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Pitch

Rapidly deploy clean energy by steering infrastructure purchases through surcharges on lifetime emissions up to $400 per ton.


Description

Summary

We need a price on emissions that will accelerate deployments of clean-energy infrastructure by about 10X. Pricing current carbon emissions hasn’t worked because:

  • Price levels that are economically or politically practical are far too low to significantly affect emissions. Objective analyses of BC’s carbon tax clearly show that emissions continue to rise, on a total or per-capita basis. Claims that the EU, RGGI, or California trading systems have resulted in big emission reductions are confusing correlation with causation.
  • It just punishes people and companies who are stuck with their existing cars or buildings—they’d all prefer cheaper, clean-energy infrastructure. Many clean-energy options already deliver lower total lifetime costs (not even counting social costs); the hurdle is financing the initial capital costs, after which fuel and maintenance costs are dramatically lower.

 

The right time to affect deployment is to charge the buyer of new infrastructure for the lifetime social costs of that purchase decision. After a new vehicle or building is purchased, it will be burning fuel throughout its useful life.

Lifetime Emission Surcharges (LESs) allow a realistic social cost level, such as $4 per gallon to cover both toxic and climate pollution costs. Such incentives would be high enough to dramatically increase EV sales, as has been demonstrated in Europe.

Rules for such surcharges need to be developed. A surcharge on all new fossil-fuel infrastructure isn’t politically feasible. Instead, the LES should be applied only to product categories where low- or zero-emission options are available and reasonably equivalent to fossil-fueled models. For example, EVs reasonably equivalent to midsize sedans are being introduced now, and over 100 EV models will be on the market by 2021. The emission cost basis could be phased in over the first few years.


Is this proposal for a practice or a project?

Not sure


What actions do you propose?

Introduction: Pricing current emissions hasn’t worked

We have desperately few years to decarbonize. We must reduce global greenhouse gas (GHG) emissions by at least 80% within 30 years, implying among other actions, a rapid replacement of all types of emitting infrastructure beginning ASAP.

Economics 101 taught us that taxing a product will decrease its demand; but the real world is far more complex. After decades of carbon pricing experiments, the emissions impacts are difficult to dig out of the noise. A 2016 survey paper of 19 cases of carbon taxes in various countries found small effects on emissions. “To put these figures in context, in the recently concluded Paris climate agreement, nations agreed to reduce their emissions by 80% or more. A reduction of 4%, while helpful, is a drop in the bucket. If we apply the median reduction per year (1.3%), it would take over 110 years to reach the 80% emissions-reduction target.”

Pricing current emissions has barely moved the needle, for several reasons:

  • A price signal large enough to affect purchasing behaviors is well over $150/ton. In 2014 gasoline prices effectively tested a $150/ton tax on driving vs. today’s fuel costs, yet vehicle miles traveled have barely changed. The continuing gradual macroeconomic decline in energy costs of all types will further exacerbate the gap between prices paid for fossil fuels and their total costs to society.
  • Whether an economy-wide price on GHG emissions is enacted by a tax or a cap, the price is still set by policy. If the price were to exceed ~$30/ton in the foreseeable future, it would be dropped due to political pressures.
  • Cross-border leakage has been demonstrated to be a problem as low as $12/ton. Hypothetical import/export price adjustments would require an unprecedentedly complex system to track embodied emissions throughout supply chains worldwide.
  • Numerous market failures with energy-efficient products are common, due partly to consumers considering only 2-3 years of operating expense, while the operating lifetime of the product is more like 5-20 years.
  • Most people and businesses are trapped by the need to fuel their current cars or buildings. It is counterproductive to punish users of dirty infrastructure with a price on their current emissions when they can’t afford to change it to more efficient cars or buildings, green power, etc. In British Columbia, “Carbon taxes have not been demonstrated to reduce GHG emissions or gasoline consumption; working and middle-class families have no alternative but to drive.”
  • Refunding the fees through dividends or other taxes just dilutes the pricing incentive. “If everyone was given back the exact amount of carbon tax they paid there would be no incentive to use less fuel and reduce emissions.”
  • Cap-and-trade (C&T) systems fundamentally compound these problems by introducing adverse policy interactions whenever mandates change the available emissions supply in the emissions market. And “…economic cycles have an exceptionally strong impact on allowance prices, which therefore are inherently volatile.”

