In last weekend’s New York Times, conservatives Rep. Bob Inglis (R-S.C.) and Arthur Laffer had an op-ed claiming that a revenue-neutral “tax shift” would make conservatives “the new administration’s best allies on climate change.”
Color me skeptical. Laffer, of course, is a conservative legend, an economist whose curve has given a great many mendacious right-wing legislators intellectual cover in the war on taxes. Inglis is best known for telling Mitt Romney that Mormons aren’t Christians.
It’s notable when prominent conservatives don’t try to deny or downplay climate change. But that’s a mighty low bar to clear these days.
There is a crucial bit of weasel wording here: “If the bill’s authors had instead proposed a simple carbon tax coupled with an equal, offsetting reduction in income taxes or payroll taxes, a dynamic new energy security policy could have taken root.”
It matters a great deal whether a carbon tax reduces “income taxes or payroll taxes.” Energy taxes are generally regressive unless offset. Reducing payroll taxes would provide some progressivity; reducing income taxes would provide additional regressivity. (Many workers pay no income tax at all.) You can bet conservatives would love that. “The good news is that both Democrats and Republicans could support a carbon tax offset by a payroll or income tax cut,” they say. Everything’s in that “or.”
As with many carbon tax fans these days, Inglis wildly overstates the effects of a modest price on carbon:
Nuclear power plants would then compete with coal-fired plants. Wind and solar power would have a shot against natural gas. Trains would compete with trucks. We would clean the air, create wealth and jobs through a new technology boom and drastically improve our national security.
The market-driven innovation that brought us the internet and the personal computer could quickly bring us new, cleaner fuels. A carbon tax that was fully offset (with payroll or income taxes cut by a dollar amount equal to the revenues generated by the new tax) would be as bold as the threat that we face.
“As bold as the threat that we face”? No. It might be bold in today’s political climate, but it is nowhere close to addressing the threat we face. A carbon-negative U.S. by mid-century is as bold as the threat we face. A modest ($15-25) carbon tax is a tiny, tiny step in that direction.
First, we have to remember all the places the price signal created by an upstream tax can be diluted or stymied on the way to consumers—i.e., those who can change their behavior in response to prices. Not every industry or business will pass an increase in operating costs directly on to the next link in the chain. Information failures and split incentives abound. Price signals that begin strong, catholic, and clear become fragmented and faint downstream. For all the hype, an upstream carbon price will deliver fairly little incentive to where the carbon is used—and where opportunities to switch to low-carbon alternatives are most plentiful.
At least, not until you crank the tax up fairly high. How high do you think you could get it before your “best allies” Inglis and Laffer jump ship? High enough?
Second, trains wouldn’t “compete with trucks” unless somebody laid rail. Many if not most carbon-reduction strategies are hostage to infrastructure. You can’t take trains without rail networks; you can’t double renewables without improving the grid.
This is to say—yet again!—that private sector price signals are only one part—perhaps not the biggest part—of a serious climate/energy strategy. You also need massive public investment and performance regulations.
Will Inglis and Laffer (and their conservative brethren) be the administration’s “best allies” in its efforts to pursue investment and regulation? Will they defy decades of conservative “free market” orthodoxy and deep-rooted ties to industry? Again, color me skeptical.
I’ve changed my mind a number of times over the years about what it’s going to take to get serious action. Currently I’m of the opinion that it will take a propitious confluence of a terrified public and a governing coalition of liberals and moderates. Conservatives are going to be bystanders at best, impediments at worst. I’d say history will judge them harshly for it, but there are always people like them doing things like they do, so history’s judgment must not be much of a deterrent.
Carl Levin (D-Mich.) [UPDATED]
To unlock wind power, put a price on carbon
Is the U.S. Chamber changing its tune on climate, or just its tone?
Comments
View as Flat
Max8806 Posted 7:46 am
05 Jan 2009
I keep seeing this point here but its not valid. "Chang[ing] their behavior" is exactly the point of a carbon price, not some shady means around it. Especially with electricity (which will become more synonymous with 'energy' over time as transport is electrified), elasticity of supply is greater than elasticity of demand. That's not a problem just reality. To the extent that carbon isn't reduced but price increases aren't passed along, that decreases profits and reduces investment in that dirty product. A carbon price may not be the be all end all but this argument is baseless.
