Opinion

Felix Salmon

The realistic and the optimal ways to overhaul energy taxes

Felix Salmon
Feb 4, 2014 16:15 UTC

Back in December, Max Baucus, the chairman of the Senate Finance Committee, came out with a pretty bold proposal to simplify America’s energy taxes, and to focus them on a simple goal: that the US should emit less carbon. That should be a pretty easy thing to do, in theory: you just raise taxes on the more carbon-intensive energy sources, while not raising them, or even cutting them, on sustainable energy sources. Except that’s not the way the US tax code works. America, it turns out, doesn’t really tax energy at all: instead, it subsidizes energy. And the amounts of money involved are very large:

Under current law, there are 42 different energy tax incentives, including more than a dozen preferences for fossil fuels, ten different incentives for renewable fuels and alternative vehicles, and six different credits for clean electricity. Of the 42 different energy incentives, 25 are temporary and expire every year or two, and the credits for clean electricity alone have been adjusted 14 times since 1978 – an average of every two and a half years. If Congress continues to extend current incentives, they will cost nearly $150 billion over 10 years.

As a result, Baucus can’t simply tweak energy taxes; instead, he has to tweak energy subsidies. His proposal is a good one: he essentially consolidates all those 42 existing subsidies into two new ones — one for electricity, and one for transportation fuel. In both cases, tax credits get handed out in direct proportion to how clean the facility is. Once carbon emissions have reached 75% of their current level, the subsidy phases out.

Charles Komanoff, of the Carbon Tax Center, responded to Baucus’s discussion draft last month, in testimony to his committee. Komanoff’s paper is conceptually simple: he asks what the outcome would be if instead of subsidizing clean energy, the government decided to go ahead and tax carbon emissions directly.

The first big difference, of course, would be fiscal. Komanoff takes 2024 as his base year, and reckons that under the Baucus plan, the government subsidies will cost taxpayers some $39 billion in per year, in ten years’ time. A carbon tax set at roughly the same level, on the other hand, would generate a whopping $450 billion per year in fresh government revenues. That’s enough money to make the system progressive, rather than regressive: checks could be sent out to lower- and middle-class households to cover any extra expenses they suffered as a result of the carbon tax. The Baucus proposal, by contrast, is regressive: most of the benefits would end up flowing to the highest-income households with the highest energy use.

The other big difference is in carbon emissions. Here’s Komanoff’s chart:

Screen Shot 2014-02-04 at 10.52.13 AM.png

A carbon tax, by its nature, affects everything: it’s applied equally to every sector of the economy, and encourages energy conservation (turning your thermostat up a little in the summer, for instance) just as much as it encourages cleaner energy creation. Komanoff’s model assumes a carbon tax which changes exactly as the Baucus subsidies do. Baucus’s tax credits work out at about $55 per ton for eliminated electricity-related carbon, and $102 per ton for eliminated carbon in the transportation sector. Komanoff’s carbon tax is set at just those levels for those industries, and at the average of the two everywhere else; overall it works out at a high $78 per ton. (Which serves to demonstrate how generous the Baucus proposal is.)

The problem is that there’s no easy way to get there from here. Fiscal policy is path-dependent, and Baucus knows full well that it’s hard enough to take one group of subsidies and replace them with two new subsidies which go to the same industries and cost roughly the same amount of money. In the current Congressional climate, it’s downright impossible to take an existing group of subsidies and replace them with a brand-new tax. Doing that would be wonderful in terms of reducing carbon emissions, but it would generate so many squeals of pain from the energy lobby (not to mention Republicans who hate all new taxes on principle) that it would never even get as far as a vote.

President Obama has said that addressing climate change will be a top priority of his second term — but he said that it would be a top priority of his first term, too, and he did exactly nothing on that front in his first four years. I doubt that Komanoff’s testimony came as any surprise to Baucus: it’s a well known fact in Washington that a carbon tax would be an extremely efficient way of raising much-needed revenues, reducing US carbon emissions, and helping America achieve energy independence. But Washington is not a town which tends to embrace efficient or logical solutions. If we’re going to reduce carbon emissions any time soon, we have a much higher chance of doing so with carrots than we do with sticks. Even when the sticks are much more effective.

COMMENT

“America, it turns out, doesn’t really tax energy at all: instead, it subsidizes energy.”

On net dollar terms this statement is clearly false. We subsidize the generation of energy via solar, wind, and the transformation of energy via ethanol. The subsidizes offered to these favored power sources are dwarfed by the taxes paid by fossil energy producers and consumers.

