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Inconsistent WSJ logic of the day

Posted by Rich Sweeney on May 17, 2009

From Martin Feldstein, last Thursday. First, he justifies the seemingly time-inconsistent notion that we shouldn’t cap carbon in 2012 because we’re in a recession now:

Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly.

Ok, I’m not really sure how much I believe that a <1% increase in prices 4 years out influences current consumption, but its a pretty common economic assumption. Yet in the next paragraph, Feldstein seems to forget his own forward looking assumption:

Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama’s proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts….But those are false tax cuts in which no one’s tax bill actually declines.

So apparently people immediately incorporate the impact of proposed future tax increases into current consumption decisions, but then fail to reevaluate their budgets when previously incorporated projected tax increases are removed. Got that?

Posted in Cap and Trade, Carbon Tax | Leave a Comment »

Write a letter to the editor, and nobody cares. Call someone an idiot on the internet and……

Posted by Rich Sweeney on March 13, 2009


Who Pays for Cap and Trade? — II

We don’t mind an intellectual fight, and in a nearby letter, two economists at Resources for the Future take aim at our Monday editorial on how the costs of cap and trade will be distributed across regions and income groups. Dallas Burtraw and Richard Sweeney call it “a bait-and-switch argument.” Mr. Sweeney added on his blog that “The Wall Street Journal is an idiot.”

That’s how the global-warming clerisy debates these days, but we’ll try to take their argument seriously. They claim that by citing state-level CO2 production data, rather than CO2 consumption data, we exaggerated regional differences. This is distortion disguised as verisimilitude.

It’s true that discrepancies in per capita emissions — 73 tons in West Virginia versus 12 tons in Rhode Island, for instance — reflect the fact that carbon-heavy power plants and industries are based in some states and not others. It’s also true that electricity crosses state lines, and that — as cap and trade raises prices — a consumer in California who buys a car built in Michigan, say, will bear some of its carbon costs.

However, one reason we didn’t mention per capita consumption figures is that, strictly speaking, they don’t exist. The economic literature on the incidence of cap and trade extrapolates carbon consumption by region from the government’s Consumer Expenditure Survey. But nearly every human activity has some carbon cost associated with it. Consider the emissions of “consuming” french fries at a fast food restaurant:

There’s CO2 in fertilizing and harvesting the potatoes; processing, freezing, then transporting them; and still more when they’re cooked. Now multiply that by the entire economy. One danger of a carbon tax — especially if it is poorly designed — is it that its costs will ripple throughout complex energy chains in ways that economic modeling can’t quantify.

Still, in the spirit of comity, we’ll mention the work of Messrs. Burtraw and Sweeney, who wrote a 2008 paper finding that cap and trade disproportionately hits the poorest households and that those effects are exacerbated in some regions over others. That was our argument too.

Of course, ultimately the incidence of a carbon tax depends on how the revenues it takes from the public are redistributed back to the public. Yet Congress, being Congress, is incapable of designing even a marginally efficient system — and given environmental politics and state carbon realities, the losers will be concentrated in noncoastal regions that rely most on coal and manufacturing.

And therein lies the value of emissions production data. Not only does cap and trade tax at the point of production (even if some of those costs are ultimately borne by consumers elsewhere), but it also shifts economic activity away from those industries. The states that produce the most emissions are going to see the strongest ancillary declines in income and increases in unemployment. The top carbon states — in absolute, not per capita, emissions — include Ohio (No. 3), Pennsylvania (No. 4), Indiana (No. 7) and Michigan (No. 9).

What really drives cap-and-trade idolaters like Messrs. Burtraw and Sweeney to schoolboy taunts is their fear that the American people might figure this out. Then their dreams of having government command a huge new chunk of the economy might collapse.

What’s ironic is that if the WSJ had simply read our paper in the first place, they’d probably have run their initial post anyways, as we find that there are regional differences in the the initial incidence of pricing carbon (just not not the 154 to 12 spread the editors implied). However, as Dallas testified yesterday, the real name of the game is what you do with the money. A lot of these regional and income level effects could be countered with careful revenue reallocation. Now the question is whether the WSJ really cares about the true net effect of carbon policy on households in states like Michigan and Pennsylvannia, or if they’re simply clinging to any story that will allow them to politically undermine cap and trade.

Posted in Cap and Trade, Carbon Tax, Climate Change | 9 Comments »

Question of the day: How much should we care about the regional incidence of climate policy?

Posted by Rich Sweeney on March 11, 2009

I’m super busy today, helping Dallas prepare to testify before Ways and Means tomorrow. So rather than rush a post I want to ask yall a question.

