The future with a serious carbon tax: Pt. 2

It’s 2030 and instead of racing toward the brink of climate catastrophe the world has begun to back away. Annual global emissions of heat-trapping gasses have fallen two-thirds—faster than anybody had dared to hope as recently as a dozen years ago—with continued steep reductions ahead. Although carbon dioxide (CO2) concentrations in the atmosphere breached 450 parts per million (ppm) last year—the level believed to offer a 50 percent chance of holding global warming below 2 degrees Centigrade this century—the rate of increase has slowed dramatically. Atmospheric CO2 was increasing by 3 ppm per year as recently as 2020; today the annual increase has fallen to just 1 ppm, and attention and investment are shifting from the need for steep emissions reductions—a global goal that has largely been attained—to large-scale, low-cost biological methods for extracting carbon from the atmosphere.

Strikingly, all of this has coincided with improved economic performance and continued reductions in global poverty—despite the absence of a binding international treaty. Although the emissions fees imposed in the United States, China, Europe, and elsewhere raised energy prices, they also sparked a technology and job-creation boom. Revenue from carbon pricing has made possible dramatic rollbacks in other taxes—especially taxes on employment and investment—giving economies a further boost. As a result, growth rates have remained robust in the big emerging market economies, making possible rapid reductions in extreme poverty and the emergence of a global middle class. In the United States and Europe, growth has accelerated from the sluggish rates that prevailed until 2018, when revenue-neutral national emissions fees were put in place as part of a grand bargain that included cuts in middle-class income tax rates.

A fantasy? Of course. But perhaps more plausible than the slim hope that UN negotiations will lead to an ambitious, binding international agreement. Read on to discover an alternative path to averting climate catastrophe. (Everything in this future history up to the publication date is real.)

Quiet US–China talks open the way for convergence on carbon prices

Following the failure of parties at the 2009 climate summit in Copenhagen to reach a binding agreement, the annual United Nations Framework Convention on Climate Change (UNFCCC) negotiations continued with little outward progress. Gradually hopes came to focus on the 21st Conference of the Parties (“COP21” in the UN jargon of the time) to be held in Paris late in 2015.

Despite dire warnings from scientists that the window for action was rapidly closing, and heroic efforts by the French to push for a new accord, Paris ended inconclusively, leaving the advocates of climate action in despair. But during the process the dialogue between the United States and China laid the foundation for the two countries to begin to move broadly in parallel to put in place roughly similar hybrid systems that included carbon taxes, ETSs, border adjustment taxes, and increased expenditures on clean energy research, development, and deployment.

During the run-up to COP21, the United States and China, then the world’s two largest emitters, found that they had much in common. Even though China had been a strong supporter of the failed 1992 Kyoto Protocol, in ensuing years its economic juggernaut and the attendant surge in its own emissions had led it to share the US view that a binding international treaty was infeasible and an inappropriate interference in internal affairs. Rather both countries favored “nationally determined commitments” that are reinforced only by “norms and expectations,” not by treaty or sanctions.

In focusing on the Paris 2015 COP the media and climate advocacy community largely overlooked quiet-but-promising US–China bilateral discussions on climate change. A joint statement released in February 2014 said in part:

In light of the overwhelming scientific consensus on climate change and its worsening impacts, and the related issue of air pollution from burning fossil fuels, the United States and China recognize the urgent need for action to meet these twin challenges. Both sides reaffirm their commitment to contribute significantly to successful 2015 global efforts to meet this challenge. Accordingly, China and the United States will work together, within the vehicle of the U.S.-China Climate Change Working Group (CCWG) launched last year, to collaborate through enhanced policy dialogue, including the sharing of information regarding their respective post-2020 plans to limit greenhouse gas emissions. [10]

Although the joint statement did not mention it, the two huge but vastly different nations were also increasingly in agreement on their opposition to a binding international treaty with top-down assignment of emissions reductions targets. Todd Stern, the US special envoy for climate change, set forth US views on this question in an October 2013 speech at Chatham House in London: “Rather than negotiated targets and timetables, we support a structure of nationally determined mitigation commitments, which allow countries to ‘self-differentiate’ by determining the right kind and level of commitment, consistent with their own circumstances and capabilities.” He added, “We need to focus much more on the real power of creating norms and expectations as distinguished from rigid rules.” [11]

