Alan Journet, November 2019

It is abundantly clear that in order to avoid the severity of climate chaos that a business as usual future of accelerating fossil fuel use and concomitant accelerating greenhouse gas (GHG) emissions would impose, we must curtail our emissions of the greenhouse gases that drive global warming.

The 2018 report of the Intergovernmental Panel on Climate Change indicates that we need to limit temperature increase to no more than 1.5 degrees C (2.7 degrees F) if we are to avoid crossing many tipping points and launching a vast series of positive feedback loops that push us further towards global catastrophe. Furthermore, to have a reasonable chance of preventing this outcome, we must have programs in place that reduce emissions to 45% below 2010 levels by 2030, and to net zero emissions by 2050.  Net zero, means simply that emissions of GHGs are balanced by the natural ability of global ecosystems to capture and sequester them.

The offending gases do not comprise solely carbon dioxide, but include others, notably methane (CH4), nitrous oxide (N2O), Chlorofluorocarbons (CFCs) and Hydro-chlorofluorocarbons (HCFCs), all of which are more potent on a pound-for-pound basis as warming agents than carbon dioxide.

In considering the options available to us, there are two question to ask: 1) How do we limit the emissions? and 2) What do we do with any funds that are raised from the imposition of a mechanism that places a price on the emissions of the gases?

Preliminary Clarifications

The Target of Climate Reduction Efforts

Considerable confusion occurs about terms – not because there is complexity, but because there is confusion in language among politicians, journalists and, yes, even climate activists:

When we discuss reducing global warming emissions by capping or placing a fee on them, the phrase often used is ‘pricing carbon.’

This is unfortunate because the target of our concern is greenhouse gases – and most folks involved in the effort know that. We know that the cause of global warming is the emissions of greenhouse gases that result from human activity -mainly carbon dioxide, methane, nitrous oxide and the fluorinated hydrocarbons such as CFCs, and HCFCs.

However, because for years we understood the problem to be caused mainly by carbon dioxide, we have become lazy and often refer to the problem as a carbon problem…even though we know that the third most effective warming gas nitrous oxide at nearly 300 times worse than carbon dioxide, contains no carbon, and we know the second most effective gas methane is 86 times worse than carbon dioxide on a pound for pound basis over 20 years and 34 times worse on a 100-year basis. meanwhile the CFCs and HCFCs are many thousands of times worse than carbon dioxide.

Although carbon dioxide remains the most important gas because of the combination of its concentration and warming impact, the other gases now account for some 35 – 40% of warming. Methane doubled in impact between the fourth IPCC report in 2007 and the fifth in 2013/14 even as carbon dioxide’s impact held relatively steady (increasing from 1.66 to 1.68 w/m².

So, whenever we are confronted with a proposal to address this problem, we must first ask if it addresses greenhouse gases, or just carbon (dioxide). The much-touted Washington ballot Initiative (1631) of 2018, for example, claimed to be a GHG emissions reduction proposal but really only targeted carbon. Had it been approved, the result would have probably been to encourage a transition by utilities from coal to natural gas, which burns more efficiently than coal in terms of carbon dioxide emissions per un it of energy generated, but results in substantial methane emissions from fracking and processing – totally negating the combustion benefit.

Indeed, several programs currently in effect (the eastern states’ Regional Greenhouse Gas Initiative cap and trade program and the BC tax program, for example) only target carbon (dioxide).

Fortunately, some proposals that seem to target only carbon (such as those proposed by CCL), really target greenhouse gases. Unfortunately, in my opinion, they confuse the issue by not stating that they are really greenhouse gas reduction proposals.

It’s wort noting that if one reads the 2015 Paris Agreement that was designed to reduce GHG emissions, one will find that it mentions greenhouse gas 15 times and carbon only twice – and then appropriately in connection with forestry sequestration.

Meanwhile, the Green New Deal similarly refers to greenhouse gases 8 times as often as carbon- only mentioned once in connection with soil sequestration.

So, we have to ask of a proposal: what exactly is it targeting?

The Two-Step Solution

We often hear about Cap and Trade and Fee and Dividend as though these are the options available to us. But this, again, confuses the issue.

