Coyote's Bi-Partisan Climate Plan -- A Climate Skeptic Calls For a Carbon Tax
While I am not deeply worried about man-made climate change, I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production. For example:
- Corn ethanol mandates and subsidies, which study after study have shown to have zero net effect on CO2 emissions, and which likely still exist only because the first Presidential primary is in Iowa. Even Koch Industries, who is one of the largest beneficiaries of this corporate welfare, has called for their abolition
- Electric car subsidies, 90% of which go to the wealthy to help subsidize their virtue signalling, and which require more fossil fuels to power than an unsubsidized Prius or even than a SUV.
- Wind subsidies, which are promoting the stupidist form for power ever, whose unpredictabilty means fossil fuel plants still have to be kept running on hot backup and whose blades are the single largest threat to endangered bird species.
- Bad government technology bets like the massive public subsidies of failed Solyndra
Even when government programs do likely have an impact of CO2, they are seldom managed intelligently. For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of these types of government interventions). Obama's coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries. Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production -- likely it is not given the arbitrary aspects of the program.
For years I have opposed steps like a Federal carbon tax or cap and trade system because I believe (and still believe) them to be unnecessary given the modest amount of man-made warming I expect over the next century. I would expect to see about one degree C of man-made warming between now and 2100, and believe most of the cries that "we are already seeing catastrophic climate changes" are in fact panics driven by normal natural variation (most supposed trends, say in hurricanes or tornadoes or heat waves, can't actually be found when one looks at the official data).
But I am exhausted with all the stupid, costly, crony legislation that passes in the name of climate change action. I am convinced there is a better approach that will have more impact on man-made CO2 and simultaneously will benefit the economy vs. our current starting point. So here goes:
The Plan
Point 1: Impose a Federal carbon tax on fuel.
I am open to a range of actual tax amounts, as long as point 2 below is also part of the plan. Something that prices CO2 between $25 and $45 a ton seems to match the mainstream estimates out there of the social costs of CO2. I think methane is a rounding error, but one could make an adjustment to the natural gas tax numbers to take into account methane leakage in the production chain. I am even open to make the tax=0 on biofuels given these fuels are recycling carbon from the atmosphere.
A Pigovian tax on carbon in fuels is going to be the most efficient possible way to reduce CO2 production. What is the best way to reduce CO2 -- by substituting gas for coal? by more conservation? by solar, or wind? with biofuels? With a carbon tax, we don't have to figure it out. Different approaches will be tested in the marketplace. Cap and trade could theoretically do the same thing, but while this worked well in some niche markets (like SO2 emissions), it has not worked at all in European markets for CO2. There has just been too many opportunities for cronyism, too much weird accounting for things like offsets that is hard to do well, and too much temptation to pick winners and losers.
Point 2: Offset 100% of carbon tax proceeds against the payroll tax
Yes, there are likely many politicians, given their incentives, that would love a big new pool of money they could use to send largess, from more health care spending to more aircraft carriers, to their favored constituent groups. But we simply are not going to get Conservatives (and libertarians) on board for a net tax increase, particularly one to address an issue they may not agree is an issue at all. So our plan will use carbon tax revenues to reduce other Federal taxes.
I think the best choice would be to reduce the payroll tax. Why? First, the carbon tax will necessarily be regressive (as are most consumption taxes) and the most regressive other major Federal tax we have are payroll taxes. Offsetting income taxes would likely be a non-starter on the Left, as no matter how one structures the tax reduction the rich would get most of it since they pay most of the income taxes.
There is another benefit of reducing the payroll tax -- it would mean that we are replacing a consumption tax on labor with a consumption tax on fuel. It is always dangerous to make gut-feel assessments of complex systems like the economy, but my sense is that this swap might even have net benefits for the economy -- ie we might want to do it even if there was no such thing as greenhouse gas warming. In theory, labor and fuel are economically equivalent in that they are both production raw materials. But in practice, they are treated entirely differently by the public. Few people care about the full productive employment of our underground fuel reserves, but nearly everybody cares about the full productive employment of our labor force. After all, for most people, the primary single metric of economic health is the unemployment rate. So replacing a disincentive to hire with a disincentive to use fuel could well be popular.
