Green Taxes Part II: Potential Revenue for Illinois?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jul 7, 2011

Last week, I wrote about carbon pricing as a way to meet the Illinois state revenue needs (instead of an increase in the income tax).  This week, in the “continuation”, I write about a possible increase in the gasoline tax.  First, I’ll set the stage again.

In early January 2011, the State of Illinois enacted legislation to raise the personal income tax rate from 3% to 5% and to increase the corporate income rate from 4.8% to 7%.  Along with a cap on spending growth, these tax increases reduce the state’s projected budget deficit in 2011 by $3.8 billion (from $10.9 to $7.1 billion).  The governor justified the tax increases on the grounds that the State’s “fiscal house was burning” (Chicago Tribune, January 12, 2011).  In my piece with Dan Karney for a recent IGPA Forum, we don’t debate the reasons for the underlying fiscal crisis in the State of Illinois, nor argue the merits of cutting spending versus raising revenue to balance the budget.  Instead, we just stipulate that politicians decided to raise revenue as part of the solution to the State’s deficit.  Then we analyze the use of “green taxes” as an alternate means of raising revenue that could mitigate or eliminate the need for increasing income taxes.

In general, green taxes are taxes either directly on pollution emissions or on goods whose use causes pollution.  In the revenue-raising context however, the basic argument for green taxes can be summarized by the adage: “tax waste, not work”.   That is, a tax on pollution might have good effects on the environment, because it discourages pollution.  In contrast, an income tax discourages earning income.

While many green taxes could be implemented, we focus on four specific examples that have the potential to raise large amounts of revenue: carbon pricing, gasoline taxes, trucking tolls, and garbage fees.  Indeed, as we show, a reasonable set of tax rates on these four items can generate as much revenue as the income tax increase.  We apply each hypothetical green tax directly to historical quantities of emissions (or polluting products) in order to obtain an approximate level of potential revenue generation. 

In a short series of blogs, one per week, we now discuss each of the four green taxes and their potential for revenue generation.  This week: Gasoline Taxes.

Gasoline sales in Illinois are subject to a state excise tax set in 1990 at $0.19 per gallon.  In addition, other state fees and a federal excise tax of $0.18 per gallon are applied to gasoline sales for a total tax rate in Illinois of $0.61 per gallon, according to the American Petroleum Institute.  However, economic studies find that the existing tax rates on gasoline are below the optimal rate that would account for all the costs of pollution and time wasted due to traffic jams.  For instance, the “optimal” U.S. total gasoline tax has been estimated to be about $1 per gallon, according to Ian Parry and Kenneth Small (2005), “Does Britain of the United States Have the Right Gasoline Tax” [American Economic Review, 95(4): 1276-89].  Illinois would have to raise the tax rate by 40 cents to reach that $1 total optimal rate.  The third line of table 2 shows that a $0.40 per gallon gasoline tax hike would collect approximately $2.0 billion (just over half of the $3.8 billion from the income tax increase).  Yet that tax increase would raise by 12.4 percent the $15.9 billion Illinoisans spend annually on gasoline.

Table 2 includes alternative calculations of revenue generation levels from a gasoline tax.  For example, a generic 5 cent per gallon excise tax increase would generate $250 million (see table 2 line 1). 

The existing $0.19 per gallon excise tax in Illinois is not indexed to inflation, so the real revenue to the State from the gasoline excise tax has steady fallen over time.  The second line of table 2 calculates that the state could adjust the tax rate back to its 1990 purchasing power by raising the rate 14 cents per gallon (from 19 cents to 33 cents).  That would just account for inflation since 1990.  The increase in revenue would be $700 million (which is 18.3% of the expected revenue from the income tax increase).

Illinois residents would then pay 4.4% more for gasoline, INSTEAD of paying more income tax.  The point is that the gas tax would discourage driving and air pollution, instead of discouraging workers from earning income.



Green Taxes: Potential Revenue for Illinois?