Two days ago I wrote that consumers in some states will experience larger price increases than others after we cap carbon. While carbon consumption doesn’t vary much across states compared to the variation in carbon from production, there is variation nonetheless, and states where per capita consumption is relatively small will experience a smaller energy price increase than states with larger per capita consumption. However, much of the difference in carbon consumption is the result of previous state level initiatives, which consumers have already paid for. The extreme example is California, which has been consistently investing in energy efficiency and renewable energy for decades. Californian’s paid comparatively higher prices for these investments in the past, but as a result they’re energy bills will be relatively less effected by a cap on carbon emissions. Recently many other states have followed suit, most notably through state RPS and regional carbon policies.

If we just look at current carbon consumption patterns and calculate the implied energy increases expected from pricing carbon, California looks like its not bearing its fair share of the burden. But hasn’t California earned its easy pass by preparing for this day of reckoning over the past two decades?

I’m not saying that the discrepency in burden is 100% justified, as different regions have different energy resources available (and the west has a lot). But there’s clearly been a lot of moral hazard involved as well. Anyone who built a coal plant in the past ten years should have factored in considerable regulatory risk. To the extent that that they didn’t, should more prudent investors be penalized?

Posted in Cap and Trade, Carbon Tax, Climate Change, Incidence | 1 Comment »

Evidenceless Grist argument of the day

Posted by Rich Sweeney on March 10, 2009

Sean Casten explains that “carbon pricing does not necessarily cause higher energy prices” because………. well because it just doesn’t.  While I’m fine with his point that we shouldn’t assume that pricing carbon will lead to higher prices (just as I think we shouldn’t assume green jobs = net jobs), he provides no evidence for his assertion, and ignores the significant literature available showing that precisely the opposite is true (EIA’s L-W runs are an example). This is because carbon intensive energy generation is currently significantly cheaper than clean energy generation, and because our current, stranded, capital is built around dirty energy. Even if you transfer all the carbon revenue to clean technologies, it still won’t compensate for these losses, at least in the short run. Here at RFF I help maintain a highly parametrized US electricity market model which incorporates the two additional costs I mentioned. If anyone has an idea how to design a carbon policy that won’t raise electricity prices I would honestly love to hear it.

Finally, before Jigga Romm’s anti-econ crusaders jump on this post, I’d like to reiterate that my criticism of Casten’s argument (?) does not mean that I am against pricing carbon. In fact I wan’t to do so precisely because it will raise energy prices, which are artificially low right now since they don’t incorporate emissions externalities.

Posted in Cap and Trade, Carbon Tax | 27 Comments »

Assuming we cap carbon emissions, what’s the added benefit of enacting a federal RPS?

Posted by Rich Sweeney on February 26, 2009

I’ve been really busy since I got back from Thailand, which is why I haven’t been posting. Now I’ve got a cold and don’t really have the mental energy to come up with anything coherent or insightful. So I figure I’ll take this opportunity to ask CT readers a question, the one in the title.

I’ve been confused about this for a long time and am hoping someone can explain it to me.  There’s been a lot of chatter recently about Obama’s apparent attempt to sneak a cap and trade program in through the back door of the budget. However, I’ve heard from multiple sources that the House Dems want a national renewable portfolio standard in place before a carbon cap is implemented.

As far as I know, the reason we want to promote renewable electricity is to reduce our carbon emissions. Since simply enacting an RPS will not guarantee that we reduce emission to the desired level, some sort of carbon price will be necessary anyways. If the RPS is less than or equal to the percentage of renewable electricity generated after carbon policy is in place, then the renewable credit price (REC) will go to zero, and the whole program will have contributed nothing more than red tape.

On the other hand, if the RPS still binds after we cap carbon, it will have the effect of increasing electricity prices without further reducing carbon emissions. Unless the CO2 permit price goes to zero (EIA estimates of L-W were in the $20 range), the emissions cap acts as both a floor and a ceiling on emissions.

So my question is, simply, why do we want an RPS if we know we need to price carbon anyways?

Posted in Cap and Trade, Carbon Tax, Climate Change, Renewables, Uncategorized | 5 Comments »

Climate change legislation in the last Congress

Posted by Daniel Hall on December 18, 2008

There is a new feature up at the RFF website that sums up the activity on climate change legislation in the 110th Congress:

It provides an overview of some of the key issues under discussion.  It also includes a table and chart that sum up 15 or so of the major proposals for cap-and-trade (or carbon tax) programs.  The chart depicts the proposed emissions targets in the various bills; the table sums up the major provisions for key issues.

In my opinion most people who follow the climate change issue spend far to much time worrying about the chart and not enough about the table — in other words, people are much too focused on the emission target and underestimate the importance of well-designed policy.  (A very current analogy might be observers who were more focused on how big TARP should be — $400 billion?  $700 billion?  $1 trillion? — than they were on how funds would actually be spent.)

The reality is that any target we pick now — particularly for far-off times like 2030 or 2050 — is going to get revised based on evolving knowledge.  But given the intrinsic path dependency involved in setting up new political institutions such as cap-and-trade programs, I think it is important to get a well-designed and robust framework in place from the beginning.

