Climate fee for stabilizing climate change by harmonizing carbon pricing across state-based carbon taxes and markets.
Climate change has substantial risks and appears to be already accelerating.
Carbon markets have not yet been shown to be effective and add complexity risks.
Carbon taxes have been shown to work, but revenue-neutral carbon taxes are insufficient, because they do not deal with climate change.
A national climate fee can harmonize state-based carbon taxes or markets.
A climate fee steadily rising at $10 a year starting in 2016 may achieve zero emissions by 2050.
Some revenue can be utilized for adaptation, mitigation, risks and R&D without growing other parts of government.
Such an architecture could scale globally.
What actions do you propose?
The climate change problem
The latest IPCC estimates state that to remain below an average of a 2 degrees Celsius increase in atmospheric temperatures, global emissions must drop by 40-70% of 2010 levels by 2050, reach zero by around 2070 and likely become negative after this (IPCC 2014). Atmospheric concentrations of CO2 need to peak at about 450 ppm before dropping, which will likely require removing CO2 from the atmosphere. Current CO2 concentrations are at 400 ppm and are accumulating at over 2 ppm a year. However, IPCC scientific estimates are very conservative, and did not currently include positive feedbacks such as methane release from the permafrost and ocean floors, which are now projected to be quite large (Schuur et al. 2015). Additionally, recent evidence shows an acceleration of melting ice in the polar, glacier and now Antarctic regions. The climate appears to becoming unstable, and nowhere in the historical record has CO2 atmospheric concentrations been shown to have risen so fast. While there are limited projections on what may happen, the risks are enormous. Thus, we need to act quickly, before climate change accelerates out of control. While atmospheric temperature is a common focus, over 90% of the excess heat actually warms the oceans. There is evidence that irreversible melting in West Antarctica has already locked in a 1 meter sea level rise (Favier et al. 2014; Joughin et al. 2014; Rignot et al. 2014). To put that in perspective, The Maldives consists of 1,100 islands, which are on average only 1.3 meters above sea level. The G7 countries, of which the US is a member, recently announced an intention of achieving zero carbon emissions by 2100. While this is headed in the right direction, it is actually insufficient to stay below a 2 degree Celsius rise, based on the latest IPCC estimates.
Issues with carbon markets
Some carbon markets have been implemented across the world, including in Europe and California. However, there are serious issues with carbon markets. They are said to provide emissions certainty by auctioning off a fixed set of carbon allowances, that are supposedly based on an environmentally allowable carbon emissions budget. But, in fact, that budget is uncertain and may be shrinking due to the climate feedbacks discussed earlier. Allowances could be locked in, which could turn out to entail dangerous levels of emissions. Unlike carbon taxes, the carbon price can fluctuate wildly, based on supply and demand. Also, carbon markets can be gamed and carbon offsets can be fraudulent. All of this has already happened with the EU/ETS, which after 10 years, has not been shown to be effective. Politicians may prefer carbon markets, because they may trade free allowances for political favors, or favor companies and markets. Further, carbon markets can create a moral hazard. Markets are driven by profits and growth, with participants vigorously protecting their financial interests. But, to successfully act on climate change, emissions must eventually be reduced to zero. This means that the volume of carbon allowances must also be reduced, which in turn reduces trading profits. That means some market participants, to protect their financial interests, may work against achieving zero emissions. Financial markets have been rife with scandals and manipulation in recent years, including the mortgage crisis which caused the global downturn, the Libor currency manipulation scandals and more. Is it really a good idea to put the fate of the climate in the hands of traders and bankers, primarily motivated by greed? Carbon offsets are very problematic too, because they suspend needed action, cannot always be verified to be additional efforts, can be fraudulent (which has already occurred at large scales), and do not actually compensate for the environmental damage that is already occurring. Time is running out, and there really is not time anymore to play with carbon markets.
Many economists agree that carbon pricing implemented with carbon taxes is superior to carbon markets. Carbon taxes are easier and cheaper to implement and administer, while less prone to manipulation and fraud. They provide a stable carbon price signal for investors and need less government oversight. Consider that British Columbia implemented a broad-based carbon tax in less than six months, and has shown reductions of 10% per capita thus far. Additionally, carbon taxes have been used effectively in Scandinavia since 1990. Carbon taxes can indirectly achieve an emissions target by measuring the volume and adjusting the carbon price deterministically. While a revenue-neutral carbon tax has a certain political appeal particularly to conservatives, it is insufficient to address the climate change problem, because it makes the assumption that there really is no problem. It does not provide any revenue for addressing climate adaptation, mitigation and risks, on either the national or global levels. Further, it can build dependencies on the carbon revenue, by applying that revenue towards other public goods or tax reductions. This can create a perverse incentive to maintain that carbon revenue, when successful abatement means the revenue should eventually disappear.
The climate fee
However, a climate fee could restrict the usage of carbon revenue to dealing with climate change with allowable climate change expenditures. Any remaining funds can be set aside for disaster insurance, paying down government debt or for return to households. Carbon revenue would not be used to fund other government programs. The climate fee rate should be set at the federal level, but carbon revenue would be collected at the state level, and put into a state climate fund. However, a percentage of the collected fee would be passed to a federal climate fund, for usage on allowable climate change expenditures at the federal level. A state might implement the climate fee as a carbon tax or carbon market. If a carbon market is used, the carbon price floor would be set to the climate fee rate. Free carbon allowances would not be permitted, since this could be used for political favors or competition between states. Any carbon offsets would only apply above the price floor, like a call option with a strike price set to the carbon price floor.
