Cap and Tax
| Sun Dec. 28, 2008 10:09 AM PST
CAP AND TAX....Matt Yglesias suggests that although a gasoline tax would have been a good idea 20 years ago, today it's obsolete:
Given what we've learned about the risks of catastrophic climate change, it [] seems like a concept that's been somewhat overtaken by events. A carbon tax, or a cap on greenhouse gas emissions with auctioned permits, would constitute a tax on gasoline among other things. And there's no particular reason that burning fuel in a car should be disfavored versus other carbon-intensive activities.
This is true, but it's worth noting that for technical reasons there's an argument to be made that cap-and-trade is a good solution for stationary carbon souces (primarily coal and gas fired power generating stations) while a tax is a better solution for mobile sources. A lot of this revolves around whether your favored cap-and-trade plan applies directly to fuel sources ("upstream" cap-and-trade) or to the actual emission of carbon ("downstream" cap-and-trade). Downstream is essentially impossible with cars and trucks since it's impractical to monitor hundreds of millions of carbon sources, so if that's the version of cap-and-trade you prefer, then you need to apply a different solution to the transportation sector.
In addition, it's also possible that driving should, in fact, be disfavored even compared to other sources. 
The elasticity of gasoline demand is very low (it's higher in the long term than in the short term, but still low in either case), which means you have to price gasoline at a very, very high level if you want to get meaningful reductions in use. In Europe, for example, gasoline is taxed at around $2-3 per gallon, which is equivalent to a carbon tax of about $1000/ton, and even the most aggressive cap-and-trade plan won't produce carbon charges remotely near this level anytime in the foreseeable future. It's arguable (though, admittedly, far from obvious) that a gasoline tax might be able to get to that range faster than a cap-and-trade plan.
I don't have any special dog in this fight. My tentative preference right now is for gasoline taxes combined with cap-and-trade for stationary sources or, possibly, for gasoline taxes in addition to a broader-based cap-and-trade plan. If we really want to reduce driving, encourage use of urban/suburban transit alternatives, and produce a revenue stream big enough to fund it, that might be what we need.
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Comments
Submitted by Robert Waldmann (not verified) on Sun Dec. 28, 2008 10:02 AM PST.
Those of us who are roughly twice Yglesias's age remember the original logic of a gasoline tax, which was designed to reduce dependence on foreign oil. That argument is, for some reason, out of fashion, but it is much more compelling now than it was then.
The fact that we have a new concern -- global warming -- which will be partially addressed by a gasoline tax isn't and can't be a reason why burning fossile fuels in cars isn't particularly bad. The case for a carbon tax as opposed to a carbon tax plus a gasoline tax is that there is no problem with gasoline consumption except for global warming.
It is odd that criticism of this nonsensical position from the author of dozens of "peak oil" posts is so measured.
A gasoline tax will reduce global warming, reduce depletion of petroleum reserves and cause the price of petroleum to fall. It is fairly likely that the cost will be entirely born by oil exporting countries and not at all by -- well us.
If one opposes a gasoline tax, one should logically advocate aid for Kuwait Saudi Arabia and Russia. If that sounds crazy then so is the current minimal US gasoline tax.
My ambivalence about an auto bail out waxes and wanes through the course of any given week. But I think it is pointless to talk about getting Detroit to concentrate on fuel efficient autos without simultaneously addressing a rational energy policy. A floor for gasoline prices would provide an incentive to build more high mileage vehicles. And for the near term people will still be dependent on autos no matter how much effort goes into building rails.
Taxing oil because of climate change concerns won't accomplish anything for the climate (i.e. all the available oil will be pumped/burned regardless). The real issues have to do with oil import costs, and the instabilities that volatile oil prices cause. Taxing oil -or oil products will send a message to the markets, that the end of the age of oil is near. Otherwise, we will blindly go on happy motoring, until we suddenly can't. Gradually increasing taxes on oil would allow for a relatively smooth transition away from it.
Gas taxes should be raised for a variety of reasons:
1-Higher taxes lead to greater mass transit use as recently evidenced (and yes, a small reduction of carbon-which is better than opposite).
2- Fixes the price to diminish OPEC and speculators disallocations.
3-Raises revevenue and not necessarily in regressive way-after all once chooses their vehicle and their efficiency.
4-Forces the Big 3 hand.
