Beneath the surface: The emerging US consensus on climate change
From Project Finance:
A conservative Republican former congressman, an associate editor of the conservative National Review, a former policy analyst for the National Association of Manufacturers and the head of the leading renewable energy trade group in Great Britain had a spirited debate this spring on climate change at an event in Phoenix hosted by Avangrid Renewables. The following is an edited transcript.
The panelists are Greg Bertelsen, senior vice president of the Climate Change Council and a former energy and environmental analyst for the National Association of Manufacturers, Bob Inglis, a former six-term Republican congressman from South Carolina and now head of republicEn.org, Travis Kavulla with the R Street Institute, a Washington think tank, an associate editor of the National Review and a former deputy chairman of the Montana Public Utility Commission, and Emma Pinchbeck, executive director of RenewableUK. The moderator is Keith Martin with Norton Rose Fulbright in Washington.
MR. MARTIN: Greg Bertelsen, you are optimistic that the United States government will address climate change, despite the fact that as recently as 2017, only 7% of Republicans believed we need to do something about it and despite the steady questioning of the basic science by the Trump administration and Fox News. Why?
MR. BERTELSEN: I look at the underlying fundamentals that ultimately drive US policy action.
Start with an organization like ours, which is made up of large energy companies, like ExxonMobil, Total and BP, the largest utility in the country, Exelon, a large Spanish bank, Santander, leading consumer-brand companies, like Proctor & Gamble and Johnson & Johnson, and large environmental organizations, like the Nature Conservancy and WWF — what used to be known as the World Wildlife Fund — all working together to formulate a policy that both Republicans and Democrats can get behind. That coalition continues to grow month by month. Its goal is to put a price on carbon.
MR. MARTIN: So there is growing support from the business community for action on climate change.
MR. BERTELSEN: Absolutely. We have never seen this level of support among the corporate community for action on climate change, and that will only increase.
MR. MARTIN: Let me challenge you. You left the National Association of Manufacturers to join this group. The NAM has 14,000 members, and they could not come to a consensus. Are things any better today at the NAM?
MR. BERTELSEN: Without question, yes. First, 14,000 companies across the country are never going to come to a consensus position on climate policy. It is not going to happen. But the scales are tipping every day more toward action rather than inaction.
For the last three Congresses before the current one, Steve Scalise, the House Republican whip, introduced a resolution that it is the sense of Congress that a carbon tax should not be adopted. Every Republican until the last Congress voted for it. The National Association of Manufacturers the first two times sent a letter to all members of Congress encouraging members to vote for the resolution on grounds that it is a critical manufacturing issue. In the last Congress, the NAM was notably silent. It is a minor data point, but you can see a big organization like that starting to turn. The NAM no longer opposes a carbon tax. It has moved to neutral.
MR. MARTIN: Bob Inglis, you were a conservative Republican member of the House. Do you see the same shift among Republicans on climate change?
MR. INGLIS: Yes. I think that things are turning dramatically. Probably the best evidence is the headline in a press release from the Energy and Commerce Committee Republicans on February 6. “Republicans are focused on pragmatic solutions to climate change.” The next day, three senior members of that committee on the Republican side followed up with an op-ed piece whose lead sentence read: “Climate change is real and we, the leaders on the Republican side of the Energy and Commerce Committee, are here to do something about it.”
MR. MARTIN: So we are starting to see a shift among Republican members of Congress in the last year?
MR. INGLIS: Since the November elections, actually. [Laughter.] November was quite a wake-up call.
Green New Deal
MR. MARTIN: The Democrats seem to be veering to the left. They have a “Green New Deal.” They hope to make climate change a key issue in the 2020 election. It is too early, of course, to know what the key issues will be, but do you think climate change will be a winning issue for the Democrats?
MR. INGLIS: I think not. I think it will split the Democratic party.
The Democrats are getting ready to have a tea party led by Alexandria Ocasio-Cortez. I don’t think Nancy Pelosi was tongue-tied when she said, “The green dream, or whatever they call it.” I think that was actually intentional on Nancy’s part to say, “Hush up. Frank Pallone, the Energy and Commerce Committee chairman, is going to handle this. His committee is where the action should be. Not with you, AOC.” I think that is what Nancy was doing, and Nancy is a pretty shrewd politician. She knows that she has to keep the Democrats from forming a tea party that ends up with something that further polarizes America.
MR. MARTIN: Travis Kavulla, why is the Green New Deal polarizing?
MR. KAVULLA: I think it is intended to be polarizing. The intention is to lay down a marker of swift radical transition. It has been characterized by its sponsors as a kind of national mobilization and interestingly, the fire coming from the Green New Deal is not trained on Republicans. It is trained on Democrats who are labeled insufficiently pro-action. We saw this in that cringy video of Green New Deal activists confronting Senator Diane Feinstein. The Green New Deal is becoming a source of division within the Democratic party.
