Wrong road to reducing emissions (Rep. Peter DeFazio, D-OR, Oregonian, on cap-and-trade)
Search Results for: cap and trade
Climate Change Baptist & Bootlegger Coalition Tells Congress Today They Want Free Money
Reason Blog likens cap-and-traders to old-time "Baptists & Bootleggers"
At Last, It Begins: Real, Substantive Debate on 2009 Climate Legislation
(This post first ran in the Huffington Post on November 25.)
Before President-elect Obama’s cabinet is named — even before we know who the next Senators from Minnesota or Georgia will be — jockeying for position on 2009 climate legislation is well underway on Capitol Hill. Detailed intellectual cases and functioning coalitions are getting built now, not just for the idea that we need robust climate legislation fast – that’s already widely accepted and anticipated in Washington – but for which specific mechanisms will deliver the biggest, fastest impact on carbon emissions and the economy.
Significantly, these discussions aren’t all taking place behind closed doors, but in full public view, for example at a public Hill briefing December 9 with carbon tax supporters like NASA scientist James Hansen, economists Gilbert Metcalf and Robert Shapiro, Canadian public affairs expert James Hoggan, and Rep. John B. Larson (D-Conn., 1st district), who has just been elected chair of the House Democratic Caucus, and who introduced an early piece of carbon tax legislation into the House. The public can attend, along with Congressional members and staff — details here.
If introducing a new tax on carbon seems like a quixotic political battle in a time of historic economic and fiscal crisis, then you’re out of touch. The economic crisis has in fact given it a big boost, and in this crisis-ridden political environment, the carbon tax is an increasingly formidable competitor to cap-and-trade schemes.
The latter work by creating trillions of dollars’ worth of complex, tradeable instruments, and public faith in market gurus to make such trading efficient, or in government agencies to regulate them, is at an all-time low.
Critics point out lots of places to hide in the cumbersome trading scheme, witness 800-pages of special interest potlatches in the DOA Warner Lieberman bill, whereas a carbon tax is as inexorable as… taxes.
Crisis-driven volatility in oil prices has proven what advocates of gasoline taxes and energy taxes have said all along: price spikes may come and go, but if we don’t somehow tax wasteful use of carbon fuels, the highs will just put windfalls in the pockets of oil producers and do nothing for American interests, either for energy independence or for getting control of our emissions. A carbon tax would put an effective floor under the price of gas, help smooth volatility, cut into the windfall profits of producers during price spikes, and as prices fall off the highs, keep oil consumers from going, as President-elect Obama recently said, from shock back into trance.
Perhaps most appealing of all amid the economic crisis is the fact that a carbon tax could be kept revenue-neutral. That would allow us to pay as we go to curb emissions; and wouldn’t entail any huge government outlays or bureaucracies to get addicted to the revenue. Along with the increase in energy prices, carbon tax revenues would be big, but the money would be given right back to taxpayers, whether in the form of direct payments like Alaskans get for oil production, or in the form of a progressive tax cuts like cutting or eliminating payroll taxes, as progressives like Al Gore and even conservatives like T. Boone Pickens have proposed.
Payroll taxes are the biggest, most regressive taxes 80% of Americans pay, and a big drag on employment since they artificially raise hiring costs. Cutting them would both put money back into the pockets of middle-class and working-class families, and take the self-imposed brakes off job creation.
If you’re President-elect Obama and you’ve promised to create 2.5 million jobs by 2011, and to lower taxes on families making less than $250,000 a year, while finding the means for a meaningful economic stimulus and major reductions in carbon emissions, that has got to sound good.
If you’re a concerned citizen who has been waiting for years for the political static to clear, and some real, productive grappling with meaningful climate legislation to begin, this is your moment. You can weigh in, sign petitions, write letters to Congress, attend that Hill briefing, and generally be part of substantive, small-d democratic debate about serious climate legislation at the Price Carbon Campaign
Photo: Flickr / Afagen.
Is the Moment Ripe for a National Carbon Tax?
(This post first ran on Gristmill, under the headline,
Can the Promise of a New Political Landscape Include a U.S. Carbon Tax?,
with the subhead, Advocates launch the Price Carbon Campaign.)
What do the defeat of the Lieberman-Warner cap-and-trade bill, the burst of the oil-price bubble, the Wall Street meltdown, the promise of a new political landscape in the wake of the fall elections, and the exigencies of the climate crisis have in common
To the Carbon Tax Center and our partners at the Climate Crisis Coalition, these events together augur for a resurgence of interest in, and potential political support for, the “gold standard” for carbon pricing: a national, revenue-neutral carbon tax.
Consider:
- The ignominious defeat of Lieberman-Warner, which collapsed in June under its 800-page weight, made crystal-clear that any carbon cap-and-trade system will be dysfunctionally complex, will take agonizingly long to put in place, and will fall prey to massive special-interest ripoff.
