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RFF on the Issues: Carbon tax rebates; China’s shale challenges

Carbon Tax Rebates

A recent poll conducted by USA Today found that taxpayer support for a carbon tax rises “if the money is returned to them.” Only 34 percent of respondents initially said they would back a tax on fossil fuel emissions, but this number rose to 56 percent when polled about carbon tax programs that returned revenue to households in lump sum rebate checks.

New research by RFF’s Rob Williams, Hal Gordon, Dallas Burtraw, Richard Morgenstern, and Jared Carbone from the University of Calgary notes that the cost to the overall economy is higher when carbon tax revenues are returned as lump-sum rebates rather than via tax cuts (an option the poll didn’t include). Nonetheless, the study, which looks at the short-term effects of a carbon tax across income groups, shows that a carbon tax with lump-sum rebates is progressive, and that a majority of households would come out ahead under such a policy (even when ignoring any environmental benefits).

China’s Shale Challenges

China has sharply downgraded its expectations for future shale gas production from between 60  to 80 billion cubic meters (bcm) per year to 30 bcm per year by 2020. The country has the largest estimated proven shale reserves in the world, but “early exploration efforts to unlock the unconventional fuel [have proven] challenging” due to issues involving geology and production costs.

In a new discussion paper, RFF’s Zhongmin Wang and Alan Krupnick and their colleagues from the Energy Research Institute in Beijing suggest that the key to overcoming the innovation barriers for Chinese shale development may lie with the country’s national oil companies (NOCs). They write: “China’s NOCs enjoy overwhelming advantages over new entrants in terms of technology, experience, financial resources, and policy. The question is how to motivate the NOCs to invest in shale gas drilling.” In a blog post, they note that “Much like the US experience, China will need to first lower costs through investments in drilling and other innovations in order to become profitable enough to encourage further capital investment.”

Taking Steps toward Green Growth in China

Green Growth (for China): A Literature ReviewFor decades, China’s government has focused on economic growth and has paid less attention to the associated environmental consequences. But today, the need for environmental regulation is more widely recognized as a critical ingredient for continued, sustainable growth in the world’s most populous country. In a new RFF discussion paper, Green Growth (for China): A Literature Review, we examine the concept of green growth in general and take a look at what it means for China to pursue such a path going forward.

The concept of green growth, as advanced by various international development organizations and governments, emphasizes environmentally sustainable economic growth. If growth is allowed to proceed with no consideration for the impacts on air and water quality, ecosystem degradation, and biodiversity, for example, the economy will eventually no longer be able to advance without harm to public health or the loss of precious natural resources. The concern over public health impacts in China is very real, with troubling levels of air and water pollution. Only 3 out of 74 large cities in China met official air quality standards in 2013, according to the Ministry of Environmental Protection. Read More

This Week in the RFF Library Blog

Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.

Footprint of Deepwater Horizon Blowout Impact to Deep-water Coral Communities
[Significance] The Deepwater Horizon blowout released more oil and gas into the deep sea than any previous spill. Soon after the well was capped, a deep-sea community 13 km southwest of the wellhead was discovered with corals that had been damaged by the spill. Here we show this was not an isolated incident; at least two other coral communities were also impacted by the spill. One was almost twice as far from the wellhead and in 50% deeper water, considerably expanding the known area of impact. In addition, two of four other newly discovered coral communities in the region were fouled with commercial fishing line, indicating a large cumulative effect of anthropogenic activities on the corals of the deep Gulf of Mexico… – via Proceedings of the National Academy of Sciences

A 2015 Global Warming Pact Probably Won’t be Enough to Stop Global Warming: MIT Study
[National Journal] Don’t expect too much from the global climate-change accord that’s expected to emerge from high-stakes international talks in Paris next year. A new MIT study concludes that even if negotiators reach a deal at the United Nations conference, it probably won’t be enough to limit global temperature increases to 2 degrees Celsius above pre-industrial levels. That’s the level many scientists say would help stave off some of the most dangerous and disruptive effects of climate change… – via MIT Joint Program on the Science and Policy of Global Change 

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The Costs and Quality of Home Energy Audits: What Homeowners Say

This is the first post in a new series on our survey of homeowners as part of RFF’s Energy Efficiency Information Initiative. Here we focus on what’s included in an energy audit and how much it costs. In the second post, we’ll reveal if people followed their auditors’ recommendations. In the third post, we’ll focus on some differences among homeowners who had an audit versus those who hadn’t.

