Abby L. Harvey
GHG Monitor
9/25/2015
On the surface, adopting a price on carbon might seem like a costly and potentially risky move economically. However, when examining the possibilities presented by a significant new source of revenue, a carbon price becomes an economically viable option, Mark Reynolds, executive director of the Citizens’ Climate Lobby said this week during an Association of Climate Change Officers webinar.
“One of the things that I think becomes obvious when you look at what members of Congress talk about when they deal with this issue is they mostly understand the front end,” Reynolds said. “They understand that there is going to be an increase in costs for people. What they don’t understand as well is what happens when a huge amount of additional money goes into the economy.”
The effect of that additional revenue on the economy and households depends on how it is used. If the money is returned to consumers or used to offset the cost of higher energy bills through energy efficiency programs, consumers are likely to benefit.
“If you only look at the front end of the policy you would be concerned with energy costs,” Reynolds said. “If you look at the back end, you see that the majority of households actually come out equal or better if you can get a system where all of the money goes back to households.”
Revenue Must Be Used Correctly Avoid Harm to Poor Households
Designing such a system is tricky, however, as demonstrated by research presented this week at an event hosted by Resources for the Future. Investigating systems by which to return carbon price revenue to households, Roberton Williams, RFF senior fellow and director of academic programs, found that what is best for the economy is worst for low-income families.
Cutting taxes on capital benefits helps the economy the most by promoting saving and investing, Williams said, but this use of revenue does little to help lower-income households as by definition they have less capital to take advantage of these tax cuts. “Capital recycling is somewhat regressive. The carbon tax, plus cutting taxes on capital, makes the bottom 80 percent of income distribution worse off. The top 20 percent is actually better off, even ignoring any environmental benefits,” Williams said. “Why? Because they get such a big benefit from cuts in capital taxes and so … it’s a very clear pattern, the poorer you are the sort of worse you do in that case.”
On the opposite end is the lump sum rebate. Under such a system, all consumers receive an equal share of the revenue collected by the government. This is a better system for lower-income households in that that sum represents a larger portion of their income than for high-income households. Williams said, though, “a lump sum rebate doesn’t change incentives to save or work, so it’s not giving any sort of boost to the economy in terms of making the economy run more efficiently. That’s why you get the biggest loss there.”
Successful Adoption of a Carbon Price Possible
Market-based carbon mitigation systems, such as a carbon price or cap and trade system, have already been adopted and proven successful in some areas of the country. For example, the Regional Greenhouse Gas Initiative is reported to have saved consumers billions and to have created 30,000 jobs in the nine member states, David Littell, a commissioner with the Maine Public Utilities Commission, said during the ACCO webinar.
RGGI states are allowed to decide how to distribute the revenue received through the cap and trade program within their states. Many choose to use the money to fund energy efficiency programs, which in turn lower energy bills regardless of a higher energy rate caused by the price on carbon by reducing energy demand. “Consumers, be they businesses, residences, directly benefit from having support for energy efficiency for weatherization in the case of residential, 3.7 million households across the nine states have received support for household weatherization programs and almost 18,000 businesses and industrial enterprises have benefited from energy efficiency, so they’re seeing direct bill reductions,” Littell said.
Companies Continue to Adopt Internal Carbon Prices
At a lower level, private companies are adopting internal carbon prices at an increasing rate, according to a report released by the Carbon Disclosure Project this week. According to the report, which compiles data requested from companies around the world, 437 companies reported using an internal price on carbon in 2015, up from 150 in 2014.
These companies are being proactive, the report says, in the face of the potential adoption of national or international carbon pricing schemes. “Global companies are voluntarily enacting pricing despite the patchwork of state-based regulations, partly as a way of addressing mandatory carbon pricing to which they may be subjected via regulatory regimes in other regions,” the report says.
Carbon Pricing Gaining Steam Ahead of Paris COP
Several countries have also indicated their intention to adopt carbon pricing mechanisms as a means to meet the commitments they make to the climate deal hoped to come out of the 21st Conference of the Parties (COP 21) of the United Nations Framework Convention on Climate Change being held in Paris in December, the World Bank said in a report this week.
Countries have been asked to submit Intended Nationally Determined Contributions (INDCs) indicating what efforts they will take to address the global threat of climate change. An analysis of the INDCs submitted to date shows that several countries will look to carbon pricing as a compliance option.
“Several INDCs explicitly indicate that carbon pricing will be an element of their mitigation strategy. For example, China, Norway, and Iceland highlighted that an [emissions trading system] will play a role in their post-2020 emission reductions. Other countries, such as the Republic of Korea and Switzerland, stated their intention to use international credits to meet their targets,” the report says.
Not all countries are on board with the adoption of a carbon price just yet, however. “By contrast, some INDCs—including those of Andorra, the EU, Gabon, the Marshall Islands, and the United States— explicitly rule out the use of international credits,” according to the report.