Filed Under (Environmental Policy, Finance, U.S. Fiscal Policy) by Don Fullerton on Jul 1, 2011

In early January 2011, the State of Illinois enacted legislation to raise the personal income tax rate from 3% to 5% and to increase the corporate income rate from 4.8% to 7%.  Along with a cap on spending growth, these tax increases reduce the state’s projected budget deficit in 2011 by $3.8 billion (from $10.9 to $7.1 billion), according to the University of Illinois and their Institute of Government and Public Affairs (IGPA Fiscal Fallout #5).  The governor justified the tax increases on the grounds that the State’s “fiscal house was burning” (Chicago Tribune, January 12, 2011).  Dan Karney and I wrote a recent piece for the IGPA Forum, but we don’t debate the reasons for the underlying fiscal crisis in the State of Illinois, nor argue the merits of cutting spending versus raising revenue to balance the budget.  Instead, we just stipulate that politicians decided to raise revenue as part of the solution to the State’s deficit.  Then we analyze the use of “green taxes” as an alternate means of raising revenue that could mitigate or eliminate the need for increasing income taxes.

In general, green taxes are taxes either directly on pollution emissions or on goods whose use causes pollution.  In the revenue-raising context however, the basic argument for green taxes can be summarized by the adage: “tax waste, not work”.  That is, taxes on labor income discourages workers from engaging in productive activities and thus hurts society, while taxing waste discourages harmful pollution and thus benefits society.  In addition, the revenue raised from these green taxes can help the State’s fiscal crisis. 

While many green taxes could be implemented, we focus on four specific examples that have the potential to raise large amounts of revenue: carbon pricing, gasoline taxes, trucking tolls, and garbage fees.  Indeed, as we show, a reasonable set of tax rates on these four items can generate as much revenue as the income tax increase.  That is, imposing green taxes can completely fill the $3.8 billion difference between the projected baseline deficit ($10.9 billion) and the post-tax deficit ($7.1 billion). 

Yet we omit many other potentially high-revenue green taxes.  For example, the State could tax nitrogen-based fertilizers that contribute to nitrogen run-off pollution in streams, rivers, and lakes.  These omissions do not imply that other green taxes could not be implemented.  Also, the simple analysis does not include behavioral responses by consumers and businesses.  Rather, we apply hypothetical green taxes directly to historical quantities of emissions (or polluting products) in order to obtain an approximate level of potential revenue generation.  

In a short series of blogs, one per week, we now discuss each of the four green taxes and their potential for revenue generation.  This week: Carbon Pricing.

In 2008, electricity generators in the State of Illinois emitted almost 100 million metric tons of carbon dioxide (CO2) according to the U.S. Department of Energy’s Energy Information Agency (EIA).  See the State Historical Tables of their Estimated Emissions by State (EIA-767 and EIA-906).  While the United States has no nationwide price on carbon – neither a tax nor a cap-and-trade (permit) policy – some jurisdictions within the United States have imposed their own carbon policies.  For instance, a coalition of Northeastern states implemented the Regional Greenhouse Gas Initiative (RGGI) to limit CO2 emissions using a permit policy.  To date, RGGI’s modest effort has already generated close to $1 billion in revenue for the coalition states.

If Illinois were to adopt its own carbon pricing policy, then even a modest tax rate or permit price could raise significant revenue.  For instance, a $5 per metric ton CO2 price on emissions from electricity producers generates about $500 million in revenue (or 14.4% of the $3.8 billion raised from the state’s income tax hike).  By way of comparison, if the extra $500 million in emission taxes were entirely passed on to consumers in the form of higher electricity bills, then the average consumer’s bill would increase by 3.75%  (where $13.3 billion is spent annually on electricity in Illinois).

Table 1 reports the possible “revenue enhancement” from the $5 per metric ton tax, along with three other pricing scenarios.  Both the $5 and $10 rates are hypothetical prices created by the authors for expositional purposes.  In contrast, the $20 per metric ton price is approximately the carbon price faced by electricity producers in Europe’s Emission Trading System (ETS).  At the $20 rate, a carbon tax in Illinois generates almost $2 billion – over half of the tax revenue from the income tax increases.  Finally, the $40 tax rate (or carbon price) is from Richard S. J. Tol (2009), “The Economic Effects of Climate Change,” Journal of Economic Perspectives, 23(2): 29-51.  It is an estimate of the optimal carbon price that accounts for all of the negative effects from carbon emissions.  At this “optimal” price, the revenue from pricing carbon in Illinois by itself could replace the needed tax revenue from the State’s income tax increase.

