Chapter 4 Carbon Pricing - Green Education and Legal Fund

See index to all the chapters for Putting Out the Planetary Fire

Carbon Pricing

– Support for a carbon tax – and How to Invest Revenues
– EJ Concerns Re Carbon Pricing
– Carbon Tax Basics
– Cap-and-Trade
– Problems with Carbon Offsets
– A New Spin on Making Polluters Pay

I first began testifying in the New York State Legislature about the need for a carbon tax several decades ago. As head of the Hunger Action Network, we were always advocating for progressive tax reforms and increased revenues since anti-poverty programs were always at the end of the line to receive government funding. We needed to expand the tax base as much as possible so that anti-hunger and welfare programs had some chance of getting additional funding. However, I was challenged over my advocacy for a carbon tax by State Senator Owen Johnson, chair of the Senate Finance Committee, who said he could not understand why I opposed carbon emissions since after all trees liked to breathe CO₂.

As a board member of the Environmental Planning Lobby, I had opposed the push in 2005 to get New York’s Republican Governor, George Pataki, to enact a regional cap-and-trade program for electricity producers with half a dozen other states. I argued that it was much weaker than a carbon tax, which economists had long argued was the most effective way to reduce greenhouse gas emissions. Many proponents admitted that a Regional Greenhouse Gas Initiative was unlikely to produce significant reductions in emissions in New York or the other participating states in the Northeast, but they hoped it would have more impact if it became a national model for states like Ohio to adopt (it did not). They also noted that cap-and-trade had been successful with acid rain, and it is invariably easier to get politicians to build on an existing successful program.

Fortunately, groups working on tax policy like Hunger Action Network and the labor-backed Fiscal Policy institute, along with New York’s then Attorney General Eliot Spitzer, were able to override the environmental groups and at least got the carbon permits to be auctioned off with the revenues going to the state to fund clean energy projects. Many of the environmental groups felt that if the polluters were to get most of their permits for free, they were likely to sue to challenge the program.

Support among climate groups for carbon pricing has waned in recent years. Environmental justice groups oppose climate pricing, especially cap-and-trade, since it often allows pollution to continue in low-income communities and communities of color in exchange for dubious carbon offsets elsewhere. Some groups argue that carbon pricing is just permission to continue polluting, with the costs passed on to the consumer; a better solution would be mandatory emissions cuts. While I agree with the mandatory cuts, the International Monetary Fund, which is not known for progressive policy positions, notes that the world’s government in effect gives more than $5 trillion annually as a subsidy to fossil fuel companies by not charging them for the damages caused by burning fossil fuels.

Carbon Pricing

The idea behind carbon pricing is to make polluters pay for the damages they cause. It puts a price on greenhouse gas emissions (e.g., carbon, methane) that reflects the cost to society from the negative public health, environmental, and global warming impacts from the burning of fossil fuels.

Putting a price on the use of fossil fuels will also make cleaner renewable energy sources more financially attractive and it will create financial incentives for polluters to reduce emissions.

Economists agree that a carbon tax is the most effective way to reduce carbon dioxide emissions.[1] However, some climate activists, including environmental justice groups, believe that mandated emission cuts are more effective and fairer.

The social cost of carbon is an estimate of the economic costs, or damages, of emitting one additional ton of carbon dioxide into the atmosphere, and thus the benefits of reducing emissions. The main components of the calculation are what happens to the climate and how these changes affect economic outcomes, including changes in agricultural productivity, damages caused by sea level rise, and the decline in human health and labor productivity.