For starters, a well-designed policy would:

1) cover as many emissions sources as possible;

2) auction all allowances;

3) give away (to politically powerful entities) as little of the auction revenue as is politically feasible;

4) use some revenues to provide per-capita lump-sum rebates;

5) use other revenues to support basic and applied energy R&D (and NOT technology deployment);

6) allow entities to bank and borrow allowances (to increase intertemporal flexibility and efficiency);

7) and use price floors and price ceilings to ensure (on one side) that there will be at least some revenues raised and emissions reduced, and (on the other side) that price increases do not become politically unsustainable.

Posted in Cap and Trade, Carbon Tax, Climate Change, Government Policy | Leave a Comment »

Apparently CO2′s gonna cost $680/ton by 2010 if the Dems get their way

Posted by Rich Sweeney on December 11, 2008

From the department of disinformation:

Jim Sensenbrenner, the ranking Republican on the House Select Committee for Energy Independence and Global Warming, made a cameo appearance at the international climate talks in Poznan, Poland, this week, announcing his opposition to any climate agreement that doesn’t require the developing world to reduce its own emissions. What’s more, he predicted dire economic consequences if the Democrats managed to pass a cap-and-trade bill in the United States, though he could hardly contain his glee over the political opportunities he saw. He told reporters that climate legislation would lead to “a doubling or tripling of electricity bills and ten-dollar-a-gallon gas,” which would then lead inexorably to the Republicans regaining control of Congress in 2010.

For those of you keeping score at home, let’s break that $10 gas figure down:

- The EPA lists the CO2 content of gasoline at 8.8 kg/gallon.

- Lets give the Senator the benefit of the doubt, and say gasoline will return to its summer levels of $4/ gallon, meaning that the carbon tax on gas is $6.

- $6/0.0088 tons CO2 = $681.82/ton CO2.

I think 2015 Lieberman-Warner estimates came in at about $21/ton. I, for one, hope this is a key element of the GOPs 2010 strategy.

Posted in Cap and Trade, Carbon Tax | Leave a Comment »

Equity, efficiency, and (long run) equivalence

Posted by Daniel Hall on June 5, 2008

You knew, dear readers, that the econoblogosphere has been arguing vociferously the last few days about carbon taxes versus cap and trade and to what degree they are equivalent, didn’t you? It seems Robert Samuelson started the entire thing with a grumpy tirade about cap and trade on the editorial pages of the Washington Post. Ryan Avent criticized it, and then things blew up. Here is Tyler Cowen, Mark Thoma, and Brad DeLong with more, another response from Ryan, and there are many further links at these posts if you want more. The short story is that only Tyler comes to Samuelson’s defense; everyone else agrees that while there are differences they are not the ones Samuelson “identifies” since he actually spends his time whinging about regulation of any kind at all. (Brad DeLong makes this point most clearly.)

I have been on the sidelines the entire time, partially because I have been very busy with my actual life, partially because I already covered this, and partially because I am consciously trying to avoid this malady. But I could not let this statement from Arnold Kling pass without comment:

In theory, you can make cap-and-trade equivalent to a tax. What I worry about is that under cap-and-trade Congress is very unlikely to have a pure auction of permits. Instead, permits will be given to favored industries. The equivalent under a carbon tax would be to set different tax rates for different industries, with favored industries getting anywhere from a partial exemption to a full exemption to a negative carbon tax, or a carbon subsidy.


Giving allowances away for free in a cap-and-trade system and giving (full or partial) exemptions in a carbon tax system are not the same thing. But why not? They seem so similar, don’t they? Some particular industry or firm gets favorable treatment — either free permits or lower tax rates — and this makes them more profitable, right? Why aren’t they equivalent? Briefly, because one system (cap-and-trade with free allowances) equalizes the marginal cost of emissions, while the other (carbon taxes with exemptions) does not.

Once you establish a cap-and-trade system, every regulated entity within that system will have an identical incentive to reduce emissions. The incentive will be the market price for allowances. And this incentive will be the same for all firms regardless of how allowances are initially distributed. Even if firms get allowances for free, they will still face an opportunity cost for emissions.

If you establish a carbon tax system with different tax rates for different sectors, however, firms will face varying incentives to reduce emissions. This will end up making some firms or sectors work much harder to reduce emissions (those with the higher tax rates) and others work less hard. This will have (at least) two unfortunate effects: one is that society will get less bang for its buck now — fewer emissions reductions for the money it spends than it could have done if marginal tax rates were equal. The second problem is that over time the existence of differing marginal tax rates will tend to push economic activities into sectors with low tax rates and away from those with high tax rates. Both these effects mean that the system is less efficient than it would have been if marginal carbon tax rates were equal across the entire economy.

Economics students will recognize this as the classic distinction between equity and efficiency. How allowances get handed out matters a lot for the distributional (equity) effects of the policy, but doesn’t affect the efficiency. Exemptions and carve-outs in a tax system, however, make the program less efficient. (The actual carbon tax policy equivalent to free allowances would be lump sum rebates of tax revenues, while leaving marginal tax rates equivalent.)

