Hansen's Climate Stewardship Act: I don't entirely agree

With US politicians squabbling over current proposals for climate change and clean energy legislation and world leaders getting nowhere fast on a global agreement to limit CO2 emissions, well-informed people may be losing hope for progress on solving the problem. But we should find some hope in that policy choices that could actually substantively address greenhouse warming are at least being openly discussed and debated. A few years ago the only options on the table seemed to be more individual virtuous action ("change your lightbulbs", "buy hybrid cars") or modest government-level efforts; world CO2 emissions continued to rise quickly even after the entry into force of the Kyoto protocol. Now at least there are substantive proposals, still inadequate, but capable of addressing at least a significant fraction of the emissions problem. Any of these would be, if they pass into law, a major step forward.

Aside from the Kerry-Graham-Lieberman (KGL) senate bill that has been so much in the news lately, we have also the Waxman-Markey bill that passed the House last year - both of these are "cap and trade" proposals, though the KGL bill avoids that label - and in fact with its constricted "price collar" and credit reserve it's much closer to a straight tax (but still one that is allowed to vary by a factor of 2 or 3 in price). Both bills act at the point of emission of CO2, rather than the point of extraction. And both bills at first give away many of the emission permits to industry, so that it becomes a real tax with money going to the government only over a period of decades. Both bills allow some form of offsets, and both bills include proposals to spend the money raised, partly but not entirely for clean energy and efficiency investments. Flawed as they are, they will clearly have a significant impact on CO2 emissions, and cost estimates indicate little damage to economic growth, and perhaps a rather large positive effect, not even counting the benefits from starting to address climate change itself.

The other bill that seems to be seriously under consideration is from Senators Cantwell and Collins (CC). As I argued here, the real problem is our extraction and import of fossil fuels which are then added to the surface carbon cycle; it makes much more sense to tax or set a cap at that point of extraction. That is one major difference in the CC proposal - they set a cap and then auction shares in that cap to the extractive industries. The effect of that is essentially to eliminate the use of "offsets" and trading markets (though Jim Hansen attacks it for still allowing some offset-like projects). It has the simple direct effect of limiting fossil carbon use to an amount we set, and allocating the "rent" of those shares (or at least 75% of that revenue) back to the American people. It seems a much cleaner policy approach than the complex mechanisms of KGL and Waxman-Markey, and much less subject to attack for unfairness, but as with any political document there are compromises that many will be unhappy with.

What Hansen has been calling for is an even simpler "tax and dividend" plan, and he along with the Carbon Tax Center has just released a People's Climate Stewardship Act proposal with details. I fail to see how such a proposal could become law without some of the sort of compromises at least in the CC bill, but let's look at what the proposal actually entails as it stands now and see whether it really makes that much more sense.

People’s Climate Stewardship / Carbon Fee and Dividend Act of 2010:
Proposed Findings:
1. Causation: The overwhelming consensus of peer-reviewed literature by climate scientists worldwide indicates that burning of fossil fuels is increasing atmospheric CO2 levels which, along with emissions of other greenhouse gases, is causing an accelerating rise in global temperatures and ocean acidification,

No argument there!

2. Mitigation (return to 350 ppm or below): Current atmospheric CO2 levels of 387 parts per million (“ppm”) are the highest in human history. A rapid return to levels of 350 ppm CO2 or less is necessary to slow or stop the rise in global temperatures and ocean acidification,

True enough - but this doesn't quite answer the question of whether it is "necessary to slow or stop the rise in global temperatures" in a "rapid" manner...

3. Endangerment: We face a global climate emergency. Further increases in global temperatures and ocean acidification pose imminent and substantial dangers to human health, the natural environment, the economy and national security and an unacceptable risk of unmanageable catastrophic impacts to human civilization,

This seems over-sold - or at least, Hansen is here positioning himself (as he has done before) and this proposal towards what one could definitely call the "alarmist" end of the spectrum of concern. What does "imminent" mean here? The Iraq war was sold to the American people on the basis of an "imminent" threat that was unfortunately manufactured; people are quite reasonable doubtful about such assertions now. He is right that continued warming presents at least a small "risk of unmanageable catastrophic impacts" - and the uncertainty we have about impacts makes those risks more significant, not less - but to what degree are those risks now imminent and "unacceptable"? To get public acceptance of a sense of emergency you have to get much broader support for such claims - and in contrast to the "overwhelming consensus" on point 1, that just is not there on this point, at least to the degree of urgency Hansen seems to require.

4. The False Economy of Cheap Fossil Fuels: Fossil fuel prices currently do not reflect their true, long term-costs to society, the environment and future generations. This false economy of cheap fossil fuels is obstructing an economy-wide transition to low carbon energy sources.

No doubt about this one.

