Carbon tax to meet climate concerns

India can display bold leadership by imposing a carbon tax on all fossil fuels in proportion to carbon dioxide emissions

Oil prices have plummeted since June 2014 by almost 60 per cent. This has obviously proved to be a bonanza for oil-importing countries like India just as it has seriously hurt oil-producing nations like Russia and Iran. The fall has been unexpected and what has added to the mystery is the behaviour of Saudi Arabia, the traditional “swing producer” in OPEC which has chosen not to cut production in order to boost prices.

The main reason now being adduced for the oil price decline is the re-emergence of the U.S. as a major hydrocarbon producer because of exploitation of its substantial shale deposits. Lower than anticipated demand, especially from countries like China, and anaemic economic growth in Europe have added to the pressure. As to the response of Saudi Arabia, the best guess is that it does not want to lose market share like it did the last time when it cut output to keep prices up. There are, of course, the usual conspiracy theories — that the Americans have put pressure on major OPEC oil producers not to cut output so that Russia could get hurt from falling prices. Another Byzantine view is that Saudi Arabia is not too unhappy with these prices since its arch-rival Iran is getting hurt and because over the medium-term it would discourage the development of new sources of supply that would threaten the Saudi position.

Revisiting an old idea

Whatever be its backdrop, the current oil price scenario offers the right moment for the international community as well as for major carbon emitter nations to revisit an old idea that has been around for quite some time as a way of dealing with the challenge of climate change — and this is a carbon tax. Economists mostly agree that such a carbon tax is the way to go, but it has faced tremendous political resistance, especially in the U.S. A couple of days ago, however, the influential economist Larry Summers, who has been a close adviser to both President Barack Obama and former President Bill Clinton, came out publicly in its favour, pointing out that a tax of $25 per tonne of carbon would add just 25 cents to the price of gasoline. There have been other intellectually weighty voices in the past who have advocated a carbon tax, William Nordhaus being perhaps the most prominent amongst them.

It is the political resistance to any form of taxation (what the late Sukhamoy Chakravarty, the distinguished Indian planner, had called the emerging fiscal sociology) that has led to systems of cap-and-trade being adopted to deal with the emissions problem. The EU has such a system, the Chinese have seven pilots and have announced a national initiative beginning next year, and the Americans too are putting it in place for carbon emissions from power plants. A cap-and-trade system puts a cap on the quantity of emissions (which is flexible) and the “rights” to emit are then traded for a price among classes of consumers. It has considerable appeal since it is “market-based” and it has actually been used very effectively to deal with the consequences of sulphur dioxide emissions from power plants in the U.S. (the “acid rain” problem as it is usually called). The cap-and-trade system does provide incentives for emission levels to decline. On the other hand, a carbon tax is much simpler and straightforward to design and administer since it does not involve fixing emission “quotas” for each emitting industry, which is technically very cumbersome.

“A carbon tax is simple to administer since it does not involve fixing emission ‘quotas’ for each emitting industry, which is technically very cumbersome”

William Nordhaus himself in his classic “The Climate Casino,” after an elaborate analysis of the two approaches, writes: “If I were put on the rack and forced to choose, I would admit that the economic arguments for carbon taxation are compelling, particularly those relating to revenues, volatility, transparency and predictability. So if a country is genuinely unsure, I would recommend it use the carbon tax approach.” Dale Jorgenson, one of the pre-eminent economists of our times, has taken the Nordhaus approach and asked the question: how to make it politically acceptable? In “Double Dividend: Environmental Taxes and Fiscal Reforms in the United States,” Mr. Jorgenson and his colleagues make out a persuasive case for a carbon tax in the U.S., but with a twist: that the revenues be used for a capital tax reduction with other countries free to recycle revenues in the matter they deem fit.

Actually, India has a carbon tax of sorts. It is not called as such but the United Progressive Alliance government’s budget of 2010-11 introduced a cess of Rs. 50 per tonne of both domestically produced and imported coal. Last year, this was doubled. However, the idea of this cess, it must be admitted, was less to curb carbon emissions but more to raise revenues for the National Clean Energy Fund. Of course, the Fund itself could well support carbon mitigation initiatives but its take-off has been slow so far since Finance Ministers see it as a source of mitigating not carbon but the fiscal deficit. The Fund has close to Rs. 15,000 crore already accumulated in it and this will grow rapidly as coal consumption increases. But the important point is that India already has an important half-step, even though its version of a carbon tax is not economy-wide and it is far below the levels that are generally accepted as being desirable (around $20-25 per tonne of carbon).

