Carbon Tax Update, October 2020

Though the reports of the carbon tax’s death may be greatly exaggerated, the policy certainly finds itself in a rut. In our age of populism and polarization, the proposals of centrist technocrats have little appeal. We will turn the calendar to 2021 in a few short months and a carbon tax will still prove elusive in the U.S.

As this month’s edition of the Ticker will discuss, the policy consistently fails to survive first contact with politics, be it in the U.S. or elsewhere. But what that may precipitate is a more hidden version of the same fundamental idea.

“30 Years of Carbon Taxes in Sweden”
Tax Foundation, September 23, 2020

Implemented in 1991, Sweden’s carbon tax was one of the first in the world, second only to Finland’s carbon tax, which was implemented a year earlier. Sweden levies the highest carbon tax rate in the world, at SEK 1,190 (US $126) per metric ton of CO2. The tax is primarily levied on fossil fuels used for heating purposes and motor fuels. Since the carbon tax was implemented 30 years ago, Sweden’s carbon emissions have been declining, while there has been steady economic growth. Sweden’s carbon tax revenues are significant but have been decreasing slightly over the last decade.

IER’s Take

The banner figure carbon tax advocates will cite from this report is that between 1990 and 2018 Sweden decreased its greenhouse gas emissions by 27 percent. That isn’t insignificant, but it should be put into context.

The United States, without a carbon tax and primarily due to the proliferation of natural gas, reduced its carbon emissions by around 15 percent between 2007 and 2019, which returned emissions totals to a point roughly on par with 1990—despite the U.S. population increasing by 80 million. That means on a per capita basis Americans reduced their emissions by a quarter. Swedes, in the same period, reduced their emissions by a third.

When compared with a non-tax scenario, Sweden’s marginal emissions reduction looks less impressive—especially when it comes with the price tag of 126 USD per metric ton of CO2.

As this report points out, the numbers are a bit disappointing and it’s reasonable to point the finger at politics. Politics, mind you, that would play out in much the same way here in the States. Due to exemptions and carveouts in the Swedish code, only 40 percent of all emissions, Tax Foundation reports, are covered by the carbon tax. Many emissions-intensive and trade-exposed businesses are granted leeway. To the chagrin of the economists who find Pigovian taxes so very seductive, political considerations alway seem to get in the way.

“Who killed the carbon tax?”

Girst, September 23, 2020:

It was a cold February day in Salem, Oregon, and Republican state senators were fleeing the capitol…The Republicans had bolted from Salem to avoid voting on a policy aimed at slashing planet-warming pollution.The bill on the table, H.B. 2020, would have put a price tag on carbon emissions — long considered one of the simplest and most efficient ways to cut greenhouse gases. It seemed like a no-brainer for a state that, like many of its West Coast neighbors, has faced record-breaking heat waves, disappearing glaciers, and choking wildfires in recent years.

With Oregon’s Republican senators in hiding, the effort failed. H.B. 2020 joined a series of bills and ballot measures across the United States — from Massachusetts to Washington state — that proposed putting a price on carbon and have remained stuck in the waiting room of American politics, never turning into law.

It’s an unexpected turn for an idea that, for more than a decade, was often at the forefront of plans to address climate change — and even held the promise of garnering bipartisan support…Today, however, both parties are largely silent on the idea, if not outright hostile.

IER’s Take

This piece is worth reading, if only to step into the minds of the frustrated pro-tax crowd. Their moment seems to have passed and they are now coming to grips with the challenge endemic to their proposal: how do you convince people that getting less value at a higher price is in their best interest? I consider myself fortunate that I’m not faced with that quandary.

As Noah Kaufman asked somewhat humorously, “From a political standpoint, why would you lead with the idea that you’re going to tax someone?” Alas, the carbon taxers did lead with that and gave tax skeptics a plank we have yet to relinquish.

“Carbon Pricing in Electricity Markets”
Federal Energy Regulatory Commission, September 30, 2020

The purpose of this conference is to discuss considerations related to state-adoption of mechanisms to price carbon dioxide emissions, commonly referred to as carbon pricing, in regions with Commission-jurisdictional organized wholesale electricity markets (i.e., regions with regional transmission organizations/independent system operators, or RTOs/ISOs). This conference will focus on carbon pricing approaches where a state (or group of states) sets an explicit carbon price, whether through a price-based or quantity-based approach, and how that carbon price intersects with RTO/ISO-administered markets, addressing both legal and technical issues.

IER’s Take

Though the carbon tax looks unlikely to take center stage any time soon, more insidious means of forcing an energy transition via a carbon price remain under discussion. The Wednesday, September 30, technical conference hosted by the Federal Energy Regulatory Commission highlighted one such possibility.

The layman’s upshot of the full-day event is that a path to a hidden carbon tax may lie with FERC’s ostensible authority to harmonize wholesale electricity markets. The fundamental question discussed on Wednesday was how FERC should handle a proposal for a state carbon tax, should one arise in a multi-state RTO/ISO market with differing state policies.

The appetite for such harmonization among the panelists appeared to be concerningly robust, particularly among certain industry executives. One light of opposition, however, shone from Chris Parker, executive director at the Utah Department of Commerce. Parker pushed back on the technocratic consensus, stating that Utahans would object to extraterritorial taxation by way of wholesale electricity markets. FERC, Parker argued, must respect all state policy preferences, including those opposed to carbon pricing.

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