Carbon tax fine print

If the Paris agreement target of keeping global warming to well below 2°C is to be met, it is generally agreed that global emissions of carbon dioxide (CO2) from fossil fuels and industry need to peak and then decline very soon–meaning before the end of next year, or very shortly after.

A recent study published in Nature Climate Change sheds light on how 18 countries have managed to achieve this feat: effectively reducing their emissions of CO2 over the period 2005 to 2015. The figure below shows emissions of CO2 from fossil fuels for the 18 countries in the ‘peak and decline’ group.

Change in CO2 emissions from fossil fuel combustion for the 18 countries in the peak and decline group [1]

In spite of this positive performance by 18 countries representing almost 30 percent of total CO2 emissions, global emissions of energy-related CO2 rose in 2017– after a sluggish period from 2014 to 2016 when there was hope that emissions may have flatlined. That hasn’t happened, and estimates for 2018 indicate that CO2 emissions are continuing to rise.

It’s instructive to look more closely at how this group of ‘peak and decline’ countries have managed to reduce their CO2 emissions over the decade through to 2015. Are there lessons to be learned?

The analysis shows that the two principal factors responsible for reducing CO2 emissions are the displacement of fossil fuels by renewable energy, and a decrease in total energy consumption–primarily due to the increasing efficiency with which energy is used. In some cases, but not all, this reduced energy consumption was found to be partially due to slower economic growth over the period. But the findings clearly show that policies favouring renewable energy are leading to emission reductions in these 18 countries (but not elsewhere), and that policies promoting energy efficiency are supporting lower energy use in this group, as well as in other countries.

These complementary policies are the principal drivers of declining CO2 emissions in the 18 peak-and-decline countries studied.

What price carbon?

Has setting a price on carbon emissions–either through a tax or a cap-and-trade scheme played a significant role in achieving the emission reduction trajectories demonstrated by the 18 countries in the ‘peak and decline’ group?

It doesn’t look like it.

For example, at least 12 countries that have set a price on carbon are not in the 18-country group, including Switzerland, Liechtenstein, Norway, Iceland and Norway–which each have carbon prices above $25 per tonne of CO2 equivalent [2]. And the obverse is also true: several countries in the peak-and decline group have no record of having imposed a national carbon tax. One of these countries is the USA.

In America, the largest single contributor to declining emissions came from the switch from coal to natural gas driven by the availability of shale gas, although energy efficiency improvements were almost as important. In the US, both the eastern RGGI states and California have carbon pricing mechanisms operating, but together these states represent only about a quarter of US gross domestic product. The inference is that carbon pricing has not been the principal factor in driving down emissions on a national scale [3].

The shift from fossil fuels to renewable energy was the principal driver in Austria, Finland, and Sweden; while increased energy efficiency was the key mechanism in France, Ireland, the Netherlands, Spain, the United Kingdom, and the EU28.

While setting a price on carbon should promote a shift from fossil fuels to renewable energy, and induce changes that result in greater energy efficiency, it’s a slow process. Phasing out coal, setting renewable energy targets, legislating fuel economy standards for automobiles, incentivising electric vehicles, and introducing more stringent building codes are all much more powerful and effective initiatives.

Carbon pricing is just one tool in a toolbox full of other options. It’s time that economists (particularly in Canada) recognized that insisting that carbon pricing is the most ‘efficient’ solution to the climate change problem, and the only one that should be considered by governments, is simplistic and wrongheaded. All the evidence points to this conclusion.

Carbon dividends

Setting a price on carbon emissions is a touchy subject in many countries–including Canada and the US. Returning the revenues from the program to households is one way to make a price on carbon more popular and less politically divisive. This is the approach being implemented in Canada and under consideration in the US, where the proposal for a Green New Deal has sparked renewed interest in the idea.

Nobody likes taxes, so one way to make the concept more appealing is to repackage it as a ‘carbon dividend’ program–where households receive a regular rebate from the government. In Canada, the plan is to pay the rebate to eligible households at the beginning of each year.

But there are two serious problems with this approach. The first is that although hydrocarbon fuels and carbon intensive services will increase in price, consumers respond only slowly to these price signals. Relying solely on carbon pricing to reduce emissions is necessary but nowhere near sufficient. Secondly, returning most if not all of carbon revenues to households leaves no funds available to finance complementary measures that focus directly on reducing emissions in the power, transport, industry, and tertiary sectors.

