Not a Lot of People Know That on Carbon Taxes

I recently published a post on my concerns with carbon pricing schemes.  Subsequently Paul Homewood at the Not a Lot of People Know That blog described the flaws in an article supporting yet another carbon tax plan. This post describes Mr. Homewood’s description of the flaws because he brings up additional issues that I did not consider.  I have also included my comment on the original post and a reply to my comment.

AEP’s Carbon Tax Fantasy

Mr. Homewood commented on an opinion piece in the British Telegraph newspaper by Ambrose Evans-Pritchard supporting HR 763, the Energy Innovation and Carbon Dividend Act.  According to the article “this initiative by the Citizens Climate Lobby has the support of Democrats and Republicans in Congress. It has been endorsed by Alan Greenspan, the late Paul Volcker, and Nobel laureate Myron Scholes in the free market camp, and Janet Yellen, Amartya Sen, and Larry Summers on the interventionist side.”

Mr. Homewood described seven flaws in the proposal.  My comments in italics.

1. 1. The only logical reason for a carbon tax is to reduce emissions. Such a tax might help to reduce energy consumption, but only at punitive levels, because energy demand is so inelastic. Therefore, the real intention is to make fossil fuels so expensive that renewables can eventually become competitive, along with CCS, hydrogen heating etc. But when that happens, there are less emissions, and consequently less carbon tax revenue to redistribute. Meanwhile energy consumers will still have to face the extra cost of expensive renewables.

• • • The point that energy demand is inelastic is important. Supporters of carbon taxes either underestimate energy demand change assuming, that people will use less or count on magical solutions that will cost less.  If they are wrong then society gets stuck with the higher costs.  I noted the problem with decreasing revenues over time in my post but did not pick up on the fact that consumers will be stuck with higher costs.

1. 2. It is well established that once governments get their hands on a new source of tax revenue, they don’t give it back. And that’s even before counting the cost of collecting and administering it.

• • • I agree completely and should note that New York’s record with the Regional Greenhouse Gas Initiative revenues confirms this problem. Twice since the inception of that program New York has raided the revenues for the general fund.  Governor Cuomo has been circumspect – he simply diverts funds from RGGI to existing programs.

1. 3. AEP claims in this same article that the cost of renewables is already plunging. In that case why do wind and solar power still need subsidies, guarantees, and now apparently punitive carbon taxes to be able to compete?

• • • Clearly this the case everywhere.

1. 4. His case for carbon taxes assumes that the world can run on predominantly unreliable renewable energy. So far, coal power has been squeezed out in Europe and the US through a combination of carbon pricing, air quality rules etc. But it has been largely replaced by extra gas fired generation. There is no evidence that gas and oil can in turn be replaced by wind and solar, and certainly not in the short time scales he has in mind.

• • • • The primary reason that coal is no longer used in New York is that natural gas is cheaper. My biggest concern with the Climate Leadership and Community Protection Act mandate to eliminate fossil-fired generation from the electric sector by 2040 is the lack of a plan to do it.

1. 5. In the UK at least, the power sector only accounts for about a tenth of emissions. Most arise from heating, transport and industry. A carbon tax would have little effect on, for instance, domestic gas usage or car travel. (We do after all already have a punitive carbon tax on cars, called fuel duty – it has not encouraged us to buy EVs). AEP’s colleague Jeremy Warner wrote about carbon taxes a few weeks ago. He reckoned that a $75 carbon tax would raise natural gas prices by 70%. Does he really believe this is acceptable to millions of people up and down the country who are already struggling to make ends meet?  As the Committee on Climate Change accept, to switch domestic heating from gas to heat pumps or hydrogen will cost hundreds of billions, money which neither householders or government has.

• • • These concerns should be red flags for the New York Independent System Operator’s proposal to have a carbon price just on the New York electricity market.

1. 6. If a punitive level of carbon tax really was introduced in Europe, the consequences would be earth shattering. The Gilets Jaune would look like a tea party in comparison with the riots such a policy would cause. As the squeeze took effect, people’s cost of living would be badly affected. At the same time, the economy would quickly tank, with companies contracting, shutting down or simply offshoring.