 

Optimistic claims that carbon pricing in BC, the EU, RGGI states, or California have resulted in significant emission reductions are grossly confusing correlation with causation. The emissions reduction in British Columbia, widely hailed as a success of their carbon tax since 2008, turned out to be mostly due to the global recession--BC’s 2014 emissions were higher than in 2010. The Congressional Research Service noted that “…from a practical standpoint, the RGGI program’s contribution to directly reducing the global accumulation of GHG emissions in the atmosphere is arguably negligible.” In any instance, the emissions data is a strong function of other emission regulations, the economic conditions, and other market forces like natural gas becoming cheaper than coal for generating electricity.

What we need is urgent and widespread deployment of clean-energy infrastructure, not more experiments with weakly pricing current emissions. A pricing solution should:

  • Enable a high enough price to induce rapid emission reductions;
  • Avoid leakage problems with a high price;
  • Enable charging for the full social costs of climate emissions as well as toxic emissions, which are typically much higher than the climate costs;
  • Avoid market failures from consumers considering only 2-3 years of operating costs;
  • Help businesses decrease, instead of increase, their operating costs;
  • Create big incentives to purchase products with lower emissions and/or higher efficiencies;
  • Be fair for all socioeconomic levels; and
  • Be more affordable for governments than granting incentive payments for clean-energy infrastructure.

 

Pricing future emissions with a Lifetime Emission Surcharge (LES)

Vehicle example: A new midsize sedan that averages 40 mpg will burn about 3,750 gallons of gasoline over its 150,000-mile useful lifetime, no matter who owns it. Estimates of the social costs from the climate and toxic pollution of that much combustion range from about $0.40 to $4.00 per gallon. Why should society subsidize that vehicle with $1500 to $15,000 of its costs? Purchasers who add dirty vehicles to the fleet should pay for the social costs of their decisions.

Today the Chevy Bolt is a zero–emission sedan option with a price similar to other midsize sedans. Tesla, BMW, Audi, VW, and other automakers will offer more options in this class in less time than any jurisdiction could change their emission policies. By 2021, there will be over 100 pure-EV models on the market, in all vehicle classes. Why should society continue to subsidize gas-guzzling competitors when there are multiple, comparable zero-emission options available in the market?

A $2 per gallon LES would add $7500 to the price of a 40-mpg vehicle, enough to significantly affect sales. If we charged $2 per gallon for the fuel, there’d be massive riots and border leakage because people need to fuel the infrastructure they own, to go to work and shop. If we charge for future emissions of cars when similar, non-emitting alternatives exist, the only people complaining would be those buyers of new vehicles who demand the old technology.

Implementation aspects: The rules for Lifetime Emission Surcharges need to be developed. A surcharge on all new fossil-fuel infrastructure isn’t politically feasible because the social costs are too realistic (too high) to be applied economy-wide. Instead, the LES should be applied only to product categories where low- or zero-emission options are available and reasonably equivalent. Today there are only a few EVs with capital cost equal to gas or diesel vehicles, but these will grow exponentially as more models become available and cheaper. Zero-emission options will never be exactly equivalent to other models, so rule development will be necessary to determine applicability of the LES to various vehicle classes.

Buildings: Emissions due to buildings are now regulated by jurisdictions through building codes, and in some cases by incentives to reduce emissions. If we charge for the emissions of electricity and heating fuels, we only punish building owners (or worse, their tenants) for their inefficient infrastructure.

On the other hand, if we add 30 years of emission costs to building/remodeling permit fees, there’s a strong incentive to build efficient buildings. The average US residential customer uses about 11,000 kWh of electricity and 67 MMBtu of natural gas annually, with average emissions of 8.3 and 3.56 MTCO2e respectively. Choosing 30 years as an average useful life of the energy systems of a new house, $100/MTCO2e equates to $35,580 of lifetime emissions costs. Instead of paying all that in a building permit, that’s plenty of money to upgrade insulation, energy-efficient appliances, space heating, and water heating, and maybe add some solar panels, too. The building would be more valuable since the higher efficiency saves money on utility costs.

