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My Climate Plan

September 1, 2009, 9:15 pm

From the comments of this post, which wondered why Americans are so opposed to the climate bill when Europeans seem to want even more regulation.  Leaving out the difference in subservience to authority between Europeans and Americans, I wrote this in the comments:

I will just say:   Because it's a bad bill. And not because it is unnecessary, though I would tend to argue that way, but for the same reason that people don't like the health care bill - its a big freaking expensive mess that doesn't even clearly solve the problem it sets out to attack. Somehow, on climate change, the House has crafted a bill that both is expensive, cumbersome, and does little to really reduce CO2 emissions. All it does successfully is subsidize a bunch of questionable schemes whose investors have good lobbyists.

If you really want to pass a bill, toss the mess in the House out. Do this:

  1. Implement a carbon tax on fuels. It would need to be high, probably in the range of dollars and not cents per gallon of gas to achieve kinds of reductions that global warming alarmists think are necessary. This is made palatable by the next step....
  2. Cut payroll taxes by an amount to offset the revenue from #1. Make the whole plan revenue neutral.
  3. Reevaluate tax levels every 4 years, and increase if necessary to hit scientifically determined targets for CO2 production.

Done. Advantages:

  1. no loopholes, no exceptions, no lobbyists, no pork. Keep the legislation under a hundred pages.
  2. Congress lets individuals decide how best to reduce Co2 by steadily increasing the price of carbon. Price signals rather than command and control or bureaucrats do the work. Most liberty-conserving solution
  3. Progressives are happy - one regressive tax increase is offset by reduction of another regressive tax
  4. Unemployed are happy - the cost of employing people goes down
  5. Conservatives are happy - no net tax increase
  6. Climate skeptics are mostly happy -- the cost of the insurance policy against climate change that we suspect is unnecessary is never-the-less made very cheap. I would be willing to accept it on that basis.
  7. You lose the good feelings of having hard CO2 targets, but if there is anything European cap-and-trade experiments have taught, good feelings is all you get. Hard limits are an illusion. Raise the price of carbon based fuels, people will conserve more and seek substitutes.
  8. People will freak at higher gas prices, but if cap and trade is going to work, gas prices must rise by an equal amount. Legislators need to develop a spine and stop trying to hide the tax.
  9. Much, much easier to administer. Already is infrastructure in place to collect fuel excise taxes. The cap and trade bureaucracy would be huge, not to mention the cost to individuals and businesses of a lot of stupid new reporting requirements.
  10. Gore used to back this, before he took on the job of managing billions of investments in carbon trading firms whose net worth depends on a complex and politically manipulable cap and trade and offset schemes rather than a simple carbon tax.

Payroll taxes are basically a sales tax on labor.  I am fairly indifferent in substituting one sales tax for another, and would support this shift, particularly if it heads of much more expensive and dangerous legislation.

Update: Left out plan plank #4:  Streamline regulatory approval process for nuclear reactors.

Update #2: Readers of TJIC wonder if this is effective, calling it just a rebate of the tax.  I answered in the comments as follows:

I think "rebate" is the wrong way to think of it. Of COURSE if you paid a higher price and then had the exactly that amount rebated to you, then it would not be a very powerful incentive. But that is not what is being proposed.

I think things are easier if you consider payroll taxes to be a sales tax on labor, which they are in effect. So we have a sales tax regime, with differing tax levels on different types of products. If we raise taxes on one item, but drop taxes on the others, then sales of that one item are certainly going to suffer. Its price just went up relative to all the other things we buy. Let's imagine a simplified world where we can buy any of 10 items (call them A, B, C, etc), each priced at $10, and we have $100 in income. Now imagine the same world tilted such that we have $105 of income and all items are $10 except "A" which now costs $20 each. On average, most people will buy less "A" and more of other stuff.

