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By Matthew Stepp on Apr 26, 2013 with 8 responses

Thomas Friedman’s Evolving Support for an Innovation Carbon Tax

Thomas FriedmanNew York Times columnist Thomas Friedman is nothing but consistent: he wants a carbon tax and he wants it bad. Since 2005, he’s mentioned “carbon tax” 41 times in his column. Yet, while his support for a carbon tax hasn’t waned, the characteristics of his preferred carbon tax policy have.

As ITIF argues in Inducing Innovation: What a Carbon Price Can and Can’t Do, pricing carbon by itself does little to support clean energy and carbon reductions. It can be a useful tool for nudging near-competitive low-carbon technologies into the market and spurring modest carbon cuts, but it’s at best a complementary climate policy. That changes if we use a carbon tax as a revenue-raiser to support additional policies aimed at making clean energy cost and performance competitive with fossil fuels. In other words, tying a carbon tax to aggressive energy innovation policy can get us better climate mitigation “bang” for our climate policy “buck.” It’s why I proposed an “Innovation Carbon Price” that ties 20 percent of carbon tax revenue to public energy innovation investments and 80 percent to strengthening corporate tax incentives for training, research, and capital equipment investments.

Friedman most often takes a simpler – albeit misguided – view: a carbon tax is the panacea for U.S. climate policy. In March 2006 he argued that a high enough carbon tax (or fuel tax) that ensures gasoline never falls below $3.50 to $4 a gallon would “make a host of new technologies competitive.” His basic premise is that a carbon tax provides a long-term price signal strong enough to raise the price of fossil fuels, which sparks consumer demand and private sector investment in clean energy alternatives. Recent history tells us this isn’t correct. Gas prices in March 2005 averaged $2.35 per gallon. Today, they’re hovering right around the $3.50 to $4 range Friedman yearned for, or for argument’s sake, a back-of-the envelope de facto ~$115 carbon tax.

EIA Gas Prices chart 2

Yet, zero-carbon electric cars aren’t competitive, but smaller gasoline cars and hybrids are. The amount of CO2 emitted for each unit of energy supplied is nearly the same as it was in 1990. In fact, U.S. carbon emissions have modestly fallen in part because of the recession, which cut energy demand, and because of increased use of slightly cleaner natural gas at the expense of coal. Higher energy prices are helping near-competitive technologies expand into the market, but spurring a full transformation of our energy system to mitigate climate change will take much more policy than price signals.

To be fair, Friedman often caveats his support for a carbon tax by mentioning what the United States should do with the revenue it would raise. In March 2005, he proposed using a carbon tax to pay down the deficit. In June 2010, he argued we should use carbon tax revenue to cut payroll and corporate taxes as part of a plan to heal the Administration’s strained relationship with the business community. The following month, he combined the two proposals into a grand energy policy bargain that he suggested Congress could make in the hours before cap-and-trade failed in the Senate. In September 2011 he wanted to use a carbon tax to “balance the budget” in an effort to get budget-hawks onboard. In January 2013, he doubled down on a carbon tax as the solution to reduce the deficit. In March he suggested 45 percent of carbon tax revenue should go to deficit reduction, 45 percent to tax cuts, and 10 percent to low-income households to offset higher energy prices.

For the most part, Friedman’s view is to use carbon tax revenue as a political bargaining chip. His neoclassical economic worldview dictates that the carbon tax price signal is most important. Everything else is expendable. The market will spur all the innovation we need.

But it’s on this point that Friedman has shown the potential for policy evolution. In June 2011, he inherently recognized the limits of price signals, arguing for a carbon tax to pay for “new infrastructure and stimulate clean-power innovation” and a gasoline tax to support a “massive increase in government supported scientific research.” And this month, Friedman upped his support for a more innovation-oriented carbon tax, calling for 50 percent of tax revenue to go towards corporate and income tax cuts, 25 percent into deficit reduction, and 25 percent into new investments in research, education, and infrastructure. Implementing a version of his plan would provide $20-25 billion per year in new funding for innovation – without a doubt a serious jolt to sagging federal support caused by sequestration and budget cuts.