Words like the “Green New Deal” conjure up government-led industrial policy as opposed to liberalization. Ironically, if you look at the electric power sector, it has been transformed by a series of liberalizing policies like direct consumer access and restructured competitive markets that have actually led to decarbonization.
At least to people who know the electric power sector, the Green New Deal seems awkward in the sense that it purports to be a kind of government hand, which is exactly the thing that led to many of the inefficiencies and a lot of the carbon intensity that the liberalizing policies have been helping to undo.
MR. PINCHBECK: The Labour party in the UK has now adopted the Green New Deal idea because they are desperate to win back the young voters they have lost.
My first reaction after reading the Green New Deal was it is fundamentally undeliverable. A lot of energy analysts did the same smug thing for about 48 hours. It is just a bucket list of things that are impractical. Why is all this social stuff in it, too, when it is supposed to be an energy policy.
However, on reflection, no policy is perfect. The ambition is in line with the science. We can dislike how radical the action is and dislike the type of action that is recommended, but the speed is bang on in line with what science suggests we will need to do. If it creates an urgency in policy and forces everyone to come together on the details, then that is a good thing.
MR. MARTIN: Let me go back to the two Republicans on our panel. Set aside the Green New Deal. Does either of you think that climate change is a winning issue for the Democrats?
MR. KAVULLA: Yes, I do. Democrats have managed to capture the issue from a previous, if not bipartisan, consensus in an era when polling suggested it ranked about level with both parties. Now you see Iowa Democrats listing it as their number two issue going into the coming election season, and you do not see it ranked anywhere among the top concerns of Republicans.
It should concern everyone that it has become a politicized issue. I think Bob Inglis is correct that you hear a new message coming from the Republican political leadership. It remains to be seen whether the kind of pleasing bromides that emerge in press releases will translate into any kind of meaningful policy endorsements, but the business community has opened the door. One of the positive externalities of the Green New Deal is that by pulling the Democratic party so far to the left on these issues, it creates space where Republicans can advocate for free market-based policies that have been successful in the US at decarbonizing parts of the power sector.
MR. MARTIN: Bob Inglis, if you were running again for your old seat in Greenville-Spartanburg, would climate change get any traction with that constituency?
MR. INGLIS: Not yet. Not in the reddest district of the reddest state of the nation. Anybody from Idaho here? I might want to pull that punch if there is anyone from Idaho or Texas. Maybe this is not the reddest, but we are pretty red.
Support for action on climate change is still a ways away in those kind of districts, but not in the suburban districts that Republicans must win in order to win back a majority in the House.MR. MR. MARTIN: Explain Florida, which is on the front line of climate change — rising sea levels are expected to leave a third of the state underwater by the end of the century — and yet the Republican leaders in that state not only are not for action, but they have also scraped references to climate change from the websites of state government agencies. How do you explain that?
MR. INGLIS: That’s changing, too. Governor DeSantis is signaling some things about environmental protection that do not go to climate change, but they get mighty close.
The challenge we face in American politics today is to survive as a Republican, you have to slam yourself up on the right-hand wall and see that there is no daylight between you and the wall in your rhetoric. If you are a Democrat, you want to be on the left-hand wall.
Jerry Nadler, who is now chairman of House Judiciary Committee, once told me, “It is exhausting to represent my district.” He represents one of the most liberal districts in the country. “I have to wake up every morning trying to out-liberal my district.” It is exhausting. The safest place for Jerry to be is slammed on that wall with no daylight between him and the wall, because you let daylight in, you will get somebody on talk radio who runs against you.
Florida Governor Rick DeSantis is trying to figure out a way to speak about climate change without creating too much daylight between himself and the wall. Our goal at RepublicEN.org is to speak in high-octane conservative terms about climate to create a safe space next to the wall. We had an event at the University of Chicago titled, “What Would Milton Friedman Do About Climate Change?” He would internalize the negative externalities. You speak in that language. You keep the daylight from coming between DeSantis and his right.
MR. MARTIN: Let’s move to another topic, which is, if there is a fault line in this panel, it should be over the role of government in addressing climate change.
Greg Bertelsen, you were so taken with a proposed carbon tax that George Schultz, Jim Baker and other Republican luminaries pitched to the Trump administration barely two weeks after Trump took office that you left the National Association of Manufacturers and joined the Climate Leadership Council to promote such a tax. Why is it appropriate for the government to lead the charge on this?
MR. BERTELSEN: Thank you for pointing out that I have a history of bad career moves. [Laughter] I joined the National Association of Manufacturers in the second term of the Obama administration essentially to oppose regulations and then two weeks into the Trump administration, I jumped ship to join a carbon tax organization.
It is an interesting way to frame the question. It also informs my answer, which is I happen to believe that climate is both the biggest environmental threat facing mankind and also the greatest economic threat. There never has been a clearer policy solution to that type of challenge than a direct price on carbon as the primary mechanism for both lowering emissions and stimulating economic growth.