Leakage: Leakage from infrastructure purchases is far easier to control than from fuels, which are fundamentally shipped around. Vehicle fee leakages are already controlled by states through licensing. Thus, cost bases up to ~$4 per gallon or ~$400/MTCO2e can be supported.

A rule will be required for used vehicles brought into a state that uses surcharges. If the vehicle would have been taxed when purchased in the state, the first license fee could be prorated for the miles remaining in its useful lifetime.

Decrease business costs instead of increasing costs: As with vehicles, a building’s operational cost without fossil fuels is significantly lower, so all owners benefit economically, as do local communities who can keep more of the fuel dollars local instead of buying fossil fuels.

Business groups generally oppose fuel fees because the costs directly hit their bottom line. Instead of generating political friction, environmental groups should promote clean-energy infrastructure purchases because the fuel and maintenance costs are so much lower. The only hurdle is financing--so steer purchase decisions by charging LESs, and also providing options for companies and families to fund the new infrastructure.

Use revenue efficiently: The main objective of surcharges for future emissions is to steer as many buying decisions as possible, not to raise government revenue. The LES provides a clean-energy incentive by robustly taxing emitting competition, and generates revenues when buyers choose to pollute. To the extent that revenue is generated, it can be used to cover program costs or to fund emission reduction projects. The best project leverage is probably to fund green banks that leverage private funds, even while repaying the state’s initial investment.

Related Policy Options

Mandates: With a high enough cost basis, the Lifetime Emission Surcharge effectively becomes a mandate to only buy zero-emission vehicles if they are available in a given vehicle class. Indeed, several European countries have proposed banning sales of all new gas or diesel vehicles by some date, as early as 2025. Mandate policies work well. Instead of the economic uncertainties of a little tax here or there, or aiming to be “economically efficient”, mandates target the desired outcome, such as clean infrastructure.

To accelerate the electrification of transportation, gas or diesel models that are redundant with zero-emission models of similar cost should be strongly discouraged. Whether the policy tactic is a stiff surcharge or an outright ban, it must be continuously managed to adjust as models and quantities become available. To some extent that is a centrally managed economy—but every surcharge levied is at least partially correcting the larger distortion of the market caused by the pollution subsidy.

LESs have potential advantages over mandates: 1) maintaining customer choice (at a price), and 2) it educates buyers and the public by highlighting the real social costs of fossil fuel emissions.

Feebates: Fees for inefficient cars, repaid as rebates for more efficient cars, were proposed over a decade ago, as a revenue-neutral policy to encourage higher efficiencies. France’s bonus-malus feebate program is said to be highly successful; Ontario and Austria also run feebate programs.

Like the LES, feebates apply price differences at the purchase of new cars instead of at fuel purchase, although the equivalent cost basis has generally been <$30/MTCO2e. The imminent EV transition will eventually obsolete fossil-fueled cars, providing a new policy opportunity to radically decrease emissions. The LES differs from feebates in that the fee is on any infrastructure with operational emissions; and the fees are not rebated to slightly more efficient vehicles, because there is more leverage in loaning extra revenue to clean-energy projects.


Who will take these actions?

Need a jurisdiction to study and pilot LESs: Several jurisdictions have studied or implemented vehicle feebates, but we are not aware of a proposal to dramatically increase the cost basis on inefficient vehicles, like an LES. Some jurisdictions waive building fees for renewable energy projects, and most require compliance with energy efficiency or emission provisions of a building code. We are not aware of an example of building permits that charge a fee proportional to emissions. Some states and the EPA issue permits to major polluters, which include fees proportional to emissions.

