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18 April 2019

Carbon Tax for Germany, but US wants Carbon Capture front and center

Carbon Tax – some people hate the idea, others just dislike it intensely. And yet Germany is once again considering its introduction according to reports in Der Spiegel. The idea has been around since the mid-1990s and has been tried across Europe, Japan, South Korea, Canada, China and many other countries, usually with disastrous consequences.

With the exception of Norway, which has always claimed that its advanced position on renewables is partly down to its early imposition of a carbon tax, it has been an unmitigated disaster and there are reasons for this.

In some cases, such as Canada, it never got more than being in a party manifesto, and that party lost in a landslide. In others such as in France, it has been imposed, but it is not clear enough how it differs from other taxes and mostly this is the issue. If a country ring-fences the money raised by a carbon tax and spends it on decarbonizing the country, it can be a source for good, but that has only happened in a handful of cases.

Most people worry that it will just become a source for inflation and a way of upsetting the population and getting the government voted out of power. Most efforts have been around taxing the carbon content of transport, heating and electricity generation. What needs to happen is the processes of how we transport, heat and make electricity need to change, not for taxes to be passed onto consumers.

In an ideal world you would tax all carbon. So for a smartphone made in China, you would tax its transport to Europe or the US, for a desk made of South American hardwood, you would tax its transport from South America. So for coal dug up on Germany and burned in China, you would tax the electrical efforts of digging it up, the transport to China and the burning, each separately.

That would go a long way to changing the world as we know it, and reverse the impacts of globalization that have come from the World Trade Organization. China would no longer be the cheapest manufacturer in the world, because of the double whammy of adding multiple layers of carbon tax to its cheap wages. It could lead to local manufacturing becoming viable once again.

But we know this would not work, because no-one is going to try it. In a funny way the tariffs that the US imposes on China, are a little like this, except that the revenues raised are not spent on improving renewables in the US, they just go into government coffers. Even renewables could be taxed, but it would not raise very much. Companies that sell Wind farms often set up local manufacturing deals so that the turbines do not travel from one continent to the other. So there would be precious little transport to tax.

Instead most past efforts have ended up not taking profit from the coffers of rich extractive companies, but instead payment has been transferred to consumers. Or there has been a cap and trade option that has allowed a fuel supplier to get out of their obligations to cut emissions, on the open market. The chances are that this German effort will make many of the same mistakes. Although the more we learn about what works in carbon taxation, the more likely one country will get an enlightened approach right, and it could become infectious to its neighbors.

If we look at France which has a carbon tax of sorts, we see it really as a tax on the common traveler, and the actions of  “Gilets jaunes” (yellow vests) last year against the rise of gas prices, led to President Macron announcing the latest round of carbon tax increases would be cancelled. This is a clear lesson to Germany that taxing fuel, and letting the prices of fuel rise, can lead to mass public protest. And critically it must be part and parcel of a “manifesto” that votes can buy into before a government is in place, where the spending is ring-fenced to accelerate the response against global warming, and promise that it will be removed once that threat is under control.

Der Spiegel magazine said that a council of economic advisers had been asked to investigate a possible system for pricing CO2 emissions. In almost all cases where a carbon tax has been even marginally successful, it has been accompanied by a series of tax cuts for the worst affected consumers. Germany is understood to also be considering not just the carbon tax, but preparing aid packages for the coal mining and coal power plant regions. The whole thing won’t make much sense if Germany collects €10bn on carbon tax and spends €25bn in regional aid.

Meanwhile in the US, the precise opposite approach is being pushed, that of taking the carbon out of fuels at the point they are burned. Several US senators are pushing for funding to accelerate the development of carbon capture technology.

Carbon capture is usually associated with fossil fuel companies who want to pretend they are doing something about CO2 emissions, but actually deliver perhaps a 10% reduction, no more.

The aim is to get the Department of Energy to provide direct research funding. The idea always tends to be “Let’s not grasp the nettle and change our industries by using renewables, when we can invent a technology which will let us remain as we are.”

Senators from both of the major US parties look like they have been put up to this by gas, oil and coal interests. They wrote a letter to the Appropriations Subcommittee on Energy and Water Development calling for more carbon capture investment, when there is already quite a lot.

The letter was signed by John Barrasso, Michael Bennet, Christopher Coons, Kevin Cramer, Steve Daines, Tammy Duckworth, Cory Gardner, Tim Kaine, Angus King, Joe Manchin, Jon Tester and Sheldon Whitehouse, a mixture of Republicans and Democrats.

But despite this being a last-ditch idea from those sympathetic to the extractive industries, if it works to curb global warming, who cares? Each country has to solve this their own way, right?

The issue remains that coal plants, which are already more expensive than wind farms, in terms of lifetime cost per kWh, will become more expensive, if they have to pay for Carbon Capture, and as a technology this would not be viable long term, as it would only work with existing “sunk costs.” The same for Gas turbines, but that cost advantage is less clear cut and gas may emerged unscathed or less so.

The “sunk” cost of building these plants, could mean that they are cheaper or at least as cheap as renewables, and with the addition of carbon capture they could see out their useful life, while not adding to the carbon problem.

However it is more likely a thinly disguise backdoor attack on renewables so that once a viable Carbon Capture technology is established, the need for renewables is not obvious or apparent. That would leave the entire industry unchanged, with the same companies in pole position for making incredible profits, by tying up exploration rights.

So something like this has to be viewed with huge suspicion, and any technologies that come out of it need to be measured carefully, so that no sneak emissions remain uncounted in the formula or the industry becomes laissez faire about getting on and installing such technology, leaving us with much the same problem.

We like the idea of a carbon tax OR carbon capture where a government taxes whatever carbon is left being emitted. But in the US right now that’s not a political possibility.

The logic behind this move fits well with recent statements from gas turbine major GE, which maintained that it should not change direction yet, and over-emphasize renewables, because it sees lots of life left in gas turbines.

There are already two federal programs on carbon capture research getting close to $200 million in funding between them. This entire pitch looks to us like a muted response to the Green New Deal, but one around which Republicans can rally, so possibly politically more likely to gain backing.