MR. MARTIN: Do you think a carbon tax is the only effective way to get there?
MR. BERTELSEN: It is the most effective way to get there. It is also the most surefire way to give certainty to the marketplace, to allow innovators the certainty they need to make the investments necessary to drive lower carbon decisions. In January, the largest group of economists ever assembled on a single statement essentially endorsed the four pillars of the council’s policy, a direct price on carbon being the primary one. The leading economists across the country — Republicans, Democrats, young, old — are in agreement that a price on carbon is the best way to go about this.
MR. MARTIN: Do you favor other government actions as well? Subsidies for renewables, for example? Cap and trade?
MR. BERTELSEN: There is absolutely space for complementary policies, but if the objective is rapid decarbonization of the economy, do it in an economically beneficial way. Do it in a way that allows all sectors of the economy to realize potential opportunities for emissions reductions. The starting place for any comprehensive climate policy should be a direct price on carbon.
MR. MARTIN: Travis Kavulla, you told the Senate Energy Committee in February that the states are being ham fisted in how they are trying to deal with climate change. Some states, for example, have renewable portfolio standards to encourage renewables, but at the same time, they give subsidies through zero emissions credits to keep nuclear power plants operating. We end up with more electricity than we need and at an increased cost. Do you think there is any role for federal or state governments to play?
MR. KAVULLA: A lot of the action is in the states at the moment, rather than the federal government, as we do not have a system like the UK where energy policy is made nationally in any meaningful way. Instead, policy is vulcanized on the part of states or even on the part of individual utilities subject to public utility commission regulation.
If you were going to rank the efficiency of policies that can reduce carbon, you would begin with a carbon tax. The second most efficient would probably be cap-and-trade. A third would be some sort of technology-neutral subsidy for technologies that are carbon free, but the last policy gets into a sphere of something like 17th best in terms of efficiency.
When you look at certain state policies — I will pick on Illinois in particular because your question leads me there — which literally subsidize renewable entry and then subsidize other plants to hang around that are threatened by renewable entry, that is bananas.
It is easy to put this in the context of a false dichotomy of do you or do you not favor government action? The reality is we are living in a sphere where government is already heavily involved and where people are paying a carbon tax, but it simply happens to be hidden and inefficient. I am a new ratepayer in the District of Columbia. The district directs a percentage of its renewable energy target specifically at solar. If you take the cost of that set-aside program and divide it by the tons of carbon that are abated as a result, the PJM independent market monitor estimates a carbon reduction cost of $861 per ton.
MR. MARTIN: So we pay extra for poorly designed state programs.
MR. KAVULLA: That is what I am paying on my electricity bills and it is not a line item and it is not a tax, so it does not have that level of transparency. We see state-level activities all over the United States that adopt hidden carbon taxes that are wildly inefficient in trying to achieve their goals.
MR. PINCHBECK: It goes further than that. You are spot on. I am so bored of pointless ideological arguments that do not get anyone anywhere of “should government intervene versus should the market do it?” It is such a reductive way of thinking about the challenge when most of us work in regulated markets of one kind or other.
Climate change calls for a mix of incentives. You mentioned the UK. The UK has a carbon floor price as well as a cap-and-trade regime with the European Union to tackle the energy-intensive bits of the economy. We chose to do a carbon price for that, but the government also introduced research and development funding for some of the technologies that the market would never invest in because they are never going to be something that is particularly valuable commercially. Yet they are very valuable for climate change action.
I think a carbon price would make a massive difference in the US, but when it gets down to telling people how efficient they have to make their homes, I suspect we have to regulate original construction because there is no way to make my mom happy about someone coming in and messing with her house. Of necessity, we end up with a mix of policies.
You are absolutely right that we have no transparency about where costs and benefits stick in the system, and so we have this conversation as if the playing field is level to start, which it is not. For example, the UK Treasury does not take into account climate externalities when doing impact assessments. Hurricane Katrina cost the US economy $11.6 billion. None of that cost from climate change is ever factored into “how much do renewables cost?” or “how much does this green policy cost?” GDP assessments do not cover it, nor do we think about what are the risks to economic growth in a world of scarce resources. Carbon pricing addresses some of that, but not all of it. It is a much more complicated picture than whether to intervene or not.
MR. MARTIN: You are a good advocate for action and your point is that the government is already heavily involved, so we just need to find the right mix of policies. Travis, I could not tell whether that is also your position.
MR. KAVULLA: Largely so. To the degree that a price on carbon does not get us there, then should we add other policies for market transformation and new technologies?
It is important to have some kind of market mechanism. The UK in some respects has been successful where it has pots of R&D funding as Emma says, but this funding is put out for competition. The big utilities have to compete in order to get that sum of money. If you are going to do some kind of state-level policy that might be an nth best option, then at least make it a competitive solicitation.
