Ann Arbor city council will soon be asked to pass a resolution offering support to a specific plan to reduce carbon emissions. In this week's "Issues of the Environment," WEMU's David Fair talks with Ann Arbor Energy Commission member Stephen Raiman about what the 'carbon fee and dividend' plan.
Overview
* On January 12, 2016 the City of Ann Arbor Energy Commission voted nine to one to endorse the carbon fee and dividend proposal of the Citizens’ Climate Lobby (CCL), and they would like City Council to follow suit.
* The CCL’s primary purpose is to help reduce Green House Gas (GHG) emissions by helping enact revenue neutral carbon fee and dividend legislation, where a fee on carbon dioxide (CO2) or equivalent gases would be levied against all fossil fuels at their point of entry into the economy. The revenue that would be collected would be 100% returned as a monthly or annual payment to every American household in order to counteract rising consumer costs associated with the fee.
* One alternative economic approach to Carbon Fee and Dividend is “Cap and Trade”, which curbs emissions by limiting the quantity of a pollutant (e.g., CO2) that can be emitted and then allocating a corresponding number of tradable emissions permits. Another approach is a “Tax and Invest” Carbon Tax; rather than a “revenue neutral” system a tax collected upstream would be reinvested in carbon-curbing technology (Nuclear power generation infrastructure is one possibility).
* Stephen Raiman was appointed to the Ann Arbor Energy Commission in 2014, and his professional research at the University of Michigan focuses on the ensuring safe and reliable life extension of nuclear current reactors and on informing the design of new materials for advanced reactor concepts.
Endorsement of the Carbon Fee and Dividend Proposal
According to Commissioner Raiman, who introduced the resolution in support of CCL’s proposal, “Carbon pollution is expensive for society, and the market should reflect that. The Citizens’ Climate Lobby has a fair and realistic plan for reducing GHG emissions. Their Carbon Fee and Dividend Plan is consistent with the goals of the Energy Commission and with the values of the people of Ann Arbor. The Energy Commission recommends that the Ann Arbor City Council also endorse the Fee and Dividend proposal. This will be brought up at a future City Council meeting.
Ann Arbor CCL is pleased that the Energy Commission recognizes Carbon Fee and Dividend as a promising plan to quickly reduce GHG emissions while benefiting the economy, and is very grateful for their support and encouragement. Building broad support is key to passing such legislation, and the Energy Commission’s endorsement demonstrates that leaders in our community are with us.
What is Carbon Fee and Dividend?
Carbon Fee and Dividend is the climate change solution created by CCL to account for the costs of burning fossil fuels. According to the CCL, “Climate scientists and economists alike say our solution is the best first step to reducing the likelihood of catastrophic climate change from global warming.”
1) Place a steadily rising fee on fossil fuels: To account for the cost of burning fossil fuels, we propose an initial fee of $15/ton on the CO2 equivalent emissions of fossil fuels, escalating $10/ton/year, imposed upstream at the mine, well or port of entry. Accounting for the true cost of fossil fuel emissions not only creates a level-playing field for all sources of energy, but also informs consumers of the true cost-comparison of various fuels when making purchase decisions.
2) Give all of the revenue from the carbon fee back to households: 100% of the revenue from the carbon fee is held in a Carbon Fees Trust fund and returned directly to households as a monthly dividend.The vast majority of households will receive more than they will pay for increased energy costs. This feature will inject billions into the economy, protect family budgets, free households to make independent choices about their energy usage, spur innovation and build aggregate demand for low-carbon products at the consumer level.
3) Border adjustments: Border adjustments will discourage businesses from relocating and encourage other nations.Import fees on products imported from countries without a carbon fee, along with rebates to US industries exporting to those countries, will discourage businesses from relocating where they can emit more CO2 and motivate other countries to adopt similar carbon pricing policies. Existing tax and trade systems avoid complex new institutional arrangements. Firms seeking to escape higher energy costs will be discouraged from relocating to non-compliant nations (“leakage”), as their products will be subject to import fees.It's good for the economy AND even better for the climate. A study from REMI shows that carbon fee-and-dividend will reduce CO2 emissions 52% below 1990 levels in 20 years and that recycling the revenue creates an economic stimulus that adds 2.8 million jobs to the economy.