Mr. Summers’ plea comes with a catch: he wants the U.S. to impose a carbon tax on its own as well as a tax on the carbon tax on its imports, in order to goad other countries to adopt the carbon tax route. Perhaps he has China in mind since it has been estimated that at least a fifth of China’s emissions are because of its export sector. He seems to think that this will be World Trade Organization-compatible. But it will pose a huge threat to the world trading system which has produced tangible benefits for those who have harnessed its potential — like China and India — if it were to be used to meet climate policy objectives.

Requiring a different response

Some years ago, drawing inspiration from no less a person than Lord Keynes himself, the Nobel Laureate James Tobin proposed a tax on short-term currency transactions. This was later expanded to cover all short-term financial transactions and is widely known as the Tobin Tax. But it remains on paper as to which periodic obeisance is paid. The carbon tax is a similar development deity but it is an idea whose time has undoubtedly come given the current and expected oil price situation. In the past, oil prices have declined as they have in recent months; the commitment of countries to make the transition away from fossil fuels has perceptibly wavered. This time around, however, given the climate change imperative, our response has to be dramatically different. A carbon tax imposed on all fossil fuels in proportion to carbon dioxide emissions would signal that transformed thinking. It would generate the needed resources for low-carbon investments in a manner that does not add to the fiscal deficit and provide the impetus to a meaningful global agreement in Paris later this year in December. This could well be India’s moment of bold leadership.

(Jairam Ramesh was Union Minister of State (Independent Charge) Environment and Forests, 2009-2011).

Source: The Hindu

Obama to unveil historic climate change plan to cut US carbon pollution

President Barack Obama will unveil a plan on Monday that will cut carbon pollution from power plants and promote cap-and-trade, undertaking the most significant action on climate change in American history.

The proposed regulations Obama will launch at the White House on Monday could cut carbon pollution by as much as 25% from about 1,600 power plants in operation today, according to those claiming familiarity with the plan.

Power plants are the country’s single biggest source of carbon pollution – responsible for up to 40% of the country’s emissions.

President Obama told West Point graduates this week that the US must lead by example on climate change. Photograph: Jim Watson/AFP/Getty

President Obama told West Point graduates this week that the US must lead by example on climate change. Photograph: Jim Watson/AFP/Getty

The rules, which were drafted by the Environmental Protection Agency and are under review by the White House, are expected to do more than Obama, or any other president, has done so far to reduce the carbon dioxide emissions responsible for climate change.

They will put America on course to meet its international climate goal, and put US diplomats in a better position to leverage climate commitments from big polluters such as China and India, Obama said in a speech to West Point graduates this week.

“I intend to make sure America is out front in a global framework to preserve our planet,” he said. “American influence is always stronger when we lead by example. We can not exempt ourselves from the rules that apply to everyone else.”

It won’t be without a fight. Obama went on in his remarks at West Point to take a shot at Republicans who deny climate change is occurring, and the White House press secretary, Jay Carney, on Thursday accused critics of making “doomsday claims” about the costs of cutting carbon.

But the White House still showed some signs of nervousness about a political backlash, releasing a report about expanded oil and gas production on Obama’s watch and adding to the furious spinning by environmental and industry groups about the potential costs and benefits of the EPA regulations.

“We actually see this … as the Super Bowl of climate politics,” said Peter Altman, director of the climate and clean air campaign for the Natural Resources Defense Council, which produced a model carbon-cutting plan that has helped guide the EPA regulations.

But if all unfolds according to plan, Obama will have succeeded in overcoming blanket opposition – and outright climate denial in many cases – from Republicans and some Democrats in Congress, an industry-funded misinformation campaign, and a slew of anticipated lawsuits.

Obama had originally hoped to cut carbon pollution by moving a bill through Congress. Four years after that effort fell apart, campaigners say the EPA rules could deliver significant emissions cuts – near the 17% Obama proposed at the Copenhagen climate summit – and the cap-and-trade programmes that were so reviled by Republicans.