- Political prospects for creating trillions of dollars’ worth of tradeable carbon emission permits have been further damaged by the Wall Street debacle and the resulting backlash against insider speculation and profiteering.
- Retreating prices for oil and other fossil fuels strengthen not just the need, but also the political wherewithal for taxing fuels for their carbon content.
- The success of the movement to elect Barack Obama to the presidency signals an era of new possibilities in which, just possibly, shibboleths such as “no new taxes” may get tossed into history’s dustbin — particularly if carbon taxes are made revenue-neutral via tax-shifting or revenue distribution.
To pivot off this moment, CTC and CCC today, with other allies, have launched the Price Carbon Campaign.
The campaign begins with three elements:
- an online petition to the Obama administration and Congress calling for serious consideration of a national carbon tax during the first hundred days of the new Washington regime;
- a letter-writing campaign to members of Congress. Your letter will be directed not only to your Senators and member of Congress (keyed by your zip code), but also to House and Senate leaders who hold sway over climate and tax legislation; and
- a congressional briefing on carbon taxes focusing on the environmental, economic, economic-efficiency, logistical, and political benefits of a national carbon tax.
The briefing, featuring NASA lead climatologist (and carbon tax advocate) James Hansen, economists Gilbert Metcalf and Robert Shapiro, and Canadian public affairs expert James Hoggan, and hosted by Rep. John B. Larson (D-Conn., 1st district), is set for a House Ways and Means Committee hearing room (Rayburn H.O.B., Room B-318) on Tuesday morning, Dec. 9.
For further details on the briefing, click here.
We hope to generate thousands of signatures and letters between now and Dec. 9, so please visit the Price Carbon Campaign now.
Photo: Flickr / patrix.
A Tale of Two Elections
The presidential campaign that culminated in Barack Obama’s historic win wasn’t the only national election in North America this fall. James Handley reports.
After building his campaign around a “Green Shift,” a revenue-neutral carbon tax that he promised would return “every penny” to taxpayers, the leader of Canada’s centrist Liberal Party, Stephane Dion, took a pounding from both left and right in the Oct. 14 election. Conservatives spun the Green Shift as “a tax on everything,” while the leftist New Democrats branded it as body blow to the poor, ignoring that their own cap-and-trade plan would squeeze families with higher fuel prices without the Green Shift’s offsetting tax reductions.
Though Dion and the Liberals carried enough other baggage to lose most elections, the carbon tax is being tagged as a factor in the Liberals’ loss of 26% of their seats, almost entirely to the Conservatives. Yet when McAllister Opinion Research asked nearly 2,000 Canadians what they thought of a tax shift that involved "cutting income taxes and increasing taxes on pollution," two-thirds said they thought it was a good idea. And a ten-point open letter issued by 230 leading Canadian economists and 120 prominent scientists incorporated key elements of the Green Shift. Clearly, a different message, or messenger, or both, was needed to create a political victory for a Canadian carbon tax.
Veteran environmental advocate Alan Durning, founder of the Seattle-based Sightline Institute, attributes the Green Shift’s political difficulties to three cognitive factors:
Distrust of government: Taxpayers don’t believe that income tax reductions will compensate for their carbon tax increases. Indeed, their skepticism may have been well-founded in this case, with Dion’s tax shifts adding up to a good deal less than 100%, according to at least one post-mortem.
Disbelief in “price elasticity”: Many citizens don’t believe that higher energy prices lead to less usage. So the premise of pollution taxes, that they create across-the-board incentives to reduce emissions, doesn’t make sense to them.
The Asymmetry of Losses and Gains: People are more averse to possible losses than they are attracted by possible gains. The $10 you stand to lose count more to you than the $10 you stand to gain. As a consequence, the carbon tax looms much larger in voters’ minds than the offsetting tax reductions.
Durning concludes that Canada’s election represents a “shrug” — the “Green Shift” just wasn’t understood. It isn’t “likely to attract a swarm of enterprising leaders to carbon tax shifting as a way to kickstart political careers. But it won’t completely scare them off, either.”
South of the border, and three weeks later, after a campaign that offered little specific discussion of climate policy, Barack Obama won the White House with a majority of the popular vote and a 2-to-1 margin in the Electoral College. Obama’s election-night speech didn’t mince words on the climate crisis, calling out “a planet in peril,” along with two wars and the worst financial crisis in a century, as the challenges facing Americans. Evidently, Obama was wise to steer clear of climate policy specifics during his campaign. Maybe, as pollsters and advisors suggested to Dion, the best time to propose a carbon tax shift is after an election. Yale economist Robert Shiller observed recently, “Candidates cannot try interesting and controversial new ideas during a campaign whose main purpose is to establish that the candidate has the stature to be president."