Point 3: Eliminate all the stupid stuff
Oddly enough, this might be the hardest part politically because every subsidy, no matter how idiotic, has a hard core of beneficiaries who will defend it to the death -- this the the concentrated benefits, dispersed cost phenomena that makes it hard to change many government programs. But never-the-less I propose that we eliminate all the current Federal subsidies, mandates, and prohibitions that have been justified by climate change. Ethanol rules and mandates, solar subsidies, wind subsidies, EV subsidies, targeted technology investments, coal plant bans, pipeline bans, drilling bans -- it all should go. The carbon tax does the work.
States can continue to do whatever they want -- we don't need the Feds to step on states any more than they do already, and I continue to like the 50 state laboratory concept. If California wants to continue to subsidize wind generators, let them do it. That is between the state and its taxpayers (and for those who think the California legislature is crazy, that is what U-Haul is for).
Point 4: Revamp our nuclear regulatory regime
As much as alternative energy enthusiasts would like to deny it, the world needs reliable, 24-hour baseload power -- and wind and solar are not going to do it (without a change in storage technology of at least 2 orders of magnitude in cost). The only carbon-free baseload power technology that is currently viable is nuclear.
I will observe that nuclear power suffers under some of the same problems as commercial space flight -- the government helped force the technology faster than it might have grown organically on its own, which paradoxically has slowed its long-term development. Early nuclear power probably was not ready for prime time, and the hangover from problems and perceptions of this era have made it hard to proceed even when better technologies have existed. But we are at least 2 generations of technology past what is in most US nuclear plants. Small air-cooled thorium reactors and other technologies exist that could provide reliable safe power for over 100 years. I am not an expert on nuclear regulation, but it strikes me that a regime similar to aircraft safety, where a few designs are approved and used over and over makes sense. France, which has the strongest nuclear base in the world, followed this strategy. Using thorium could also have the advantage of making the technology more exportable, since its utility in weapons production would be limited.
Point 5: Help clean up Chinese, and Asian, coal production
One of the hard parts about fighting CO2 emissions, vs. all the other emissions we have tackled in the past (NOx, SOx, soot/particulates, unburned hydrocarbons, etc), is that we simply don't know how to combust fossil fuels without creating CO2 -- CO2 is inherent to the base chemical reaction of the combustion. But we do know how to burn coal without tons of particulates and smog and acid rain -- and we know how to do it economically enough to support a growing, prosperous modern economy.
In my mind it is utterly pointless to ask China to limit their CO2 growth. China has seen the miracle over the last 30 years of having almost a billion people exit poverty. This is an event unprecedented in human history, and they have achieved it in part by burning every molecule of fossil fuels they can get their hands on, and they are unlikely to accept limitations on fossil fuel consumption that will derail this economic progress. But I think it is reasonable to help China stop making their air unbreathable, a goal that is entirely compatible with continued economic growth. In 20 years, when we have figured out and started to build some modern nuclear designs, I am sure the Chinese will be happy to copy these and start working on their CO2 output, but for now their Maslov hierarchy of needs should point more towards breathable air.
As a bonus, this would pay one immediate climate change benefit that likely would dwarf the near-term effect of CO2 reduction. Right now, much of this soot from Asian coal plants lands on the ice in the Arctic and Greenland. This black carbon changes the albedo of the ice, causing it to reflect less sunlight and absorb more heat. The net effect is more melting ice and higher Arctic temperatures. A lot of folks, including myself, think that the recent melting of Arctic sea ice and rising Arctic temperatures is more attributable to Asian black carbon pollution than to CO2 and greenhouse gas warming (particularly since similar warming and sea ice melting is not seen in the Antarctic, where there is not a problem with soot pollution).
