Pricing carbon emissions to fight climate change Jana Gastellum Program Director – Climate Oregon Environmental Council John Perona Professor, PSU and OHSU Citizen lobbyist, CCL

Tonight’s seminar Carbon pricing programs 101 (JG) Emissions trading systems (JG) OR state policies and governance (JG) CCL’s fee & dividend pricing proposal (JP) Combining federal and state policy (JP)

Last seminar (Wednesday May 23) Climate and environmental justice; PJET Guest speaker: Sam Baraso, Sr. policy analyst, Multnomah Cty. office of sustainability

Economic cause of climate change Carbon emissions are embedded in our lifestyle Actions producing emissions now provide free benefits Costs of emissions are (1) globally distributed and (2) not evident to us when we act Even when made aware, most people/firms won’t voluntarily pay these costs A mandatory price on carbon emissions internalizes the costs and provides incentive for equivalent actions with lower emissions

C Emissions = (1) Population x (2) GDP/capita x (3) C emissions/GDP Kaya identity: If any of the three terms drops to zero (or near-zero), then the product of the three terms also approaches zero! GDP/capita can’t get near zero without economic collapse Lower C emissions/GDP: need incentive (and technology)

CCL’s Carbon Fee and Dividend Policy An important first step 1 Place a fee on fossil fuels at the source (mine, well or port). 2 Return all of the revenue to households equally. Our solution is called Carbon Fee and Dividend. We believe Carbon Fee and Dividend makes fossil fuels accountable for their costs in the clearest, fairest and most transparent way. It’s what economists and climate scientists alike have argued is the best first step we can take. It’s has three parts; we call it the three-legged stool. A fee’s placed on fossil fuels at the source (well, mine, port of entry). This fee starts low and increases steadily each year. All of the money collected is held in a trust fund and returned to American households monthly, on an equal basis. Under this plan about 2/3 of all households would break even or receive more in their dividend checks than they would pay in higher prices due to the fee, thereby protecting the poor and middle class from higher prices. The final leg of the stool is a border tariff adjustment on goods imported from or exported to countries without an equivalent price on carbon. This adjustment would both discourage businesses from relocating to where they can emit more CO2 and encourage other nations to adopt an equivalent price on carbon. This approach rewards producers, consumers, and other nations if they emit fewer greenhouse gasses, which, if we remember from earlier in the presentation, is the goal. A border adjustment on goods imported from or exported to countries without an equivalent price on carbon. 3

CCL’s legislative proposal $15/ton CO2 equivalent fee in first year Fee increases by $10/ton every year Fee is applied to all GHG’s generated by production and burning of fossil fuels AND to manufacturers of HFCs/SF6 etc. Fee increases continue until emissions are reduced to 10% of 1990 level Should reduce emissions enough to stay below 2°C temperature rise

CCL’s proposal: A revenue-neutral fee & dividend program Revenue neutral: No change in the amount of revenue coming into the government [would also apply to offsetting tax cuts] Tax: generates revenue for the government Fee: recovers cost for providing a service (fuel), from the firm that benefits (eg Exxon) Pigouvian tax: achieve economically most efficient outcome by internalizing cost [Price/ton CO2 matches incremental damage from the emission of that additional ton]

Market response: higher prices for oil, coal, gas and for climate-impacting refrigerants

Petroleum-based products are not taxed Rebate is provided for the fraction of fossil fuels (mainly oil) that is incorporated into consumer products and not burned. Fossil fuels used in the production of these goods are taxed

Collecting the fee: at the source of the fuel -sources: mine, well, or point of entry into US -fee is collected at the first point of sale [example: electric utility purchases coal from a mining company; utility pays fee to the Treasury Dept] Some practical considerations: -assess the fee at the petroleum refinery, not the wellhead -assess the fee at ~500 natural gas processing plants -assess the fee on the 500-800 coal producing firms Fee is proportional to the carbon content of the fossil fuel (less for natural gas, more for coal) Other existing excise taxes provide models

Collecting the fee: why upstream? -sources: mine, well, or point of entry into US -fee is collected at the first point of sale Simplicity – collection is from a relatively small number of firms Possibility of carbon price for fossil fuel exports: US Constitution Export Clause – prohibits domestic taxes from being applied to exported goods BUT “severance fees” are an exception [Severance fees can only be applied upstream]

What CCL’s policy does not address -Methane leakage from pipeline transport -CO2 or other GHG emissions from non-fossil fuel sources (eg, cement manufacturing) -Downstream generation of high CO2-equivalent GHG’s after the initial fee is paid: Example: fertilizer manufacturing from natural gas eventually generates a large amount of N2O. Fee & Dividend – the best first step. NOT the only thing we need to do…

CO2 emissions from cement manufacturing

What CCL’s policy does not address -Methane leakage from pipeline transport -CO2 or other GHG emissions from non-fossil fuel sources (eg, cement manufacturing) -Downstream generation of high CO2-equivalent GHG’s after the initial fee is paid: Example: fertilizer manufacturing from natural gas eventually generates a large amount of N2O. Fee & Dividend – the best first step. NOT the only thing we need to do…

Carbon pollution from fertilizer production N2O emissions from NH3 Ammonia (fertilizer) Where does the energy-rich H2 come from? CH4 + 2 H2O  4 H2 + CO2 (hydrogen gas from methane reforming) CH4 Drilling  Processing  Sale to downstream users CCL’s fee is imposed at the processing step

