An Internal Carbon Price for the City of Ann Arbor

Abstract

Carbon pricing is frequently cited as an effective and economically viable policy solution. However, few examples of carbon pricing programs, like a carbon tax or fee, currently exist at the local scale. Where entities might lack jurisdiction to implement a carbon tax or are otherwise constrained by budget, politics, or other resources, internal carbon pricing offers a solution. An internal carbon price allows an organization to put a price on carbon for its own energy consumption or production to reduce harmful emissions and demonstrate a commitment to sustainability goals. For this report, a carbon price refers to any program that applies a price to carbon emissions. Carbon fee is used interchangeably with carbon tax, both of which are used to refer to carbon pricing programs that levy a specific charge on a unit of emissions (e.g. one metric ton). The City of Ann Arbor’s Office of Sustainability and Innovations (“the Client”) recruited our team of four University of Michigan (“the University”) master’s students from the School for Environment and Sustainability (SEAS) to explore the impacts of and design an internal carbon fee program. The program would place a price solely on Ann Arbor’s municipal carbon emissions and is proposed to start in the upcoming 2021 fiscal year. This is a major step in achieving the city’s carbon neutrality goals, consistent with its landmark A2Zero plan. Over approximately 14 months, our team researched how to create an operable internal carbon fee program for the City of Ann Arbor. Using skills in economic modeling and data analysis, we modeled the energy, cost, and emissions impacts of a $5/metric ton fee on the City of Ann Arbor’s buildings and fleet emissions. We also put together a detailed program design and supporting materials to help kickstart the process in its first year. Researching this project required in-depth understanding of the economics of carbon pricing, the City of Ann Arbor’s internal operating structure, budgeting mechanism, and utility billing process. We began the process with a review of professional and academic evidence, and municipal data provided by the Client. We coupled the literature review with interviews with professional and academic experts in public policy, urban planning, and environmental economics. Following this initial research phase and through meetings with members of Ann Arbor’s city government, we created an economic model and a detailed process for the program. The economic model determines the fee owed by each department based on energy, natural gas, gasoline, and diesel consumption. The model also projects program revenue and expected emissions reductions as a result of the program through 2030. The program is designed to fit into existing city financial and operating structures to collect carbon fee revenue and allocate the funds back to departments to support energy efficiency investments. Under the $5/metric ton carbon fee scenario, we estimated that energy and fuel costs would increase by between 1.5 to 4.4 percent in 2020. The internal carbon fee would yield a 0.1 percent emissions reduction and generate $173,200 in revenue by the end of the first program year. With an annual incremental $5/metric ton increase in fee, the program would impose a $55/metric ton cost on emissions that results in a 7.4 percent emissions reduction and bring $1.2 million in gross revenue in 2030. We recommend for the Client to use the economic model to calculate each department’s carbon fee (i.e. program revenues). Finance and Administrative Services (“Finance”) would collect program revenues into an internal service fund called the Carbon Fund. The Client would oversee the Carbon Fund and determine the prioritization and use of funds. As a result of our work, we provide the following short-term recommendations to the Client: ● Pilot an internal carbon fee with a $5/metric ton starting price, beginning in FY2021. ● Work with the Finance department to create an internal service fund to collect fees from departments operating under the City’s General Fund. ● Calculate and apply each department’s internal carbon fee based on energy consumption and fleet fuel usage. ● Communicate internal carbon fee structure and fee impacts to each affected department using informational materials such as frequently asked questions (FAQ) documents or an energy report. ● Allocate program revenue to prioritize building energy audits, followed by the most relevant and important energy efficiency upgrades as determined by the audits and city needs at the time of investment. ● Following effective program implementation, explore potential expansion of the program to departments outside of the City’s General Fund. Our experience has also provided us with general takeaways and best practices for internal carbon pricing program design and implementation: ● Perform extensive background research into similar carbon pricing schemes before designing a final program. ● Accurately track and inventory all emissions within the project scope to support accurate price calculations and forecasting. ● Create a user-friendly model that allows employees to easily track the impacts of a fee on the system. ● Garner support from key stakeholders, establish clear rules for participation in the program, and integrate its functions into existing operating structures.