It's amazing how sometimes an idea you're certain is never going to go anywhere, like the mythical phoenix, it suddenly rises from the ashes! That seems to be what is happening with the idea of imposing a carbon tax to deal with the problem of greenhouse-gas induced climate change.
Several years ago, even very strong supporters of such carbon taxes said there was no way one could be implemented. To borrow another metaphor, the idea was even described as "the third rail of politics", referring to what happens when someone touches the third rail on a subway line: electrocution and instant death. For politicians, just as trying to reduce Social Security is the political equivalent of "touching that third rail", so the idea of imposing a carbon tax would be the same.
Until it isn't. Things have changed. The phoenix is suddenly rising, and a carbon tax may now be a real possibility!
My reason for writing about this is to propose an idea that could make any carbon tax Congress passes more effective. My proposal: if we're going to impose a carbon tax, we should give carbon polluters a choice on how to pay the tax. Here's the choice:
- Pay the carbon tax, or
- Receive a credit for paying the money into a fund strictly for doing research to mitigate climate change, or
- Receive a credit for paying the money to a "carbon recycler".
Here's a simple example. Oil company X sells gasoline at retail that generates 1,000 tons of carbon dioxide. If the carbon tax is $ 50/ton, then company X has a $ 50,000 tax obligation. It could pay the $ 50,000 directly to the government. Alternatively, it could invest $ 50,000 in research to reduce the emission of carbon dioxide, or it could purchase $ 50,000 worth of carbon recycling from a company such as Carbon Engineering. The latter two investments each would generate a $ 50,000 carbon tax credit. The net result in each alternative is that the company X would pay $ 50,000.
The "carbon polluter" is going to be a business whose product caused
carbon dioxide or other greenhouse gas to be emitted into the atmosphere. If one of the carbon tax proposals is passed into law, every enterprise that adds greenhouse gases into the atmosphere wilI have to pay the tax. Much of the focus now is on what will happen to the money. The great fear of Republicans, and many others, is that the tax will simply be used to create more Big Government. To avoid that, plans such as the one advocated by former US Secretaries of State George Shultz and James Baker provide that all of the money is returned to citizens on a pro-rata basis. Such a solution would truly be "revenue-neutral". I think that's a great idea!
The other great challenge is to make sure the tax doesn't create a lot of economic disruption. To avoid that, major economists have suggested that any carbon tax start off at a low level, then gradually increase until the emissions goal is achieved. Starting at a low level should prevent economic disruption. Several plans under consideration do start with carbon taxes set in the $ 10 to $ 20/ton of CO2 range. The problem is how high to increase the taxes. The Baker-Shultz proposal envisions a relatively low top end – about $ 65/ton - whereas another plan, introduced by Representative Ted Deutch of Florida, called the Energy Innovation and Carbon Dividend Act, proposes a top tax of about $ 115/ton, a far higher number.
A $ 115/ton tax scares a lot of people, even if all of the tax money is sent back to consumers in the form of a dividend, like the Baker-Shultz proposal. No doubt, the revenue raised by such a tax would be tempting to divert to some other purpose. The Republicans have good reason to be concerned, even if they fully believe in the benefit of such a carbon tax (and many don't). No matter what level the carbon tax would be, it would generate billions and billions of dollars. With the US government presently running a trillion dollar deficit, that money will look awfully tempting!
Economists tell us that if we impose the carbon tax, it should spur innovation and substitution. The carbon tax will make fossil fuels just that much more expensive, so people will begin to "substitute" alternatives (think electric vehicles for transport and renewable energy for electricity), and investments will be made to look for new technology. After all, if the price of gas at the pump goes up 50 cents because of the carbon tax, people will think a lot more about buying hybrids or all-electric vehicles. Purchases of gas guzzlers will decrease, and the car that pulls up next to you will more likely be a Tesla or other all-electric.
A carbon tax is merely a means to an end: less greenhouse gas emitting fuels. There are only two broad ways to reduce greenhouse gases: either switch fuels or figure a way to "recycle" the CO2 we dump into the air.
Actually, there is another way – mandates by government – but a regulatory strategy tends to be very inefficient. Not only that, it's extremely unlikely to happen because of conservative opposition. Governmental regulators tend to be pretty lousy at making technology decisions anyway. Imagine what the device on which you're reading this had been mandated by some governmental agency. Pretty likely, it wouldn't be anywhere near as good as the one you presently have.