In my mind this difference is important, and constitutes a public choice argument for cap and trade. In order to get any climate policy passed you are realistically going to have to make a lot of political side deals. With cap and trade the natural side deal is to give away allowances. This may not be fair, and it may be ugly, but it at least leaves us with a system that is efficient, and this is very important when thinking about policies that will likely be in places for several decades. With taxes, however, the natural side deal is exemptions. And once full or partial exemptions get established in a carbon tax code I doubt they will go away. That might not look too problematic today but the inefficiency will just get larger and larger over time and by 2020 or 2040 we will be very unhappy we have a system that has inefficiently squeezed economic activity into certain sectors. Better to give up some equity now in exchange for a system that is built for the long haul.

Posted in Cap and Trade, Carbon Tax, Climate Change | 3 Comments »

Where’s your network?

Posted by Daniel Hall on June 3, 2008

Ryan Avent wants to know if carbon and congestion pricing will boost the case for regional rail:

I’m of the opinion that a carbon pricing scheme would give a boost to rail travel over both driving and short-haul flying. But a potentially more important factor in some regions might be the runway congestion charges under consideration. I suspect that auctioned spots would tend to go toward long-distance flights, for which there are few good substitutes (question to the gallery: what are the high margin flights–where do airlines make their money?). Were that the case, demand for regional rail should significantly increase.

Aviation policy wonk Evan Sparks replies that short hop flights are a valuable underpinning of the airline industry:

An airline hub offers positive network effects up to the point of congestion, which varies by airport. Without the network effects of hubbing, few cities could support much air service on their own — especially long-haul international service. Sure, New York, Chicago, Los Angeles, Boston, and Miami might be OK, but even they would see cuts. Without sufficient short hops to feed the hub, marginal international destinations would face the axe. Therefore, you can’t discourage simply limit short-hops without seeing network effects. … policymakers must be cautious when tampering with the ability of airlines to take advantage of network effects in offering air service widely and efficiently. (emphasis added)

Evan knows more about the practical in-and-outs of the airline industry than I do about any subject whatsoever, so I want to be careful with my reply. But I think he is assuming that the existence of network effects implies that there are positive externalities, and it’s unclear to me that this is the case here. The examples Evan cites in his post involve private benefits that are being captured in market prices, e.g., Delta decides to use a hub-and-spoke service model because that is how it is most profitable. Network effects sometimes do have associated positive externalities. For example, if many different actors own or operate the network then each may have insufficient incentive to invest in it — the free rider problem — and so there is a case for regulatory intervention to encourage the socially optimal level of investment. But in this case it sounds like a single actor (i.e., the airline firm) operates the network.

Congestion, on the other hand, generally involves an unpriced negative externality — Delta’s use of runway space doesn’t only delay Delta’s other planes but also those of competitors — and hence there is a case for regulatory intervention.

The original question concerned which flights were high margin and if you read Evan’s response it does indeed sound like it is long-haul international flights that are most profitable. This seems intuitive to me since there are just not any good substitutes available. So I’d expect to see these flights to continue even once we price carbon and congestion. It’s also reasonable to think that pricing these externalities will decrease demand for short flights. This worries Evan:

Airlines have gradually centered themselves around hubs. … This tends to be more efficient, even if some individual flights defy logic. A couple personal examples: whenever I go to New York, I take surface transportation. But last year I flew through JFK from DC (thirty minutes) to catch a flight to London. On a trip to New Orleans last month, I flew first from Baltimore to Philadelphia — a fifteen minute flight. Such options maximized efficiency and provided me with much cheaper options than had I relied on nonstops.

Two things about this: First, I suspect that neither Evan nor any of you really care that much which mode you take to reach your nearby intermediate destination. If a flight is better — faster, cheaper, more convenient — then you’ll fly Baltimore to Philly, but if a train is better you’ll hop on board. Right now flying is cheap because it involves lots of things that neither you nor the airline pay for, like a warmer world, or other delayed passengers. If you have to pay the price for those things, however, rail might look a lot better. Second, what are these 15 and 30 minute flights Evan is talking about? I can’t imagine that these are the actual marginal increment of travel time that his short flights added to his trip. Let’s talk about boarding, taxiing, etc.

But these brings me to my final point, which is that as much as airline travel can be a hassle, it is very often even more inconvenient — or even downright impossible — to switch modes within a single trip. One of Evan’s commenters makes a very smart observation about this point:

What we really need is more of what Continental does with Amtrak – intermodal codesharing. You’ll notice that Continental doesn’t fly EWR-PHL. You have to take an Amtrak train with a Continental code on it. …

Of course, that requires a convenient plane to train connection and not many hub airports offer that. Sure, US Airways could do it in Philly if we could get a station built near PHL. That’s a long ways away and it will require a lot of money, but it’s ideal.

