Speaker 1: Today on the podcast, we look at whether we can
Speaker 1: solve climate change with the invisible hand of the free
Speaker 1: market and some help from mister tax collector. Stay tuned, Hello,
Speaker 1: and welcome back once again to Parts per Billion, the
Speaker 1: environmental podcast from Bloomberg Law. I'm your host David Schultz,
Speaker 1: and I hope you had a great Thanksgiving. So if
Speaker 1: you follow environmental news even casually, you know that there's
Speaker 1: not much time left to avoid the worst consequences of
Speaker 1: global climate change. Humanity is in a situation where nearly
Speaker 1: every proposal to fight climate change needs to be taken seriously,
Speaker 1: and the one we're going to be talking about today
Speaker 1: is something economists have been touting for a while now.
Speaker 1: Putting some kind of price on greenhouse gas emissions, either
Speaker 1: through a tax or some kind of other carbon pricing scheme,
Speaker 1: could be an elegant and effective way to reduce these
Speaker 1: emissions really fast. The thinking here is that if it
Speaker 1: becomes expensive to burn fossil fuels, individuals will respond accordingly
Speaker 1: without the need for heavy hand government mandates. It might
Speaker 1: sound good on paper, but how would it really work
Speaker 1: in practice. That's what we'll be looking into today with
Speaker 1: two economists in a bit, we'll imagine what the global
Speaker 1: situation would look like if different countries have different carbon taxes.
Speaker 1: The first we'll start here in the States. Sanj Potneike
Speaker 1: is an economist director at the brig Institution, nfellow at
Speaker 1: the Institute for Sustainable Energy Policy at Johns Hopkins University.
Speaker 1: He spoke with Bloomberg Taxes David Hood about how and
Speaker 1: even weather a carbon tax could work in the US. So,
Speaker 1: first of all, we have to break down a little
Speaker 1: bit of what the current proposals are on the table.
Speaker 1: And so first is the infrastructure building was just signed
Speaker 1: into law by President Biden, and when we look at
Speaker 1: the climate provisions in there, there is nothing about a
Speaker 1: carbon tax or any climate related tax in there. They
Speaker 1: do dedicate almost fifty billion US dollars for climate resilience,
Speaker 1: which I think is a really big step because we
Speaker 1: see many more extreme weather events in the United States
Speaker 1: that have a negative impact communities across the country, that
Speaker 1: cause a lot of loss and damage. And then we
Speaker 1: have the second bill, which is the Reconciliation Bill, which
Speaker 1: is still under consideration right the latest what I've heard
Speaker 1: is that that doesn't seem to be enough senators to
Speaker 1: actually advance a carbon tax, but we will only know
Speaker 1: once the package actually passes. It does have a really
Speaker 1: big dedicated trunk of money to climate which is about
Speaker 1: five hundred and fifty five billion in the latest proposal
Speaker 1: that was put on the table, and a lot of
Speaker 1: that money will go to foster renewable energies, including tax
Speaker 1: breaks for like a renewable energy electricity producers, for people
Speaker 1: to buy electric cars, and things like that. So there
Speaker 1: we have an important tax angle and there can be
Speaker 1: a significant impact through these levers, but it's important that
Speaker 1: those are like I like to see, these are carrots, right,
Speaker 1: These are positive amounts of money that are being distributed
Speaker 1: to people, to producers and to consumers in form of
Speaker 1: tax breaks. These are not a carbon tax that would
Speaker 1: actually put a price on carbon emissions. I guess taking
Speaker 1: a step back for our listeners who may not be
Speaker 1: familiar with a carbon tax, can you explain how that works? Yes,
Speaker 1: And that's a really interesting question because we just came
Speaker 1: off the COP twenty six Climate Conference, and so one
Speaker 1: important policy tool that countries have to actually achieve the
Speaker 1: emissions reductions that they promised is to put a price
Speaker 1: on carbon and so we currently have about sixty five
Speaker 1: jurisdictions around the world that have some sort of a
Speaker 1: carbon price, either in place or being implemented or implanning,
Speaker 1: and so there is a good dashboard from the word Bank.