There are, in fact, two separate questions:

1. how do we reduce emissions (the options are by capping them or by placing a fee on them – hence the cap approach or the tax/fee approach),
2. if we raise funds, what do we do with them? the options are:
   1. return them to the taxpayer (the Dividend approach)
   2. use them to lower other taxes (the tax and shift / revenue neutral approach as in BC)
   3. use them to promote renewable energy R&D, address social justice issues, and promote carbon capture and sequestration projects (the Invest approach as in CA and proposed for OR).

Notice, and sorry for the confusion, but nowhere does the concept ‘trade’ appear in the discussion. That’s because it’s a commonplace component of the cap approach as I will explain below.

So, to understand a proposal, we need to know (a) whether it’s a cap or fee program, and (b) if it raises funds – what it does with those funds.

What is Our Target

Regardless of the approach we take to reducing emissions, there will be a target.  This will vary from proposal to proposal. For example, the CA program targets 80% GHG emissions reductions from 1990 levels by 2050 and Oregon’s HB2020 followed that model.  Meanwhile, the proposal recently passed in New York leapfrogged these to target net zero GHG emissions by 2050. This is interesting because the infamous 2018 IPCC report that has been used to argue we have to undertake substantial action within 10 years in order to have a reasonable probability of achieving a livable planet argued for a target of net zero emissions by 2050.

Note that the target is not zero GHG emissions since that would require that we stop breathing (or, at least, exhaling) a somewhat difficult requirement.  Rather, our goal is to limit emissions to an annual amount the planet can neutralize.

So, we should measure proposals in part on the basis of their goals.

Where do we impose the fee or cap?

For simplicity, the imposition should be assigned as far upstream as possible since there are fewer entities that need to be monitored. The assumption is, of course, that charges will be passed down to consumers.

Limiting Emissions Through a Cap & Trade Approach

We ensure emissions reductions within a given jurisdiction by issuing permits or allowances to emit greenhouse gases measured in terms of their carbon dioxide equivalent. We then reduce the number of those permits annually along a trajectory that has been agreed – towards a goal that has similarly been agreed.  This is a direct approach targeting emissions directly.

In principle, these allowances could be issued free to polluters or sold at a set price, but generally they are either auctioned or released as a combination where some are free and the remainder are auctioned, – thus they raise funds.

Entities either receiving permits or competing for them at auction are those responsible for the largest amounts of emissions – in CA and the OR proposal, this number is 25,000 metric tons annually – which meant the top 100 or so emitters in Oregon.

These polluters then compete at auction to buy the number of allowances they think they will need during the coming compliance period – usually a year.

If a polluter finds itself able to reduce emissions below the number of allowances purchased, excess allowances can either be retained for a future cycle, or traded on the open market to an entity that cannot reduce emissions to the number of allowances purchased – hence The Trade.

In addition, programs often allow a polluting entity to satisfy some small proportion of its compliance obligation through offsets.  This means they allow polluters to invest in projects that either reduce emissions (e.g. renewable energy generating projects) or capture GHGs from the atmosphere (e.g. through sustainable forestry or regenerative agriculture). In the CA program and the OR proposal, offsets are limited to 8% of an entity’s compliance obligation (total emissions).

In the distribution of allowances, some free allocations or adjustments may be designated to

• reduce the potential rate impacts for utility users – especially low-income ratepayers
• reduce the negative impacts on emissions intensive / trade exposed industries to protect jobs resulting from polluting entities just moving out-of-state (called leakage).
• reduce the impact of potential fuel price rises on rural residents (agriculture & forestry).

Limiting Emissions Through a Tax or Fee Approach

The terms tax and fee are interchangeable and refer to the technique of imposing a fee on emissions (price on pollution) resulting from our activities.

The premise is that as the price of a commodity rises, users will seek cheaper alternatives.  In the case, a fee is added to fossil fuels and industrial processes that emit greenhouse gases, the fee being imposed on every metric ton of emissions measured in terms of the carbon dioxide equivalent.  There is no limit to what any entity can emit.

The fee is then raised annually to encourage further transitions from polluting fuels or processes at a rate to keep the emissions reduction on the assigned trajectory.  If emissions reductions occur faster than expected, the fee is either not increased or could be less than if the reduction is insufficiently rapid.

What Do We Do with the Funds Raised?

Now the jurisdiction has raised funds, the question is what should be done with those funds?

Option 1 is to return them to the taxpayer as a Dividend. This is what the federal Energy Innovation and Carbon Dividend Act does.  But, in addition, a proposal introduced by Chris Van Hollen (SB940) also includes a Dividend despite being a Cap approach. Hence, it’s a hybrid of the usual Cap & Invest vs Fee and Dividend choices as a Cap and Dividend proposal.