LESs for vehicles: Any country, state, province, or region that licenses motor vehicles could apply vehicle surcharges. The main implementation policy to decide is when and how to target a vehicle class when new EV models are introduced. For example, if a new electric minivan’s purchase price is 10% higher than the class average, the range is 20% less, and the operating cost is 30% lower, should it trigger LESs on similar models? The jurisdiction would start with one or two vehicle classes and at some low cost basis, such as $0.50 per gallon, to introduce the process. In any case, the cost basis should ramp to $1 or $2 per gallon by about 2021, when many EV models will be available.

LESs for buildings: Within legislative constraints, any jurisdiction that issues building permits could charge LESs on fixed infrastructure such as buildings or factories. Any good building design has an estimated energy usage, and the local emission factors for that energy usage imply the lifetime emissions of the building.

The jurisdiction may start with a limited subset of buildings and at some low cost basis, such as $30/MTCO2e, to introduce the process to builders and debug the kinks; and then widen the application and ramp up the cost basis to achieve the targeted impact. One necessary approximation will be the future emissions of the utilities or the cost of clean electricity or natural gas; this will interact with the cost basis applied.

Cross-border leakage is not an issue when you can’t move the building.

LES is sector-specific and even product specific. While that may seem more complex than an economy-wide price on emissions, energy sectors are already heavily regulated and require exceptions in an economy-wide program anyway. Sector-specific regulations are effective and exist in most states, such as renewable portfolio standards for electricity generation.


Where will these actions be taken?

As described above, the LES approach for buildings is applicable to any jurisdiction that issues permits for new, fixed infrastructure.

LESs for vehicles must be applied by whatever jurisdiction controls vehicle licensing fees.


In addition, specify the country or countries where these actions will be taken.

No country selected


Country 2

No country selected


Country 3

No country selected


Country 4

No country selected


Country 5

No country selected


Impact/Benefits


What impact will these actions have on greenhouse gas emissions and/or adapting to climate change?

Very wide LES applicability: Buildings are responsible for nearly half (44.6%) of US CO2 emissions (2012), and transportation accounts for another 34.3%. Globally, around 65% of GHG emissions are due to energy generation and usage, all of which are addressable with clean-energy infrastructure and thusly candidates for LES policies. Therefore, the maximum potential GHG impact of LES is 65% of 2015 global climate emissions, or around 24 GTCO2e annually.

Impact of fiscal incentives on market penetration of clean-energy products: Electrification of transportation is growing exponentially, so EVs are probably the highest initial impact case for LESs. How much could LESs accelerate EV deployments? Since EV forecasts vary widely, the effects of LES cases are estimated by their impacts on a selected EV forecast as the business-as-usual case. A conservative forecast with good credibility is the BNEF EV forecast. That forecast estimates that EV sales will be about 8% of light-duty vehicle sales by 2025 and 54% by 2040. It assumes current national policies continue. “Most of our long-term consumer uptake modelling is driven by economics – vehicle purchase prices and total cost of ownership…”?, which is exactly how LESs intend to affect market penetrations.

The scattered results of existing carbon pricing systems are partly due to the very low prices. Several EU countries have offered large incentives for purchasing electric vehicles, and these results shed light on the potential impact of large LESs. A very approximate fit of the incentive as a percentage of the EV price, to the relative share of an ICE vehicle with similar function and price, reveals roughly 10% relative share of EVs at 10% incentive, exponentially rising to 1000% at 60% incentive (figure 5). In other words, one tenth as many EVs were sold with a 10% incentive and 10 times as many EVs were sold at a 60% incentive. That makes sense for a ballpark model of overcoming “newness” with price.

Assuming a $4 per gallon social cost of gasoline and 35 mpg average competing vehicle, the LES for 150,000 miles is $17,142. That surcharge on a competitive midsize ICE sedan priced at $25,000 and an EV of the same price is a 41% incentive; for which the model would predict a roughly equal market share. Presumably a 41% incentive is necessary on an equal-price EV only when customers are initially skeptical and not necessary after the new model is established—but it costs the government nothing and any revenue raised would fund other mitigation projects.