The EPA, using its authority under the Clean Air Act, proposed the first rule phase, covering future power plants, last September.

In this the more politically contentious phase of the plan, it is widely believed the EPA will depart from the “inside the fence-line” convention of earlier environmental regulations for mercury and other pollutants, which focused on emissions-scrubbing on specific power plants.

The EPA administrator, Gina McCarthy, is seeking steep reductions – as much as 25% – but she has hinted repeatedly that she will allow states latitude in how they reach those targets.

The plan would allow electricity companies to reduce pollution by shutting down the oldest and most polluting coal plants. They can install carbon-sucking retrofits. They can expand wind and solar energy, upgrade the electrical grid, encourage customers to update to more efficient heating and cooling systems, or more efficient appliances and lightbulbs.

“They have recognised huge emissions reductions opportunities are often cheaper than trying to do it all inside the plant,” said David Doniger, who heads the climate programme at the NRDC. “If you want to get substantial reductions and you want to get it economically, you have to take into account a system-wide approach.”

The EPA to expected to try to soften the impact of the regulations by coming out with a range of targets, taking account of the energy mix in different states, and by allowing a two-step phase-in of the targets, with steeper cuts delayed until 2030.

But campaigners and industry are bracing for a fight.

The Chamber of Commerce, one of the major opponents of the environmental regulations, said in a report on Wednesday the EPA regulations would cost $51bn a year in higher electricity prices and lost jobs and investment – but those figures were disputed.

Coal mining companies, power plant operators that are heavily dependent on coal, attorney generals in about a dozen Republican-controlled states, and conservative think tanks also argue the system-wide approach oversteps the EPA’s authority, and are lining up for legal challenges.

“I suspect we will see more environmental litigation as it relates to CO2 emissions going forward from a variety of sources,” said Karen Harbert, who heads the Chamber’s energy institute.

America’s carbon dioxide emissions have been falling over the last few years to the lowest levels since the 1990s, because of a switch from coal to cheaper natural gas, and on a smaller scale increased investment in renewables. The economic downturn also reduced demand for electricity.

The White House said those changes – which were mainly market-driven – showed the EPA regulations would not hurt the economy as critics claim.

“We can transform our energy system to be less carbon intensive while still growing the economy,” Obama’s counsellor, John Podesta, told a conference call.

The EPA rules would fix those reductions in place and – as several campaigners and energy analysts noted – be a relatively easy reach for a large number of states which have already moved to cut emissions and expand wind and solar power.

More than 30 states already have regulations promoting renewable energy. Minnesota and Colorado are pledged to get 30% of their power from renewables by 2020.

Meanwhile, nine north-eastern states and California are already rewarding power companies which cut carbon through operating cap-and-trade systems.

Those changes in the energy landscape – and an intense outreach campaign by McCarthy and other officials – could defuse of the opposition, said Paul Bledsoe, an energy consultant who served on Bill Clinton’s climate change task force. “I think there is a divide between the companies,” he said. “Coal heavy companies are going to fight it tooth and nail, especially behind the scenes, legally. The more gas, nuclear and renewable-heavy companies are going to be more sanguine about it.”

The EPA rules could also end up vastly expanding regional cap-and-trade programmes. Kelly Speakes-Backman, who heads the Regional Greenhouse Gas Initiative in the north-east, said she had already had quiet approaches from a number of state officials.

She said the nine states in RGGI had already cut carbon dioxide emissions 40% from 2005 levels, and were aiming to halve carbon pollution by 2020. The new EPA rules would be a “game-changer” for cap-and-trade.

Once Obama makes his announcement on Monday, the clock starts ticking. The EPA will have one year to take public comment from anyone from Greenpeace to Peabody Coal before finalising the new standards in June 2015.

Once those rules are final, the states will have one year, or until June 2016, to submit their plans for meeting the new EPA targets.

With Obama’s term ending in January 2017, those are tight deadlines – especially with the legal and political battles ahead. But it does put Obama in position to fulfill the promises he made on climate change when he was first elected in 2008.

“This whole suite of policies is getting us within shooting range of where we could have been with a cap-and-trade bill,” said Vicki Arroyo, who heads the climate centre at Georgetown University law school. “If the EPA is really restructuring programmes to take advantage of systems wide benefits … then that is just huge.”

Source: The Guardian