With the policy summary of the IPCC WGII report out, this is a good time to concentrate on policy. Any effort to lower emissions has to put a price on carbon and other greenhouse sources. As I think extensive discussion has shown, a carbon tax is the best way to price emissions, and to price the destruction of carbon sinks.
One advantage of carbon taxes (and auctioned permits as well -- close enough to a carbon tax for practical purposes) not often noted is that it they produce revenue that can be directed back to consumers. This is an important contrast to the Kyoto system, where large numbers of permits were given away to big polluters. As with any method of raising the price of carbon, ultimately the cost was passed on to consumers. But with the permit giveaways, the consumer did not recover any of those costs.
On a small scale, this is merely painful and unfair. But suppose this was done with a large-scale rise in emission prices -- one that increased the prices of consumer goods by 25 or 50 percent? Not only would this cause direct suffering, the odds are pretty good that reduced consumer demand would cause at least a recession, with a real risk of world-wide depression. You need to return some the costs to consumers, not only on moral grounds but on Keynesian ones -- to avoid a precipitous drop in overall demand.
I will add that when you talk about a drop in consumption for poor people, you are talking not just suffering but death. Even in the rich nations, there people poor enough that cutting their real income by a third or half will kill some of them. Cut the income of people in poor nations already living on a few dollars a day, and you are talking slaughter.
Gifting the money to the rich (as permit giveaways or income tax cuts do) does not solve this. The rich cannot, by themselves, keep consumption from falling. And for you supply-siders, additional capital made available from such cuts or giveaways would not provide stimulus to make up for what would be a demand-led downturn. So a carbon tax or auctioned permit system lets you avoid serious economic consequences a permit giveaway would provoke -- providing the money is directed in a way to benefit large numbers of people.
Most people proposing a carbon tax understand this. That is why you have proposals to use the money to reduce payroll taxes, or to fund school programs, or fund a clean energy program; use the revenue in ways that probably benefit large numbers of people; the result is not only more fair (benefiting people who otherwise would be hurt) but provides the stimulus to avoid a downturn.
However, I still see a political problem with such programs: they tend to benefit narrower groups than are hurt by them -- either demographically or over time. Payroll tax cuts do nothing for retired people (many of whom are either poor or on the edge of poverty and would be deeply hurt by utility and other price increases), nor the non-working disabled. Additional funding for schools provides no immediate benefits to families without someone attending those schools -- the old again, as well as single people. Remember these taxes distribute pain to just about everybody, so distributing benefits to a smaller number is political suicide.
In addition, in the long run, revenue from these taxes will decline. Their whole point is to discourage consumption. Of course they will be phased in gradually via escalator clauses; so even as emissions decline, revenues will rise for a while. But past a certain point, that will change. The tax will be fully phased in, and revenue will decline. It is not a good idea for things like social security or school funding to depend on declining revenue sources. When the time comes to replace those revenues, I guarantee conservatives will use the opportunity to push for funding cuts instead.
What about using carbon tax revenues for a clean energy fund? It answers one objection: such a fund would ultimately benefit everybody. But it replaces it with a question of timing. Efficiency improvements and clean energy sources can be put in place quickly, but not at the same rate as a carbon tax is put into place. So the benefits would trickle in much more slowly than the costs. Most people would see higher energy bills long before efficiency means lowered them again.
As an example, think of climate control improvements in existing buildings -- perhaps the single thing that could be implemented most quickly. Imagine a package: attic and floor insulation, weather sealing, window insulation kits, insulated curtains or shutters. Now here is the problem: there are only so many people skilled at doing energy audits and installing this kind of package. You can train some, but recently trained workers without experience are not who you want installing insulation in your home. Training would need to be done at a slow enough rate that trainees could be absorbed into experienced teams and gain experience themselves before new trainees were added. Even a crash program for every home the U.S. (minus those with climate control efficiency measures already in place) would realistically take between four and ten years (at minimum) if you wanted quality work.
So the only way to use the revenue from a carbon tax or auctioned permit system would be to return that revenue directly to the residents of the region that levied it. Everyone who bore the costs of a carbon tax would benefit from it, in about the same time frame. Because higher income people tend to cause more greenhouse emissions than poor ones, such a refund system would be slightly progressive net -- providing most people with more income than the carbon tax increased their costs. Once in place it would be popular; everyone likes getting checks; see also Alaska.
A long term advantage to this is less resistance to incremental raises. Higher carbon taxes would mean larger checks. So you could build both scheduled increases and automatic ratchets that respond to emissions declining less than scheduled.
Yes, we would still need a clean energy fund. But we could fund it from something other than a carbon tax. Everyone who has looked seriously at what it would take to solve global weirding has realized it will take more than putting a price on carbon. George Monbiot, Joe Romm, the Stern report, the CERES group, and RMI are examples. Note that this transcends ideology. Monbiot is somewhat left, Stern and the CERES group are conservative. I'd describe both Joe Romm, and the RMI as centrists. My next post on this subject will deal with what policy will be needed beyond a carbon tax.
New nukes? A fair shot, not a free ride
To unlock wind power, put a price on carbon
Comments
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thebrowze Posted 8:12 am
11 Apr 2007
It's also less effective: if people simply get back part or most of what they pay in carbon taxes then they have less incentive to reduce their carbon footprint.
