Burying the lede: “Carbon Tax Starting Now is Our Only Hope”

One of the great tricks that writers in corporations learn when they have to deliver bad news is to do what newspaper editors used to call “burying the lede” — taking the most important part of a story and carefully moving it away from the headline, first, or last paragraph. The Oregon Global Warming Commission 2015 Biennial Report to the Legislature is a classic example.

The report could have been titled “Carbon Tax, Starting Now, is Our Only Hope,” because that’s what the report actually conceals in the middle, where that sobering conclusion is likely to disturb the sleep of the fewest possible number of readers, since few who are not already aware of that fact are very likely to read past the executive summary.

Note that the report writers again cannot bring themselves to use the words “bad news,” even in the most honest two paragraphs of the entire report, preferring instead the weaselly “less positive news”  when reporting that Oregon will fail to cut greenhouse pollution by 2020 and will fail even more by 2050.

Now for the less positive news: despite an overall lower forecast than previously reported thanks to the implementation of Oregon’s RPS and other policies, that forecast is not expected to come within striking distance of our 2020 and 2050 emission reduction goals. Rather, with 5 years left to go we appear to be on track to miss our 2020 goal by just over 11 million MTCO2e. That gap widens to 32 million MTCO2e in 2035 on a linear path to our 2050 goal.

The temporal nature of our 2020 and 2050 goals – one being so close it is hard to see how we could meet it, and the other being so far away it is difficult to imagine what policies and technologies might get us there – leads us to suggest two things in the sections that follow: first, Oregon needs an interim target between our current two to help ensure that we do not defer meaningful actions until it is too late. And second, in order to meet that interim target and put Oregon on a sustainable path to meeting our 2050 goal, we must immediately begin taking more ambitious action than what we have seriously contemplated as a state historically. We elaborate on what some of these actions could be in Section V below.

The solution to all this fail?  Redefine the goals so that they don’t seem so hard:

In December 2004, Oregon’s Advisory Group on Global Warming submitted its recommendations to Governor Kulongoski. The emissions reduction goals it proposed, subsequently adopted by the 2007 Oregon Legislature, included: a near-term (2010) goal of arresting emissions creep upwards; and a 2050 end goal for achieving a sustainable emissions level, estimated at the time by climate scientists to be at least 75% below 1990 levels.

The Advisory Group, aware that a goal set for as far away as 2050 could be shouldered aside with relative ease by more immediate demands, also recommended an intermediate 2020 goal to give greater focus and immediacy to state reduction efforts. There was no scientific rationale for proposing a “10% below 1990 levels by 2020.” The date seemed far enough away to allow meaningful emissions reduction policies to be adopted, investments to be made, regulatory actions to be designed and implemented, so that measurable emissions reductions were plausible. It also seemed near enough to lend State greenhouse gas reduction efforts a degree of urgency.

That date is now only five years away. Oregon, and the nation, have taken some meaningful policy steps (Federal vehicle efficiency standards; a US-China climate accord; Oregon’s utility efficiency and renewable energy initiatives), and we’ve benefited from serendipitous events (lower cost gas; rapidly declining wind and solar costs) that are delivering near-term lower emissions. But neither the country nor Oregon is on track for 2050. 23 Neither has adopted the necessary systemic regulatory, taxation and infrastructure investment policies that would put us on a dependable trajectory to 2050. Without an intermediate check point, we risk deferring meaningful actions to much later, much closer to 2050, when such actions would be less effective, and would have to achieve unrealistically steep and costly reductions.
The Oregon Global Warming Commission is therefore recommending that the State identify and commit to a new intermediate target that will be: (a) near enough to focus State and community efforts without having to assume “silver bullet” technological bailouts; and, (b) far enough in the future to allow choices to be made and consequences to be realized.

The Commission will begin using an intermediate 2035 emissions reduction goal of 32.7 million MTCO2e. This target was identified simply as the intermediate 2035 level the state would achieve if it drew a line between our adopted 2020 and 2050 goals. Figure 7 above shows the 2035 goal along the trajectory between 2020 and 2050 in comparison to our projected emissions forecast for that year.