I'm a libertarian, so I grit my teeth at such games. I don't like the taxes in the first place. I don't like the government playing outcomes games with taxes. But my point is that if we are going to insist on doing something to limit CO2, then shifting the sales tax burden so that total taxes are the same but taxes on fuels are higher while taxes on labor are lower strikes me as a substantially lower cost solution than any of the other alternatives being suggested.

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Category: Climate
  • Michael

    1 Implement a carbon tax on fuels. It would need to be high, probably in the range of dollars and not cents per gallon of gas to achieve kinds of reductions that global warming alarmists think are necessary. This is made palatable by the next step….

    2 Cut payroll taxes by an amount to offset the revenue from #1. Make the whole plan revenue neutral.

    Would the payroll tax cut go to the business or the employee or both? Except for businesses and people that travel a great deal, why would I care? Sure, gas is more expensive, but I now have more income to buy that gas.

    It would seem to me that the tax on fuel would need to rise to a level where it would have to hurt businesses and people who use fuel to cut co2 output.

    I'd need to stop using my car. Set the thermostat at 60 in winter, 90 in summer. Business would need to move from trucks to rail. Maybe nuclear rail engines.

    If government is taking 10% of my yearly wealth, and comes to me and says, were still only going to take 10% of your yearly wealth just in a different way, how does this force change on me?

  • Andrew

    @ Michael:

    You can now control whether or not you spend that extra 10% on gas. Many people may do that, but I for one would love to be able to save even more money than I already do by not driving.

  • Raven

    You missed a very important caveat:
    A rider that automatically reduces or eliminates the tax if the planet fails to warm as predicted. It could be combined with one that increases it automatically if the planet does start warm faster than expected.

    I also think that carbon taxes with matching tax reductions are a waste of time because the government would then become dependent on carbon fuel consumption for revenue. This would undermine the incentive to create other policies that would actually reduce consumption.

  • MJ

    I'm guessing that if the British folks that Cameron so approvingly refers to had a chance to actually read the proposed climate bill, they would also have an unfavorable opinion of it also.

    I'm generally in agreement on the carbon tax scheme, with the caveat that any government that inserts that many loopholes and special exemptions into a cap-and-trade bill will also do so with a carbon tax.

  • MJ

    Michael,

    The payroll tax reduction would probably have to be split between employees and businesses to achieve political feasibility.

    The tax would work because the price of fuel would rise, thus discouraging further consumption. If you had more income, you would be much more likely to spend it on something other than fuel. In addition, the high price would send signals to individuals to conserve and to make investments that reduce their energy consumption. I doubt that you would need to turn your thermostat down to 60 in winter (though you could if you felt it was desirable).

  • Link

    Any tax in the US will drive jobs and production abroad, and likely result in an increase in CO2 emissions. Why not build 200 nuclear plants as fast as we can? It'd help on energy independence too.

  • Max

    What? We Europeans are more subservient? Well, that may be true for most Europeans, but there are still some people who aren't like that. I could say the same about the US, in respect of your Fuhrer-Cult towards Obama ;)

    Also, while politically most Europeans are state-lovers, there is a different picture on private liberty, especially in the southern countries that still ignore (largely) bans on tobacco smoking or other ridiculous legislation =) (just take a trip to Italy ;) )

    But intellectually and on ecological legislation, Europe is bankrupt. There are no new ideas and the economic crisis has rendered most balance sheets to the point where no new projects are possible. This is good for everyone who wants a sane discussion about "environmental plans to change climate". And hopefully, it stalls all major "dummy" projects on climate change for about 5-6 years. perhaps until then we will see that most of it was alarmism and not an acute problem..

  • Max

    Well, regarding a gas tax, I can only say: Europeans already tried it and it cripples you financially. We have gas prices of 1.3 euro per liter which is the equivalent of 6.84 dollar per gallon. Driving will not go down below a significant portion, because what other possibility does one have to go to work?
    You can either drive or well, work or bicycle. Both options are no-options and since railroad travel is in most cases also no option, they will drive regardless of the price.

    It will only make people poorer...

  • Scott

    Increased fuel prices means increased food prices.