Which goes right back to a point which you can read Ryan making nearly every day on his blog: once we start pricing carbon and congestion, it will be much less painful if we have transportation options that are not carbon- and congestion-intensive. Rail is one of those options. This means that rail would be a smart infrastructure investment, and it also means we should get the institutional structure right to allow travelers to transfer between modes.

Posted in Carbon Tax, Transportation | 1 Comment »

Some motherly advice on deficit reduction

Posted by Rich Sweeney on May 20, 2008

Over on EconomistMom, Diane Lim Rogers notes that economists of all political and ideological stripes appear to support pricing carbon, which, by itself, amounts to increasing taxes. She then muses that part of the appeal comes from the fact that a carbon tax is an efficient tax, and the revenue could go towards alleviating other less efficient taxes. In particular, Rogers’ main interest is in deficit reduction. Now as I noted in the comments, it seems pretty unlikely (at least in my reading of the current political climate) that deficit reduction will garner much, if any, of America’s newly created carbon permit pie. My guess is that it’ll be eaten up by some combination of giveaways to industry (a la McCain), giveaways to the people (a la Boyce and Riddle), and spending on R&D (a la Joseph Romm). These three spending options all have obvious political constituencies, but it wasn’t obvious to me who the deficit reduction constituency is (except the unborn, who, for obvious reasons, don’t seem to carry much political clout). Nevertheless, deficit reduction is obviously a reasonable option, so I decided to check out the Brookings Paper Rogers links to.

Here’s is the comment I left for Diane after reading her paper, in which I show my ignorance of public finance,

I’m curious about the distributional implications of using this revenue to pay down our national debt. In your paper, you say, “Even if one interprets the benefits of deficit reduction as distributed broadly across the current population, i.e., as a fixed dollar amount of benefit to each American, this benefit will be progressive relative to income (a higher percentage of a lower income).”

But why would one interpret the benefits this way? Wouldn’t the benefit be proportional to each person’s share of future taxation? And given that wealthier Americans have higher average tax rates and pay taxes on a much larger ammount of income, it seems to me that reducing future tax burdens would be really regressive.

Diane replied,

Rich, there are debates on this—what is the burden of budget deficits across the income distribution? (It’s easy to figure out the intergenerational burden, not so easy to speculate on the inTRAgenerational burden among rich vs. poor.) Obviously it depends on what we think the form of the future burden will take–higher taxes or reduced government services, or some combination of both. The more it’s higher taxes, the more it depends on how we think taxes would be raised. If taxes would be raised proportionate to the current (progressive) federal tax distribution, then you’re right, that would be a more progressive change, so reducing the deficit and avoiding such future tax increases would be a regressive change. In my paper I was making the assumption that the future tax increases and/or benefit decreases associated with deficits would be distributed fairly evenly across the population, which would mean that relative to income, avoiding deficits would be a progressive change

So there you have it. I’m not surprised to hear that the distributional implications of deficit reduction are highly dependent on how you assume future tax increases were going to be financed. Given this, the real question I have is not “Under what assumptions is deficit reduction progressive?”, but instead, “What are the most realistic assumptions we can make about where future deficit driven tax increases/ decreases are likely to come from?” I know this is basically unanswerable, but any evidence (even anecdotal) or hypotheses would be welcome. I’m currently working on a paper analyzing the incidence of US climate policy, and it seems to me that this is the million dollar question when it comes to deficit reduction.

Posted in Cap and Trade, Carbon Tax, Climate Change, Incidence, Political Economy | Leave a Comment »

Today’s best person in the world: Peter Orszag

Posted by Rich Sweeney on April 24, 2008

Today the Director of the CBO is testifying before the Senate Finance Committee on the implications of a cap and trade program. In addition to the full testimony, you can read Orszag’s summary comments on the CBO blog. As I read them, two points stood out.

First, Orszag says that the CBO believes a tax is generally more efficient than a cap because of its flexibility. We’ve already debated this issue too much. I’m merely pointing this out to chalk Orszag up in the pro-tax column on the proverbial scoreboard.

The real bombshell comes in the final paragraph:

CBO has concluded that the federal budget should record the value of allowances that are given away by the government if the recipients of the allowances could readily convert them into cash. In particular, the budget should record the value of those allowances, when they are distributed, as both revenues and outlays. That procedure, which CBO has already applied in its estimates for S. 2191, underscores that giving away allowances is economically equivalent to auctioning the allowances and then dedicating the proceeds to the recipients.

It’s one thing for economists and eco-bloggers to point out the reality of pass-through. It’s quite another for the CBO to recommend codifying it in the calculation of the federal budget. This is going to be controversial on the Hill, but if anyone can explain it simply and convincingly to Congress its Orszag.

Today’s best person in the world: Peter Orszag.

