How Companies Set Internal Prices on Carbon

Despite the uncertainty created by the recent election, companies around the globe are demonstrating a commitment to keeping climate change in check. More than 300 American companies signed an open letter to President-elect Trump urging him not to abandon the Paris agreement. Others are acting on their own to reduce emissions in their daily operations, by setting an internal price on carbon.

The number of companies incorporating an internal carbon price into their business and investment decisions has reached new heights, a recent CDP report shows, with an increase of 23 percent over last year. The more than 1,200 companies that are currently using an internal carbon price (or are planning to within two years) are using them to determine which investments will be profitable and which will involve significant risk in the future, as carbon pricing programs are implemented around the world. Sometimes, they also use them to reach emissions reduction goals.

Not all carbon prices are created equal, and companies differ in how they set their specific price. Here’s a look at some of these methods:

Incorporating Carbon Prices from Existing Policies

 Some companies set their carbon price based on policies in the countries where they operate. For example, companies with operations in the European Union might decide to use a carbon price equal to that of the European Union Emissions Trading System (EU ETS) allowances, and those operating in the Northeastern United States might adopt the carbon price that results from the Regional Greenhouse Gas Initiative market.

ConocoPhillips, for example, focuses its internal carbon pricing practices on operations in countries with existing or imminent greenhouse gas (GHG) regulation. As a result, its carbon price ranges from $6-38 per metric ton depending on the country. For operations in countries without existing or imminent GHG regulation, projects costing $150 million or greater, or that results in 25,000 or more metric tons of carbon dioxide equivalent, must undergo a sensitivity analysis that includes carbon costs.

Using Self-Imposed Carbon Fees

Others take a more aggressive approach by setting a self-imposed carbon fee on energy use. This involves setting a fee on either units of carbon dioxide generated or a proxy measurement like energy use. These programs also often include a plan for using the fees such as investment in clean energy or energy efficiency measures. This can be an effective method for incentivizing more efficient operations.

Microsoft, for example, designed its own system to account for the price of its carbon emissions. The company pledged to make its operations carbon neutral in 2012 and does so through a “carbon fee,” which is calculated based on the costs of offsetting the company’s emissions through clean energy and efficiency initiatives. Each business group within Microsoft is responsible for paying the fee depending on how much energy it uses. Microsoft collects the fees in a “central carbon fee fund” used to subsidize investments in energy efficiency, green power, and carbon offsets projects. Still, by limiting carbon fees to operational activities, Microsoft has yet to address a large chunk of their emissions.

Setting Internal Carbon Prices to Reach Emissions Reduction Targets

 Other companies set an internal carbon price based on their self-adopted GHG emissions targets. This involves determining an emissions reduction goal and then back-calculating a carbon price that will ensure the company achieves its goal by the target date. This method is a broader approach focused more on significantly reducing emissions while also mitigating the potential future risk of carbon pricing policies.

Novartis, a Swiss-based global healthcare company, uses a carbon price of $100/tCO2 and cites potential climate change impacts as a motivator. The company has its own greenhouse gas emissions target, which it is using to cut emissions to half of its 2010 levels by 2030. These internal policies mean that Novartis, which is included in the European Union’s Emissions Trading Scheme (EU ETS), has been able to sell surplus allowances and thus far avoid an increase in operating costs.

Where we go from here

 While these internal carbon pricing activities are welcome – and we hope they continue – they are not sufficient to reduce greenhouse gases to the degree our nation or world requires. Like these forward thinking companies, nations around the world, including the United States, need to consider the costs of inaction, including the climate-related costs, to avoid short-sighted investments. Ultimately, we will need public policies that put a limit and a price on carbon throughout the economy.

The spread of internal carbon pricing could signal greater support for carbon pricing by governments. But companies can do more: the ultimate test of a company’s convictions and commitment to carbon pricing might be their willingness to advocate for well-designed, ambitious policies that achieve the reductions we need.

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Groundbreaking Study Shows New Coal Plants are Uneconomic in 97 Percent of US Counties

By: Ferit Ucar

At Environmental Defense Fund (EDF), we understand that market forces can drive either a healthy environment – or harmful pollution. I recently wrote about how generating electricity often creates pollution, which comes with environmental and health costs that are usually not paid for by the polluters. That’s why EDF works to identify and correct market failures, like the failure to understand – as well as account for – all of the costs pollution imposes on society.

