RFF Study: Young Generation Would Benefit Most From Climate and Fiscal Benefits of Carbon Tax

A new paper, “Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts” by economists at the Washington, DC think-tank Resources for the Future, finds that a $30/ton tax on CO2 pollution would reduce U.S. emissions 16% by 2025. The report concludes that dedicating the carbon tax revenues, estimated at $200 billion each year, to “down payment” of the federal budget deficit offers greater economic-efficiency benefits than other revenue-return options. Moreover, according to RFF, using the carbon tax revenues to pay down the deficit would especially benefit the young, by curbing global warming and its associated future costs, and by reducing tax burdens of today’s young people far into the future.

Using a new intergenerational economic model, RFF economists examined different ways to use revenue generated by carbon taxes, revealing the impacts of those choices across the age spectrum of the U.S. population. They modeled four scenarios: three in which the carbon tax revenues are used to reduce taxes on 1) capital, 2) labor, and 3) sales of goods, and a fourth in which the revenues are returned in lump sum “dividends.” RFF found the differences in annual aggregate welfare among the four options to be relative small ― less than 3 percent. Interestingly, returning revenue as lump-sum dividends offers a slightly more progressive income distribution than a labor tax shift.

More striking differences are revealed across the age spectrum: people who are now too young to vote would benefit most from a carbon tax used to fund deficit reduction, according to RFF. The authors conclude: “[E]nacting such a policy [a carbon tax used to pay down the deficit] will be politically difficult unless current generations are altruistic” enough to act now to curb global warming and to pay down deficits, both of whose impacts will be greatest on the young. That’s an understatement.

Comments

  1. Sage says

    That would be a regressive tax. It would pay down the deficit — which is good — on the backs of the poor — which is bad.

  2. says

    Actually some new research suggests that carbon taxes aren’t necessarily regressive, partly because fixed incomes get adjusted for consumer price levels (including energy). The lifetime (as opposed to annual) incidence of carbon taxes doesn’t necessarily look regressive either. (See e.g., “Designing a Fair Carbon Tax, Resources for the Future.) Finally, it’s not clear that paying down the deficit is regressive; younger people tend to have lower income (and less wealth). Policy that avoids the worst of global warming and the need for big tax increases (or cuts in social programs) might turn out to be a very generous legacy.

  3. Paula Swedeen says

    Hello Charles and James. I hope the approaching holiday season finds you both well. I see that you are still promoting a revenue neutral approach, and still acknowledge that this approach will provide small GHG reductions compared to what is needed. As you both know, the science keeps getting sharper on how little time we actually have. Have either of you modeled the aggregate impact on emissions reductions of investing some portion of the proceeds on efficiency, renewable deployment and mass transit? I know you are philosophically opposed to such options, but a discussion of how re-investment in targeted reduction actions might add to what can be achieved through tax-shifting seems like a useful counterpoint to this whole discussion. Just because the government, at the state or federal level, serves as the pass-through for those funds does not preclude significant benefits in productivity and employment. And, it appears from recent articles that oil companies keep investing in more exploration and development of fossil fuel stores that need to be kept in the ground despite internal carbon pricing of $40/ton or more. So obviously, something in addition to a tax that only puts a price on carbon without additional actions will not allow us to reduce emissions fast enough or far enough.

    I am still of the opinion that using economic efficiency, or reduced tax burdens on businesses as the most important measure of climate policy effectiveness when businesses and individuals stand to lose (are already losing) life and property from the impacts of climate change is like caring about how well you are dressed as you are stuck on the railroad tracks with an oncoming train. Wouldn’t it make more sense to get off the tracks first? In response to your comment directly above, James, I am not convinced that any plausible carbon tax proposal that is revenue neutral will allow us to avoid the worst impacts of climate change: a 16% reduction by 2025 will likely lock in impacts that make concerns about productivity and deficit reduction seem quaint.

    Thanks for continuing to entertain my challenges to revenue neutrality!

  4. says

    Hi Paula,

    Rep. John Larson’s (D-CT) proposed carbon tax would start at $15/T CO2 and rise to $115 in a decade, reducing U.S. emissions by 1/3 in that time, roughly in line with the trajectory needed to avoid 2 degrees C of warming. The bill includes border tax adjustments to induce other nations to follow and would return revenue by reducing payroll taxes. See Reaffirming the Case for a Briskly Rising Carbon Tax.