Why the U.S. Should Want to Reduce Climate Damage to Other Nations

Filed Under (Environmental Policy) by Don Fullerton on Jun 10, 2011

The usual argument against unilateral U.S. effort to cut greenhouse gas emissions and reduce climate change is that we’d impose significant costs on ourselves, with most benefits going to other countries.   Thus, we should wait for an international agreement.  By the way, an international agreement is not going to happen.  Meanwhile we wait, which means more global warming, sea level rise, and increased extreme weather events like floods, droughts, and hurricanes.   That argument may also include the claim that U.S. agricultural productivity might increase from a little global warming, and the U.S. is rich enough to protect itself against sea level rise. 

According to that logic, we can’t worry too much about damages to other countries, as we can’t take care of the whole world by ourselves.

The problem with that logic is that those costs to other countries will unavoidably become costs on us!  Take two examples.  First, a Reuters article points out that “a third of Bangladesh’s coastline could be flooded if the sea rises one meter in the next 50 years, creating an additional 20 million Bangladeshis displaced from their homes and farms.”   Some large percentage of the nation could disappear under water.  And that’s only one such nation.  Global warming and sea level rise could displace hundreds of millions of poor people.  The U.S. will find itself unable to turn its back on such a disaster, for humanitarian reasons.  Moreover, the costs would come back to haunt us in other ways, through increased wars and other political disruptions of great danger to the U.S. itself.

A second example appears in a recent NY Times article about the effects of global warming on agricultural productivity.   It starts by describing terrific recent technological advances: “Forty years ago, a third of the population in the developing world was undernourished. By the tail end of the Green Revolution, in the mid-1990s, the share had fallen below 20 percent, and the absolute number of hungry people dipped below 800 million for the first time in modern history.”  But those technological advances have leveled off, while growing demands have reflected huge growth in worldwide population and incomes.  The resulting grain price spikes have contributed to the largest increases in world hunger in decades, perhaps 925 million last year (see screen-shot).

What is the role of human-induced climate change?  The level of carbon dioxide in the atmosphere has already increased by 40 percent since the Industrial Revolution.  We are on course to double or triple this level within a hundred years.  This climate change contributes to extreme weather events.  “Many of the failed harvests of the past decade were a consequence of weather disasters, like floods in the United States, drought in Australia and blistering heat waves in Europe and Russia. Scientists believe some, though not all, of those events were caused or worsened by human-induced global warming. …  In 2007 and 2008, with grain stockpiles low, prices doubled and in some cases tripled. Whole countries began hoarding food, and panic buying ensued in some markets, notably for rice. Food riots broke out in more than 30 countries.”

The world’s population was less than 3 billion in 1950.  It is now about 7 billion, and is expected to grow to 10 billion by the year 2100. “Unlike in the past, that demand must somehow be met on a planet where little new land is available for farming, where water supplies are tightening, where the temperature is rising, where the weather has become erratic and where the food system is already showing serious signs of instability.”

Suppose the U.S. is only to look out only for itself.  Forget altruism.  Forget unilateral efforts to save the world.  Wouldn’t we merely be protecting ourselves by doing something now to reduce worldwide political instability that could result from a hundred million refugees and famines of that magnitude?

One size fits all?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on May 27, 2011

Lately, mandates seem to be an increasingly popular choice of policy by the Federal government.  Just the last few years have seen health care mandates, automobile fuel efficiency mandates, and now – coming January 1st, 2012 – light bulbs.  That’s right, those pear-shaped incandescent bulbs have lit American homes for the last 130 years, but they begin phasing out of stores in favor of Light Emitting Diodes (LED) and Compact Fluorescent Light (CFL) bulbs, thanks to a 2007 bi-partisan mandate signed into law by then-President George W. Bush.  As an economist, I cringe when I think of mandates, as they remove incentives for innovation, take choices away from consumers, and put the decision-making into the less-informed hands of the policy makers in Washington. 

The end-goal of the light bulb policy is to reduce polluting emissions.  News stories such as USA Today provide information regarding the extra efficiency of CFL and LED bulbs in comparison to incandescent bulbs.  When the law takes full effect in 2015, the U.S. Department of Energy estimates that “Families nationwide will save nearly $6 billion a year and will help eliminate 30 million metric tons of carbon dioxide emissions annually — the equivalent of taking about 8 million cars off the road each year.”  Other nations already have policies in effect that are more stringent than those here in the United States, including Canada, Russia, Australia, and the European Union.

