Editore"s Note
Tilting at Windmills

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May 14, 2008
By: Kevin Drum

UN-REGRESSING A CARBON TAX....The other day I mentioned that a cap-and-trade system for greenhouse gases would be a huge windfall for power companies if the permits are given away based on past history instead of being auctioned to the highest bidder. What's more, energy prices would rise substantially (that's the whole point) and the poor would be hit much harder by this than either the middle class or the affluent.

A cap-and-trade scheme that auctions off 100% of its emission permits would eliminate the windfall profits, but it would still act essentially as a regressive carbon tax, raising the price of energy and hitting the poor disproportionately. The nice thing about the auction, though, is that it provides government revenue that can be used to offset the regressivity of the original tax. But if we did that, would there be any revenue left over for anything else?

An analysis by CBPP says yes. They conclude that about 15% of the revenue would be needed to compensate companies for their losses and about 14% would be needed to hold low-income consumers harmless. That leaves more than 70% for other purposes, including funding of green R&D. Here's their basic recommendation for helping the poor: "We propose pairing a tax rebate with climate rebates issued through the electronic benefit transfer (EBT) systems that state human service agencies use to provide assistance to many poor people....Funds set aside for climate rebates should go to intended beneficiaries, not administrative costs or profits. Accordingly, policymakers should provide relief as much as possible through existing, proven delivery mechanisms — such as the EITC and state EBT systems — rather than new public or private bureaucracies, which entail very substantial administrative costs."

More here if you want to read up on this stuff.

Kevin Drum 1:10 PM Permalink | Trackbacks | Comments (33)

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Comments

The only way you will ever get this enacted into law is to return the entirety of the revenue to each person on a per capita basis. The same goes for a straight carbon tax.

It isn't for no reason at all that people want to shoot oil company executives, and politicians aren't bullet proof.

Posted by: Yancey Ward on May 14, 2008 at 1:19 PM | PERMALINK

While it would be a windfall to give away the permits and then allow them to be traded, companies would still have incentive to lower their carbon footprints since the fewer permits they needed the more they could sell.

Still, 100% works better from a birth death perspective.

Posted by: crack on May 14, 2008 at 1:30 PM | PERMALINK

Peter Barnes' proposal to return 100% of revenue to the public directly is the way to go. Yeah it only takes 15% of the revenue to compensate the poorest of the poor. So hurting the rest of the working class, plus a portion of the middle class is fine?

And it is not as though we don't have other sources to get revenue from. We spend almost as much on our military as everyone else in the world combined. If we diverted hundreds of billions of dollars from our military to clean energy we would never miss it. Too politically tough? How about the 50 billion dollars a year we give in direct subsidies to the fossil fuel industries, the even more we give in tax breaks not given to other industries, plus the subsidies given to ethanol? I'll bet you could get 150 - 200 billion annually out of that. Plus in general, we have had so many decades of tax cuts for the rich (from Carter forward) that we could probably grab revenue there.

Plus if an emissions tax or cap works, it would be a growing revenue source for no more than ten years. Past a certain point, the price of emissions would grow more slowly than the rate at which we lowered the cap. Given the urgency of the situation, we would probably want that to happen with ten years.

Posted by: Gar W. Lipow on May 14, 2008 at 1:30 PM | PERMALINK

Don't worry. President McCain will ensure that whatever measures the government takes to address global warming will be carefully designed to empower the powerful and enrich the rich, at the expense of everyone else.

Whether they actually do anything to mitigate global warming is irrelevant, since the effects of global warming will mainly be to kill off the vast majority of the Earth's human population, who are not rich, and are not particularly useful to the rich, and thus are not needed anyway.

Posted by: SecularAnimist on May 14, 2008 at 1:44 PM | PERMALINK

Yes, they recommend that we subsidize gasoline usage by the poor.

To be fair, they want to subsidize gasoline usage for the poor for a medium period of time while government deploys the rest of the capital as an investor in alternative fuels. Eventually, they hope, government investments will reach equilibrium thus lowering the need to subsidize gasoline usage for the poor.

