Eco-Nomics: Carbon Taxes and Cap-and-Trade

An excellent primer on the similarities and differences and where the current legislation falls by Greg Mankiw in Sunday's New York Times. Here are the highlights:

During the presidential campaign of 2008, Barack Obama distinguished himself on the economics of climate change, speaking far more sensibly about the issue than most of his rivals. Unfortunately, now that he is president, Mr. Obama may sign a climate bill that falls far short of his aspirations. Indeed, the legislation making its way to his desk could well be worse than nothing at all.

Let’s start with the basics. The essential problem of climate change, scientists tell us, is that humans are emitting too much carbon into the atmosphere, which tends to raise world temperatures. Emitting carbon is what economists call a “negative externality”— an adverse side effect of certain market activities on bystanders.

The textbook solution for dealing with negative externalities is to use the tax system to align private incentives with social costs and benefits. Suppose the government imposed a tax on carbon-based products and used the proceeds to cut other taxes. People would have an incentive to shift their consumption toward less carbon-intensive products. A carbon tax is the remedy for climate change that wins overwhelming support among economists and policy wonks.

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What Mr. Obama proposed was a cap-and-trade system for carbon, with all the allowances sold at auction. In short, the system would put a ceiling on the amount of carbon released, and companies would bid on the right to emit carbon into the atmosphere.

Such a system is tantamount to a carbon tax. The auction price of an emission right is effectively a tax on carbon. The revenue raised by the auction gives the government the resources to cut other taxes that distort behavior, like income or payroll taxes.

So far, so good. The problem occurred as this sensible idea made the trip from the campaign trail through the legislative process. Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.

The numbers involved are not trivial. From Congressional Budget Office estimates, one can calculate that if all the allowances were auctioned, the government could raise $989 billion in proceeds over 10 years. But in the bill as written, the auction proceeds are only $276 billion.

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How much does it matter? For the purpose of efficiently allocating the carbon rights, it doesn’t. Even if these rights are handed out on political rather than economic grounds, the “trade” part of “cap and trade” will take care of the rest. Those companies with the most need to emit carbon will buy carbon allowances on newly formed exchanges. Those without such pressing needs will sell whatever allowances they are given and enjoy the profits that resulted from Congress’s largess.

The problem arises in how the climate policy interacts with the overall tax system. As the president pointed out, a cap-and-trade system is like a carbon tax. The price of carbon allowances will eventually be passed on to consumers in the form of higher prices for carbon-intensive products. But if most of those allowances are handed out rather than auctioned, the government won’t have the resources to cut other taxes and offset that price increase. The result is an increase in the effective tax rates facing most Americans, leading to lower real take-home wages, reduced work incentives and depressed economic activity.

Most people I talk to don't really understand Cap-and-Trade and think it just represents a loophole for polluters. No, but I agree with Mankiw that these permits need to be auctioned and not given away. In fact this article described the sentiment of most economists I talk to (of all political persuasions). The differences in opinion among my conversants are in how much they are willing to compromise in the face of political reality. Has the Obama administration bowed too much? I think the most unfortunate reality is that people just don't understand what it is and what giving the permits away v. auctioning them means and for this I applaud Mankiw for a lucid description. I think if people really understood what was going on, the energy industry would not be able to hijack this process and we would see auctioning.

Fred Thompson: Should Oregon Take the Lead on Carbon Taxes?

There are two kinds of tax buffs: monomaniacs and standpatters. The monomaniacs want to replace existing taxes with some theoretically superior, often untried alternative: land taxes, consumption taxes, or increasingly these days, wealth taxes. The standpatters generally believe that existing taxes, whatever they are, are pretty much OK, although they might allow for some tinkering at the margins. I am pretty much a standpatter.