It’s a target that will be more challenging to achieve if, as expected, we fail to meet our 2020 goal and have that additional ground to make up.

The most important part of the entire report is buried inside, and it’s the part that models the effect of a carbon tax on greenhouse pollution emissions. Although written in stupefyingly bureaucratic language, it’s another part worth reading in full:

In order to estimate and illustrate the possible emissions effect of implementing a carbon price in addition to the programmatic measures described above, we sought the expertise of Portland State University’s Northwest Economic Research Center (NERC). NERC and PSU researchers completed a legislatively-mandated study of the effects of an Oregon carbon fee at the end of 2014 and presented their findings to the legislature49. The Commission requested the assistance of these researchers in estimating the interaction between the emission reduction measures and a carbon price, understanding that the relationship between the two would not simply be additive. In the sections below, we briefly describe the process of evaluating the interaction and the resulting emission reductions we could possibly expect to see in this case.

Methodology

The basic methodology used by the NERC team for purposes of this analysis was very similar to the approach used in the original study, however for our purposes the geographic area of interest was the entire state of Oregon rather than six sub-regions as was the case with the original study. The primary modeling inputs were the forecast of Oregon’s energy-related greenhouse gas emissions, the baseline fuel prices (which then deviate due to the assessment of the carbon price), and carbon intensities of fuel used in Oregon. Changes in demand for different fuels resulting from the increase in prices under a carbon price informs the results for overall state-wide emissions reductions attributable to the carbon price. The analysis did not determine how or whether the application of a carbon price would shift the resource choices made by electric utilities and relied exclusively on consumer demand reduction for the carbon savings calculated from the electric sector50.

The tax level and resulting fuel consumption determine how much revenue is generated by the tax. In the original analysis, the study team also examined a wide range of options for how the state could use the revenue generated. The choice of what to do with the revenue is an important policy question that we do not grapple with in this Report. The different revenue repatriation schemes were found to have very similar emissions impacts at various levels of a tax. Therefore, for purposes of our analysis we only examine the effects on emissions rather than the economic effects of different revenue schemes. In addition, in our analysis the tax level is kept below the level that would generate enough revenue to require factoring in the use of the revenue in order to accurately estimate emission reductions.

In order to estimate the interaction between the programmatic measures and a carbon price, changes were made to the primary modeling inputs described above prior to applying the carbon price to the baseline fuel prices. Essentially, the study team tried to first estimate what Oregon’s emissions, fuel use, and fuel price future would be under Case 1 (where all programmatic measures are implemented from 2015-2035, as described above) and use this future as the new “baseline” against which to apply the carbon price. Including information about the measures in Case 1 allowed the study team to update the emissions and economic baseline in their model, which means the carbon price is added to a new baseline that includes policies that have already altered behavior to a certain degree, and the carbon price builds upon the outcomes of those policies and measures.

Results

Several similarities and some differences occur between this analysis and the original study of a standalone Oregon carbon tax. As in the original study, we find that emissions begin to decline immediately after application of the carbon price, and at a faster rate than with just the programmatic measures by themselves. Similarly, higher tax rates generate greater emission reductions.
While the overall effectiveness of the carbon pricing mechanism is smaller in our analysis than in the original study – a $60 tax reduces 2035 emissions by just 7.2 million MTCO2e in this analysis, compared with 14.5 million MTCO2e in the original study – this would be an expected    outcome of the fact that the programmatic measures are already reducing fossil fuel demand and emissions substantially over the 20 year period. In reality, the two types of approaches (a carbon pricing mechanism and programmatic measures) would complement one another, making the overall reductions greater than either approach by itself51. The application of a carbon price results in additional actions being realized beyond those we have identified in Case 1 because such additional actions become cost-effective. Indeed, this is what we find when we compare our full Case 2 results with the results of the original study – Case 2 reduces 2035 emissions by 28.9 million MTCO2e compared with 14.5 million MTCO2e with a carbon price alone.