Speaker 1: You can go the carbon pricing dashboard that shows where
Speaker 1: we have the different programs and so, in effect, there
Speaker 1: are two ways to put a price on carbon. One
Speaker 1: way is a carbon tax. That is pretty straightforward. What
Speaker 1: that means is, let's say you're a factory and you
Speaker 1: have hundred tons of Cu two emissions per year. With
Speaker 1: a carbon tax of say thirty dollars per ton, you
Speaker 1: will have to pay for each ton of Cu two
Speaker 1: emissions that you put out in the atmosphere. There is
Speaker 1: no limit on your emissions. So basically the idea from
Speaker 1: the regulatory side is because it is more expensive for
Speaker 1: you to emit now, the firm might have an incentive
Speaker 1: to try to reduce emissions. The second one, which has
Speaker 1: been a bit more popular across the world, are carbon
Speaker 1: markets or cap and trade. It's basically an emissions trading
Speaker 1: scheme where you have a group of firms or a
Speaker 1: group of factories and you say, look, you guys have
Speaker 1: an emissions limit. As an example, for next year of
Speaker 1: one hundred tons of CU two. The current level of
Speaker 1: emissions tres hundred and fifty tons, so we want to
Speaker 1: achieve reductions of fifty tons. And then the regulator comes
Speaker 1: in and distributes these permits emissions permits two companies, and
Speaker 1: companies can then decide, let's say you have one firm
Speaker 1: that has emissions of sixty and only got forty permits,
Speaker 1: should I reduce or should I trade on the market.
Speaker 1: And the effect is here that you set an emissions limit,
Speaker 1: so you can control a limit, but then the price
Speaker 1: is determined by the market for the overview, I guess
Speaker 1: taking another step back, is taxation an effective lever to
Speaker 1: curb these emissions and slow down global warming? Climate change?
Speaker 1: That's a really important question, and the answer is a
Speaker 1: clear yes. So as the vast majority of economists have
Speaker 1: argued for a long time, actually, the most efficient, the
Speaker 1: most cost effective, and the quickest way to reduce emissions
Speaker 1: is to put ap price on carbon and that can
Speaker 1: be either in form of a carbon tax, or it
Speaker 1: can be in form of, as I've described before, a
Speaker 1: carbon market through emissions trading. Why is that the case,
Speaker 1: because if you think about it, currently in the United States,
Speaker 1: at least unless we look in California, we are not
Speaker 1: paying for the negative effects of the carbon we put
Speaker 1: in the atmosphere, right, And so this is a clear
Speaker 1: problem of what economy is called negative externality. And in
Speaker 1: order for someone that produces carbon emissions to internalize those costs,
Speaker 1: we need to put a price on that. And so
Speaker 1: that really reflects the true costs of your operations, either
Speaker 1: if you drive a car or if you produce something.
Speaker 1: And so that price in form of attacks or a
Speaker 1: common price on the market is actually the way that
Speaker 1: most economists prefer. So if Congress, if Congress is going
Speaker 1: to fall short of some of these goals, obviously the
Speaker 1: administration has its goals and members of Congress have their goals.
Speaker 1: Is there anything that the I R. S can do
Speaker 1: without Congress's, you know, explicit authority in on these issues.
Speaker 1: I think when we look at actually what has been
Speaker 1: happening over the last twenty years in the US, we
Speaker 1: have seen that most of the times the major climate
Speaker 1: actions have come through the agencies, right, because it was
Speaker 1: so difficult to pass anything through Congress on climate, most
Speaker 1: of the actions happened either through the EPA or now
Speaker 1: as we're getting into new terror and the Biden administration
Speaker 1: has done some really good things in that area through
Speaker 1: financial markets and banks, where for instance, their new report
Speaker 1: by the Financial Stability Overside Committee now came out and
Speaker 1: kind of like put climate risk at the center, which
Speaker 1: I think is really critical and that's a very important
Speaker 1: first step. And we all expect also some regulations to
Speaker 1: come through the SEC on climate disclosure and climate risk disclosure.
Speaker 1: And I think the Biden administration is doing a lot
Speaker 1: of things in that area because it's a bit more
Speaker 1: under their control, and especially their whole of government approach
Speaker 1: I think is really critical. I mean just thinking about
Speaker 1: their irs, right, like thinking about what climate change will
Speaker 1: mean for government revenues. Right, it will have a severe
Speaker 1: impact because companies will be affected by climate change, so
Speaker 1: their revenues might drop if they are a subject to
Speaker 1: certain extreme weather events. Right. We have the same for
Speaker 1: individuals that might be affected by that, that might lose
Speaker 1: their homes, all of their wealth. And so I think
Speaker 1: there are significant implications going forward for tax space and
Speaker 1: for the revenue we can raise and for the expenditures
Speaker 1: we have to lay out of our budget to adapt
Speaker 1: the climate change what's sort of next. What are the
Speaker 1: things that you're most watching for, both on the international
Speaker 1: arena and in the domestic space. So I think on
Speaker 1: the regulatory side, I'm definitely keeping very close eye on
Speaker 1: any carbon pricing regulations that are coming out, because frankly,
Speaker 1: if we look at it, the US is behind most
Speaker 1: of the rest of the world. Other kindries are moving
Speaker 1: rapidly to implement the carbon price and that means they
Speaker 1: will also have a leg up when they're trying to
Speaker 1: develop new technologies, new industries, and it's not good for
Speaker 1: the US to be a laggard in that space. And
Speaker 1: on the other hand, the other big trend that I'm
Speaker 1: looking at is really the market forces. We have seen
Speaker 1: an increased pushed by investors to look at climate change
Speaker 1: as a risk issue and to force companies to start
Speaker 1: addressing it and analyzing it, and so we see a
Speaker 1: lot of literary action that reinforces those trends. But I
Speaker 1: believe as more investors are realizing that climate change is
Speaker 1: a risk issue, it's an economic issue that can actually
Speaker 1: move the needle quite significantly, and so that's one of
Speaker 1: the trends that I'm also looking at very carefully. That
Speaker 1: was the Brook Institution. Sanjay Patnaike speaking with David Hood.