5. Benefits of Carbon Fees: Steadily-increasing carbon fees on fossil fuels are the most efficient, transparent and enforceable mechanism to drive an effective and fair transition to a low-carbon economy. They will stimulate investment in low-carbon technologies, create powerful, predictable incentives for businesses and households to increase their energy-efficiency and reduce their carbon footprints and harmonizing carbon tariffs will create incentives for other nations to enact carbon fees,

A price on fossil carbon to cover its externalities is definitely needed; the argument here is that a "steadily increasing fee" would be "most efficient" (is there peer-reviewed economic support for that?), "transparent" (probably, depending on implementation) "enforceable" (probably), and provide
"powerful, predictable incentives". The component that I have the worst issue with here is the "predictable" claim. Just look at the history of the renewable energy production tax credit - probably the most unpredictable incentive US companies have ever had to face. Why would practical legislation for a "steadily increasing carbon fee" be significantly more predictable than the PTC?

6. Co-Benefits: Adding carbon fees to the prices of fossil fuels will have many additional benefits, including: 1) reducing dependence on foreign oil, 2) stimulating advances in low-carbon energy technology, 3) job growth in low-carbon energy and energy conservation, efficiency and retrofitting, 4) reducing conventional (non-greenhouse-gas) pollutants emitted by fossil fuel burning which cause health and environmental harm,

This seems partially redundant with (5), but yes, this is the impact of any added cost for fossil carbon, whether implemented through caps or taxes.

7. Return Revenue: All revenue from carbon fees should be returned to households equitably, in order to build broad public support and ensure that families can afford the energy they need during the transition from fossil fuels to cleaner energy,

Isn't there then a danger of creating a dependence on that fossil revenue, and public demand to "optimize" the tax so that revenues are maximized, rather than to raise the tax high enough to eliminate fossil carbon use altogether? Because in the end we want this "return revenue" to essentially go away completely. This is a real hazard even if the government keeps all the revenue raised, of course, as well. My preferred scheme would be to simply use the money to pay down US debt. Maybe we can arrange things so the debt is erased at the same time we stop using any fossil fuels; that would be a neat trick... In any case, while this is obviously designed to build some popular support for the idea, I am definitely not convinced it's the best path forward for climate legislation.

Therefore, we propose the People’s Climate Stewardship Act:
1. Collection of Carbon Fees/Carbon Fee Trust Fund: Beginning on July 1, 2011, a carbon fee of $15 per ton of CO2 equivalent emissions will be imposed on all fossil fuels at the point of first sale in the U.S. economy. CO2 equivalent fees shall also be imposed for other greenhouse gases including methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons (HFCs) emitted as byproducts, perfluorocarbons, and nitrogen trifluoride. All fees are to be returned to American households as outlined below.

Hmmm. For a large oil company, point of first sale could be at the gas pump. It's not clear to me that makes this as simple as it could be - why not go with the Cantwell-Collins approach of taxing the extraction and import of fossil fuels directly?

2. Steady step-up of CO2 Fees, Ensuring Replacement of Fossil Fuels with Low-Carbon Energy: The yearly increase in carbon fees including other greenhouse gasses shall be at least $10 per ton of CO2 equivalent each year, to steadily reduce U.S. CO2-equivalent emissions by 2050 to 10% of the 1990 U.S. CO2-equivalent emissions. EPA and DOE shall annually review greenhouse gas emissions data and determine whether an increase larger than $10 per ton per year is needed to achieve emissions reductions commensurate with that reduction trajectory. If EPA and DOE find that U.S. emissions are not being reduced sufficiently, the CO2 fee shall increase by $15/T CO2 in the following year. [Modeled after Rep. Larson’s H.R. 1337 “America’s Energy Security Trust Fund Act.”]

How do you avoid Congress meddling with those increases? And this is rather non-specific on how the 2050 point is to be reached. If EPA and DOE allow US emissions to be still at 50% of 1990 levels in 2049, what is the penalty for not making the 2050 target? Oops? I think a better approach would be to allow for a specific total fossil carbon allowance from now through 2050 - some number of hundreds of billions of tons. But of course, that would be a cap, which Hansen for some reason finds distasteful (because it allows for trading and markets?)

Also note that, to the extent the tax rate increases are not at a steady rate (remember PTC!) you lose that predictability that allows for more sure business planning, and end up in roughly the same position as a fluctuating cap-and-trade price scheme would.

3. Mechanisms for 100% Revenue Return: All revenue from CO2 and CO2 equivalent fees shall be returned to households. Mechanisms include: (1) Equal monthly per-person “dividend” payments made to all U.S. households (1/2 per child under 18 years old, with a limit of 2 children per family) each month beginning on August 28, 2011, (2) Use all carbon fee revenue to reduce payroll taxes for employers and employees. Unemployed persons and Social Security recipients shall receive equivalent distributions.

