James Hansen has again been lecturing Congress on the virtues of tax-and-dividend. I’m no policy expert, but neither is Dr. Hansen, so I’m going to share some of my own amateur observations for the benefit of fellow Grist wonks.
Hansen did some calculations and came up with the following dividend estimates for a $115/ton (equivalent to $1/gallon) tax:
Single share: $3000/year ($250 per month, deposited monthly in bank account)
Family with 2 children: $9000/year ($750 per month, deposited monthly in bank account)
Wow! Free money! That sounds enticing. Of course, the money has to come from somewhere, so people’s energy costs would, on average, increase by the same amount. But with that much money sloshing around there are bound to be huge inequities. For example, I live in northern California, where we have a mild climate and little coal power, and I don’t need to drive much, so I might see my net income rise by maybe a couple thousand dollars. That would be nice, but folks back east who are paying more wouldn’t like it one bit.
The tax rate and dividend should increase with time. ...
[The tax rate should increase until fossil fuel energy is not competitive with clean energy.]
Nothing’s going to happen until the tax rate is high enough to overcome the price barrier. Once it does, there will be a “tipping point” at which clean energy will start to overtake fossil fuels and a variety of positive feedback mechanisms (competition, technology, economies of scale, learning by doing) will make the transition self-sustaining and gradually less dependent on price supports. So what is needed is a high price incentive right away—not a gradually escalating incentive.
However, a high price incentive does not imply a high tax; it is possible to have an initially high and declining carbon price incentive implemented through an initially low and increasing carbon tax.
The dividend would put money in the hands of the public, allowing them to purchase vehicles and other products that reduce their carbon footprint and thus their taxes.
It’s not that simple. Vehicle owners don’t think much about fuel costs when they make purchasing decisions, so an effective policy would shift the monetary incentive into vehicle prices (e.g. via feebates). Suppose that were done, so that gas guzzlers in a particular vehicle utility class were subject to a $2000 carbon tax, while comparable hybrid vehicles with half the fuel consumption were only levied a $1000 tax. The $1000 price difference would cause buyers to favor the low-emission vehicle, and their carbon dividends would be more than sufficient to offset the $1000 tax.
Rather than routing the monetary incentives through dividends, an alternative approach would be to simply apply gas guzzler taxes to directly subsidize low-emission vehicles. For example, a $500 tax on the guzzler, which finances a $500 subsidy for the hybrid, would result in the same $1000 price differential and the same incentive for the hybrid—but without the complications and distributional inequities that would be created by an economy-wide carbon tax.
Better yet, keep the tax at $2000, and use it to fund a $2000 subsidy. Now you’ve got a $4000 price differential in favor of the hybrid.
Actually, that’s a little over-simplified. If hybrids make up a small market fraction—say, 10 percent—with guzzlers making up the other 90 percent, then a guzzler tax of only $400 could fund a $3600 hybrid subsidy, again yielding a $4000 price incentive.
Well, why not take it a step further: At a 10 percent hybrid market share, keep the tax at $2000 and increase the subsidy to $18,000!
Okay, that’s going overboard, but the point is that a very modest tax can create a comparatively huge price incentive immediately, while the hybrid market is in its nascent stage. As the hybrid market grows, the tax might increase to unreasonable levels to maintain the same price incentive, but by that time hybrid technology will have become cheap enough that the incentive can be diminished or even eliminated. (The same principle would apply to other industries like electric appliances and power generation.)
The broader point is this: If carbon tax (or allowance auction) revenue is applied directly and specifically for its intended purpose of reducing the taxed industry’s carbon emissions, and is not squandered on free handouts (“dividends”), then it is possible to create immediate and substantial price incentives far greater than anything that tax-and-dividend lobbyists (or cap-and-traders) have in mind.
If we want use dividends to give consumers an equity stake in decarbonization, we could do so by investing carbon tax revenue in renewable energy and clean technologies in exchange for equity, and distributing equity shares to the public on a per-capita basis. Those shares would yield dividends that increase—not decrease—as carbon is phased out.
[revised 3/2/2009]
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Sean Casten Posted 3:19 am
02 Mar 2009
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Anthony Posted 3:27 am
02 Mar 2009
I came, I saw, I cried
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David Roberts Posted 3:35 am
02 Mar 2009
After all, Ken isn't talking about Congress handing out money to favored industries. Just like feebates, this would be an automatic transfer of money, inside an economic sector, based on objective performance standards. No legislator would ever have his/her hands on this money. So the incentive would be better performance, not better lobbying.
grist.org
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Bikechess Posted 3:58 am
02 Mar 2009
It may be "unfair," but living in a non-temperate climate means a bigger carbon footprint. A direct price on carbon would signal this loud and clear - and it should...