    Hell, increased fuel prices mean increased prices for damn near everything in our economy. The reduction in payroll taxes going to account for that? Taxing fuel by dollar amounts is an incredibly bad idea.

  • Rex Pjesky

    And taxing labor does not increase the price of everything?

    This plan is perfect, given the constraints. You tax a bad thing (driving) and "subsidize" a good thing (providing income opportunities for people.)

    And I'd disagree with the policy reversal if warming does not happen. A dollar for dollar switch of payroll tax for carbon tax could be a good policy regardless of global warming.

  • JT

    Wouldn't a gas tax effectively be inflationary? Goods are transported, crops are grown, people are flown, and driven by gas-powered equipment. Wouldn't everything get vastly more expensive until a non-gas infrastructure were assembled over the course of 20 years or so? Or would the gas tax only be in suburban areas and targeted only at passenger vehicles?

  • Michael

    If government wants people to conserve a resource they make it more expensive via tax. But if the tax is offset with income tax cuts, I don't see it accomplishing much. Yes there would be changes. Distribution companies would shift to using rail more with trucking at the local level. Manufacturers might be indifferent. Their tax burden simply shifts from taxing production labor to taxing production energy. This would benefit some companies, be neutral on most, and drive a few to other countries.

    Coyote needs to better explain how he envisions the payroll for fuel offset. If it's at the company level, payroll tax - fuel tax = total tax, little changes. If it's at the country level, ie government cut payroll taxes 50%, puts the tax on fuel, and then lets the chips fall, you'll get some changes in how businesses work and some co2 reduction.

    The green energy people are telling us that the country can dump its current energy model and go green pain free. Warren's revenue neutral tax model seems to be trying to cut co2 using pain free tax changes.

    I have a lot of respect for Warren's knowledge and views, but without a co2 free transportation fuel alternative, using taxes to reduce co2 would require pain.

  • rex

    Mike, what you describe in the first part of your comment deals with income/substitution effects in econonomics. Coyote's plan would cause substitutions toward work and away from energy. It would do so without any income effects.

    That it impacts some more than others is just the point. People who choose to live far from work would be losers, for instance. But isn't that just the point?

  • Tim

    I would think that to avoid some of the inflationary side effects, you need to structure the carbon tax on multiple tiers; one for gas, one for Diesel, one for Jet-A, one for 100LL, one for coal, one for home heating oil, etc. Of course, this brings the tax structure back into the political realm.

    Maybe you could structure the tax on *all* fuel as a rate on carbon content per BTU -- basically the number of carbon atoms per BTU for ideal combustion.

    Anyway, one thing that has already shown up in state revenues on gas taxes will more clearly come to light. This type of tax will, long term, have negative revenue. As people conserve; the tax revenue decreases. Not that is necessarily a bad thing, but....

  • morganovich

    raven-

    i'd be very careful tying taxes to warming. doing so provides the government with a powerful incentive and temptation to adulterate the data.

    GISS and had-crut are already highly suspect, badly tainted, and utterly unaudited datasets that have repeatedly refused to release their methodologies.

    imagine how bad they could become if the number had such a direct revenue significance.

    some of this might be avoidable by using the satellite systems instead, but, while more open, they are also very expensive and budget pressures on new birds would doubtless be brought to bear over time.

    put this much money on the table, and everybody will lie and cheat, especially if cooling starts to drop revenues.

    further, while this whole proposal is interesting in concept, revenue neutral is realistically implausible. set the tax on carbon = decrease in payroll, and you'll get a net drop in taxes over a couple years as consumption moves away from carbon due to higher prices. then what will they do? increase payroll taxes again? tax carbon more and incur even more elasticities?

    the real solution here is to realize that CO2 based warming is simply not a real threat and go focus on something important.

  • perlhaqr

    Personally, I want the Left to propose and implement a ludicrously high tax on gasoline -- on the order of $10 per gallon -- clearly in the name of their "green" ideology, so that more people will understand what sort of tax-driven social engineering these people want, and come to hate them.