Posted in Cap and Trade, Carbon Tax | Leave a Comment »

Fun with statistics: the regressivity of gasoline taxes

Posted by Rich Sweeney on April 17, 2008

Yesterday on Grist, Joseph Romm responded to a reader who argued that he should care more about incidence when talking about gas taxes. His response was a litany of citations suggesting that gas taxes were not in fact regressive, partially because the poor don’t own cars/ drive as much. Romm’s supporting evidence is pretty compelling. He cites a recent study by Don Fullerton (who used to be at RFF) which finds that a gas tax would only be regressive across the top half of the income distribution (BTW, Fullerton’s paper is one of the best I’ve seen on the public finance options for curbing vehicle emissions if you’re interested in that issue). Yet despite all of the evidence Romm put forth, I was still skeptical of his claim. I’m working on an incidence paper myself right now, and do see regressivity in the data. It just depends on how you define it. Below is a table with gas expenditure by income quintile from the 2007 BLS Consumer Expenditure Survey (which, btw, is the same source Fullerton uses):

Notice how different the story looks depending on whether you put income or consumption in the denominator. Both measures have their faults, and, in the policy world, people tend to flip back and forth between them depending what point is being made. Ideally economists would like to put lifetime income in the denominator, assuming that people incorporate their future welfare/ wealth into their current decision making (ie college student go into debt with the expectation that they’ll make much more money later on). For a more detailed discussion on defining incidence see this working paper by Gilbert Metcalf.

For those who don’t have time to check out the Fullerton paper, I’d also just like to point out something about the table Romm presented in his post.

However, he omitted the third column. To be fair, his point was about average effects across all people. Yet one can imagine how the second statistic might be relevant to policymakers. While poorer people are less likely to own cars/ drive, the ones that do are likely to be significantly impacted by an increase in the price of gasoline. If a household making under $20,000 a year does own a car, it’s probably because they live in an area where there aren’t any other options for getting to school, work, etc. This means that their demand response in the face of a price increase would probably be negligible, and a gas tax would simply crowd out other consumption. Thus you could imagine framing incidence in terms of rural vs. urban households, as well as simply rich vs. poor.

None of this is to say that one way is best. And I definitely support a gas tax, although I think we should be smart about implementing it. I just thought I’d point out that on this issue, like just about every other issue in DC, different people can use the same data to make different points.

Posted in Auto, Carbon Tax, Gasoline, Government Policy, Transportation | Leave a Comment »

Fifty dollars per ton of carbon dioxide

Posted by Daniel Hall on April 2, 2008

That is what Marty Weitzman thinks we should do about climate change.

This came up at the World Bank event I wrote about yesterday. During the Q&A session a World Bank employee came to the mic and said that the Bank would likely soon adopt a social cost of carbon (SCC) to use when evaluating its projects, and what SCC would Weitzman recommend?

Weitzman hemmed and hawed and noted that the whole point of his paper was that there are these big uncertainties, and that previous attempts to calculate the socially optimal price on carbon haven’t accounted for these and thus are wrong, and that you couldn’t even really do the calculation with the current tools we have. But he finally acknowledged that if you made him philosopher-king and demanded an answer he would say that the price on emissions (i.e. a carbon tax or the price of a cap-and-trade permit) should be $50 per ton of CO2, rising at rate of a few percent over inflation.

A few thoughts:

1. Muse about uncertainty all you want, but ultimately you have to name your price.

2. This is higher than a lot of mainstream economists who work on this issue. Bill Nordhaus thinks the right value today is around $10 per ton of CO2 (see Table 5-4 of this publication); Billy Pizer at RFF thinks it is close to double this (ungated version here, see Table 5 (3 in gated version) suggesting the correct valuation is 82% higher). On the other hand Nic Stern estimates it should be $80 per ton of CO2.

3. Carbon prices in Europe are currently about 70% of this level (thanks partially to the weak dollar).

4. Carbon prices in the U.S. are short of this mark by about… oh, that’s right, $50.

Posted in Cap and Trade, Carbon Tax, Climate Change | 11 Comments »

Who vets NYTimes op-eds?

Posted by Rich Sweeney on March 25, 2008

Today’s piece on carbon taxes by Monica Prasad was pretty weak. Her argument is that we should tax carbon but recycle 100% of the revenue back to industry. While this is not necessarily a bad idea, the evidence she sights from Denmark’s experience is pretty JV. How much of Denmark’s comparatively strong clean energy growth came from R&D investment vs. simple resource availability? Who knows. European carbon emissions have gone up since a carbon tax was imposed, but how much higher would they have been without the tax? Not relevant. And oh yeah, just ignore all of the petty equity and distributional implications.

Also, this sentence didn’t make any sense: “But unless steps are taken to lock the tax revenue away from policymakers and invest in substitutes, a carbon tax could lead to more revenue rather than to less pollution.”

Sorry for the random rant. Read and form your own opinion, of course :)

UPDATE: Apparently the Environmental Econ guys got to this before I did, pointing out that demand for gasoline is not perfectly inelastic. Although, surprisingly, they forgot to hyperlink their first behavioral response. You guys are slipping!