MR. PINCHBECK: It was a 2008 Labour government that signed the Climate Change Act. The Act represented a consensus view. It has been right-wing governments that have delivered the policy beneath it.
MR. KAVULLA: Offshore wind is an example of this. You have the Vineyard project off Massachusetts that had to win a competitive solicitation and is coming in relatively low cost.
But compare that to a log-rolling exercise in Virginia where environmentalists teamed up with Dominion to get a state legislative package passed that gave Dominion a no-bid rate-based option for offshore wind that came in at $300 million for a 12-megawatt project resulting in 80¢ per kilowatt hour of electricity, or more than 10 times the result of a competitive solicitation in Massachusetts.
So there are clearly two paths that you can take on these types of policies. One is a form of log-rolling rate-based entitlement that brings out the worst of the capital bias of the regulated utility industry, and the other tries to draw on aspects of liberalization in order to get you lesser cost carbon reductions.
Best Policy Option
MR. MARTIN: Let me bring Bob Inglis back in here. Your website, republicEN.org, says that the group favors conservative and free enterprise solutions to climate change. What does that mean?
MR. INGLIS: The government being just the honest cop on the beat. It says all costs in and all subsidies out. Now compete. Of course “all subsidies out” is hard to get to. For example, is the oil depletion allowance a subsidy or is it not?
There is a libertarian strand in Republicanism that basically says just level the playing field, internalize the negative externalities, and get the government out of the business of favoring one technology over the other.
I spoke at an American Wind Energy Association event and I said, you know I’m going to be the skunk at the garden party because I am going to say when I get there, let’s eliminate the production tax credit for wind. They said go ahead if you are really talking about internalizing the cost of burning fossil fuels. If you are, we don’t need the production tax credit. In fact, we don’t like the near-death experience every time the tax credit comes up for renewal. Just level the playing field and we will fend for ourselves.
MR. MARTIN: Do you favor the government putting a price on carbon?
MR. INGLIS: Yes. We think that is the most efficient way of pricing in the negative externalities.
MR. MARTIN: Travis Kavulla, you complained about hidden carbon taxes. Would you favor an overt carbon tax?
MR. KAVULLA: Yes. I think it is superior to the alternatives. One of the talking points that I use with my Republican friends is that it is an opportunity to get rid of some of the inefficient policies, like the Clean Air Act’s purported regulation of carbon dioxide, which would be unnecessary if you transparently priced it, or sub-optimal things like the CAFE standards for transportation. Some of the regulatory clutter could be repealed, I hope, in exchange for a carbon tax. A lot of people are pushing a kind of tax and dividend. I think that is the optimal strategy.
The reality is we are going to get to a place where people are looking for revenue to run the government and, rather than raise general taxes, increasingly carbon may be viewed as an attractive source of that revenue. It might become a kind of political sweet spot. There are regions in the United States that already put a modest price on carbon, mostly through a cap-and-trade regime.
It will be interesting to see how a plan unfolds that the New York ISO is formulating to put a price on carbon in its market and whether the plan gets approved by the Federal Energy Regulatory Commission. Some of the early modeling suggests that the wholesale cost of energy would increase by 50% to 75%, but then the money collected would be rebated back to consumers. If that happens, it could be a really interesting on the ground experiment in how carbon is transparently and robustly priced in the electric power sector.
MR. MARTIN: Emma Pinchbeck, the UK puts a price on carbon currently. Is there a way to explain simply how it works?
MR. PINCHBECK: No. [Laughter] We have a carbon floor price, which the UK government has always kept, even when scaling back green policies, because it is a source of revenue for the UK Treasury.
It is a market-based solution to the problem of climate change. There is no top-down decarbonization target for the UK power sector. It is all done through a mix of carbon pricing and a collective sense of where we need to move as a country. Our carbon floor price is higher than Europe’s. It forces the power sector to address hard questions like, “Is it worth keeping this coal-fired power station open for another five years given the current price of renewables?”
MR. MARTIN: Before you go further, is it simply a fuel charge or is it also a cap-and-trade regime within the European community?
MR. PINCHBECK: The part of it that relates to the European scheme is cap-and-trade. The carbon floor price in the UK is a price. So we have an internal carbon price in the UK, but it has a relationship with the EU trading scheme. Please don’t ask me what Brexit does to this because I have no idea. [Laughter]
MR. MARTIN: You were forewarned.
MR. PINCHBECK: The UK will be completely off coal by 2025. The carbon price is now fundamental to our energy market design and will remain so going forward as renewables become the incumbent power source.
MR. MARTIN: Bob Inglis, you are a great admirer of a speech that President Kennedy gave in 1962 at Rice University where he called for putting a man on the moon by the end of the decade. We did not have the technology to do it at the time, but we had a Sputnik moment. The Russians had succeeded in launching the first Earth-orbiting satellite. We mobilized our scientists to catch up. You call climate change a slow moving Sputnik moment. Do you think there is a role for agencies like NASA, DARPA and ARPA-E to promote new technology to deal with climate change?