Secondly, better market design could obviate the need for much public investment in the grid. I'm not saying no public grid improvement is necessary, but I think most people here don't fully appreciate what private actors could be motivated to do (with their own private at-risk capital without putting taxpayers on the hook) if they had an incentive to do so. As an example, energy storage is often phrased as a problem of renewables. Its not, its a grid problem. A grid that purchases "energy" frequency regulation as two separate products incentivizes development of energy storage, or any other means of ensuring grid reliability with more variable energy supply. Further development of the organized markets (e.g. ISO-NE, NYISO, PJM, etc) would more efficiently accomplish this, but this requires some to get over their fear of markets and desires that everything energy be hostage to marginal cost-based payments.
One company just developed a flywheel (a sort of mechanical battery) which they have contracted to provide these ancillary services to some of the organized markets.
http://video.energypolicytv.com/displaypage.php?vkey=9d32 ...
Max Epstein
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Adam Stein Posted 7:56 am
05 Jan 2009
I'm not totally sure where we get this fixation with consumer behavior. Americans are 69%corn not because they eat tons and tons of corn of the cob. It's because everything they eat is in one way or the other derived from corn, which in turn is a consequence of the fact that corn is heavily subsidized. Likewise, all the stuff we consume is made out of carbon, because today that's where energy comes from.
Pricing carbon isn't just (or even primarily) about getting consumers to change their behavior. It's about getting carbon out of the supply chain.
(By the way, I don't disagree with the larger point of this post. I just keep running across this formulation of what carbon pricing is about, and wish it would stop.)
www.terrapass.com/blog
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racc Posted 8:09 am
05 Jan 2009
More at: http://everyoneforever.org/blogger/
It is not about us, it is about everyone.
http://www.everyoneforever.org/
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David Roberts Posted 8:43 am
05 Jan 2009
Take coal. You tax coal where it's mined -- that is, you tax coal mines. Starting from there, you have "consumers" in the broad (and infelicitous) sense I meant: utility buys coal from mine company; business buys power from utility; consumer buys product from business.
Coal mine owners cannot change their behavior to reduce their carbon footprint without going into another business. So to get behavior change you need them to pass along the price signal to the next link in the chain. But what if, for any of a dozen reasons, they just eat the increase in opex? Make marginally less money for their shareholders? Cut costs elsewhere? There goes your signal. Similarly for every link down the chain.
Perhaps coal mines will become a slightly worse investment if the profits take a hit, but will that signal be decisive in a world where commodity and labor prices are fluctuating all over the place?
The notion that you drop a price signal in at the top of the economy and it cascades frictionlessly down to every part below is only plausible on an economist's white board. Is all I'm saying.
Again, for the gillionth time: I'm not opposed to a price on carbon by any stretch of the imagination. But I do think proponents of upstream taxes pretty consistently overstate their probable effects. (Remember: Inglis and Laffer want to stop here. This isn't one part of a broader effort for them.)
grist.org
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tlaskawy Posted 9:54 am
05 Jan 2009
The recent drop in oil prices should be an object lesson in why regulation may be more important than taxes. Prices are low now because of a recession-induced drop in demand but we all expect they will shoot right back up again soon. Now imagine that we have had moderate success in weaning ourselves off oil in the near future. Oil prices will respond to such a structural drop in demand by, at a minimum, plateauing if not actually dropping. If the consumer is simply expected to respond to price signals then he/she will go right back to the cheapest source, which could be oil or coal (even with a tax of some sort). Unless, of course, the government had in the meantime outlawed gas-powered engines. Or provided subsidies to power companies to decommission coal-fired power plants. To get caught up in an argument about carbon taxes is to miss the big picture. I never thought I'd say that, but there you go.
Beyond Green
http://weaversway.coop/blog/
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Max8806 Posted 9:54 am
05 Jan 2009
If they "eat" the price increase, they are decreasing profits, which decreases future investment (i.e. discourages others to grab a shovel and start digging for coal). I've made this point on a few different threads and never had it addressed. David, do you dispute that profits spur further investment? I thought that was pretty noncontroversial econ101. If they send less to their shareholders in dividends it works the same way, because buying stock is investing in that company.
