This is a guest post by Monica Prasad, who wrote an op-ed in Tuesday's New York Times called "On Carbon: Tax, Don't Spend." It elicited responses from David Roberts and Charles Komanoff.
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Thanks to David and Charlie for picking up on and responding to my carbon tax op-ed. I've learned a lot from Grist, so I was happy to see this. Some responses to their criticisms.
David's beef is with the word "spend" in the headline. I agree the headline is stupid, and it was not my idea. It implies that I'm advocating hoarding the revenue. Instead, I was trying to say that the goal is to avoid collecting the tax revenue in the first place, by getting firms to change their polluting behavior. If they're not polluting, they don't pay the tax, and there's nothing to spend. (I wanted to call it "How to Make a Carbon Tax Work.")
David asks:
Why notspend"lock some of the tax revenue away" to cushion the blow of higher energy prices on low-income and working families? Why not use it to reduce the (regressive) payroll tax? Why not use it to help train workers laid off in fading industries? Why not use it to fund weatherization and retrofitting of existing buildings, to reduce energy use? Why shouldn't social and economic justice enter the picture?
The answer is that if the revenue is used for some worthy goal, policymakers might end up trying to maximize the revenue for that worthy goal (as has happened with some regulatory taxes in the past). In this case, that means maximizing pollution. I have some more discussion of this in the longer paper called "Taxation as a Regulatory Tool: Lessons from Environmental Taxes in Europe" [PDF].
Charlie asks whether the changes in Denmark and Norway are a result of the tax. In Denmark, he says the success is because of wind power, energy taxes on coal, and bicycles. I agree completely. But this is the point of the op-ed: wind power and bicycles give firms and individuals something to switch to. If you don't have substitutes, a carbon tax doesn't get you reductions.
I discuss energy taxes in "Taxation as a Regulatory Tool," and I agree they played a role. (They were chopped from the op-ed because rates have fluctuated over time and there wasn't enough space to present the necessary qualifications.) But again, these taxes were successful because they were coupled with lower energy taxes on natural gas. They gave firms somewhere to go, and that's the key point: the possibility of substitution, or of changing your behavior easily.
As to Charlie's and David's worry about the way carbon taxes will affect lower- and middle-class Americans: Ideally, if the companies do find ways to avoid the tax by switching to cleaner fuels, it doesn't have some of the regressive consequences. It's true that prices will go up, and that will hurt those at the economic edge the most. But this will happen with any climate change policy. It seems much more reasonable to pass separate policies to alleviate the situation of those at the economic edge, rather than getting the issue mixed up with the question of a carbon tax.
Charlie has a point about Norway's exports. The IPCC guidelines right now are to count the emissions where the fuel is produced, but it's true that some have criticized this, and there's a debate going on. I'm not sure how to resolve the issue. But it does seem to me that since Norway benefits from those exports, at least some of those emissions should be counted against its account. Moreover, if we're criticizing the way emissions are measured, it's worth nothing that international transportation is excluded right now from all counts of CO2 emissions. If those were included, Norway's emissions would actually go up.
Charlie's larger point is right, though: it is very difficult to show that the tax itself led to the CO2 outcome. My approach was to put together a theoretical framework, using things we know about how other kinds of taxes work, to make predictions about how a carbon tax might work. It turned out that two of the predictions (about substitutability and locking the revenue down for environmental goals) seemed to be correct, in the sense of predicting the outcomes we see in the four countries with carbon taxes.
No, it's not a slam dunk case. But does anyone have a better way? (That's not a rhetorical question: please email me or let me know in comments if you have a better way!)
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Comments
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Gar Lipow Posted 2:58 am
27 Mar 2008
Public investment - Public investment provides alternatives for people to respond to price signials with.
Rule based regulation: In the absence of regulations, very large price increases tend to produce very small demand reductions. But many of our consumption sectors really are easy to measure. In Denmark and Norway there are building regulations that regulate maximum consumption for climate control per square foot. In transportation you can measure emissions per passanger mile or per ton mile. In home appliances and office equipment most of the energy consumption is by a handful of types of appliances and equipment: again fairl straightforward to do energystar type regulations.
An emissions tax in the context of such public investment and regulation can be very effective; also it is neccesary for control industrial emissions because of the variety of sources in that sector are not really amenable to either rule based regulation or public investment. Not that there are not a few technologies within that sector responsible for a bit emissions chunk. Regulation and subsidies can play a signficant role here, but not as a substitute for emisisons pricing.