MR. INGLIS: Yes. In fact, I hope that contrary to President Trump’s budget, Congress dramatically increases ARPA-E funding. I think that, plus constructive hearings, are the only two things we should ask of the current Congress.
The reason to increase ARPA-E funding is we all live figuratively in Missouri, the show-me state. If you can show me that new technology can help, then you increase my sense of efficacy and I can engage on the climate-change issue. If you tell me that there is nothing I can do about this and I am just hosed, then I give up.
Here is where a schism appears between Republicans and libertarians. My libertarian friends would not like that, but my Republican thought is that only the government can do basic research effectively, and it should do it in a big way. As John Kasich wrote in USA Today earlier this week, we are not talking a little money either. We should be talking big money.
MR. PINCHBECK: Can I tell you a story? I thought that the most inspiring thing about visiting Svalbard, the northernmost inhabited area near the north pole, would be feeling moved by the rugged wilderness, but just outside Svalbard, there is a mountain of ice and it is -23° on a good day. The environment is trying to kill you as soon as you go out the door. About 150 years ago, at the dawn of the last industrial revolution, a group of Victorians wearing nothing but oilskins arrived in Svalbard, looked at a mountain of ice in -23°, discovered there was coal in it and said, “Let’s mine it.” In those conditions.
They could see the potential to harness technology in a changing global economy, and they were willing to put the resources of the British government and the empire to work to do it. We talked about the problem of climate change, but we are in the midst of another period of transformative economic and technological change, and humanity has made these transitions before. The moon shot analogy is really good for what we are trying to do.
MR. MARTIN: The industrial revolution took hold in the UK starting in the 1840s due to private enterprise.
MR. PINCHBECK: Yes. I work in the private sector. I left NGOs and came back to the private sector because the market is moving and I find that inspiring, but I think we face an existential challenge as a society. The problem does not really suit incrementalism. It doesn’t really suit left or right. It is going to have to be an all-of-the-above solution. I am both pro-market and pro-intervention for when there will be market failures.
MR. MARTIN: So there is no time to rely solely on the private sector?
MR. PINCHBECK: That, too, so we have to do this fast. It is about setting ambition and it is about scale. That is where central governments have an advantage because they can invest for scale. They can also take risk.
MR. MARTIN: Greg Bertelsen, we seem to have a consensus here that putting a price on carbon is an effective policy. The carbon tax you are promoting would collect about $200 billion a year. It would turn it back to the public as a dividend check in an effort to create political support for the program. Tell us more about how it works.
MR. BERTELSEN: A number of you told me this morning that Gina McCarthy, the Obama EPA administrator, spoke here yesterday and suggested that perhaps —
MR. MARTIN: She threw shade on your organization. [Laughter]
MR. BERTELSEN: That’s what I hear. If you dig deep enough in Google, you can find a statement from her after the launch of her new organization that if she were still running the US Environmental Protection Agency, she would take in a second a deal to put a direct price on carbon in place of a more complicated regulatory approach.
Those of you who were here yesterday, correct me if I am wrong, but I believe her comment yesterday was that we need a policy that can be explained easily to the American public.
That is why we are so intrigued by the concept of putting a price on carbon by taxing fossil fuel companies. I think everyone is still with us up to this point. We are for putting a tax on fossil fuel companies and then taking all of that money and returning it directly to the American public in the form of either monthly or quarterly dividend checks.
MR. MARTIN: From whom would you collect the tax?
MR. BERTELSEN: From the petroleum industry at the exit point of the refinery. From coal companies at the mine mouth. From natural gas companies perhaps at the gathering station. The goal is to put the tax as far upstream as possible so that the tax is collected from the fewest number of taxpayers at a point where it is administrable. It will send a price signal through the entire economy.
MR. MARTIN: Would the tax be collected from power companies?
MR. BERTELSEN: Under our proposal, no. It would be assessed on fossil fuel companies, presumably some or all of those costs would pass through to utilities when they buy fuel.
MR. MARTIN: How much would the charge be on carbon?
MR. BERTELSEN: We proposed a price starting at $40 a ton, escalating a few percentage points per year above inflation.
To give you a sense of what the modeling shows in terms of emission reductions, if the program starts by 2021, by 2025 we would be about 32% below 2005 levels or well below the US Paris target. But that is just the first part of the equation.
The second part is what do you do with $200 billion in revenue. There are plenty of worthy causes in the climate space and elsewhere for the $200 billion a year. But if this is to be a climate policy first, it must first pass, and then the tax must stay in place and increase with time. You can imagine what might happen with opportunistic politicians challenging incumbents who voted for the gasoline tax or the energy tax. Bob Inglis might be able to speak to this from experience.