4) A structured rising price on GHG emissions: A structured rising price on GHG emissions will focus business planning on optimizing investment priorities to thrive in a carbon-constrained world. Carbon Fee and Dividend does not increase the size of government, require new bureaucracies or directly increase government revenues. The dividend increases real disposable income, protects personal spending decisions and will recruit widespread, sustained engagement. Finally, Carbon Fee and Dividend is elegant in its simplicity, transparent it its accessibility to public scrutiny and clear in its signals and benefits.
Legislation - Carbon Fee and Dividend Goals, the legislation that the CCL would like to see enacted:
1. Collection of Carbon Fees/Carbon Fee Trust Fund: Upon enactment, impose a carbon fee on all fossil fuels and other greenhouse gases at the point where they first enter the economy. The fee shall be collected by the Treasury Department. The fee on that date shall be $15 per ton of CO2 equivalent emissions and result in equal charges for each ton of CO2 equivalent emissions potential in each type of fuel or greenhouse gas. The Department of Energy shall propose and promulgate regulations setting forth CO2 equivalent fees for other greenhouse gases including at a minimum methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons (HFCs), perfluorocarbons, and nitrogen trifluoride. The Treasury shall also collect the fees imposed upon the other greenhouse gases. All fees are to be placed in the Carbon Fees Trust Fund and be rebated 100% to American households as outlined below.
2. Emissions Reduction Targets: To align US emissions with the physical constraints identified by the Intergovernmental Panel on Climate Change (IPCC) to avoid irreversible climate change, the yearly increase in carbon fees including other greenhouse gases, shall be at least $10 per ton of CO2 equivalent each year. Annually, the Department of Energy shall determine whether an increase larger than $10 per ton per year is needed to achieve program goals. Yearly price increases of at least $10 per year shall continue until total U.S. CO2-equivalent emissions have been reduced to 10% of U.S. CO2-equivalent emissions in 1990.
3. Equal Per-Person Monthly Dividend Payments: Equal monthly per-person dividend payments shall be made to all American households (1⁄2 payment per child under 18 years old, with a limit of 2 children per family) each month. The total value of all monthly dividend payments shall represent 100% of the total carbon fees collected per month.
4. Border Adjustments: In order to ensure there is no domestic or international incentive to relocate production of goods or services to regimes more permissive of greenhouse gas emissions, and thus encourage lower global emissions, Carbon-Fee-Equivalent Tariffs shall be charged for goods entering the U.S. from countries without comparable Carbon Fees/Carbon Pricing. Carbon-Fee- Equivalent Rebates shall be used to reduce the price of exports to such countries. The State Department will determine rebate amounts and exemptions if any.
Other Economic Approaches to Curbing Greenhouse Gas Emissions
Policymakers evaluating strategies for reducing GHG emissions have two general approaches to consider. A cap-and-trade system curbs emissions by limiting the quantity of a pollutant (e.g., CO2) that can be emitted and then allocating a corresponding number of tradable emissions permits to sources covered by the program. A carbon tax curbs emissions by raising the price of fossil fuels based on their carbon content. Each approach has advantages and disadvantages, and a well-designed system of either type will be more effective than a poorly designed system of the other type.
Although Carbon Fee and Dividend (CFD) is considered “revenue neutral,” it is still a carbon tax, albeit at the highest point upstream possible. The argument is that the current system subsidizes fossil fuels at the production point, discouraging investment in renewables and greener energy. Some have argued that CFD will not provide the economic offset necessary to counteract the consumer cost increase that will be received at the downstream level. (I have seen elegant models suggesting that this is not the case, but I have also seen models in the other extreme, showing that it will actually penalize consumers with lower incomes most).
