I can’t buy into your idea that taxpayers would somehow be given shares in clean energy companies. This sounds to me like a “state run” energy company and I don’t see that as something most of us in the US want.

I think we are much better off with the simple, transparent approach of returning the collected taxes to consumers and businesses in the form of lower FICA taxes. Consumers do not lose purchasing power and business does not lose competitiveness.
Thanks

Re par. 1: What I am asking (for the electricity industry) is why not impose a carbon fee on high-carbon energy and use the proceeds to subsidize low-carbon energy (making the policy revenue-neutral within the industry)?

Re par. 2: We need not know which low-carbon technologies will prove most effective because the fees and subsidies would be based strictly on emission performance, not on technology type.

Re par. 3, point 1: Clean-energy generation (i.e., minimum CO2 per kWh) and energy efficiency (minimum kWh per unit of economic utility) can be incentivized using separate, but similar, pricing approaches. For example, appliance feebates would combine fees on low-efficiency appliances and rebates on high-efficiency appliances to motivate continuing improvements in efficiency. I believe that either this kind of pricing approach or financing incentives could, in fact, be more effective than performance standards at overcoming institutional and cultural obstacles.

Re par. 3, point 2: The “predictably rising price,” as I understand it, would start at something like $10/ton-CO2 and “eventually” rise to perhaps $100/ton. In my view, this “gradual” approach, like cap-and-trade, is fundamentally a strategy of procrastination. However, a carbon fee starting at around $10/ton could create an immediate marginal incentive for clean energy equivalent to something like $100/ton if the revenue is applied to clean energy generation.

Re par. 4: You are still missing the point. Consumers need to be “made whole” because of the high costs of clean energy, but clean energy would not be expensive if it is subsidized. To repeat my point from my original comment, “Consumers would still benefit because price competition from subsidized renewable energy would yield consumer dividends in the form of low energy prices.”

Re par. 5: To paraphrase the question that I have already asked twice, have Shapiro et al investigated the relative efficacy of recycling revenue through direct cash dividends (or tax breaks) versus clean-energy subsidies, in terms of both decarbonization incentives and consumers’ long-term economic interests?

mihm,

Thank you for the clarification. So the correct equation is
less carbon = higher FICA taxes
So the government does not lose its tax base, but taxpayers lose their tax dividend as carbon is phased out.

Here’s an alternative suggestion: Rather than giving the carbon tax revenue directly to consumers, give them equity shares in clean-energy companies (which would be purchased with carbon tax revenue). Then they would accrue dividends that increase, not decrease, as carbon is phased out.

Which approach would garner more political support for decarbonization: letting consumers make money from carbon emissions, or letting them make money from clean energy?

The “revenue neutral” part means that the amount of revenues (taxes) collected would remain the same. It is only the source of those revenues which would change.

For example
If $100 billion were collected in carbon tax revenues over the course of a year, the FICA tax paid by employees would be reduced by $100 billion.

If that number decreased to $50 billion, then the FICA tax would only be reduced by $50 billion.

The government does not lose any of its tax base.

On to another point, it would also be effective to replace at least a part of the employers FICA tax with the carbon taxes paid by business. This would have the added advantage of lowering the cost of employing workers.

I think you’re asking why not subsidize low carbon energy instead of (or in addition to) taxing hi carbon energy.

My answer: We don’t really know which (new? undiscovered?) low carbon technologies will prove most effective. We know what we don’t want: more CO2 emissions. We want to oust the “incumbent” technology. But we want to let all challengers compete.

We have strong indications that energy efficiency measures lead the challengers’ pack and many would save money even at today’s fossil fuel prices. (See the recent McKinsey report.) That suggests the need to clear away some institutional and cultural obstacles that won’t be overcome by a price signal alone. But that “path clearing” is not a substitute for a predictably rising price that assures an increasing return on the investments needed for efficiency and alternative energy.

To get to the long-term goal: emissions reductions of 80 or 90%, we’ll need to sustain rising carbon prices by continually pumping revenue back to households, so while we’ll all have incentives to de-carbonize, we’ll be “made whole” and can build political support. That “revenue recycling” limits the funds available for subsidies even if we could pick the best technologies.

I’ve heard economists like Rob Shapiro say that recycling 3/4 or more of carbon revenue would do the job. He suggests using about 1/4 for basic alternative energy R&D and for transition assistance for displaced coal workers. That’s essentially the formula in Rep. Larson’s bill.

I fully agree that we need price as a policy tool, but we need policy instruments that can create sustained incentives for full decarbonization of the global economy — not just the kind of marginal reductions that result from reduced demand. (Furthermore, you should recognize that the money that was lost in the ‘73 oil embargo and in the current recession was not rebated to consumers — if it had been, it might have largely nullified the price response.)

Can you respond to my query in my original comment: “Considering the renewable plant’s ten-fold gain in its price advantage under the second alternative, which approach would be expected to more quickly decarbonize electricity production while keeping clean energy affordable?”

Not an “impossible dream” if we choose good policies. US fossil fuel use (and thus GHG emissions) declined twice in my lifetime: 1) for a brief time, in response to price increases from the ‘73 oil embargo and, 2) the current recession. Shows the power of price. We need it as a policy tool.

Okay, I think I understand. You want to tax fossil fuels and give the revenue to consumers to offset the taxes that consumers pay to subsidize fossil fuels. A more direct way to achieve the same end would be to eliminate preferential fossil fuel subsidies. But the field would still not be level because fossil fuel prices do not reflect health and environmental impacts.

Your last comment is telling. You view avoidance of catastrophic climate change as a “dream”.

We propose a revenue-neutral carbon user fee, NOT as a revenue source for the government, but as a way to level the playing field. It’s now tilted so heavily in favor of fossil fuels that the price disparity makes both public and private investment in low-carbon alternatives extremely unattractive and excessively risky. We propose to recycle all or nearly all carbon tax revenues to households via a reduction in the payroll tax (Rep. Larson’s carbon tax bill would initially exempt the first $3800 of earnings from the payroll tax; the exemption would rise with the carbon tax rate) or via a direct distribution (“dividend”) to households.

Thus, the “good” problem you describe would not arise. But it’s nice to dream of the time when emissions start falling enough for declining revenues to even be a concern…

We are better of with a simple, transparent carbon tax that is fully refunded. More carbon = higher tax. less carbon =lower tax

The best idea I have heard is use all of the collected revenues to reduce the employee FICA tax on the first $20,000 or $30,000 of annual earnings. That way it goes directly to working people who are most affected.

I am sure that politicians, lobbyists, and various special interest groups would want to be able to distribute this carbon tax revenue to their favorite pet projects. However, American individuals and businesses have proved to be very resourceful in reducing their energy use as those costs increase. In the longer term, America is a country of innovators and we innovate best when individuals and businesses risk their own money to develop new technologies in the hope of later getting a profitable return on their investment. Most Americans do not benefit when businesses and other special interests are given our tax dollars in subsidies, earmarks, and bailouts.

Senator X will want a larger subsidy for wind because the wind industry has a large plant in his state. (and he just happens to get a large campaign contribution from those interests)

Senator Y will want a larger subsidy for solar because he has thousands of solar jobs in his state.

Senator K will want large bailouts for wind EXCEPT those that he can see from his summer home in Cape Cod.