The only sure way to drive down emissions of CO2 is to combine the two approaches. By all means introduce a revenue neutral scheme if this is the only way that the program is politically feasible. But combine this with strong interventions to facilitate the transition to renewable energy (already the least-cost alternative for power generation), and promote substantial improvements in energy efficiency.

Caveat emptor

When oil companies appear to be in favour of a carbon tax, it is essential to read the fine print. ExxonMobil and ConocoPhillips are among the oil companies backing a campaign to get their version of a carbon tax introduced in the US senate this year. The proposal has been developed by former Republican Secretaries of State James Baker and George Shultz [4].

The oil majors are having a hard time in the US. A slew of lawsuits related to climate change is costing them serious money, and carries the risk of substantial and escalating financial penalties if they ever lose a case. The Baker-Shultz carbon tax proposal is intended to reduce these risks by “streamlining regulations” and curbing state authority over climate policy. Exxon has reportedly stated that carbon regulations would be made “superfluous” by a carbon tax [5].

It’s not hard to see why the oil companies would love to see a carbon tax structured in this way. They would no longer be exposed to climate change lawsuits, and the EPA’s authority to regulate greenhouse gases would be rolled back. Moreover, the emission fees paid by the oil companies are simply passed onto the consumer. The net financial cost to the companies is close to zero.

The jewel in the crown for the fossil fuel industries would be the cessation of the EPA’s regulatory powers related to carbon dioxide and methane. Rolling back automobile fuel efficiency standards, weakening the regulations controlling mercury pollution from power plants, and blocking rules curbing emissions of methane from oil and gas production and refining operations would be a huge win for the oil and petrochemical companies–all in the guise of the fossil fuel companies doing their bit to reduce global warming and lessen the impacts of climate change.

The Baker-Shultz proposal should be categorically rejected.

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For more information :

[1] The 2005-2015 period is shown in purple, with the linear trend for each country. Emissions are from the International Energy Agency. The countries are generally presented in order of their approximate peak date. Conspicuous by its absence is Canada. See the Nature Climate Change article for more details //www.nature.com/articles/s41558-019-0419-7.pdf
[2] See: State and Trends of Carbon Pricing 2018. World Bank Group. Available at //hdl.handle.net/10986/29687/
[3] The USA has two major carbon tax schemes in operation: one in California the other in the north-eastern states which are members in the Regional Greenhouse Gas Initiative. Check out the page on this website for more details : //www.climatezone.org/pricing-carbon/the-rggi/
[4] See: Carbon tax plans: How they compare and why oil giants support one of them. Inside Climate News : //insideclimatenews.org/news/07032019/carbon-tax-proposals-compare-baker-shultz-exxon-conocophillips-ccl-congress
[5] The quotes are from the Inside Climate News article cited above


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Martin Bush

Martin Bush graduated from the University of Sheffield in the UK with a PhD in chemical engineering and fuel technology. Since then, he has travelled extensively. He has spent the last 30 years leading natural resources management, renewable energy, and climate change adaptation and mitigation projects in Africa and the Caribbean. He lives in Markham, Ontario, Canada. He can be contacted at climatezone.central@gmail.com.

One thought on “Carbon tax fine print

  • 03/09/2019 at 11:55 pm
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    Good comments!

    The advocates for carbon taxes argue that “the polluter should pay”, but who is actually paying? Carbon taxes can easily be passed on to the consumers so they do not present a problem for fossil fuels suppliers and their government partners (bearing in mind that governments heavily rely on revenues from the fossil fuel industry). Such taxes create the false illusion that renewable energy is inherently more expensive than fossil fuels, and the complex tax procedures instill fears that they are primarily “tax grabs”, so the real consequence is the buildup of public opposition to a switch to renewable energy that is so plainly evident.

    Carbon taxes are also subject to a major uncertainty in how they should be determined. As they are presently applied the GHG measurement procedures totally ignore the huge mass of methane that is being produced by shale fracking for both gas and oil. When a well is fracked it releases methane for half a century thereafter. That methane takes a long time to reach the surface but there is no reason to assume that at some point in the future it will not add to the atmospheric methane on a very large scale. Moreover, the government promises to virtually eliminate such GHG over the next three decades – after 2050 there should be no methane so it is absurd to use the 100 year averaging for methane. Clearly they should be using the 20 year GWP value (86) rather than the arbitrary value of 25 that is used for the NIR estimates.

    As the article argues we should put our faith in deploying renewable energy more effectively, an approach that would both rapidly displace fossil fuels and save billions of dollars in the process.

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