Speaker 1: Now let's move on to the global perspective. Frank Iceh
Speaker 1: is an economist with the London based consulting firm CRU.
Speaker 1: He's previously worked in the finance ministries of both Germany
Speaker 1: and the UK, and also spend time at the IMF.
Speaker 1: I spoke with Blimberg Taxes Michael Rappaport about how a
Speaker 1: carbon tax might play out across international borders and about
Speaker 1: the difference between a carbon tax and carbon pricing. When
Speaker 1: you have a carbon text, you post a price and
Speaker 1: let the market find supply and mind, or you can
Speaker 1: do it the other way around. It's called a cabin
Speaker 1: trade system where you let a certain amount of supply
Speaker 1: of carbon emissions allowances into a system and then the
Speaker 1: market finds its own price. So it's it's two ways
Speaker 1: of achieving an increase in prices and they both work
Speaker 1: and they're equally popular around the world. To talk a
Speaker 1: little bit about what was a camp in that respect
Speaker 1: at the COP twenty six conference. So we just concluded
Speaker 1: what they agree on rules for a global trading work
Speaker 1: to train emissions reduction credits. So so this was you're
Speaker 1: absolutely right. In twenty fifteen at the Paris cop A
Speaker 1: country said, okay, we are now going to move to
Speaker 1: this next stage. It's the Paris Agreement and having a
Speaker 1: framework on how countries can trade carbon emissions across borders
Speaker 1: was one of the major aspects which was discussed and
Speaker 1: negotiated back then, and they then over the last few
Speaker 1: years five six years, didn't manage to negotiate exactly how
Speaker 1: to do that. But at this cop at COP twenty
Speaker 1: six No. One class, they said, okay, we now have
Speaker 1: an idea how we want to actually do that. One
Speaker 1: problem that hasn't been addressed yet or it's not a problem,
Speaker 1: but it is. I think part of the solution is
Speaker 1: hold to actually implement that and how to ensure that
Speaker 1: it is actually correctly enforced. So countries have agreed on
Speaker 1: the framework and hold to actually what to do the
Speaker 1: rules of the game, but they don't need a global
Speaker 1: agency to actually say you're all playing to the right rules.
Speaker 1: You mentioned before that carbon taxes and emission creating or
Speaker 1: kind of equally in use. There's a consequence disagreement kind
Speaker 1: of tilt things more toward toward the trading model than
Speaker 1: the tax model. No, I don't think that's that's the case.
Speaker 1: They are quite independent. I mean, one of them is
Speaker 1: about in a way, driving the carbon tax and the
Speaker 1: cap and trade system. They're about driving up the price.
Speaker 1: The other one is about let's allocate in the most
Speaker 1: efficient way the carbon allowances across countries, So that's not
Speaker 1: about driving prices. And they're the two. I mean they
Speaker 1: both of them are very very useful and crucial to
Speaker 1: achieving climate change targets around the world, but they are
Speaker 1: quite independent of each other. So I don't think that
Speaker 1: carbon taxation or cabin trade is affected by this agreement
Speaker 1: on or what role do you see these carbon taxes
Speaker 1: specifically playing going forward in this So the cabin trade system,
Speaker 1: I mean, the EU is the biggest they established already
Speaker 1: in the mid nineties, the biggest emission trading scheme, and
Speaker 1: that has become ever bigger. They are they just moved
Speaker 1: at the beginning of this year and to what is
Speaker 1: called the Phase four, so they're releasing less and less
Speaker 1: of the allowances into the market. The price goes up,
Speaker 1: and the price has gone up tremendously over the last
Speaker 1: half a year. We are now one ton of carbon
Speaker 1: gas emissions allowance is now I think trading at sixty
Speaker 1: sixty five euros and that's I think seventy eighty dollars.
