and Carbon Taxes Bruce M. Everett, PhD July 15, 2019 What is the - - PowerPoint PPT Presentation

The Social Cost of Carbon and Carbon Taxes

Bruce M. Everett, PhD

July 15, 2019

Future economic cost

• f one additional tonne
• f CO2 emissions,

discounted to today’s value.

What is the “Social Cost of Carbon”

• Used to evaluate cost-benefit of CO2

regulations

• Obama Administration calculated

SCC ~$42/tonne for 2020

• Trump Administration estimates $1-6

What is the “Social Cost of Carbon”

Why care about the SCC?

Growing support for CO2 taxes with the tax set at the Social Cost of Carbon.

Founded June 20, 2017 Members include:

• James A. Baker
• George Schultz
• Ben Bernanke
• Stephen Hawking
• Larry Summers
• Janet Yellen

Corporate Founders (among others)

A sensible carbon fee should begin at $40 a ton and increase steadily over time...

A sensible carbon fee should begin at $40 a ton and increase steadily over time...

“Economic theory suggests a carbon tax should be set equal to the social cost of carbon…”

“Economic theory suggests a carbon tax should be set equal to the social cost of carbon…”

• Where does $40/tonne come from?
• Does it mean anything?

Two key questions about the SCC

Developed by an Interagency Working Group

Integrated Assessment Models (IAMs)

• GDP
• Population
• CO2 Emissions

Scenarios CO2 ➔ °T Climate Model  °T ➔GDP Economic Model

• Discount each year’s loss to present value
• Add up the years
• Recalculate with +1 tonne of CO2
• Difference = Social Cost of Carbon

• DICE

Dynamic Integrated Climate-Economy model (William Nordhaus)

• FUND

Framework for Uncertainty, Negotiation฀ and Distribution฀ (Richard Tol)

• PAGE

Policy Analysis of the Greenhouse Effect (Chris Hope)

The government task force uses 3 models

• These models are complex and opaque.
• We built a simplified model.
• Operates in EXCEL
• Available at CO2 Coalition website
• Simple, but replicates the structure of IAMs
• Uses Government’s basic assumptions
• Everyone welcome to use our model.

The government task force uses 3 models

The government models – damage functions

Temperature change, °C Global damage as % of GDP

• Wide range of estimates for same temperature

At 4°C, 1-4% At 7°C, 3-20% Damages for year 2100

Our model – damage functions

Temperature change, °C Global damage as % of GDP

Note: We do not claim that our model better represents either climate dynamics or economic damage. Its purpose is to demonstrate how IAMs work.

With the government’s scenarios and assumptions:

SCC ($/tonne) ranges from ($13.1) to $57.5 Average = $22.9

Our model – results

• 1. Climate sensitivity = 3.5 (very high!)
• 2. Damages calculated out to 2300

The government’s model – assumptions

• 1. Climate sensitivity = 3.5 (very high!)
• 2. Damages calculated out to 2300

The government’s model – assumptions

1. Global population 2.3 billion (30% of today’s) 2. Global GDP was $6 trillion (10% of today’s) 3. Per capita GDP was $2,600 (25% of today’s)

• Most wealthy people lived in N Amer and Europe

4. The world was stuck in a deep depression

• US GDP had fallen 10% in a decade
• US unemployment was 20%

5. Totalitarian ideologies were on the rise

• 6. The world was on the verge of a devastating war
• 7. Many critical technologies were unknown:
• Computers, television, antibiotics, contraception,

advanced vaccines, GPS, robotics, cell phones

The World in 1938 How well could people have predicted today’s world?

1. Global population 2.3 billion (30% of today’s) 2. Global GDP was $6 trillion (10% of today’s) 3. Per capita GDP was $2,600 (25% of today’s)

• Most wealthy people lived in N Amer and Europe

4. The world was stuck in a deep depression

• US GDP had fallen 10% in a decade
• US unemployment was 20%

5. Totalitarian ideologies were on the rise

• 6. The world was on the verge of a devastating war
• 7. Many critical technologies were unknown:
• Computers, television, antibiotics, contraception,

advanced vaccines, GPS, robotics, cell phones

The World in 1938 How about a group of experts convened in 1838? 1738?

Scenarios 250+ years into the future are science fiction.

Why pretend we can tell the future?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% IMAGE MERGE MESSAGE MiniCAM

Why pretend we can tell the future?