Final Thoughts
At its core, this is a very low cost, even negative cost, climate insurance policy. The carbon tax combined with a market economy does the work of identifying the most efficient ways to reduce CO2 production. The economy benefits from the removal of a myriad of distortions and crony give-aways, while also potentially benefiting from the replacement of a consumption tax on labor with a consumption tax on fuel. The near-term effect on CO2 is small (since the US is only a small part of the global emissions picture), but actually larger than the near-term effect of all the haphazard current programs, and almost certainly cheaper to obtain. As an added benefit, if you can help China with its soot problem, we could see immediate improvements in probably the most visible front of man-made climate change: in the Arctic.
Postscript
Perhaps the hardest thing to overcome in reaching a compromise here is the tribalism of modern politics. I believe this is a perfectly sensible plan that even those folks who believe man-made global warming is a total myth ( a group to which I do not belong) could sign up for. The barrier, though, is tribal. I consider myself to be pretty free of team politics but my first reaction when thinking about this kind of plan was, "What? We can't let those guys win. They are totally full of sh*t. They are threatening to throw me in jail for my opinions."
It was at this point I was reminded of a customer service story at my company. I had a customer who was upset call me, and I ended up giving them a full-refund and a certificate to come back and visit us in the future. I actually suspected there was more to the story, but I didn't want a bad review. The customer was happy, but my local manager was not. She called me and said, "That was a bad customer! He was lying to you. How can you let him win like that?" Does this sound familiar? I think we fall into this trap all the time in modern politics, worried more about preventing the other team from winning than about doing the right thing.
Mike Powers:
Well, let's say I'm a liberal. You're saying something about China and India, which (since we aren't talking about education) are majority-nonwhite countries, so that must mean you're a racist. And you're suggesting that we not subsidize wind power, so that means you're a climate-change denialist. And you're suggesting that we expand the use of nuclear power, and something something Chernobyl Fukushima. Therefore I don't have to listen to you about anything.
March 17, 2016, 10:28 amSamWah:
CO2 is food for vegetation. Do you want to starve the vegetation?
March 17, 2016, 10:40 am"So replacing a disincentive to hire with a disincentive to use fuel could well be popular." Would a disincentive to use fuel lead to less employment? Seems that way to me.
Curtis:
Your plan would reduce CO2 emissions and increase employment with no overall cost. If things were sensible, it's a no brainer. But some people (who drive a lot) and companies (e.g. aluminum) would pay a lot more. They would yell, scream and lobby while the 95% who benefited would be silent and the greens are too stupid to get behind it because they do not understand economics.
March 17, 2016, 10:49 amAndrew_M_Garland:
At best, companies would pay the carbon tax and the same amount of employment tax would be cancelled. This would be bad.
Employment taxes are incident on employees. Employees bear the burden, although companies make some of the payments. Competition adjusts wages to pay what remains after employment taxes are collected from the employer.
To see this, consider an employee who receives $3,000/month, with the employer paying $1,000/month on employment benefits and taxes. Competition has set the market price for this employee. He is worth $4,000/month.
Now, decrease employment taxes by $100/month. The employee is still worth $4,000/month. Employers will compete away the extra cash until the employee receives $3,100/month with the employer paying $900/month.
So, this carbon tax arrangement would cost the employer say $10,000/year on energy used, but any benefits from reduced employment taxes would go to the employees! Reduced employment taxes cannot offset increased general business taxes for the business. This is a trap.
At worst, and most probably, the carbon tax would be imposed without any offsets. Worse, accepting such a tax accepts in principle the argument that increased carbon is damaging our economy. We would become hostage to every slanted "study" which estimated what the tax should be, and government would smile at the additional, arbitrary tax it would have imposed.
March 17, 2016, 12:05 pmMaximum Liberty:
+1
I'd specifically reduce the employer-side payroll tax, because that would also have the same effect as reducing the minimum wage (without actually reducing the amount that the minimum-wage worker gets) and because it may have a stronger (though probably temporary) effect on the quantity of employment by reducing the price of labor (again, without reducing what the employee takes home).