While it’s a stretch to say that Friedman has thrown aside his faulty neoclassical proclivities on the role of price signals and energy innovation, his potential evolution is important nonetheless. Friedman has been one of the most vocal supporters of climate policy and innovation (while often not at the same time). Bringing both together to create a cohesive carbon tax proposal moves the needle towards the type of innovation-based climate policies America needs to be debating and ultimately implementing. It reframes U.S. climate advocates’ near-myopic focus on carbon pricing, mandates, and subsidies and expands the discussion on how we can use those tools to spur innovation. It’s certainly a step in the right direction.

  1. By Russ Finley on April 27, 2013 at 8:45 pm

    It’s a funny world. There are reasons we pay attention to what Friedman
    has to say and it sure isn’t because he is right more often than anyone
    else. He’s a glaring example of the principle
    of cumulative advantage
    , or maybe preferential
    attachment
    , or the Matthew Effect.

    Writing about what Friedman says, however, can provide a small measure of cumulative advantage by proxy. Here’s an example of me doing it <a
    href="http://grist.org/article/energy-independence-is-the-easy-part/&quot;with
    a review I wrote about one of his books. He makes a good punching bag.

    [link]      
    • By Matthew Stepp on April 29, 2013 at 11:53 am

      Russ –

      Agreed. In this case, it’s an opportunity to highlight the need for a different policy framing by recognizing a high profile advocate’s (somewhat) approval of it.

      MS

      [link]      
  2. By James Handley on April 28, 2013 at 1:54 pm

    Hi Matthew,

    Your pull-push approach sounds appealing. Pull down the unfair price advantage that fossil fuels enjoy over renewables and efficiency with a carbon tax that reflects climate and other environmental damage. (A UNEP/Trucost report last week concluded that CO2 is the #1 unpriced externality in the global economy.) And push clean energy R&D and implementation with the revenue.

    We know much more specifically what we don’t want (more CO2 pollution) than what we do want (efficiency and cost-effective renewable energy). A briskly-rising tax on CO2 wouldn’t just reduce demand for fossil fuels, it would send a powerful signal to energy suppliers to invest in low carbon energy and innovation. And to accomplish the enormous task of largely decarbonizing our economy, the CO2 price will need to rise (and keep rising) briskly.

    The Carbon Tax Center’s 5-sector price elasticity model (by Charles Komanoff) shows that the CO2 price will need to rise to $140/T within a decade to reduce emissions 30%, putting the U.S. on course for 80% reductions by 2050. With border tax adjustments, we can create incentives for our trading partners to enact their own carbon taxes leading to a rising global carbon price and worldwide decarbonization.

    To do that fairly, while building broad political support, and to prevent a carbon tax from becoming part of a perverse “austerity” program that contracts economic growth putting more people out of work, much (if not all) of carbon tax revenue will need to be pumped back into the economy in a distributionally-fair way.

    British Columbia offers a shining example: All revenue from BC’s carbon tax reduces other taxes and assists low-income households. That “revenue-neutral” formula engendered political support (centrist Gordon Campbell was re-elected), allowing the tax to rise $5/yr for each of five years to its current level of $30/T CO2. The tax has reportedly reduced emissions roughly 17% compared to the rest of Canada whose emissions have been roughly flat in the same period.

    Yes, the appeal of diverting carbon tax revenue to R&D or green energy or any number of good works is strong. But note that the tax itself would create enormous, focused supply-side incentives for energy research and innovation. BC’s example suggests that revenue return can help build broad, sustained support for a briskly rising carbon tax. And here in the U.S., a revenue-neutral carbon tax appeals to conservatives who would be turned off by “tax and spend programs.”

    George Shultz, Greg Maniw, Doug Holtz-Eakin and Bob Inglis top the growing list of conservatives calling for revenue-neutral carbon taxes. I hope we’ll heed their call. (And in his recent NPR interview, I heard Friedman say he’d support a revenue-neutral carbon tax, too.)

