Getting Serious About Carbon pricing

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www.wri.org/carbonpricing Getting Serious About Carbon pricing April 30, 2015 Washington, DC

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Michael obeiter www.wri.org/carbonpricing Putting a Price on Carbon: A Handbook for U.S. Policymakers

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Why price carbon? Pricing carbon can be a core element of U.S. long-term climate change strategy A carbon price can also serve other policy goals Promote economic growth Support clean energy Transition assistance www.wri.org/carbonpricing

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Objectives Putting a Price on Carbon provides an overview of carbon pricing Basic primer Refresher and reference work Future work from WRI will build on this foundation www.wri.org/carbonpricing

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Paper overview Basics of Pricing Carbon A Brief History of Carbon Pricing Key Design Features Uses of Carbon Pricing Revenues Economic Effects of a Carbon Price www.wri.org/carbonpricing

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Carbon pricing programs around the world www.wri.org/carbonpricing

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Carbon pricing in the united States www.wri.org/carbonpricing Federal proposals McCain/Lieberman (2003) Waxman/Markey (2009) Whitehouse/Schatz (2014) Delaney (2015) …and many more

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Program Type: carbon Tax vs cap-And-Trade Both incentivize emissions reductions Similar design and revenue decisions Carbon tax offers administrative simplicity and price certainty Cap-and-trade offers emissions certainty www.wri.org/carbonpricing

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carbon price design: Key questions Which gases? Which sectors? Where to impose the regulation? What price or cap level and trajectory? Include a border tax adjustment? How to monitor and enforce? What complementary policies? www.wri.org/carbonpricing

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Carbon price design: Examples Regional Greenhouse Gas Initiative Electricity CO2 Most revenues go to energy efficiency $2.9 billion in lifetime savings to 3.7 million households British Columbia Carbon Tax Started at C$10, now C$30 Covers ~3/4 of GHGs Most revenues used to reduce taxes www.wri.org/carbonpricing

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Revenue use Revenue can be used to accomplish various objectives: Promote economic growth Offset adverse impacts Investment in climate change protections Substantial revenue opportunity $15 / tonne price could generate ~$100 billion www.wri.org/carbonpricing

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Revenue neutral Tax Swaps Taxes on labor/capital discourage productive activity we want more of A carbon tax discourages activity we want less of Why not tax destructive instead of productive activities? For example, use revenues to reduce income or payroll taxes www.wri.org/carbonpricing

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Lump sum dividend Send every household a check Key advantages: Relatively simple Revenue neutral (or nearly neutral) Ensures low-income taxpayers are not negatively impacted www.wri.org/carbonpricing

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Additional revenue uses Various other policy objectives: Deficit reduction Transition assistance R&D for low-carbon technologies Climate change adaptation Different uses of revenue are of interest to different stakeholders www.wri.org/carbonpricing

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Economists overwhelmingly support a carbon tax Source: http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_8oABK2TolkGluV7; weighted by confidence Statement: Government should raise revenue with a carbon tax instead of labor income taxes

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Economic impact Studies Winners and losers in short run Smart use of revenue can offset negative impacts Trade-offs exist between revenue options www.wri.org/carbonpricing

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conclusion A carbon price can be the cornerstone of long-run U.S. climate policy AND achieve multiple additional objectives Designing a carbon pricing policy involves a number of important decisions that can broaden support www.wri.org/carbonpricing

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Future research WRI aims to promote dialogue on why and how to implement a carbon price WRI will delve deeper into key issues: Basic economics and incentives underlying a carbon price Regional disparities and how to address them How a carbon price can drive innovation Keep an eye on www.wri.org/carbonpricing for new research

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Putting a Price on Carbon: A Handbook for U.S. Policymakers THANK YOU www.wri.org/carbonpricing

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www.wri.org/carbonpricing Getting Serious About Carbon pricing April 30, 2015 Washington, DC