Well, I have news for all of you. One of the largest energy costs the poor pay, now, is payment to government for gasoline use in vehicle fees, insurance and support for cops. The use of gasoline by the poor is small enough that current government costs dominate, not the gas tax. A poor person who drives 1,000 miles a year is currently subsidizing a government that assumes we all drive 10,000 miles a year.

If you want to help the poor, them let them put two dollars in a meter and drive for the day, fees and insurance paid; rather then charge them on yearly basis. As it is the actions of environmentalists are the principle cause of the current gas subsidies that poor people pay to the middle class.

The problem ultimately is this, the middle class will not go along with anything unless the current transportation system is intact. That severely restricts your options. If government investments, after ten years, cannot make transportation and emission controls work under the current transportation framework, then we will have wasted huge amounts of money and still have the same problem.

Unfortunately, the whole point of getting government involved is to protect the current transportation system because government is too heavily invested in the current grid. This is all about protecting investments made in the past by government.

The legislature will protect the status quo, just look at the most recent energy bill as Kevin pointed out.

Until we understand how to deal with the legislature, we are better off leaving this in the hands of the judiciary.


Posted by: Matt on May 14, 2008 at 1:46 PM | PERMALINK

Just when u thot it wuz safe 2 go bak on teh interwebs.

Posted by: Swan on May 14, 2008 at 2:00 PM | PERMALINK

Simple math example.

Assume the average driver drives 12000 miles a year at 20mpg. 600 gallons of gas a year

Raise the gas tax $1 and increase taxes by $600.

Eliminate the employee section of social security and you reduce taxes by $620.

Basically, you are revenue neutral.

I know, people will drive a little less so the tax will be a little less than $600.

I know that $620 is bigger than "less than $600.

I know some people don't make $10,000 a year.

But the idea is fairly straight forward. Easy to implement.

Encourages conservation.
Makes it easier to get into the workforce.

Seems fairly close to a win-win

Posted by: neil wilson on May 14, 2008 at 2:02 PM | PERMALINK

This kind of plan seems engineered to maximize the ability of participants and politicians to play with the system for rent-seeking ends. I like the idea of a carbon tax vs. cap-and-trade because it is so much less subject to such rent-seeking and manipulation, so lets not append a system that lets the manipulation back in the door.

Here is a counter proposal: Use the proceeds of the carbon tax to reduce the employee and/or employer contribution to social security. Offset the new regressive tax by reducing another regressive tax.

Posted by: coyote on May 14, 2008 at 2:05 PM | PERMALINK

Why would we compensate companies for the increase? This just subsidizes the use of energy, and reduces market forces to reduce energy consumption.

Posted by: tomj on May 14, 2008 at 2:27 PM | PERMALINK

The Cap & Dividend plan is the right way to go-- cap carbon, 100% auction and give the proceeds back to the public through dividends.

It's an elegant policy solution that you can explain to a 3rd grader.

Posted by: Sam on May 14, 2008 at 2:29 PM | PERMALINK

The Cap & Dividend plan is the way to go. Cap emissions, auction 100% of the permits and return all the auction revenue to the public. It reduces emissions while protecting household incomes and spurring private investment in new technologies. That's all you need to do.

As a bonus, it's an elegant plan that you can explain to a 3rd grader.

Posted by: Sam on May 14, 2008 at 2:33 PM | PERMALINK

Here's a crazy idea. Has anyone ever proposed a progressive sales tax on electric power? Say the first 100 dollars' worth (just to pull a figure out of the air) would be untaxed, but excess usage -- the people that own McMansions with central air and leave on all the lights all the time -- would be taxed aggressively.

