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WILLIAM TUCKER: Should Nuclear Support a Carbon Tax?

 

By William Tucker

As the possibility looms that Republicans may be back in control of the White House after the election, a debate has once again arisen over whether the nation should consider adopting a carbon tax.

The ground is constantly shifting under this issue.  Back in 2007, when cap-and-trade was first being suggested, Steve Hayward, Kenneth Green and Kenneth Hassett of the American Enterprise Institute put out a paper reasoning that a carbon tax would be much easier to administer and would accomplish the same goals without so much government intervention in the economy.

This summer such prominent Republicans as former Secretary of State George Shultz began promoting the idea that a carbon tax could be part of a general effort to overhaul the tax code, using the carbon levy to reduce other streams of revenue such as personal income and corporation taxes.  Former South Carolina Congressman Bob Inglis, defeated in a primary by the Tea Party in 2010, started and “Energy and Environment Initiative” at George Mason University in which he is urging Republicans to embrace climate change and the carbon tax.

Faced with the possibility that a carbon tax could be on the agenda in January, think-tank conservatives have suddenly begun to change their minds.  In July, Green retracted his previous position:  

I no longer believe that such a tax (or, for that matter, other eco-taxes) can be implemented in the sort of ideal, economically beneficent way that people favoring individual liberty, free markets, or limited government might sanction. . . . A carbon tax would simply become another general revenue raiser and a step in carbon-seduction. "Oh, come on, you've already accepted the tax, now let's do cap-and-trade and regulation."

Two weeks ago, Derrick Morgan, vice president of the Heritage Foundation, made an even more elaborate case in a paper entitled “A Carbon Tax Would Harm U.S. Competitiveness and Low-Income Americans Without Helping the Environment.” So even before the proposal gains ground in some areas of conservative opinion, others are turning against it.

First off, there is great irony to all this switching back and forth by principled economic thinkers.  Both cap-and-trade and the carbon tax were originally conservative proposals, designed in the Milton Friedman spirit of using market mechanisms and economic incentives to achieve environmental ends instead of government “command-and-control.”  When conservatives first broached these ideas (Shultz wrote a cover piece for Harper’s in 1979), environmentalists were originally apoplectic, charging that either system would “legalize pollution” and “make it so only the rich could pollute.”

Their unwillingness to accept the logic of market mechanisms eventually melted away after the first Bush Administration wrung a compromise out of Congress and got it to agree to try cap-and-trade in 1991 in dealing with the problem of sulfur emissions.  (Remember “acid rain?”)  The results were absolutely spectacular.  The original EPA estimate had been that cleaning up sulfur emissions would cost anywhere between $3 billion and $12 billion per year for the first ten years.  By 2003, the clean-up had gone 22 percent beyond the original goals and cost only $800 million a year.  Environmentalists became the world’s biggest supporters of cap-and-trade, insisting that it used to curb Europe’s carbon emissions.  The reason the Obama Administration chose cap-and-trade for reducing carbon emissions is because of these successes.  

 

What worried Hayward, Green and Hassett in 2007 was that the success of cap-and-trade in reducing sulfur might not carry over to the larger carbon market.  While sulfur is only emitted from a few power plants using high-sulfur coal, carbon comes from tens of thousands of sources across the entire economy.  The bookkeeping would be a nightmare and require a huge government bureaucracy.  Also, cap-and-trade standards tend to turn mushy and get bogged down in frauds such as the Chinese companies that have thrown up polluting factories in China and then closed them and sold the “carbon offsets” to European countries.  The AEI scholars argued that a straight tax on carbon fuels – gas, coal and oil – would be much easier to administer and resistant to fraud.

So why the think-tank turn against the carbon tax now?  

Both Green’s and Morgan’s initial argument is that they doesn’t trust Congress.  Green writes:  

[W]atching states loot "dedicated" eco-taxes for general revenue, seeing the emergence of more proposals for revenue-raising carbon taxes to finance continued deficit spending, and generally bearing witness to endless insincerity on the part of greens and their allies, I have to admit that my friends in the free-market movement were right.

Morgan quotes Barbara Boxer saying that the proceeds from cap-and-trade permits should not be used to lower business taxes but to reduce taxes for the middle class.  

Now leaving aside whether the middle class might benefit from greater business activity, the comment does seem to indicate that any proceeds from a carbon tax might end up as just another means of redistributing income.  But remember we’re talking about a situation where the Republicans could control at least the White House and the House of Representatives.   Barbara Boxer might not have as much power in a new regime and Republicans might be able to secure a reduction in income and business taxes by dangling a system of reducing carbon emissions before a Democratic Senate.