Carbon taxes, however, simply make too much sense to be ignored, even by a standpatter like me. Taxes are generally nasty. When you tax something, you get less of it. Most of the things we tax are good things: employment, savings, investment, consumption, etc. Taxing them means that we get less of these good things. But Pollution is a bad thing. As Dale Jorgenson, Richard Goettle, Mun Ho, and Peter Wilcoxen explain in their book Double Dividend: Environmental Taxes and Fiscal Reform in the United States, taxing pollution means you get less of the bad stuff and, at the same times, get revenue that can be used to reduce the nastiness of the existing tax system. Moreover, the authors of Double Dividend don’t rest their case on this obvious point, they simulate the effects of environmental taxes on the U.S. economy using a highly plausible model that takes account of the heterogeneity of producers and consumers, as well as expectations about future prices and policies, to show that environmental taxes can be made to produce win-win outcomes for almost everybody in America.

Can we afford a carbon tax that would properly address the climate change problem? Mikhail Golosov, John Hassler, Per Krusell, and Aleh Tsyvinski, in an article forthcoming in Econometrica  “Optimal Taxes on Fossil Fuel in General Equilibrium,” make an equally plausible case that an optimal carbon tax would not seriously threaten economic growth. That, indeed, it would be no higher than the current carbon tax rate in Sweden, for example.

On Thursday, February 6, from 5-7 PM, I’ll be attending a panel discussion on “Should Oregon Take the Lead on Carbon Taxes?” The event is free and will be open to the public at Portland State University, Smith Memorial Student Union, Room 296/298. Participants will include: Michael Armstrong, Senior Sustainability Manager, City of Portland Bureau of Planning and Sustainability, Yoram Bauman, Standup Economist, Carbon Tax Expert, and Former Lecturer, University of Washington, Jackie Dingfelder, Former Oregon State Senator and Portland State University Ph.D. Candidate and Jenny Liu, Assistant Professor of Urban Studies and Planning and Assistant Director, Northwest Economic Research Center, Portland State University. I hope to see you there.

Eco-nomics: Global Warming

The science is solid, the evidence is real and the culprit is human activities - so says the National Research Council:

The compelling case that climate change is occurring and is caused in large part by human activities is based on a strong, credible body of evidence, says Advancing the Science of Climate Change, one of the new reports. While noting that there is always more to learn and that the scientific process is never "closed," the report emphasizes that multiple lines of evidence support scientific understanding of climate change. The core phenomenon, scientific questions, and hypotheses have been examined thoroughly and have stood firm in the face of serious debate and careful evaluation of alternative explanations.

"Climate change is occurring, is caused largely by human activities, and poses significant risks for — and in many cases is already affecting — a broad range of human and natural systems," the report concludes. It calls for a new era of climate change science where an emphasis is placed on "fundamental, use-inspired" research, which not only improves understanding of the causes and consequences of climate change but also is useful to decision makers at the local, regional, national, and international levels acting to limit and adapt to climate change. Seven cross-cutting research themes are identified to support this more comprehensive and integrative scientific enterprise.

The report recommends that a single federal entity or program be given the authority and resources to coordinate a national, multidisciplinary research effort aimed at improving both understanding and responses to climate change. The U.S. Global Change Research Program, established in 1990, could fulfill this role, but it would need to form partnerships with action-oriented programs and address weaknesses that in the past have led to research gaps, particularly in the critical area of research that supports decisions about responding to climate change. Leaders of federal climate research should also redouble efforts to deploy a comprehensive climate observing system.

So what to do? A carbon tax is the solution most economists favor, at least in part because if the relative simplicity. Here is Ed Glaeser on the current bill:

This bill is a behemoth for three reasons. First, it tries to do far more than just charge for carbon emissions. The bill starts by providing “incentives for the growth of safe domestic nuclear and nuclear-related industries.” It supports carbon capture in coal plants, expands offshore drilling, establishes an Office of Consumer Advocacy and promotes “clean energy career development.” Standard economics suggests that many of these interventions would be unnecessary if we had the right tax on carbon emissions; if companies pay the full social costs of their actions, they have the right incentives to invest in greener technologies without any further help from Uncle Sam.

The second reason that the bill is so big is that it uses a complicated cap-and-trade system rather than a simple Pigouvian tax. In theory, a permit system can be identical to a tax. Selling permits to emit carbon at $50 a ton is equivalent to taxing carbon emissions at $50 a ton. But tradeable permits, typically and as promulgated in the American Power Act, differ from a tax for two reasons: the quantity of permits is relatively fixed, and many permits will be given away rather than sold.