March 17, 2016, 12:18 pmstan:
Because lots of people do really, really stupid stuff, Coyote proposes doing stuff that is stupid, but not as stupid.
Do they teach thinking like this at HBS?
March 17, 2016, 2:16 pmErikTheRed:
Ehhhhh....
It's nice to *theorize* that you can get a new tax and then offset it against eliminating a bunch of other stupid stuff in a world of honest politicians and kept political promises, but reality says that you get the new tax... and the stupid stuff manages to find a way to stick around. Thanks, but no thanks.
March 17, 2016, 4:47 pmMike:
We have a similar revenue neutral carbon tax initiative coming to the ballot in Washington State (revenue offset with lower sales taxes). But it is opposed by the far left because they want a version that raises tax revenues.
You should read Cliff Mass. He has a similar reasoned, pragmatic approach to climate issues, only not on the skeptic "side".
March 17, 2016, 9:41 pmLoneSnark:
You are entirely wrong in your conclusion. You are correct that payroll taxes are paid by the employee, but your suggestion that consumption taxes are paid by corporations is absurd. As profits fall, corporations cut production, driving up prices and restoring profitability. If the two taxes are in fact identical, then for every extra dollar employees take home in salary they will pay in higher prices for carbon intensive goods. Of course, then the reactions occur. Facing higher wages, employees will choose to work more, increasing total economic activity. Facing higher prices for carbon intensive goods, consumers will shift their buying habits to consume more goods that are not as carbon intensive.
March 17, 2016, 10:44 pmAndrew_M_Garland:
To LoneSnark,
My conclusion is that higher taxes on corporations would not be offset by the same amount of lowered taxes on employment.
I confess that I can't follow the complex interactions which you claim will all follow.
In particular, these parts seem strange to me:
---
"As profits fall, corporations cut production, driving up prices and restoring profitability."
Maybe they try to charge more, cut production, and go out of business. Why not that?
---
"Facing higher wages, employees will choose to work more, increasing total economic activity."
Employees will receive more and the government less. Different things will be purchased, but of the same market value. Some employees may try to work more (how?) and others may take more vacation with the extra money. Why not that?
---
March 17, 2016, 11:08 pmMaybe you have a link which explains the interactions which you present.
David Zetland:
Worked in British Colombia, but maybe Canadian pols are more honest?
March 18, 2016, 3:50 amDavid Zetland:
This is a great "no regrets" list of action items. I've been talking carbon/CC/pollution policies for years and most of these ideas fit right in.
March 18, 2016, 3:51 amQ46:
Exhausted? That is the plan, to wear everyone down until opposition dies.
Having efficiently taxed, as per your recommendation, this non-problem we can then move on to the next non-problem to invent and tax.
How about rejecting the premise?
March 18, 2016, 5:57 amHenryBowman419:
Already you run off the rails with this foolish statement. The use of carbon-based fuels is demonstrably good for per-capita GDP. Any "social costs" (a term that truly should be banned from use in intelligent conversations) are dwarfed by the enormous benefits.
March 18, 2016, 6:03 amQ46:
As profits fall, corporations cut production...
In what World?
As profits fall corporations cut cost, the first of which is labour costs. If profits fall enough corporations either close or switch efforts to more profitable market sectors.
Cutting production to reduce demand assumes there is no competition to increase their production or new producers will not enter the market to meet the shortfall.
March 18, 2016, 6:05 amQ46:
Quite so.
I wonder if 200 years ago, all the clever coves could have estimated the 'social cost' of all those factories belching out their stuff on future generations by the year 2 000?
How many saw smart phones, shopping on-line, London to New York within half a day by flying through the air in those black clouds pouring out of those 'dark, satanic, mills'.
Should they have taxed steam power, coal or just banned the Industial Revolution?