But Morgan doesn’t stop there.  He goes on to argue that a carbon tax would be a general tax on manufacturing, spreading across the entire nuts-and-bolts economy and reducing our international competitiveness.  

The flaw in this argument is that it regards the current industrial situation as static.  If a carbon tax makes electricity more expensive then things will stay that way forever.  But the point of a carbon tax is to level the playing field for other forms of generation that do not produce carbon dioxide.  Most prominent among these, of course, is nuclear power.  If the increases costs of power can be temporarily offset by lower business and capital gains taxes, the overall impact on the industrial economy could be muted.

Nuclear has long been stymied by cheap coal.  Now it is being shut out by cheap natural gas.  But if both these forms of energy were made to pay the cost of their air emissions – which is a legitimate concern – then nuclear would become far more attractive.  And although policy analysts at the Heritage Foundation and AEI do not seem to recognize it, building nuclear today would make electricity much cheaper in the long run and be a boon to America’s industrial future.  

Not surprisingly, Morgan also argues that “choosing to place a tax on carbon is an endorsement of the theory that man-made emissions of GHGs have a significantly harmful effect on the environment.”  In other words, his underpinning assumption is that we can forget about all this global warming stuff.   But as summer temperature records fall and warmer winters become more common , it is becoming increasingly clear that global warming worriers may have a point.  You don’t have to believe that New York City will be underwater in 20 years to be concerned about the buildup of carbon dioxide in the atmosphere.  If you are, then nuclear obviously has an important role to play.  A carbon tax would be an excellent place to start in reviving the nuclear construction effort.  

8 Responses to “WILLIAM TUCKER: Should Nuclear Support a Carbon Tax?”

  1. JimHopf Says:

    It is the positions/arguments of these conservatives that are inconsistent and insincere, not the environmentalists. So, he’s saying (near the end) that he does NOT believe in global warming? If so, then of course a CO2 tax (or cap and trade) is bad policy. Why were they even talking about it in the first place?
    Could it be that these conservatives liked the idea of a CO2 tax simply because it would largely fall on the poor and middle class, and free up funds that could be used to cut taxes (mostly for the rich)? And then (as he describes in his own words), they were outraged to learn that the govt. might have the temerity to use the funds for something other than tax cuts (for the rich), possibly (gasp) increasing govt. spending! How about a payroll tax reduction (better idea)?
    It seems clear that they never were really concerned about GW. If they were, they would understand that the main point is to place a financial disincentive on fossil fuels, so that the price charged more accurately resembles the real cost. Environmental/health costs are every bit as real as other costs. What is done with the money is of secondary importance. Yes, such taxes would increase energy costs, but since the funds are put to use elsewhere (govt. programs or tax cuts), any net effects should be small. But again, the main point is that it actually leads to more acurate pricing of various energy sources. If non-emitting sources never get cheaper, and energy prices stay somewhat higher over the long term, then so be it; that’s what the energy ACTUALLY costs. Why are free market advocates arguing for a warped market, based on govt. intervention (yes, Virginia, NOT factoring in environmental costs constitutes a govt. intervention in the market). Note that most estimates of economic impact are quite small, on the order of ~1% of GNP.
    How can anyone seriously take the position that environmental impacts should not be factored in at all, and not even a small financial incentive to use a much cleaner source should exisit? And yes, of course nuclear should lobby heavily for a CO2 tax. Any real nuclear advocate should be offended by the current policy where nuclear is required to not pollute and guarantee containment of all its wastes/toxins, while the fossil industry gets to just dump their wastes/toxin into the environment, for free.
    The argument about international competitiveness is somewhat valid, and yes an international agreement would be better, but wouldn’t it be just as valid to argue that having strict nuclear regulations, say, requiring containment domes for example, is also bad since it raises our power costs and hurts our industrial competitiveness? Why does only nuclear pollution matter? (Could someone please ask the Japanese?)

  2. Brian Mays Says:

    So, he’s saying (near the end) that he does NOT believe in global warming? If so, then of course a CO2 tax (or cap and trade) is bad policy. Why were they even talking about it in the first place

    The AEI article appears to me to be an exercise in picking the lesser of two evils. It’s not logically inconsistent to claim that A is better than B while simultaneously claiming that neither A nor B is a really good idea.

    How can anyone seriously take the position that environmental impacts should not be factored in at all …

    Well, it’s difficult to factor in something that is difficult to pin down. These impacts are difficult to evaluate, and in the few cases in which such an evaluation exists, the uncertainties are very large.

    So what are you going do you do, just make up numbers? That’s not very scientific.

  3. Brian Mays Says:

    … and not even a small financial incentive to use a much cleaner source should exist?

    Well, actually, you’re creating a financial disincentive to use much “dirtier” sources, but let’s ignore semantics for the moment. Be careful about asking about a “small” anything here. Anything too small isn’t going to do your particular objectives any good.