Cap-and-Trade
With this approach, a regulatory body (e.g., the federal government) sets a cap on emissions of a particular pollutant (e.g., CO2) from a designated group of polluters (e.g., power plants). The total emissions allowed under the cap are divided into individual permits, each representing the right to emit a certain quantity of the pollutant (e.g., one ton of CO2). The permits are then allocated to the sources covered by the program. (There are a variety of allocation methods, including free distribution to the capped entities, an auction, or some combination of the two.) At the end of the compliance period (e.g., one year), each regulated source must report all emissions and surrender an equivalent number of permits, to be retired from the system.
Since the total number of permits is limited by the cap, the permits take on financial value and can be traded on the open market. Companies that are able to reduce their emissions at low cost can sell their surplus permits to companies for whom the cost of reducing emissions is high. Each company has the flexibility to choose how to meet its emissions target, but market incentives encourage companies to invest in new technologies or employ conservation measures to lower the cost of reducing emissions. Over time, the emissions cap is tightened to achieve more aggressive pollution-reduction targets, requiring companies to adjust their strategies to comply with the new levels.
Acid Rain Program: An Example of [Successful] Cap-and-Trade
The most successful cap-and-trade system to date is the Acid Rain Program created under the 1990 Clean Air Act Amendments. It set a permanent cap on the total amount of sulfur dioxide (SO2) that could be emitted by electric power plants across the country. At full implementation in 2010—after increasingly stringent emissions limits have been imposed—the program is expected to have reduced annual SO2 emissions to one-half the amount emitted in 1980.
Regulated sources (electric power plants) are allocated allowances (permits) based on historic fuel consumption and emissions rates prior to the start of the program. At the end of each year, every source must hold enough allowances to cover its emissions for the year. The allowances needed to match its emissions are deducted from the utility's compliance account and retired from the system. Sources that have excess allowances may sell them or bank them to use or sell in future years. Emissions trading gives each source the flexibility to design its own compliance strategy. Monitoring and stiff penalties promote compliance.
Design Considerations— an effective cap-and-trade program to reduce GHG emissions is far more complex than was creating a system to reduce emissions of SO2. The Acid Rain Program covered just one sector—electric power plants, the principal source of SO2 emissions. Major sources of CO2 and other GHGs, on the other hand, include electric power plants, transportation, industry, residential and commercial sectors, and agriculture.
Deciding which GHGs and emissions sources to include and where in the fossil fuel supply chain the point of regulation will occur are key issues for policymakers.
As typically envisioned, a carbon tax would be imposed on fossil fuel suppliers at a rate that reflects the amount of carbon that will be emitted when the fuel is burned. The tax would be included in the price of the coal, oil and natural gas supplied to wholesale users and ultimately passed onto consumers in the price of electricity, gasoline and other energy-intensive products. Coal, which generates the greatest amount of carbon per unit of energy (BTU), would be taxed at a higher rate per BTU than oil or natural gas. By raising the price of carbon-based energy, the tax would create incentives to reduce energy use, stimulate demand for more energy-efficient products, and promote a shift to cleaner fuels and renewable energy.
A federal carbon tax would affect all sectors of the economy. Tax proponents suggest that it be levied at the wholesale stage as far "upstream" as practicable—namely at the point at which the fossil fuel passes from the producer (e.g., the coal mine, oil tanker, or natural gas wellhead) to the next entity in the supply chain. Electric power generators, for example, would pay the tax on the coal, oil, or natural gas they purchase and then pass the cost on to retail electric utilities "downstream," which in turn would pass it along in the rates they charge their customers.
A carbon tax could be revenue-neutral: all revenues could be rebated directly to every citizen (tax-and-dividend) or could be used to reduce existing taxes (tax-and-shift). Alternatively, revenues could be invested in development and deployment of new clean-energy technologies (tax-and-invest) and/or in energy efficiency programs (tax-and-caulk).
The carbon tax can be set to reflect what economists call the social cost of carbon (SCC), "the present value of additional economic damages now and in the future caused by an additional ton of carbon emissions." Estimates of SCC vary widely, reflecting uncertainty about future climate change scenarios and disagreement as to how to value the impact of projected climate damages. Peer-reviewed estimates of SCC for 2005 have an average value of $12/metric ton of CO2.
