Charles Komanoff – Page 46

Carbon Tax Center

Pricing carbon efficiently and equitably

Time for a Smart Taxpayer Revolution

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Guest post by Lindsay Sturman, a writer living in Los Angeles with her family.

We all hate taxes, but we also want and need government services. Rather than raise taxes or cut services, there’s a Third Way that has been overlooked: tax behavior that costs the public money.

“Sin taxes,” or better yet, “Smart Taxes” create a virtuous cycle – the tax raises the price of the product, causing consumption to drop, thus reducing the costly and damaging behavior. It’s Economics 101 – if we raise the price, we’ll get less of the behavior.

It’s unusual in government to have your cake and eat it too – but “Smart Taxes” is one of those rare perfect storms.

Tobacco is a great example, because most people wish fewer of us smoked, especially children. Over a hundred studies have shown that raising the price of cigarettes causes consumption to go down. Smoking also costs taxpayers dearly in health care costs treating Medicare and Medicaid patients for lung cancer, emphysema, chronic pulmonary disease and heart disease. Economists across the political spectrum agree that a pack of cigarettes should be taxed to reflect the true cost to society of smoking so taxpayers are not subsidizing tobacco companies.

Think about it: tobacco companies put out a product that causes disease and death, they make a handsome profit, and society is stuck with a huge bill estimated to cost the U.S. $96 billion a year, according to the Campaign for Tobacco-Free Kids. Economists have a word for the damage: an “externality.” In a perfect capitalist system, the cost of the externality of lung cancer would be captured in the price of a pack of cigarettes.

Carbon combustion is another area that costs us dearly – in higher rates of diseases such as asthma, traffic crashes, tailpipe and smokestack pollution, and the potentially catastrophic effects of global warming. Why should taxpayers subsidize the corporate pollution and the detrimental effects of a product, while the polluters walk away with a huge profit? Let the polluters pay, and let the price reflect the cost.

Along with cigarette taxes, another smart tax in use for decades is alcohol taxes, which cover at least some of the cost of alcohol-related disease and accidents. Along the same lines, a tax on bullets could offset some of the societal costs of shootings – the costs to hospitals, police departments and the court and prison system; this was once a political non-starter, but there is now a growing movement calling for this change. We could also be made better off, economically and health-wise, by taxing sugar and soda consumption that contributes to the marked increase in diabetes and obesity-related diseases; the costs are staggering, with obesity alone costing America a shocking $147 billion a year.

Here are examples of Smart Tax proposals from across the political spectrum:

  • Carbon tax — Carbon Tax Center puts revenue in the trillions with a substantial cut in emissions – $1.5 trillion over 8 years.
  • Soda tax — 1 cent per what? tax would raise $160 billion over 10 years while motivating 8-10% decline in consumption, lowering our health care costs.
  • Tobacco tax— 50 cent per pack rise could raise $80 billion in 10 years (Congressional Budget Office).
  • Marijuana tax – In states where legal, could raise $90 billion in 10 years and save the same in reduced law enforcement. Net gain: $180 billion.

By taxing “bads” we can achieve the trifecta: raise money to treat the disease/damage/costs, reduce consumption and thus prevent disease/damage/costs in the first place, and make a dent in health care spending and the cost of government across the board. Not to mention avoiding the incredible suffering these diseases cause – which is the best reason to do it.

Smart Taxes do not have to be a tax increase, but rather a tax shift. For every dollar raised in carbon, alcohol, and tobacco taxes, another tax could be lowered dollar for dollar: payroll taxes, income taxes, business taxes, or sales taxes. Lowering those taxes would encourage the economic activity that we want more of but which our upside-down tax system inhibits. Republicans and Democrats alike agree that sales taxes cut down on sales and payroll taxes impede job growth.

Smart Taxes could motivate the next taxpayer revolution. Whatever our political persuasion, we as citizens need to demand that our elected officials lower taxes on “goods” and raise them on “bads.”

Photo: A.C.N. Photography, via Flickr.

Presenting: An Even Better Carbon-Tax (Spreadsheet) Model

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Today we unveil our enhanced carbon tax model. The link on our Home Page takes you automatically to the new version. (You may also download the model by clicking here.)