Limit of 2 children per family! Well, that'll go over well in some sectors!!! Again, I'd prefer all revenues to simply go to reduce the national debt. Efficiency and other renewable energy promotion programs are good - and should be funded separately, in my view, though of course the money is fungible in the end. Sending it all back to the people is a transparent populist ploy that is, in the end, pretty much meaningless, or worse, possibly detrimental to the kinds of carbon cutbacks we want this program to achieve.

4. Border Adjustments: To ensure that U.S.-made goods remain competitive abroad and to provide an additional incentive for U.S. trading partners to adopt their own carbon fees, Carbon-Fee-Equivalent Tariffs shall be charged for goods entering the U.S. from countries without comparable Carbon Fees. Carbon-Fee-Equivalent rebates shall reduce the price of exports to such countries and ensure that U.S. goods remain competitive in those countries.

Yes, something like this is absolutely necessary, agreed. We don't want to just move carbon-intensive manufacture overseas and have the same or worse CO2 impact from our economic activities.

5. Phase Out of Fossil Fuel Subsidies : All existing subsidies of fossil fuels including tax credits, shall be phased out within 5 years.

This is good.

6. Moratorium on New or Expanded Coal-Fired Power Plants without CCS: No new coal-fired power plants shall be permitted, constructed, or operated. No expansions in capacity of any existing coal power plants shall be permitted, constructed, or operated. [Exception: Permits may be issued for facilities that successfully demonstrate safe and effective long-term Carbon Capture and Sequestration of at least 90% of CO2 emissions.]

I have my doubts about CCS, but yes, this is a necessary rule. I fail to see what this has to do with the tax proposal though - this is a regulatory measure in the electricity sector, and really out of place here. If taxes are sufficient to cut fossil fuel use, then why do we need additional regulations like this anyway?

7. Seeking Treaties: The President shall seek treaties with other countries that encourage adoption of similar programs to reduce CO2 and other greenhouse gas emissions worldwide.
Proposed by Dr James Hansen: Earth Day, April 25, 2010.

On the whole it's really not a bad proposal - but it has real faults, just like everything else out there. I really wish I understood why Hansen was so dogmatic about this particular approach being so much better than all the others. What we need is a price on fossil carbon to capture the externalities associated with burning it - climate change being likely the worst of those. How we get that price and who benefits in detail is of far far less concern.

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Re: "how we get that price

Re: "how we get that price and who benefits in detail is of far far less concern" - Actually, I think it is a key point and is critical for creating the right incentives. Offsets are not very popular and economics is far from perfect. However, there is a respectable argument for them, which is that the money paid for them would go directly to those developing the most efficient and effective projects (assuming of course that whatever bill we get allows for payments for project level activities vs paying governments for reductions achieved). In the land use sector, this can be an important source of funding for conservation and landscape restoration that have high upfront costs, and would directly benefit communities. Although they do enable continued emissions by those paying for them, if they are required for compliance, and if the price is high enough, they also create an incentive to reduce them. More importantly, such an approach would direct future investment towards the alternatives needed to displace current sources of emissions. I have done my share of ranting about economics and markets when they become the end all, but they can be an important tool for achieving social goals - i.e., markets and government are not an either/or proposition.

In the interest of full disclosure, I admittedly have an interest in this as my perspective comes from experience of working for a company that provides technical and marketing support to those developing such projects in the land use sector. But I am not speaking for them so I will leave their name and mine out of this.

I think I largely agree with

I think I largely agree with your points here - certainly I have some faith that markets generally can do a pretty good job of selecting the best, most efficient options for society to take as a whole, given the right market structure and regulatory framework etc. But there's a whole other class of things you can do - like the coal plant moratorium Hansen includes in his proposal - which I didn't really even get into in this article, which have absolutely nothing to do with markets, they are government actions that have direct impact. So yes, I agree that markets and government are not an either/or proposition.

I guess my point was, if you agree with Hansen that it is essential for human civilization that we take the steps to cut fossil carbon use substantially over the next few decades, any mechanism that passes political muster and actually turns into action is better than some idealistically "fair" plan that never becomes law. So that was my meaning in the "who benefits in detail" statement. Maybe I should have clarified it a bit more...

A colleague of mine is

A colleague of mine is convinced that the failure to include land use and offsets in Kyoto is the reason we haven't done a damn thing yet. I could think of more reasons but I think you get the point. I have nothing against a moratorium on coal plants....

Dr. Smith, you describe our

Dr. Smith, you describe our proposal for 100% revenue return as a "transparent populist ploy."

So what if it's "populist?" I don't think "transparent" is so bad, either.