The tax rate could also be designed to achieve a given stabilization target. An analysis of three energy-economic models estimates that a carbon price trajectory consistent with stabilizing atmospheric CO2 at 450 parts per million (ppm) would require that the price on emissions reach $25-$70/ton CO2 by 2020 and continue rising to $127-$230/ton CO2 by 2050.
The Carbon Tax Center proposes a revenue-neutral "starter" tax of $10/ton CO2, increasing by $10/ton CO2 each year for 20 years. Each $10/ton CO2 charge would raise the price of gasoline by 10¢/gallon and the price of electricity by an average of roughly 0.66¢/kWh. It also would generate $55 billion in revenue and would reduce CO2 emissions by about 4 percent.
A cap-and-trade system and a carbon tax are both market-based policy instruments that create incentives to reduce carbon emissions. A cap-and-trade system is a quantity-based instrument; it fixes the total quantity of emissions and allows the price of energy and energy-related products to fluctuate according to market forces. A carbon tax is a price-based instrument; it fixes the price of carbon-based energy and allows emissions levels to vary according to economic activity.
Emissions Certainty
The strength of the cap-and-trade approach is that it can set firm limits on emissions. The cap is set at a level designed to achieve a desired environmental outcome (e.g., reduction of emissions to 80 percent of 1990 levels by 2050), and individual companies have the flexibility to choose how they will achieve their emissions targets. (A "flexible cap" approach, on the other hand—one that includes a safety valve feature, for example—would no longer provide certainty that emissions reduction targets will be met).
A carbon tax does not guarantee achievement of a particular emissions target. It allows the quantity of emissions to fluctuate as the demand for energy rises or falls. Allowing emissions to vary from year to year gives firms the flexibility to abate less and pay more in taxes when abatement costs are unusually high (and vice-versa when abatement costs are low). The tax could be designed to rise steadily over time to achieve a certain stabilization target (e.g., a concentration of atmospheric CO2 of 450 ppm by 2100).
Price Predictability
The advantage of a carbon tax is that it can fix the price of carbon emissions. It creates a permanent incentive to reduce emissions, and if set at the appropriate level, it encourages investment in alternative fuels and energy-efficient technologies that have high up-front costs. Under a cap-and-trade system, the price of emissions permits may vary considerably from year to year. An especially cold winter, for example, or sudden growth in a particular industry could increase the demand for energy and cause a spike in the price of permits. This potential volatility could have a disruptive effect on markets for energy and energy products and could make business planning more difficult.
Both major cap-and-trade programs in existence today—the Acid Rain Program and the European Union's Emissions Trading Scheme (ETS)—have experienced significant volatility in the price of emissions permits. In the case of the Acid Rain Program, SO2 prices fluctuated considerably in the early years of the program and then spiked dramatically in 2004-2005, despite a large bank of allowances. During the three-year ETS trial period (2005-2007), allowance prices that were initially high dropped precipitously in April 2006—after it was discovered that emissions were significantly lower than expected, causing the demand for allowances to plummet.
Environmental Effectiveness
The effectiveness of a cap-and-trade system depends on a variety of design features. (1) How stringent is the emissions reduction timetable? Will reductions be deep enough to have a meaningful impact on climate change? (2) How will baseline emissions be measured and a corresponding and appropriate number of emissions permits be determined and distributed? (3) Will the cap be applied economy-wide or to only certain sectors or sources? (4) What types of cost-control measures, if any, are included? Are they set high enough to spur investment in clean energy technologies? (5) Will any revenues be generated? Will any portion of these be invested in energy efficiency and low-carbon technologies?
Similar issues must be addressed in designing a carbon tax system, such as whether a credible commitment has been made to keep the tax in place, whether exemptions will be granted to certain sectors or industries, and how revenues will be used. Basically, however, the effectiveness of the tax depends in large part on whether the tax rate is set high enough to create real market incentives that lead to developing and adopting climate-friendly technologies. An economy-wide tax that is scheduled to rise steadily over time sends a consistent and long-term price signal that encourages investment in clean energy technologies and energy efficiency.
