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Pitch

Two taxes: one to fund renewable energy projects to offset excess emissions; another to fund long-term remediation and adaptation projects.


Description

Summary

"If you cannot measure, you cannot manage it."—Lord Kelvin

The Problem

Most carbon tax proposals suffer from a clear cause-to-effect line of sight on how carbon pricing will help reduce the overall emissions. Also, they do not discriminate between the national emission targets and the global GHGE damages, and hence are not objective-driven. This lack of visibility is particularly acute and evident when it comes to meeting national goals of emission targets.

The Proposal

What we propose is to have two separate carbon taxes; (i) a Carbon Tax for Emissions Target (CTET) applied only to excess emitters to fund short-term offsetting of excess emissions relative to the emission reductions targets, and (ii) a Carbon Tax for Emissions Damage (CTED), applying to all emitters and used towards longer-term GHGE mitigation and adaptation. We present a mathematical model that cascades the national emission targets down to the industrial sectors and the individual firm within each sector.

Features:

1. Goal-Driven: the model provides clear visibility on the progress towards emissions reduction targets. 

2. Science-Based: A mathematically-based model that enables the setting and tracking of the performance of every  company based on a single metric. We illustrate the framework using the automotive sector.

3. Equitable: The CTET will only target the excess emitters relative taking into account the market dynamics of their specific industry sector, as well their economic performance relative to their competitors, hence providing an equitable basis for their allowable emissions relative to their overall sector.

4. Comparable: The theoretical framework, allows for objective performance comparison, hence allowing benchmarking and assessment of every company’s performance, relative to its peers and to its overall sector.

5. Actionable: The model allows for specific policy development and implementation by government officials as well as managerial planning and tracking by corporate managers.


Is this proposal for a practice or a project?

Project


What actions do you propose?

We propose implementing two different taxes; (i) one (CTET) of about $230/t of excess emissions that will be imposed on commercial emitters whose emission intensity exceeds the target emission intensity of their industrial sector, and (ii) another (CTED) of $30/t of all emissions that will be imposed to all the emitters regardless of whether they’re meeting the target emission intensity of their respective sector.

The CTET will be used within one year of its assessment to fund the deployment of renewable energy sources that will at a minimum offset the excess emissions within the following calendar year. The CTET amount of $230/t was determined on the basis that a 10 kW solar panel system, typically costs about $32,600 (around $3.26 per watt), and produces about 14 MWh of electricity. Assuming a straight line depreciation of 20 years, in the simplest case, it amounts to a system cost of about $115/MWh/yr of clean electricity ($32,600/20/14). Considering that on average, the production of 1 MWh of grid-level electricity from fossil fuel produces about 0.5 t-CO2-e, it follows that to offset each 1 t-CO2-e of excess emission we need to replace 2 MWh of fossil fuel derived electricity by its clean counterpart, which then sets the cost of offset to $230/t-CO2-e.  

The second tax (CTED) is similar to the traditional flat carbon tax, which we propose here to set to a fixed $30/t, and which will be imposed on all the emitters that sell in the country of tax. Those tax revenues will then be used for long-term climate remediation and adaptation measures, such as additional subsidies towards large scale adoption of renewables, energy-efficient buildings and households, research and development (R&D) investment in green technologies, dividends to low-income and middle class households, etc..

Both taxes will be imposed in proportion to the company sales in the country in which the tax is imposed, instead of in proportion of the actual GHG emissions in that country. This will eliminate the possibility of tax evasion by moving the manufacturing and operations of the company to a more carbon lenient region or country.

How will it work?

For the theoretical part of our paper, we have started by assuming that the total GHGE of any given country is well known and measured in t-CO2-e. We restrict our emissions to Scope 1 and Scope 2 only. Scope 3 emissions were excluded to avoid double-counting. Since we consider in our model direct (scope 1) and indirect emissions (scope 2) from electricity use, and consider the GHGE by end-use sector, effectively attributing the GHGE from electricity production to the sectors that use that electricity. We hence exclude the electricity generation by utilities companies since this would cause double-counting as well.

Our model, at the moment, is strictly concerned with only the commercial sector, and how to cascade the GHGE reduction target from the national level down to the individual firms and entities in a fair and deterministic way, and that takes into account the market dynamics and competitive pressures between the entities of a given industry sector. As such and in its present form, it does not extend to emissions from the public sector, the residential sector or the passenger car sector. Currently, it's estimated by the US Environmental Protection Agency (EPA) that the Scope 1+2 GHGE amount to 33% from Residential & Commercial buildings, 29% from Industry, 27% from Transportation, and 9% from Agriculture. GHGE from Commercial buildings accounted for about 60% of the  Residential & Commercial sector, while GHGE from commercial transportation accounted for about 40% of the total emissions from the transportation sector. Adding all the contributions together, we estimated the total emissions from the commercial sectors to account for 67% of total emissions of all the sectors at the country level, or about 4,385 Mt-CO2-e of the total 6,587 Mt-CO2-e produced in 2015 in the US. We show hence that the commercial sectors accounts for the lion's share of the total Scope 1+2 emissions at the country level, in the US. In our model, we will use a multiplier h which represents the portion of the GHGE from the commercial sector relative to the total national level. 

