Yale to impose carbon tax on itself, led by the man who helped invent it

By Benjamin Hulac | 04/22/2015 08:19 AM EDT

Yale University will become one of the first colleges or universities to put an internal price on their carbon emissions, school officials said Monday.

Yale University will become one of the first colleges or universities to put an internal price on their carbon emissions, school officials said Monday.

After forming a university committee — chaired by William Nordhaus, the Yale economist who has studied the confluence of economics and climate change since the 1970s — Yale President Peter Salovey and Provost Benjamin Polak announced that the fee is slated to begin in the new academic year as a three-year pilot program, after which the carbon charge would fully kick in.

"The task force has provided a blueprint for a novel university-wide carbon charge program," Salovey and Polak said in a joint statement.

William D. Nordhaus
Yale University economist William Nordhaus. | Photo courtesy of Yale University.

"Its goal is to incentivize Yale to further reduce its carbon footprint in a way that is not administratively or economically burdensome," they said. "We believe that this proposal can serve as a model for other institutions."

In a call from New Haven, Nordhaus — whose brother, Robert, drafted Section 111(d) of the Clean Air Act, the provision upon which the Obama administration’s Clean Power Plan hinges — said this carbon tax proposal is the first such program he knows of and the most comprehensive in coverage.

"We didn’t see anything like this," he said of the proposed policy, which Nordhaus and his task force members will officially present this evening at Yale.

Sovereign governments and regions, such as Australia and British Columbia, have used carbon taxes — superior economic mechanisms to cap-and-trade systems, according to Nordhaus, who has called emissions-trading markets "second-best" to carbon taxes in part because they are complicated to implement.

The crux of a carbon tax, which economists across the political spectrum largely endorse in one form or another, is its use as a financial lever to shift social behavior.

A ‘sticker price’ on future energy costs

What Yale is doing, Nordhaus said, is adopting a mantra requiring departments and administrators to consider the complete sticker price that comes with constructing a new dormitory, for example, or expanding energy-intensive facilities.

"You can build it, but you have to pay the whole cost," said Nordhaus, describing the school’s carbon-taxing plan and calling carbon taxes "instinctive to economists."

Based on energy consumption, the program would levy a charge against university departments of $40 per metric ton of emissions. That $40 number is the current figure the federal government uses to estimate the social cost of carbon, a term describing the complete economic and societal costs underpinning greenhouse gas emissions.

The tax would rise 3 percent annually and be indexed to inflation. It would cover direct emissions from controlled and owned energy sources and greenhouse gas emissions from electricity, heat or steam that Yale purchased, known, respectively, as Scope 1 and Scope 2 emissions. (The committee highlighted indirect emission sources, categorized as Scope 3 items, such as air travel, construction, cement and rented cars, for future study.)

The university’s Scope 1 and 2 emissions add up to 300,000 metric tons of carbon dioxide, the report found. With these data, Yale’s carbon fee would be $12 million a year.

The carbon-charge task force chose the $40-per-ton fee because it seemed like the "philosophically correct" price to "minimize net damages"; it has been used a lot in federal regulations ("So it actually has some history," Nordhaus said); and other prices simply appeared "flawed."

The charge on emissions would be revenue-neutral, a facet that Nordhaus said can be difficult to explain, but broadly means proceeds are cycled back in deductions.

Under the proposal, particular Yale offices, colleges and departments would be measured and charged on their net emissions in comparison to past emissions, but the university overall would see zero or near-zero in carbon taxes.

"This means that units whose emissions grow slower than the average would receive a rebate," the proposal reads.

In 2005, Yale’s then-president, Rick Levin, set an objective to cut institution-wide emissions 43 percent by 2020 from 2005 levels. As of last summer, Yale had achieved about one-third of that goal.

Yale is also using its financial weight — with $25.4 billion in cash and investments, according to a report published last week by Moody’s — to make financially savvy and climate sensitive investment choices.

Teaching better investment decisions

In an letter addressed last summer to university money managers, David Swensen, Yale’s chief investment officer, told his team "to avoid companies that refuse to acknowledge the social and financial costs of climate change and that fail to take economically sensible steps to reduce" emissions.

Questionable investment targets, he wrote, include coal-producing firms, oil sands companies, businesses dependent upon coal power and operations with low-lying coastal real estate.

He even included some economics parlance, describing how including in investment strategies the externalities generated by carbon emissions — factors that escape modern economic pricing — "will create opportunities for profit."

Even in the absence of salient carbon-cutting governmental policies, Swensen wrote, "your consideration of the costs and risks of climate change should lead you to better investment decisions."

According to the Energy Information Administration, emissions and economic expansion, historically linked closely, split between 2013 and 2014 (Greenwire, April 20).

Carbon dioxide emissions increased 0.7 percent last year over 2013, yet the U.S. economy far outpaced that rate, growing 2.7 percent year to year.

Nordhaus has long said carbon pricing is vital to shift domestic and global economies away from carbon-intensive industries and growth.

"The basic idea is that we currently don’t penalize people, whether you or me or a firm or a university or a university club, when it emits a greenhouse gas like CO2 into the atmosphere," Nordhaus told an audience at the University of Chicago last April. "It’s free. There’s no charge on it. But in fact, it’s doing damage."

As for the plan he will present today, the economics professor said he is confident it will be in place in a few years, as long as the university moves prudently.

"I have no illusion that this is going to make a dent in the future of climate change," he said. But, he added, institutions like Yale shape economic markets and influence social policies.

"I think there’s a lot of excitement," he said of the on-campus atmosphere regarding the emissions fee. "If we don’t have carbon pricing, we will never solve this problem."