Carbon Fee and Dividend An important first step 1 Place a fee on fossil fuels at the source (mine, well or port). 2 Return all revenue (minus administrative costs) to households. Our solution is called Carbon Fee and Dividend. We believe Carbon Fee and Dividend makes fossil fuels accountable for their costs in the clearest, fairest and most transparent way. It’s what economists and climate scientists alike have argued is the best first step we can take. It’s has three parts; we call it the three-legged stool. A fee’s placed on fossil fuels at the source (well, mine, port of entry). This fee starts low and increases steadily each year. All of the money collected is held in a trust fund and returned to American households monthly, on an equal basis. Under this plan about 2/3 of all households would break even or receive more in their dividend checks than they would pay in higher prices due to the fee, thereby protecting the poor and middle class from higher prices. The final leg of the stool is a border tariff adjustment on goods imported from or exported to countries without an equivalent price on carbon. This adjustment would both discourage businesses from relocating to where they can emit more CO2 and encourage other nations to adopt an equivalent price on carbon. This approach rewards producers, consumers, and other nations if they emit fewer greenhouse gasses, which, if we remember from earlier in the presentation, is the goal. A border adjustment on goods imported from or exported to countries without an equivalent price on carbon. 3

Household Dividend HOUSEHOLDS IMPACT STUDY – 1 year (K. UMMEL, 2016) $644/year/household* *After tax average over all US households [Average net benefit after costs] All households have higher costs Costs are higher for higher-income families because they consume more carbon-intensive products “Static” model of CCL’s policy

CCL’s dividend return benefits low-income HHs

Breaking down costs and dividend return $$$ Higher costs Higher income Location (zip code) House vs apartment More cars Home heating source Greater expenses for: -home heating -electricity -gasoline $$$ Higher dividend after taxes Lower income More adults More children (up to 2) CCL’s Carbon Calculator – estimate dividend and costs https://citizensclimatelobby.org/calculator/ $$$ Higher costs Higher income Location (zip code) House vs apartment More cars Home heating source Greater expenses for: -home heating -electricity -gasoline $$$ Higher costs Higher income Location (zip code) House vs apartment More cars Home heating source Greater expenses for: -home heating -electricity -gasoline

How CCL’s dividend can reach all low-income Americans -provide a refundable tax credit for workers, or use existing tax information plus an additional form as the basis for monthly dividend checks -provide a supplement to existing federal payments for retirees, the disabled, and veterans -use the electronic benefit transfer (EBT) payment system that provides food stamp benefits

CCL’s nonpartisan approach Pleases conservatives revenue neutral plan does not grow government rewards business innovation Pleases progressives dividend return to households greater benefits to lower income households

Carbon Fee and Dividend The best first step 1 Place a fee on fossil fuels at the source (mine, well or port). 2 Return all of the revenue to households equally. Our solution is called Carbon Fee and Dividend. We believe Carbon Fee and Dividend makes fossil fuels accountable for their costs in the clearest, fairest and most transparent way. It’s what economists and climate scientists alike have argued is the best first step we can take. It’s has three parts; we call it the three-legged stool. A fee’s placed on fossil fuels at the source (well, mine, port of entry). This fee starts low and increases steadily each year. All of the money collected is held in a trust fund and returned to American households monthly, on an equal basis. Under this plan about 2/3 of all households would break even or receive more in their dividend checks than they would pay in higher prices due to the fee, thereby protecting the poor and middle class from higher prices. The final leg of the stool is a border tariff adjustment on goods imported from or exported to countries without an equivalent price on carbon. This adjustment would both discourage businesses from relocating to where they can emit more CO2 and encourage other nations to adopt an equivalent price on carbon. This approach rewards producers, consumers, and other nations if they emit fewer greenhouse gasses, which, if we remember from earlier in the presentation, is the goal. A border adjustment on goods imported from or exported to countries without an equivalent price on carbon. 3

Border adjustments Imports – Impose a tariff at the border, on all imports from countries that do not price carbon Exports – Provide a rebate to US manufacturers so they can sell abroad at competitive prices in countries with no carbon fee This may cause an international domino effect… (Ted Halstead, Climate Leadership Council, TED talk)

What are the broader benefits of Carbon Fee & Dividend (CF&D)?

National/regional economic modeling (REMI) Initial: $10/Mt CO2 Increase: $10/Mt CO2/yr 100% dividend return Border adjustment Emissions Economy (jobs; GDP) In 2014, Regional Economic Models, Inc. (REMI) released a national and regional study of Carbon Fee and Dividend. The report detailed the projected impacts of a steadily rising fee and dividend (versus no fee and dividend) on: Emissions Jobs and GDP Health Household income The report concluded that there is no economic argument against Carbon Fee and Dividend. It reduces emissions quickly, grows GDP, increases jobs, and saves lives. Health Incomes

Carbon emissions reductions (REMI) 33% After 10 years 52% After 20 years

Jobs created (REMI study) Under Carbon Fee and 100% Dividend Return After 10 years 2.1M New Jobs After 20 years 2.8M New Jobs

Saved premature deaths (REMI study) Under Carbon Fee and Dividend 90,000 lives Over 10 yr 230,000 lives Over 20 yr We know that when you burn fossil fuels you also release other toxic substances that contribute to more air pollution, which shortens peoples’ lives. So, reducing emissions saves lives by preventing premature deaths associated with asthma and respiratory disease. 13,000 premature deaths are prevented per year after ten years of carbon fee and dividend. 227,000 premature deaths prevented in 20 years.

CF&D together with state cap & trade? Possible approaches: I. Preemption II. Stacking III. Integration

CCL criteria to support state cap & trade Designed to reduce CO2 emissions beyond existing approaches Protect low income households from price increases Be politically viable for the state Harmonize well with CF&D at the national level