Economists are virtually unanimous that pricing carbon emissions is an essential first step toward a low-carbon economy; and their consensus that price-based policies like a carbon tax are much more effective than quantity-based proposals like cap-and trade is almost as strong. For some time now, leading scientists such as Canadian geneticist David Suzuki and NASA climatologist Dr.James Hansen in the U.S. have been warning of tipping points that will trigger global climate catastrophe, and urging nations to adopt carbon taxes as the most immediate and effective policy tool available to change direction. Hansen urges, simply, “tax polluters, pay people.”
The Carbon Tax Center is organizing a Capitol Hill briefing on the morning of Dec. 9 that will feature Dr. Hansen and economists Gilbert Metcalf and Robert Shapiro. (Details will be posted here shortly.) The briefing will also offer insights to U.S. policymakers on using the experience in Canada to frame and sell a carbon tax here.
The economy will be the Obama administration’s first priority. Not only is a gradually-increasing carbon tax on coal, oil and gas producers and importers the most effective medicine for a fevered “planet in peril.” In addition, direct distribution of all the revenue to individuals would provide “stimulus checks” where they’re needed most. Alternatively, a carbon tax “shift” offers “a double dividend” by reducing greenhouse gas emissions and improving the overall efficiency of the economy by reducing taxes that discourage employment.
Either way, the time for effective and economically-stimulative climate measures is now.
Photo: Flickr / Antony Pranata.
A Question of Balance: Finding the Optimal Carbon Tax Rate
Guest Post by James Handley
Economists are virtually unanimous: Raising the price to emit carbon is essential for reducing greenhouse gas emissions and staving off climate disaster. But how high should that price be set? And how steep a trajectory should be chosen to get there? Here, we look at what several leading economists have said about carbon tax rates, as well as their preferences for the use of carbon tax revenues.
One of the most forceful and respected advocates of carbon taxation is Yale economist William Nordhaus. In his new book, A Question of Balance, Weighing the Options on Global Warming Policies, Nordhaus employs a complex model of the U.S. economy to determine the "optimal" carbon tax rate – the rate that would cost the economy no more in reduced productivity than the climate damage it would prevent. He writes:
According to our estimates, efficient emissions reductions follow a "policy ramp" [with] modest rates of emissions reductions in the near term, followed by sharp reductions in the medium and long terms. Our estimate of the optimal emissions-reduction rate for CO2 relative to the baseline is 15 percent in the first policy period, increasing to 25 percent by 2050 and 45 percent by 2100. This path reduces CO2 concentrations, and the increase in global mean temperature relative to 1900 is reduced to 2.6°C for 2100 and 3.4°C for 2200." (p. 14)
Nordhaus assumes that, at least in the near term, Earth’s climate system will respond predictably to rising levels of greenhouse gases. He thus distances himself from the more aggressive stance of Al Gore and Sir Nicholas Stern who advocate steeper carbon pricing policies to avoid triggering irreversible "tipping points" in the climate system. Nordhaus also assumes a far higher "discount rate" than Stern, which leads to greater emphasis on present costs than distant benefits. With these assumptions, Nordhaus concludes that a carbon tax starting at $7.40/ton of CO2 is optimal, so long as it increases by 2-3% a year in real terms (after inflation) until 2050, with steeper increases after that.
Nordhaus suggests revenues "be used to soften the economic impacts on lower-income households, to fund necessary research on low-carbon energy, and to help poor countries move away from high-carbon fuels." (p. 24) He calls internationally "harmonized" carbon prices the most efficient way to induce emissions reductions worldwide.
Another forceful advocate of carbon taxes is Gilbert Metcalf of Tufts University. In his paper, A Green Employment Tax Swap: Using A Carbon Tax to Finance Payroll Tax Relief, published jointly by the Brookings Institution and the World Resources Institute, Metcalf recommends a carbon tax just under $17/ton of CO2. This would nearly double coal’s price, reducing its use by 32%, while petroleum products would increase in price by nearly 13% and natural gas by just under 7%. Metcalf also advocates dedicating carbon tax revenues to eliminate the payroll tax on the first $3,660 earned by each worker. He calculates that this equates to an average 11% reduction in payroll taxes, with greater percentage reductions for the lowest-paid workers.
Metcalf’s rationale for reducing payroll taxes is simple:
"In general, taxes on labor supply discourage labor and create economic losses to workers over and above any taxes collected. Workers forego opportunities to work longer hours or engage in training that increases their productivity and wages. Moreover, workers may choose not to enter the labor force in response to taxes on wage income. Tax reductions can encourage additional labor supply either on the intensive margin (hours worked) or the extensive margin (the decision to enter the labor force). The Green Employment Tax Swap encourages additional labor supply on the extensive margin." (p. 2)
Greg Mankiw, Harvard economist and former economic advisor to President Bush, has written in the New York Times in support of Metcalf’s proposal.
