Exxon Now Advocates for Carbon Tax? Hmmm

What’s behind the “Americans for Carbon Dividends” scheme?

By Leonard Hyman and Bill Tilles for WOLF STREET:

It’s not every day that two former Republican US Senators, currently full-time oil lobbyists, advocate for a carbon tax. When one of their main clients, Exxon Corp., also decides to publicly and financially support this effort for $1 million, it deserves attention.

Former Senators Trent Lott (MS) and John Breaux (LA), both with substantial ties to the US energy industry, recently formed a political action committee, Americans for Carbon Dividends (AfCD). This group now advocates for a carbon tax. The actual proposal was released by a related organization, the Climate Leadership Council (CLC), which is headed by former Secretary of State and longtime Republican grandee, James A. Baker, lll.

Interestingly in terms of carbon emitters, this group is an amalgam of oil, natural gas, and nuclear power interests – no one from the coal industry. Reminds us of the camping story about outrunning a bear. Only need to outrun your fellow campers. In this instance, the coal industry seems to be the slow camper.

This proposal has four key parts:

  1. A $40 per ton tax on carbon rising annually at a gradual rate;
  2. Tax revenues generated would be refunded to all citizens (hence the name, “Carbon Dividends”);
  3. This plan would terminate the EPA’s regulatory authority over carbon emissions and specifically terminate the recently enacted Clean Power Plan;
  4. Require “border carbon adjustments to level the playing field and permit American competitiveness.” (Other relatively high CO2 emitting countries apart from the US are China and Russia).

The CLC, in its advertisement touting the four-part plan’s inclusiveness, cited it as being “Pro-Environment, Pro-Growth, Pro-Jobs, Pro-Competitiveness, Pro-Business and Pro-National Security.” With the staggering, wholesale abandonment of federal environmental oversight proposed in return for modest levels of taxation, we would agree is definitely pro-business.

These industries are saying two things publicly: Human-induced climate change is real and that it represents genuine economic and social threat. And it is the first time they’ve backed a carbon tax. At present about forty other nations either have or are contemplating a carbon tax.

It’s also interesting that the energy industry is making this announcement the same week as the Nobel Laureates in Economics were announced. One of the winners, William Nordhaus, developed the so-called DICE model where the social costs of carbon is equal to the “economic impact of a unit of emissions in terms of t-period of consumption.” In 2015 this method generated a carbon price of $31.20 per ton.

The theory is that CO2 can be treated or taxed like other economic activity. But the difference here is that the tax should be equal to the marginal environmental damage costs. These frameworks also assume rather modest “externalities.” In classical economics, externalities are presumed to be small enough so as not to distort the economy. The obvious problem here is that climate change may clearly result in catastrophic, i.e. non-marginal changes which are profoundly distorting in effects.

Following this logic, taxing energy companies fully for the devastating impacts of hurricanes or wildfires for example would simply result in more bankruptcies. This may or may not discourage long term energy production, but would certainly create new sets of financial winners and losers.

Why are we hearing about this now, a few weeks before elections in the US?

Opponents of this measure like the Union of Concerned Scientists and Greenpeace have denounced this as “a nicely worded PR exercise (that) is no cure for decades of deception.” The Greenpeace spokesperson added that this proposed measure is intended to “protect executives from legal accountability for climate pollution and fraud.”

Before concluding, to preempt the howls of pain or declarations of self-sacrifice over this scheme, let’s put the numbers in perspective. The U.S. emitted 6.9 billion metric tons of carbon dioxide equivalents last year. The proposed tax, at $40 per ton, would bring in $276 billion or slightly more than Exxon’s revenues last year, about $800 per person here in the US. We also as a nation spent $1.05 trillion dollars on energy last year. The US had a GDP of $19.5 trillion in 2017.

To probably no one’s surprise, a tax (absent other offsets) would raise energy costs. Coal costs would rise the most. But the overall impact on our economy would be relatively modest. We are not sure how a remedial carbon tax compares with the damage that could or will be blamed on climate change. For example, just two recent hurricanes, Irma and Florence, may have cost the US economy $100 billion.

Our point is that the energy industry’s plan raises relatively small sums to address a huge problem. And none of the proposed taxes are paid by energy companies. They would receive a savings offset that would go into their pockets.

Furthermore, most analyses show that energy consumption has a low elasticity of demand. That means we need it when we need it regardless of the price. Adding 25% to the nation’s electricity prices, for example, might only reduce demand by 5%. We get that the price increase of a carbon tax will reduce energy demand and emissions. But how much will emissions rise as an offset by absence of federal regulatory control – as also proposed here? Does the term “Trojan horse” have any application?

Our view is that this is more of an opening gambit. There is a chance the Democratic Party will soon take over at least one branch of Congress, with much of the party’s energy coming from its left. And as a result, environmental legislation is possible.

We think this proposal is an attempt to make some superficial climate concessions (and also seemingly make a grab for the reasonable centrist middle of policy), while radically restricting governmental authority in the area of environmental regulation. On the other hand, if the Republicans retain control of both Houses of Congress next month, then perhaps we would regard this as a possible blueprint. By Leonard Hyman and Bill Tillesfor WOLF STREET