Myth: All solutions to climate chaos raise prices

Busted: Majority of emissions cuts can come from public spending

Posted by Gar Lipow (Guest Contributor) at 1:13 PM on 25 Jul 2008

A common rap by environmental economists is "any means of cutting emissions raises prices." Though it is used in defense of a valid point (in the long run we will have to institute either a carbon tax or a permit system), it is simply not true.

The vast majority of emissions cuts can come via public spending that won't raise prices. We can subsidize efficiency improvements to buildings, fund a conversion of most long-haul trucking to rail, and in the long run electrify all transit and decarbonize electricity generation.

But doesn't the money for these subsidies have to come from somewhere? Yup, but a lot these are areas where the private (as opposed to social) gains exceed the subsidy -- meaning even if the people receiving the subsidy end up paying for most of it from taxes, they come out ahead. However, there is no reason the people receiving the subsidies have to pay for most of them. Most of our military budget is devoted to aggression rather than protecting us. We have had enormous tax cuts for the rich from Jimmy Carter forward. We have wasteful existing subsidies for fossil fuel and various unsustainable practices. There is an old liberal-mocking slogan I'd like to turn around and adapt: "Don't tax you, don't tax me, tax the fellow behind that tree."

If you want more detail on what those means of reducing emissions are, what they would cost, and what the benefits are, look at the spreadsheet Jon Rynn and I have put together. If you question whether any emissions price is needed, briefly:

The industrial sector is too complex to capture most efficiency opportunities except through response to price signals.
Emissions pricing is needed to keep rebound effects to manageable levels.
Emissions pricing will help "mop up" stuff that public investment and rule-based regulation won't capture.
Lastly, rule-based regulation is sometimes an emission price in itself. In many cases rule-based regulation actually saves money for those regulated. (I've documented examples in the past.) But in many others the cost/benefit ratios are positive only when considering social benefits or reductions of social costs. In that case they do increase the price of the particular goods or services affected by the regulation, even though they save money for society as a whole. But we can start public investments with the large number of regulations which would save money for those regulated. Save the hardest parts for last.

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Public likes public investment

As argued in this post from DR a year ago, "The promise and perils of public investment in energy", where he references an article by Teague and Navins in American Prospect.

They argue, based partly on polling, that the public would be much more open to mitigating global warming via public investment than via carbon pricing (Teague and Navins use the word "regulation", which seems to mean carbon pricing. Also, Navins is head of the shop Shellenberger works for, but he doesn't call for gee-wiz innovations).

The article is timely, I think, because it addresses the issue of the perceived cost of global warming mitigation, which the rise in the cost of gasoline is making worse. In other words, they anticipated that proposing a carbon price would lead to accusations of trying to impoverish people, while public investment avoids that problem.

Also, on the subject of where to get the money, "The Decline of Corporate Income Tax Revenues" shows that they went from 21% of Federal revenues in the 1950s to only 7% now; if the Federal budget is 2 trillion, then bringing it back up to 21% would yield at least $300 billion (about 15% of 2 trillion).

by Jon Rynn at 1:56 PM on 25 Jul 2008

Reducing emissions is not an impost on the economy

Emissions reduction is not an impost on the economy. The reason it is thought to be an impost is that economists believe that increasing prices is the only way to get investment in renewables and in energy savings. There is another way and that is to Reward people for reducing emissions and require the Rewards money to further reduce emissions. The same principle applies to Water and you can see how reducing the amount of water makes it cheaper for my local area.

http://cscoxk.wordpress.com/2008/07/27/making-better-use- ...

If you do the same calculations for energy reduction you will find the same outcome. That is instead of increasing the price of polluting energy pay people not to use it but require them to spend the Rewards they receive on ways to produce an equivalent product that has no emissions.

If the equivalent product is cheaper to produce then this will in the long term result in lower costs for the product. The running costs of renewable energy sources are ALL cheaper than burning fossil fuel because the fuel is "free".

Economists with their concentration miss the main point that it is investment that gives us wealth. If we concentrate on distributing investment money to amplify the effect of the investment dollar we can have a net zero emissions economy within any time frame we wish. I think ten years is probably good enough - but we could make it five or twenty. At the end of the time we will be wealthier but it will be the people who conserved who will be the owners of the new renewable energy assets.

by cscoxk at 3:55 PM on 26 Jul 2008

Corporate Tax

One of the main problems with Jon Rynn's suggestion to raise corporate taxes to reach a target portion of federal revenue is that with globalization it is far too easy for companies to shift revenue around to countries with lower tax rates. This is especially true for industries where the value of intellectual property is hard to determine.

A company like Microsoft can sell intellectual property to it's Irish subsidiary which does some ill-defined adding of value and then books a lot of revenue with tax going to the Irish government which is willing to take a smaller cut.

I support the progressive individual income tax. If high paid individuals want to actually live in countries with far lower individual income tax rates, so be it. But having a corporate tax rate higher than other countries simply leads to offshoring of business and jobs.

Highly profitable companies are good for everyone, especially considering that so much equity is owned by everyday middle class people through pensions and retirement accounts.

Maybe progressives should consider lowering corporate tax rates to be competitive with countries like Ireland and then raise dividend and capital gains tax rates.

by PJD at 11:22 AM on 27 Jul 2008
[ Parent ]

Income Taxes

>One of the main problems with Jon Rynn's suggestion to raise corporate taxes to reach a target portion of federal revenue is that with globalization it is far too easy for companies to shift revenue around to countries with lower tax rates.

And yet many nations manage to be prosperous with higher corporate income taxes than we have. That is because if have the will you can guard against paper shifting. And if we used this money productively for education, health care, infrastructure and so on, it turns out there are often business advantages to doing locating factories and campuses in a nation with the kind of benefits a strong government sector can provide.

by Gar Lipow at 12:02 PM on 27 Jul 2008

NYC same thing

I remember back in the 1980s then Councilwoman Ruth Messinger (who unfortunately lost to Giuliani in a Mayor's race, if memory serves) argued that NYC should stop giving tax breaks to big companies to stay in NYC, because they would stay for exactly the reasons Gar outlined. Location of human and physical capital is generally much more important than tax rates. But we should certainly raise the dividend and capital gains taxes too!

And once again, I'll point out that employee-owned-and-operated firms would not run away to a lower tax rate or even lower wage-rate country (expanding internationally is a different thing, as we know, Gar).

by Jon Rynn at 12:27 PM on 27 Jul 2008

Corporate and Income Taxes

An alternative I hardly ever see considered is the removal (gradually, to lessen the shock) of all corporate taxation and the simultaneous increase of personal income tax derived from "interest and investment."

Shareholders would find that a graduated tax rate would be incentive for them to pressure corporations to invest their profits in lower prices, more R and D, higher employment, while the same shareholders would still receive stable and moderate "return on investment."

Des Emery

by Des Emery at 7:07 PM on 27 Jul 2008

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