Why is it assumed the 'cost' to future generations of 'global warming' by any means will be net negative not net positive.
I think it is time we stopped calling any of this science and give it its proper name...soothsaying.
Hayek called it the fatal conceit that anyone could have enough useful knowledge to predict and plan outcomes.
March 18, 2016, 6:13 amRob Raffety:
All of us should be getting behind this idea. I've been (ineffectively) screaming about this for years. If sensible people don't get out in front of this issue, the crazies are going to have the initiative. People in the grip of the media induced panic over climate change will elect far-left zealots to solve the "problem." Most of the proposed solutions are coming from the same people who wanted to shut down industry and free market capitalism BEFORE all of the worry about global warming started. They aren't pushing for sensible reforms, they're pushing for the same anti-growth policies they always have, based on the same Malthusian assumptions they've always held.
Even if you don't think that CO2 emissions are a problem that needs to be solved, you have to acknowledge that fossil fuels are a diminishing resource. A tax on them encourages efficiency in their use. Despite any other ill affects on the economy, it's not an entirely bad tax. The payroll tax, on the other hand, does nothing other than increase the cost of labor. It's regressive in nature and half of it is hidden from the people who pay it. I can't think of a worse tax currently imposed on Americans. No matter your opinions on global warming, this would be a move in the right direction.
March 18, 2016, 7:17 amPenkville:
Hasn't anyone read Bjorn Lomborg?
There's no interest in doing the sensible. As others have said here, all you would get (on a national scale anyway) is a Carbon Tax and all the silly stuff as well.
You have to remember a lot of this is about control and making you do the silly stuff allows Greenies to feel good about themselves.
So far, at least, it's proved impossible to have a grown up discussion about this subject and what (if anything) to do about it, since it's so politicized. I suspect it will be ever thus and that attempts at compromise such as this are therefore doomed to failure.
March 18, 2016, 8:03 amDaublin:
It's a good deal if it could be made, but this is exactly the problem. The CO2 tax would come in and the other stuff would also stay.
Politically, the harms of CO2 get nowhere. The data aren't being analyzed carefully, and straightforward measures aren't being pushed. Other forcings of global warming are largely ignored, and potential forcings for global cooling are not even put on the table. Instead, CO2 just gets trotted out as a justification for things that already had political momentum: efficiency regulation; spending on alternate energy sources; trains; electric cars.
It's hard to read the materials of fans of CO2, and to believe they take CO2 all that seriously. I'd be delighted to see something to the contrary. It looks all the world to me like an issue that wouldn't exist if it weren't for the voting masses being hoodwinked.
March 18, 2016, 2:10 pmstan:
so a massive transfer of cash from rural America to city dwellers is a great idea? Why?
March 18, 2016, 6:35 pmstan:
Still curious why a massive transfer of wealth from rural and suburban America to city dwellers is a good thing
March 20, 2016, 5:44 pmAnn_In_Illinois:
Minor point: The Chinese don't need to wait for the US to develop nuclear power plants. I was living in Hong Kong when the Daya Bay nuclear plant opened in Southern China, around 1993. It was across the border but within radiation distance of HK, so we heard a lot about it. As I recall, it was designed and built by the French, who stayed to run it for at least a few years. Supposedly some French restaurants opened in Shenzhen to cater to the French living there.
This also reminds me of Hopewell Holdings, led by Gordon Wu, who led the way into China. They built a coal-fired power plant in China in 1981, and the communists didn't take it when it was done! That was quite a surprise at the time. Anyway, Wu and his engineers decided that the most efficient size at the time for coal fired plants was 660 MW, and worked out a cookie-cutter approach to build a bunch of them in China, the Philippines and Indonesia. That's certainly the approach that the US should take - find a good, standardized design.
In fact, have the French build them and run them the first few years, and maybe we'll also get more good French restaurants and bakeries around the country.