We believe it will be a lot harder to challenge supporters if to repeal the energy tax or the gas tax, you must also take away the dividend check that people have been getting in the mail every quarter.
The case study for this is the Alaska permanent fund. This is a program that has been in place for four decades in Alaska. Part of the cost for oil and gas companies to do business in Alaska is they must share some of the revenue from oil and gas production with the citizens of Alaska. Alaska residents get a check every year. It is a hugely popular program. It is politically untouchable. In fact, every now and again a politician tries to touch that pot of money and, every time, he or she is beaten back.
MR. MARTIN: There is another piece of it: a border adjustment to ensure that US manufacturers who had to pay more for fuel will not be disadvantaged. How does that work?
MR. BERTELSEN: It is complex, but simple to explain. Goods that the US exports to countries that do not put a price on carbon would be rebated the carbon tax at the US border. Goods coming into the country would be assessed a fee equivalent to what they would have had to bear had a carbon price been in place abroad. The goal is not to design a protectionist program, but the advantage of this for a lot of US industries is the US economy happens to be a lot more carbon efficient than that of China or India.
A border adjustment encourages production to take place in countries where carbon emissions are less, such as the United States. I think this is another key lever for encouraging Republicans, who are more business minded, to come on board.
MR. MARTIN: But who generally are not protectionists. Bob Inglis, you have good political antennae. Does this sound saleable to you?
IMR. NGLIS: I think it is.
The dividend creates a political constituency as he was just describing. It also helps address regressivity because a carbon tax by itself is regressive. At republicEN.org, we support the proposal, but we are also a little more ecumenical in terms of the revenue recycling.
If you want to cut individual or corporate income taxes, we are for that. If you want to recycle the revenue through a cut in payroll taxes, we are very much for that. The Congressional Budget Office says that if you cut payroll taxes and put on a carbon tax, the bottom 70 percentile income earners do better under that system than they do today. If you are truly concerned about regressivity, that is the place to go.
MR. MARTIN: Carbon and fuel taxes have had to be rolled back in Australia. There is pressure to do so in Canada. Emmanuel Macron in France had to roll back a fuel tax. Do you know enough about those schemes to be able to distinguish them from what is proposed here?
MR. INGLIS: I spent some time two years ago traveling around Australia speaking at the invitation of the Australian Institute to Australian conservatives. Australia did a carbon tax, undid it, did it, undid it. That is a problem for the business community.
Australia does not have the ability to do a border adjustment, which is the key aspect of America’s ability to lead. If you want access to this American market, fine. You are going to have to pay our carbon tax on entry unless you have the same-level carbon tax at home. Say that China challenges the border adjustment in the World Trade Organization. We think it loses. If we are right, China, 24 hours after losing in the WTO, will have the same price on carbon dioxide because otherwise its exporters will pay a tax on entry into the United States that goes to Washington and that could have been collected at home and been retained in Beijing.
Then you have the whole world following. No international agreement is needed. To the people on right-wing talk radio, did you hear that? No international agreement. No bowing and scraping at the United Nations. Just a bold move by the United States that says we are going to lead and now, rest of the countries in the world, decide what you want to do in your interest.
MR. PINCHBECK: I have spent the last seven years having an argument with a government that is right wing about climate policy and —
MR. MARTIN: Your right wing is our center to left.
MR. PINCHBECK: Well, I don’t know. We are doing Brexit, and that’s pretty right wing for the moment.
This is about why I am skeptical about carbon pricing on its own as a solution. From experience with both markets and people, we do not always do the economically efficient thing. Like, ever.
Take me, for example. I work in energy policy. My husband is always hectoring me to turn the lights off. We are humans, and we behave in strange ways.
There is no such thing as a subsidy for renewables currently in the UK. Renewables are winning on a pure price point. They are the cheapest form of generation to build. That said, we cannot build onshore wind or storage very easily on just merchant models alone for various reasons, including that we do not price things transparently in our economy. Financiers in the City also require a long-term guaranteed return on their investments. They want to see a floor price, even a subsidy free one.
MR. MARTIN: So we don’t need the government involved?
MR. PINCHBECK: Not so fast. We need the government to correct market failures.
The reason that people are hostile in France, for example, to carbon pricing is that it was sold as a climate change policy at a time when Macron is hated, and it was tied to a whole load of other populist sentiment against things like EU intervention. It is seen as a kind of globalist interventionist policy in an era of rising nationalist sentiment. Macron did not bother to communicate it effectively. He just thought he could say climate change. Government policies need to be more effectively communicated.
Markets do not always follow economic efficiency. They do things for other reasons, too. That is where you get market failures and sometimes where you need policy.
Utility Business Model
MR. MARTIN: We are winding down. I have two more questions.