And vehicle owners DO think about gas prices. I think the summer's shift in purchasing patterns is evidence...
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Ken Johnson Posted 4:07 am
02 Mar 2009
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Gar Lipow Posted 4:28 am
02 Mar 2009
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Ted Clayton Posted 4:32 am
02 Mar 2009
"We don't want no stinkin' cheap books!
Hybrids today are the same deal: over-built and sexed-up deliberately to keep them a high-end product - same business-strategy that Gutenberg used.
... Whereas hybrids are actually, like airplanes, an inherently simpler, more-flexible, adaptable, interchangeable ... cost-lowering vehicle 'philosophy' - like the printing press.
To keep hybrids expensive, takes work. Hybrids are expensive, because powerful interests fear the inherent cost-reduction of the fundamental approach.
To get America out of gas-guzzlers, the Government should throw a competition to design a low-cost hybrid, aimed at the low end of society.
Hoity-toity people don't want no stinkin' cheap hybrids. No, they want a symbol of their social superiority. And car-companies are happy to oblige them ... for the proper 'consideration'.
Screw 'em. Let the government hold the competition to make a po' folk's hybrid - then offer assistance (if necessary) to get the winning design up on it's feet & running.
Probably, an existing company would see the wisdom of going cheap-hybrid (once it couldn't be prevented..), "Well ... if'n you put it that-a way...".
What we have currently is a BS game. Hybrids are Ooh-La-la!, and spendy, and all the parties in a position to change the situation are 'shining it on'.
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GreenMom Posted 4:33 am
02 Mar 2009
Various feebate ideas has been around for a while, but maybe now we finally have a chance to get something enacted...
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Gar Lipow Posted 5:48 am
02 Mar 2009
Also when you talk about recycling the money back into emissions reductions:
Fine for things like automobiles. Not so good if done generally, because even then you end up with things you want to do depending on things you don't want to as a source of revenue. Even with automobiles, you might end up with a lot autos that are just efficient enough not to get taxed, followed by an abrupt drop in the subsidy for electric cars, followed by a lot of electric car companies going out of business. A reason not to overdo subsidies. You want subsidies to help break chicken/egg deadlock. You don't want to create industries so dependent on subsidies, they collapse when the subsidies are reduced or eliminated.
Also, why is always more efficient to direct revenue from a carbon tax or feebate into the same sector? Suppose you tax the electric industry on emissions per kWh. OK, well maybe a good place to spend that is electric industry: solar or wind or generating electricity from waste heat. But maybe it makes more sense to use that money to weather seal homes. That saves some electricity directly, and it also saves natural gas that can then be used as a replacement for coal in electricity generation.
If you moved from specific products to sectors maybe you could generalize it. Fees for homes and offices that emit above a certain level per person or per square feet, subsidies for weather sealing and duct sealing, and insulation, and window treatments, and efficient lighting, appliances and office equipment, and subsidies for solar space and water heating and for ground source heat pumps. Feebates in transport based on emissions per passenger mile and per ton mile. Feebates in electricity based on emissions per kWh. Ironically, the one sector we do NOT have a good proxy , that is a good what in the emissions per what equation is manufacturing. I know Sean thinks emissions per delivered BTU work process is such a proxy, but he overlooks that there are a lot of ways to reduce emissions per dollar of output that this does not capture. In manufacture of high quality steel for example, beyond heat per ton of steel, there is near net shape manufacture of steel, which reduces scrap during manufacture, and thus ends up with more USABLE steel per unit of emissions. Also there is not just a question of scrappage of raw materials incorporated in products, but scrappage (as opposed to use) of materials used in manufacturing process not incorporated in product. Spills, emergency flaring and so on. Plus of course scrapping finished products due to various avoidable problems (for example not adequately inspecting raw materials, and not adequately controlling processes.) 8% to 16% of industrial emissions could be reduced just by feasible reductions in avoidable scrapping, about a 1/4th to 1/2 of savings from Tom Casten's estimate of maximum feasible savings from recycled energy. And that does not even consider other forms of changes in material intensty: reduced use of materials, reduced use of high carbon footprint marterials, increased product lifespan. Nor does it consider changes in process once material choice and lifespan are optimized that can reduce BTUs needed to drive a particular result as opposed to just delivering BTUS to that process more efficienctly.