The US view was comparable to the position China and other developing countries had taken for some years in the UNFCCC negotiations, namely that developing countries should commit only to “nationally appropriate mitigation actions” (NAMAs, in climate talk jargon). Taken together with the agreement at the 2011 climate talks in Durban, South Africa, that the goal of the climate talks should be “a legally binding deal comprising all countries” [12] the two largest emitters were gradually moving onto a path where they would hold back from a binding international agreement on emissions reductions but instead move in parallel—and in consultation with one another through bilateral talks—to take aggressive actions to address the problem.

Of course, action in the United States was impossible before the 2016 elections, due to a highly polarized Congress and fierce opposition to climate action from conservative activists within the Republican Party. As we know now, the groundwork was quietly being laid for that to change.

 

In the United States, revenue neutrality was key

The most important change—and arguably the least expected—was the rapid rise in the United States of a broad coalition in favor of revenue-neutral carbon pollution fees. Strange to recall, it was not so long ago that the very findings of climate science were a hotly disputed, highly partisan issue in the United States, with the two main parties at the time, Democrats and Republicans, differing not in their preferred policy response but in the degree to which they accepted the now universally recognized facts that the earth is getting hotter and that human-caused climate change is real.

In 2009, three out of four Democrats said that there was solid evidence of rising temperatures on Earth, while just one of three Republicans acknowledged knowing this fact. By 2013, 80 percent of Democrats and half of Republicans said that they knew that the earth was getting hotter. Of course, that meant that the other half of Republicans either did not know or were unwilling to acknowledge that they knew this important piece of information. And among the so-called Tea Party Republicans, a highly conservative faction then challenging the traditional GOP party leadership, only one in four said that the earth was warming.

This partisan divide had three sources. First, Al Gore, a former US vice president who lost a hotly disputed 2000 election to George W. Bush and went on to champion climate action, made some conservatives eager to dismiss climate science as a “hoax” by the left to expand the power of the state. That Gore then won an Academy Award for his climate film An Inconvenient Truth and later shared the Nobel Peace Prize with the UN’s Intergovernmental Panel on Climate Change further inflamed these resentments.

Second, many conservatives worried that regulatory responses to climate change—from tighter fuel economy standards for automobiles, to regulations requiring more efficient light bulbs, to tighter pollution controls on coal-fired power plants—were part of a larger program to trample individual freedoms and choke private enterprise. Finally, these embers of resentment and worry were fanned by a steady infusion of money from fossil fuel companies who supported so-called “climate-skeptic” candidates and ran public disinformation campaigns, such as pro-energy advertising that confused public opinion on the issue.

 

Generational and attitudinal shifts

Against this background, a sea change in public opinion was quietly under way, driven in part by younger voters. A 2013 survey by the Pew Research Center ound that younger Americans were much more likely than their older counterparts to understand that the earth is getting warmer and that human activity is the primary cause. [13] Among Americans 18 to 29, 70 percent said that the earth is getting warmer, compared with just 61 percent among Americans 65 and older. More than half (52 percent) of the younger poll respondents said that human activity was mostly to blame, compared with a mere one out of three (36 percent) among older group. In the years that followed, the younger cohort retained its comparatively greater understanding of climate change science as it aged, and, in addition, awareness of the problem increased across all age groups.

In this dynamic, public opinion on climate change followed a path that was already discernable in the early part of the century on two formerly controversial issues: gay marriage and decriminalization of marijuana. In both of these examples, localities and states had responded to changing public opinion more quickly than the national government. And in both cases, court battles ensued in a dizzying array of jurisdictions, with cases brought by supporters of the status quo and those out to change it. In a now familiar pattern, proponents of change, with demographics on their side, made fitful progress, two steps forward, one step back, that over the period of just a few years added up to a change that would have once been thought impossible. States served as laboratories for policies that would eventually be tried at the national level. Seemingly overnight, views once regarded as outside the mainstream became so commonplace that politicians seeking elective office had little choice but to embrace them.