Posted by: thersites on May 14, 2008 at 2:38 PM | PERMALINK

Thersites,
Rather than taxing the electric power on a per dollar basis, I think better on a kWHr basis is better. Here where I live, the cost of electrons is amazingly cheap since local power is generated by nuc. So where I used to pay at least $70/mo back when I lived in New York State in 2002, I now pay

Posted by: optical weenie on May 14, 2008 at 2:52 PM | PERMALINK

OW: on a kWHr basis is better

You're probably right. And maybe make it surcharge, rather than a tax. This could cover the utilities' "losses" without penalizing the poor, and without having to add bureaucracy or modify existing assistance programs. And anything that penalizes excessive energy consumption has to be a good thing, yes?

Posted by: thersites on May 14, 2008 at 3:25 PM | PERMALINK

Thersites and optical weenie:

Don't forget it cost money to collect those taxes.

Variable taxes on electric power is not that easy. Do you give rebates to poeple with plug in cars? My electric lawn mower produces less green house gases than your gas engine mover. I have a small vacation home. Does the utility give me tax free energy?

It would be far simplier and more efficient to figure out a way to rebate the money through a payroll tax refund or an income tax refund.

Posted by: neil wilson on May 14, 2008 at 3:29 PM | PERMALINK

carbon tax

How does one calculate their carbon usage? If I pay a farmer a ton of money to grow corn, using lots of carbon-based chemicals and fuel for equipment; and then conning everyone else into ethanol as "carbon-neutral.", who gets the carbon credit?

Carbon is everywhere. If you study organic chemistry you'd appreciate the complexities of the political debate.

What we need is an idiot tax. Tax the idiots and leave the rest of us in peace.

Posted by: Tom Nicholson on May 14, 2008 at 3:30 PM | PERMALINK

I object to an idiot tax. My paycheck would go to zero!

Posted by: optical weenie on May 14, 2008 at 3:37 PM | PERMALINK

neil wilson: My electric lawn mower produces less green house gases than your gas engine mover.

Does it, (assuming I have a reasonably efficient mower) or does it just move the source? (Unless you're on nuke or hydro or something.) I'm not trying to be a smartass, I honestly don't know.

Posted by: thersites on May 14, 2008 at 3:58 PM | PERMALINK

The basic problem with an idiot tax is that the people that need to file won't know how to fill out the form.

Posted by: thersites on May 14, 2008 at 4:02 PM | PERMALINK

No Thersites, the Idiot 1040 Income Tax Form is simple.

A) How much money did you make? ______
B) Send it in

Posted by: optical weenie on May 14, 2008 at 4:05 PM | PERMALINK

slightly related: The U.S. wind power industry installed 1,400 MW of generating capacity in Q1 of 2008. If current incentives for wind and solar remain in place for at least 10 years, the cap-and-trade vs tax debates will be irrelevant.

Posted by: spider on May 14, 2008 at 4:40 PM | PERMALINK

Matt: The legislature will protect the status quo, just look at the most recent energy bill as Kevin pointed out.

As the wind power example illustrates (but does not prove), the status quo is quite favorable toward the development of alternative energy supplies. Could be better (what couldn't?) but don't lose sight of what is actually happening.

Posted by: spider on May 14, 2008 at 4:46 PM | PERMALINK

Kevin,

I have a better idea. Let's just hire a few million people to dig holes. That's right, holes in the ground, gazillions of them. When they are done digging, they can start filling. Just think of the enormous contribution to the economy this would make! We'd put millions of people to work, at good wages with good benefits - what a concept!

Posted by: DBL on May 14, 2008 at 6:05 PM | PERMALINK

slightly related: The U.S. wind power industry installed 1,400 MW of generating capacity in Q1 of 2008. If current incentives for wind and solar remain in place for at least 10 years, the cap-and-trade vs tax debates will be irrelevant. -spider

I like that idea a lot better. Just subsidize low-carbon alternatives enough to make them competitive and let it take off.

Posted by: Doc at the Radar Station on May 14, 2008 at 7:39 PM | PERMALINK

The nice thing about the auction, though, is that it provides government revenue that can be used to offset the regressivity of the original tax. But if we did that, would there be any revenue left over for anything else?