  • Michael

    Rex, that is what I'm asking Coyote about. Where does the payroll tax change. My personal pay check has 40% taken from it for government. If government comes to me and says that 40% is going to 20% but gas will have a $3 a gallon tax on it, I'm like so what. That extra 20% will cover my additional costs for gas and food.

    If Coyote was to reduce payroll taxes for businesses, what are these taxes? There's SS, Medicare, and unemployment that I'm aware of. I don't see these being cut. I don't think government is going to drop the mandates it has on businesses that increase the cost of employees.

    If you guys could tell me what taxes could be cut to offset higher taxes on fuel and keep everything revenue neutral, but at the same time cause me or small business to radically change our use of carbon fuels would be most helpful.

    Note: I'm with Coyote that co2 isn't a world ending threat, but for the sake of his argument in this post, I'm assuming his goal is a huge drop in the use of carbon fuels.

  • EscapedWestOfTheBigMuddy

    Advantages:

    1. no loopholes, no exceptions, no lobbyists, no pork. Keep the legislation under a hundred pages.

    Some non-trivial fraction of our policy makers doubtless consider---consciously or unconsciously---these to be drawbacks.

  • Scott

    Rex P, of course taxing payroll causes the employer to have to pay the employee more to match the real income, but this is not a new cost. Payroll tax is a cost that's been in the system for a long long time.

    Where is the extra money that employers are supposed to be saving going to come from? Do you expect employers to reduce the employees wage by the amount of the payroll tax reduction to cover their increased costs?
    If so, then the employee now has, at best, no more available income than before to deal with significantly higher fuel prices, consumer consumption goes down, new recession.
    If not, then the employer payroll expenditures don't change but fuel costs have significantly increased which leads to higher prices.

  • Michael

    Scott, I agree. I just don't see how any co2 plan is going to be pain free until there is a cost effective replacement for carbon fuel. Nuclear could cover electricity and ocean shipping and might even be scaled to drive rail engines. But I don't see anything in the pipeline for cars and trucks and to heat homes.

  • Nozzle

    Nuclear power was once viewed as a gift from god...The US Navy pioneered nuclear power and have been "underway" on nuclear power for over fifty years...It has proven to be safe and reliable. Has their even been one death in the USA which can be attributed to nuclear power? The lunatic fringe co-opted this important energy source and denied the public a clean safe modern source of electricity. Now, that we are importing seventy percent or so of our oil and sending hundreds of billions of hard earned dollars overseas. All the while, our leaders are debating the modern equivelent of how many angels can dance on the head of a pin as they discuss global warming and carbon taxes as a means of controlling the climate...We are fools if we don't put this important form of energy to work in order to reduce our dependance on mostly foreign oil...Our energy policy or lack therof is approaching the point of being a national security emergency.

  • MJ

    Hell, increased fuel prices mean increased prices for damn near everything in our economy. The reduction in payroll taxes going to account for that? Taxing fuel by dollar amounts is an incredibly bad idea.

    I disagree for two reasons:

    1) A fuel tax could be implemented gradually, in order to smooth the transition toward higher energy prices. Plus, there would be offsetting adjustments made by consumers to reduce demand. The resulting impact on prices would be very small and not abrupt.

    2) Any increase in prices would be countered by rising incomes resulting from the payroll tax cut.

  • Ian Random

    I really want it to have hard targets for energy producers. If consumers use too much and they exceed their quota, they shutdown with no loopholes. Kind of like Kulifornia a few years ago, when they wouldn't let the producers put a barge mounted generator in the bay. Then people can sit in the dark while contemplating global-hothouse-warming-greenhouse-climate-change and pray for the wind to pick-up or the clouds to dissipate over their solar cells.

  • macquechoux

    "Cut payroll taxes by an amount to offset the revenue from #1. Make the whole plan revenue neutral."