Something very similar occurred with attitudes toward climate change. Climate change denial continued to appeal to a vocal minority of highly conservative voters who could be counted on to turn out in the primaries. But candidates who catered to such views increasingly failed to win office in the general elections. Conservative donors, including business interests who recognized the need for climate action, began withholding funds from such candidates, instead backing politicians who could articulate a way forward on climate that was in line with conservative values yet would appeal to younger voters, many of whom were concerned about climate change but also drawn to Libertarianism on issues such as gay marriage, decriminalization of marijuana, and avoidance of foreign military entanglements.

One early sign of this shift: former congressman Bob Inglis, long a lonely Republican advocate for climate action, garnered surprising support from younger voters when he entered the 2016 GOP primaries advocating revenue-neutral carbon taxes. His remark in a 2012 discussion of the issue proved prescient: “I think that the impossible may be moving to the inevitable without ever passing through the probable,” he said. [14]

How did this happen? Identifying the many forces at work and who did what when is beyond the scope of this paper. Many organizations and individuals played important roles. Our list is far from comprehensive. Rather it is an attempt to highlight some of the types of organizations that played a role in advancing the idea of carbon taxes much faster than people had previously believed possible.

 

R Street Institute: a libertarian voice for carbon pollution fees

Overcoming conservative antipathy toward climate action required a new approach that recognized climate science and addressed it with a simple, market-friendly tool—emissions taxes. Such a proposal, long favored by economists, also had potential appeal to elements of the environmental left but was seen as a political nonstarter due to opposition on the anti-tax right. In hindsight there is a seeming inevitability that the seeds of the solution sprouted in the free-market R Street Institute. The key to winning acceptance on the right was revenue neutrality, a carbon tax (or pollution fee) with 100 percent of the proceeds returned to the citizens through a combination of rebates and cuts in other taxes.

Today, of course, the R Street Institute is widely known around the country, having eclipsed once-better-known conservative think tanks that clung too long to climate skepticism, squandering their credibility. But 15 years ago R Street was new and little known. Its founding president, Eli Lehrer, had previously been a vice president of the Heartland Institute, a fossil fuel–funded climate-skeptic organization; he left because Heartland’s top leadership refused to acknowledge climate science and respond to it with sensible policy proposals. R Street’s mission statement described it as “a free market think tank supporting limited, effective government and responsible environmental stewardship.” [15]

Unlike some other conservative groups that saw climate science as a liberal ruse for unbridled government expansion, R Street accepted the conclusions of climate science as a starting point and then applied conservative principles to devise a response. The conclusion: eliminate fossil fuel subsidies and make polluters pay. Already in 2013, R Street’s website stated, “Government subsidies that encourage environmental destruction should be removed. At the same time, governments do have a role to play by assigning a cost to carbon and other pollutants, and then stepping out of the way to allow price signals and market forces (rather than command-and-control regulation) to determine the most efficient allocation of resources.”

Where Lehrer differed from most environmental activists was in his insistence that all proceeds from carbon pollution fees be used to reduce or eliminate other taxes, that is, that carbon pollution fees be revenue neutral. This approach proved crucial to winning support from the right, which staunchly opposed regulation-based climate policy for fear that it would impinge on citizen freedom and increase the size and complexity of government. [16]

Rebating the proceeds of the tax also provided a means for addressing a concern among some economists and many people on the left: that carbon taxes would exacerbate rising inequality, since they lead to higher energy prices and poor and working families pay a larger share of their income for energy than higher-income households. Various proposals were floated and vigorously debated for how to structure the rebates. States that pioneered carbon pollution fees tried a variety of approaches. In the end, the US national legislation adopted a hybrid approach, not unlike that of British Columbia described below, that included tax cuts and transfers for low- and moderate-income households that otherwise would be most disadvantaged by rising energy prices. [17]

In hindsight we can see an early version of this approach in a 2013 speech at the Center for Global Development (CGD), where Lehrer proposed a pollution fee of $15 to $20 per ton, calibrated to raise sufficient revenue to eliminate the employee portion of the Medicare tax.[18] He suggested that the pollution fee should increase steadily at a dollar or two per year, until the tax was about double the initial level. Since revenue from pollution fees at any given price per ton would fall over time, as emitters shifted to cleaner technologies, the fee per ton would need to continue to rise to provide sufficient revenue to fund Medicare. Additional revenues, he suggested, could be applied to reduce and eventually eliminate the corporate income tax. [19]

The idea of a revenue-neutral carbon pollution fee might have remained largely speculative had it not been for the work of a variety of advocacy groups. The groups had different strategies and sometimes different policy goals, but all were dedicated to raising the price of fossil fuel carbon emissions with the dual goals of reducing emissions and channeling investment into energy efficiency and clean energy alternatives.