Another Update: Over on Grist, David Roberts adds to the Prasad critique by pointing out (as I weakly alluded above) that the US aint Denmark, and that distribution and ease of transition matter a lot. My favorite line: “Far as I can tell, though, what Prasad calls not spending looks a lot like what the rest of us call spending.”

Posted in Carbon Tax | 6 Comments »

Pork barrel term of the day

Posted by Rich Sweeney on March 3, 2008

Comitological hypothecation.

Hypothecation is eurospeak for earmarking. Not sure if comitological is a word, but this is supposed to mean that it takes place in a governmental committee.

If we ever get around to capping or taxing carbon, there’s gonna be a whole lotta comitological hypothecation goin on in Congress.

H/T Dallas.

Posted in Cap and Trade, Carbon Tax, Government Policy | Leave a Comment »

Assorted links

Posted by Daniel Hall on February 20, 2008

1. British Columbia is implementing a revenue-neutral carbon tax. Mike Moffatt is a fan.

2. Oil closed above $100 per barrel for the first time ever yesterday (in nominal terms). The WSJ Environmental Capital guys immediately called it speculation rather than fundamentals.

3. In the face of high fuel prices, residents in the Northeast U.S. are switching back to wood-burning stoves, but this move carries its own costs, particularly to local air quality.

4. Cameroon wants to rent a forest — preferably to conservationists — but doesn’t seem to have any takers. The article points out that they may be above the market-clearing price.

5. Ezra Klein praises density.

6. George Monbiot, writing about climate change policy, is offended that economists place a monetary value on human life, and that hence there is a chance “we would then find that it makes economic sense to kill people.” One of the Free Exchange bloggers defends the use of benefit-cost analysis, while Tim Haab provides a straightforward explanation and able defense of why economists place a value on life. (Hint: it’s because we all do — they’re called trade-offs.)

Posted in Carbon Tax, Climate Change, Forestry, Land Use, Oil | Leave a Comment »

Why the CBO likes a carbon tax

Posted by Daniel Hall on February 14, 2008

The Congressional Budget Office released a report yesterday examining greenhouse gas emissions mitigation policy. Terry Dinan at the CBO authored the report, Policy Option for Reducing CO2 Emissions. The report looks at using 3 forms of incentive-based regulation: a carbon tax, and two variants on a cap-and-trade program, referred to as “inflexible” and “flexible” cap and trade. The report concludes that a carbon tax will be the most efficient policy instrument.

The reported has ignited a series of blog entries: the CBO director’s blog summarized the report, and Mankiw promptly excerpted the key result. Environmental Economics has already put out a series of posts this morning. For my money the most interesting conversation is happening over at Felix Salmon, where you must read the comments as well.

I want to use the discussion as a springboard to explain why the CBO says a carbon tax is more efficient, and I’m going to try to do so in a way that delves into the economics literature but remains grounded in relatively plain language. I’m also going to explain at the end why I still think cap-and-trade is the way to go.

First, Felix highlights a relevant excerpt from the report:

Read the rest of this entry »

Posted in Cap and Trade, Carbon Tax, Climate Change | 7 Comments »

The case for carbon consumption caps

Posted by Rich Sweeney on December 17, 2007

Judith Chevalier lays out the case for carbon consumption caps in Sunday’s NYTimes. Carbon consumption caps would solve the international leakage problem as well as insulate American workers from competition from countries without climate policy. Such an approach would also provide producers in developing nations with the incentive to become greener now, even though their governments may be decades away from enacting economy wide carbon restrictions. For these reasons, I agree a carbon consumption cap is an “elegant” solution – in theory. But I do have a couple questions about how, and if, it could work in practice.

  1. Is this possible under the current WTO rules? Chevalier mentions but glosses over this point at the end. My guess is that many LDCs would consider this an unfair tariff. It’s also a slippery slope to use trade policy to achieve political goals. What’s next, linking imports to labor standards?
  2. Is this type of regulation economically and informationally feasible? It seems like this would involve a substantial amount of regulatory oversight and a very costly labeling, monitoring and tariffing bureaucracy. Also, many imported goods are made of components from several countries. When would the tariff be applied?
  3. Finally, would such an approach even significantly curb net Chinese emissions? By taxing exports only, it seems just as possible that the effects of domestic leakage, from exporting to non-exporting sectors, could dominate.

Posted in Cap and Trade, Carbon Tax, Climate Change | 1 Comment »

The interplay between an emission price and technology policy

Posted by Daniel Hall on December 15, 2007

I think we have been fairly clear here at CT about our thoughts on the role of technology policy within climate policy. It’s a somewhat nuanced position; I’d summarize it thusly:

The government should support energy technology R&D, and particularly fundamental research (i.e., basic and applied research as compared to development and deployment activities). The principal rationale for such support is that there are spillovers — large, broadly-dispersed societal benefits — associated with research that cannot be captured privately by firms; thus, there are large under-incentives for firms to invest in the socially optimal level of R&D. At the same time, the core feature of any approach to reducing greenhouse gas emissions should be an emissions pricing policy: a carbon tax or a cap-and-trade program. Such a policy is the most cost-effective approach when fundamental change must be made to complex and disaggregated systems such as the energy infrastructure. Further, a pricing policy will itself boost private sector R&D by increasing the returns to innovation, particularly in areas such as development and deployment where there are fewer market failures. Thus, R&D policy is a necessary complement, but not a substitute, for an emissions pricing policy.