Equity
Both a carbon tax and a cap-and-trade system raise the cost of products like electricity and gasoline. These price increases would disproportionately affect lower-income households inasmuch as they spend a larger percentage of their income on energy products than do higher-income households. The way in which the two regulatory systems handle any revenues they raise would determine the extent to which each is able to reduce this disparity.
A carbon tax directly raises substantial revenues. If the revenues were rebated equally to all citizens or used to reduce regressive taxes (e.g., the federal payroll tax), it would return more money (in rebates or tax savings) to lower-income households (and to people who take steps to reduce their energy consumption) than they would pay in carbon taxes. In contrast, wealthier households, which use more energy on average (flying, driving, living in big houses), would pay more in carbon taxes than they would receive in rebates or tax savings.
Similarly, a cap-and-trade system that auctioned permits to the capped entities would generate sizable revenues that could be rebated to citizens or used to reduce other taxes, thereby offsetting the regressive effects of higher energy prices. Free distribution of the permits, on the other hand, could lead to significant windfall profits for the firms receiving the permits. Research indicates that only a modest portion of the allowance value—less than 15 percent—is needed to compensate for the cost of meeting the cap. The remainder would be passed along in higher prices to consumers "downstream.”
Simplicity and Transparency
A cap-and-trade system would require a new administrative structure—a system to allocate emissions permits, markets where firms can buy and sell those permits, and a means of monitoring emissions and trades. Free permit allocation would make it difficult to estimate the economic impact of the cap-and-trade system on consumers and industries. Auctioning permits,on the other hand, would create a clear carbon price signal and provide greater transparency to the system.
A carbon tax could build on the well-developed administrative structure of existing taxes, such as the current excise taxes on coal and petroleum. A tax based on BTU heat units—already standardized and quantifiable—would fairly reflect the carbon content of each type of fuel. The underlying premise of a carbon tax—that the price of energy and energy-intensive products should include the environmental costs associated with their production and use—is transparent and readily understood.
Citizen’s Climate Lobby
The Ann Arbor chapter of the Citizens’ Climate Lobby is quite new, forming in March 2014. They helped organize the Climate March last year. Citizens’ Climate Lobby is a rapidly growing, grassroots, non-partisan organization with over 170 chapters throughout the US and Canada. It is expanding to other countries as well. In Michigan there are also chapters in Traverse City, Midland, Mt. Pleasant, Grand Rapids, Lansing, Kalamazoo and Detroit.
CCL and Nuclear
Raiman sees nuclear as a necessary player in halting climate change and GHGs. He applauds the work of Dr. James Hansen, a supporter of the CCL agenda, who believes, “...that renewables alone cannot realistically meet the goal of limiting global warming to 2 degrees C, and that a major expansion of nuclear power is essential to avoid dangerous anthropogenic interference with the climate system this century.” Dr. James Hansen is a professor at the Department of Earth and Environmental Sciences at Columbia University and former head of the NASA Goddard Institute for Space Studies.
CCL does not advocate for or against nuclear power generation. We understand the science that shows the low-carbon generating capacity of nuclear power, and we understand the objections that many people raise. Dr. Hansen, the world’s preeminent climate scientist and a member of our Advisory Board, supports nuclear energy as a way to help speed the transition from fossil fuels to a zero-emissions energy economy. Fourth Generation nuclear can theoretically reduce the amount of radioactive waste the world must deal with, but cost projections for the business model are uncertain. CCL’s aim is to correct the market’s failure to accurately price carbon-emitting fuels, by passing legislation to internalize fossil fuel externalities to industry, so investors will move to low-carbon alternatives. CCL does not advocate for or against nuclear and expects the low-carbon energy marketplace will play the lead role in deciding whether it is viable in the post carbon-fuel era.