Europe offers the carbon lite sources even more generous breaks while on net taxing energy even more heavily than we do in the states… hard to see what they get for their money aside from crushing electric bills and $7-8/gallon gas… god bless them for getting the ball rolling though.

5 of the 7 billion people alive on this planet owe their very existence to the fossil fuel industry… THAT is the real inconvenient truth.

p.s. to BenE… those new CAFE standards are a paper tiger… they are back end loaded and when congress wises up to the fact that they cannot be met they will just be torn up like the renewal motor fuels mandates are being as we speak.

Posted by y2kurtus | Report as abusive

How much carbon does bike-sharing save?

Felix Salmon
Dec 2, 2010 13:56 UTC

How should bike-share services pay for themselves? Up until now, the main model has been sponsorship and advertising. But CityRyde has a bright idea: why not sell carbon offsets?

The idea’s pretty simple: as bike-share use rises, the amount of carbon-emitting vehicle use falls. So bike shares save carbon; CityRyde even has a methodology to determine exactly how much. (One thing I’d like to see, though: virtually all bike-share programs involve trucking bikes from the center of town back into the periphery, not to mention transporting broken bikes to be fixed. So somewhere in the methodology there should be an accounting for the amount of carbon emitted by the bike-share program itself.)

In any case, if the bike-share program sold carbon offsets to companies which want to claim to be carbon-neutral and to individuals wanting to offset their carbon emissions, that could raise some revenue: CityRyde co-founder Jason Meinzer told me his rule of thumb is that you could bring in between $25 and $100 per bike per year that way. For a scheme with 50,000 bikes in New York City, that would equate to between $1.25 million and $5 million per year: hardly chump change.

Meinzer didn’t share with me exactly how he got his numbers, though, so I ran a smell test. Let’s say each bike travels 15 miles per day, 350 days per year: that’s 5,250 miles per year. A lot of bike rides are simply for pleasure, and others—especially in a city like New York—replace walking or taking mass transport. Those are activities with negligible marginal carbon emissions.

But let’s say that 1/3 of bike journeys would otherwise have been taken in a car of some description. That means that each bike saves 1,750 passenger-miles in cars. If one car carries the same number of people as two bikes, on average, then that’s 875 car miles saved. At 1.2 pounds of CO2 per mile, that’s basically half a ton of CO2 emissions saved per bike per year. And while the market in carbon offsets is far from transparent, my feeling is that you’d be lucky to get $5 per ton, which would equate to $2.50 per bike per year. That’s a full order of magnitude lower than Meinzer’s lower estimate.

Meinzer’s methodology is a lot more sophisticated than that, and I’ll update this post if he wants to share his own math. But at $5 per ton, selling carbon offsets would gross only about $125,000 a year—which, by the time you subtract the cost of measuring the carbon saved and administering the sales, leaves you with little or nothing in net revenue. So while it’s an intriguing idea, I’m not yet convinced it’s a practical one.

Update: Meinzer says that he does account for the carbon costs of the program, in the “Project Emissions” and “Leakage” sections of his methodology; I don’t see it myself. And he explains that he gets his much higher estimate for total revenues from selling carbon offsets at a much higher price:

Our credits most certainly will be sold at a premium due to the novel co-benefits associated with their generation even outside of the carbon mitigated; e.g. health and social (and remember some credits sold for as high as $111 last year). This has been validated by the carbon brokers we’ve been working with over the years. Moreover, outside of the “price-point” per carbon a key angle we are taking to obtain an even higher premium on our credits is via creative bundling; by lumping the carbon credits w/ the sponsorship and advertising. Case in point – Blue Cross Blue Shield donated $1.5 million to have their name tied to the existing 1,000-bike Minneapolisbike share. Had they been able to purchase the offsets stemming from that program the donation would have been MUCH higher. This argument is reinforced by the fact that this donor in particular clearly has a key interest in health, and so the aforementioned co-benefits of our credits would prove even more attractive given the health-benefits of biking. Most big names companies are already offsetting their carbon emissions each year anyways for a variety of reasons, even outside of a regulatory mandate.

COMMENT

To the guy who said “CityRyde is going to sell carbon offsets to generate revenue for its business eh?” — No.

CityRyde is going to sell the methodology to generate carbon offsets to sustainable transportation initiatives in order to help them generate revenue to support the construction of sustainable infrastructure. As someone who’s actually followed the company, I can tell you that generating funding for green transportation is precisely what they’re trying to do.

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