A conservative climate plan liberals can love

A conservative climate plan liberals can love
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Economists view taxes as the ‘first best’ means to influence economic behavior, so it is no surprise that fee-based alternatives to command-and-control for carbon emissions are finding favor in conservative circles.

The unquestioned premise of the carbon tax is that simply ramping up the cost of emitting carbon dioxide (or extracting fossil-carbon) and using the revenue to compensate for the regressiveness of such a tax can get us to our climate goals — the so-called Carbon Dividend. That premise is highly doubtful for two simple reasons. First, while some variant of a carbon tax might help us meet intermediate reduction goals, we must not lose sight of the end-game: zero net release of carbon-dioxide into the atmosphere.

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[The Paris Agreement calls for achieving carbon neutrality by 2070 and a carbon-negative economy thereafter in order to avoid the worst consequences of global warming.] Thus a “successful” carbon tax will result in zero revenue. Worse yet, government dependence on carbon tax revenue could create a perverse incentive for failure. 

If redistributing the unavoidable costs of decarbonization is essential, some other mechanism must be found. 

Second, 2070 is within the lifetime of the capital projects we undertake today. Whatever we build next must pay its way in a carbon-neutral economy. Getting these choices right the first time (to avoid stupendous stranded capital a few decades hence) requires a stable policy that sets a clear, quantitative target for fossil carbon emissions from any activity and an equally certain cost for failing to meet that target. The Carbon Dividend and its variants do neither. 

Widely favored on the left, cap-and-trade empowers government to set a trajectory for economy-wide emission reductions regardless of activity, and issue tradeable permits for the allowed emissions. Cap-and-trade defines the outcome while giving some (possibly doubtful) assurance that competitive markets will minimize the cost. The problem is that a national cap-and-trade program coupling all uses of energy would be devilishly difficult to implement. Legislation would be elaborate. Fairness would be difficult to assure even if it could be defined. Temptation to distort markets would be irresistible and suspicions of favoritism and fraud never-ending.

There is a third way. We can have the efficiency of a carbon tax and the outcome of cap-and-trade by modifying how a fossil carbon emission tax is computed. The Fossil Carbon Concentration Fee (which definitely needs a better name) is a good example of such a scheme. FCCF defines a schedule for decreasing the fraction of fossil carbon in any emission stream regardless of size or purpose and imposes a stiff per-ton tax for fossil carbon emissions above the target threshold. 

For a simple example, the allowed fraction of fossil carbon could decline 2 percent every year after 2020 to reach zero in 2070, and the tax is fixed at a rate higher than the highest plausible carbon mitigation cost of any industry, something like $300 per ton. The exact value doesn’t matter; so long as it is high enough nobody will be paying the tax.

In this example, an industry that emits a total of 1,000 tons of carbon dioxide in 2045 is allowed 500 tons of fossil carbon emissions but has the option of paying $300 for each excess ton or emitting less and selling credits to other businesses.

Unlike a gradually increasing tax on all carbon emissions, the steep marginal cost of excess fossil carbon emissions and the ability to trade credits will guide the economy toward an overall reduction in fossil carbon emissions very similar to the result of cap-and-trade. The fossil carbon concentration fee is a cousin to the carbon dividend (identical where fossil fuel is unavoidable) but can achieve the results of cap-and-trade without all the overhead. It is a conservative’s fire-and-forget climate plan that liberals can live with.

Mike Tamor, Ph.D., is an adjunct professor at the Arizona State University School for Innovation in Society. He previously worked as a Henry Ford Technical fellow at Ford Motor Company. His 35-year research career spanned from fundamental material science to the development of hybrid electric and fuel cell vehicle technology to global energy systems and sustainability.