Saturday, 28 June 2014

Carbon taxes can be good for jobs

Carbon taxes can be good for jobs - the key is to distribute the tax revenues to ordinary people, who will spend them on more goods and services. This creates more revenue and jobs than are lost in fossil fuel industries and high energy manufacturing sectors. At least this is the conclusion of analysis performed by Regional Economic Models Inc (REMI) for the Climate Citizen's Lobby [1].

In developing countries, where energy demand is growing, it is possible to grow the renewable energy supply sector without pensioning off fossil fuel power stations. However, in the developed world demand for energy is relatively stable and growth on one side has to be balanced by losses on the other. There are industrial strength arguments over which policies are best for the consumer in terms of energy prices, with bloody battles over implausible assumptions. Fossil fuel interests talk up the capital costs for renewables and are optimistic about global market prices for gas and oil [2].

However, the impacts of renewable energy policies are much wider than just consumer energy prices. REMI looked at the impact of a carbon tax escalator in the USA on GDP and jobs at regional and national levels and in different economic sectors. They modelled a revenue neutral tax whereby all the tax revenues were distributed to households based on the number of people in them (counting children under 18 as half). The tax would start at $10/tonne CO2 and rise by $10 per year and it would be paid by companies that extract fossil fuels or import them. They also assumed a border adjustment for imported goods so that local manufacturers would not be disadvantaged by cheaper products coming in from abroad that did not pay the tax. (Though they rather glossed over that as I will discuss later). They assumed that the carbon tax would be passed onto consumers as higher prices - either directly such as higher petrol prices for car drivers or indirectly via goods produced like food, fridges and clothes.

The nice features of the revenue neutral system is that households with low energy use gain more from the distribution than they would lose on the high prices, whereas high energy use households pay more through the tax. This benefits the low energy use households and they can spend their gains on more goods and services. Since low income households tend to spend less on energy they also tend to gain the most benefit.

In their sectoral analysis REMI found that health care and social assistance, finance and insurance and retail sectors grew the most from the carbon tax whereas manufacturing and mining were the biggest losers. In terms of jobs, there were very few losses except in mining and the biggest gains were again in health care, social assistance and retail. Overall there was a net gain from the carbon tax of 2.8 million jobs and around $75 billion/year GDP from about 6 years into the policy (see chart).
Increase in USA GDP due to the carbon tax policy as modelled by REMI. The overall increase is about 0.5% From The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax [1]

Regionally, most regions gained in both jobs and revenue right from the start. The only exception was the West South Central region comprising Arkansas, Louisiana, Oklahoma, and Texas. This region would ultimately lose up to 2% in revenue and very marginally in jobs. Texas isn't just an oil state any more - they also have a thriving wind industry, with 12 GW wind capacity, more than twice as much as any other state. [3]

Granted the REMI model is only a model, and quite a complex one at that. The report does not say much about the uncertainty in their assumptions. However, since the tax escalates over time the simulation is not so sensitive to the balance in costs. It isn't a matter of if renewables are cheaper than fossil fuels, rather it is a matter of when the shift occurs.

The difficult bit is the border adjustment. This is critical to make the policy work and could be contentious in terms of international trade agreements.

The tactic REMI chose (if I understand correctly) was to tax goods coming in according to the average carbon tax being paid by the local industries making the same products. That is probably the simplest approach. However, it means that as USA industries improve by becoming more efficient, their competitors from abroad also pay less tax at the border.

On the other hand, it would be almost impossible to tax imports according to the actual amount of carbon emitted in their manufacture, and even if you could it would lead to different market distortions. You would end up with corporations exporting goods from their most efficient factories to the USA and selling their more polluting goods locally.

By the way, REMI found the carbon tax also had the effect of reducing CO2 emissions by 33% and saving 13,000 premature deaths by improving air quality.

It is very hard to predict the economic impact of energy policies with a useful degree of certainty, and it is even harder to get them implemented, juggling industry winners and losers and negotiating international trade agreements. However, I applaud REMI and the Climate Citizen's Lobby that commissioned the report for expanding the debate beyond the narrow energy price issue.

[1] The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax (Resources for the Future Library Blog) Jun 10th 2014
[2] Renewable Energy Modelling Ways (Cleantechnica) June 24 2014
[3] Wind Power Production Record Broken in Texas (Scientific American) June 26 2014

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