Although those are my words, I think my co-bloggers would broadly agree with the sentiments. There are certainly other thinkers out there, however, who put much more emphasis on the role of technology R&D — they feel that it should be the core of climate policy and that emissions pricing policies are peripheral, unnecessary, or perhaps even counter-productive. In general I feel that these thinkers are underestimating the innovation that will occur under a pricing policy and overestimating its transaction costs. However, there are certainly better arguments for such an emphasis than others. Paul Klemperer gives one of the best I have read at VoxEU:

Developing countries are not going to give up the immediate aspirations of their (often growing) populations for climate-change benefits that are largely in the future. Worrying about preserving the environment for our great-grandchildren is a luxury developing nations do not have. …

[M]ore R&D into clean energy is probably the highest priority of all. Finding a clean energy source that is cheaper than those currently available is the only politically-plausible way of curbing continuing growth in developing nations’ emissions.

Further, he makes two insightful comments about why the rich world should develop new nuclear and CCS power facilities:

First, whether we like it or not, China (and India and others) are going to continue to develop nuclear energy. So unless the West continues to develop it too, the safety and storage and handling issues will be resolved in environments with less democratic accountability than in Europe and the US, and with more pressure to take shortcuts than in richer countries.

Second, China (and India and others) will continue to exploit their enormous coal reserves. So we urgently need research and development on lower cost Carbon Capture and Storage (CCS) technologies to remove coal plants’ emissions. The UK government is right to subsidise a demonstration CCS plant. It should probably subsidise several. It is also right to insist that the technology chosen is one that can be retrofitted to traditional plants. China is building one such plant every five days.

I agree that the rich world’s governments should be researching technologies now that the developing world can use tomorrow. But I wish he would have been more clear that an emissions pricing policy still has an important role to play, and technology policy cannot go it alone. For example, there are practical limits to how quickly R&D investment can be ramped up: an immediate doubling of energy R&D dollars might do less to stimulate new innovation than serve to push up salaries in a field that requires long training. Further, the reality is that private sector R&D investment is always going to be far larger than government R&D; Professor Klemperer, however, is quick to see private disincentives for R&D at every turn:

Businesses know that when an innovation is sufficiently important, the innovator gets little of the benefit: the developers of drugs for AIDS, and of vaccines for Anthrax and bird flu were threatened with compulsory licenses in many countries (including in the United States) until they “voluntarily” licensed their innovations cheaply.

An emissions pricing policy, however, is exactly the opposite of government appropriation of private research! Rather, it signals to businesses that emissions reductions are genuinely valuable, and there is profit to be made if they can find better ways to reduce.

I think it’s perfectly reasonable to increase government support for R&D out of a desire to subsidize long-term reductions in the developing world. But such reasoning should strengthen, not diminish, our resolve to have an emissions price as the central feature of climate policy.

Posted in Cap and Trade, Carbon Tax, Climate Change, Technology Policy | 1 Comment »

Bloomberg is audaciously hopeful

Posted by Evan Herrnstadt on December 14, 2007

In his speech at the Bali conference, Michael Bloomberg described a cap-and-trade system as vulnerable to “special interests, corruption, and inefficiencies,” and called for a tax in its stead. There have been numerous posts here at CT weighing the merits and deficiencies of taxes against those of a cap-and-trade system, so I’m not going to try to expand or improve upon those.

However, a major argument raised against a carbon tax is that of political intractability. Bloomberg attempted to address this major weakness of his policy:

He said most experts would agree that carbon taxes are “a very difficult political lift,” since they would probably boost costs for energy consumers. “But that’s what leadership is all about, and we need leaders around the world who get things done,” the New York City mayor said.

First off, a cap-and-trade, unless full auctioning occurs, is also likely to raise costs for energy consumers. Second, is it just me, or do politicians put far too much stock in their own ability to lead America to greatness? Obviously we need to elect people who have vision on important issues, but choosing realistic policies is also a big part of being an effective leader. Regardless, with Chris Dodd largely out of contention, it would be interesting to see Bloomberg jump in the Presidential race. He could inject the cap-and-trade vs. carbon tax debate into national politics. Jumping right to that dicussion in a general election (especially one in which two major candidates are discussing it) might cast mandatory carbon mitigation as an inevitability.

H/T: Mankiw.

Posted in 2008 Elections, Cap and Trade, Carbon Tax | 5 Comments »


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