    Er, Coyote, what about us old folks that are currently living off declining dividends and sinking rates of returns on bonds and other modest savings? Whether it be cap & trade or a pure simple carbon tax a la Mankiw my cost of electricity, natural gas, gasoline, and every other good that I consume would increase. What would be my offset? What am I missing here?

    Confused elderly fan.

  • Scott

    MJ,
    1. Could... the effects of artificially doubling the price of fuel over any period of time is an arguable subject, kinda like looking into a crystal ball.
    2. What increase in incomes? The plan is to offset increases in fuel prices with decreases in payroll taxes. The amount of free income is not changing. However the COGS is increasing with the increase in transportation & production costs. So unless businesses decrease their employee's incomes to match... prices will go up.

  • Michael

    Scott, what would you define as a payroll tax? There is SS, medicare and unemployment. What could the federal government cut to offset the fuel tax?

  • Scott

    Income taxes. I know how SS, Medicare, and unemployment taxes (paid for the "company", ugh) are lumped into the tax revenues for the sake of government spending, but personally I find that practice deplorable.

    Anyway, I don't support this idea of any sort of carbon tax. I think at the base of the issue we're just trying to create some faux sense of control over our world which I really believe we do not have.

    Coyote, your new example is invalid. What you're describing is a classic product substitution scenario. The problem is for the angle you're looking at it is that all the items A, B, & C have to be interchangeable/substitution goods. So it works if you're talking about the dynamic between, say, Dr. Pepper, Coke, and Arizona Ice tea, which at their base are all pretty much the same product and... if push came to shove you could do without all of them. But with fuel you're dealing with a product that has no readily available substitute. So your example should go something like this.

    You've got your items A (fuel), B (Soda), & C (DVD). In the origination of the scenario you've got an income of $100 a week and each of the items costs $10 per unit. Now, in order to continue making income and to go get (or have delivered to you)the other products you are required to purchase at least 3 units of A ($30), your remaining income ($70) can now go to A, B, or C as you feel fit. Now, in the modification of the scenario you're now bringing home $105 a week, but the cost of A has been increased to $20. You still have to buy 3 units of A ($60), and then you've got your remaining income ($45) to spend on A, B, or C as you wish. True, you are now less likely to buy more of A then you have to, but you are also less able to buy as many of B & C as you were before.

    As long as fuel is a required purchase/good, increasing the cost of it is only reduce the overall available available income for spending on other goods/services.

  • Michael

    Scott, that is how I envisioned this working with the addition that income taxes would be cut so the remaining income level of $45 would be restored to the $70 level.

    I just didn't see how there could be much elasticity in carbon fuels to reduce co2 without a readily available substitute.

    One thing I noticed is that some people lump electricity (carbon and non carbon produced) in with internal combustion. Like the Pickens' idea of build windmills so we can run our cars on natural gas. One has nothing to do with the other.

  • Scott

    Michael, how would you manage that? How do you account for the person that makes $1000 but still only buys 3 units and the person that makes $100 and buys 3 units? Are you just going to assume a base consumption? So each person has their income adjusted up by the extra $30 they are now having to spend on A? That works well enough with our really simple example, but how do you translate that to the much more complex real world which you've got 100 times more variables to consider (vehicle usage, mpg, vehicle type, etc). Does the guy that can ride his bike to work and makes $400 a week deserve the same tax benefit as the guy who makes $400 and buys a tank of gas every week so he can get to work?

  • Michael

    Scott, I don't think any of this is going to work at all. Either at the individual level or national level. I'm just wondering how Coyote sees keeping the tax revenue neutral, reduce co2, and not cause harm to the economy, since I don't see carbon fuel use as very elastic.

    If the Coyote plan was a 30 to 40 year plan, where electricity comes from nuclear power, and transportation combustion is hydrogen based, then at some point in this transition a carbon tax might be useful.

    But really, if co2 was a real threat to people, carbon fuels would be headed for an outright ban. The cap and trade, carbon tax, credits for windmills and solar panels is all just basic progressive politics. Taking money from producers and giving it to favored leftist groups while achieving nothing.