A third prominent carbon tax advocate is Robert Shapiro, former undersecretary of Commerce in the Clinton Administration and now head of SonEcon a Washington, DC consulting firm, and co-chair of the U.S. Climate Task Force. In his recent report, Addressing Climate Change Without Impairing the U.S. Economy, Shapiro begins with the science:
"…a range of scientific studies has concluded that the world’s current climatic conditions can be sustained if atmospheric CO2 concentrations do not exceed a general range of 450 to 550 ppm over the long term. Stabilizing carbon dioxide concentrations at those levels will require sharp reductions in net global emissions of CO2 for the next several decades." (p. 2)
Shapiro’s optimal carbon tax would
reduce carbon emissions at the rate and levels required to move to a path that will stabilize future atmospheric concentrations of CO2, so they do not produce destructive climatic changes, and in ways that impose the least marginal social and economic costs. Because climate science is still developing, scientists cannot say with certainty what the marginal cost of CO2 emissions is today, and consequently at what precise point a carbon-based tax — or the cap in a cap-and-trade program — would achieve this goal.
Shapiro continues:
One of the most comprehensive surveys of these issues, conducted by a leading European expert, Dr. Richard S.J. Tol, assessed 103 published estimates of the marginal costs of CO2, including 43 studies published in peer-reviewed journals. Among these more rigorous analyses, the average or mean value of this measure was $50 per metric ton of carbon or $13.64 per metric ton of CO2." (p.15)
Shapiro accepts this figure and uses the U.S. Energy Department’s NEMS model to predict the effects of gradually increasing to that carbon tax level. He concludes:
… Americans’ use of the least carbon-intensive forms of energy, renewable fuels, would rise sharply (up 220 percent by 2030) while the use of coal, the most carbon intensive fuel, would fall correspondingly (down 54 percent by 2030). Much of this shift would occur in the fuels used to produce electrical power. By 2030, these shifts would drive down U.S. annual CO2 emissions by about 30 percent, compared to what they would be without a climate change program, or about 6 percent less than current emissions." (p. 18)
Shapiro recommends recycling 90% of the carbon tax revenue, with the balance dedicated to research and development of low-carbon energy:
This policy then would return to workers, businesses or households nearly $3.6 trillion of the $4 trillion collected by the tax. These recycled revenues would be sufficient to reduce, on average, the annual payroll tax rate for workers and businesses by two percentage points, or exempt from payroll tax the first $10,066 in a worker’s earnings (or exempt the first $5,033 from the payroll taxes paid by both workers and their employers), or provide every working person a rebate payment of $1,080 each. [Alternatively,] these revenues also could be returned as flat payments to every household averaging $1,275 per year, per household, from 2010 to 2030. These payments would more than offset the direct tax related costs for the majority of American households, since the $1,563 in direct costs applies to the "average-income" household. (p. 21)
The Carbon Tax Center advocates establishing a $10/ton CO2 tax and increasing it at that rate each year for at least a decade. Using a simple but transparent model, CTC estimates that this more aggressive approach would reduce U.S. CO2 emissions relative to their expected growth curve by a third, if ramped up for 10 years and then held constant, and by almost half if the incrementing is extended over a second decade. This would put the U.S. on a trajectory to meet the recommendations of the Fourth Assessment by the Intergovernmental Panel on Climate Change to reduce emissions by 80% from projected "business as usual" levels by 2050. As for use of carbon tax revenues, CTC is agnostic between tax-shifting and pro-rata "dividends," provided the tax is kept revenue-neutral.
The table below summarizes the four sets of carbon tax recommendations:
Source | Initial tax, $/tonCO2 | Annual Tax Increment | Tax Rate in 10 yrs | Tax Rate in 20 yrs |
Revenue treatment |
Nordhaus | $7.40 | 2 – 3% | $9 – 11 | $11-13 |
offsets for poor, low-carbon energy R&D, assistance for LDCs |
Metcalf | $16.60 | 0 | $16.6 | 16.6 | payroll tax shift |
Shapiro | $15 | $2 | $35 | $55 | payroll tax shift |
Carbon Tax Center | $10 | $10 | $100 | $100-200 | payroll tax shift/dividend |
All four sources propose starting with modest carbon taxes. CTC recommends predictable, step-wise increases to create clear expectations, while two others recommend gradual increases but concede that adjustments in carbon tax rates may be needed to meet emissions targets.