The Energy Institute at the University of Texas at Austin (UT) just released a useful tool in that pursuit: a studythat aims to capture the full cost of new electric power generation – including environmental and public health costs – on a county-by-county basis in the United States. The study evolves traditional ways of estimating new generation costs by 1) incorporating pollution costs, and 2) breaking data down to the county level.

The results show economics are leading the U.S. to a cleaner energy economy, in which there is no role for new coal plants. Let’s break it down.

Enhancing the levelized cost method

The Levelized Cost Of Electricity (LCOE) method is commonly used to compute the costs of different power sources – including fossil fuels and renewables – on a comparable basis. The LCOE, expressed on a dollar per kilowatt-hour (kWh) basis, is the estimated amount of money it takes for a particular electricity generation technology to produce a kWh of electricity over its expected lifetime.

In its conventional form, the LCOE method does not take into account environmental and public health costs – costs external to electricity generation but caused by it. It also does not show the variation in costs of building and operating identical power plants across different geographies. The study provides an improved method that addresses these limitations. The study also factors in siting challenges – like water availability and access to fuel – that prevent certain plant types from being built in a given county.

The UT study presents results in a map format, which facilitates cost comparisons by fuel source, technology, and location. The study team released interactive maps that show the cheapest technology by county, as well as calculators that enable users to compare costs for different scenarios.

Key findings

The following U.S. map shows the least-cost technology when factoring in siting limitations, and environmental and public health costs. The key displays the number of counties in which each power technology is the least-cost option.

map-1

The analysis shows:

  • Wind is the least-cost option in the most number of counties.
  • Coal plants are never the least-cost option.
  • Natural gas combined cycle (NGCC) plants are the least-cost option in counties where the wind isn’t as strong.
  • Utility-scale solar photovoltaic (PV) plants are the least-cost option in counties where it’s particularly sunny and/or there is a lack of cooling water availability, which is needed for thermal generation like coal.
  • When a county faces siting challenges that prevent other technologies from being built, residential solar PV plants (like rooftop solar) are the least-cost option. Put another way, rooftop solar is a viable option in every county; other power sources are not.

If you remove the environmental and public health costs from the analysis, the map looks different:

map-2

Even without accounting for the environmental and public health costs, wind remains the least-cost option in over 1,000 counties – that’s about one third of U.S. counties. And solar appears on the map nearly five times as much as coal.

Caveats

Although the study presents an improved way to measure the costs of electricity generation, we should acknowledge its limitations. It does not:

  • Remove the subsidies received by coal and natural gas during the exploration and extraction process, which effectively make fossil-fuel plants appear less costly than they actually are.
  • Account for the uncertainty of future fuel prices and capacity factors for fossil fuel and nuclear plants.
  • Demonstrate the environmental and public health benefits of retiring an existing fossil-fuel plant. As the study states, if emission rates from existing (rather than new) power plants were used, the public health costs would, on average, be 10 times higher.
  • Factor in the costs associated with managing the variability in wind and solar’s generation output.
  • Model the implications of the federal Production Tax Credits and Investment Tax Credits for renewable generation technologies, as well as subsidies at the state or local level, which affect investment decisions. (The calculators do allow changes to capital cost assumptions; so therefore, these could be factored in).
  • Consider economic factors other than cost – like revenue – that also affect investment decisions.
  • Account for the high-level environmental damage risks associated with electricity generation from nuclear, natural gas, and coal as a result of incidents like Chernobyl and Fukushima, Aliso Canyon, and Dan River coal ash spill that cause massive, long-term, acute, and dispersed chronic harm.

    The Energy Institute study clearly shows the economic viability of wind and increasing prospects for solar.

The Energy Institute study clearly shows the economic viability of wind and increasing prospects for solar. Moreover, it provides policymakers and the public with important information on the full cost of electricity for new power sources – including the environmental and public health costs such as asthma attacks, premature death, and lung damage resulting from fossil-fuel pollution.