    First, keep in mind that for many plant owners the incentives/disincentives are practically nonexistent. The typical owner in a regulated environment will simply be allowed to pass on the tax to the consumer as a cost of doing business, just as they are allowed to pass on fluctuations in the price of fuel.

    Even in a deregulated environment, the incentive/disincentive effect of a carbon tax is practically neutral for many gas plants, because in a competitive wholesale electricity market, such as PJM, the price of electricity is set by the plant with the highest marginal costs, which is usually a gas- (or oil-) fired plant.

    So if you own a gas plant, your costs go up due to the tax, but the other guys’ costs go up too, including the guy setting the price, so your extra costs get covered by what you get paid and you make the same profit. Once again, the cost of the tax is passed on to the consumer. Coal plants get hit the hardest under this situation, since their costs rise more rapidly than what they get paid, due to their lower efficiency (kWh/tCO2) when it comes to emissions, so this might result in companies closing some old coal plants with high maintenance costs.

    Nuclear plants do well under this situation, but then again so do highly efficient gas plants, such as modern CCGT plants, which emit less CO2 per kWh than the intermittent or “peaker” plants that often set the price. Therefore, unless the tax is large enough to make the difference between the incentives provided to these two plants sufficient to overcome the higher capital costs (and financing costs and regulatory risk) of the nuclear plant, operators in a merchant environment are simply going to build new, more efficient natural gas plants if they build anything at all.

    So what do you do? Simply set the carbon tax at a level high enough to favor nuclear plants over gas plants? In that case, free-market advocates, such as the AEI and HF, are going to accuse you of using government to pick favorites, and it would not be wrong of them to do so.

  4. JimHopf Says:

    Yes, the merchant environment will respond just like it should. Gas will have some advantage over coal, and nuclear and renewables will have some advantage vs. gas. Even in the regulated environment, utilities are required to try to use the cheapest option (and convince the PUC). I personally think the carte blanche passing on of fuel costs is something that should be questioned (every bit as much as nuclear plant construction overruns). As a case in point, Southern Co. massively switched from coal to gas when gas became cheaper, and I believe they’re in a regulated environment.
    Given current low gas costs, even a small CO2 tax will result in a large amount of coal generation switching to gas. Many of the very old, very dirty coal plants may end up being shuttered for good (something we should all celebrate).
    The ideal policy would be to apply external costs (i.e., set pollution/CO2 taxes) based on a scientific quantification of the associated harm to health and the environment, as opposed to setting them to achieve any pre-determined outcome. Such a policy should NOT be considered “picking winners”.
    I believe that if external costs were truly, and accurately, factored in, coal would clearly go away. The only remaining question would be whether nuclear or gas would replace it. If coal ends up getting replaced by gas instead of nuclear, so be it. After all, my main motivation for supporting nuclear has always been environmental, with the specific goal of eliminating coal. I still believe, however, that over the mid-to-long term, gas supplies will not be sufficient and prices will not remain low. And no, renewables will never be able to supply most, let alone all, of our electricity. Thus, nuclear would do well (eventually) if external costs were applied.
    One thing I have trouble understanding though is people who advocate nuclear but are against applying external costs, or are not concerned about the environment in general. Do they really think that nuclear has any future at all if the present, spectacularly unlevel playing field is maintained? Where nuclear must go to the ends of the earth to avoid even a tiny chance of emitting pollution, where fossil fuels (esp. coal) are allowed to just continually dump massive amounts of pllution directly into the environment, w/o even having to pay a (small) fee to do so? Personally, I don’t see any chance of a nuclear future under such conditions. It should be clear that the only reason for all the proposed nuclear projects (COL applications, etc..), including Vogtle and Summer, was due to the expectation of CO2 limits and/or taxes.

  5. Brian Mays Says:

    Even in the regulated environment, utilities are required to try to use the cheapest option (and convince the PUC).

    But after the plant has been built, it is a mighty hard sell to convince someone that building an entirely new plant is going to be a cheaper option than paying higher fuel prices for the current plant.

    I believe that this is why you see the current marketing blitz of “cheap” natural gas by the oil/gas companies. The goal is to get the plants built and the customers locked into buying the fuel. After that, if fuel costs rise, the oil/gas companies prosper while the consumers suffer.

    Given current low gas costs, even a small CO2 tax will result in a large amount of coal generation switching to gas. Many of the very old, very dirty coal plants may end up being shuttered for good (something we should all celebrate).

    I don’t disagree here, but keep in mind that most of those “old, very dirty” coal plants are also very small coal plants. So while many of these plants might close down, the decrease in generation by coal might be rather modest.