5-Prevents overcorrections that leads to complacency-and yes-oil is too cheap now.
So one can see it is not all about carbons but I shudder to think it would not have some impact there-just perhaps not the most efficient but even there-slapping a dollar tax on a gallon is certainly very simple and uncomplicated.
Submitted by Maynard Handley (not verified) on Sun Dec. 28, 2008 10:51 AM PST.
Cap-and-trade is a foolish idea for the simple reason that it totally brakes down when you want to make the solution international.
A carbon tax is conceptually neutral --- you pay so many dollars to be allowed to generate so much pollution; and it is trivial to utilize it to force other nations to get on board. You look at the exports of China, you look at the carbon output of China, and you put a tariff on all Chinese goods that is equal to the pro-rata'ed amount of carbon that went into the production. This is neutral between your producers and China's, so it shouldn't upset the WTO; and, of course, China won't long accept the fact that another country is collecting taxes that it could be collecting, so it's a way to get them to impose such a tax in a fairly politically neutral manner.
Cap-and-trade, on the other hand, is politically disastrous at the international level. The way the US operates with its obsession regarding sovereignty, there will not be a single global cap, and a single global entity that regulates the trading. Rather what will happen is that supposedly every nation should have its own caps. And at that point, all hell breaks loose. How do you decide what cap each nation gets? Obviously pretty much every nation outside the West will claim that the only fair solution is a cap based on population. Apart from the fact that the West will never accept that, such a cap rewards nations for the extremely eco-hostile behavior of having larger populations. If you're going down this sort of route, I think the only reasonable solution would be caps based on something like population in 1950, but of course pretty much no nation will accept this. In the first place almost no nation wants the principle set in place that growth of their population is an externality that they will have to pay for. In the second place, every nation, seeking some sort of advantage, is going to claim various reasons why their population in 1950 shouldn't count --- it was just after WW2, their borders later changed, now they are full of immigrants and refugees, etc etc.
Taxing may, conceptually, be pretty much the same as cap-and-trade, with the per-country-allocations determined by the wealth of each nations, and so its unfair in that sense; but the unfairness isn't straight-up in your face, the way it would be if the per-country-allocations were explicitly set based on country wealth, or current carbon usage, or a similar sort of rule.
Personally I think the way to do this, that can be sold in the US, and then world-wide is a partial swap of income tax for carbon tax. Retain the income tax at the high end (and, in the US certainly, create a few higher income brackets for your million and billion dollar incomes), but at the low end abolish or reduce the income tax, and make up the revenue in a carbon tax. Now we have the situation economists always say you want --- taxing something you want less of (pollution) and not something you want more of (labor). Since this is a fairly dramatic restructuring of people's tax situation, we may want to phase this in in a linearly proportional fashion over five years or so.
But, to be honest, I have little faith this is the way things will go. I suspect that cap-and-trade will win the day in the US because there are powerful constituencies for it
- various industries can hope they will get the same grandfathering that they got with the Clean Air act in the 1970s (and are STILL exploiting)
- financial firm reckon they will make various types of funny money in the trading
- weak-willed US politicians think they would prefer something that doesn't seem like a tax
And then, only after we have this created in the US will anyone in the govt think of the international implications, at which point all the problems I arose will arise, ad what is done internationally will
- happen too late to be of any use AND
- done with such obvious strong-arming by the west, in particular the US, as to create a world-wide legacy of hatred that will make the Bush II years seem like glory days.
It still seems pretty indirect. But I guess it's unamerican to directly regulate irresponsible development, manufacturing, water use, etc.
If I was dictator I'd try to steer billion dollar developments toward infilling and mass transit lines and steer manufacturing and homebuilding toward energy efficient products -- instead of focusing on putting subtle long term pressures on end users.
MH's analysis seems not too bad. Except, how does the arithmetic work on carbon tax vs income tax (vs SS payroll tax?). If I concentrate only on the carbon that I can "see" (meaning, fuel oil for furnace and gasoline for cars), I think we're in the ballpark of 2000 gallons per year (maybe 700 for the cars, probably 1300 or more for the furnace -- oil heat is like that).