Figure 1. Percentage of People Whose Audits Included these Characteristics

Figure 1. Percentage of People Whose Audits Included these Characteristics

Building scientists and energy efficiency experts have a message for homeowners: there are a number of cost-effective improvements that can lower our energy bills, from simple weather stripping and air sealing to upgrading to a new high-efficiency furnace. But many homeowners don’t know where to begin. They might know they have an old furnace, but they have no idea how effective the attic insulation is, where all the air leaks are, and which improvements are likely to pay off.

This is where home energy audits come in. A professional can determine where a house is losing energy and how to correct the problem. Auditors look for air leaks all around the home, evaluate air ducts for leaks (if the home has ducts), assess insulation in the attic, crawlspace, walls, and around pipes, and evaluate heating, air conditioning, and water heating equipment. They may use special techniques, such as a blower door test to manipulate air pressure in the house and draw air through unsealed cracks and openings, and infrared imaging to show where heat is escaping.

However, only about 4 percent of the homeowners surveyed in the US Department of Energy’s 2009 Residential Energy Consumption Survey reported having an audit recently. Even among people who have had audits, the follow-up with retrofits and improvements is usually incomplete. If energy efficiency investments pay for themselves in energy savings, why aren’t more homeowners taking advantage of these opportunities?

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This Week in the RFF Library Blog

Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.

PAGES: Public Access Gateway for Energy and Science
[Science Magazine] The U.S. Department of Energy (DOE) today unveiled its answer to a White House mandate to make the research papers it funds free for anyone to read: a Web portal that will link to full-text papers a year after they’re published. Once researchers are up to speed and submitting their manuscripts, that will mean 20,000 to 30,000 new free papers a year on energy research, physics, and other scientific topics. Although the plan will expand public access to papers, some onlookers aren’t happy. That’s because the papers will not reside in a central DOE database, but mostly on journal publishers’ websites. Open-access advocates say that will limit what people can do with the papers… – via US DOE

The Climate Implications of U.S. Liquefied Natural Gas, or LNG, Exports
As the expansion of shale gas production has positioned the United States to become a potential net exporter of natural gas, the overall effect that increased exports would have on the climate has been in dispute. Many aspects of an increased natural gas exports scenario would affect emissions. On the one hand, natural gas could partially displace the use of coal overseas in the generation of electricity. This would put downward pressure on emissions, as natural gas plants on average emit approximately 50 percent less carbon dioxide, or CO2, than coal plants… – via Center for American Progress / by Gwynne Taraska and Darryl Banks

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Tax Inversions and Carbon Taxes

Because the US has the highest corporate tax rate in the world, firms can save billions of dollars by attaining a new corporate address in a low-tax country without physically relocating any of their existing business. To do so, American firms simply need to acquire a foreign firm and reincorporate the newly formed company abroad. Since 2012, 12 US firms have successfully moved offshore and many more are attempting to follow, including AbbVie, in a deal to buy British-based Shire for $55 billion and Medtronic’s deal to purchase Irish device maker Covidian for $43 billion. This strategy is known as a “tax inversion” and this post explores how a tax on carbon can help prevent them.

Not surprisingly, inversions cost the US treasury tax revenue, and the recent wave of new inversions has caught the attention of the White House and members of Congress. In July, Treasury Secretary Jack Lew called for “economic patriotism” in an effort to persuade Congress to act on the matter and President Obama declared, “I don’t care if it’s legal. It’s wrong.” Just last week, Democratic Senators called for unilateral executive action and both Secretary Lew and President Obama announced an examination of whether or not the Treasury has the authority to “discourage some of the folks who may be trying to take advantage” of inversions.

Yet inversions are simply a symptom of a much wider problem: our broken corporate tax code. High marginal rates, large loopholes, and a system that tries to tax profits earned abroad puts US companies at a disadvantage relative to their foreign competitors, promoting inversion. Instead of focusing on inversions, our policymakers should concentrate their efforts on meaningful corporate tax reform.