AEP talks about a “border carbon tax”, but this would make matters even worse. For a start it would put up prices for consumers even more. Secondly it would set off a highly damaging trade war, as China and the rest of Asia would not sit back and take it. There would be only one loser in such a war, and it would not be Asia.

In any event, an EU carbon tax and border tax would never get off the ground, as the East bloc would reject it out of hand. Why, after all, should their economies, which rely heavily on coal, be hamstrung to suit German and French Greens?

• • • These are the leakage issues that I described in my original post. I agree that implementation of a carbon tax that actually drove behavior changes and investment decisions would be so expensive that protests and political changes would be inevitable.

1. 7. Of course, the bottom line with all of this is that a carbon tax would need to be truly global to have any real effect. Would anybody trust China, for instance, to institute a proper system, rather than some fake one which merely shuffled bits of paper around. Many other developing countries would be in the same position.  They won’t stop using fossil fuels, because they know that they work and renewables don’t. No amount of creative accounting will change that.  Maybe he thinks the UN could ultimately administer a carbon tax, collecting and redistributing the revenue itself. If so, heaven help us all!

• • • I agree completely with this bottom line.

 My Comment

I commented (December 27, 2019 9:31 pm) with the following:

I agree that all carbon pricing schemes are flawed. I think that there are a number of practical reasons that carbon pricing will not work as theorized. Because a global program is impractical, leakage is always going to be a problem. The carbon price has to be set such that revenues over time increase significantly and either the funding to make reductions dries up or as you point out the rebates dry up. The economists who support this theory seem to be blissfully unaware of the reality of the energy market or how inelastic demand is. Based on observed emission reduction programs in New York I think that indirect market signals are going to lead to less cost-effective reductions in the time frame necessary for the aggressive reduction rules. Finally, no supporters seem to understand the very real problems of implementation logistics. More here https://wp.me/p8hgeb-gw.

Phoenix44 replied to my comment (December 28, 2019 9:20 am):

None of that is true. The simple point about a carbon tax is that it encourages markets to come up with solutions. Unless you believe there are no solutions, it is the best way of solving the problem. We can continue to argue on here that there is no problem, but nobody who matters is listening.

Refusing to then support the least damaging solution is I am sorry to say, stupid.

My reply comment to Phoenix44 (December 28, 2019 1:57 pm):

With all due respect I think you miss the point of our critiques.  Even if you believe that a carbon tax is the best solution, that does not mean that our criticisms are incorrect.  It just means that this theoretical solution is not perfect.  I believe that it can be claimed to be the best solution only if you can implement this across the globe and across all the energy sectors.  If that cannot be done, then to claim that it is the least damaging solution because it is the best theory is flawed.  At the link above I posted on this problem in New York.  Advocates claim this is the best theory so it should be least damaging when we apply it to just the electric sector, in just New York State.  I don’t think it is going to work.

So, what would I do to address your problem?  I believe that the only way to successfully de-carbonize is to make the alternatives cheaper with no subsidies or externalities considered.  One way to try to do that would be to have a small carbon tax on those that feel we have to do something and invest all that money in research and development for cheaper and safer alternatives – how about small modular thorium reactors or fusion?   If you want to electrify transportation then you need a cheap, environmentally benign battery too.  Unfortunately, there are those opposed to nuclear in any form and even oppose getting cheap, abundant electric power to those who don’t have it.  Ultimately that is the stupid position.

Conclusion

Despite all the theoretical advantages  of carbon pricing I believe that any carbon pricing scheme that gets implemented will suffer from the practical constraints that Mr. Homewood and I have described.  In New York, I believe direct funding of emission reduction efforts will be more cost-effective.  As noted in my reply comment I think that the only way to successfully de-carbonize is to make the alternatives cheaper with no subsidies or externalities considered.  If the real goal is to de-carbonize the world, then it would be far better for New York to mobilize its intellectual capital for research and development for cheaper alternatives than to try to use intermittent and diffuse renewable energy to make emissions reductions now.  Carbon pricing will not provide incentives for the breakthrough technology needed to solve the global problem.