    You’re right, we’re not supporters of using carbon tax revenue for “clean energy” subsidies. Congress is poorly equipped to choose technology winners (ethanol is a good example); price signals can push markets to do the de-carbonization job much more effectively and broadly. British Columbia’s revenue-neutral carbon tax is an environmental and economic case in point. Sweden has also successfully used carbon taxes to reduce emissions and cut other taxes.

  5. Paula Swedeen says

    Hello James,

    Thanks for the reply. I understand that you don’t agree with the government being able to use carbon tax revenue to further reduce emissions beyond what your model shows is possible. I am asking however, despite your opposition, have you or anyone you know of,actually modeled what happens if the right choices are made in programs funded by public revenue? The piece that is on the front page of your website, published 12/6, talks about a state-based approach where NY could use some of the revenue to invest in improving infrastructure and helping people invest in solar. That is government using revenue from a carbon tax to help reduce emissions. I am interested in stepping away from what looks like an almost ideological bias against any level of government using carbon tax revenue in any way to gain emission reductions beyond what a carbon tax can do with a full consumer refund or some form of 100% tax shift. There are many examples of effective use of public funds: loan guarantees, investment in public transit, weatherization of homes in low income communities, etc. Government has the ability, though they do not always exercise it, to create and execute programs, or at least fund programs created by others, that result in emission reductions beyond what “the market” would accomplish on its own.

    I was reacting to your citation of a $30/ton tax that achieves low levels of emissions reductions by 2025 compared to what is needed. How realistic do you think Rep. Larson’s top-end $115/ton is? And when? How realistic is it to think that Congress will pass a carbon tax at all anytime within the time frame we have to effect steep reductions? Isn’t it much more likely that states are going to take actions on their own? If you guys promote a revenue neutral approach on a state-by-state level, should there not at least be an examination of the relative difference in performance vis a vis emission reductions of approaches that do not allow state governments to use the money in any way whatsoever to reduce emissions beyond the price signal versus ones that allow governments to fund programs that have proven to be effective in reducing emissions (like investing in expanded public transit, or jump-starting community solar co-ops). Have you or anyone you know of looked at the relative merits of these different approaches? I still hear in most of your posts an adherence to revenue neutrality that runs counter to both examples of effective programs that are ultimately funded through public money, and the fact that most politically realistic carbon tax schemes won’t reach high enough prices by themselves to reduce emissions fast enough. In addition, limiting temperature increases to 2 degrees C is not considered safe or prudent anymore (see http://thinkprogress.org/climate/2013/12/03/3014701/scientists-warming-disastrous-350/).

    So please, I am looking for a response that goes beyond the usual “government bad, free market good”.

    And, before you tout B.C.’s carbon tax, you should really look into how much carbon they are emitting from continuing to log their primary old growth (its a lot – only about 25-30% of forest carbon goes into wood products, the rest is emitted within a few years of logging, and wood product carbon is eventually emitted as well.) Hundreds of years worth of carbon accumulation is emitted when old growth is logged. This CO2 is not re-absorbed in any meaningful time frame: something they could at least partially avoided by using a portion of their carbon tax proceeds to buy out leases on Crown lands that have not yet been logged. And their overall emission reductions are not that steep, nor does there seem to be the political will to increase the magnitude of the tax much beyond where it is today. I do not really see this as a model policy approach.

  6. says

    Hi again Paula,

    Your central question: Has anyone modeled emissions reductions when carbon tax revenue is dedicated to, say, building wind, water and solar power (a la Delucchi & Jacobson)? Answer: I haven’t seen such analysis; unfortunately, our model isn’t set up to do it.

    The point of a carbon tax is to encourage replacement of fossil fuels with renewables and efficiency. Undesired side effects are 1) the “income effect” — higher taxes reduce buying power, and 2) regressive effects — low-income households bear a disproportionate burden. Progressive revenue return can mitigate those undesirable effects and increase the political appetite for continuing to raise the carbon tax. The RFF study here is pointing out that using carbon tax revenue to reduce deficits may have a beneficial distributional effects.

    We’re not impressed with “clean energy” subsidies as a way to use carbon tax revenue. “Big dogs eat first” on Capitol Hill. Subsidies tend to go to “incumbent” technologies; they’re not good at spurring innovation. And more revenue dedicated to subsidies means less can be returned to taxpayers. Which doesn’t mitigate regressive effects and reduces political appetite for raising the carbon pollution tax.

