Aldyen Donnelly: Comparing real life cap-and-trade to emission tax theory

Here we have the latest installment in the debate over whether more taxes will actually result in less pollution.

At the NYT blogsite, Laurie Williams and Allan Zabel kindly responded to my entry into the debate. Their reaction to my first posting follows, as well as my response.

Laurie Williams:
I am responding to Aldyen Donnelly…about our website. You asked about real life experiences with carbon fees. In a Feb. 2009 paper on our website, Keeping Our Eyes on The Wrong Ball, we describe how a CFC tax was used in the U.S. effort to address stratospheric ozone. In that case, as in climate change, we needed to make the environmentally friendly alternatives price competitive with the damaging substances we are working to phase out. Here is a quote from then EPA Administrator William Reilly, on how the tax worked:

On January 1, 1990, a new tax went into effect in the United States, a tax on the manufacture of CFCs. This tax exceeds in value the cost of CFCs themselves and it will rise steeply in the years ahead, raising $400 million in new revenues this year, and raising $5 billion over the next five years. This added cost of CFCs sends a powerful signal: it says bring on the substitutes fast! And it reduces the comparative economic advantage CFCs would otherwise enjoy over the more expensive substitutes. This tax on CFCs has already caused the United States to reach the agreed targets for reduction earlier than required. See here.

The difference with climate change, is that fossil fuel energy is a huge percentage of our economy. As a result, equal monthly per capita rebates to all adults (less for children) are needed to provide a cushion during the transition.

Hope this is helpful. If you have additional questions about any of this, feel free to write to us at: williams.zabel@gmail.com.
Thank you for your efforts to study this critical issue. Laurie Williams and Allan Zabel

Aldyen Donnelly:
Laurie,

I appreciate your response. Your (and Administrator Reilly’s) description of the role of CFC taxes in the CFC phase out is consistent with the analysis I mourned over in my message. The analysis attributes the successful phase-out of CFCs to a tax measure, failing to mention the mandatory product standard-type mandatory production phase-out that was also embedded in US law in 1991. If the tax measure was all that was required, what was the need for the production limits?

See Section 7671c of Title VI of the Clean Air Act, Phase-out of production and consumption of class I substances� [this includes all CFC-based refrigerants] , which stipulates that “it shall be unlawful for any person to produce any class I substance in an annual quantity greater than the relevant percentage specified in Table 2. The percentages in Table 2 refer to a maximum allowable production as a percentage of the quantity of the substance produced by the person concerned in the baseline year.” The baseline year is 1990

Table 2 Other class I substances (CFCs) 

1991 85%

1992 80%

1993 75%

1994 65%

1995 50%

1996 40%

1997 15%

1998 15%

1999 15%

“Effective January 1 2000, it shall be unlawful for any person to produce any amount of a class I substance.”

As I suggested [in my original posting], I can find you no examples in which a tax measure that, in isolation, can be demonstrated to have achieved the elimination or signficant reduction of the production or consumption of a pollutant or pollution precursor. There is a legally binding product standard-based reduction order associated with every success story, including the CFC example you offer.

To attribute the US’s successful elimination of CFC-based refrigerants to the production tax, without any reference to the legislated production caps, is to tell an incomplete story.

I respect your right to posit that CFC production would have been eliminated under the tax measure in the absence of the legally binding production caps. But, as I said before, that is pure theory. I remain unable to locate a single example of a tax measure, anywhere in the OECD world, that proved environmentally effective in the absence of a complementary mandatory production or sales reduction order. But, also as I said before, I can show you numerous successful production and sales reduction orders that did not benefit from a complementary tax.

Clearly neither the EPA Administrator of the day nor Congress had confidence that the CFC production tax measure, in itself, would achieve the desired outome. If they had, they would not have directly mandated production caps.

Also, a simple google search reveals that the US EPA relied heavily on CFC production limit enforcement orders to bring US CFC manufacturers in line. For example, see here. Of course, if the product standard was not a matter of law, the EPA would have had no capacity to enforce the desired production cuts. And if the production tax was as material a disincentive as your message suggests, these enforcement orders would not have been necessary.

I think it is worth noting that the Ozone Depleting Substance sections of the Clean Air Act created a limited exception for CFCs that were produced in the US for export to developing nation markets:

“(e) Developing countries (1) Exception. Notwithstanding the phase-out and termination of production required under subsections (a) and (b) of this section, the Administrator, after notice and opportunity for public comment, may authorize the production of limited quantities of a class I substance in excess of the amounts otherwise allowable solely for export to, and use in, developing countries that are Parties to the Montreal Protocol Any production authorized under this paragraph shall be solely for purposes of satisfying the basic domestic needs of such countries. (2) Cap on exception (A) Under no circumstances may the authority set forth in paragraph (1) be applied to authorize any person to produce a class I substance in any year [from 1991 through 1999] in an annual quantity greater than the specified percentage,PLUS an amount equal to 10 percent of the amount produced by such person in the baseline year. (B) Under no circumstances may the authority set forth in paragraph (1) be applied to authorize any person to produce a class I substance in the applicable termination year referred to in subsection (b) of this section, or in any year thereafter, in an annual quantity greater than 15 percent of the baseline quantity of such substance produced by such person.”

Presumably, the CFC tax applied to US production for export markets. I cannot find but would be interested in seeing what the US CFC export statistics look like. Obviously if US manufacturers continued to produce the maximum allowable CFC exports in spite of that tax, that fact would tell us something important about the effecitiveness of the production tax. (I am not saying that happened. I don’t know what the export numbers are. I am just saying they might be worth a review.)

April 16, 2010

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