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Archive for the ‘Incidence’ Category

WRI’s got my back

Posted by Rich Sweeney on March 19, 2009

At risk of inviting another WSJ hissy fit, one more word on the regional incidence of cap and trade. The data that the editors used in their initial editorial, and which I subsequently took issue with, came from the World Resources Institute. Now WRI has weighed in on the matter, and here’s what they have to say:

In arguing against cap-and-trade policies, opponents often try to have their cake and eat it too, using contradictory logic and selective use of statistics to make their case. Take the latest op-ed from the Wall Street Journal, which basically argues that cap-and-trade policies are inevitably regressive.

The WSJ starts off with a fairly standard observation:

Once the government creates a scarce new commodity – in this case the right to emit carbon – and then mandates that businesses buy it, the costs would inevitably be passed on to all consumers in the form of higher prices.

Okay, that’s economics 101. But then comes this observation and chart (using WRI data), which suggests that some states will benefit at the expense of others:

California is the No. 2 carbon emitter in the country but also has a large economy and population. So the average Californian only had a carbon footprint of about 12 tons of CO2-equivalent in 2005. The situation is very different in Wyoming and North Dakota—paging Senators Mike Enzi and Kent Conrad—where every person was responsible for 154 and 95 tons, respectively.

This is where the Journal starts cherry-picking the data. While many factors can explain a state’s relatively high or low per-capita emissions, one of the most significant ones is electricity exports between states. In particular, Wyoming, North Dakota and West Virginia are huge electricity producers that export at least 60% of their electricity to neighboring states. On the other side, New Jersey, California, and Florida are huge importers: 41%, 38% and 20% respectively. But emissions are “charged” in the states where the fuel is consumed, which means states that produce more electricity than they use have disproportionately high emissions—especially in per-capita terms.

In other words, the chart in many ways reflects production rather than consumption. And as the Journal points out, production costs would “inevitably be passed on to all consumers.” Owing to inter-state trade (especially for electricity), that means that all states—rich and poor—will share the burden of a cap on carbon.

There will no doubt be regional differences in the economic impacts of cap-and-trade. That’s why nearly every cap-and-trade proposal includes some form of cost mitigation, either directly to taxpayers (such as “cap-and-rebate”) or to “end-use energy consumers” (as in the US-CAP proposal). But to suggest that a few states will bear the lion’s share of the burden while other states benefit is disingenuous and deeply misleading. The Journal can and should do better.

And they didn’t even call the newspaper an idiot*.

* Note: Anyone who read my post would see (I think) that I wrote the WSJ is an idiot** for refusing to publish my letter, not for their initial confusion about carbon emissions from production.

** Also note that a newspaper cannot be an idiot.

H/T to Mathias in the comments.

Posted in Cap and Trade, Incidence | 2 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 »

Against the median

Posted by Rich Sweeney on February 23, 2009

Sen. Schumer makes an interesting point about the common perception of middle class in America:

The median-household-income statistic is too blunt an instrument, because it includes households headed by 20-year-olds (i.e., students) as well as 90-year-olds (i.e., retirees). If you earn $48,000 at 20, you’re doing fine and don’t need government help; at 90, you’re on a fixed income and have different needs (and more options) from government than someone younger. According to an analysis by Third Way, the median household income for people ages 25 to 60, the prime working years, is about $68,000; if they’re married, it’s about $78,000. If both spouses earn income at some point during the year, the number rises to $85,000. So the “middle class” most Democratic politicians imagine—that is, typical working-age families—is actually much higher on the income ladder than they realize, somewhere more in the range of $60,000 to $100,000.

From The Atlanic.

Posted in Incidence | Leave a Comment »

The Incidence of US Climate Policy

Posted by Rich Sweeney on September 10, 2008

Last week Dallas Burtraw, Margaret Walls and I released a new RFF discussion paper titled, “Where You Stand Depends On Where You Sit: The Incidence of US Climate Policy.” In it we analyze the first-order impacts of 10 different cap-and-trade policy alternatives across regions and income groups. Rather than overtly advocating one policy or attempting to optimize outcomes along some predefined dimension, this initial report is intended largely to highlight the potential distributional effects of capping carbon and to describe the broad range of options available for policymakers to address these effects. There’s too much in the paper for me to summarize here, and I expect different readers to take different conclusions away from it, depending on their interests and familiarity with the issue. That being said, the most basic conclusion of the paper can be summed up as follows:

1) Consumption patterns and carbon footprints vary across regions and income groups. Accordingly, the effects of placing a price on carbon will also vary along these dimensions.

2) At the same time, pricing carbon will also create an enormous new asset for the government to redistribute. How policymakers decide to allocate this value will, in the end, determine who bears the cost of US climate policy.

I should reemphasize that this is still a discussion paper, so please feel free to contact me with comments. We’ve already received a lot of really great feedback, and plan to revisit the paper at some point in the near future. Finally, Dallas is slated to testify before Ways and Means on this and other climate policy issues next week. Word is that Bloomberg’s gonna be on the panel as well. Stay tuned.

Posted in Cap and Trade, Climate Change, Government Policy, Incidence | 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 »