Logically speaking, the question contains its own answer. No need for a study.

There must be "revenue left over for anything else" because people other than poor people are paying the tax too.

To refund companies and the poor is to selectively levy a carbon tax on non-poor people. If non-poor people use carbon, then you get revenue.

Posted by: mk on May 14, 2008 at 11:59 PM | PERMALINK

When we run out of easy carbon what will we tax?

There is less than 40 years of world proven oil reserves left and new discoveries are much smaller and harder to reach. See the DOE site:
www.eia.doe.gov/emeu/international/reserves.html

It is time to convert less than 1/2% of the continental US to solar thermal-to-electric plants like Solar One Nevada to produce twice our current electricity for all our needs including electric cars, buses and trains.

Posted by: on May 15, 2008 at 12:34 AM | PERMALINK

OK, who should sue and who should get more damages. Starting my list:

The Amish
Bike riders of San Francisco
People commuting on scooters
Walkers
Some Native American Tribes

Anyone who can prove they operate with and expectation of nominal "co2" forcing. Let them organize in groups and sue.

Hey, if you don't care, then buy emission permits, otherwise collect in proportion.

Prove it! Says the judge.

Some proofs are easy, the Amish.
SF bike riders can swallow GPS receivers.
Audit themselves, call Underwriters Lab.
Form energy clubs, do what you need to generate proof by measurement.

This is the era of very low cost measuring devices.

Do this and you will get their, I mean fast.


Posted by: Matt on May 15, 2008 at 1:32 AM | PERMALINK

They should use a carbon tax to replace the most regressive tax currently in existence: the Social Security Payroll tax. This is the one way of doing it that not only wouldn't be political suicide (by taxing the gas working folks need to get to their jobs), but would actually be popular.

Posted by: Kevin Carson on May 15, 2008 at 2:58 AM | PERMALINK

One of the few genuine cases for business compensation is for trade-exposed energy-intensive industries - aluminium smelters are the classic example. If you don't compensate them, it's quite possible that the industry will just move to countries without emissions trading schemes and thus result in no net reductions in global emissions.

If people are interested in some of these issues, they should have a look at the Garnaut Review website. It's an inquiry into an emissions trading system for Australia.

Posted by: Robert Merkel on May 15, 2008 at 9:24 AM | PERMALINK

Doc

It's been shown again and again that if you don't restrict pollution emission, the cleaner alternative s just never become universal.

Polluters have an immense ability to shift to better technology/ cleaner power. And power consumers (including households) have an immense ability to shift to more energy efficient forms.

But they won't do that unless there is a clear payback.

Posted by: Valuethinker on May 15, 2008 at 10:35 AM | PERMALINK

I'm still in favor of, if you go the cap-and-trade route, issuing the emissions permits annually directly to natural persons who are U.S. citizens on an equal per capita basis and allowing them to use, sell, or retain them as they please. Some might be sold "free and clear" through auction systems to maximize profits, others might be sold based on contracts that restricted their use.

Posted by: cmdicely on May 15, 2008 at 10:59 AM | PERMALINK

spider wrote: "If current incentives for wind and solar remain in place for at least 10 years, the cap-and-trade vs tax debates will be irrelevant."

Unfortunately, the current incentives, which are miniscule compared to subsidies to the fossil fuel and nuclear industries, but are nonetheless vital to the continued growth of both wind and solar generated electricity, are due to expire at the end of 2008 and have not been renewed. See the American Wind Energy Association website for details.

Posted by: SecularAnimist on May 15, 2008 at 11:22 AM | PERMALINK

I like cmdicely, he gets us where we should be. Individuals own emission credits, we sell them if we do not need them.

But the emission credits still have to be defined, and we would still like something other than the rent seeking legislature to define damages, and hence set the quantity of permits.

Posted by: Matt on May 16, 2008 at 10:17 AM | PERMALINK




 

 

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