Speaker 1: Maybe the global price I think it's around three dollars,
Speaker 1: So you can see the EU is so much more
Speaker 1: expensive for emissions. China created set up now in the
Speaker 1: summer late summer, its own trading scheme. They had something
Speaker 1: on the regional level, they were dry running it for
Speaker 1: a long long time, and now they started on a
Speaker 1: national level as scheme. And China as the biggest carbon
Speaker 1: emitter in the world, obviously, once they set up as
Speaker 1: such a scheme that could be a tremendous policied to
Speaker 1: to make a difference. They set their prices at the
Speaker 1: moment very low, but they now got the infrastructure to
Speaker 1: to change it if they want to. So this is
Speaker 1: now from now audits policy and they say, okay, we
Speaker 1: want to we want to start withdrawing free allowances. We
Speaker 1: want to drive up the price. And I mean that's
Speaker 1: that's two big regions. California has it. They are not
Speaker 1: as a country, they are a state in the United States,
Speaker 1: but they have one of the largest global cap and
Speaker 1: trade systems, and they are they are popular, but I mean,
Speaker 1: as I said earlier on their taxation versus cap and trade,
Speaker 1: I think it's equally balanced. Is what is implemented in
Speaker 1: countries and regions. And then relating to all this is
Speaker 1: you know, the EU, if you wants ago adapted a
Speaker 1: proposal for a carbon border adjustment mechanism to to place
Speaker 1: taxes on an uncertain imports in order to try to
Speaker 1: equalize things with countries where the regime might not be
Speaker 1: a strict and the US has had discussions about this idea. Also,
Speaker 1: what do you think cbams do they have a role
Speaker 1: to play in all of us? Absolutely? If you if
Speaker 1: you let's say, the whole word does nothing and you're
Speaker 1: the only country or region that introduce US and text.
Speaker 1: We've just seen that with the OECD organized Global Solution
Speaker 1: to and Minium Corporation text. If you increase the text,
Speaker 1: you are worried as a country, as a government that
Speaker 1: you lose international competitiveness. Businesses will move away, they go
Speaker 1: to the cheaper location. And in order to in a
Speaker 1: way stop that, you need to bring the prices up
Speaker 1: again so that important domestic producers and import us and
Speaker 1: face similar prices. That is what this border adjustment mechanism
Speaker 1: is all about. As an economist, I would say this
Speaker 1: is at most second best solution. It really is very
Speaker 1: good because it's very very complex and potentially impossible to
Speaker 1: implemented in practical terms. When you import something, let's say
Speaker 1: a European country import something from the US, the US
Speaker 1: product will not be entirely made in the US. We
Speaker 1: have global supply chains, so something will come from China,
Speaker 1: something will else come from South Africa. All of these
Speaker 1: countries have different carbon regimes. It's nearly impossible to get
Speaker 1: that right. And that's why countries have already moved on,
Speaker 1: or international organizations have moved on and said, okay, that
Speaker 1: this order adjustment mechanism is really is dealing with an
Speaker 1: issue which is a really big issue, but it's not
Speaker 1: a good way of dealing with it. There should really
Speaker 1: be a minimum global carbon price and then the countries
Speaker 1: should sign up to that. That could be different across
Speaker 1: advanced countries and emerging countries. Emerging countries probably need lower
Speaker 1: energy prices carbon prices because they're still developing, so but
Speaker 1: but countries should agree. Big countries, the big emitters, the
Speaker 1: ones which have which are responsible for most international trade,
Speaker 1: they should agree to set some minimum standard which would
Speaker 1: make that adjustment mechanism at the border redundant. That was
Speaker 1: Frank Issh, an economist with CRU speaking with Michael Rappaport.
Speaker 1: Before that, you heard Sanjia at Potnit with Brookings speaking
Speaker 1: with David Poot And that's it for today's episode of
Speaker 1: Parts pervillion. If you want more environmental news, check us
Speaker 1: out on Twitter. We used the handle at environment just
Speaker 1: that at Environment. Today's episode of Parts per Billion was
Speaker 1: produced by myself, David Schultz, with special help from Patrick
Speaker 1: game roseo. Pars per billion was created by Jessica Coombs
Speaker 1: and Rachel Dagle and is edited by Rebecca Baker and
Speaker 1: Chuck McCutcheon, and our executive producer is Josh Block. Thank
Speaker 1: you everyone so much for listening. The number of words
Speaker 1: in the tax code is estimated to be one million,
Speaker 1: about the same length as the entire Harry Potter series.
Speaker 1: Add in i RS, REGs, rev rulings and case law
Speaker 1: and it can be a lot. We all need a
Speaker 1: little help to sort it out. Each week on the
Speaker 1: Taxgral podcast, I talk to the best in the business.
Speaker 1: And these aren't crazy technical dives. They're interesting and easy
Speaker 1: to didest looks at topics that matter to you. It's
Speaker 1: all that you need to stay ahead on the most
Speaker 1: important tax issues. You can subscribe to the podcast for
Speaker 1: free ontaxdral dot com because paying taxes is painful, but
Speaker 1: hearing about them shouldn't be