Option 2 is to use the funds to lower other (e.g. personal income or corporate) taxes, the so-called tax and shift approach, are sometimes called Revenue Neutral.

Option 3 is to promote renewable energy or energy efficiency research, development and implementation via assisting industrial, commercial, and residential transitions to lower emissions technologies and processes.

Option 4 involves stimulating projects on our natural and working lands (notably in forestry and agriculture, for example) that would more effectively capture and sequester carbon from the atmosphere.

Option5 involves investing funds in remedying social injustices historically generated by (for example) the polluted air and water resulting from fossil fuel extraction and processing facilities or that will be generated by the transition from fossil fuel to renewable energy and addressing the economic disadvantages suffered by rural and coastal communities.

Option 6 involves providing economic assistance to historically economically disadvantaged regions or demographic groups (such as rural and coastal regions, and Native American tribes).

Oregon’s (2019) HB2020 comprised a cap, trade and invest approach where investments were assigned to Items 3 –  6 above.

Some Concerns

In the case of Oregon, a Portland State University study of the efficacy of a tax or fee approach in Oregon conducted in 2013 by the Northwest Economic Research Center indicated that even a fee of $150 per ton of emissions would be insufficient as early as 2035 to keep the state on trajectory towards the goal of 80% below the 1990 level by 2050 target. Meanwhile, in CA, the auction price has fluctuated in the $15 to $20 per ton of emissions range and the state has already dropped below its 2020 intermediate emissions target. Apparently, in order to be effective, the tax/fee approach would need to be far higher and thus more economically disruptive than the cap approach. This suggests that the direct approach via a cap is likely to be less economically disruptive than the indirect fee/tax approach.

A study of the Canadian pricing system (a carbon tax-fee system) suggested that a price of over CAN$200 per tonne* of CO₂e emissions would be required to achieve that nation’s 2030 Paris agreement (Individually Determined National Contribution IDNC) goals. Meanwhile, a 2018 study by the Canadian Center for Policy Alternatives of emissions reduction options for Ontario reported that the tax/fee system is inherently more economically disruptive because even the inadequate proposed price per tonne of emissions is higher than the auction price of permits from a cap system (CAN$30 vs CAN$18 per tonne).  Consequently, the revenue raised is greater for the tax/fee than the cap over the same annual emissions total. The same study also suggested that a cap and trade system with a Climate Change Action Plan would achieve greater greenhouse gas emissions in 2020 than the Revenue Neutral (income tax reducing) tax/fee approach.

In Oregon, a particular problem associated with the tax/fee approach is that passage of a bill raising a tax requires a 3/5^th majority in both chambers (i.e. 36 House members, and 18 Senators).  This could be an insurmountable hurdle under current circumstances.

As noted above, the cap approach directly limits emissions to the number of allowances issued while the fee/tax achieves it indirectly by assuming that increasing the price of a commodity (i.e. fossil fuel) will reduce its use.  But, in an expanding economy, everyone might just suck up the increasing fee and continue polluting. Thus, emissions reductions are not guaranteed.

Non-regulated emissions: The entities subject to these pricing programs are those that are already regulated. Unfortunately, data suggest that substantial non-regulated emissions are also occurring. In particular, forestry activities (esp. logging) are estimated to result in greater annual emissions in Oregon than transportation – which is listed as the top emitting sector of regulated GHGs. Some climate activists argue that any effort to address emissions should include these currently non-regulated sources.  There are two concerns about imposing such a demand: The first is whether we can afford to wait for the development of adequate protocols to address all emissions before we start placing regulated emissions on a downward trajectory?  The IPCC analysis suggests we cannot afford to wait. The second question is more politically pragmatic: since the emissions that are currently not regulated are largely those from agriculture and forestry, imposing a pricing on those emissions would have profound negative consequences therefore likely would receive little rural support.

*a ton (U.S. = short ton) is 2,000 U.S. pounds, a concept confined to U.S. usage.  Meanwhile, a tonne (used outside the U.S. but only rarely used in the U.S. is equivalent to a metric ton) is 1,000 Kilograms, or  2,204.6 pounds. Additionally, the current exchange rate is US$1 = CAN$1 1.33). Thus a price of CAN$200 per tonne would be ≈ $136 per U.S. ton.