A study published in September 2022 in Nature estimated the social cost of carbon to be $185 per ton of CO₂— 3.6 times higher than the U.S. government’s value of $51 per ton. [2] (The Trump administration had lowered it to $1 to $7 per ton, which it used to justify its roll back of Obama-era EPA regulations on power plant emissions and vehicle fuel efficiency.)[3]

The NYS Department of Environmental Conversation recently set $125 as the social cost of carbon, while methane was set at $2,782 per ton and nitrous oxide at $44,727 per ton.[4]

A study by professors at the University of Chicago estimated that the very long-term social cost of carbon, the cost borne by future generations living in a changed world, will be $100,000 per ton.[5]

Estimates on the social cost of carbon vary for a number of reasons, starting with what costs are excluded in the calculations. Some of the omitted damages are the effects of climate change on fisheries; the effects of increased pest, disease, and fire pressures on agriculture and forests; and the effects of rising sea levels and resource scarcity due to migration. Models generally omit the effects of climate change on economic growth. What is the value of the estimated 8 million or so people who die annually from air pollution?[6]

The International Monetary Fund (IMF) is a strong proponent of a carbon tax. It estimates that the world governments provide an annual $5.9 trillion subsidy to fossil fuel companies, primarily by failing to make them financially responsible for all the damages caused by their pollution. The IMF estimates that raising fuel prices to their “fully efficient levels” would reduce projected global fossil fuel CO₂ emissions 36% below baseline levels in 2025, in line with the 25 to 50% reduction in emissions needed by 2030 to be on track with containing global warming to the Paris goal of 1.5-2 degrees celsius. (The IMF notes, however, that most levels of the carbon tax have been far below what they should be to reflect actual costs.)[7]

According to the World Bank, in 2020 there were 61 carbon pricing initiatives in place or scheduled for implementation, consisting of 31 cap-and-trade systems and 30 carbon taxes. These programs covered about 22% of global greenhouse gas emissions, up slightly from the prior year. Governments raised more than $45 billion from carbon pricing in 2019.[8]

However, the global average carbon price is $2 a ton — a small fraction of the estimated $75 a ton price in 2030 consistent with a 2 degree celsius warming target.[9] A Congressional study of the impact of the cap-and-trade program in northeastern states (the Regional Greenhouse Gas Initiative) found that the cap on emissions was too high and the prices too low (less than $6 a ton) to drive down emissions, but that there had been a beneficial impact from the revenues being invested in renewable energy.[10]

A carbon tax (or pricing) has been a major topic of discussion at the recent international Conferences of Parties. At COP26 in Glasgow, delegates did approve Article 6 – the Paris Agreement’s rules governing carbon markets. Brazil and others want carbon offset payments for protecting forests. Little progress on implementation however was made at COP27, though the IMF said the price of carbon needs to average at least $75 a ton globally by the end of the decade for global climate goals to succeed. In December 2022, the European Union agreed to tax imports based on their carbon footprint, “inserting climate-change regulation for the first time into the rules of global trade,” raising concerns both in the U.S. and in developing countries.[11]

Support for a Carbon Tax – and How to Invest Revenues

A global poll taken in 31 countries prior to the COP26 gathering in late 2021 found 62% of people globally are in favor of a carbon tax while one third are opposed to raising taxes to encourage decreased use.[12]

One of the big debates with the carbon tax is how much to rebate to consumers to offset the regressive nature of the tax and how much if any to invest in climate action such as the development of renewables.

Since low- and moderate-income households spend a higher percentage of their income on energy than the wealthy, a carbon tax is generally viewed as regressive. Most agree that some, if not all, of the revenues should be rebated to individuals to offset the tax. But there are many different opinions as to the best approach.

Polls over the years show a majority of Americans support making polluters pay for carbon emissions. A decade ago, a majority of respondents supported a revenue-neutral carbon tax, and an even larger majority supported a carbon tax with revenues used to fund research and development for renewable energy programs. Surprisingly, Republican Party support for a carbon tax was significantly higher (about 50%) when the revenues are used to promote renewable energy.[13]

So, while supporters of the “100% fee and dividend” model argue that it is more politically doable to give all the revenues back to consumers, that contention is not supported by polling. Using the revenues to reduce other taxes also polls better than providing a dividend to every American. [14] And for many politicians, if they are going to take the risk of enacting a tax, they prefer to direct at least some of the funds to objectives such as deficit reduction, education, infrastructure investments, etc.