 

Citizens’ climate lobby

One of the more influential of these was the Citizens’ Climate Lobby (CCL), a nonpartisan group founded in 2007 by Marshall Saunders, a former Colorado real estate broker and developer who had been active in the international microcredit movement. Drawing on his experience as a successful development advocate, Saunders built a nationwide, nonpartisan network of volunteers who pushed for a revenue-neutral carbon fee, starting at $10 to $15 per ton and increasing by a similar amount each year. The fee was to be assessed at the point of production (the wellhead or mine) or point of entry into the United States, with all revenue distributed to households in the form of a rebate.

Led by Saunders, CCL adopted a low-key, nonconfrontational approach, organizing local groups by congressional district that worked to develop helpful, friendly relationships with elected representatives and members of the press by providing timely, reliable information. To ensure consistency, volunteers were asked to listen in on monthly conference calls and to pass a test of their knowledge about the carbon fee proposal. The group posted two-page draft legislation on its website and a Frequently Asked Questions list that gave volunteers ready answers to possibly difficult questions. “How would a carbon fee affect energy prices?” Answer: “The best example would be gasoline. A $1 per ton increase in the carbon fee would equal about 1 penny on the price of gas. So if the carbon fee started at $15/ton, gasoline would go up by 15 cents per gallon the first year and 10–15 cents each year afterward [as the tax per ton increases].”

CCL pushed consistently for the rebate of 100 percent of the revenue yielded by a carbon fee and rapid increases in the charge per ton of pollution. The group asserted that returning all revenue to the American people “will improve the prospects of attracting Republican support AND provide the best protection for households against rising energy costs.” Increasing the fee by $10 to $15 per year was necessary, CCL pointed out, in order to “reduce CO ₂ emissions 30 percent below 2005 levels over the next 10 years . . . more in line with the reductions needed to avert future catastrophe.” [20]

In early 2014 CCL released a now famous study that suggested even very high carbon emission fees were not only compatible with sustained economic growth but could actually drive job creation, provided that the bulk of the revenue is recycled in some form. [21] The study, commissioned from Regional Economic Models Inc., a private consulting firm, simulated the economic impact of carbon taxes within California at $50, $100, and $200 per metric ton of CO₂emissions associated with the use of energy. In the study, the first $4 billion per year in revenue was assumed to go into a fund for investments in renewable energy. The remainder was to be refunded to tax payers either in an “across-the-board” (ATB) tax cut to income, sales, and corporation taxes or a “fee-and-dividend” paid out to households modeled on the Alaska Permanent Fund. [22]

The study found that while the resulting higher energy prices could have a negative effect on growth and jobs, the tax relief made possible by rebating the proceeds would help to restore competitiveness of firms in California, and increased income for Californians would encourage spending on local businesses. There were modest differences in the economic outcome between the two approaches—ATB or fee-and-dividend—but both had large positive impacts on economic growth and jobs. The ATB approach, which came to be known as the “tax swap” was projected to mean 300,000 more jobs in the state by 2035, an extra $18 billion in state GDP, an additional $16 billion in annual income, and carbon emissions less than 75 percent of 1990 levels.

The study sparked a surge of interest in carbon taxes and was soon replicated for other US states, with support from CCL and a growing number of think tanks and other nongovernmental groups. A wide range of environmental groups, many of which had long favored putting a price on carbon but had not put it at the top of their policy agenda because they considered it a political nonstarter, began to coalesce around the proposal, bringing to bear their substantial fundraising prowess and grassroots networks. Groups as diverse as Environmental Defense Fund, Rainforest Action Network, the Sierra Club, Conservation International, the Audubon Society, Greenpeace, and 350.org joined in the push.