When pollution costs are accounted for, as the UT study shows, coal power plants are not the lowest-cost electricity generation technology anywhere. Even without including environmental and health costs and renewables subsidies, and despite the fact extraction of coal remains subsidized, new coal plants are still not economic in 97 percent of U.S. counties. As we work to fix outdated rules, we know that market forces are helping to clear the way for clean energy progress and cleaner air.

This post originally appeared on our Energy Exchange blog.

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Defending BLM Standards that Reduce Waste, Protect Air Quality

us-doi-blm-logo-300x261EDF, along with a coalition of health and environmental groups, just filed a motion to intervene in defense of vital new standards that will prevent the wasteful loss of natural resources, save money for taxpayers and tribes, and reduce emissions of dangerous and climate-disrupting pollution.

The Bureau of Land Management’s (BLM) waste prevention standards will reduce venting, flaring, and leakage of natural gas on BLM-managed federal and tribal lands – but they are being challenged in U.S. Federal District Court in Wyoming by oil and gas industry groups and three states.

Federal and tribal lands are an important source of oil and gas production. Together, the amount they produce is the equivalent of five percent of the U.S. oil supply and 11 percent of the U.S. natural gas supply, and generates more than $2 billion annually in royalties.

Unfortunately, oil and gas companies that lease these federal and tribal lands lose substantial amounts of publicly-owned natural gas through unnecessary venting, flaring, or leaking at production sites.

A recent study from ICF International found that in 2013, drilling on federal and tribal lands —mostly in the rural West— leaked, vented, and flared natural gas worth about $330 million. An analysis from the Western Values Project estimates taxpayers could lose almost $800 million over the next decade if wasteful venting and flaring practices continue.

In addition to wasting a public resource, oil and gas companies’ unnecessary venting, flaring, and leakage on federal and tribal lands also poses significant public health and safety risks.

The wasted natural gas is primarily composed of methane – a powerful greenhouse gas, capable of warming the climate at a rate 84 times that of carbon dioxide over a 20-year period.

The leaked, vented, and flared natural gas also emits air pollutants including carcinogens such as benzene, and volatile organic compounds – which contribute to hazardous smog.

BLM’s recently finalized venting and flaring standards deploy common sense, cost-effective, and readily available technologies — already effectively in use in several states across the country — to capture this gas.

The standards yield significant benefits by minimizing the waste of a taxpayer-owned natural resource, and by curbing emissions that contribute to air pollution and climate change, all while helping to create new jobs in methane mitigation. They will save, and put to productive use, up to 56 billion cubic feet of gas a year — enough to supply up to 760,000 households – and will provide millions in additional revenues for taxpayers.

The standards will also cut methane emissions by up to 169,000 tons per year — the equivalent to carbon emissions from as many as 890,000 vehicles.

These benefits will accrue to millions of people across the country, including those living near oil and gas development on federal and tribal lands.

EDF member and New Mexico rancher Don Schreiber has more than 100 oil and gas wells on and near his ranch in the San Juan Basin that will now be covered by the BLM standards. In a declaration supporting EDF’s motion to intervene, he describes the impact of venting, flaring, and leaking from these wells on his family and, in particular, his grandchildren:

Most noticeable is the near-constant smell from leaking wells. …  These odors make breathing uncomfortable and often cause us to leave affected areas as quickly as possible. … We worry about [our grandchildren’s] exposure to air pollutants from oil and gas development on the property, and always are careful to keep them away from the wells and above ground pipeline equipment. Protecting our grandchildren from the negative health effects of oil and gas emissions is a constant concern when they come to visit us. (New Mexico rancher Don Schreiber, Declaration)

With the new standards, he anticipates a reduction in the “harmful air pollution near my home and in the state where my family and I live, work, and recreate.” (Declaration)

BLM’s efforts to reduce natural gas waste have broad and cross-cutting support from elected officials and community members across the West. In a recent bipartisan poll of Western states, 80 percent of respondents supported BLM standards to curtail waste of this valuable resource. And, over the course of several years during which the rule was under development, BLM solicited the feedback of community stakeholders, oil and gas developers, and local, tribal and state governments. The final rule is the result of a collaborative and deliberate process and includes changes that reflect this stakeholder input.