There are also important climate benefits. Returning revenue allows the CO2 price to keep climbing to the needed levels. Using a four-sector model, economist and Carbon Tax Center co-director Charles Komanoff estimated that the US could achieve 30% reductions if the carbon price started at $15 and stepped up in $12.50 / T CO2 increments from 2012 to 2020. That would produce a per person "dividend" of $1400 which would put the first 3/5 of households in the position of breaking even or better. A carbon fee with equal, 100% revenue return is income-progressive, and would benefit a majority of households -- addressing one of the key concerns of people who don't think climate policy should punish poor and middle income families.

Economist Paul Krugman asserted (NYT magazine, 4/5) that cap/trade/offset has the political advantage of letting politicians give away allowances (really money) to those affected -- mostly utilities and industries. That's what the EU tried. But utilities pocketed the handouts and passed on their allowance costs to households. Households bear the cost of cap/trade/offset. While Waxman-Markey would give 35% of allowances to utilities "for the benefit" of consumers, economist Dallas Butraw (Resources for the Future) testified to the Ways & Means Committee that most of that value would benefit commercial users who buy 2/3 of the electricity in the US. As with the utilities in the EU, that's a windfall-- they can pass their costs through. That leaves households with 1/3 of that 35%; a whopping 12% of allowance value. But we're going to pay all or very nearly all of the carbon price.

How high do you think the carbon price can go if it rips 88% of the bill out of families' budgets? If cap/trade/offset passes the Senate, do you think public will stand for this hidden, volatile and regressive tax long enough to do much good? At least the Cantwell's CLEAR act proposes to return 75%. That's a start, but it would fully compensate just half of households.

James Handley - thanks for

James Handley - thanks for your comment here. Populism is certainly a useful technique to get something moving. I just think it's a little dangerous to rely on appeals to people's personal interest rather than technical merits of the proposal. If it gets the job done (reducing fossil carbon use) then I really don't have a problem with it. You are of course familiar with the British Columbia carbon tax and dividend plan, so we do have a practical example of how it can work - but I note that BC is talking about adding a "cap and trade" system as well, as evidently the tax isn't sufficient to bring down emissions to the degree needed.

I don't understand your "88%" calculation at all. In the end, the capital to fund the infrastructure needed to improve efficiency and replace fossil fuels has to come from somewhere. To the degree that capital produces positive returns in itself, the funding can be entirely from debt financing and there is no added cost to "families' budgets" or anybody else, rather people will see decreased costs and positive impact on their budgets. To the degree the returns are economically negative (while positive for the environment and long-run economy) then 100% of that cost is going to, one way or another, come out of "families' budgets". Essentially all wealth in our nation resides ultimately with individuals and their families one way or another, so whether we're adding or subtracting from total wealth, that's where it's going to go to or come from.

That we have rapacious corporations and regressive taxation policies that deepen wealth inequalities in our nation, to the extent that needs to be corrected by government action, is really a very separate problem from the issue of fossil carbon. We definitely should pursue policies to fix some of those problems. But I don't see a lot of upside in forcing carbon policy to achieve particular social equity goals at the same time. Yes there will be "winners" and "losers" from any carbon policy scheme - and that's the purpose of politics, to figure out how to get the goal accomplished in a way that's perceived as fair by all sides. Your scheme forces a particular notion of fairness - not that it's a bad one, in my view - but I suspect it constrains the problem too much for our political system to deal with.

Anyway, I would like to hear your views on two points I specifically raised as serious concerns with your proposed legislation:

* If EPA and DOE allow US emissions to be still at 50% of 1990 levels in 2049, what is the penalty for not making the 2050 target? Oops?
* Isn't there then a danger of creating a dependence on that fossil revenue, and public demand to "optimize" the tax so that revenues are maximized, rather than to raise the tax high enough to eliminate fossil carbon use altogether? Because in the end we want this "return revenue" to essentially go away completely.

Dr Smith, On your first

Dr Smith,

On your first point, yes, proposals like Waxman-Markey and the sketches we've seen of KGL kick the bulk of reductions far down the road-- when there's little chance to catch up. That "kick the can down the road" problem is especially pronounced if you consider the effects of 2 billion tons of offsets in an economy that emits 6 billion tons of CO2. Stanford Prof Michael Wara testified that it's effectively no cap at all, for at least a decade. We like Rep Larson's proposal: A steadily-increasing price (rising $10/yr) adjusted upward to $15 for any year after the EPA/DOE emissions inventory didn't decline enough to keep us on track. As you noted, the goal is a reduction in total emissions between now and 2050. Year to year emissions fluctuations matter far less than keeping an upward-trending price signal clear so investors in low carbon energy can expect a return on investment every year, not a feast or famine situation as created by the volatile prices in the EU.

On your second point, I look forward to the day when we face declining carbon revenues. When that does happen, it will be because we've made a big transition to low carbon energy, thus households won't need as much help...

- jh