Fixing the number of permits may actually be the right thing to do. As my colleague Martin Weitzman wrote almost 40 years ago, quantity controls are better than prices if we are more certain about the right quantity than we are about the right tax. In the case of global warming, we may arguably be more confident that the amount of carbon should stay relatively flat than we are about the per-ton damage from carbon emissions.

Giving away permits rather than selling them is often defended as a means of ensuring that global warming doesn’t become an excuse for higher taxes. A carbon tax could easily get out of hand if the public sector starts seeing it as a solution to America’s budgetary shortfalls. Freely distributing permits seems to be crucial in building support for the bill, but the cost in simplicity is significant.

International trade is a third reason that this bill is so complicated, because we are trying to use domestic legislation to handle a global externality. If America charges for the carbon emissions involved in making an industrial product but our trading partners do not, then American producers will be at a competitive disadvantage.

Fred Thompson: Does Oregon Need a Mileage Tax?

Note: Another dispatch from Fred Thompson:


Oregon’s State Highway Trust Fund is broke. Options addressed by the Oregon Transportation Commission, the Governor's Office, and the Legislature aimed at fixing this state of affairs include raising DMV fees to recover the full cost of the products/services it delivers to Oregonians. By state law most of the division’s services are supposed to recover their costs; the remainder are supposed to make substantial contributions to the Highway Trust Fund. But, because the legislature has repeatedly failed to authorize DMV to increase its user fees, the DMV is instead costing the Highway Trust Fund over $100 million per annum. ODOT has also been looking at alternatives to replace the gas tax, now the main support for the Highway Trust fund, among these are a fee for studded tires, a leading cause of road wear, and a weight-use-per-mile tax for personal vehicles. Cars are becoming more fuel-efficient. Consequently, the gas tax isn’t keeping up our needs for highway construction and maintenance. A car that gets 60 miles-per-gallon is great for the environment, but it contributes substantially fewer tax dollars and as much highway wear-and-tear and congestion as any other car.

Oregon is a leader in the study of mileage-based taxes. It has long relied on a weight-use mile tax for commercial vehicles. And it began to develop a mileage tax for personal vehicles as early as 2001. The pilot programs it has conducted since then have garnered national attention in transportation circles. As Governing Magazine reports: “Many view the state as being on the cutting edge of transportation funding. A Congressional Budget Office report published in 2011 suggested a miles-driven fee as a viable alternative to the gas tax, and many national transportation experts have endorsed the idea too.” These pilot projects have looked at outfitting cars with a special-purpose GPS device that would tell them where they have been. The latest iterations rely on commercial GPS devices (like phones or navigation devices) or more simply a wireless device that would report mileage back to ODOT HQ on a daily or weekly basis.

A lot of folks don’t like mileage-based taxes. Blue Oregon’s Keri Chisholm calls them a “terrible, horrible, no-good, very bad idea that just won't die.” Keri grants that more money is needed to maintain Oregon’s transportation infrastructure, but, like a lot of people (although not a majority of the state legislature), he would prefer to increase the gas tax, 15 to 20 cents per gallon.

I like mileage taxes. Most people do as long as they remember that the tax is a charge for highway use, not primarily a means of deterring driving or harmful emissions. A good mileage tax would reflect axle weight and miles travelled, which, together with vehicle speed, constitute the main determinants of highway wear and tear. Ultimately, it would probably be advantageous to incorporate operating speed into the mileage rate. This would allow the tax to be calibrated to the damage a car causes to the State’s streets and roads, but would require something more than a simple report of miles traveled. Installing a system based on GPS data on highway usage, would also make it easier for ODOT to figure out when and how much maintenance state highways need and to allocate funds to municipalities and counties based upon the actual use of their streets and roads.

Of course, the critical advantage of a GPS-based mileage tax is that: "You can potentially calibrate the level of the tax to the degree of congestion on the particular road at the particular time of day, so the tax better reflects the changing externality associated with driving." In the longer run, congestion pricing would also be useful for planning for future highway needs. In my opinion, its potential use in congestion pricing is the best possible argument for building a GPS system.

