On carbon: Tax, and spend wisely

What investments should be made with carbon tax revenue?

Posted by David Roberts at 8:03 AM on 26 Mar 2008

Read more about: carbon tax | climate | business | economy | Denmark

Monica Prasad had an op-ed in The New York Times yesterday called "On Carbon: Tax, Don't Spend." It's ... peculiar.

This basic pitch: "if reducing emissions is the goal, then a carbon tax is a tax you want to impose but never collect." That is to say, per the headline, you Don't Spend the tax revenue.

Far as I can tell, though, what Prasad calls not spending looks al lot like what the rest of us call spending. She says the revenue from the tax should be returned to industry in the form of investments, "earmarking much of it to subsidize environmental innovation."

Investments aren't spending?

Then there's the formulation that we should "lock the tax revenue away from policymakers and invest in substitutes." Who does she think is doing the locking away, fairies? It's policymakers! Choosing to spend the revenue exclusively on technology investments is making policy. And it is spending.

Don't get me wrong, I've got no problem investing in environmental innovation. Everyone agrees the U.S. should do much more of that. But Prasad is arguing that such investments are the only effective or justified use of carbon tax revenue.

I don't see why we should accept that. Why not ~~spend~~ "lock some of the tax revenue away" to cushion the blow of higher energy prices on low-income and working families? Why not use it to reduce the (regressive) payroll tax? Why not use it to help train workers laid off in fading industries? Why not use it to fund weatherization and retrofitting of existing buildings, to reduce energy use? Why shouldn't social and economic justice enter the picture? Yes, revenue will decline over time, but so will the regressive impact of a carbon tax. The two could be "locked" to decline in tandem.

Prasad's example, Denmark, is actually quite instructive. It's one of the few countries that's lowered its net GHG emissions, in part using a carbon tax. Prasad notes that the gov't largely returns carbon tax revenue to industry as investment.

What she doesn't note is that while Denmark boasts impressive economic growth, it also boasts a robust welfare state, on that, in the Wall Street Journal's words, places "a higher priority on things like generous health care, free schools and guaranteed pensions than on profits, low taxes and individualism."

If I lived in a country that like I'd say, sure, what the hell, give the carbon tax revenue back to industry. It's not like I'm going to be struck down by a debilitating health condition and find myself out of work, uninsured, and bankrupted by medical bills!

In the U.S., however, matters are more precarious. That's why carbon tax proponents talk about using the revenue to reduce payroll taxes, create green job training programs, finance retrofitting and efficiency programs, and otherwise mitigate the impact of energy price increases.

Hell, if we used the revenue for social investments like Denmark's made, I bet the U.S. could even be as successful in reducing emissions as they've been!

Prasad emphasizes Denmark's business-friendly investments but not its public-friendly investments. Perhaps the real lesson from that country is that the U.S. needs both to succeed in a generational task like creating a new green economy.

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Dreams are nice

I think it's unrealistic at best to suppose that the revenue from a carbon tax will find its way back to us (us being the non-rich.) There's nothing in the recent history of this country to suggest such a thing.
The carbon allotments need to be allocated per person, globally, or nothing constructive will happen.

by wgartist at 9:38 AM on 26 Mar 2008

Disagree with you, David

The problem with a carbon tax generally is that it doesn't provide any direct incentive to those who would otherwise invest in technologies to lower carbon emissions - it is a stick without a carrot. We simplistically tend to assume that the carrot appears by virtue of carbon-intensive folks raising their prices, but this is not guaranteed. Lots of manufacturers have gotten squeezed by the run up in energy costs in recent years because they could not pass 100% of those price increases to their consumers. Meanwhile, many in the environmental community have argued pretty strongly against polluters getting to maintain profit margins and pass the cost of carbon compliance along in rates (this idea is most typically applied to regulated utilities.)

So if you are hitting emitters with a stick and then passing the carrot along to serve some other social purpose, you are explicitly delaying the point at which society starts investing in carbon reductions.

by Sean Casten at 9:44 AM on 26 Mar 2008

Sean,

I'm not arguing against any investments. I'm just saying that there's no reason to accept the notion that that is the only legitimate use of funds. The point about putting the revenue in some sort of fund out of the reach of politicians -- a good one -- does not necessarily entail using that fund purely on the business community.

After all, broad social buy-in is also important for the health of long-term climate policy, and you won't get that if a large swath of the population is getting screwed.

grist.org

by David Roberts at 2:45 PM on 26 Mar 2008

David,

My point is one of economic efficiency. If we tax people on income and spend that income protecting oil imports, one can reasonably make the point that this artificially pushes money from one part of the economy to another and distorts investment considerations (relative to, say, paying for Perisan Gulf adventures with a gasoline tax).

As I read this piece, it essentially makes the same point on carbon, in the sense that the collections ought to have a relation to the distributions. Can we make a case that there are good causes, worthy of government support that are not currently supported but could be if we suddenly had revenue from a carbon tax? Of course. That it distorts the investment, since the person who's doing something good about carbon is now receiving <100% of the value they create (while the guy doing the bad thing is receiving 100% of the penalty).

The result is that we end up using the proceeds for a carbon tax to support those folks who are really going to be hurt by rising energy costs, but in so doing direct resources away from those investments that would lower the cost of energy, essentially magnifying the problem it is attempting to solve.

And there is a longer post coming from me on precisely this issue... stay tuned.

One other point, for what it's worth. I believe that the US has a bigger welfare state the Denmark. Provided you include the costs of incarceration, which we use in this country as the bottom of the social safety net.

by Sean Casten at 4:13 PM on 26 Mar 2008
[ Parent ]

A peculiar piece indeed, that NYT op-ed

Hi David --

You called it peculiar, I called it curious, vexing, even a tad bipolar in my blog post for the Carbon Tax Center. In other ways, too, our two posts were right in synch. Being a numbers guy, I threw in a few of those to make the point that those Scandinavian carbon taxes are too thin to be a solid base for the writer's thesis. Sigh.

Charles www.komanoff.net

by Charles Komanoff at 5:05 PM on 26 Mar 2008

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