Limiting families to purchase only these new light bulbs means paying a higher price up-front in order to cut emissions.  But the enacted “ban” applies to everybody, no matter whether the use of the old style bulb might be very important to some individuals.   To ban all incandescent light bulbs is not efficient, if certain individuals could use them with benefits that exceed the social cost.  The alternative is a price incentive, such as a price on greenhouse gas emissions in a cap-and-trade type system.  Then firms and individuals get to decide for themselves whether and how to reduce electricity use and cut emissions most cheaply and effectively.  When government policymakers issue a mandate, they are effectively saying they know what is best for us.  And with heterogeneity among firms and individuals, those policymakers can’t possibly know what single set of abatement methods is best for all different people simultaneously.

South Carolina has seen significant innovation on the part of policy makers in figuring out a way around this new light bulb law that could have ramifications for federal mandates of all sorts.  The Commerce Clause gives the Federal government the authority to regulate commerce between the states.  As Martin Hutchinson from Money Morning writes, “According to the Supreme Court’s 1935 decision in the case of Schechter Poultry vs. United States, the federal government does not have the power to regulate commerce that is entirely conducted within a state.”  In other words, if the state of South Carolina has a manufacturer that produces light bulbs in the state and for sale within the state, they could theoretically escape this mandate. 

The 2007 law doesn’t make incandescent bulbs illegal but instead sets requirements on their efficiency; these standards are proving to be quite difficult for the industry meet.  It is similar to the Corporate Average Fuel Efficiency (CAFE) standards established for the automobile industry, where producers are told to increase the miles per gallon (MPG) of cars produced, but the government does not attempt to dictate how this must be done.

In the long-run, this policy may save families money on their electric bill and reduce emissions.  But any one such law is not a comprehensive co-ordinated policy that chooses the cheapest forms of pollution abatement.  I’d rather see government address the problem in a comprehensive cost-effective way.

A Proposal for an “Osama Bin Laden Tax”

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Jeffrey Brown on May 10, 2011

I saw an interview on CNN this morning of James Woolsey, former CIA Director, who noted that oil played a key role in bin Laden’s 1998 fatwa, in which he called for violent jihad against the U.S.  Woolsey now drives an electric car, and he has a bumper sticker on the back that says something along the lines of “Osama bin Laden hates this car.”  The idea is that the U.S. addiction to foreign oil – particularly oil from regions of the world that are hostile to our values – is helping to feed and finance our enemies. 

This got me thinking, once again, about the immense economic logic of taxing carbon.  By taxing carbon, and thus reducing domestic demand for carbon-intensive energy such as oil, we can reduce our dependence on imports from volatile regions of the world. 

Politically, Republicans have long been opposed to carbon taxes, just as they have been opposed to raising nearly any tax.  I happen to be a Republican.  I share the conservative view that government is too big, that the growth of entitlements and other spending is a threat to our long-run economic vitality and our economic leadership.  I don’t want to raise taxes either (although neither do I want to run huge deficits – which means, of course, we have to cut spending).  But even so, I remain a supporter of a carbon tax, so long as it replaces other taxes that are far more damaging to our economy.  I also remain completely baffled by the knee-jerk Republican resistance to it.

So let me briefly make my case for what I call the “Osama bin Laden Tax.”

My plan, such as it is, has two simple elements:

  1.  We impose a tax on carbon in order to shift demand to less carbon-intensive energy sources.  This reduces our demand for foreign oil, and indirectly, provides fewer resources in the support of anti-American terrorism.  
  2. However much money is raised by this tax, we use to reduce other taxes.  We could reduce the marginal corporate tax rate, or marginal income tax rates, or – for those concerned about the distributional consequences – we could reduce the payroll taxes for Social Security (which are widely viewed as regressive).  So the plan does NOT raise the net tax burden.  Rather, it simply replaces highly distorting taxes (i.e., those that discourage labor supply) with a beneficial tax (i.e., one that discourages oil use).

What are the benefits?