So how would a tax on carbon prevent tax inversions? Carbon taxes have the potential to raise billions of dollars each year that could finance the type of tax reform that would make US corporations more competitive and reduce their incentive for inversion. Further, a carbon tax combined with corporate tax reform is an extremely efficient method of reducing harmful greenhouse gases. In a recent RFF discussion paper, my coauthor Lawrence H. Goulder of Stanford University and I show that the most cost-effective carbon tax is the one that uses its revenues to finance corporate tax rate cuts.

While the political landscape has not been kind to recent so-called “grand bargains,” a bill that establishes a carbon tax while reducing corporate tax rates could satisfy members on both sides of the aisle. My grand bargain would give Democrats an efficient and legally binding climate policy (to replace the less-efficient and legally uncertain EPA power plant rules) and it would give Republicans meaningful corporate tax reform. Sounds like a win-win to me.

Exporting the Cost of Dams

Ataturk Dam, Turkey

Ataturk Dam, Turkey (credit: Carsten ten Brink / flickr)

Last year, former Egyptian President Mohamed Morsi proclaimed: “We will defend each drop of Nile water with our blood if necessary.” He was referring to the Grand Ethiopian Renaissance Dam that Ethiopia is constructing, which may affect the flow of the Nile River into Egypt. A year later, talks between the two nations still have not progressed.

For years, economists have been concerned that the local benefits of dams have been overstated and the local costs have been understated. Even if countries make efficient decisions about dam construction on domestic rivers, countries sharing a river may overdevelop the river if they are able to pass on some of the costs imposed by dams to other countries. As evidenced in the Egypt-Ethiopia dilemma, these issues may create the potential for conflict across borders when countries share a river. Read More

Measuring the Early Effects of a Carbon Tax: Comparing Three Policies across Income Groups

The Initial Incidence of a Carbon Tax across Income GroupsEconomists argue that the most efficient way to reduce greenhouse gas emissions is to raise the price of energy by introducing a price on carbon emissions, either through a tax or a cap-and-trade regime. A tax (or a cap-and-trade system that auctions off permits) has a secondary effect beyond providing incentives for reducing emissions: it raises a lot of new government revenue. Just what is done with this revenue weighs heavily on the distributional effects of a carbon price; in fact, it has greater relevance to the distributional outcome than the actual price on carbon emissions. In a new RFF discussion paper, with RFF’s Rob Williams and Richard Morgenstern, and Jared Carbone of the University of Calgary, we analyzed three different options for allocating the revenue from a $30 per-ton tax on carbon (which translates to $192 billion in the first year), and the effects on the distribution of the cost burden across income groups in the United States. These effects change over time. We focus here on the initial effects at the outset of the policy because these near-term consequences are the most salient in the contemporary political dialogue.

Most carbon tax proposals plan to return the money collected by the government to the people. For instance, California’s cap-and-trade scheme returns much of the revenue to utility customers with a biannual “climate credit.” The three policies we examine would recycle all carbon tax revenue—that is, the level of governments spending would not change. In one policy, an equal share of the revenue is returned to each resident in the form of a lump-sum rebate. In another, the revenue is used to pay for a cut in the marginal labor tax. And in a third, it pays for a cut in marginal capital taxes. The tax cuts are implemented as an equal percentage reduction in the tax rate at all income levels, although different approaches would have different effects. It has been well established that total economic efficiency is expected to be greatest when the revenue from a carbon tax is used to reduce the capital tax and next best when it is used to reduce the labor tax because, in each case, the policy substitutes for a preexisting distortionary policy. A lump-sum rebate does not share this characteristic. However, economic efficiency comes with particular distributional outcomes that should also be evaluated.

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Resources Magazine: Reflections on the Oil Shock of 40 Years Ago

The 1973-1974 energy crisis produced many lessons, but Joel Darmstadter cautions that the benefits of moving toward US energy independence should not be overdrawn.