We're also in the two-PhD (comp sci and business) tax bracket, so I would not expect that our income taxes would go to zero. Nonetheless, say that they were cut by $4000 -- that's a $2/gallon tax. Offsetting $8000 of income (or payroll, or both) tax would require a fuel tax in the ballpark of $4/gallon. However, that would net out to only 50% more than we were paying this summer just past, and I think it is still less than people were paying in (parts of) Europe this summer. Our numbers might not be representative; most of the country does not use oil heat, on the other hand I drive a smaller car, and drive it less, than most people.
This summer, $4/gallon fuel seemed to get some people off their behinds. $6/gallon seems like something that we would adapt to fairly quickly -- it would be heck on big trucks, but great for solar-heat installers and bike shops.
No gas tax. There's no reason why I should have to share the burden with the guy towing a boat behind a Tundra for profligate use of resources if I make more sensible choices in transportation and hobbies. Instead slap a big honkin gas guzzler tax on both the boat and the pick up. Give serious tax incentives to buy more more fuel efficient vehicles. It gives the manufacturers more certainty about the market going forward which they desperately need in the short term.
We must federalize health care immediately. Detroit can't afford to give up selling high profit margin gas hogs otherwise.
This is interesting, but unfortunately vacuous IMHO.
The reason is that gasoline demand is highly inelastic, and so gasoline is an attractive basis for taxation regardless of the economic effect of the tax.
Cigarettes and booze are taxed for the same reason -- not because anyone expects demand for a harmful good to be reduced (quite the contrary, in fact), but rather because we can get a lot of money out of it and the tax is politically palatable.
For the same reason, gas taxes will be raised when and to the extent that they can be. If somehow "gas guzzling" is made as much of a political "crime" as smoking, then they can -- and will -- be raised more.
Yeah, gas consumption is the single biggest carbon-emitter, oil-consumer, etc., and yeah, it would be good to reduce it. But unless we're willing to impose European-level taxes, we will not -- as we have not with smoking -- make any impact on demand via taxation.
No gas tax. There's no reason why I should have to share the burden with the guy towing a boat behind a Tundra for profligate use of resources if I make more sensible choices in transportation and hobbies.
You're not. And a higher gas tax is the simplest way to capture the costs because it avoids the question of what is a 'gas guzzler'. The system will be gamed otherwise, because a toyota tundra is also useful, for instance, to haul around solar panels. See also SUV's, CAFE standards, and the existing truck tax credit to see how necessary exceptions get gamed into gaping loopholes.
Also, Karl Rove appreciates your sanctimoniousness. He and his friends are going to need all the help they can get over the next few years to turn purple states back red.
I find it interesting that Kevin's post, which responds to MY, is longer than MY's. I think that's because KD actually feels the need to make arguments, as opposed to tossing out delphic pronouncements.
A couple of substantive points:
-the elasticity of gas consumption is not in fact as low as often assumed (incld, in the KD post). Just look at how the way in which this year's higher prices impacted consumption.
-MY was in a sort of convulted way responding to a specific proposal to hike gas taxes a la the NY times editorial. But what would he think of some more modest increase to a tax that hasn't been increased in quite a while? Should we have no gas tax?
the problem with taxes is that you can't put a hard cap. also, by contrast with maynard handley's analysis, i think it's a lot easier to have an internationally managed regime (such as the IPCC) to incrementally tighten the allowable carbon emission levels than to expect people to keep voting for carbon tax increases in the future. do you know any republicans that will vote for tax increases? once you have an international regime in place, however, it's easier from the domestic side for the government to say that it's out of our hands now and we have to deal with the cap levels (much as Washington points to the WTO as the 'culprit' when it chooses or is forced to scale back on protectionism in politically sensitive sectors). the kyoto scheme was to reduce by x% of your 1990 emissions (x was to be reset every few years according to need)--don't see how this is all that controversial.
While it's true that the elephant in the room is getting the US and China (and other emerging markets) to agree to caps, I think this is much easier to achieve domestically by executive fiat (i.e. the Obama Administration signing the Protocol and subsequent direct/indirect pressure on China to follow suit) than by national taxation (or regional, such as in british columbia). i know there is some talk about setting the price of carbon as a tax and then returning the profits straight to the public, which might be politically feasible.
but if we're still talking traditional taxation scheme, it seems like a political non-starter in the US. I think if either China or the US budge on climate, then the other will follow suit.
if you have an international system, you also have mechanisms for purchasing offsets abroad, which may be cheaper than cutting carbon emissions at home (a la Kyoto's Clean Development Mechanism).
as for the upstream/downstream argument, upstream is definitely the simplest to administer, because we're talking about a handful of producers rather than countless downstream consumers. of course that doesn't answer the question of who bears the cost...
tightening up the cafe standards even more, along with a price on carbon emissions will be more than adequate incentive to push the automakers to fuel efficiency.