  1. We would improve national security by reducing our dependence on foreign oil, a policy goal that has been shared, but not achieved, by nearly every Democratic and Republican administration for decades.  
  2. We would also get big environmental benefits, given that carbon emissions are known to contribute to climate change.  This is the usual motivation for the call for a carbon tax, and I also support it for this reason.  But I recognize that some of my fellow Republicans are not as concerned about climate change.  So the key point here is that even if you think the environmental benefits are zero, there is still a compelling case to replace inefficient taxes on income and investment with a more efficient tax that reduces our indirect reliance on a volatile part of the world that often has interests that are counter to ours. 
  3. The usual arguments against a carbon tax, e.g., that it would hurt American competitiveness or cause job losses, are simply not true in this case!  This is because for every dollar we raise, we are reducing taxes by a dollar somewhere else in the economy (e.g., reducing the wage bill).  Thus, the net tax burden would NOT rise. 
  4. Because it is revenue neutral, there is no reason for even the Tea Party to oppose it, as it would NOT grow the government.  Indeed, as I point out in my next bullet below, it could actually reduce government intervention in our lives. 
  5. Best of all for my fellow believers in the power of markets – if we have a carbon tax, then we can get rid of all the command-and-control regulations on energy.  We would no longer need the Department of Energy or the EPA to regulate emissions.  We would no longer need Congress or Presidents to pick winners and losers by subsidizing ethanol or wind power or clean coal.  We just tax carbon, and then we let the market work with minimal government intervention!

In fairness, there would be some individual losers – energy intensive industries would see their costs rise.  But for every loser, there is a winner, such as other industries that are less energy-intensive, but perhaps more labor or capital intensive, which would see their costs go down.  So there would be a transition period during which some U.S. industries would become more competitive while others less so.  But the key is that OVERALL U.S. competitiveness would not be harmed whatsoever.  Our precise areas of comparative advantage might shift, but not the overall level of our ability to compete.

So that is it.  Now, politically, I know this is not easy.  I know that big energy companies, energy-intensive manufacturers, etc. – would oppose this on narrow self-interested grounds.  And I know they are big campaign contributors.  But on philosophical, ideological, and economic policy grounds, it is hard to come up with much of an argument against a revenue neutral carbon tax that is used instead of other taxes, rather than on top of them.

So, let me go on the record as a Republican in favor of an Osama bin Laden tax on carbon.  Anyone care to join me?

How Much Should Congress Leave to the Regulators?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 11, 2011

The very existence of the Environmental Protection Agency (EPA) has long been a point of contention between the two political parties.  What is, and what ought to be the role of the EPA with regard to policy making?  Congress cannot possibly enact laws that contain every detail about subsequent implementation, monitoring, and enforcement.  And they should not put everything in the law anyway, in order to allow enough flexibility to deal with future contingencies.  Besides, those in Congress don’t have the science background necessary to decide all of the details of some technological aspects of pollution prevention.

The law does not say that every electric power plant must reduce emissions of each pollutant to no more than some number, like 37 micrograms per cubic meter.  Instead, the law from Congress just says that EPA should protect human health to an adequate margin of safety.

Yet some would prefer that the EPA disappear, along with every agency having any regulatory power.  This agency, which was conceived in 1970 under Richard Nixon, has analyzed and supported some of the most important pieces of legislation of the last forty years, ranging from the Endangered Species Act to – more recently – the new emissions standards going into effect this year. 

In 2007, the United States Supreme Court ruled in a 5-4 decision called “Massachusetts vs. EPA”, that the EPA could in fact regulate greenhouse gases under the Clean Air Act, on the grounds that such emissions do affect human health.  When combined with the new Republican-dominated Congress, we have set the stage for yet another ideological battle. 

Throughout the past decade, much of the discussion about controlling carbon dioxide emissions has largely centered around the idea of Cap and Trade.  That system would effectively put a price on each unit of pollution emissions.  It would create a market where the need for emissions and the cost of emissions are balanced in a way that can achieve economic efficiency.  However, the most viable attempt at this in recent years, the Waxman-Markey bill of 2009 (H.R.5454), passed the House and not the Senate.  It would not even get past the House in this term.  

The question then becomes, what exactly are the cards that the EPA retains in their deck? 

A recent article is titled “Greenhouse Gas Regulation Under the Clean Air Act” by researchers at Resources for the Future (RFF, by Burtraw, Fraas, and Richardson).  It seeks to explore the options available to the EPA, in-depth.  What they find is that the EPA can implement measures that will reduce greenhouse gas emissions significantly in a measured and cost-effective manner.  For this to happen, however, they argue that the EPA must become bold and decisive in their actions. 

Bold action may be taken as an example of government overreach, and so the EPA must be careful.

