29 january 2013

In Energy Taxes, Tools to Help Tackle Climate Change

Eduardo Porter, The New York Times, January 29, 2013

To understand the complicated politics of climate change in the United States, you may want to talk to Pamela Johnson, president of the National Corn Growers Association’s Corn Board.

She is concerned about the weather. The drought that parched the lower 48 states cut the harvest at her northern Iowa farm by about 40 bushels an acre. For the first time in memory, she says, she had to rely on the federally subsidized crop insurance program to stay afloat.

And yet Ms. Johnson’s main concern, and that of most other growers in the association, is not about how to deal with a changing climate — how to slow the pace of warming and how to adapt to a warmer world with more erratic weather.

Rather, growers worry that political support for crop insurance might flag after a year in which taxpayers paid billions in subsidies to farmers while virtually everybody else faced deep budget cuts.

“We are Americans before we are farmers,” Ms. Johnson said. “We know we have budget problems.” Still, she added: “For our farmers, crop insurance is the main concern. It helps keep us in business.”

The erratic weather across the country in the last couple of years seems to be softening Americans’ skepticism about global warming. Most New Yorkers say they believe big storms like Sandy and Irene were the result of a warming climate. Whether climate change is directly responsible or not, the odd weather patterns have underscored the risk that it poses to all of us.

What’s yet to be seen is whether this growing awareness of the risks will translate into sufficient political support to address climate change, especially after we figure out the costs we will have to bear to do so.

In his inaugural address, President Obama wove Hurricane Sandy and last year’s drought into a stirring plea to address climate change. “The failure to do so would betray our children and future generations,” the president said.

But even as he put global warming at the top of his agenda, he avoided dwelling on how much it would cost to address. And nowhere in his speech did he allude to the most powerful tool to address the problem: a tax on the use of energy.

Dealing with global warming will be expensive. The price tag last year for the drought was about $35 billion, according to the reinsurer Aon Benfield. Hurricane Sandy cost a further $65 billion. The National Oceanic and Atmospheric Administration said that last year ranked as the second-costliest in terms of natural disasters since 1980 — lagging only 2005 when Hurricane Katrina swamped New Orleans.

And yet this is nothing compared with what the future will bring.

“The impact to date has been pretty small,” said William Nordhaus of Yale, one of the leading economists studying the impact of climate change.

Nicholas Stern of the London School of Economics, another expert on the costs of climate change, said: “What we are seeing is on the back of warming of only 0.8 degrees centigrade” since the second half of the 19th century. “What we risk is 4, 5, 6 degrees even by the end of this century.”

For all the damage wrought by Sandy and Katrina, weather disasters in recent years have cost us probably less than a tenth of 1 percent of our economic product. Yet, according to Professor Nordhaus, “Damages will rise more sharply than the temperature curve.”

The president’s speech notwithstanding, the cost of dealing with these looming disasters is not to be found in the budgets discussed by the White House and Congressional Republicans, which would shrink much of the government to its smallest share of the economy since the early 1960s.

Neither is the cost of steering the economy away from the fossil fuels that are to blame for a warming atmosphere. A report from the World Economic Forum estimated that would cost $700 billion a year in public and private investment.

The reluctance is not because we have no idea how to finance these efforts. We do. Top economists agree a tax on fuels and the carbon they spew into the atmosphere would be the cheapest way to combat climate change. Most advanced countries rely on some variant of this tax. The question is whether the prospect of more droughts and more powerful hurricanes will push Americans to embrace it, too.

Among the 34 industrialized nations of the Organization for Economic Cooperation and Development, these taxes average about $68.4 per metric ton of carbon dioxide. The United States, by contrast, has a gas tax to pay for highway improvement, and that’s about it. Total federal taxes on energy amount to $6.30 per ton.

Some states add excise taxes — California has a gas tax equivalent to about $46.50 per ton of carbon dioxide and a $2.33-per-ton tax on jet kerosene. But, according to a review by the O.E.C.D., the federal government is unique in imposing no taxes on other energy use, from residential heating to power generation.

A tax on energy could single-handedly take on climate change. For starters, it would encourage people and businesses to burn less, reducing emissions at a stroke. One study found that a carbon tax of $15 per ton would reduce greenhouse emissions by 14 percent as people sought to save energy by driving less, insulating their homes and switching to renewable fuels, among other things.

What’s more, it would raise lots of money. Estimates reviewed in a report by the Tax Policy Center ranged from 0.6 percent of the nation’s gross domestic product — for a tax of $20 per ton of carbon dioxide — to 1.6 percent of G.D.P. for a tax of $41 per ton. Consider this: 1.6 percent of G.D.P. is $240 billion a year. And $41 per ton amounts to an extra 35 cents a gallon of gas.

By way of comparison, the Swiss economy does fairly well even while shouldering an effective carbon tax rate of more than $140 per ton.

Some of the money raised through more taxes on energy could be spent steeling communities to cope with more intense hurricanes and moving others out of harm’s way. It could even help ease the fiscal squeeze that so consumes our elected officials.

There are drawbacks. A carbon tax would fall more heavily on the poor — the Congressional Budget Office estimates that the poorest fifth of Americans spend 21.4 percent of their income on gas and utilities while the richest 20 percent spend only 6.8 percent. But economists at the budget office have pointed out that there are several ways to compensate lower-income Americans.

For all the merits of an energy tax, the United States seems a long way from embracing one. It was only three years ago that the corn growers and the rest of the farm lobby allied with energy producers and other corporations to derail President Obama’s first shot at climate change legislation, which would have set a limit on carbon emissions and required businesses to buy permits to emit.

As things stand, drought is unlikely to change their minds. Farmers are still covered by crop insurance, and they have powerful allies in Congress who will fight to keep the subsidies in place. They may see little reason to support legislation that would make energy or fertilizer more expensive.

“Farmers would be deeply affected by an energy tax,” Ms. Johnson said.

As things stand for them, it is probably cheaper to deal with the occasional drought.

[Table of national energy taxes. Click to enlarge.]Image images//import_038ef7ed6ec3392225f72ca0e9e73157_30porter-graphic-articleInline.gif

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