Standing in stark contrast to this careful process, industry associations rushed to file legal challenges seeking to overturn the waste prevention rule within 40 minutes after it was released — hardly enough time to read the rule, let alone meaningfully consider its contents.

And in a subsequent filing seeking to block these protections before they become effective, these industry associations put forward a number of flawed claims, not least of which was their suggestion that BLM acted unlawfully because its rule may “only” produce additional annual royalty revenues of $22.4 million — a sum the filing characterizes as “de minimis.”

While $22 million annually may be an insignificant amount for the oil and gas companies litigating to overturn this rule, it has real meaning for infrastructure projects, schools, and communities across the country that stand to benefit from this funding.

It’s unfortunate that some have engaged in reflexive efforts to roll back protections designed to prevent the waste of our nation’s public resources and, at the same time, protect our air quality and climate.

The good news is that BLM’s commonsense standards are firmly rooted in the agency’s manifest authority to minimize waste and to address the harmful health and environmental consequences of oil and gas development on federal lands.  We at EDF look forward to vigorously defending these standards in court.

Posted in Economics, Energy, Greenhouse Gas Emissions, Health, Partners for Change, Policy| Comments are closed

We Lose More Than You Think if NASA's Climate Science is Cut

NASA

(This post originally appeared on EDF Voices)

A senior adviser to President-elect Donald Trump is urging the new administration to shut down NASA’s world-leading climate science work. The idea, apparently, is that turning away from facts about climate change will make it go away.

That would not only be devastating for global efforts to keep our climate safe, but a severe problem for anyone who depends on cutting-edge weather prediction – including farmers, states vulnerable to destructive storms, businesses and our economy as a whole.

The problem is that climate and weather research comprises a “seamless suite” of services. Advancements in climate modeling support critical weather prediction modeling.

Since weather prediction and short-term climate prediction (think El Niño, drought and so on) are important to all Americans, cuts to climate research at NASA would have large economic consequences and negative impacts on efforts to protect American lives and property.

This work is particularly important in dealing with weather disasters occurring across the southern tier of the United Sates. And as the climate continues to change, weather prediction will become ever more important for preparedness and planning.

The bigger picture is that climate change is on a path to cause trillions in damage to our economy, according to Citibank estimates. That’s why so many leading businesses want to keep us on track to cut carbon pollution. If we don’t we will be leaving a terrible burden for our children.

Science Makes America Great

America was born in an age of reason. Our founders respected science.

Science made America what it is – it helped us win World War II, the space race, the Cold War and made us the preeminent global power.

Weather and climate prediction have provided incalculable value to our economy and saved untold numbers of lives.

Slashing vital research on climate – as suggested by Bob Walker, a former Republican congressman from Pennsylvania who now serves on Trump’s NASA transition team – will hurt everyone, no matter who they voted for.

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What Do the 2016 Elections Mean for the Clean Power Plan?

President-Elect Trump has repeatedly claimed that climate change is a “hoax,” and has appointed notorious climate denier Myron Ebell to run the transition team for the Environmental Protection Agency (EPA). During the campaign, Trump advocated for “scrapping” the Clean Power Plan – the nation’s first limits on harmful climate pollution from existing power plants, which are among the United States’ very largest sources of these contaminants.

Lost in this campaign rhetoric was the reality that states and companies across the country are already making cost-effective investments in transformative clean energy technologies that are rapidly reducing emissions of climate pollution across the power sector. These investments are helping deliver a more reliable and affordable electricity grid, yielding tremendous public health benefits by reducing emissions of soot and smog-forming pollutants, and driving job growth in communities around the country.

The Clean Power Plan builds on all of these trends and helps ensure they will continue for years to come, but the Trump Administration will be hard pressed to stop the progress underway in its tracks.

If Trump does try to roll back the Clean Power Plan, he will find himself on the wrong side of history, the law, and public opinion. The Clean Power Plan is firmly rooted in our nation’s clean air laws, and there are millions of Americans across the country – along with a broad and diverse coalition of states, cities, businesses, faith organizations, consumer advocates, and other leaders – who support these protections and will fight to preserve them.

cpp_supportmap_600Large Majorities of Americans Support the Clean Power Plan.

