August 2020’s carbon tax discussion was surprisingly robust. Over the course of the past 31 days we’ve seen a new carbon tax bill pitched in the Senate, a new paper from Columbia’s SIPA Center on Global Energy Policy, and we’ve seen the carbon tax enter the chat in a Senate race that could determine the balance of the upper chamber for years to come.

“Is the carbon tax dead? Not yet, says this senator.”
Girst, August 10, 2020

For years, the idea of putting a price on carbon emissions seemed like a no-brainer — economists claimed that it would cut fossil fuel pollution quickly and efficiently, and at the same time, could even give money back to the American public. But lately the policy has fallen out of favor. Over the past few months, as Democrats have rolled out multiple comprehensive plans to slow down climate change and turbocharge renewable energy, the idea of a ‘carbon tax’ has been notably absent.

One lawmaker doesn’t seem to have gotten the memo. On Friday, Senator Dick Durbin, a Democrat from Illinois, introduced the ‘America’s Clean Future Fund Act,’ which would set a steadily rising price on carbon dioxide emissions. The tax would start at $25 per metric ton of emissions (that’s the equivalent of about 22 cents extra per gallon of gasoline) and rise by $10 or more per year. Given the COVID-19 economic downturn, the bill suggests waiting to institute the price until ‘the U.S. economy is no longer in economic turmoil due to the current pandemic,’ but no later than 2023.

IER’s Take

So what’s in the bill?

No later than 2023 America’s Clean Future Fund Act would institute a carbon tax of $25 per metric ton of CO2 equivalent, applied upstream and to non-fossil fuel high emission facilities. The fee would increase by $10 per year above the consumer price index, meaning by 2030 we could be paying more than $100 per metric ton of CO2 equivalent, or about a buck extra per gallon of gas.

The bill could create a “Climate Change Finance Corporation” to finance non-fossil-fuel energy projects, climate resilience, and R&D.

The bill would give grants to states and local governments for “transition assistance” to carbon-intensive industries and employees who are put out of work.

And the bill would, according to the Durbin website, give payments “to low- and middle-income individuals and facilities that capture, store, and/or utilize carbon.” This is a headscratcher. I’ve seen a lot of bills introduced on the Hill and I don’t think I’ve before seen one that put the onus of carbon capture on low-income individuals.

Jokes aside, this is a wealth transfer and one that most economists would say undermines the viability of a carbon tax. The competing funding demands this bill places on the tax revenue are in competition with each other. It would seem unlikely that “transition assistance,” meaningful R&D investment, and a purposeful redistribution can be achieved.

“A Near-Term to Net-Zero Alternative to the Social Cost of Carbon for Setting Carbon Prices”
Nature Climate, August 17, 2020:

Economists overwhelmingly support pricing CO2 emissions. How much to charge for each ton of emissions is perhaps the most important element of a carbon pricing policy, yet little consensus exists among economists about the appropriate level for CO2 prices.

To find optimal CO2 prices, economists have long focused on a metric called the social cost of carbon (SCC), an estimate of the marginal damages of an additional ton of CO2 emissions. However, the SCC cannot be credibly estimated with sufficient precision to provide practical assistance to policymakers setting CO2 prices. The SCC approach is also disconnected from real-world policy discussions that position CO2 prices as one element of a strategy to avoid the risks of exceeding thresholds of global warming.

In the face of these constraints, this paper introduces an alter- native approach. It starts with policymakers selecting a net-zero CO2 emissions target informed by the best available science and economics. Then, near-term to net zero (NT2NZ) CO2 prices are combined with a broader policy strategy to achieve an emissions pathway consistent with the net-zero target in the near term, when the projections of energy–economic models are most useful.

IER’s Take

Courtesy of IER Senior Economist David Kreutzer:

“The climate activists’ frustration with something called the social cost of carbon (SCC) reached a breaking point recently. In their recent article in Nature Climate Change, Kaufman et al. admit that the estimates for the SCC are so divergent as to be useless for policy making. They overcame their frustration by, in essence, simply assuming the SCC is infinity.

My coauthors and I found also found SCC estimates to be useless for policy making, years ago. (For example, see here, here, and here.) It is fine to not use it, but it isn’t fine to not use it and act like you did. In the Kaufman et al. world, the economics start after you have already decided to zero-out all CO2 emissions by 2040 (or 2050 or 2060).”

“Open Letter from Senator Daines to Governor Bullock”
The Missoulain, August 28, 2020

It has come to my attention that the Climate Solutions Council has recommended inclusion of carbon pricing policy in the Montana Climate Solutions Plan. Carbon pricing proposals undermine the free-market principles our nation was built upon, expand the reach of the federal government into Montanans’ daily lives, and disproportionately affect low-income households and energy-dependent, rural economies.

A punitive approach to reducing emissions like the ones being considered by your Climate Solutions Council will drive up energy and manufacturing costs, increasing the cost of living substantially while simultaneously decreasing income and employment opportunities in places like Colstrip, Sidney, and the Crow Reservation.

IER’s Take

Steve Daines’ letter to Steve Bullock hits upon many of the themes we’ve stressed for years. Carbon pricing is nakedly punitive and no lipstick can change that. We hope to amplify the Senator’s message and to add to it our own repudiation of carbon pricing known as the Energy Freedom Resolution:

I. Affordable, reliable energy is a vital aspect of human wellbeing, providing electricity for our factories and hospitals, heat and light for our homes and schools, and locomotion for the cars, trucks, trains, and ships that move people and goods about the planet. Affordable, reliable energy enables the modern standards of wealth and health we enjoy.

II. Energy derived from carbon-based fuels fits the affordable, reliable profile necessary for human wellbeing. Carbon-based fuels—given their energy density, abundance, portability, and dispatchability—are key resources, both here in America and across the globe, where as many as a billion people still lack electricity. If technological developments give other energy sources advantages over carbon-based fuels, then people in a free market will naturally adopt them.

III. Political schemes designed with the explicit intention of increasing the cost of the carbon-based fuels deprive people of affordable, reliable energy. A tax on carbon dioxide emissions, commonly called a carbon tax, is one such scheme. A carbon tax would hinder access to affordable, reliable energy and therefore harm our quality of life.

IV. Private decisions made in a free market best reflect people’s interests. Central planners claim the mantle of the public good, but through energy taxes, mandates, and subsidies—whoever the beneficiaries may be—they only impede our decision-making. Energy freedom—the liberty to produce and use affordable, reliable energy—empowers people to manage life’s challenges as they see fit.

V. The American principles of individual liberty and decentralized governance endorse energy freedom. Implementing a carbon tax in order to satisfy speculative computer models is contrary to those principles. Energy freedom ensures affordable, reliable energy will continue to promote human wellbeing, here in America and abroad.

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