    On the state / provincial level, things may be are different. You’re right that there’s not much prospect of a high enough state-level carbon tax to induce serious emissions reductions by itself. So maybe some analysis of ways to use state carbon tax revenue to fund renewable energy or efficiency makes sense. We’re also starting to hear discussion about using revenue from state carbon taxes to fund infrastructure “hardening” and disaster relief.

    BC started at $10/metric ton, rising $5/t each year for 4 years. That, and the 17% reduction in emissions it induced, strike me as impressive. BC voters seem to have supported (tolerated?) the increases, they enjoy cuts in business taxes, income taxes, sales taxes and the energy assistance funded by carbon taxes. Yes, they’ve stopped at $30/t; their politicians say they’re waiting for neighboring provinces and states to enact carbon taxes before going higher.

  7. Paula Swedeen says

    On B.C.’s carbon tax, the 17% reduction was in fuel use, not total GHG reductions. My read of the report I think you are referring to is that all fossil fuel-related GHGs decreased by 10% from 2008 through 2011 (last year for data was available). Two important points: I acknowledge that is significant given that not many other jurisdictions in the U.S. and Canada have implemented carbon pricing mechanisms, so I am not discounting that. However, B.C.’s forest-related emissions are not accounted for in these figures, and have gone up by over 300% since 2000. According to their 2010 full GHG inventory, there was a net of 8 million metric tons of CO2 emissions from timber harvest net of new sequestration from re-planted clear-cuts. That is over 4 times the annual reductions achieved that are at least partially attributed to their carbon tax. Forest-based emissions are very real and will not be re-absorbed for well over 100 years (given the age of most of the forest they harvest), beyond the time when it makes a difference. To not take that into consideration when assessing the impressiveness of their tax scheme is false accounting. Their revenue neutral approach prevents them from investing any portion of the tax proceeds to reduce emissions from deforestation.

    I agree with you that Congress would likely not set as effective means of spending carbon tax revenue as is needed beyond giving back a portion of the tax to people who would otherwise be regressively impacted. However, I do not believe they are going to pass a carbon tax at all given the structural issues created by gerrymandered districts and the influence of fossil fuel money on both parties. Within the next 8-10 years, most action in the U.S., and potentially Canada, is going to be at the state-provincial level. Given this, and the fact that any carbon tax that may get passed will not likely reach $100/ton range, I do think there will be a role to play for government investment beyond whatever market impact the price signal will have on its own, because those reductions are not going to be steep enough. There is the potential for that money to be used effectively. It is possible to pass legislation with performance measures on the how the money would be spent, rather than allowing a pork-ridden free-for-all.

    Also, I am curious if you define government spending any money in any form a subsidy, and therefore “bad”. We have discussed in the past the need for more investment in public transit and bike transportation infrastructure. Most of Washington State’s emissions come from the transport sector. None of the Puget Sound jurisdictions have enough money to support adequate public transit. If a carbon tax were passed that made gas more expensive, but there was not a corresponding investment in public transit as an alternative, people are just going to drive anyway. And your model shows personal transport is not effectively dealt with by the carbon tax alone. So, is spending revenue from a carbon tax on investments in public transit (you can always assume I mean after the impact on low income residents is taken care of) an ineffective subsidy?

    What about loan guarantees or government purchase and installation of solar facilities? Tax rebates for electric vehicles and government investment in charging stations? There are proven technologies that do reduce emissions. Couldn’t investment in increased deployment of these known technologies at a scale beyond what is possible by the effects of the tax by itself over the next 5-10 years make a big difference,especially given the trajectories of reductions required starting yesterday (6-8% per year, not 2-3%)?

    Finally, as another example, WA emits 4-5 million tons of CO2 from conversion of forest to development on an annual basis. Investing in purchase of conservation easements to prevent forest loss would be effective, could be done with a small portion carbon tax revenue even at $25-$30/ton, and many states have excellent track records with publicly funded conservation easement programs. Would this not be a good investment?

    I think it is irresponsible to keep pushing a revenue neutral approach,especially at the state/province level when the potential that it would by itself not reduce emissions adequately is high, and there are multiple examples of how revenue could be spent to achieve additional reductions. At the very least, the options of multiple approaches that include less than 100% revenue recycling through dividends or tax shifts should be fully examined prior to pushing one policy model over another.

Last modified: October 20, 2013