Donald Trump did not get elected with a mandate to dismantle important climate protections supported by large majorities of Americans. Poll after poll shows that Americans all across this country — in red and blue states alike — broadly support clean air, clean energy, and climate progress. This includes strong, diverse support for the Clean Power Plan, even in states currently suing over the standards. More than two-thirds of voters favor federal action to reduce emissions of pollutants that cause climate change.

If the new administration tries to take steps to roll back these important measures, they will have to do so knowing that they are woefully out of touch with the majority of the American people.

Weakening or rescinding the Clean Power Plan, or other public health and environmental protections, also won’t do anything to address the economic concerns that did figure prominently in Trump’s campaign.

As recent analyses by respected energy experts have demonstrated, the coal industry has been experiencing declining production and employment due to factors that have nothing to do with the Clean Power Plan – including intense competition from natural gas, the falling cost of renewables, and a slew of bad investment decisions. Even Senate Majority Leader Mitch McConnell recently expressed doubt that attacking environmental regulations will cause a turnaround for the coal industry.

At the same time, undoing the Clean Power Plan could adversely and needlessly affect long-term growth in America’s vibrant clean energy industry –  which currently supports hundreds of thousands of manufacturing and construction jobs around the country, and employs far more people than the coal or oil and gas industries.

Leading Businesses, Cities of All Sizes and in All Regions Support the Clean Power Plan

In addition to enjoying the support of millions of Americans, limits on carbon pollution represent good business and good governance. Our cities, states, and companies support limits on climate pollution and investments in new, clean energy technologies that bring jobs and economic opportunity to our communities.

The week after the election, more than 360 of the nation’s leading businesses — including DuPont, General Mills, Levi Strauss, Nike, and Starbucks — signed a remarkable statement urging Trump to honor the United States’ commitments in the Paris Agreement to reduce dangerous climate pollution. These companies declared that “Failure to build a low-carbon economy puts American prosperity at risk,” and that the “right action now will create jobs and boost US competitiveness.”

Power companies that together own or operate one of every ten megawatts of the nation’s generating capacity – including some of the nation’s largest operators of fossil fuel powered plants – are supporting the Clean Power Plan in court.

So are many large energy users. Leading businesses that employ tens of thousands of people in all regions of the country — including Adobe, Apple, Amazon, Google, IKEA, Mars, and Microsoft — recognize the importance of the Clean Power Plan to their economic growth and are also supporting the rule. More than 100 of America’s top companies signed a public statement this spring calling for “swift implementation” of the Clean Power Plan.

Adding to this groundswell of support, 18 States, 60 cities, the U.S. Conference of Mayors, and the National League of Cities are supporting the these standards in court. These municipalities include major cities in states that are litigating against the Clean Power Plan, such as Houston, Grand Rapids, and Miami.  Many of these cities are on the front lines of climate change and they know their citizens don’t want leaders who put politics above their safety and well-being.

Our Nation’s Clean Air Laws Require EPA to Protect the Public from Harmful Pollutants that are Destabilizing Our Climate

EPA has a legal responsibility to protect the public from dangerous climate pollution that threatens our prosperity, security, and public health.

The Supreme Court has affirmed EPA’s authority to regulate greenhouse gases under the Clean Air Act three times since 2007, including EPA’s authority to limit carbon pollution from power plants under the Clean Air Act provision that is the basis for the Clean Power Plan.

As so many Americans around the country recognize, the Clean Power Plan is a common-sense and cost-effective step towards fulfilling this bedrock legal obligation. Many companies and states also recognize that it provides unprecedented compliance flexibility that may not be replicated in another regulatory approach. Although Congress could attempt to modify or roll back the Clean Power Plan by amending the Clean Air Act, such action would be extremely controversial and encounter especially stiff opposition. Americans across the country — and the numerous states, municipalities, businesses, consumer advocates, faith organizations, and other leaders who support the Clean Power Plan — will vigorously oppose any attempt to weaken these vital, hard-fought protections for climate and public health.