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Ken Johnson Posted 8:24 am
02 Mar 2009
The general principle is that the tax is applied to emissions (at a uniform dollar-per ton rate) and is refunded in proportion to emissions-related economic utility (e.g., per vehicle, if they are in the same utility class). There should be no "abrupt drops" or discontinuities in the tax/refund formulas. Marginal incentives for emission reduction are determined by the tax rate (aka. "emission price"), but with the refund a high tax rate does not imply high net taxes. Initially, net taxes are low and net subsidies are high, but as clean tech displaces fossil fuels the revenue-neutral allocation formula automatically shifts to high net taxes and low net subsidies.
Keeping revenue neutrality within an industry, or even within sub-sectors within an industry, can in some cases avoid massive and economically destabilizing revenue flows that would make a high tax rate impracticable without providing any real emission benefit. For example, if pure output-based refunding were applied to electricity generation, most of the revenue flow would go to legacy renewables (large hydro, nuclear). That may be fine if those sectors have capacity for expansion to displace fossil fuels. But if they don't, the subsidy diverts resources from new renewables, which could be scaled up much quicker and cheaper if the subsidy shift were focused on new renewables.
Economy-wide policies (tax or otherwise) are intended to reduce the cost of achieving near-term targets and mandates, but can increase long-term costs of climate stabilization. The economic theory behind such policies essentially rationalizes procrastination. For example, investing in weather stripping might be able to achieve a marginal 1 percent reduction in coal use more cheaply than installing wind turbines, but to achieve 100 percent reduction in coal we will have to make a heavy investment in renewables sooner or later -- better sooner if there is to be any hope of attaining climate stabilization. Don't pick the "low-hanging fruit" first if the best, ripest fruit is up high.
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Gar Lipow Posted 12:00 pm
02 Mar 2009
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biodiversivist Posted 12:32 pm
02 Mar 2009
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Sam Carana Posted 12:39 pm
02 Mar 2009
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Gar Lipow Posted 2:25 pm
02 Mar 2009
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Ken Johnson Posted 2:48 pm
02 Mar 2009
One problem that I have with the feebate approach is that it generally involves revenue transfers that shouldn't be necessary for carbon reduction strategies that have no net cost. For example, if weather stripping saves more money in reduced heating bills than it costs, why should it be necessary to spend carbon tax revenue on weather stripping? Utilities can provide homeowners financing for energy efficiency, and can recover their costs through utility bills, but customers will still be making money on the deal.
The same principle applies to vehicle regulations. For example, California's Pavley regulations have projected average technology costs of about $50/ton (and marginal costs of about $150/ton), but the costs are outweighed by projected benefits (fuel savings) of over $400/ton (see here - Table I-2). If regulatory incentives are constructed to simply internalize relative fuel costs or savings in vehicle purchase prices, then there may be no need for fuel economy standards or revenue transfers (via feebates or emission trading).
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Gar Lipow Posted 1:57 am
03 Mar 2009
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David Roberts Posted 3:44 am
03 Mar 2009
grist.org
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Sean Casten Posted 4:16 am
03 Mar 2009
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Gar Lipow Posted 5:01 am
03 Mar 2009
Of course in terms of effectiveness I'm pretty sure straight regulation beats output based standards. A simple ever tightening regulatory standard for total emissions per kWh within each utility district will have the same results. And most electricity is produced within utility districts large enough to provide plenty of flexibility in terms of path take to achieve reductions. If compliance within a single district did not allow enough flexibility you would allow utility disticts to voluntarilty combine into compliance superdisticts to let them achieve compliance across multiple districts.
Also straight emissions standards per kWh rather than an output based system in this case achieves the same advantage David attributes to cap-and-trade over carbon taxes: certainty in amount of reduction rather certainty of emissions price.
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Ken Johnson Posted 5:20 am
03 Mar 2009
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Ken Johnson Posted 5:36 am
03 Mar 2009
Why not cut to the chase and set a regulatory standard of zero emissions? Well, because we are more concerned about costs than about emissions. So how do you set your regulatory targets to ensure cost acceptability, given that you can't reliably predict future costs? You base them on worst-case assumptions, biased toward extreme cost conservatism. And when costs turn out be lower than expected (and benefits higher), you find that your regulations are not motivating emission reductions commensurate with our willingness to pay, not to mention sustainability requirements. But because regulations are so inflexible, you need an Act of Congress to tighten them.
With monetary incentives (e.g. taxes, feebates) you set the price incentive by direct regulation. If technology turns out be be cheap, you get lower emissions, not price collapse. No Act of Congress required.