Republicans are currently in discussion to introduce the Energy Tax Prevention Act of 2011 .  They recognize that the EPA holds some powerful cards after the Supreme Court ruling in 2007, and they want to take that power away.  This Act would shift the EPA’s ability to regulate from the Agency to the legislative branch.  Yet such an action could take any decision-making ability from the scientists and put it in the hands of the politicians.  As EPA leader Lisa Jackson said, “Politicians overruling scientists on a scientific question – that would become part of this committee’s legacy.’”  Herein lies a problem with democracy.  The people in charge of making the decisions that affect us all, often have little knowledge of the actual issues at hand.  After all, Republicans from oil-rich states like Oklahoma still claim global warming is nothing but a hoax.

The State of the Union may be strong, but the state of America’s energy policy is less clear

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 28, 2011

On Tuesday night, President Obama gave the State of the Union (SOTU) Address (transcript) before a joint session of Congress.  The speech drew upon imagery from the Cold War past in order to spur action regarding America’s energy policy.  “This is our generation’s Sputnik moment,” the President declared, and thus he will send a budget to Congress that invests “especially [in] clean energy technology, an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.”  To deal with this “Sputnik moment”, the President set forth two goals: (1) become the first country to have a million electric vehicles on the road by 2015; and (2) get 80% of America’s energy from clean sources by 2035. 

(Not quite as inspiring as President Kennedy’s urging on May 21, 1961 that “this nation should commit itself to achieving the goal, before the decade is out, of landing a man on the moon and returning him safely to the earth.”  On July 20, 1969, Apollo 11 landed on the Moon and Neil Armstrong took his first step on the lunar surface.)

I have three issues with the President’s approach.  First, the wording of the goals in the SOTU Address needs to be parsed carefully in order to understand their meaning or lack of meaning.  For instance, does “electric vehicles” mean all-electric vehicles or do hybrids count towards that goal?  Similarly, what is the definition of “clean sources”?  Fortunately, in this case we have an answer later in the Address.  As the President admits, “Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all.”  However, ambiguity still exists because clean coal and natural gas technologies can be deployed with or without carbon capture and sequestration technologies.

Second, the President did not offer details about HOW to achieve these goals.  The Address includes references to investments in clean energy technology, but it specifies neither investment level nor investment horizon required to meet the stated goals.  He did not say, for example, $10 billion annually for 10 years.  If clean energy is really a priority for the President, and given concerns about the fiscal deficit, then clarity about the needed investment level would be helpful so that other programs can be identified for cuts in order to balance the budget.  Also, the President said that “clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.”  I agree.  However, an efficient, well functioning market requires a price signal.  This brings me to my last point.

Third, the President did not directly address environmental policy when setting his goals.  If the President really means “low-carbon” or “no carbon” when he says “clean”, then the absence of a carbon policy in the Address becomes conspicuous.  Specifically, the President did not indicate if he would again push for a cap-and-trade bill.  Given the composition of the new Congress, a cap-and-trade bill or any other piece of legislation that puts either an explicit or implicit price on carbon emission seems politically infeasible.  To have a market for these clean energy technologies, where is the price signal going to come from?  

In their forthcoming book called “Accelerating Energy Innovation: Insights from Multiple Sectors”, Rebecca Henderson and Richard G. Newell look at lessons from the histories of innovation in other industries and implications for the energy industry.   The introduction says: “Taken together the histories point to three key factors as critical to accelerating innovation: (1) well funded, carefully managed public research that is tightly linked to the private sector; (2) rapidly growing demand; and (3) antitrust, intellectual property and standards policies that together promote vigorous competition and the entry of new firms.”

How many people would ‘demand’ electric vehicles at a high price, just out of the goodness of their hearts?  Or would that demand depend on the existence of a policy that raises the price of burning fossil fuels?

The President noted that when Sputnik was launched, NASA did not exist.  Yet, the Department of Energy has existed for many years, and America’s energy policy is still unclear and uncertain.

Without Climate Legislation, We Might Get More Regulations!

Filed Under (Environmental Policy, Finance) by Don Fullerton on Oct 22, 2010

On Tuesday October 19, the Center for Business and Public Policy (CBPP) presented a panel of experts on “Environmental Regulation: Building a Low-Carbon Economy.”  It was sponsored by the College of Business and the MBA Program with financial support from State Farm.  This blog may help tie our virtual audience to activities at the “brick and mortar” University, with a few reflections of my own.