The Incoming Administration Cannot Simply Dismantle the Clean Power Plan by Fiat

In addition to deep support, proponents of a safer climate have America’s bipartisan bedrock clean air laws on our side.

Any attempt to withdraw or modify the Clean Power Plan or other clean air protections would first have to go through the same rigorous, inclusive public notice and comment process that EPA carefully followed in adopting them. Such changes would also be subject to judicial review in the federal courts, and would be set aside if they are contrary to the Clean Air Act or do not rest on sound technical and policy foundations.

Previous Administrations that have attempted to make sweeping changes to Clean Air Act protections – including the George W. Bush Administration – abandoned these efforts in the face of strong public opposition and defeat in the federal courts.

The Clean Power Plan Builds on and Accelerates the Transition to a Clean Energy Future that is Already Under Way in the Power Sector

Perhaps the biggest reason opponents shouldn’t expect to overturn the Clean Power Plan overnight is that this important rule is only cementing the direction our energy system has been moving for years.

States and power companies across the country recognize this transition is the best way to provide ratepayers with affordable, reliable, and low carbon electricity – and they understand that the Clean Power Plan provides a common-sense, flexible, cost-effective framework for achieving those goals.

Even without the Clean Power Plan targets in effect, the Energy Information Administration has reported that power sector carbon emissions have fallen by 21 percent since 2005 –almost two-thirds of the way towards meeting the Clean Power Plan’s 2030 emission reduction targets.

Wind and solar are expected to account for almost two-thirds of the electric generating capacity added to the grid in 2016. Many states are on track to fully meet their Clean Power Plan reduction targets. Meanwhile, retail electricity prices actually fell in 2016 for the first time in many years.

That doesn’t mean the Trump Administration can’t attack the Clean Power Plan. We fully expect a fight, and we know it won’t be easy. But we are ready to fight – and we hope you’ll join us.

The transition to a clean energy future is already well underway, and it cannot and will not be stopped. The health and prosperity of America’s families and communities depend on it.

Posted in Clean Air Act, Clean Power Plan, EPA litgation, News, Partners for Change, Policy| Read 1 Response

Ensuring Environmental Outcomes from a Carbon Tax

(This post originally appeared on EDF Market Forces)

How can we ensure that a carbon tax delivers on its pollution reduction potential? An innovative, new idea could provide greater certainty over the environmental outcome.

As momentum intensifies around the world for action to fight climate change, the United States is emerging as a leader in the new low-carbon economy. But if we are going to reduce climate pollution at the pace and scale required — cutting emissions 26-28% below 2005 levels by 2025 and at least 83% by 2050, on a path to zero net emissions —we need to roll up our sleeves on a new generation of ambitious climate policies that harness the power of the economy and American innovation. An emerging idea could be a game-changer for the prospects of a carbon tax to help tackle climate pollution.

Economics 101 teaches us that market-based policies, including cap-and-trade programs as well as carbon taxes, are the most cost-effective and economically efficient means of achieving results. Both put a price on carbon emissions to reduce dangerous pollution. Cap-and-trade programs place a “cap” on the total quantity of allowable emissions, directly limiting pollution and ensuring a specific environmental result, while allowing prices to fluctuate as pollution permits are traded. The “guarantee” that the cap provides is a primary reason this tool has been favored by EDF and other stakeholder s focused on environmental performance. That U.S. targets are based on quantities of pollution reductions also speaks to the need for policy solutions tied to these pollution limits.

In comparison, a carbon tax sets the price per unit of pollution, allowing emissions to respond to the changes in behavior this price encourages. The problem, from an environmental standpoint, is that a carbon tax lacks an explicit connection to a desired pollution reduction target — and therefore provides no assurance that the required reductions will actually be achieved. We know that a carbon tax will impact emissions, but even the most robust modeling cannot provide certainty over the magnitude of that impact. Furthermore, fundamental factors like energy or economic market dynamics can change over time, affecting the performance of a tax. Because greenhouse gas pollution accumulates in the atmosphere over time, even being slightly off the desired path over several decades can produce significant consequences for cumulative emissions, and thus climate damages.