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Gar Lipow Posted 7:14 am
03 Mar 2009
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BILL HANNAHAN Posted 8:31 am
03 Mar 2009
We could start by charging the first generation cost of having more than two children. The full lifecycle emissions of a newborn infant are far greater than from an SUV.
Things Everybody Should Know About Energy
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Peter Dorman Posted 11:39 am
04 Mar 2009
There are three legs for carbon policy: regulation, investment and an economy-wide cap/tax. Hansen prefers a tax; I prefer a cap. In a world of certainty (we know exactly how much tax equals how much emission reduction) the two would be the same. We don't live in that world, so the burden of uncertainty has to fall one way or the other. Hansen would put it on carbon emissions, I'd put it on carbon prices; otherwise we're in sync. In any case, the third leg is not intended to do the whole job but just to make sure that the job gets done.
The cap/tax needs to be as simple as possible. The goal of this leg is to fix in place as a requirement the achievement of our overall carbon target, so have a single cap/tax for the whole thing. Just one, applied across the board. No fiddling with this product, that technology, etc. If it's a tax, say $x per ton of carbon introduced into the economy, period. If it's a cap, specify the number of permits for introducing carbon into the economy and auction them all off. Leave all the detailed consideration of how we save carbon where to regulation, investment and markets.
The tax/cap is a sales tax. Sales taxes are regressive. But give the money back to the public as a dividend, and the majority of people will come out ahead. In particular: (1) Don't fund green investments out of a national sales tax. Don't be regressive. (2) Care about the living standards of ordinary people. Lots of folks are barely making it or not at all, especially in the current economic situation. Don't raise their energy taxes and leave them to suffer the consequences. Give them the money back. (3) We are talking about a carbon diet that the country must adhere to for at least the next 40 years. It has to be politically untouchable, like Social Security. (Bush tried to junk it but couldn't get anywhere.) If you don't give the money back you will have to depend on the willingness of political majorities, year after year after year, to willingly tighten their belts for the green cause. I'd rather up the odds by adopting a policy that goes out of its way not to hurt people.
Repeat: we need lots of targeted policy in housing, transportation, manufacturing, agriculture. This is not the role of the cap/tax, although it does provide an appropriate incentive environment for policy. (Think how much easier it will be to get voters to support bonds for mass transit when gas is really expensive.) So we don't need fine-tuning on carbon prices, just a single, big, emission-reduction-forcing boost will do it.
Peter
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F James Handley Posted 1:55 pm
04 Mar 2009
See Hansen Tells Ways & Means: Revenue-Neutral Carbon Tax Needed to Spur Clean Technology Revolution.
I am intrigued by Ken's idea of investing "dividend" money in the green economy, especially renewable energy. Since the "dividend" would presumably be income-taxable, maybe a way to encourage investment would be to allow people to invest and defer taxes (like an IRA) in an approved fund for clean energy capitalization. That would allow those with discretionary income to make green energy investments, providing a pool of capital, while not hurting those who need their "dividend" money immediately.
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Sortition Posted 2:34 pm
06 Mar 2009
A policy built on subsidizing hybrids and similar targeted subsidies would be problematic on several fronts. Here are a few issues I came up with while eating a small, nutritious snack:
"Green subsidies" is not a comprehensive policy but a patchwork of ad hoc solutions that would not give consumers, producers and innovators a clear and predictable system of incentives to reduce carbon emissions and develop green technologies.
It is open to manipulation as various special interests would lobby for subsidies.
The benefits of many such subsidies would be hard to analyze in advance and would be open to debate. Your suggestion of subsidizing hybrids, for example, could be very problematic. E.g., it would encourage buying cars - hybrids, but still cars; replacing conventional cars for hybrids carries the cost of producing the hybrids; buying hybrids locks society into the private car transportation mode; for people spending much of their driving time on the highway a hybrid does not significantly increase efficiency.
While the costs and benefits of tax-and-refund clearly flow from people who pollute less to people who pollute more, it is hard to control how the costs and benefits of the subsidies will be distributed. For example, people who use public transportation would not be rewarded, while people who already own a gas guzzler would not be penalized. If R&D is eligible for subsidies, various industries could use the subsidies to fund their research and development projects, socializing the costs and privatizing the profits. If R&D is not eligible for subsidies, the subsidies would entrench existing technologies, deterring development of new ones.
"It is democratic for public offices to be assigned by lot, for them to be elected is oligarchic." -Aristotle
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