In terms of funding public investment - I suggest taking that from military spending rather than depending on emissions taxes. You don't want clean energy technology dependent on dirty power for subsidies. I like Peter Barnes' suggestion of rebating revenues to the public as the Alaska Pipeline does. That compensates perfectly for the regressive effects of energy taxes on not only the poor but the middle class. No program depends on that revenue, and the rebates fade out as the things they compensate for do - collection of energy taxes. If people start fussing about their rebate checks shrinking, we can extend the taxes to other pollutants.
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TomCasten Posted 3:36 am
27 Mar 2008
The better way is an output emission allowance standard, as follows. Use delivered electricity or useful thermal energy as the metric. Give every producer of heat or power the same allowance for every unit they deliver. Require every producer to obtain and offset every ton of CO2 they produce with an allowance. Make the allowances fully tradeable and exchangeable between heat and power. Fine any producer who does not cover CO2 emissions with allowances 150% of the average cost of the CO2 emissions over the prior year. True up annually.
Add two features. Publish a schedule that reduces the allowance per unit of electricity and of heat each year to achieve a society wide drop of CO2 emissions. Then adjust the scheduled alowance in future years for growth (or shrinkage) of economy-wide fossil CO2 emissions. For example, to adjust the scheduled allowance of CO2 per MWh in 2012, multiply the original scheduled allowance by a fraction which has the 2008 base year economy-wide fossil CO2 emissions divided by the 2011 CO2 emissions. This insures that the total allowances shrink as designed, withou regard to growth of fossil fuel use or economic growth.
Why is an output allowance system better?
The market sets the allowance price for CO2 and constantly adjusts. There is no way even the wisest philosopher queen could ever set the right tax rate to accomplish desired CO2 reduction. Pols set the desired reduction and the market discovers the price per ton of CO2.
There are no frictional losses. Every dollar paid by the dirty electricity and thermal producers goes to the cleaner producers, avoiding the tempetation for politicians to divert CO2 revenues to other purposes.
Selling excess allowances immediately benefits clean energy projects and helps encourage deployment. Although CO2 tax payments may discourage dirty energy production, the tax does not directly encourage clean energy production.
The output allowance system imposes no direct costs on the economy. All payments from a dirty energy producers go to clean energy producers. Either approach will redistribute wealth, but the allowance system transfers the dirty energy payment directly to clean energy projects.
The dynamic effect will reduce delivered energy costs. Entrepreneurs will lay awake nights trying to deploy projects that profitably increase delivered fossil efficiency.
The output system lets the market select the technology of cleaner energy instead of a government such as Denmark selecting the favored technology.
Most importantantly, output is the correct metric for CO2 control. The economy gains no direct benefit from burning fossil fuel, but that burning causes pollution. Useful energy services have no direct impact on the environment, except to the extent their production caused pollution. The economy depends on the availability and cost of useful energy services. Heat and power are the closest thing to useful energy services that are measured. (No one measures the light in the room, which is the truly useful 2% to 4% of the fuel energy that was spent to genrate and deliver electricity and then convert that power to light). Success of any system depends upon measuring and rewarding the right metric. Output is the right metric to induce profitable greenhouse gas reductions.
Problems:
We have not thought of a way to use output allowances for transportation, since output is not recorded. Government could set a tax on transportation fuel equal to the 'market discovered price' of a ton of CO2 from heat and power. Be aware that 69% of US CO2 emissions are from production of heat and power (42% form power, 27% from heat). Then use the revenues to promote cleaner transportation, perhaps funding mass transit.
Ditto the 17% or so of GHG from non-CO2. Perhaps tax the same way as transportation.
Circuit Breaker? The government could have unlimited allowances to sell at a starting price deemed acceptable by the pols, say $10 per ton of CO2. Then increase the price by 10% per year comppound or higher value. This eases the transition problems from inefficient dirty production to cleaner and more efficient production and soon drives the price of government allowances out of reach.
Tom Casten
Chair, Recycled Energy Development
Tom Casten, Chair, Recycled Energy Development LLC
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Charles Komanoff Posted 1:29 am
28 Mar 2008
I'm glad Monica is training her talents on carbon taxes. This field needs more creative thinkers, particularly people versed in sociology.
But I'm unconvinced on her main point about vesting carbon tax revenues in decarbonizing alternatives. Partly it's because, in the US at least, that path has traditionally been more of a black hole than a green one. Partly it's because the carbon tax itself will provide big (though not always fully sufficient, I agree) incentives to reduce carbon. But mostly it's because the poor and middle class have to be protected directly and massively, which can only be done by explicit and near-total return of carbon tax revenues.
I disagree as well on the need for substitutes, largely because I view substitutes for carbon as a matter of degree rather than binary -- substitutes exist along a spectrum. And of course instituting carbon taxes will expand that spectrum.
I look forward to continuing this conversation.
Charles
http://www.komanoff.net
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