Starting with PG&E, Travis Kavulla, you are a former utility regulator. You have said the PG&E bankruptcy raises in the minds of regulators whether utilities should act as insurance companies. Regulators must decide whether the cost of rare events like wildfires and hurricanes should be socialized by passing through the costs to ratepayers or should be borne by utility creditors and shareholders.
What do you think the PG&E bankruptcy will mean for the basic utility business model going forward?
MR. KAVULLA: It is hard to draw generic lessons from California, but there is one lesson that I think can be drawn, which is how vulnerable big central-station networks are to black-swan events like wildfires in the West and hurricanes in the coastal areas.
I would usually say to most people that the 9% and 10% returns on equity that regulators dole out to largely risk-free companies are supernormal and excessive. But here you have found, once in a blue moon, a regulated firm whose return on equity actually understates, evidently, its level of risk, which is kind of surprising. I had always been under the assumption that we were overcompensating these people for their risk.
If you actually expect them to bear climate risk, then their ROE is going to have to be substantially higher. In a sector where California law puts much of the liability on California utilities and where utilities have no meaningful recovery opportunity from their ratepayers, you are going to have to nearly double their returns on equity. It raises questions about the optimality of that form of regulation versus creating something like a state-backed loss fund or trying to get the insurance community involved and reinsuring some of this risk.
It is something that anyone who operates a large utility network should be paying attention to, notwithstanding the weirdness of California public policy having contributed to the problem.
MR. MARTIN: Are there any questions from the audience?
MR. HAYMAKER: Tom Haymaker with Clark Public Utilities in the state of Washington. I listened to the suggestion that carbon taxes might be the most efficient or best way to get greenhouse gas reductions. Washington state is one of the most environmentally conscious states in the Union. We had two public referenda on a carbon tax, and both times the tax lost. In fact, the proposal lost in all but two counties in the state. So I am having a cognitive dissonance moment here, where I hear you guys — and I believe you are right -– say a carbon tax that is the best way to do it, but the voters, even in the state of Washington, are saying, “We don’t want such a tax.” How do we put those things together?
MR. MARTIN: Let me ask before our panel answers. Did you vote for it? [Laughter]
MR. HAYMAKER: That’s none of your business.
MR. MARTIN: Cognitive dissonance. Go ahead, Greg Bertelsen.
MR. BERTELSEN: Two quick thoughts. First, not all carbon tax proposals are created equal. Without getting into the details, I would argue there were serious flaws with the design of the Washington state carbon tax. Second, the vote underlines the importance of national policy being consensus-based. In Washington state, you had big oil against big environment, and it got super-ugly and super-expensive, which is why we are starting with the opposite approach. We are starting with big oil and big environment working together to avoid that very collision.
MR. KAVULLA: Keith, can I add quickly? The fatal flaw in state initiatives on carbon taxation is that you cannot do a border adjustment. If the governor of Illinois wants to solve his budget problems, he could try to have the state impose a carbon tax. Billboards would spring up immediately around Chicago that say “Illinoised yet? Move to Indiana.” If you put on a carbon tax within a state, the leakage to the neighboring states is massive. That is why it only works as a federal policy.
MR. MARTIN: Another question, this time from Kevin Lynch with Avangrid Renewables.
MR. LYNCH: Thanks, Keith. Along those lines, I don’t have a lot of confidence that the American voter can wait a year for the dividend after the tax is imposed, so I am wondering if the proposal is backwards. Should we do the dividend and then the tax?
MR. BERTELSEN: The Climate Leadership Council agrees with you. What we propose doing is to pay the first dividend before the tax hits, so that the first thing you see as part of the program is a check in the mail.
MR. KAVULLA: And to reiterate, notwithstanding that it is insane to regulate locally a globally diffuse gas, most action on carbon pricing in the United States is on a regional and state level. The New York ISO is in all likelihood going to make a filing with FERC to impose a carbon price with a retail-side emanation in the form of a rebate on people’s bills of the incremental revenue.
To the degree that we believe in the laboratory-of-democracy kind of approach in America, it is good to vet some of these policy ideas on the ground like that. It is a much fairer system. Not to pile in on Washington state, but one of the biggest objections to the carbon tax on the voter ballot was that the proceeds would go into a governor-controlled slush fund. I think the UK term for it is a quango. There was not a lot of political confidence in that. It did not pass for all sorts of reasons, but if you really wanted to be critical, it looked like a crass power play rather than a bona-fide good-spirited carbon price.
And hilariously, a tax promoted by a libertarian academic was opposed by the Sierra Club, because it didn’t do enough for “social justice” and all the kind of rent-seeking that usually attaches to green energy policies. So hilariously, you had a kind of libertarian purist thing that was opposed by the environmental left.