Many proposals have sought to provide some level of rebate to individuals – some targeting low- and middle-income families – through the tax system. One problem with this approach is that the lowest income individuals often have limited interaction with tax returns, so they may miss out. Plus, if they are living from paycheck to paycheck (or on benefits or social security), getting a once-a-year tax rebate does not help them pay their monthly bills.

In New York, a polluter penalty bill developed by NY Renews proposes distributing some of the revenues in ways that directly help low-income consumers (e.g., free subway tickets in New York City). Others have advocated reductions in other regressive taxes. And the provision of relief checks to Americans during COVID did show it was possible that the government could do the same with a climate dividend payment.

Public support is much stronger when the proposal is framed as “making polluters pay” rather than as a tax.[15]

Probably the biggest pushback comes from those who argue a carbon tax would raise energy bills. Most elected officials focus heavily on their next election and worry that voters will punish them if they see prices go up at the gas pump or in their heating bills. Voters also do not like the word tax.

Polls also show that while a strong majority of voters want action on climate change, for most voters (outside of Greens and liberal Democrats) global warming does not rank among their top priorities.[16]

Division of opinions about how to invest the revenues from a carbon tax has led to significant disagreements among climate campaigners. In the state of Washington, labor and environmental justice groups actively opposed a 2016 ballot initiative in support of a revenue neutral approach that would cut other taxes. But when that coalition came back in 2018 with a ballot proposal to use carbon pricing to raise revenues to invest in green jobs and environmental justice measures, it was still defeated.[17]

A major reason for its defeat was that the oil industry poured $31.2 million into a TV ad-heavy campaign to defeat the measure, more than had ever been spent to defeat a ballot initiative in the state’s history.[18] The industry at times argued that it was not that they opposed reasonable carbon pricing, they just opposed that particular proposal.

EJ Concerns Re Carbon Pricing

In recent years more climate groups have started to oppose carbon pricing as an inadequate substitute for mandated emission cuts.

Opposition is especially strong for cap-and-trade programs, where the amount of carbon emissions a given company may produce is capped but they are allowed to buy rights to produce additional emissions from a company that does not use all of its own pollution allowance. This can lead to continuation of pollution in existing environmental justice communities in exchange for carbon offsets elsewhere (the values of which are debatable).

Mary Nichols, who was widely viewed as effective as the head of the California Air Resources Board, was defeated when President Biden sought to nominate her to head the EPA and lead the fight on climate, largely since environmental justice groups saw this as a way to protest California’s cap-and-trade program.[19]

Others argue that carbon pricing just leads to price increases rather than emission reductions, with the fossil fuel companies merely passing the price on to the consumer. They argue instead for mandated emission reductions.

Tom Goldtooth, founder of the Indigenous Environmental Network, argues that “a carbon tax distracts from the urgent need to keep oil, coal, and gas in the ground. It would be a tax scheme benefiting the polluters, which does not cut emissions at source at the level that is needed to get the world to 1.5º C. It will result in the continuation of environmental injustice displacing families, affecting Indigenous treaty rights, and upending local economies.”

Food & Water Watch argues that the inclusion of a carbon tax would create an inequitable, discriminatory, ineffective, and ultimately regressive proposal that gives a green light to the biggest climate scofflaws to pay to pollute and maintain a harmful status quo.[20]

My position is that one should do both mandated cuts and a carbon tax. There is no justification for continuing $5 trillion in annual subsidies to fossil fuel companies by allowing them to pollute without paying the related costs.