So what if they "eat it" by cutting OPEX without cutting revenue/profits? Well, that's called productivity. Carbon abatement will never, and should never, be the sole aim of the economy. If the right to emit carbon is a limited resource, as it should be, so is the available labor supply and capital stock at any time. Increasing (or maintaining) output while cutting any one of those factors creates/increases national wealth.
If you (like me) believe that how the economy values the tradeoff between labor, capital, and carbon productivity must include an absolute assurance that carbon emissions stay below a certain point, than you should prefer cap/trade over a carbon tax. But on the margin for any particular firm, their job is still to maximize output subject to macroeconomic constraints (which translates into microeconomic prices) on capital, labor, and carbon. That is what is efficient for the economy as a whole.
If the firm chooses to do that by more efficiently utilizing labor or capital instead of carbon, that is up to them. If that route is taken by "too many" firms, the resulting shift in the relative availability of the macroeconomic constraints (labor, capital, carbon) will translate into shifts in their relative prices/costs, and adjust firm behavior accordingly.
Max Epstein
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Adam Stein Posted 9:57 am
05 Jan 2009
Price signals do tend to propagate quite far. I imagine that in most cases they propagate all the way to the end consumer, or maybe one level short. The exception might be in really messed up markets like electricity, although even here I'm guessing the long-run effects are much more robust than the short-run effects. I'd love to be able to back up that assertion with more than anecdotal evidence, but for the time being I'll just put it out there.
One other thing: "making marginally less money for shareholders" is a price signal. Unattractive projects don't attract capital.
I hope it's clear that this isn't argument against efficiency standards. Mostly I think this supposed opposition between pricing mechanisms and command and control mechanisms is a fake one that allows us to wank away on blogs. But as long as we're wanking, someone oughtta stick up for price signals.
www.terrapass.com/blog
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David Roberts Posted 10:23 am
05 Jan 2009
Adam, I'll just say that price signals do not want for defenders. My worry -- and the reason I've been writing posts raising questions about them -- is that there seems to me a large and growing faction arguing that a modest price signal is all we need, and that it can unite people across partisan lines, and this problem really isn't so tough after all, and etc.
I'm pro price signal, but I don't think it serves us well to allow conservatives to frame them as sufficient.
grist.org
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biodiversivist Posted 1:22 pm
05 Jan 2009
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Sean Casten Posted 9:00 am
06 Jan 2009
Nuclear power plants would then compete with coal-fired plants. Wind and solar power would have a shot against natural gas.
it belies a complete misunderstanding of energy markets that ought to be sufficient to disqualify this from any further discussion. CO2 pricing of any flavor would increase the variable cost of power production, not the fixed costs of capital recovery. The economic advantage that gas has over solar is because of capital costs, not variable costs. And the reason no one is building nuclear isn't because they are expensive to operate.
To see the problem, let's assume that their issue wasn't global warming, but auto safety, which they proposed to fix by putting a tax on auto insurance so that less safe car owners paid higher premia. Under such a scheme, poor people would finally be able to stop riding motorcycles and start driving volvos. Clearly, if anyone actually made that argument, they'd be laughed (laffed?) out of any freshman economics class. And yet that's precisely the case they make here.
(This is entirely separate from David's larger point that not all carbon pricing schemes are equal, which I quite agree with. But when a so-called expert makes such a fundamental error about the thing they're supposed to be an expert about - in this case, how carbon pricing would affect the fuel mix in our power sector - we ought to call their expertise into question long before we start debating the merits of their specific recommendations.)
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Max8806 Posted 9:09 am
06 Jan 2009
So the carbon price, while not significantly affecting cost of building solar or wind or nuclear, does significantly increase its revenues by raising marginal fuel costs, and so marginal supplier prices. This accelerates/improves capital recovery.
Max Epstein
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Sean Casten Posted 12:52 pm
06 Jan 2009
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Max8806 Posted 9:26 am
07 Jan 2009
Max Epstein
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