The climate fee would be assessed in the state where the emissions occur, such as with power plants. However in the case of transport fuels, they can be assessed based on carbon content in the state where the fuel was sold. If carbon (CO2 or methane) emissions are from refinement, fees would be assessed in the state where the refinement and emissions occur. On import of carbon-intensive goods, a border carbon adjustment may apply, when the importing jurisdiction has a lower carbon price. In that case, the border carbon adjustment would be the difference between the two prices.
Use of carbon revenue
Carbon pricing provides a behavioral incentive to reduce emissions, but this alone is likely not enough due to differences in elasticities of demand. Investments in R&D will be needed for the development of low-carbon technologies, and energy R&D should generally increase by a factor of three (iea 2013). Already, there are adaptation costs, which will grow over time. California needs desalination plants, and food crops in the central valley are already being affected by severe droughts. In Florida, the everglades are under threat from rising sea levels, as flooding in Miami becomes more common. Forests are suffering from increased wildfires, disease and infestations, and the western US is projected to become drier (IPCC 2014b).
Legislation can set criteria for a set of allowable climate change expenditures. These might include low-carbon and climate-related R&D, low-carbon infrastructure and transportation systems, compensating low-income households for regressive properties of carbon pricing, subsides for renewable and low-carbon energy, adaptation to rising sea levels, desalination plants, and more.
States have diverse economies with varying exposure to fossil fuel interests and dependencies. As such, members of congress from potentially more impacted states often block congressional action on climate change. A way around this problem is to federally assist the more heavily impacted states with the federal climate fund. For example, Wyoming, Montana, Pennsylvania, Ohio, Kentucky and West Virginia are heavily dependent on coal. To assist moving away from coal, federal climate funds could help finance job training for displaced coal miners and managers in the expanding renewable energy industry. The amount of federal climate funding a state might receive can be based on a formulated criteria, which could include climate vulnerabilities, maintenance of carbon sinks (such as forests), fossil fuel dependency and state GDP per capita.
This climate financing architecture is recursive, and could be applied at the federal, state or global levels. If the US were to implement such a system, it could be applied at the global level as well, with some variation. For example, the federal climate fund becomes the Green Climate Fund at the global level. Countries, like states, have different capabilities and circumstances.The climate fee could also be set to a globally harmonized carbon price.
Who will take these actions?
The federal government will set a national climate fee rate. It will also receive some carbon revenue from states, which goes into the federal climate fund. These funds would be used for allowable climate change expenditures at the federal level, or sent back to the states for the same purpose, based on a formulated criteria. The US contribution to the global Green Climate Fund would also come from the federal climate fund.
State governments collect the climate fees based on either a carbon tax or carbon market allowances with a carbon price floor, with carbon revenue going into a state climate fund. These funds would be restricted to allowable climate change expenditures. Some revenue would be contributed to the federal climate fund. Unused funds could go into a disaster fund, pay down public debt or be returned to households.
Businesses or organizations pay carbon taxes or surrender carbon allowances based on carbon emissions. Individuals may be assessed a carbon tax on fuel carbon content, at the point of purchase.
What challenges will be faced in implementing this proposal and how will they be overcome?
Congressional republicans will oppose any real action on climate change until realizing they face an existential threat from a growing worried public as climate change advances. Will this be too late?
How much will emissions be reduced or sequestered vs. business as usual levels?
Given the science, legislation should be designed to eventually reduce emissions to zero. This proposal achieves that by 2050, and would be in line to limit the temperature increase to below 2 degrees Celsius. The business as usual case is likely to lead to a rise of 4 degrees Celsius or higher by 2100, which may be catastrophic.
What are other key benefits?
The main desirable outcome is a US contribution towards stabilization of the climate system. However, there are other substantial benefits as well. Less pollution and cleaner air translates to less disease and lower health care costs. Less water evaporation means more water for crops in arid areas. The US military considers climate change a threat multiplier (DOD 2014), so reduced emissions may reduce global threats. An effective carbon price would help create a viable clean tech industry in the US. Effective action would also reduce biodiversity loss and ocean acidification from CO2.
What are the proposal’s costs?
In the absence of carbon pricing and policy, damages from climate change could be extensive, even catastrophic. Weighing the costs of action against the costs of inaction is a difficult task, which integrated assessment models attempt to do with high uncertainties. How much is the biosphere worth? Considering the huge risks, the costs of action appear to be much less, and the morally correct choice. These actions must be sufficient to stabilize the climate and prevent runaway climate change.
An increasing carbon price does increase the costs of fossil fuel derived energy. This can be regressive and effect lower income households more. It can also increase the costs of derived goods and services. In addition, companies and communities dependent on fossil fuel revenue would see these revenues drop over time. However, as energy production moves to clean sources, the realized annual social costs of carbon and pollution will drop, and over time, energy costs will actually become cheaper.
The goal is to achieve zero anthropogenic emissions by 2050 and negative emissions thereafter. This can be achieved by increasing the carbon price gradually, until it reaches an estimated average marginal abatement cost of removing CO2 directly from the atmosphere in 2050. As this estimate changes over time, the carbon price trajectory can be updated. If we say that price estimate will be $350 per ton of CO2 in 2050, then the CO2 price could increase $10 a year, starting in 2016. This provides a predictable carbon price timeline that can be utilized for investment and deployment of low-carbon infrastructure. This may seem high, but keep in mind that the current CO2 price in Sweden is already $160 per ton of CO2 for households and service industries, and the economy is doing quite well, and clean tech has also developed. Emissions per capita in Sweden is also 28% below the EU level and less than a third of the US level.
DOD (2014). Quadrennial defense review 2014. US department of defense.http://www.defense.gov/pubs/2014_Quadrennial_Defense_Review.pdf
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