Several reasonable objections have been raised against mileage taxes. The first is that vehicles licensed in other states would be exempt from the system. That is not now the case with commercial vehicles and occasional visitors to the state could simply be included in system by which we collect taxes on commercial vehicles. More frequent visitors would undoubtedly find it more convenient to plug into the state’s GPS system.

Second, “removing financial advantages of low carbon impact driving is antithetical to the health of our ecology and the direction our economy needs to go.” I have a lot of sympathy with this argument, but Oregon’s current gas tax is too low to have significant effect on carbon emissions, the state is the wrong entity to impose a carbon tax (although in the absence of national action, better than nothing), and abating greenhouse gases calls for taxing all sources at the same rate, proportional to the harms they produce, not just motor fuels. Moreover, there are substantial federal and state incentives aimed at persuading folks to substitute high mileage vehicles for gas guzzlers.

Third, giving ODOT the means to monitor our cars’ movements throughout the state would infringe upon personal privacy. Putting a GPS device in everyone's car is evidently upsetting to a lot of people. This seems silly to me. Most new cars already have such devices and many of us carry cellphones around on a regular basis. Is it safe for Verizon or GM to have access to the information produced thereby, but not ODOT? OK, I think we are a bit nuts about privacy in any case: that personal and corporate tax returns, information on children and families, and personal heath records are all private makes the formulation of coherent public policy nearly impossible. By my opinion here doesn’t matter. The fact is that it would be a simple matter to allow folks with serious concerns about their privacy to buy their way out of the system. 

There is one objection to this proposal, however, that really doesn’t make sense, that road use is the wrong tax base: “even people who don't drive are road users. Any type of commerce or business depends on our road network; every product we buy is shipped via roads at least partially. The idea that the cost of roads must be paid through a ‘user fee’ is silly. We are all road users.” That we are all road users whether we drive on them or not is absolutely true, but it is equally true that insofar as paying a road tax is a cost of doing business, the tax will be shifted to those of us who ultimately benefit from their use. But, in fact, this argument is irrelevant to the proposal under consideration, which is concerned exclusively with the use of personal vehicles. Oregon already applies a mileage tax to commercial vehicles.

Eco-nomics: Carbon Tax

Why do most economists favor a carbon tax as a way to address the harmful consequences of carbon emissions? Efficiency.

Here is a smart and succinct defense of carbon taxes over cap-and-trade by Ted gayer of the Brookings Institution, it was his testimony before the U.S. Senate Committee on Energy and Natural Resources on December. It is all about the incentives... [HT: Greg Mankiw]

1202 Carbon Tax Gayer

That said, cap-and-trade is a heck of a lot better than nothing, and a pretty good second best: I am not that convinced that the incentives problem Gayer talks about is going to be that important (the plant a tree so you can say you saved a tree - you are still creating one more tree which in this case stands for carbon reduction). Here is Paul Krugman's defense of cap-and-trade:

A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems.

This is true even if some emitters are “grandfathered” with free allocations of permits, as will surely be the case. They still have an incentive to cut their emissions, so that they can sell their excess permits to others.

The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story.

The key is reduced carbon emissions, cap-and-trade gets you there and appears to be the only thing politically feasible. The world is getting warmer as we speak, it is time to act.

Oh, and one last thing, if we are really going to address this problem, the wealthy countries are going to have to help out emerging economies.

Fred Thompson: Update on IP28

Fred Thompson checks in with a post on IP28. 

Monday morning (May 23) the Legislative Revenue Office released its report on Initiative Petition 28 – the proposal to levy a 2.5 percent tax on the Oregon sales of C-corporations in excess of $25 million. The LRO report is the closest thing to an authoritative, unbiased assessment of the proposal that we are likely to see. Its big takeaway is that IP28 would increase state revenue by a lot, about $6 billion in the next biennium. So, if you think that Oregon needs a lot more ($3 billion a year) of your (mostly) money for education, health, transportation, and other programs and activities, or, in the alternative, you think the grasping hand of the state is already getting too much of your hard-earned cash and dumping it down various rat-holes, that’s pretty much all you need to know.