Two recommend that a fraction of carbon tax revenue be devoted to research and development of low-carbon energy. All recommend "recycling" most or all carbon tax revenue over targeted subsidies to energy industries, because price signals would more effectively spur individuals and firms to develop and implement conservation and alternative energy technologies. "Revenue recycling" would improve the overall efficiency of the economy and provide stimulus that could more than offset income effects of a carbon tax on middle- and low-income families, always a salient point but particularly now, as a deep recession looms.
Bloomberg, Economists, Greens Tell Ways & Means: Price Carbon Upstream, Distribute Revenues to Consumers
Reported for the Carbon Tax Center by James F. Handley.
The "fierce urgency" of the climate crisis compels action, said Rep. John Larson (D-CT) at Thursday’s House Ways and Means Committee’s packed hearing on climate change revenue measures. Hurricane Ike’s devastation of coastal Texas imparted deeper meaning to Martin Luther King’s phrase. Witnesses pointed to storm-related damage as one of many ways in which failure to reduce the greenhouse gas emissions that drive global warming will destroy ecosystems and economies alike.
Citing the effectiveness and simplicity of a carbon tax, New York City Mayor Michael Bloomberg urged Congress to tax fossil fuel producers upstream, and distribute revenue downstream to consumers by reducing payroll taxes. A carbon tax would impose a cost proportional to carbon emissions, but because revenue distribution would not be linked to consumption, the system would “use capitalism” to create broad incentives for energy conservation and alternative energy, Bloomberg said.
While reiterating that he favors a “straightforward carbon tax,” Bloomberg said carbon cap-and-auction would also work if revenues were distributed downstream, an idea elaborated later by Peter Barnes of Cap and Dividend. Bloomberg urged the U.S. to avoid competing to become the world’s cheapest producer — a strategy that has thrust China into an environmental nightmare and a downward wage spiral. Bloomberg and Dr. Frank Ackerman of the Stockholm Environment Institute and Tufts University cited Germany’s standing as a world leader in manufacturing high-value products despite high wages and energy prices.
Climate policy, said Dr. Peter Orszag of the Congressional Budget Office, poses the thorny problem of imposing short-term costs to achieve long-term benefits. The Lieberman-Warner cap-and-trade bill would have created $100 billion in carbon emission allowances. Orszag stressed that giving away permits to energy producers, as the bill proposed, would enrich fuel producers rather than protect energy consumers. To avert the extreme volatility experienced under EPA’s sulfur dioxide cap and maximize economic efficiency, Orszag urged that a carbon cap be designed flexibly with banking of permits.
Dr. Dallas Burtaw of Resources for the Future agreed with Orszag that giving away permits to energy producers wouldn’t reduce price increases felt by consumers. A tax with a direct dividend would function as a transparent system, Burtaw said, that would signal to the public that we are addressing climate change as a national initiative that is “not engineered to squirrel away special privileges.”
Tim Regan of Corning Incorporated warned the Committee over the competitive disadvantage to energy-intensive industries such as his own under either cap-and-trade or a carbon tax. But Robert Lighthizer, an attorney with Skadden, Arps’ international trade department, assured the panel that the WTO allows the U.S. to impose tariffs equivalent to domestic carbon prices on imported products to put domestic products on a level playing field. Gary Hufbaur of the Peterson Institute cautioned that the WTO has not ruled on these matters but argued that this need not delay U.S. action to create incentives for our trading partners to join in combating global warming.
The Committee questioned panelists extensively. Rep. Paul Ryan (R-WI) cited the conclusion of the February CBO study that a carbon tax would be five times as effective as a simple cap-and-trade system. Several panelists noted that setting tariffs to harmonize the burden on imported goods would be much simpler under a carbon tax because the exact price of carbon would be fixed while under cap-and-trade the price would fluctuate.
After a recess for floor votes, the Committee began its second panel with Frank Ackerman of the Global Development and Environment Institute of Tufts University. “The debate has shifted at last” Dr. Ackerman declared. “Climate science is no longer debatable and now the serious economic discussion is underway.” He insisted that costs of inaction would be staggering — far more severe storm damage, sea-level rise inundating coastal-area homes, farms and businesses, particularly in Florida and the Caribbean, and endemic water shortages. Ackerman testified that the costs of well-designed policies to cut carbon would be small by comparison, probably only 1% of output.
Daniel Abassi of the emissions trading and investment firm MissionPoint Capital called on Congress to price carbon through a cap-and-trade system, with 25% of allowances given to industry and 75% auctioned, with revenue used to reduce distortionary taxes, for tax incentives, efficiency upgrades and low-carbon energy R&D.
