1. Carbon Taxes 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. 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. No longer seriously contested by anybody other than vested interests, their hired “experts” and indebted politicians. See An Inconvenient Truth and IPCC Fourth Assessment. See An Inconvenient Truth and IPCC Fourth Assessment.

3. Warmer Winters: 4.3ºF, 1971-2002 38 39 40 41 42 43 293031323334353637 Latitude ( o N) o Boston New York Philadelphia Washington, DC Winter (Dec-Jan-Feb) Mean Temp (ºF) Cameron Wake, UNH Boston is the new Philly; NYC is the new D.C. (winter temps.)

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

5. The Problem: Unsustainable CO 2 Emissions Worldwide World must reduce emissions ~80% by 2050, with big cuts starting now. World must reduce emissions ~80% by 2050, with big cuts starting now. Americans are emitting many times our share of CO 2 (next slide). Americans are emitting many times our share of CO 2 (next slide). Americans must reduce by >80%. Americans must reduce by >80%.

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

7. What about China? “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 U.S. Chin a Lines X in 2009 U.S. Chin a Lines X in 2009 U.S. China X

8. Chemistry → Responsibility 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. U.S. Chin a Lines X in 2009 U.S. Chin a Lines X in 2009 U.S. China X

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.” “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 CO 2 Emissions High taxes on carbon emissions from coal, oil and natural gas will : High taxes on carbon emissions from coal, oil and natural gas will : Reduce fossil fuel use and CO 2 emissions Reduce fossil fuel use and CO 2 emissions Substitution of clean fuels and technology Substitution of clean fuels and technology More efficient use of energy More efficient use of energy Provide a revenue stream to enable Provide a revenue stream to enable Progressive tax-shifting, or Progressive tax-shifting, or Rebate to all U.S. residents Rebate to all U.S. residents

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

12. Rely on “Market Forces”? Here Come Synfuels Rely on “Market Forces”? Here Come Synfuels Only a carbon tax can subject CO 2 -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 Selecting the next best energy technology by fiat has largely benefited lobbyists + special interests Oil shale, nuclear power, synfuels, ethanol, etc. Oil shale, nuclear power, synfuels, ethanol, etc. Many new sources also emit CO 2 Many new sources also emit CO 2 Renewable Portfolio Standards: helpful – but not enough Renewable Portfolio Standards: helpful – but not enough

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

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

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

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

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

21. A “Starter” Carbon Tax-Shift $37 / ton of carbon = $37 / ton of carbon = 10¢ / gallon of gasoline, jet fuel, etc. = 10¢ / gallon of gasoline, jet fuel, etc. = 0.72 ¢ / kWh (U.S. retail average) 0.72 ¢ / kWh (U.S. retail average) Reduces U.S. CO 2 emissions ~ 4% Reduces U.S. CO 2 emissions ~ 4% Repeat 10 X (while standards and incentives also cut emissions) 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%. 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. 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. 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. Finding: Demand for gasoline (and other fuels) is at least somewhat price-sensitive.

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

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

25. USA After “Starter Tax x 10” CO 2 emissions down by a third CO 2 emissions down by a third Oil use down by ~5 million barrels/day Oil use down by ~5 million barrels/day Energy Energy Coal-fired generation reduced Coal-fired generation reduced Wind and other renewable generation increased Wind and other renewable generation increased Incandescents / halogens out, CFL’s + LED’s in Incandescents / halogens out, CFL’s + LED’s in Transportation and Land-Use Transportation and Land-Use SUVs out, sedans in SUVs out, sedans in Costlier air and highway travel creates market pull for 300-mph intercity rail Costlier air and highway travel creates market pull for 300-mph intercity rail Urban trips by bicycle up 10x, to 10% Urban trips by bicycle up 10x, to 10% Urban revitalization 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) 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) 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 Subsidies By Taxpayers: Relatively Small By Climate: Enormous

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

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

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

32. Some Support in Opinion Polls Feb. 2006 New York Times poll Feb. 2006 New York Times poll 55% would support increased tax on gasoline if it reduced dependence on foreign oil. 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. 59% would support if the increased tax would curb energy consumption and global warming. Oct. 2006 M.I.T. survey Oct. 2006 M.I.T. survey Over three years, 50% increase in respondents’ willingness to pay more for electricity to reduce global warming. 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 Cap-and-trade is alternative vehicle for “putting a price” on carbon Proposed by US CAP – coalition of large environmental groups and large corporations Proposed by US CAP – coalition of large environmental groups and large corporations Emissions are capped at a level determined through the political process Emissions are capped at a level determined through the political process Allowances/permits to emit CO 2 up to the cap are distributed or auctioned Allowances/permits to emit CO 2 up to the cap are distributed or auctioned Market participants can buy or sell as necessary Market participants can buy or sell as necessary

34. Cap v. Tax: Predictable Prices Carbon taxes provide predictable prices necessary to encourage investment in Carbon taxes provide predictable prices necessary to encourage investment in less carbon-intensive technology less carbon-intensive technology carbon-reducing energy efficiency carbon-reducing energy efficiency carbon-replacing renewable energy carbon-replacing renewable energy Cap-and-trade aggravates price volatility that discourages beneficial investments 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 “Safety-valve” would authorize auctioning additional allowances if allowance prices exceed predetermined level Emissions cap could be politically fragile without public support Emissions cap could be politically fragile without public support No magic emissions level (except as low as possible) No magic emissions level (except as low as possible)

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

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

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

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

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

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