If, however, you are concerned about the nuances of tax policy, this report should be of considerable interest, insofar as it addresses a couple of additional questions: who pays, and with what consequences for the growth and economic welfare of the state?

With respect to who pays, the main takeaway is that about 2/3s of IP28’s total tax burden, $2 billion, will be shifted forward to Oregon consumers. This is an amount equal to nearly one percent of all the goods and services produced in the state. As a point of comparison, that would be equivalent to a retail sales tax on goods of about 6 percent, although IP28’s effects would be more uneven and its incidence harder to suss out.

This is so, because the businesses that are responsible for collecting/remitting the tax account for less than 60 percent of the state’s commercial value-added, altogether about 25 percent of total state product. Consequently, one percent across the board implies an average effective burden in the taxed sector of approximately 4 percent. However, the actual burden would vary greatly across final products, with some drugs and packaged foods bearing burdens in excess of 7.5 percent, while most services and products would weigh in at less than one. Not surprisingly, the LRO punted on this issue, spreading the tax hike across the economy like peanut butter.

Who Pays for IP28 (OR Households)?

The LRO further argues that most of the remaining 1/3 of the total will be shifted out of state. Remarkably, it estimates that the U.S. Treasury will eat the lion’s share of this remainder, about $700 million, with the balance of the annual burden of IP28 split between capital providers (75-80 percent or >$200 million) and employee wages (20-25 percent, >$40 million). Like the LRO’s estimate of IP28’s dead weight loss (about $.5 billion), given their other assumptions, this estimate of the hit to federal corporate-income-tax receipts seems on the high side to me, but is entirely possible.

Which takes us to the other big takeaway from the LRO report: that the dead weight loss associated with IP28 is nearly $.5 billion per annum and is likely to increase over time, that it will cost 38 thousand private-sector jobs. This is huge – it’s about the number of jobs Oregon’s business workforce added last year. Since the LRO is working with a DGE model, this loss will be almost entirely recouped by increased government sector activities (of presumably equal or greater value?), so arguably, from the standpoint of the economy as a whole, it isn’t a big deal. Nevertheless, it seems hard to square with the notion that, while IP28 will hurt some businesses and help others, its net effect on capital suppliers will be trivial.

Many will say that the LRO report rebuts the claim of the proponents of IP28 that its burden won’t be passed along to consumers or, if passed on to consumers, since the businesses responsible for collecting/remitting the tax are all big national corporations, they will pass 99 percent of the mark-up on to customers out of state.

The second of these hypotheticals is clearly wishful thinking. In the first place, it violates two basic premises of economics: that businesses maximize free cash (after tax and interest) flows and that cross subsidization is contrary to profit maximization. Maybe these reasons are convincing only to economists, but they work fine for me. More persuasively, perhaps, this hypothetical is flatly contradicted by commonplace fact. Businesses everywhere add retail sales taxes and excises (like cigarette and gas taxes) to their prices, which vary accordingly from state to state. Where value-added taxes exist, businesses incorporate them directly into their prices, and, where jurisdictions levy different rates, as in Europe and Canada, prices reflect those differences. It is even the case that prices in Washington State vary according to their B&O Tax rates, the closest analog I know of to IP28.

The first hypothetical is trickier. The LRO doesn’t really show that most of the burden of IP28 will be shifted forward to final consumers; it simply assumes that, because it is a fairly broad-based tax on sales, that’s how it will behave. I sympathize: IP28 is sui generis – we have absolutely no experience with a tax exactly like IP28, from which we could extrapolate likely outcomes. None! In no other country, in no previous time. As I noted, the best analog to IP28 is probably Washington’s B&O tax; IMHO the LRO worked from the next best analog, Ohio’s gross receipts tax, owing to the availability of recent data.

The problem is that this may not be good enough. Big businesses have a lot of expertise when it comes to managing costs. They deal with cost increases like IP28’s all the time. What this means is that they find ways to avoid or mitigate costs, pass them on to others, customers or employees, or, if the business is worth it, and they cannot avoid the costs or shift them to others, eat them, but there is no guarantee that their Oregon business will be worth it, especially where low-margin, high-turnover businesses are concerned.