The BNEF forecast projects 8% EV share of all light-duty vehicles in 2025, but there will be multiple EV models in all vehicle classes by then. The large incentive model would indicate more like 50% share by 2025 with the 40% incentive. And if 50% of the buyers paid a LES at $4 per gallon, that would generate ~$800B of fees worldwide.

The impact estimate assumes moving 2025 EV share from 8% to 50% in 5% of the light-vehicle market. (see below)


What are other key benefits?

Equity: Charging for lifetime emissions as proposed would only hit buyers of new cars, buildings, or other infrastructure, i.e., affluent people or companies. The cleaner cars and products would not immediately affect used product markets, although a higher number of used EVs would become available after a couple years from people upgrading or from vehicles coming off of leases, etc. Thus, a basic LES policy is not fundamentally regressive or progressive. Of course, the parameters of the policy could be tuned to favor disadvantaged communities in various ways.

LES applicability to toxic emissions: LES is sector- and category-specific, thus also applicable to pricing the toxic emissions from fossil fuels used in that category. The social cost of many combustion cases (notably coal, but diesel is also extremely unhealthy) are much larger than the climate costs, and should logically be added to the surcharges.

LES applicability to embodied emissions: The LES as proposed doesn’t account for factors like the slightly higher embodied emissions of EVs vs gas/diesel vehicles, but an LES could also price in embodied emissions if auditable data on such emissions from various products were available. For example, a building LES could account for embodied emissions of the materials, instead of earning (rather arbitrary) LEED points.


Costs/Challenges


What are the proposal’s projected costs?

Rough costs: The startup and annual costs of a LES program depend strongly on the scope and complexity of the policy and rule details. As an order-of-magnitude ballpark, UC Davis estimated startup costs of $3.75M and annual costs of $6.5M for a feebate program involving four agencies administering sales of about 2 million cars per year in California. California is large enough market to get economies of scale, but $3 per sale is a negligible ongoing cost.

Potential negative side effects: When and how to apply the surcharges will be key. Emitting vs. non-emitting vehicle models will never be exactly equivalent in size, performance, range, features, etc., so some judgement or algorithmic formulae will be necessary to apply a surcharge in a vehicle class.

Unintended consequences will likely include leakage of buyers who choose a different class of vehicle to get the features they want or to avoid a surcharge. For example, if a buyer really wants 500-mile range in a sedan but the longest EV sedan range is 310 miles, they may instead choose a pickup without a surcharge.

These problems will recede over time as more EV models are introduced. This is a rationale for starting with a lower cost basis when there are few model options, and increasing the cost basis as the model equivalences are established.

Political resistance: The big challenge of any high enough price on carbon will be the political firestorm from incumbent industries, mainly oil companies. LES policy for vehicles strikes to the heart of petroleum’s existence, so there will be attempts at pre-emptive legislation, massive disinformation, communication campaigns about restricting your freedoms (to pollute anything and everything…), smear campaigns, truckloads of dark money, etc. Gaining and maintaining support for LES will require a robustly green political base and careful, well-funded messaging.

Electric utilities can and should be allies in the electrification of transportation, since EVs are their largest electricity growth opportunity in any developed country. Thus, any advocacy to steer utilities toward clean energy can be paired with growth opportunity carrots in electric loads, as well as major demand response opportunities with EVs. Gas utilities who are developing renewable natural gas (RNG) sources are also potential allies, since RNG can provide a low or zero net emission fuel for freight and shipping.

LES policies for buildings will face political resistance similar to renewable portfolio standards (RPS), plus resistance to change from builders and realtors. The correct story is that efficient or net-zero buildings save far more fuel money over their lifetimes than the initial construction cost increments.

If you haven’t upset anyone, then you haven’t changed anything.


Timeline

Market share impact: As described above, the impact sheet assumes that 5% of global markets adopt a LES, wherein those markets use a cost basis that has the effect of equalizing the share of EVs vs. conventional vehicles by 2025 (50% each). It assumes a linear ramping from zero effect when such programs are introduced in 2020, after which the cost bases and the number of EV models increase through 2025.