Thus, we're most likely to solve the greenhouse gas problem only by getting better technology – the kind that makes it cheaper to use renewable technology instead of fossil fuels, or by figuring out a way to recycle all that excess CO2 out of the atmosphere. The carbon tax only does that indirectly, and over the long run. The problem is that it may take us too long to do that, even if the carbon tax gets as high as $ 115/ton. To be effective, the carbon tax needs to spur technological change and/or encourage carbon recycling. Is there a more direct way to do those things, yet still do them in an economically sound way?
My idea does that in two ways. First, take a portion of the carbon tax and invest it directly in research to improve technology associated with climate change. The money could be collected by the government, then directed into appropriate research. Instead of that, why not give the carbon polluter a choice of paying a given sum either to the government, in the form of the carbon tax, or invest in climate change technology? The carbon polluter should be indifferent in terms of the dollar amount, but could benefit by directing some of the tax into research. Those research dollars could create the next big revolution in solar panel technology or battery storage, for example.
The other choice to give the carbon polluter is to direct a portion of the tax to purchase "carbon recycling". One of the emerging solutions to the climate problem is the removal of CO2 directly from the atmosphere, sometimes referred to as "negative emissions". The technology to do this is emerging. One company making headlines is called Carbon Engineering. The company, based in Canada, says it is nearly ready to build a plant capable of removing same amount of CO2 from the atmosphere as 40 million trees! It's gotten some major investment already from a number of very prominent investors.
A tree can remove anywhere from 13 to 48 pounds of carbon dioxide from the atmosphere each year. Assuming an average of those two numbers – about 30 pounds/year – then the proposed Carbon Engineering plant could remove 600,000 tons/year. One of the other companies developing a negative emissions product is called Climeworks.
Like any new business, Carbon Engineering has the problem not only of building the plant, they've got to get paying customers. If carbon polluters are permitted to redirect at least part of their carbon tax obligation to purchase the output of the Carbon Engineering plant, or competitors, then there could be a direct spur to the carbon recycling industry. It would have the intended effect of the tax – getting a substitute technology in place. The more interest there is in purchasing the product of "carbon recyclers", the more likely it is that this nascent industry will develop some strong companies. Of course, the government could invest money in negative emissions technology, but governments don't usually do a very good job of picking winners. Instead, the better solution is to let the marketplace decide. The best way to do that is to give CO2 polluters the opportunity to pick the winners.
Why would we want to give "carbon polluters" the choice of either paying the carbon tax or "investing" the tax money either in research or in carbon recycling? In the case of research, the carbon polluters may be in the best position to know what types of research could help their industry. As an example, why not let electric utilities invest in research to improve battery storage technology? Improving battery storage makes it easier for utilities to adopt renewable technology, for example. One of the great concerns electric utilities have had about renewables is maintaining stability in the power supply. Better battery storage will definitely help. The companies that end up paying the carbon tax are really in the best position to know what types of research could be most helpful to their respective industries.
The same is true for carbon recycling. Carbon polluters will likely look to the companies with the best technology to recycle each polluter's waste stream. After all, they've got a vested interest in seeing that carbon is successfully recycled for their waste products. The alternative is more regulation. A great example of this relates to coal. While lots of people would love to see the coal industry disappear, at least with respect to electric generation, that's unlikely to happen for a very long time, if ever. Carbon dioxide from coal burning will continue for a very long time, exacerbating the greenhouse gas problem. However, if effective carbon recycling becomes a reality, companies could continue to burn coal but with dramatically reduced carbon dioxide pollution. Anyone burning coal will want to direct carbon tax money into research to find a solution.
The carbon tax will result in ever higher prices for energy products that contain greenhouse gases. This will make alternative, non-CO2 emitting energy just that much more attractive. The higher the carbon taxes, the greater the incentive to switch. However, if all of the carbon tax is returned to consumers as a dividend, the necessary research into new technology, as well as the development of carbon recycling, could remain limited.
So how would this proposal work in practice? I envision the following. First, the new law would specify each year how much carbon polluters would pay in tax per ton of greenhouse gas emitted. Under my plan, carbon polluters could go ahead and pay their tax. Alternatively, they could invest in climate change research and/or purchase the "output" from negative emissions companies like Carbon Engineering. They would then claim a carbon tax credit for these investments. The net effect would be that all, or a portion, of their carbon tax payments would go to the intended targets of research or emissions recycling. The rest would go to the government, presumably to be remitted as dividends back to the public.
Even though some of the political calculus has changed, no politician is going to touch any third rail. For a number of reasons, the latest carbon tax proposals may have some real potential because they envision returning the carbon tax funds to the public. While that's good, the proposals neither directly encourage the essential research and development to create the necessary technology to solve the problem nor encourage the creation of a carbon recycling industry. The proposal outlined above will directly address those problems. Again, not a panacea for solving the problem, but excellent steps in the right direction.