Nevertheless, if businesses cannot avoid the tax by means of smoke and mirrors or pass it on to their customers, as the LRO presumes, the real economic effects of IP28 will probably be bigger than predicted, and mostly negative; the revenue increase from IP28 could also be substantially smaller – i.e., more pain, less gain.

I am a cautious guy. I don’t like giant leaps into the dark, which is what IP28 is. Moreover, Oregon is already running one big policy experiment, the minimum-wage boost, which could interact with IP28 in a variety of ways, mostly adversely.  Of course, as Paul Warner, the head of the LRO, reminds us, state tax policy rarely if ever outweighs the main determinants of economic performance – the business cycle, exchange rates, productivity growth, etc. All true. So, maybe, my anxiety is misplaced. But some states – Kansas, Wisconsin, Oklahoma, Michigan – have experimented with big tax changes and managed, as a consequence, to shoot themselves in the foot.

Sen. Mark Hass

There are smart ways to boost state revenue: eliminate the PIT kicker, enact a carbon tax, broaden the weight-use-mile tax to comprehend passenger cars, adopt a real gross receipts tax (treating it as an alternative minimum tax for C-corporations) or a value-added tax, etc. This is not one of them. Besides, Oregon’s economy has performed relatively well over the past quarter century, much better on average than the rest of the U.S. Why tempt fate?

Obama Wants More Infrastructure Investment, Will Democrats Go Along?

NOTE: Once more into the breach from Fred Thompson.  The title refers to this piece by Kevin Drum. 

“The proposed Keystone XL project consists of a 875-mile long pipeline and related facilities to transport up to 830,000 barrels per day … of crude oil from Alberta, Canada and the Bakken Shale Formation in Montana. The pipeline would cross the U.S. border near Morgan, Montana and continue through Montana, South Dakota, and Nebraska where it would connect to existing pipeline facilities near Steele City, Nebraska for onward delivery to Cushing, Oklahoma and the Texas Gulf Coast region.”

I should acknowledge up front both that I am an infrastructure enthusiast and that I think Keystone XL is a very smart infrastructure project. Montana, North Dakota, and probably Alberta crude would sell for $20 a barrel more than it does now if it could be cheaply transported to Houston, Texas. A rough, quick and dirty calculation suggests that XL, which will move 800,000 barrels a day at low cost, would generate about $6 billion in net benefit per year; that’s a present value of approximately $120 billion (i.e., the size of Oregon’s annual state product). But like all big infrastructure projects Keystone XL has an environmental downside, in this instance arguably a very big one. James Hansen, for example, asserts that its effects would be both catastrophic and irreversible.

Most of the principled disagreement over the Keystone XL pipeline appears to reflect different counterfactuals. By principled I mean arguments that do not involve the rejection of anthropogenic climate change or denial that prudence requires that we take the possibility of catastrophe very seriously and take action to avert or, if that is not possible, mitigate its dimensions.

The key counterfactual has to do with what will happen if Keystone XL is not built. Opponents claim that the crude oil it would carry will remain in the ground, resulting in a net reduction in the output of greenhouse gases. Proponents believe that Canada’s tar sands will be exploited at more or less the same rate whether XL is built or no.

Can we bring some simple economic thinking to bear on this issue? Perhaps, but before that some context. First, nearly all of the crude oil exported from Canada will be refined and consumed in the United States. Second, most of the Canadian crude now consumed in the US comes here via pipeline and is refined in Oklahoma, Missouri, and Illinois. Relatively small amounts are shipped by rail, some all the way to Texas and New Jersey, but not much. A handful of fairly small pipelines carry oil from Alberta through British Columbia and Washington. Some of the crude they carry is refined in Washington State but most of it is shipped on to California. Third, Keystone 3, which runs from Oklahoma to Texas, will be completed this year. Consequently, because the refineries there can process the Canadian stuff much more efficiently, a lot of the Canadian crude now refined in Illinois and Oklahoma will soon go on to Texas. Fourth, Canadian crude going to Texas will replace Venezuelan, Mexican, and Nigerian crude that now arrives by ship. Expansion of the pipelines from Alberta to British Columbia and Washington would replace oil from the Mideast (where California gets most of the oil it refines).