In our analysis of the emissions from the sector and entity level, we will use a key metric, namely the emission intensity metric defined as the ratio of t-CO2-e to the operating revenues generated by either the entity or the total sector in millions of dollars ($M). This emission intensity ratio defined relative to revenues has been widely used in sustainability and emissions reporting frameworks such as GRI, although both the GRI 4.0 and the CDP guidelines allow organizations to use their own organization-specific denominator, which can be profit, EBITDA, units of productions, etc.

We also argue in this proposal that revenue is not only a fair and simple common denominator to use between companies within the same sector, it's also the most appropriate from four separate standpoints:

(i) It can be seen as a proxy metric for the economic value-added that a company has contributed to society or the market place, and that the market place has valued to an amount equal to the aggregate revenues.

(ii) Similarly, if we use the GHGE as the environmental and social cost to society that the company has imposed on society in exchange for that economic value creation, then the ratio of emission over revenue, becomes an external cost/benefit ratio that is society-centric rather than company-centric. Other internal metrics such as units of production, EBIDTA or other forms of profit fail to capture the external economic value created by the company.

(iii) Finally, revenue is a well defined and readily available number that every company already tracks and documents according to global standards. Other proposed denominators such as GDP for example \cite{Randers2012} are much harder to measure and hence much harder to standardize.

(iv) We argue in this proposal that the simplest form of cutting emissions, which is the proportional cuts method, is not fair. For example, asking every company to cut 30% of their emissions by 2030, or 2.14% per year, would unfairly penalize the fast growing companies who might be greener and more innovative than their competitors, but are growing faster because of their innovative and greener technologies. At the same time, companies who may be meeting those reduction targets because of their shrinking revenues may be viewed in a more favorable light, while in fact their emission intensity levels may be much higher than their growing competitors.

Illustration of the Theoretical Framework

Skipping the mathematical derivation for the interest of space restrictions, we show below in Figure 1  a graphical representation of our theoretical framework.

Figure 1: Flow diagram showing the cascading year-over-year of the national-level target reduction down to the commercial entity level, and the sustainability condition to test whether a given entity has met its fair share of reductions relative to the target reductions.

Assuming $230/t for the CTET and $30/t for the CTED, the two carbon taxes are then assessed as follow:

CTET = 230*( RIi,j -1)* Ii,j* US-Revenues

CTED = 30* Ii,j* US-Revenues

To illustrate the proposed framework, we now share the results of a study that was done for the automotive sector, that includes the 10 major automotive companies in the world. By dividing  sum total Scope 1+2 emissions of all the 10 companies by their aggregate revenues, we found that the sector emission intensity Iauto= 31.36 t-CO2-e/$M. In order to meet the US emissions target by 2025, and assuming the global automotive market annual growth maintains an average of  3% through 2025, then the target emission intensity of the whole sector is given by equation (9) and must follow the curve shown in Figure (2) below. Should the sector grow by more than 3%, then the reductions in emission intensity required would be even greater.

Figure 2: Projection of the emission intensity of the automotive sector that is required to meet the US GHGE reduction target.

Now, in Figure 3 below, we plot the emission intensities of the 10 auto makers against the projected overall sector emissions intensity in 2015, 2020 and 2025 required for the sector to meet the 2025 US GHGE reductions target. We observe that 3 out of the 10 are already exceeding their 2015 sector emissions intensity, while only 3 car companies meet the 2020 required intensity level, and only 1 company, namely BMW, which with an intensity level of 14.3 Mt-CO2e/$M already easily meets the sector intensity level of 19.26 targeted for 2025. A remarkable result of this approach is that it enables the easy identification of the sector leader.

Figure 3: Emission intensities for the 10 big auto makers in 2015, shown with the emission intensity of the automotive sector in 2015, along with the projected levels in 2020 and 2025 that need to be achieved by the sector as a whole in order to achieve the US target reductions of 25% by 2025 compared to 2005 levels. (Source: ET Index Research.)

Figure 3 allows the immediate spotting of those companies that will incur the CTET tax in 2015, for instance GM, Honda and marginally to Nissan and Ford. In 2020 on the other hand, should the emission intensities of the above companies not decline per the required amounts, then the CTET tax would apply also to Toyota, Kia and Mazda.

Now, taking into account their US revenues, we show in Figure 4 the amount of carbon taxes each of the companies would have to pay. We estimated that the total collected CTET revenues collected would amount to about US$603 M which can then be used to fund the generation of about 5,235 GWh/year of clean energy, hence eliminating 2.617 Mt-CO2 every year from fossil-based electricity generation which equate the excess emissions, and hence allowing the country to stay on track of its emissions reductions target.

Figure 4: US-based Carbon Tax scenario that would apply in 2015  to some of the automotive companies
with sales in the US (US sales data was not easily available for missing companies).