Table 1. Oil Production, Consumption, and Price at the Time of the Oil Crisis

Table 1. Oil Production, Consumption, and Price at the Time of the Oil Crisis

In recalling those oil producers “whose embargo once brought the industrial world to its knees” (Baltimore Sun), commemorative coverage of the worldwide price shock of 1973–1974 may sometimes veer toward the dramatic. Still, one would have to be a committed contrarian to downplay the seriousness of the shock. The virtually unprecedented and precipitous more-than-threefold increase in the real price of a barrel of oil not only produced significant near-term economic damage in the United States and elsewhere but also sharpened intense policy concerns about the implications for future vulnerability of energy-dependent societies.

Background on the Crisis

What key elements drove that upheaval of 40 years ago? No episode of turbulence in the Middle East exists in isolation from what has gone before and is likely to recur. That said, the oil shock’s precipitating genesis was the outbreak on October 6, 1973, of the Yom Kippur War. This conflict, the fourth Arab–Israeli war in 25 years, began with a coordinated attack by Syria and Egypt in an effort to reclaim lands lost to Israel during the 1967 Six-Day War.

The October outbreak of hostilities was followed by two events—the first was political and, as it turned out, largely symbolic; the second was painfully economic. First, in October 1973, the Arab–Israeli conflict prompted a group of Arab oil producers to institute a selective embargo on oil exports. The second development was a collective decision by member countries of the Organization of the Petroleum Exporting Countries (OPEC) to raise the price of oil.

The embargo, by far the easier issue to consider, was conducted by a somewhat shifting group of Arab oil exporters that embraced a fairly ambiguous set of goals during its relatively brief six-month existence. (The embargo was formally terminated in March 1974.) In essence, it targeted the United States and the Netherlands with oil delivery shortfalls as a protest against the two nations’ presumed support of Israel. Yet, to demonstrate the achievement of this objective—or that of any embargo—one would need to find statistical evidence of manipulated and extended export restrictions. No such evidence exists, notwithstanding an embargo announcement, pledging supportive output reductions.

Several major non-Arab oil producers (and OPEC members)—among them Venezuela and Iran—failed to join the embargo. In addition, all indications suggest that an effective rerouting of world oil flows spared the intended targets any major disruption in supply. These logistical responses, though no doubt entailing some added transportation costs, are separable from the genuine damage inflicted by the steep rise in oil prices. In short, it is hard not to view the embargo as a largely symbolic and limited expression of political sympathy by Arab oil producers.

If, judged by its futility, the embargo was mostly a token gesture, the dramatic rise in the price of oil was anything but. To probe how the world demand for and supply of oil came to intersect and settle at such a dramatically higher price, one needs to explore the degree to which shifting consumption, production, or both represented the principal driver of change. In fact, a good case can be made that both factors did play an important role.

Read the rest of this article.


RFF on the Issues: Clean Power Plan comments; Natural gas price drop

Clean Power Plan Comments

The US Environmental Protection Agency (EPA) has wrapped up a series of four hearings inviting oral comments on the Obama administration’s Clean Power Plan proposal, which is currently open for public comment until October 16. The agency has highlighted multi-state plans, target methodology, and their proposed “best system” to achieve emissions reductions as areas that would particularly benefit from public input.

In a recent blog post, RFF’s Anthony Paul and Sophie Pan break down the four “building block” components that together form EPA’s “best system” for meeting state carbon dioxideemissions targets. They note that calculating the emissions reductions that can be achieved under the blocks individually is important “in the case where some building blocks don’t survive legal challenge.” The authors conclude that block number two—involving shifts to natural gas—might offer the biggest potential emissions reductions.

Natural Gas Price Drop

Cool weather and increasing inventories have caused the price of natural gas futures to drop below $4 per million Btu, to its lowest seasonal price in 13 years, with both trends projected to continue over the next few months. These unusually low prices are also “prompting power plants to switch from coal,” even as output from natural gas generators continues to fall.

In a new discussion paper, RFF’s Joshua Linn, Lucija Muehlenbachs, and Yushuang Wang show how with lower natural gas prices, electricity prices and emissions fall—but not in lockstep. Muehlenbachs explains in a follow-up post: “When there is more switching, we see a smaller drop in the electricity price (because prices are set at the now-higher cost of coal-fired generation, not the falling cost of natural gas). But at the same time, with more switching, we see a larger drop in emissions. So, ultimately, the more that electricity consumers benefit from a price drop, the less we see environmental benefits.”