Carbon Tax Update, August 2020

As covered by Morning Consult on July 31, the Climate Leadership Council (CLC) has commissioned a report on its carbon tax plan. As of this writing, a 26-page summary from the report’s authors at Thunder Said Energy is available here. It appears a longer report will follow. Based on the available information, the report has some significant holes, even on its own terms. My initial concerns follow.

Big claims from CLC; bigger holes

Thunder Said Energy

July 2020 analysis:

By driving technological innovation, the CLC plan would reduce US CO2 emissions by 57% by 2035 (vs. 2005), unlock $1.4tn of new investment, create 1.6M jobs and enhance US competitiveness.

CLC Plan as Basis for Modelling: Thunder Said Energy modelled the consequences of a $43/ton CO2 price in the US starting in 2021, then rising by 5% above inflation each year, reaching $112/ton by 2035. Our bottom-up analysis assessed the impact on the costs and potential benefits of 30 different energy technologies. This summary is drawn from our longer report.

Emissions Reductions of 57% by 2035: Based on the cumulative emissions reductions of 30 different decarbonization technologies, unlocked at different price points, the CLC plan would reduce US CO2 emissions by 57% from the EPA’s 2005 CO2 baseline. See Figures 1 and 2.

$1.4 Trillion of New Capital Investment in Technological Innovation: The plan would produce an initial investment surge of $95bn of new spending in 2023 and create 195,000 direct new jobs that year. By 2035, the CO2 price would unlock a total of $1.4tn of new capital investment in energy-related technological innovation

IER’s Take

Telling us that we’ll see a 57-percent emissions drop suggests a major shift in trajectory, but to know if that’s the case we need to grasp the emissions trajectory under a scenario in which current policies are maintained in the absence of a carbon tax. We’ve already seen greenhouse gas emissions fall more than 10 percent since 2005 (the year off of which the 57-percent figure is based). How much lower will emissions be under this plan than they would otherwise be? That’s a key question. And that the answer to that question isn’t broadcast on page one should raise eyebrows. The relevant number isn’t 2035 emissions with carbon tax vs. 2005 emissions, but 2035 emissions with a carbon tax vs. 2035 emissions without.

A second concern readers should have about this report is the short shrift it gives to the significant price increases energy users would face as a result of the tax. Almost as an afterthought, the authors note in the final paragraph of the introduction that the starting tax rate would result in an increase of $0.40 per gallon of gasoline. Given the 5 percent annual hike, that means over a dollar extra per gallon by 2035. The starting tax rate would also result in an immediate 14-percent electricity rate hike (based on ERCOT 2019 numbers) and a 20-percent increase in the price of natural gas for residential use. On page seventeen, the report states that the tax could increase home heating costs by between $110 and $2,600. That’s quite a range of possibilities.

A third aspect of this report deserving scrutiny is its inconsistency with respect to the use of the tax revenue. On page one, it states the proceeds will be “returned to all Americans as equal quarterly dividends.” On page three, however, it states “payments can be redistributed to individuals who bear the costs of climate change.” If we are going to buy into the externality framework, we should recognize that something as complex as global warming will have heterogeneous effects on people in different circumstances. People in some regions theoretically will face challenges like more severe storm surge, while people in other regions, conversely, could benefit from extended growing seasons and the fertilization effect of increased carbon dioxide concentrations. Therefore, stating that the tax revenue will be “redistributed to individuals who bear the costs of climate change” is at odds with the statement that revenue will be “returned to all Americans as equal quarterly dividends.”

The most extraordinary blind spot in this report is that it doesn’t tell us one thing about the CLC tax’s effect on atmospheric greenhouse gas concentrations or the related temperature rise attenuation that would ostensibly justify increasing energy costs. The explanation for this omission is obvious: Thunder Said Energy and CLC simply don’t know how much of an impact the tax would have. Associates of CLC assure us that they have a border adjustment analysis coming in the future that would shed light on this most obvious of concerns.

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