A new approach: Environmental Integrity Mechanisms (EIMs)

Two recently-released papers by the Nicholas Institute at Duke University and Resources for the Future (RFF) directly address this key concern with a carbon tax —and suggest an innovative path forward. They illustrate how a suite of provisions – we’ll call them “Environmental Integrity Mechanisms” or “EIMs,” though each paper uses different terminology – could provide greater levels of certainty regarding the emissions outcome, by allowing for adjustment of the carbon tax regime over time to course-correct and keep us on track for meeting our targets.

EIMs – if carefully designed – can play an important role in connecting a carbon tax to its performance in reducing pollution. They are a type of built-in insurance mechanism: they may never be triggered if the initial price path achieves its projected impact, but provide a back-up plan in case it does not.

These mechanisms are analogous to well-studied “cost containment” provisions in cap-and-trade that are designed to provide greater certainty over prices. Cost containment provisions are included in several successful cap-and-trade programs around the world. For example, California’s cap-and-trade program includes a price collar that sets a floor as well as a ceiling that triggers the release of a reserve of allowances.

EIMs are a parallel effort to introduce greater emissions certainty into a carbon tax system. With the recent publication of these two papers, EIMS are beginning to receive well-deserved greater attention. These provisions help bridge the gap between caps and taxes, merging the strengths of each to create powerful hybrid programs.

How EIMs might work

Let’s take a closer look at how these “EIMs” could work.

• First, the initial tax level and/or growth rate could be adjusted depending on performance against an emissions trajectory or carbon budget benchmark. This could occur either automatically via a simple formula built into the legislation, by Congressional intervention at a later date based on expert recommendations, or by delegation of authority to a federal or independent agency or group of agencies.

There are clear advantages to including an automatic adjustment in the legislation. This avoids having to go back to a sluggish Congress to act; and there is no guarantee that Congress would make appropriate adjustments. Moreover, Congress is likely to be loath to relinquish its tax-setting authority to an executive agency — and such delegation could even face legal challenges. Delegating tax-setting authority to an executive agency could also introduce additional political uncertainty in rate setting.

In designing such an automatic adjustment, policy makers will need to consider the type, frequency and size of these adjustments, as well as how they are triggered. The RFF paper in particular discusses some of the resulting trade-offs. For example, an automatic adjustment will reduce the price certainty that many view as the core benefit of a tax. On the other hand, by explicitly and transparently specifying the adjustments that would occur under certain conditions, a high degree of price predictability can still be maintained – with the added benefit of increased emissions certainty.

• Second, the Nicholas Institute brief discusses regulatory tools that could be employed if emission goals were not met –including existing opportunities under the Clean Air Act, or even new authority. The authors point out that relative to automatic adjustment mechanisms, regulatory options are more difficult to “fine-tune.” Nevertheless, they could provide a powerful safeguard if alternatives fail.

• Finally, as the Nicholas Institute brief discusses, a portion of tax revenue could be used to fund additional reductions if performance goals were not being met. This approach could tap into cost-effective reductions in sectors where the carbon tax might be more challenging to implement (e.g. forestry or agriculture). The revenue could also be used to secure greater reductions from sectors covered by the tax — for example, by funding investments in energy efficiency. In a neat twist, the additional revenue needed to fund these emissions reductions would be available when emissions were higher than expected — that is, precisely when more mitigation was needed.

EDF’s take

Our goal is to reduce the amount of carbon pollution we put into the atmosphere in as cost-effective and efficient a manner as possible. This means putting a limit and a price on carbon pollution.

Even at this preliminary stage in the exploration of EIM design, one takeaway is clear: all carbon tax proposals should include an EIM with an automatic adjustment designed to meet the desired emissions path and associated carbon budget.

More work is needed to develop and evaluate the range and design of EIMs. And while a cap is still the most sure-fire means of guaranteeing an emissions outcome, this growing consideration by economists and policy experts opens a new path for the potential viability of carbon taxes as a pollution reduction tool in the United States.

The bottom line is this: The fundamental test of any climate policy is environmental integrity. For a carbon tax, that means an EIM.

Posted in Economics, Greenhouse Gas Emissions, Policy| Comments are closed
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