By 2016, CCL’s annual June lobby day in Washington, which had begun with just a few hundred people, had ballooned into a three-day festival with dozens of co-sponsoring organizations that drew tens of thousands of people to Washington for marches, speeches on the National Mall, and meetings with their elected representatives. More important, CCL members and affiliated volunteers showed up at every campaign event throughout the long and messy Republican primary to ask candidates their views on climate and a revenue-neutral carbon tax, as well as at the rallies organized for the Democratic frontrunner Hillary Clinton and her challengers. By the time of the general election, candidates from both of the major parties, the third-party Libertarian candidate, and the candidate from the new National Green Party, who managed to get on the ballot in a handful of states, all favored carbon taxes in one form or another. The debate was not about whether to have such taxes, but how quickly to raise them and whether they should be entirely or only partly revenue neutral.

 

British Columbia shows the way

US interest in carbon pollution taxes was also boosted by slowly growing awareness of the success of a carbon tax implemented in the western Canadian province of British Columbia starting in 2008. A 2013 assessment of the tax by the Ottawa-based think tank Sustainable Prosperity found that the province’s consumption of fossil fuels covered by the tax fell 19 percent per capita compared with the rest of the country, while the province’s economy outperformed most of Canada. [23] As a result, British Columbia’s greenhouse gas emissions fell 10 percent between 2008 and 2011, versus a 1.1 percent decline for the rest of the country. Investments in clean energy were twice that in the rest of Canada, with a 48 percent increase between 2008 and 2010. By 2011 clean energy industries in the province had $2.5 billion in sales and employed more than 8,400 people.

British Columbia’s success was initially largely overlooked, not only in the United States but even within Canada itself, which was in the midst of a last-gasp oil boom. Starting in 2011, when the Conservative Party won a majority in the national parliament, Canada had become what Andrew Nikiforuk, a Canadian environmental activist writing in Foreign Policy, called “a rogue, reckless petrostate.” With oil and gas accounting for about a quarter of Canada’s export earnings, the federal government led by prime minister Stephen Harper had “muzzled climate change scientists, killed funding for environmental science of every stripe, and . . . systematically dismantled the country's most significant long-cherished environmental laws,” Nikiforuk wrote.[24]

Canada’s transformation from model global citizen to petro bully was most evident in the United States in Ottawa’s no-holds-barred push for President Obama to approve the Keystone XL pipeline, which would have brought tar sands crude from Alberta, Harper’s political base, to Texas refineries on the Gulf Coast, where it could be processed into diesel and exported to Europe and Latin America. [25] In December 2011, Canadian environment minister Peter Kent had announced that Canada was withdrawing from the Kyoto Protocol, the global climate treaty, arguing that “the Kyoto protocol does not cover the world’s largest two emitters, the United States and China, and therefore cannot work.” While he was right—the Kyoto Protocol was already seen as largely irrelevant—the move nonetheless should have been a wake-up call to the international climate community, which was at that time still pinning its hopes on a new global accord. [26]

Despite the adverse national political environment in Canada, polls in British Columbia showed that public support for the provincial carbon tax increased during the first four years of implementation, to 64 percent. In research that would help show the way to a revenue-neutral carbon pollution fee in the United States, investigators found that the carbon tax was popular in part because it made possible a reduction in other provincial taxes, giving British Columbia the lowest income taxes in Canada. Other Canadians began to notice: a 2013 poll found that 59 percent of Canadians would support a carbon tax similar to British Columbia’s in their own province.

The British Columbia carbon tax gave those who changed their habits (by driving less or buying a more fuel-efficient vehicle, for example) an opportunity to save money, because the revenue raised through the tax was being shared with them in the form of tax breaks. By 2014 the tax had brought in some $5 billion in revenue; more than $3 billion had been returned in the form of business tax cuts, [27] more than $1 billion in personal tax breaks, and nearly $1 billion in low-income tax credits, [28] to protect those for whom rising fuel costs could mean the greatest economic hardship. That year the British Columbia ministry of finance reported that for individuals earning up to $122,000, income tax rates in the province were Canada’s lowest. [29]

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This article originally appeared on the Centre for Global Development blog. To see the original, please click here. Comments are welcome and should be sent to LawrenceMacDonald@gmail.com.