    - James Handley

    Carbon Tax Center

    http://www.carbontax.org

    [link]      
    • By Matthew Stepp on April 29, 2013 at 11:50 am

      My main concern with a high c-tax is three-fold: (1) we will never get it. While a c-tax in general is politically dead, a smaller tax has a higher albeit still small probability;

      (2) I don’t think it will have the big impacts economists argue it would have because passed the obvious low-hanging fruit, there simply aren’t viable tech alternatives in many cases. Consumers would continue paying higher fossil fuel prices until better tech comes along. We see this in Europe with really high gas prices leading consumers to drive smaller gas cars, but not EVs. Or in the US example I give in the piece – high fuel prices today compared to a few years ago isn’t doing much to drive low-carbon tech adoptions. At the end of the day, even with a high c-tax, we’re still waiting for better tech so why not tie the two together;

      (3) A revenue-neutral c-tax removes any opportunity to leverage it for innovation. So while conservatives may buy-in, I still think using some of the revenue to drive innovation is absolutely required. Further, there are ways to structure the corresponding tax reductions so that they also influence innovation.

      Matthew Stepp

      [link]      
      • By Robert Rapier on April 29, 2013 at 1:52 pm

        “We see this in Europe with really high gas prices leading consumers to drive smaller gas cars, but not EVs.”

        Bingo. I point this out to people all the time when they ask at what price of gasoline various alternatives will be competitive. I point to gasoline prices in Europe, and note that things like EVs are not being widely adopted.

        RR

        [link]      
      • By James Handley on April 30, 2013 at 12:15 pm

        Matthew,

        You’re (unfairly) focusing on the transportation sector where price elasticity (responsiveness to price changes) is notoriously low. A tax on carbon pollution would indeed need to be higher to induce behavior changes in transportation than in electricity generation and manufacturing.

        Further, your graph of motor fuel prices overstates price increases by failing to adjust for inflation. Your graph does vividly show fuel price volatility which deters investment in cleaner alternatives by increasing risk. A predictably rising carbon tax would do a lot more to induce innovation and investment than slowly-rising but volatile gasoline prices.

        Finally, you’re assuming Congress is well-informed and disciplined enough to pick technology winners and resist pressure from “incumbent technologies.” By way of example, the subsidies in the Sanders-Boxer bill include more lard for the already-pampered nuclear industry and to biofuels whose carbon footprint often exceeds that of fossil fuels.

        We simply must press for a briskly-rising carbon tax so that all energy suppliers and users feel the pull. Fantasies that a low carbon tax could fund a miraculous technology breakthrough are a pernicious distraction.

        - James Handley
        Carbon Tax Center
        http://www.carbontax.org

        [link]      
  3. By David F Collins on April 29, 2013 at 8:16 pm

    From Henry IV, part 1, Act 3, Scene 1 — by William Shakespeare
    GLENDOWER: I can call spirits from the vasty deep.
    HOTSPUR: Why, so can I, or so can any man; But will they come when you do call for them?

    Innovation, like sprits from the vasty deep, is easier to call for than to bring forth. If our nation pays for it via revenues of any kind of tax, we will get some kind of innovation, maybe even what we need. Such dirigiste policies work pretty well in a short term when the goals and path are clear, agreed upon and mutually consistent, like in the Space Program/Race of the 1960’s. Such is not in the complex situation (Global Warming, Resource Depletion, inter al.) that calls for the Carbon Tax, among other measures.

    Is living close to places of employment, provisions (food, etc.), recreation innovation? Is investment in bringing rail transport infrastructure up to the quality levels of a century ago, innovation? Is rationalizing the production, distribution and consumption of food, innovation? To paraphrase the semantic former President, it depends on your definition of innovation. It is best implemented by a frothy mix of dirigiste government and the old lazy fairies of “let a thousand flowers bloom”.

    Further, regarding the Carbon Tax, what matters more than exactly what level the Tax is pegged at is that it rises as certainly as does the Sun in order to speed along the needed changes, innovation or whatever. And there is nothing to concentrate the mind as effectively than the certainty of hanging in the morning or rising taxes. (Both of which can serve other useful ends.)

    [link]      
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