In 2017, former republican Secretaries of State James Baker and George Shultz along with Ted Halstead of the Climate Leadership Council (some prominent Republicans and business leaders) published The Conservative Case for Carbon Dividends.[21] It supported a carbon tax combined with returning the money to taxpayers as a “climate dividend.” The plan called to scrap Obama-era emission regulation, saying that a market-driven approach would have the same impact as regulation. While the oil companies would just pass the cost of new taxes on to customers, they would get a dividend to help them pay for it. The plan called for border adjustments to ensure an increase in the cost of goods coming from nations that do not have a similar carbon tax. The council also wanted the fossil fuel polluters to be protected from lawsuits over their contribution to climate change.[22]

Some of the biggest groups pushing for a carbon tax, like Citizens Climate Lobby, have been willing to accept such proposals.[23] Most climate groups however, reject the idea of trading a carbon tax in exchange for EPA’s power to regulate carbon (though some point out EPA has not done much with this power). Virtually all reject waiving the fossil fuel companies’ liability for climate damages.

Carbon Tax Basics

A carbon tax is an “upstream” tax on the carbon dioxide content (or equivalent from other greenhouse gases) of fossil fuels (coal, oil, and natural gas) and biofuels. The cost of the tax is then passed along to consumers and producers, with fossil fuels and energy intensive goods and services becoming costlier. If the carbon tax is effective, goods and services which are less energy intensive will become more affordable than those which release larger quantities of carbon dioxide into the atmosphere.

Under a carbon tax, “the government sets a price that emitters must pay for each ton of greenhouse gas emissions they emit. (The idea is that) businesses and consumers will take steps, such as switching fuels or adopting new technologies, to reduce their emissions to avoid paying the tax. A carbon tax differs from a cap-and-trade program in that it provides a higher level of certainty about cost, but not about the level of emission reduction to be achieved (cap-and-trade does the inverse).”[24]

A carbon tax can be levied at any point in the energy supply chain. The simplest approach is to levy the tax “upstream,” where the fewest entities would be subject to it (suppliers of coal, natural gas processing facilities, and oil refineries). A tax could also be levied “midstream” (on electric utilities) or “downstream” (on energy-using industries, households, or vehicles). Without provisions protecting local production, a carbon price could put domestic energy-intensive, trade-exposed industries (such as chemicals, cement/concrete, and steel), at a competitive disadvantage against international competitors that do not face an equivalent price. A shift in demand to those countries could result in what has been called “emissions leakage” from one country to another. All existing carbon pricing programs include mechanisms to address competitiveness concerns.[25]

Taxes on greenhouse gases come in two broad forms: an emissions tax, which is based on the quantity an entity produces; and a tax on goods or services that are generally greenhouse gas-intensive, such as a carbon tax on gasoline.

A carbon tax can recapture some of the costs pushed on to taxpayers and consumers from burning fossil fuels, such as the $30 billion added annual health costs in New York State to deal with air pollution and fossil fuels and the tens of billions of dollars of damage from climate change (e.g., severe weather).

Unlike cap-and-trade, carbon taxes do not create complex and easily gamed “carbon markets” with allowances, trading, and offsets.

Cap-and-trade

In a cap-and-trade system, the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap. Emitters must hold allowances for every ton of greenhouse gas they emit. Companies may buy and sell allowances, and this market establishes an emissions price. Companies that can reduce their emissions at a lower cost may sell any excess allowances for companies that need them. Governments can auction allowances, give them away for free, or some combination of the two. Auctioning generates revenue that can be used for climate or other purposes.[26]

A big question is whether the cap is set low enough to actually spur major reductions in emissions.