The climate crisis is “a major threat to national security,” declared Jerome Ringo of the Apollo Alliance Having just been in Louisiana and Texas, Ringo said average people aren’t talking about the Wall Street meltdown, they’re asking “why they’ve been hit with so many category 5 storms; climate change comes up in almost every conversation.” Ringo called for Congress to push the U.S. to a green jobs economy by funding public transportation and infrastructure. He warned that emissions trading could mean “rich companies get richer” and asked that carbon revenues be dedicated to training and investment in alternative energy.
Peter Barnes urged Congress to put cap-and-trade auction revenue where it will do the most good both politically and economically — into a direct monthly dividend to each U.S. resident along the lines of the Alaska Permanent Fund. A dividend would offset economic effects on consumers and also build the broad political support needed to support climate legislation, Barnes said.
Expanding on the Apollo Alliance’s call for funding public transportation, Bill Millar of the American Public Transportation Association cited DOE studies showing that transport generates a third of U.S. carbon emissions. [Ed. note: autos and light trucks generate 21-22% of U.S. CO2; air travel and freight add another 10%, approximately.] “If a typical two-car, two-adult household chooses to eliminate one car and take public transportation, walk or ride a bicycle for most of its trips, [its] CO2 emissions can be reduced 30% which is more than if that household went without electricity,” Millar testified. Millar said that spending $1 billion on public transportation would create at least 35,000 jobs. He also called transit a direct way to offset the effects of higher fuel prices on consumers.
David Kreutzer of the Heritage Foundation testified that a U.S. policy capping emissions or a carbon tax would do little to reduce global greenhouse emissions and would not be worth the cost. Ackerman strongly disagreed, “If the U.S. leads, the world will follow, but if we don’t, the worst consequences” can be expected.
Photo: Flickr / HispanicCaucus.
Think-Tank Gives Thumbs-Up to "Dividending" Carbon Revenues
Dividend? Yes.
Payroll tax-shift? No.
EITC tax-shift? Yes.
Energy-efficiency? Hmm, tell me more.
These are the bottom lines on carbon "revenue treatment," as we read them, of Resources for the Future’s impressive new report, The Incidence of U.S. Climate Policy. Released late last week, the report concludes that distributing carbon permit or tax revenues equally among U.S. residents would be income-progressive, whereas using the revenues to reduce payroll or income taxes would widen the already yawning income gap between rich and poor.
These findings appear just as serious attention is beginning to be paid in carbon-pricing circles to the disposition of the enormous revenues that would be raised under either a hefty carbon tax or a stringent carbon cap-and-trade system. Tomorrow, Sept. 16, the Energy and Environmental Study Institute and Clean Air – Cool Planet are co-hosting a Capitol Hill briefing on Climate Change Legislation and Revenue Recycling, while on Thursday Sept. 18 the House Ways & Means Committee is convening a Hearing on Policy Options to Prevent Climate Change focusing on revenue treatment.
The RFF report evaluated the effects of a CO2 cap-and-trade program on households in each of 11 regions of the country and sorted into annual income deciles, i.e., 10 income-percentage groupings. (The light blue bars in the chart at right denote net costs for each decile from poorest to richest after the revenue-dividend "remedy," with downward-pointing bars indicating net gains; these incidence findings for cap-and-dividend should apply about equally for a carbon tax-and-dividend.) Using the Modified Suits Index, or MSI (a variant of the better-known Gini coefficient for measuring income inequality), the report calculates an MSI of plus 0.15 for the cap-and-dividend approach championed by social entrepreneur Peter Barnes. Since an MSI of zero indicates income-neutrality, while minus one and plus one denote perfect regressivity (all taxes fall on the poorest decile) and progressivity (only the wealthiest are taxed), respectively, the plus 0.15 rating indicates that cap-and-dividend would be moderately progressive. And indeed, the RFF analysis finds that cap-and-dividend would produce a significant gain in "consumer surplus" (overall utility) for households in the lowest income decile, but a loss for most higher-income families.
Conversely, a cap-and-trade with much of the revenue applied to reducing payroll taxes, as long urged by Al Gore, has an expected Modified Suits Index of minus 0.33, indicating considerable income-regressivity. Indeed, that figure is more extreme than the minus 0.18 value estimated for cap-and-trade before considering revenue uses, strongly suggesting that applying carbon revenues to reduce payroll taxes is a non-starter so far as protecting poor families is concerned. Using carbon revenues to increase the Earned Income Tax Credit is progressive, however, with an expected MSI of plus 0.23.
Intriguingly, RFF holds out high hopes for investing carbon revenues in energy-efficiency programs. According to the report, investing in "EE" would yield around the same "progressive" outcome (an MSI of plus 0.16) as cap-and-dividend, but with larger emissions reductions. Though the authors note that "There are important institutional challenges to achieving gains from end-use efficiency investments," they add that "our modeling suggests that if these challenges can be overcome such a policy might have important distributional benefits."