Submitted by Steve High (not verified) on Sun Dec. 28, 2008 7:58 PM PST.
I support a gas tax/subsidy to stabilize gasoline at about $5/gallon. In other words, if gas goes above $5/gallon, the government would reduce taxes to keep it at that figure. Business will despise this tax, but nevertheless be able to plan better if the price is predicable.
True, this is a bad time to raise taxes, esp. regressive taxes. However payroll tax reduction would produce immediate relief to compensate for higher gas prices.
We should discourage gas purchases and encourage hiring.
Any number of solutions are available to lower CO2 emissions. They all involve sacrifice, trade-offs, and costs, and I don't think we have leadership that can sell the sacrifices.
1. Mandate small cars or tax gas. Trade-off: Americans want SUV's, and auto workers would have to accept far lower wages in making smaller cars. Sacrifice: Detroit, economy.
2. Get the population down. Trade-off: Smaller tax base at a time when government is ueber-maxed out on astronomical debt. Sacrifice: Social Security.
So who is going to make the sacrifice? Is Mr. Clean Air Obama going to send the 30 million fecund illegals back to Mexico and sacrifice future Democratic votes? Hell, no. He'll make 'em good minivan and SUV citizen drivers.
Are the auto unions going to clamor to make small cars on which Detroit loses $2000/ unit? LOL.
Will the world turn to nuclear power so we can all have nuclear weapons and radioactive ground water?
The world, especially the US, ain't ready for sacrifice.
you have to price gasoline at a very, very high level if you want to get meaningful reductions in use.
If this is true, isn't it telling us that reducing gasoline use is very costly? Or, in other words, that people value the services provided by gasoline very highly?
We should be looking to reduce carbon emissions in the *least* costly way, not "accross the board" or any such thing. That's why a comprehensive carbon tax makes the most sense.
Kevin Drum: "In Europe, for example, gasoline is taxed at around $2-3 per gallon, which is equivalent to a carbon tax of about $1000/ton"
1 gallon of gas generates 20 pounds of CO2. 1 ton = 2000 pounds = 100 gallons of gas.
100 gallons * $2-3 per gallon = $200-$300/ton.
An intelligent mix of carbon tax, cap and trade and slightly higher fuel taxes could balance consumption and send appropriate signals about the acceptable use of fuels in this century. However, (***unacceptable opinion warning***) political acceptance and implementation of this mix of behaviour modification practices will be more difficult if it is justified by the 'battle' against climate change. There are enough good reasons to do this (and enough good reasons to do almost all of what a sound energy policy requires) without using this particular argument. Why give Senator Inhofe an extra reason to rebel? (I am somewhat to the left of the good Senator--as I am somewhat to the left of Mr. Drum and the new president elect. But, there has to be one issue, I guess...) Listen, folks. If you push this idea using all the other desired outcomes and add language such as, "in case more evidence comes to light regarding our effects on the environment, this already sensible policy would serve as a good start," you will a) have a better chance of reaching consensus, and b) not sound like an echo chamber. I'm not real happy that I share any opinions with Senator Inhofe, let alone a signature policy question that will define a good part of the next decade in terms of public policy decisions. Fortunately, I can hide behind the skirts of people like Richard Lindzen and Steven MacIntire, and feel less like a nut. But I am happy to support a balanced combination of carbon tax, cap and trade and fuel tax because they are good ideas for other reasons. Before you go off on me, think a minute. Do you want consensus and support? There's a reason this should be important to you. The next decade may well be much colder than the past 20 years. This may be reversion to the norm or it may be a pause in the upward trend. But this fall or pause in temperatures will reduce the perceived need to make huge sacrifices in the name of global climate change, especially when there are other valid claims on our attention and the public purse. To secure support, I hope that the Obama administration chooses to advance the other perfectly good arguments for a sound energy policy and characterises it as an insurance policy in case anthropogenic contributions to atmospheric greenhouse gases are later proved to need reduction.
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