Posted by: bmeverett | January 21, 2016

The New York Times Misses the Point (Again)


The New York Times constantly reports and opines on climate change, but never seems to understand the real issues. Their latest misfire is a January 19 editorial entitled “Proof That a Price on Carbon Works”. The Times editorial board is clearly confused about the meaning of the word “works”.

The first paragraph of the piece claims “Lawmakers who oppose taking action to lower greenhouse gas emissions by putting a price on carbon often argue that doing so would hurt businesses and consumers. But the energy policies adopted by some American states and Canadian provinces demonstrate that those arguments are simply unfounded.” The Times offers three examples of carbon taxes that “work”: British Columbia, the California/Quebec agreement (clearly a rather unusual partnership) and the 9-state Northeast Regional Greenhouse Gas Initiative (RGGI). Let’s start by establishing two metrics to determine if a carbon tax “works.” First and foremost, the tax would provide a meaningful incentive for consumers to reduce energy consumption or prefer lower-carbon fuels, bearing in mind that changing the trajectory of atmospheric carbon dioxide concentrations will require massive not trivial reductions. (As noted in previous posts, I do not support the view that carbon dioxide emissions need to be reduced, but I’ll set that aside for purposes of this discussion.) Second, the tax would not damage the economy or place an undue burden on consumers. A carbon tax should not be regarded as “working” unless both conditions are met.

The Times editorial claims that its examples demonstrate that carbon taxes can achieve the second objective, but makes no attempt to address the first. Let’s stipulate that these carbon taxes have had no adverse effect on the local economies, and have a look at their likely impact on incentives for carbon reduction. British Columbia for example, has instituted a supposedly successful carbon tax of C$30 per metric tonne or $US21 at current exchange rates. Sounds good, but is it meaningful? A gallon of gasoline emits about 9 kilograms of carbon dioxide, so the BC carbon tax is about US$0.19 per gallon. To put this in context, gasoline taxes in BC are US$0.65 per gallon ($0.385 provincial and $0.265 federal). Taxes in the greater Vancouver area, where most of the BC driving occurs, are even higher at US$0.925/gallon. Current gasoline prices in Vancouver are between US$2.60 and $US2.70, so the carbon tax increases gasoline prices by about 7%. According to the Canadian Automobile Association, the average cost of operating a mid-sized sedan in British Columbia is about US$0.60 per mile, assuming 12,000 miles per year of driving and 27 miles per gallon fuel efficiency. A carbon tax of US$0.19 per gallon would cost the driver US$0.007 per mile or just over 1% of the full cost of owning and operating an automobile in British Columbia.

Should we really expect this tax to influence either consumer choice of vehicle or driving habits? If drivers want to reduce their driving cost, they could get a much better result by buying a slightly less expensive car. People choose their vehicle not just to minimize the cost of driving from point A to point B, but also for comfort, safety, performance and style. In 2008, gasoline prices in BC were over US$5.00 per gallon. BC gasoline sales declined only about 2% that year, and recovered almost immediately when gasoline prices fell again in 2009. An article in the Globe and Mail from last March reported that 2014 sales of luxury sport utility vehicles in British Columbia were 50% above the national average. So much for changing consumer behavior.

How about electricity generation in BC? Would this tax help British Columbians replace high carbon power generation fuels with renewables? Hardly. BC obtains 90% of its electricity from 72 hydroelectric stations, which take advantage of BC’s favorable geography, with high mountains and fast-flowing rivers. In the power generation business, BC’s carbon tax is irrelevant.

The BC carbon tax does raise, however, an interesting question. BC produced 29 million tonnes of coal in 2014, including both metallurgical coal used in the steel industry and thermal coal used in power plants. Almost all of this coal was exported either to other Canadian provinces or to other countries. Coal not burned in BC is not subject to the carbon tax nor are its emissions included in BC’s carbon inventory.

I have no problem with BC producing and selling all the coal it wants, but should BC engage in high-minded moral preening about its climate policies when the emissions from its high carbon fossil fuel production are simply generated elsewhere? Atmospheric carbon dioxide concentrations are relatively insensitive to where the emissions occur. How should carbon emissions inventories account for a situation in which fossil fuels produced in one jurisdiction are consumed in another? Just asking.

How about the California/Quebec partnership, in which each places a cap on carbon dioxide emissions and requires emitters to purchase the rights to these limited emissions? The effectiveness of cap-and-trade systems like these depends entirely on the severity of the cap. According to the Times, emission permits are selling for only $13/tonne, which tells us a lot. California already has a gasoline tax of $0.4062/gallon in addition to the federal excise tax of $0.184 for a total of $0.59/gallon. Current gasoline prices in California are $2.77 per gallon, so the carbon tax adds only $0.12 or 4% to a price that has already fallen more than $1.00/gallon in the past year.

I could go through the Quebec gasoline numbers, but the result is the same. The carbon tax is too small to impact consumer behavior in any meaningful way.

How about California electricity? Could the carbon tax help California switch from high-carbon fossil fuels to low-carbon renewables? The data suggest otherwise. California gets almost 70% of its electricity from either hydro, much of it imported from the northwest, or pumped storage units. Another 14% comes from biomass, including wood and municipal landfill gas (both favorites of alternative fuel enthusiasts). Five percent is generated by petroleum, but these units are mainly either peak-shaving turbines for use on hot summer afternoons or back-up diesel generators for hospitals and other critical facilities. In total, almost 90% of California’s electricity comes from sources not influenced by the carbon tax.

About 8% of California’s electricity comes from natural gas, a low but not zero emission source. Could the carbon tax provide a real incentive to replace this capacity with renewables? Let’s do the math. Using the latest cost data from the Energy Information Administration (https://www.eia.gov/forecasts/aeo/electricity_generation.cfm), assuming 80% financing at 6% interest with a 15% return on equity and ignoring all subsidies, electricity from new natural gas plants in California could generate electricity at about 3.8¢ per kilowatt-hour (kWh). Under the same assumptions, the generation cost would be 7.2¢/kWh for onshore wind power and 14.7¢/kWh for large-array solar. A carbon tax of $135/mt would be required to equalize natural gas and onshore wind generation costs, and a tax of $430/mt would be required to equalize natural gas and solar generation costs. (Note that this calculation does not even consider the huge challenges and costs involved in integrating intermittent power into a complex and sophisticated grid.) The actual carbon tax of $13/mt is nowhere near large enough to change basic power generation economics.

By the way, the replacement of high-carbon coal with low-carbon natural gas does not require any carbon tax, since it’s already cheaper to generate power with natural gas throughout most of the US. Politicians like to take credit for this market development even though it has little if anything to do with government policies.

How about electricity in Quebec? Like BC, Quebec obtains most of its energy from hydro. In fact, Quebec generates enough hydropower to supply 99% of Quebec’s requirements and still export significant amounts of power to neighboring provinces and the US. Once again, the province is taxing something that doesn’t exist, namely high carbon power generation.

Having gone through these calculations for BC, California and Quebec, the $7.5/mt tax prevailing in the Northeast RGGI looks laughable, equivalent to less than $0.07 per gallon of gasoline.

If there is no substantive impact of these taxes on carbon dioxide emissions, why bother? The answer is simple. Carbon taxes are presented to the public as a kind of “sin tax” comparable to taxing cigarettes or alcohol. Governments get revenue while telling the public that the taxes bring other social benefits and help save the world. Environmental groups and climate advocates like the New York Times editorial board praise these politicians to the hilt without even looking at the numbers. The Times editorial notes that Ontario and Alberta are considering similar carbon taxes. Why not? Carbon taxes are a political winner, as long as nobody bothers to do any analysis.

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