The RFF geographical analysis is also encouraging, generally finding lesser interregional differences than are often supposed — largely because regions with high carbon consumption in one sector, such as driving, tend to have offsetting lower carbon usage in other sectors like home heating.
We encourage visitors to this Web site to comment with their own observations on the RFF report and the issues it addresses.
Image courtesy of Resources for the Future.
Media Maturity Smoothing Carbon Tax Path
Match the statement with the "green" source:
- Statement 1: Expensive energy is a powerful medicine. It may hurt when taken, but it brings long-term cures for a host of ills.
- Statement 2: Willingness to advocate an explicit carbon tax is the real test of whether either [presidential] candidate is ready to confront [global warming].
- Statement 3: Pricey gas is mostly just economic pain. But beyond the agony at the pump, life is getting a little better in ways we may not notice.
- Source 1: Sierra (Club) magazine
- Source 2: Al Gore
- Source 3: Greenpeace
Answer: None. The statements are real, alright (though elided slightly here), but none is from a certified greenie. All three are from articles in mainstream magazines: Business Week (The Real Question: Should Oil Be Cheap), National Journal (How to Get Serious About Energy Policy), and Time (10 Things You Can Like About $4 Gas), respectively. All three appeared in the past month.
Nor were the quotes chosen selectively. Almost any sentence picked at random from the articles would say the same thing: Expensive energy, though painful for a nation built on cheap fuels, is
an absolute necessity for dealing with oil dependence and global warming.
Clearly, a change is in the air. America is growing up, as I argued in an article in Gristmill in May reporting public rejection of the gas-tax "holiday" proposed by Senators Clinton and McCain.
Naturally, not everyone in the media has gone adult. Rush Limbaugh, for one, dismissed the Time article as yet another attempt to "tell you how to live ’cause you’re too stupid to know, by effete-snob Drive-By Media leftists." But a new consensus is emerging among mainstream media: "There’s no faster mechanism than high prices for oil to change behavior… You suddenly are reminded how the economy works." (Time, quoting author Eric Roston) "Expensive energy, in many ways, is good." (Business Week) "A revenue-neutral package of a carbon tax and cuts in other taxes is
surely within the bounds of domestic political salesmanship." (National Journal)
Of course, the recent rise in energy prices is neither sufficient nor optimal. Higher energy prices are best delivered via tax policy so the increased revenues can be socially invested or, better, returned to individuals and families, rather than lining the pockets of obscenely wealthy Saudis, Russians and Texans. A rising trajectory of prices also needs to be locked in. (Business Week: "What really drives behavior is not the actual price, but the perception of where costs will be over the long term.") A host of market barriers still impede energy efficiency. And tackling carbon emissions requires a carbon tax; coal’s abundance ensures that the market can’t manage alone.
The National Journal article, by veteran political reporter Clive Cook, is notably upbeat on the last possibility. The subhead reads, "Politicians of both parties take it for granted that the American voter cannot tolerate an explicit tax on carbon," a notion that the article calls into serious question. We close with these excerpts:
The country’s mood on global warming has changed — most people now seem to take the danger seriously — but public opinion on energy policy has two contradictory strands. People are worried about rising temperatures and changing climate; but they are also worried about expensive gas. If you are serious about reducing carbon emissions, expensive gas is not a problem; it is an unavoidable part of the solution.
Politicians of both parties take it for granted that the American voter cannot tolerate an explicit tax on carbon, which would be the best way to curb greenhouse gases. This supposedly immovable resistance is why the presidential candidates advocate a system of tradable emission permits instead. But if cap-and-trade binds tightly enough to make a difference, it will necessarily make carbon-releasing fuels more expensive. The system cannot work any other way: It can succeed only by attaching an implicit tax to carbon.
As it happens, I think the political toxicity of a carbon tax as against cap-and-trade–assuming we are serious about this, and contemplating a cap-and-trade system that makes a difference–is exaggerated. A revenue-neutral package of a carbon tax and cuts in other taxes is surely within the bounds of domestic political salesmanship. But also bear in mind the decisive international advantage of a straightforward carbon tax.
Yes, America should lead on global climate change, but it cannot solve the problem alone. Its efforts will be futile unless other big emitters — especially China and India — join in. Reaching agreement on a global cap-and-trade regime, and coordinating each country’s efforts within it, would be fantastically difficult. Think about Europe’s problems with Kyoto, and multiply by 10. It would be far, far simpler to organize international efforts around a harmonized carbon tax. Why strive to coordinate a million quantities, when you can gradually coordinate a single price?