MR. PINCHBECK: Do you think it is because people fundamentally do not like to feel that things are being done to them, and we need to do much better at explaining that the impacts of climate change are coming for you whether you like it or not? It will intervene in your life, and here are the solutions can be done for you: for example, the green energy jobs that we are seeing created in the UK, the wealth creation, the regional investment and other community benefits that come off the backs of our wind farms.
The polling on climate change is consistent in the UK: roughly 80% of the public thinks we should do more, 65+% think we should do more to encourage in renewables. Our electorate remains fractured politically, but what has shifted is the economic case. People understand that this industry and this change produce benefits for them.
MR. MARTIN: A signal moment in the US was the Super Bowl commercial for Budweiser.
MR. PINCHBECK: I saw that, with the dog!
MR. MARTIN: You had an American beer company touting how it uses green energy in order to sell beer. Consumer change is a leading indicator in government policy.
There is time for only one more audience question.
MR. JOHNSON: Jessica Johnson from Avangrid Renewables. I’m interested in the idea of a carbon tax. I wonder whether someone can talk about its relation to the existing subsidies that the oil and gas industry receives from the federal government.
MR. KAVULLA: I think you are looking at a chorus of people who oppose, maybe not all types of subsidies, but probably that subsidy at the very least. Subsidies create hidden costs. The one you mentioned is a real problem.
If any kind of carbon tax is adopted, it would also require attendant regulatory reforms that clear out some of the clutter that directs money to different sectors, some to renewables and some to oil and gas producers. The opportunity is ripe for a reform.
MR. INGLIS: While a carbon tax and clearing out all energy subsidies are the ideal policy, the best climate policy is the one that can pass. For every existing subsidy, renewable or fossil, there is a member of Congress who is a constituent for that tax provision and that leads to complications. It gets ugly quickly. The ideal and the feasible do not always overlap perfectly.
MR. MARTIN: Short comment. We have to close.
MR. COLLADO: Pablo Callado with Iberdrola. My comment is that it does not help renewables to keep talking about subsidies. We need to banish that word from our speech. We are talking about the cheapest technology. All we need is long-term visibility into the revenues to make sure our projects are bankable.
MR. PINCHBECK: It is rare at the moment as a UK citizen that I get to feel smug about anything, because you have all read the Brexit news.
However, the power sector transition in the UK means that we are a bit further ahead on the decarbonization curve than others. With respect to the gentlemen on stage, I rarely think about climate change or any kind of top-down policy any more. I think about how best to accelerate and support a market that is moving by itself. I have not had a conversation about whether we need to subsidize renewables in about three years, because when I walk into a government department now with the nuclear industry and the oil and gas lobby, I am the cheapest form of energy generation. The only issue is whether to accelerate a change that is already occurring and is being driven by the private sector.
All of my work at the moment is on the demand side. It is on smart technology, homes, transport, integration with the wider energy system, and the tricky stuff. We have won a lot of these arguments. It might not feel like it, but the policy debate is over.
MR. KAVULLA: And from a US power market perspective, there are plenty of situations where the going-forward costs of existing resources exceed the cost of new renewable entry. And yet the existing power plants stay operational. Why is that?
It is not because government intervention is there to promote renewables. It is because regulation and policy retain capital inefficiencies. That is the paradox of all this talk about the Green New Deal. If you had a customer empowerment act, something that promoted liberalization in the power sector and competitive entry, you would actually discipline it a lot. It is regulation and policy that maintain some of the inefficiencies in the power sector. Left alone, customers would gravitate more quickly to renewables.
MR. MARTIN: I want to wrap up with this. Bob Inglis, you gave a fascinating TED talk last year in Boston.
You had a refrain. You kept repeating, “Suppose you are a conservative member of the House,” and you followed it each time with an observation. For example, you said you worried while in the House about the fire of populist nationalism. Those who play with fire cannot control it. Pitchforks and torches are not great building tools.
You said you would go to county meetings in your Congressional district when you were running for reelection, and the voters would want to hear you say that there is a closet Muslim socialist in the White House. You were unwilling to say it.
You lost your seat. And yet you came away from it all with your American optimism intact. What makes you think this country is going to be able to pull itself together again? We are so divided politically.
MR. INGLIS: Well, here we are in Arizona, and to quote my very dear friend, former Arizona Senator Jeff Flake, “The fever will break.”
Tom Friedman described the American DNA in The World is Flat. This is a country young enough and brash enough to believe that every problem has a solution. Every once in a while we get down on our luck and we feel put-upon, and we will listen to somebody telling us a down-in-the-mouth tale.
But eventually we get tired of it. I think we are in the process now of tiring of it. We will return to our basic selves. Sir Winston Churchill never lost hope in us during the early days of World War II when Britain battled alone against the Nazis and night after night, the German bombers pounded London and other cities. He assured the British people, “You can always count on the Americans to do the right thing after they’ve exhausted every other option.”
We are in the process now, having had our pity party, the Great Recession and feeling really bad about ourselves, we are going to come out of it. The fever will break.