Share of projected damages by period

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% IMAGE MERGE MESSAGE MiniCAM

Now-2100

Why pretend we can tell the future?

Share of projected damages by period

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% IMAGE MERGE MESSAGE MiniCAM

Now-2100 Share of projected damages by period 2100-2200

Why pretend we can tell the future?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% IMAGE MERGE MESSAGE MiniCAM

Now-2100 Share of projected damages by period 2100-2200 2200-2300

Why pretend we can tell the future?

With the government’s scenarios and assumptions:

SCC ($/tonne) ranges from ($13.1) to $57.5 Average = $22.9 If we limit the analysis to the year 2100: SCC ($/tonne) ranges from ($16.9) to $32.3 Average = $10.4

Our model – results

• 1. Climate sensitivity =3.5 (very

high!)

• 2. Damages calculated out to 2300
• 3. Discount rate = 3%

The discount rate reflects the time value of money At 3%, $1 next year is worth $1/1.03 today $1 in 2 years is worth $1/(1.03)2 today and so on

The government’s model – assumptions

There is no agreed discount rate for long time frames (30+ years). OMB recommends testing up to 7%. 3% is the low end of the range. 1%? 3%? 5%? 7%?

(Climate sensitivity = 3.5)

• ----- Ave SCC ------

DR = 2300 2100

1% $277.7 $32.2 3% $22.9 $10.4 5% $4.9 $3.7 7% $1.5 $1.3 Pick a number, any number! Same climate dynamics and damages The impact of assumptions

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 2019 2100 2200 2300

Whom are we helping? GDP (Trillion $2018)

IMAGE Scenario Trillion $2018

>30X 2019 GDP

0.0 2.0 4.0 6.0 8.0 10.0 2019 2100 2200 2300

Whom are we helping? Population (Billion)

IMAGE Scenario Billion

$0 $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 2019 2100 2200 2300

Whom are we helping? Family income ($)

IMAGE Scenario Average $2018 per family of 4

$0 $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 2019 2100 2200 2300

Whom are we helping? Family income ($)

IMAGE Scenario Average $2018 per family of 4

17%

5X 2019 Per capita GDP

Ferrari ($252,000) Lamborghini ($525,000)

Should climate policy transfer wealth from today’s poor to tomorrow’s rich?

The SCC calculation is too sensitive to be useful as a policy tool. But What would happen if we did set a $40/tonne carbon tax?

Conclusion

• 1. A $1/tonne on CO2 = 1¢/gal on

gasoline.

• 2. US CO2 emissions ~ 5 Gt per year.
• 3. US emissions ~ 15% of the world total.

Three things you need to know

US renewable energy pricing is a tangle of subsidies, mandates and portfolio requirements. Prices well below costs.

• A $40/tonne carbon tax = 40¢/gallon.
• A tax of $1,000/tonne ($10/gal) would be

required to make electric cars competitive without subsidies.

Transportation

• A tax of $200/tonne would be required

to make wind power competitive with natural gas for power generation.

Wind energy

• A tax of $500/tonne would be required

to make solar power competitive with natural gas for power generation.

Solar energy

• 5

10 15 20 25 30 35

Global CO2 emissions in 2017 (Gt)

Billion tonnes of CO2

IPCC says we must be around here by 2050.

• 5

10 15 20 25 30 35

US

Billion tonnes of CO2

Europe Other industrial China India Other Asia Africa Middle East Former Soviet Union Latin America

IPCC says we must be around here by 2050.

Global CO2 emissions in 2017 (Gt)

• $40/tonne tax = 5-20% of gap between fossil

fuels and renewables.

• Negligible impact on CO2 emissions
• $200 billion/year tax burden ($40 X 5 Gt)
• $1,700 per household
• ~ 2017 tax cut
• Highly regressive
• Imposed on middle class

The hard math on carbon taxes

• There is no level of carbon tax that can

reduce CO2 emissions in a meaningful way without serious damage to the economy.

• A carbon tax is a national sales tax

disguised as an environmental policy.

• Easy to increase by “discovering” that SCC is

actually $60/tonne or $80/tonne

Conclusions on carbon taxes

• There is no level of carbon tax that can

reduce CO2 emissions in a meaningful way without serious damage to the economy.

• A carbon tax is a national sales tax

disguised as an environmental policy.

• Easy to increase by “discovering” that SCC is

actually $60/tonne or $80/tonne

Conclusions on carbon taxes

Thank you