Photo: Flickr / J.A. Campbell
A Convenient Tax – June 2008
We launched the Carbon Tax Center seventeen months ago to inform and engage the public about the need for and benefits of revenue-neutral carbon taxation. Coincidentally, that same week the United States Climate Action Partnership, a coalition of mainstream environmental organizations, major electricity generators and giant industrial corporations, announced its formation and legislative agenda: a federal carbon cap-and-trade system. To state the obvious, USCAP has a lot more money and political clout than we do. Not surprisingly, USCAP managed to buy a tremendous amount of press and political support for its cap-and-trade program.
Our strategy at CTC has been simple. We provide an objective source of carbon tax and cap-and-trade related facts, economic arguments and news. We let the public know about the broad support for a carbon tax from economists and opinion leaders across the political spectrum. We were confident the public and Congress would eventually recognize that a revenue-neutral carbon tax is far superior to cap-and-trade for a variety of efficiency and equity reasons that we set forth in an issue paper on our Web site and in a variety of debates and other forums. We expected that Americans would see that the cap-and-trade scheme proposed in bills such as Lieberman-Warner is essentially a tax, with the revenue doled out to special interests. We were betting that once cap-and-trade was revealed as a hidden tax proposal, its putative political advantage over a straightforward carbon tax would vanish.
Events are proving us right. Cap-and-trade’s aura of inevitability evaporated in the U.S. Senate this month. Why? Because, just as we predicted, Senators balked at the cap-and-trade bill’s complexity, its windfall profits for carbon polluters and the feeding frenzy to distribute the revenues in classic pork-barrel fashion.
We don’t buy the notion that in rejecting cap-and-trade, the Senate is defying the public outcry for an effective response to global warming. As John Tierney wrote in his New York Times science blog, “Maybe a better deal — and a better policy — will emerge from this failure.” Tierney emphasized that James Hansen, the NASA climate scientist who has been so outspoken on the imminence of global warming, now backs a “tax-and-dividend approach” with carbon revenues “divided equally, so that people who use less energy than average — like lower-income people — would get back more than they spend.” As Tierney pointed out, “Refunding money directly removes the temptation for Congress to treat … carbon-reduction revenues as a chance to dispense trillions of dollars worth of favors — as proposed in last week’s bill, which was aptly dubbed ‘pork-and-trade.’”
Sound familiar? It should. Hansen’s proposal is the same revenue-neutral carbon tax the Carbon Tax Center has been urging all along. In fact, if you’ve been keeping up with our posts you may have noticed that CTC adopted the tax-and-dividend terminology several weeks ago, a switch we picked up from Peter Barnes’ excellent work on cap-and-dividend.
Meanwhile, as readers of our posts and our “Latest News” headlines surely know, the real action on revenue-neutral carbon pricing is in Canada. Liberal Party Leader Stéphane Dion has transformed the climate debate in Canada with his proposal for a $15.4 billion, 4-year “Green Shift.” Read our post on the subject for a quick summary, the Green Shift Handbook for the details and our “Latest News” for reaction to the Green Shift in Canada and around the world. And on Tuesday (July 1), British Columbia inaugurates the Western Hemisphere’s first substantial and comprehensive carbon tax — a day after it distributes dividend checks from the revenue-neutral tax to households and businesses.
A tremendous opportunity awaits. The failure of the Lieberman-Warner cap-and-trade scheme has created a huge opening for a better and more workable method for putting a price on carbon. Splits within USCAP have re-emerged. In a powerful speech on June 25, Lewis Hays, III, Chairman and CEO of FPL Group (a member of USCAP), reiterated his support for a carbon fee stating, “[T]he simplest and most effective way to price carbon is with a continuously escalating fee – or a ‘tax’ as the big carbon emitters like to call it. Under a carbon fee that starts modestly and rises steadily over time, companies will find it more and more expensive to use dirty fuels.”
To take advantage of the opportunity and to capitalize on the post-election window in which new policy ideas can command serious attention, the Carbon Tax Center is organizing a conference in Washington, D.C. this November. Our goals are to:
- increase public awareness of the environmental and economic advantages of a carbon tax over other policies to reduce greenhouse gas emissions;
- place carbon taxes higher on the U.S. Congressional agenda;
- enable carbon tax advocates to forge connections with one another:
- address obstacles (political, economic, and scientific) to enacting a U.S. carbon tax, and to discuss the ideal form of such a tax;
- recognize leaders who have publicly advocated a U.S. carbon tax; and
- discuss lessons learned from the Green Shift proposal in Canada.
We are assembling a terrific roster of speakers and participants. James Hansen has already agreed to speak, and we anticipate many more leading voices on climate change and carbon pricing.
We need your financial help to make our conference happen and to continue our essential work. Please click here to find out how to contribute to CTC. [Note: the foregoing link replaces the original instructions for contributing in this post, which no longer apply.]
Please be as generous as you can, and please donate today. Thank you.
Sincerely,
Charles Komanoff
Dan Rosenblum