Per the same example above, the CTED tax would amount to a total of $14.6M that would be invested in R&D in green technologies, dividends for low to middle income families and possibly long-term adaptation measures for the most exposed areas and populations to climate change impacts.

Besides clearly meeting the stated conditions of being goal-driven, science-based, equitable, comparable and actionable, our framework offers some key benefits that distinguish it from other carbon pricing proposals:

  1. The CTET tax, by its targeting only the excess emitters, cannot be passed on to the consumers, or the company risks losing its competitiveness relative to its “cleaner” competitors. Hence, it provides a strong internal incentive to reduce its emission intensity while maintaining its cost of productions, and quality of products and services.
     
  2. Also, by applying the taxes based revenues rather than production, the companies have no incentive to move their production facilities to a more emission-friendly country or area.
     

While the framework currently applies strictly to the commercial sector only, its key feature of a dual-carbon tax based on emission targets and emission intensity threshold, can be expanded to include the public and consumer sectors. For example, one can devise a consumer CTET through an increase in electricity and gas price, once a consumption threshold has been exceeded. The same could be done for gasoline consumption.

As far as the practical implementation of this proposal, each company will be required to report the target emission intensity of its sector, its own emission intensity, its total scope 1+2 emissions, and its global and US operating revenues. The above will then be used to determine the CTET and CTED taxes and remit them to the IRS.


Who will take these actions?

 

For the US as an example, Congress will have to enact these policies, and mandate the IRS to assess and collect the taxes. Mandatory reporting of audited global and US operating revenues as well as Scope 1+2 emissions will be required from every commercial entity that sells products or services to the US. In the case of multinational companies with a high level of diversification among industry sectors, e.g. Samsung, Mitsubishi, Dupont, BASF, etc., reporting of revenues and emissions will be required at the sector or divisional levels.

Each company will be required to report the target emission intensity of its sector, its own emission intensity, its total scope 1+2 emissions, and its global and US operating revenues. The above will then be used to determine the CTET and CTED taxes and remit them to the IRS.


Where will these actions be taken?

These actions must be taken and managed at the federal level of each country that made a commitment to the Paris Agreement and committed to a clear emission target by a certain date.

In addition, specify the country or countries where these actions will be taken.

Every one of the 1905 countries that signed the Paris Agreement.


In addition, specify the country or countries where these actions will be taken.

United States


Country 2

Canada


Country 3

China


Country 4

Japan


Country 5

Germany


Impact/Benefits


What impact will these actions have on greenhouse gas emissions and/or adapting to climate change?

The CTET tax will enable for the first time the ability to establish a clear line of sight between the excess emissions and the measure takes to offset those emissions with renewable energy projects whose immediate impact will be to eliminate an amount of emissions that is equal or greater to the excess emissions.  The net benefit will be to allow any country that implements the CTET to remain on track of its target emission or even improve it.

Adaptation

Unlike most proposals, this one presents two separate taxes for two distinct objectives. While the CTET is exclusively targeted to help a country achieve its emission targets commitments, the CTED is also set aside for the long-term measure towards the mitigation of and adaptation to climate change. The particular use of the funds could include R&D of green technologies, subsidies for green enterprises, development of smart cities, sustainable infrastructures, etc.

Global Impacts

This proposal will achieve optimal impact if applied on a global scale. Not only will it help each country achieve its emissions targets more or less concurrently with the others, it will also establish a level field and a common reporting framework that will bring the reporting of GHGE, that is today still voluntary, to a comparable level of completeness, transparency and materiality as financial accounting.


What are other key benefits?

See previous section on Impact/Benefits.


Costs/Challenges


What are the proposal’s projected costs?

Zero or marginally low costs of setting up the reporting database and issuing the reporting requirements to all the participating commercial entities.


Timeline

CTET: 1-20 years f where the implementation happens in year 1, and impact and benefits can be realized in year 2 and beyond, until all entities have reached and continue to meet the compliance with the national emissions targets.

CTED: 5-50 years for the funding, and implementation of the longer term measures for remediation and adaptation


About the author(s)

Dr. Lotfi Belkhir is a physicist, inventor, entrepreneur and a scholar. He is currently the Endowed Chair in Eco-Entrepreneurship at the Walter G. Booth School of Engineering Practice at McMaster University. Dr. Belkhir’s current research and teaching have for core mission the advancement of a sustainable society through innovation, entrepreneurship, design and policy. Dr. Belkhir is a regularly featured speaker on the subjects of Entrepreneurship, Innovation, Sustainability and Corporate Social Responsibility at many venues. He holds a Ph.D. in physics and a Master’s in Management of Technology. Originally from Algeria, Lotfi is fluent in English, Arabic and French.


Related Proposals


References

Jacob Jackson and  Lotfi Belkhir, "Assigning Firm-level GHGE Reductions Based on National Goals - Mathematical Model & Empirical Evidence", Manuscript JCLP10580, Accepted for publication in Journal of Cleaner Production, 2017.