Opponents of cap-and-trade argue that it can lead to an overproduction of pollutants up to the maximum levels set by the government each year, since allowable levels may be set too generously, actually slowing the move to cleaner energy. Emissions credits and penalties are often cheaper than converting to cleaner technologies and resources, meaning that cap-and-trade is not a real incentive for those industries to change their practices.[27]

California’s cap-and-trade program is one of the largest in the world and among the first. Although the state’s program helped it meet some initial, more easily attained benchmarks for emission reductions, many worry that it enables California’s biggest polluters to conduct business as usual and even increase their emissions. By 2019, carbon emissions from the state’s oil and gas industry actually rose 3.5% since the program began. Many say cap-and-trade is rarely stringent enough when used alone; direct regulations on refineries and cars are crucial to reining in emissions. Such programs usually include offsets, and offset programs largely don’t work.[28]

Pope Francis in his climate change encyclical stated that “The strategy of buying and selling ‘carbon credits’ can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. … in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors.”[29]

A University of Southern California study of that state’s program showed that low-income communities and communities of color were less likely to see reductions in pollution and more likely to live near polluting plants that participated in cap-and-trade. Many studies have found that cap-and-trade programs can maintain or even worsen environmental disparities by allowing polluting industries, often in communities of color, to buy their way out of reducing their emissions.[30]

Cap-and-invest has recently emerged as an alternative branding to cap-and-trade, putting more emphasis on the need to invest funds raised through the program into climate mitigation and adaptation efforts including renewable energy and funding targeting environmental justice communities. The State of Washington has adopted this, and New York is considering a similar plan.

In 2023, many groups in New York appear willing to accept cap-and- invest due to the refusal of state lawmakers in recent years to implement more progressive forms of carbon pricing. These groups want to raise new climate revenues to help with the climate transition (e.g., subsidizing decarbonization efforts), especially to meet the new goals to invest at least 35% of such funds in environmental justice communities. They are increasingly focusing on calling on state lawmakers to raise $10 billion a year for climate action, while leaving it to lawmakers to figure out how to pay for it. The groups however, stress the need for the state to avoid the use of carbon offsets, particularly any that would allow pollution in environmental communities to continue.[31]

The existing cap-and-trade program in New York for electricity (the RGGI) only prices carbon at $12 a ton and Congress found that the cap was set too high to have a significant impact on reducing emissions. The state estimates the social cost of carbon at $121 a ton.

Some studies have found that cap-and-trade systems “if well designed and appropriately implemented, can achieve their core objective of meeting targeted emissions reductions cost-effectively.” While proponents they argue that allowing that market to set the price will lower costs, they recognize that “a robust market requires a cap that is significantly below business-as-usual emissions.” They also stress the importance of the government being able to document the actual level of emissions, including before the program starts.[32]

The Problems with Carbon Offsets

One key issue is whether companies can use verified emissions reductions generated outside the cap to comply. Governments and industry argue that such offsets can lower the overall costs of meeting the cap. For instance, agricultural and forestry projects can often reduce emissions at lower cost than industrial facilities. However, to be effective, offset projects must undergo rigorous verification procedures to ensure that emissions are actually reduced, and that only one entity takes credit for the offset.

Many studies have concluded that the emission reduction benefits of carbon offsets are greatly oversold and are not a substitute for reducing emissions. Many carbon offset efforts have focused on planting trees. Critics argue that continuing to dig up and burn fossil fuels and emitting fossil fuel emissions into the atmosphere, and then removing these by growing forests, does not actually reduce emissions or atmospheric concentrations over a century-long time scale, due to the length of time needed for trees to mature.[33]

“Projects meant to regenerate Australia’s outback forests to store carbon dioxide have been awarded millions of carbon credits – worth hundreds of millions of dollars – despite total tree and shrub cover in those areas having declined,” a 2022 analysis has found.[34]

Carbon emissions for fossil fuels are effectively permanent, remaining in the atmosphere for hundreds to thousands of years. In contrast, crops, soils, oceans, and forests are “fast-exchange” carbon reservoirs, with limited carbon storage capacity. They can re-release carbon back into the atmosphere over the course of a few decades, or sometimes even over a few days.[35]

