An Economy-Wide Carbon Tax: Implications for Commercial Buildings

Transcription

1 An Economy-Wide Carbon Tax: Implications for Commercial Buildings MARILYN B R OWN MATT C OX XIAOJING SUN N OVEMBER 2 9,

2 Table of Contents Federal Policy Option: An Economy-Wide Carbon Tax Experience with Carbon Taxes Appropriate Federal Role Barriers Addressed and Stakeholder Views Broad Applicability, Feasibility and Rapid Implementation Administrative Feasibility: Three Carbon Reduction Policies Cost-Effectiveness Next Steps

3 Federal Policy Option: An Economy-Wide Carbon Tax Assume that the Federal government imposes an economy-wide tax on CO 2 emissions starting at $25/ton CO 2 tax in 2015, with a 5% annual increase until 2035 We also examine: a Low-tax Scenario: $5/ton CO 2 tax, starting in 2015 with a 5% annual increase. Social Cost of Carbon (SCC) Moderate-tax Scenario: Based on Social Cost of Carbon estimates, with a 3% discount rate, starting in SCC High-tax Scenario: Based on Social Cost of Carbon estimates, with a 2.5% discount rate, starting in EIA GHG Scenario: AEO 2o11 GHG Price Economy-wide Case. CO 2 price starts at $25 per ton beginning in 2013 and increases to $75 per ton in 2035

4 U.S. Experience with Carbon Taxes While the policy has been debated, the U.S. has never levied a nation-wide carbon tax. However, there has been some experience at the local level. Babylon, NY, rewrote its municipal solid waste code to declare carbon a solid waste and start to collect fees for carbon emissions. The tax revenues were used to finance a program of home energy retrofits, staffed by local unemployed youth. In Boulder, CO, a municipal 'carbon tax' is imposed on electricity consumption and paid through utility bills, with deductions for using electricity from renewable sources. The tax revenues are used to fund community-wide greenhouse gas emission reduction programs.

5 International Experience In July 2008, British Columbia, Canada, started the only large-scale carbon tax in the North America. It requires purchasers and users of fossil fuels to pay $20 per metric ton of CO 2 -equivalent. Australia just passed national carbon tax legislation in Nov It will come into effect in July 2012 when the country s five hundred biggest polluters will face a carbon price of $23.8 per metric ton of CO 2 -equivalent. The tax will increase by 2.5% a year in real terms for the following three years before being turned into an emissions trading system in 2015.

6 Appropriate Federal Role As a general matter, government remedies are most suited to overcoming genuine market failures or government failures. (CCCSTI, 2009, p. 5). Market failures exist when the action of an individual or a firm affects the production or consumption of another party, with no market mechanism for compensating for the action. An example of an externality is the inability of the producer of a technology to capture the full benefits of that technology as with the benefits of reduced greenhouse gas emissions in a world where such emissions are not appropriately priced. According to the Stern Report, Climate change is the greatest and widest-ranging market failure ever seen. Source: Box 1-1 in Committee on Climate Change Science and Technology Integration (CCCSTI) Strategies for the Commercialization and Deployment of Greenhouse Gas Intensity-Reducing Technologies and Practices (U.S. Department of Energy) DOE/PI-0007, January.

7 Barriers Addressed A national carbon tax would address one of the most important barriers to the adoption and use of low-carbon technologies: high cost. This barrier occurs when some combination of the capital cost of the technology, its cost of operations, or other aspects of a project that employs the technology yields a product that costs too much relative to other technologies or products that perform essentially the same function. The high-cost barrier is a function of endogenous costs (e.g., the nature of the fabrication process and its materials requirements), but it also reflects fiscal and regulatory uncertainties. Infrastructure limitations can also contribute to high costs, as when critical infrastructure is inadequate or supply channels are insufficient. A national carbon tax would make low-carbon technologies more cost-competitive. Source: Marilyn A. Brown, Jess Chandler, Melissa V. Lapsa, and Benjamin K. Sovacool Carbon Lock-In: Barriers to Deploying Climate Change Mitigation Technologies, Oak Ridge National Laboratory, ORNL/TM-2007/124, November (

8 What Stakeholders Would Benefit or Suffer most from a Carbon Tax? Stakeholders who might support a carbon tax include: environmental groups; designers, builders, and manufacturers of energy-efficient buildings and technologies; and other green energy industries including energy-service companies and renewable energy companies, outdoorfocused businesses, and insurance companies. Stakeholders who might oppose a carbon tax include: electric utilities (especially those reliant principally on fossil fuels), natural gas utilities, oil companies, and other carbon-intensive industries. Opposition will come from groups who do not believe in anthropogenic climate change, and from regions that would experience the highest carbon taxes. Other stakeholders include the federal government, States and localities, and consumers. Opposition will depend upon the timing, coverage, and size of the tax.

9 Broad Applicability The effects of carbon taxes on commercial building energy efficiencies are geographically broad, based on estimates of their impacts across the nine U.S. Census divisions. Energy savings range from 0.3% to 12.5%. CO 2 emission reductions range from 9.2% to 22.8%.

10 Political Feasibility Administrative Feasibility: Three Carbon Reduction Policies Economic Desirability High Medium Low High Medium Low Carbon tax (0) Cap and trade (13-23) Renewable portfolio standards (29) (Numbers in parentheses indicate the number of states that have adopted each regulatory approach.) An extensive academic literature suggests that macroeconomic efficiency favors a carbon tax with socially productive revenue recycling over other forms of regulation. It has also been argued that the choice of a policy instrument is less important than having an effectively designed instrument.