After 2025, it is assumed that fossil-fuel resistance will remain strong worldwide and 95% of the world market follows the BNEF 2017 (business as usual) forecast. The 5% that adopted LES is assumed to rapidly transition from 50% EV share in 2025 to 80% in 2030, and plateau at 80%. Such rapid transitions of market share are normal in technology transitions. Thus, the global impact of more or less than 5% LES adoption for vehicles can be roughly estimated by scaling these impact numbers by the adoption percentage.

In the impact tab, a 5% adoption is assumed for all years, due to political resistance from incumbent industries. Where adopted, the impact in 2030 is estimated at 56% increase in EV market share (80% vs. BNEF's 24%), for an acceleration of EV fleet percentage by about a decade and thus a 26% increase in electrification of the fleet by 2030. LES can address 84% of US  and 73% of EU transportation emissions. Thus the 2030 impact on emissions in the US is 5% X 84% X 26%. 2040 and 2050 impacts are also assumed to be a 26% increase vs. BAU; note that these are assumptions that may or may not relate to the IPCC BAU case, given the dynamics of EV markets.  

Disclaimers: These impact assumptions include no leverage from the 5% to other states or countries, no impact on manufacturing learning rates from the higher EVs volumes in the 5% countries/states, and no other changes.

It must be emphasized that some EV forecasts are far more bullish than the BNEF forecast, for entirely logical reasons. The BNEF forecast is chosen as a baseline to estimate LES leverage, but EV adoption could be much faster than the BNEF forecast, obviating the need for LES or any emission pricing policy for vehicles. The ability of automakers to deliver the market demand could be the limit on market share gains, as is currently the case with the Tesla Model 3.

This impact also does not calculate any effects from LES policies for buildings, which could and should also have large impacts.

Within 50-100 years, our descendants will all be dead if we don’t adopt policies dramatically different from our current reality.


About the author(s)

Eric W. Strid received the SBEE degree from MIT in 1974 and MSEE from UC Berkeley in 1975. He cofounded Cascade Microtech, a global semiconductor equipment supplier, in 1984 and then led its growth as CEO through 2007, taking it public in 2004. After retiring in 2012, Eric was alarmed to find that nothing will matter unless we fix climate change. In late 2013 he turned optimistic, based on the learning rates of clean-energy technologies. In 2014 he was recruited to advocate carbon pricing in the Columbia River Gorge and began studying the policy options, only to find that the right answer is “none of the above.” Eric serves as a technology and policy advisor to Power Oregon. An early adopter of clean energy, he has remodeled two houses to be net-positive energy, one including home charging of two EVs at the average US usage (15 kWh/day).


Related Proposals

The proposal by Adele Morris of the Brookings Institute, Proxy pricing carbon in state government procurement, contracting, and acquisition, notes that “…state governments spend about $105 billion each year on capital expenditures. These governments could lower emissions by choosing contracts and equipment in a way that accounts for the carbon emitted by those goods and services.” To the extent that proxy pricing is calculated for the lifetime emissions of the capital equipment and the proxy price is used in purchasing decisions, that would act as the correct incentive to price future emissions instead of only current emissions, similar to the proposed Lifetime Emission Surcharge.

While GHG emissions due to government operations is a small minority of the country’s total emissions, Ms. Morris is correct to emphasize how government agencies can develop and demonstrate better processes for including social costs in purchases of goods and services.


References

[See hyperlinks in the text]

Eric Strid, testimony to Oregon House Committee on Energy and Environment, February 2017. https://olis.leg.state.or.us/liz/2017R1/Downloads/CommitteeMeetingDocument/101616

Comments to Oregon DEQ’s GHG Market Study, December 2016 http://www.oregon.gov/deq/FilterDocs/ghgMarketComments.pdf Comments from Eric Strid on pp. 43-49 and from the Green Energy Institute on pp. 59-73.

Eric Strid, Planning Oregon Emissions, a white paper that explores the physical, economic, policy, and governance options for climate and toxic emissions in Oregon. http://cgcan.org/wp-content/uploads/2017/04/Planning-Oregon-Emissions-170331-1.pdf