Why not use the money to fund sustainable and efficient energy research? Because we won't see the result immediately? That's roughly analogous to saying we shouldn't fund primary education because we won't see the benefit of educating today's 10-year-olds for another 15-20 years. It's a longer term investment in solving the very problem the tax was meant to alleviate. Not to mention that when carbon tax revenues start to fall with be roughly the same time they aren't needed as much to fund energy research. The system will wind down by its own design. It seems to me a much better solution than an obvious hand-out designed to build political support from the uninformed masses who could care less about climate change.
As a side note: the taxes would start out as a progressive tax, but may not end up that way. There are clean technologies out there, in ever increasing numbers. These technologies, however, are mainly accessible to the wealthy. When was the last time you saw a family below the poverty line driving a Prius or installing solar panels? The wealthy have much greater means to reduce their carbon footprint (and therefore avoid paying the taxes) than do the poor. These carbon taxes could very well turn out to be regressive. It would have achieved the goal of getting the overall level of carbon emissions reduced but the revenue may end up coming more from the poor. This is not, in my opinion, a reason to scrap the tax. I am just pointing out that some of the more "feel-good" aspects of this proposal (income redistribution and a progressive tax) may be counter-productive, beside the point, or false.
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Gar Lipow Posted 8:51 am
11 Apr 2007
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thebrowze Posted 9:17 am
11 Apr 2007
I just don't see how this is necessarily a bad thing. If we use revenue from carbon taxes to fund research it will most likely make the efficiency gains come more quickly, which will lower the carbon footprints for people in all income brackets, and therefore the taxes. Also doing this means we would not have to find funding elsewhere for the research, and could instead cut income taxes for the poor, or provide money for other underfunded social programs.
I am a little confused about your definitions of regressive and progressive. A carbon tax, like a sales tax, will necessarily be a regressive tax because on the whole poor people spend a larger proportion of their income on energy than rich people do. A tax does not change from being regressive to progressive simply because of what you do with the revenue.
Instead of simply cutting everyone a check for the same amount (which would indeed result in the poorest people getting back more than they paid), why not use the money for a subsidy to pay for energy efficient technology for the poor in the same manner we provide the poor with health insurance through medicaid? Not only would this help to alleviate the tax burden but would also help to poor reduce carbon emissions in a way that was not previously possible to them (not to mention giving them additional incentives to reduce emissions in a way that giving them their money back would not).
I'd love to hear your thoughts.
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Charles Komanoff Posted 1:46 pm
11 Apr 2007
Good to see you again taking up the carbon tax cause. But this time it took you awhile to make your main point (that carbon tax revenues are best rebated equally to all), and I think you hit a few potholes en route.
You paint the spectre of big carbon taxes raising the price of consumer goods by 25-50%. I'm skeptical. Yes, fuels and energy need to rise that much and more. But "embodied" energy (in mfg'ing, shipping, etc.) rarely accounts for more than 10% of goods prices. A doubling in energy prices should thus tack on no more than 10% to goods prices -- less, actually, since the gradual ramp-up will let suppliers move to lower-carbon fuels and processes.
Also, did you really mean to say that the point of carbon taxes is to discourage consumption? Perhaps what you meant is that the point is to discourage use of fuels and energy, particularly high-carbon forms. That's an important distinction!
Last, though I certainly agree that auctioned permits would be far better than given-away permits, I disagree that auctioned permits are about as good as a direct carbon tax. The tax can be in place much sooner, due to its simplicity and resistance to gaming and rent-seeking. The tax also comes with a known price trajectory, which is of utmost importance in ensuring that capital goods are specified and bought in climate-aware fashion.
For more on advantages of taxing carbon over capping it with auctioned permits, go here: http://www.carbontax.org/issues/carbon-taxes-vs-cap-and-t ....
Charles
Carbon Tax Center
http://www.carbontax.org
Charles
http://www.komanoff.net
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Gar Lipow Posted 8:09 am
12 Apr 2007
In terms of how much carbon taxes will raise prices overall - it depends on how well we respond with efficiency improvements. Because embedded energy is not the only way energy affects prices. Transportation costs, energy costs of running a retail store. And from the gas price shocks in the 70's it seems that it is not just a matter of energy costs being past along. For some reason what gets passed on are those costs, plus more. Probably anytime someone is force to raise a price, they look for the next optimum price/profit point - which is usually above the minimum they are forced to raise prices to. In others words if energy costs force you to raise price 2.5% you may find you suffer no greater loss in sale by raising price 3%. And at the lower end of the income spectrum, especially for people on fixed incomes, a sharp rise in energy prices can spark the heat/eat dilemma. A good reason to switch to clean energy in the long run, but something we need to protect against in the short run. Again, I think returning revenue directly to the people who the emissions tax (everybody) works better than putting it into any particular program.
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Gar Lipow Posted 8:21 am
12 Apr 2007
In terms of using revenue from a carbon tax to fund clean energy development, plus perhaps aid for the poor: you have a very unstable situation. Middle class people tend to turn against programs that support only the poor. Think of medicaid. The most popular programs are ones where everyone is in the same point - where everyone benefits.
So taking the revenue from a carbon tax and returning directly to the people ends up with something politically stable - hard to take away once you have.
In terms of funding clean energy from something other than a carbon tax - I think it is a good not a bad thing to have funding source that outlasts the current crisis. Because eliminating fossil fuels does not mean we eliminate the need for improvements. We may well want to learn to tap higher percents of the sun's energy, of the wind's power of the the earth's heat than we know how to do now - commercializing currently experimental 40% efficient solar cells, tapping wind power flying energy generators at 15,000 feet and higher, accessing geothermal energy outside of tectonic faults and so on.
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