In the original study, annual reductions from the baseline due to the tax remain fairly constant once they reach their peak yearly level. This means that the tax succeeds in dropping emissions down to a certain level, and then overall emissions level off or begin increasing slightly with projected growth while the tax achieves roughly the same reduction in emissions per year. In our modified analysis, once the annual reductions due to the tax reach their peak annual level, the reductions per year begin decreasing until the end of the time period. However, because the programmatic measures are also in place to drive down emissions, overall emissions continue to decline despite the decreasing effectiveness of the tax. Intuitively this makes sense

– as the baseline emissions fall due to the measures, the effectiveness of a carbon tax held steady at $60 (nominal) at reducing the next unit of emissions should also decline. This may argue for increasing the level of the carbon tax in the later years (or indexing it to inflation) if additional programmatic measures are not implemented sufficient to achieve the desired total reductions.

Does Case 2 achieve the 2035 target?

For purposes of this Report, we present the results of a $60 carbon price applied along with the programmatic measures from Case 1. Just as in the original study, the price is phased in beginning at $10 per ton, increasing by $10 per year until it reaches the final level. As figure 8 demonstrates, a carbon price at this level is effective at bringing emissions down below the linear trajectory to our 2035 goal for much of the 20-year time period. For the last 3 years of  the time period, statewide emissions appear to be just above the linear trajectory and in 2035 would be above the state target by a small amount. As with Case 1, this is not meant to be an exact depiction but rather illustrative of the magnitude of emissions reductions that could be achieved with this combination of policies and programs.

In addition, we should note that a carbon price was modeled for purposes of this Report as an Oregon-only policy, and because the legislatively-authorized NERC analysis was available to us; but Case 2 could be illustrative of a number of different policy options. For example, a cap on emissions that declines over time would create an implied carbon price in the market that could have a very similar effect. This is the case with the implementation of California’s climate policy program – though an overall cap on emissions is in place, programmatic measures are expected to drive the bulk of the state’s actual reductions. A national-level policy could also create this price signal.

Several conclusions could be drawn from this analysis. First, it seems that if implemented with other ambitious measures to drive down emissions, a carbon tax could be phased in more gradually than a $10 per year increase and Oregon would still be on track to hit its longer term targets. It is also clear that by 2035 the marginal emission reductions from the $60 tax are not able to drive statewide emissions all the way to the interim goal (although it does appear that such a tax would be effective at getting us within striking distance, and we acknowledge that this analysis is best viewed as illustrative rather than precise). This could suggest a carbon price trajectory that is phased in more gradually but reaches a slightly higher 2035 level. Perhaps more plausibly, it could suggest that Oregon would need to revisit both programmatic and pricing tools again, probably more than once, between now and 2035.
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48 With both of our Cases, we recognize that there is a possibility of outside forces, such as additional federal action or technological breakthroughs, boosting our reductions between now and 2035. Beyond the assumptions that are inherent in our ambitious policy and technology measures discussed above, we have not included any additional assumptions about these types of outside forces because we do not believe that Oregon should rely on hypothetical future reductions to achieve our goals. However, we should be prepared to capitalize on such regulatory or technological changes by putting in place favorable policies that reward moves toward low carbon solutions and by actively seeking out those solutions within our own borders.

49          http://www.pdx.edu/nerc/sites/www.pdx.edu.nerc/files/carbontax2014.pdf

50 In addition, the analysis did not make clear whether natural gas would be effectively taxed twice for electricity generation, and if so, whether there would be additional cost impacts of taxing natural gas at the point of importation into the state and at its use to generate electricity.

51 It is important to note that future fuel prices (for electricity, natural gas, petroleum, etc) will play an essential role in determining whether measures, such as those depicted in Case 1, will have their desired outcomes. Low energy costs.

The fragment of text at the end of footnote 51, “low energy costs” is a classic breadcrumb in a bureaucratic maze — evidence of editing by management as the report moves up the chain and gets progressively rewritten to obscure and weaken its conclusions and to wrap them in a thick gauze of happyspeak. A sentence beginning “Low energy costs” might well have continued “are directly proportional to increased emissions,” a very unhappy conclusion for policymakers heading into an election year.