupled non-linear chaotic system, and therefore that the long-term prediction of future climate states is not possible.” IPCC 002

“Large, abrupt climate changes have repeatedly affected much or all of the earth, locally reaching as much as 10°C change in 10 years. Available evidence suggests that abrupt climate changes are not only possible but likely in the future, potentially with large impacts on ecosystems and societies.

This report is an attempt to describe what is known about abrupt climate changes and their impacts, based on paleoclimate proxies, historical observations, and modeling. The report does not focus on large, abrupt causes—nuclear wars or giant meteorite impacts—but rather on the surprising new findings that abrupt climate change can occur when gradual causes push the earth system across a threshold. Just as the slowly increasing pressure of a finger eventually flips a switch and turns on a light, the slow effects of drifting continents or wobbling orbits or changing atmospheric composition may “switch” the climate to a new state. And, just as a moving hand is more likely than a stationary one to encounter and flip a switch, faster earth-system changes—whether natural or human-caused—are likely to increase the probability of encountering a threshold that triggers a still faster climate shift.” US National Academy of Sciences, 2002, Abrupt climate change: inevitable surprises.

tol

­

Source:  Copenhagen Consensus

The theory of abrupt climate change suggests that we are adding to instability of the climate system with emissions of carbon dioxide, methane, nitrous oxide, CFC’s and aerosols.  These are all factors that are amplified by population growth, development and land use changes.  So while actual dollar costs and benefits proposed should be regarded with scepticism – we can act to reduce the risks of anthropogenic changes to the climate system.

The diversity of sources of greenhouse gases (shown below) says that a diversity of technologies is required to turn things around.  The situation is further obscured – to make a pun – by the emissions of black carbon particulates.  Accounting for all climate effects, black carbon is believed to have a warming effect of about 1.1 Watts per square meter – some two thirds of the effect of burning fossil fuels.  Significantly higher than emissions from electricity generation plus transport fuels.  What is needed are practical responses to the range of greenhouse gas and their diverse sources – as well as to emissions of black carbon particulates.

facts-figures-international-sector

Source:  Center for Climate and Energy Solutions

“Total cumulative emissions from 1870 to 2013 were 390±20 GtC from fossil fuels and cement, and 145± 50 from land use change. The total of 535±55GtC was partitioned among the atmosphere (225±5 GtC), ocean (150±20 GtC), and the land (155±60 GtC).”

The best response to anthropogenic carbon already in the atmosphere is to take it from the air and sequester it in degraded soils – of which we have globally a significant supply.  The technology – billions of years old – involves sunlight and chlorophyll.  It would conserve soil and water, restore environments and biodiversity, enhance food security and increase global wealth and societal resilience.  The historic carbon loss from 5 billion hectares of degraded agricultural soils is in the order of 175 GtC – a considerable proportion of the 225 GtC anthropogenic carbon remaining in the atmosphere.  The figure below shows the relative declines in soil carbon following conversion to farming.  Agricultural lands are some 5 billion hectares in extent – and to this can be added opportunities to conserve and restore forests.

  • Arable land (1.4 billion hectares) – land under annual crops such as cereals and vegetables.
  • Permanent Crops (0.15 billion hectares) – orchards, plantations and vineyards.
  • Permanent Pastures (3.4 billion hectares) – areas for natural grasses and grazing of livestock – rangelands and pastures.

Together – and using the most modern methods of science and soils and grazing management – it is an historic opportunity not just to sequester carbon but to build resilient and secure communities and conserve biodiversity.

soil carbon

Source: Lal and Follett, 2008

Economic growth provides resources for solving problems – restoring organic carbon in agricultural soils, conserving and restoring ecosystems, better sanitation and safer water, better health and education, updating the diesel fleet and other productive assets to emit less black carbon, developing better and cheaper ways of producing electricity, replacing cooking fires with better ways of preparing food, etc.  We can sequester carbon in agricultural soils and in conserved and restored ecosystems, reduce nitrous oxide and harmful tropospheric ozone and save money on fertilisers, burn methane to produce low cost electricity, reduce the strong climate effects of black carbon and the millions of premature deaths that result from cooking over open fires at the same time.  Population, development, technical innovation, multiple gases and aerosols across sectors, land use change and the environment are the broader context – and here we need models of economic freedom and practical bottom up management of global environments.

It is apparent as well that the externalities of black carbon can’t be addressed solely by taxes on fossil fuels.  The sources of black carbon – and its effects on climate – are even more diverse than greenhouse gases.  But we may focus on stationary and mobile plant, fires in forests and savannas and domestic cooking fires.

black carbon

Source:  Bond, T. C. et al, 2013

The solutions to black carbon emissions are fairly obvious and include providing $20B for improved cooking stoves for the 3.5 billion people cooking on open wood and dung fires.

For diesel engines and coal fired electricity generation the solutions are technological and are essentially business as usual.  There have been great advances in recent decades in reducing carbon dioxide, nitrous oxides and particulate emissions.  We pay for these in fleet and in power costs.  Improvements in diesel engine emissions are shown graphically below.

diesel engine emissions

Source:  Fiebig et al 2014

Technological advances for coal fired power station have reduced nitrous oxides, sulphur dioxide and particulate emissions.

best technology

Source:  IEA Workshop on High Efficiency, Low Emissions Coal Technology Roadmap Date: 29 November 2011

Trends in pollutants have been on the way down in recent decades in the west.

NOX

Source:  IEA Workshop on High Efficiency, Low Emissions Coal Technology Roadmap Date: 29 November 2011

SO2

Source:  IEA Workshop on High Efficiency, Low Emissions Coal Technology Roadmap Date: 29 November 2011

We are well on the way to eliminating the health impacts of coal and oil use.  Not so much with other non-industrial sources of black carbon and nitrous oxide.  These other sources can be addressed but not by taxing fossil fuels.  Externalities of traffic accidents and congestion will always be with us regardless of the energy source.  There is an historic opportunity to reduce the concentration of greenhouse gases in the atmosphere by improving the management of agricultural lands and in conserving and restoring ecosystems.  The way to do this is with smart development goals.  This focusses existing aid resources on high value outcomes – and emphasises open trade.  Taxing fossil fuels to encourage energy substitution can only have a limited effectiveness – and can impose costs that considerably exceed benefits.  Alternatively – focusing on restoring lands has a huge potential to sequester carbon.  Taxing at a relatively low rate to fund development of cost competitive energy technology is a different proposition.

“The key to solving for both climate and poverty is helping nations build innovative energy systems that can deliver cheap, clean, and reliable power.”  Our High-Energy Planet

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