The Clean Development Mechanism (CDM) came out of the 1997 Kyoto Protocol, when dozens of nations made a pact to cut greenhouse gases. The program subsidized thousands of projects, including hydropower, wind and, even coal plants that claimed credits for being more efficient than they would have been. CDM became mired in technical and human rights scandals, prompting the European Union to stop accepting most credits. A 2016 report found that 85% of offsets had a “low likelihood” of creating real impacts. A 2015 study of another global program, Joint Implementation, found that 75% of the credits issued were unlikely to represent real reductions, and that if countries had cut pollution on-site instead of relying on offsets, global CO₂ emissions would have been 600 million tons lower. ProPublica found that investments in Reducing Emissions from Deforestation and Forest Degradation (REDD) were also plagued with numerous problems and failed to meet their stated goals; often they just attached the logo to an existing project to draw down more funding.[36]

A New Spin on Making Polluters Pay

Many groups promoting a carbon tax frame it as a “make polluters pay” plan, which polls high than labeling it as a “tax.” But with limited progress on adding some form of fee or pricing on carbon emissions, some groups have begun to pivot more towards having governments directly raise funds from fossil fuel companies, particularly as their profits soared in recent years.

The Polluters Pay Climate Fund Act, introduced in Congress in 2021, seeks to require the largest U.S.-based fossil fuel extractors and oil refiners and foreign-owned companies doing business in the U.S. to pay into a Polluters Pay Climate Fund based on a percentage of their global emissions. The Fund would then be used to finance a wide range of efforts to tackle climate change.

The sponsors say that by “using peer-reviewed ‘carbon attribution’ research, it is possible to definitively attribute carbon and methane in the atmosphere to specific companies like ExxonMobil, Chevron, and Shell. Using this methodology, Congress can establish a Polluters Pay Climate Fund that assesses companies based on their contribution to global emissions and appropriate the funds to ensure a just climate transition. The payors into the Polluters Pay Climate Fund would be U.S.-based fossil fuel extractors and oil refiners and those foreign-owned companies doing business in the U.S. that were responsible for at least 0.05% of the total carbon dioxide and methane gas emissions between January 1, 2000 and December 31, 2019. This would limit the total number of payors to the 25-30 biggest polluters, with those who polluted the most paying the most.”[37]

A similar Climate Change Superfund Act has been introduced in New York, seeking to raise $30 billion over 10 years to recover some of the oil and gas industry’s recent windfall profits and use them for adaptation costs that would otherwise be charged to state taxpayers. The money raised will be used to fund infrastructure projects to adapt to climate change by, for example, repairing damage from extreme weather events or upgrading coastal infrastructure.[38]

[1] https://www.scientificamerican.com/article/how-to-set-a-price-on-carbon-pollution

[2] https://www.nature.com/articles/s41586-022-05224-9

[3] https://theconversation.com/what-is-the-social-cost-of-carbon-2-energy-experts-explain-176255

[4] https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/coal/123120-new-york-regulators-set-central-cost-of-carbon-dioxide-emissions-at-125mtt

[5] https://news.uchicago.edu/story/climate-change-will-ultimately-cost-humanity-100000-ton-carbon-scientists-estimate

[6] https://costofcarbon.org/files/Cost_of_Carbon_Fact_Sheet.pdf

[7] https://www.imf.org/en/Topics/climate-change/energy-subsidies

[8] State and Trends Carbon Pricing, https://openknowledge.worldbank.org/handle/10986/33809, p. 7

[9] https://www.imf.org/en/Topics/climate-change/energy-subsidies

[10] https://crsreports.congress.gov/product/pdf/R/R41836/14

[11] https://blogs.edf.org/climate411/2022/12/12/article-6-looking-ahead-to-cop28/; https://www.reuters.com/business/cop/exclusive-cop27-imf-chief-says-75ton-carbon-price-needed-by-2030-2022-11-07/; https://www.wsj.com/articles/europe-reaches-deal-on-landmark-carbon-import-tax-11670921011?st=41xf64lfdgkpd5z;

[12] https://globescan.com/2021/11/05/new-global-poll-shows-growing-public-support-for-carbon-tax/