March 20, 2016, 5:54 pmLoneSnark:
I had a link. It was a graph of corporate profits as a percentage of GDP over the 20th century. High taxes, low taxes, high regulation, low regulation, profits always eventually returned to around 10% of GDP.
"Maybe they try to charge more, cut production, and go out of business. Why not that?"
Yes, usually exactly that. But you must remember, few industries are monopolies. Most sectors are served by multiple producers. Even if the average profits among the producers is 10%, some of them are taking home 20% while some are operating at a loss. Drive up costs and the weakest producer will fold, so even if every firm's profits fell, the average profits will stay about the same.
Markets operate as closed feed-back loops. If profits are high, then new firms will enter the competition, increase competition and drive down prices. If profits become normal, then new competition will stop entering. If profits become too low, then the weakest competitors will go out of business, price competition will lessen, and prices will rise.
What this means is that corporate profits will always be about the same, so it is sensible to just assume, whatever policy changes you suggest, that profits will be about the same afterwards.
March 20, 2016, 8:17 pmPhantom_Phlyer:
If a revenue neutral carbon tax was implemented with 100% of revenues collected going to off-set FICA collections (and strengthen the Social Security Retirement account), the plan should be phased in over a long period of time (say more than five years). Only through such a multi-year phase-in can the proper amount of FICA tax be accurately determined and be off-set.
March 21, 2016, 7:06 pmRob Raffety:
1) You're going to have to explain the mechanism behind this massive transfer of cash. I don't see it.
2) It's not a great idea. It's a better (or less bad) idea than the payroll tax it would replace and a better (less bad) idea than the alternative cap-and-trade proposals they keep trying to push on us.
Maybe it's net "bad" but almost all taxes are. Just like government, they're a necessary evil. A carbon tax is basically a use tax on fossil fuels, a finite resource that has real (though overblown) negative environmental impacts. How is it better to tax labor than fossil fuels?
March 22, 2016, 2:09 pmRobert B:
just like above...you have yet to elaborate on this point.
Just saying things, doesn't make it true.
March 27, 2016, 8:40 pmBlackbeard:
I'm not a climate scientist but I am an engineer with 30 years experience in renewable energy, so I do know something about CAGW. Generally I agree both with your characterization of the problem (There is something going on but it's not a immediate, world-ending catastrophe.) and the remedial program you outlined. Nevertheless I would oppose your program or any compromise along those lines. Why? Because, given recent history as well as who is running for president this year, I absolutely do not trust the other side. They will take whatever compromise is offered, define that as the new floor, and start again from there. How will they be able to get away with this obviously bad faith? They will simply lie, knowing that the media, the entertainment industry and the academic world will back them all the way.
March 29, 2016, 3:05 pmJohn G:
The idea of using a revenue neutral tax to raise the price of fossil fuels is a good one. The main difference between your implementation and the proposal from citizens climate lobby is how the money is returned. I like the simplicity of your tax relief idea (very easy to implement), but it does seem too regressive.
The CCL carbon fee and dividend plan proposes returning all the money collected back to all American households on an equal basis, every month. One share per adult, a half share per child up to two children per household. The benefit of that progressive payout plan is that many poor people come out ahead (receive more in their dividend check than they pay in higher prices due to the fee), and will immediately spend the difference, which gives the economy a boost. And better off people can use their money to get off fossil fuels faster so the smart ones will also be able to come out ahead while using their purchasing power to accelerate the market for alternatives.
https://citizensclimatelobby.org/carbon-fee-and-dividend/
August 2, 2016, 8:39 pmJohn G:
Actually there is a legitimate effort from a diverse group of concerned citizens (mostly volunteers) to get a bill passed in Congress in 2017 that is a proposal quite similar to this idea.
https://citizensclimatelobby.org/carbon-fee-and-dividend/
August 2, 2016, 8:56 pmJohn G:
http://www.wsj.com/articles/imf-estimates-trillions-in-hidden-fossil-fuel-costs-1431958586
August 2, 2016, 9:00 pm