    Another effect of this, however, is to bring down the price of coal, since price decreases with demand. Thus, there will be incentives to keep the larger, modern coal plants running, since they will be cheaper to operate, perhaps even reaching the marginal costs of some of the more poorly run nuclear plants.

    Don’t make the mistake of thinking that coal is going away completely because of something like a carbon tax. Short of banning coal plants outright, either directly or via onerous regulatory abuse, the US will continue to get some (probably a substantial portion) of its electricity from coal.

    The ideal policy would be to apply external costs (i.e., set pollution/CO2 taxes) based on a scientific quantification of the associated harm to health and the environment, as opposed to setting them to achieve any pre-determined outcome.

    The problem with this idealization is that a credible “scientific quantification of the associated harm to health and the environment” due to carbon dioxide does not exist. The estimates of the increase in temperature due to a doubling of carbon-dioxide in the atmosphere spans a range that covers a factor of two — i.e., the high end is over twice the value of the low end. Estimates of how much carbon-dioxide is expected to increase over the next 88 years covers an even larger range, from 40% higher than today to 140% higher.

    And this is before you even begin to consider what “harm” an equilibrium change in global mean near-surface air temperature would do. There are so many assumptions and uncertainties involved that this is just guesswork. You’re fooling yourself if you think that you can scientifically quantify this putative “harm” with any certainty whatsoever.

    So any price on carbon is going to be a convenient guess, chosen to get whatever response out of the market that is desired. We might as well be honest and admit that.

    Do they really think that nuclear has any future at all if the present, spectacularly unlevel playing field is maintained?

    Sure it does, although it’s future in the US is uncertain. Nuclear power plants are being built and will continue to be built in other countries, however.

    If you’re unhappy about the unlevel playing field, then why not level it? Increasing regulation and increasing taxes is not the only way to accomplish this. Did it ever occur to you that maybe less regulation and less fees could accomplish the same thing?

    After all, why is China building 26 nuclear reactors while the US is currently building only one? Surely this has nothing to do with China’s concern about the environment.

  6. Rod Adams Says:

    @bemays:disqus – I would have sworn that the US is building 5 nuclear reactors, not one. My count includes 1 at Watts Bar, 2 at Vogtle and 2 at VC Summer.

    Which one are you counting and why are you not counting the others?

  7. Brian Mays Says:

    Rod – That is a very good question, and you bring up a good point. There is some construction going on at three sites in the US.

    My bigger concern, however, was assessing the number of reactors currently being built in China, an area that I do not know as well as the US. Therefore, I relied exclusively on the statistics provided by the IAEA’s PRIS database, in the hope that the IAEA’s standards for what constitutes “under construction” is the same for China as they are for the US.

    So PRIS says that there is 1 reactor in the US and 26 reactors in China that are classified as “under construction,” and that’s what I went with.

    See the PRIS database for more information.

  8. Rob Brixey Says:

    First of all, I’d like to thank God for Global Warming. I have seen global representations of an Ice Age and I’m no fan of those conditions. I prefer the Mississippi River in a fluid state and the polar ice cap somewhere North of Atlanta, Georgia. Geological records indicate that the Earth experiences Ice Ages in about 100,000 year intervals. How fast can the climate change? Biological finds include frozen Mammoths with greens in their guts indicating that change can occur in the wink of an eye.
    I have seen correlation between CO2 and Global Temperature shown on graphs. The authors would do well to show a CO2 solubility in seawater chart vs Temperature trend on the same page. The Earth is covered 75% by seawater. I know this because I spent eight years in the Navy, and 75% of the time – that’s what I saw (correlation or causation). Quite clearly, as seawater temperature rises, solubility lowers. This could be the correlation between atmospheric CO2 rising with rising Global Temperature.
    So is Global Warming man made? The point is well debated.
    Lets address another issue – taxation.
    Taxation is Congressionally authorized robbery of one class for the promised benefit of another.
    In the case of Carbon Taxes – people who use Coal or Natural Gas will pay taxes.
    That’s not utilities, it’s the ratepayers – since all costs of sustainable businesses are always passed through.
    It has been both presumed and promised that this largesse will be paid to “developing countries so they don’t build new coal plants”. Now this is Congress (liars on a National scale) and the United Nations (liars on a Global scale) assuring these funds will be spent for the noble and glorious purpose of environmental promotion.
    Fact is – they’ll give money to defaulting Solyndras, as well as GM, AIG, war budgets, and international bailouts such as Spain and Greece – all designed to cover their previous corrupt expenditures.
    Corrupt entities should not be entrusted with our money. The less tax – on any level – the less harm we do to our ourselves and our neighbors.
    Carbon? The jury is out.
    Taxes? You know how that works.
    The merged concept include two very different issues.