Arguments Against a Nuclear Solution
At this stage of the game there are still many scientists that argue that nuclear can never be considered a true renewable energy source due to the risks. For example, Alan Robock, Distinguished Professor of Climate Science, Rutgers University, says, “More than 99 percent of the current 437 nuclear power systems in the world use highly enriched uranium to produce heat and boil water, which drives turbines. Plutonium and many other highly radioactive elements are waste products. The benefits of nuclear power include minimal emissions of greenhouse gases that cause global warming, and a fairly reliable continuous source of electricity. But nuclear power presents many downsides. These include:
* Nuclear weapons proliferation. A plant for processing fuel for a typical nuclear reactor could produce enough highly enriched uranium for 10-30 nuclear weapons per year. Waste reprocessing could produce 30 plutonium weapons per year. Nuclear power, partly due to the ill-conceived Atoms for Peace program, preceded the spread of nuclear weapons to India, Pakistan, Israel, and North Korea, and Iran appears to be trying the same route. While additional nuclear reactors in existing nuclear states would not be a problem, proliferation of nuclear power around the world would only exacerbate the problem of nuclear weapons, and this is the greatest danger the world faces.
* Possibility of catastrophic accident. Based on the 20 core melt events that have occurred in military and commercial reactors worldwide since the early 1950s, including Three Mile Island, Chernobyl, and Fukushima, Lelieveld, Kunkel, and Lawrence showed that the risk of catastrophic nuclear accidents has been drastically underestimated. They showed that the risk of human exposure to dangerous radiation from nuclear accidents in eastern United States, virtually all of Western Europe, and East Asia is higher than once every 50 years. Nuclear reactors are built, operated, and regulated by humans, and humans make mistakes. Accidents can happen not just from meltdowns, but from earthquakes, tsunamis, and aircraft accidents.
* Possibility of terrorist attack and radioactive release. None of the nuclear reactors in the United States are guarded against terrorist attacks. The spent fuel, now being stored outside the containment vessels, would be an easy target, and sophisticated terrorists could also cause a meltdown.
* Unsafe operation. In the United States, the Nuclear Regulatory Commission has a cozy relationship with the nuclear industry, resulting in poor oversight and enforcement of rules. The industry has a for-profit culture that emphasizes profit over safety. There are planned and unplanned radioactive releases during routine operation. There is lax enforcement of fire protection rules at nuclear plants. And there are no viable evacuation plans should accidents happen.
* Not economically viable. Nuclear power is incredibly expensive. It could not even exist in the U.S. without huge government subsidies, including insurance against accidents. Too cheap to meter, a claim when nuclear power was first being developed, was a fantasy. Waste disposal problem not solvable in near future. For political reasons, there is no repository for the spent fuel, which accumulates at each nuclear power plant, just waiting for an accident to happen.
* Extraction of uranium very damaging. Uranium mining exposes workers to lung cancer and the surrounding areas to contamination. In the U.S., it is Native Americans who suffer disproportionately.
* Nuclear power emits 10-20 times the carbon dioxide as wind power. Mining, processing, and transportation of nuclear fuel is energy intensive.
* Proponents of nuclear power, recognizing these dangers, propose new "safe" future generation technology (which does not now exist), assembly line production of standard designs, and continued operation of existing plants that are already beyond their 40-year design lifetime in the United States.”
The Ann Arbor Energy Office works to reduce energy consumption and advance energy efficiency and renewable energy projects at the municipal level and throughout the community. The Energy Office operates in three major areas: 1) managing projects, programs, and grants; 2) developing informational resources, and 3) advising city managers, elected officials, and the general public on energy policies and programs.
In 2012, Ann Arbor City Council adopted the city's first Climate Action Plan. This plan set goals to reduce communitywide greenhouse gas (GHG) emissions 25% by 2025 and 90% by 2050. The Energy Office is developing tools and programs to help reach these goals.
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— David Fair is the WEMU News Director and host of Morning Edition on WEMU. You can contact David at 734.487.3363, on twitter @DavidFairWEMU, or email him at dfair@emich.edu