As before, the model is a compact (600 kB) Excel spreadsheet that runs on PC’s or Macs with Excel 2003 or later. Like prior versions, it splits the U.S. energy-economy into a handful of “sectors” (e.g., electricity, passenger vehicles) and, for each, generates 20-year-or-more projections of usage and per-unit carbon emissions with and without a price on carbon pollution. You can set the prices yourself — we say “prices,” plural, because you can specify both the initial price and the rate of year-to-year increase; or you can use our “out of the box” pre-set prices.

The result is a pair of emissions projections — one with the carbon price and the other without — with both referenced to the same set of anticipated changes in economic activity and energy prices. The difference between the respective projections is the emission savings (reductions) imputed to the carbon tax.

Here are the key new features (these bullet points have been updated to reflect the 2014 version of the model):

  • The model is baselined to 2013 levels of economic activity and fuel use. Thus it reflects the dizzying shifts of late in electricity generation shares, from high-carbon coal (which lost six percentage points of market share from 2010) to lower-carbon gas (up four points) and zero-carbon wind (up four points).
  • The model employs “official” U.S. forecasts of economic growth, general inflation, and, most importantly, of prices for electricity, natural gas and crude oil, rather than our own forecasts. (The carbon tax is layered “on top of” the official prices.)
  • Explicit treatment of inflation. First, the carbon tax itself can be indexed to general inflation, or not; second, energy prices (including the carbon-tax-affected prices) are translated into the nominal (inflation-inclusive) prices in which end-users actually experience (i.e., pay) them. While this may sound complex, the model results are more rigorous (accurate) than before.
  • The model has seven sectors, up from five. We’ve split our catch-all category of “Other” energy uses (other than electricity, driving and other personal ground travel, freight movement, and aviation) in two: uses fueled by natural gas, and uses fueled by petroleum products. This enables the model to more fully capture differences in gas and petroleum prices including sensitivities to carbon taxes. A “miscellaneous” category captures CO2 emissions from non-electricity-generation uses of coal; from non-energy uses of fossil fuels such as natural gas used in chemical plants, LPG (liquid petroleum gas), lubricants and naphtha; and fuels used for energy in U.S. territories (which are not included in other tabs).
  • We’ve overhauled our derivation of the tax’s impact on petroleum usage. Not only was our previous method needlessly convoluted; it also over-calibrated oil’s shares of the different sectors and thus led to overstating the reductions in petroleum usage from the carbon tax-caused reductions in future energy usage. (The predicted reductions are impressive nonetheless: for the Larson bill, which we model with inflation-indexed prices of $15/tonCO2 in the first year, incremented by $12.50/ton each year, the tenth-year reductions in oil usage are 4.3 million barrels a day from 2005 levels, and 2.6 million b/d from projected oil requirements without a carbon price; for comparison, the Keystone XL pipeline is intended to deliver 0.83 million barrels a day of crude from Canadian tar sands to U.S. refineries.)
  • A new spreadsheet tab, Index, has links that improve navigation among the 22 different tabs.
  • Clearer graphs of CO2 reductions and petroleum savings, and a new graph of revenue generation, expressed both nationally and per-household.
  • Generally improved layout and presentation.

The key result — the model’s estimate of CO2 reductions from U.S. carbon taxes — is largely unchanged from earlier versions. In the tenth year of a “Larson”-type carbon tax, with the carbon tax rates noted in the large bullet-paragraph above, projected U.S. emissions CO2 from fossil fuel combustion are 1.8-1.9 billion metric tons less than predicted without a carbon price, a 33% reduction.

A few tabs in the spreadsheet aren’t yet complete. Nevertheless, the features enumerated here constitute such a large improvement over the prior version to warrant posting it today. We invite all users of the model, old and new, to kindly:

  • Update earlier findings you may have drawn from prior versions of the model, substituting results from this one.
  • Walk through the model with an eye toward evaluating it for logic, rigor, presentation and functionality. Please e-mail us all suggestions and criticisms, via info@carbontax.org.

Happy modeling, and best wishes.

   — Charles