Building Keystone XL also means that the crude oil produced in North Dakota and Montana, the bulk of which is now moved by train to refiners, would instead be transported by pipeline. Consequently, building XL would have the immediate result of reducing the amount of crude transported by rail in the US. Whether it would also forestall an increase in rail shipments from Canada to the US is more iffy.

Initially, many of Keystone XL’s opponents implicitly took the ‘no effect’ position. They argued that XL is unneeded, that XL’s only effect would be to make the route traveled by crude from Alberta to Texas less circuitous, and that existing pipelines and railroads have more than enough capacity to move Canadian crude to the US: “Keystone XL’s capacity won’t be needed until sometime after 2020 at the earliest and maybe not until after 2030.” Consequently, most of the opposition focused on XL’s threat to the Ogallala Aquifer and the environmentally sensitive Sand Hills area of Nebraska. It was only after Keystone changed XL’s proposed route to avoid the Sand Hills that opposition coalesced around the argument made all along by XL opponent James Hansen that “If this project gains approval, it will become exceedingly difficult to control … exploitation of tar sands [which] would make it implausible to stabilize climate and avoid disastrous global climate impacts.”

The crux of this claim is that extraction and use of fossil fuels like oil and coal are directly related to the cost of transport. “If a pipeline provides cheaper transport, it’s going to suppress the cost of fossil fuels, prolonging their use. The cost of transport and the price of fossil fuels cannot be separated.” With respect to oil from Alberta’s tar sands, “the payoff from getting bitumen out of the sand is very low, it has to be heated to make the oil flow. The acidity of the oil is high and it’s full of stuff that no one wants to burn. Lacking the pipe line, there won’t be enough margin to support moving the product by rail.” Clearly, at least some opponents of the Keystone XL understand that the relevance of transportation costs to the extraction and use of crude oil depends on whether its producers are marginal suppliers or infra-marginal suppliers and by how much. If they are marginal suppliers, transportation costs are critical, if they are infra-marginal suppliers, not so much.

What is the weight of the evidence on this issue? My reading of the evidence is that, at $50 a barrel, the tar sands would be marginal suppliers. At $100 a barrel, exploiting this resource is a license to print money, even if the cost to get it to refiners is >$20 a barrel. Right now Alberta is an infra-marginal supplier. That is also the case with respect to North Dakota and Montana. Of course, one can imagine contingencies in which things would be otherwise. The price of oil could drop, for example, or, some time in the future, producers may choose to exploit harder to access or process tar sands. Clearly, there are circumstances in which transportation costs would affect the exploitation and use of these resources, although it is hard to imagine situations in which they would matter as much as the development of production technologies. The bottom line is that success in the fight against greenhouse gases does not depend in meaningful ways on this or any other infrastructure project. 

What does the fight against greenhouse gases depend upon? The enactment of measures such as carbon taxes, the payoff to investments in alternative technologies, and, to a lesser extent, trade policy. How would a carbon tax work? A carbon tax would drive a  Investing in technologies that provide substitutes for coal and petroleum: conservation, solar and wind power, nuclear power, algal biofuel, even natural gas and methane hydrates, will further reduce the demand for fossil coal and oil. That’s the next most important thing we can do. At best, fights about infrastructure are sideshows; at worst, distractions from issues that really matter in the fight against pollution and global warming.

wedge between the price paid by consumers and the price received by producers, reducing both supply of (production) and demand for fossil fuels (consumption) and encourage alternative, less carbon intense technologies. For example, a carbon tax of approximately $50 a barrel would render Alberta a marginal supplier (assuming fixed technology) and go a long way toward preempting more intensive exploitation of this resource. It doesn't matter whether the tax is levied at the pump or on the producer/importer and it most emphatically doesn't matter what you call it, the incidence of an excise tied to carbon content would be the same, as would the effects on consumption and production. Enacting something like a carbon tax is the most important thing we can do to fight greenhouse gases.