11 Potential for Rapid Implementation: The Commercial Building Sector Responds Quickly to a Carbon Tax 1.0% Carbon Tax s Impact on National Energy Intensity 2.0% Carbon Tax s Impact on Commercial Energy Intensity 0.0% % 0.0% % Low -4.0% Low -2.0% -3.0% 5% SCC Moderate CCP&T SCC High EIA GHG -6.0% -8.0% 10% SCC Moderate CCP&T SCC High EIA GHG -4.0% -10.0% -5.0% -6.0% % change is from the NEMS 2011 Reference Case -12.0% -14.0% Energy intensity is measured in thousand Btu/$GDP Commercial energy intensity is measured in Btu/sq.ft.

12 Significant Potential Benefits Commercial Total Energy Consumption (Quad) Commercial Sector Total Emissions (MMT CO 2 ) 37% 22 10% After an initial reduction, the carbon tax scenarios return to the Reference case rate of growth of energy consumption by 2030 (or earlier) Reference Low SCC Moderate CCP&T SCC High EIA GHG Significant emission reductions from commercial electricity consumption in most carbon tax scenarios due to the decarbonization of electricity Reference Low SCC Moderate CCP&T SCC High EIA GHG

13 Quads of Energy Consumed in the Power Sector Additionality: End-Use Policies do not Transform the Power Sector % % 21% 22% 24% 14% 27% 30 12% 12% 13% 25 18% 24% Nuclear Renewables % 48% 46% 35% 47% 24% Coal Natural Gas % 16% 17% 21% 17% 23% 0 Reference CCP&T Reference CCP&T Reference CCP&T

14 Decomposition of Carbon Tax Effects The reduction in commercial building energy intensity is overwhelmed by the effect of lower carbon intensity from the use of cleaner sources of electricity.

15 Change in Cooling Technology Service Demand: Carbon Tax vs Reference Case Consumption is measured in TBtu of delivered energy.

16 Cost-Effectiveness The CCP&T carbon tax would likely cause higher expenditures on each major fuel type in the commercial sector lower fuel consumption does not offset higher prices. Commercial Sector Energy Expenditure Increases Due to Carbon Tax (Billion 2009-$) Electricity $10 8% $23 17% $40 23% Natural Gas $2 4% $2 6% $11 26% Distillate Fuel $0 8% $0 6% $1 12% Commercial Total $12 7% $26 15% $53* 23% *Includes approximately $1 billion spent on miscellaneous fuels (renewables, coal).

17 A 34% Rise in Electricity Prices Causes an 8% Drop in Electricity Consumption & a 45% Decline in CO 2 Emissions (in 2035) Commercial Electricity Consumption (Quads) 8% Emissions from Commercial Electricity Use (MMT CO2) 6 45% Demand drops because electricity prices increase in the commercial sector 34% in the CCP&T scenario, in Commercial sector electricity rates are flat in the REF case Reference Low SCC Moderate CCP&T SCC High EIA GHG Nuclear, coal, renewables, and natural gas become approximately equal contributors to power generation in 2035 (all between 9 & 11 Quads). Hence, CO 2 from electricity plummets Reference Low SCC Moderate CCP&T SCC High EIA GHG

18 A 33% Rise in Natural Gas Prices Causes a 5% Decline in Energy Demand & CO 2 Emissions (in 2035) Commercial Sector Natural Gas Consumption (Quad) 5% 220 Emissions from Commercial Natural Gas Use (MMT CO2) 5% Natural gas prices in the commercial sector increase by 33% in the CCP&T scenario, in 2035, above the 20% rise in the REF case. This causes a 5% decline in demand over the REF case. This is less of a drop in demand compared to the electricity sector, which sees a similar price increase Reference Low SCC Moderate CCP&T SCC High EIA GHG Reference Low SCC Moderate CCP&T SCC High EIA GHG

19 The Carbon Tax s Economy- Wide Impact on GDP is Small 28,000 Real GDP (Billion 2005$) 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10, Reference Low SCC Moderate CCP&T SCC High EIA GHG The low-tax scenario has its biggest impact in about 2020, with a reduction of less than 0.2% in real GDP. The biggest impact occurs in 2017 when the SCC hightax scenario causes a 1.4% reduction in real GDP.

20 Carbon Tax Revenues are Estimated to Be About $320 Billion in 2035 National Carbon Tax Revenue (Billion 2009-$)* CCP&T *Recall that the CCT&P carbon tax schedule is similar to the social cost of CO 2 emissions.

21 Carbon Tax Revenues Outweigh the Energy Expenditure Increases Energy Expenditure Increase Due to Carbon Tax (Billion 2009-$) Residential 13 6% 22 10% 51 19% Commercial 12 7% 26 14% 53 23% Industry 27 12% 30 12% 66 25% Transportation 40 6% 36 5% % CCP&T Total 92 7% 115 8% %

22 Next Steps Characterize more of the technology transitions in the commercial sector with/without carbon taxes Understand the minimal response of on-site renewables to carbon taxes. The lack of response of building-integrated PV is especially surprising. Analyze the role of individual renewable resources and CCS in the power sector with/without carbon taxes

23 For More Information Dr. Marilyn A. Brown, Professor Georgia Institute of Technology School of Public Policy Atlanta, GA Phone: Thanks to Roderick Jackson (ORNL) and Paul Baer (Georgia Tech) for their comments and insights.