Climate legislation recently failed in this Congress, so the U.S. will not soon adopt any cap-and-trade policy.  To provide incentives for Congress to act, however, the Obama Administration had said that otherwise the EPA will act to reduce carbon emissions using other forms of regulation under the Clean Air Act.   The key question here is what can or should be done without climate legislation.  The Panel members were asked to discuss the future of energy use, its role in creating a low carbon economy, and what future energy policies and regulations will be needed.

The first speaker was William A. Von Hoene Jr., the Exelon Corporation’s Executive Vice President for Finance and Legal.  Exelon has 17 nuclear reactors at ten locations, as well as other plants powered by hydro, wind, solar, landfill gas, and fossil fuels.  Their electricity is relatively low in carbon emissions, with 5.4 million customers primarily in Illinois and Pennsylvania.  They favor carbon pricing because it reduces overall abatement costs relative to a patchwork of tax credits for certain technologies and mandates such as “renewable portfolio standards.”   Those policies might not target the cheapest form of abatement, whereas a carbon tax or cap and trade price would provide clear and crisp signals to reduce emissions in any of the cheapest ways.  He also talked about their “Exelon 2020” business strategy of greening their operations, helping customers reduce emissions, and producing more low-emission electricity.

A problem, of course, is that none of these other technologies are very cheap.  Protections for nuclear power may prevent any new plant, and the U.S. has no long term storage plans anyway.  Other renewable options like wind or solar are not cost-effective unless the cost of coal-fired electricity is raised by a carbon dioxide tax of more than $30 per ton.

The second speaker was Mark Brownstein, Deputy Director of the Energy Program for the Environmental Defense Fund.  He talked first about “what went wrong” with climate legislation in Congress.  Divisions were not just by party but by region, since the President’s plans were offset by a coalition of Republicans and coal-state Democrats.  The recession also added to perceptions that markets don’t work, which spills over to carbon permit markets.  He also talked about “what’s next”, including renewed effort to put climate legislation back on track, with eyes on state action and EPA regulations.   Finally, he discussed “what’s the focus” at EDF.  Besides continued discussion of climate policy and EPA, they are interested in energy market reform.  For example, smart grid technology that links various electricity markets can allow more people to buy power from areas that have newer and cleaner production.

The third speaker was Jon Anda, UBS Securities’ Vice Chairman and Head of Environmental Markets.  He also extolled the virtues of carbon pricing, because it would encourage new technology that could help the U.S. compete internationally.  It would “decarbonize” production at the least cost, minimize leakage, and realize various “co-benefits” (reductions in other pollutants).   In particular, he pointed out that a carbon permit system should not apply to utilities only, because reduced emissions among utilities would be offset by increased emissions elsewhere (“leakage”).  It needs to cover all use of all fossil fuels. 

For example, carbon pricing for utilities only would raise the price of electricity, but that could discourage the use of electric vehicles.  Carbon pricing also needs to apply to gasoline, for drivers to make the right tradeoffs between whether to buy an electric car or a fuel-efficient gasoline car.

Going it alone on climate legislation

Filed Under (Environmental Policy) by Kathy Baylis on Sep 20, 2010

On November 2, California will vote on proposition 23 that postpones the move to a cap and trade system for greenhouse gas emissions until four consecutive quarters of an unemployment rate of 5.5, a condition that, according to a recent NYT article  has only been met 3 times over the past 40 years.  This proposition would essentially kill the 2006 California legislation that mandated the state to reduce emissions to 1990 levels by 2020. 

Opponents to the legislation argue that the legislation raises costs for California businesses, potentially driving firms across the state line while  California will not be able to capture much of the benefit of greenhouse gas reduction.  In economics terms, we might well be concerned about so- called leakage, where environmental regulation in one area just pushes the polluting activity next door.  An energy producer required to pay for carbon-dioxide generated from a power plant within California might just transfer some of that production capacity to plants outside of the state, both reducing jobs in California while having no effect on emissions.  Add to this the fact that because climate change is a global problem, most of the environmental benefits of any hard-fought-for emissions reductions will go to regions outside of California, raising the question as to why a jurisdiction would ever want to go it alone to reduce greenhouse gases.

So why go it alone?  Green jobs.  The opponents to proposition 23 note that the burgeoning green energy sector in  California is a source of jobs, with good potential for future employment growth as other jurisdictions move toward regulating emissions and import ready-made green technology from California providers.  In an op-ed article George Shultz, Reagan’s secretary of state compares California’s move on climate change legislation to the state’s earlier first mover experiments on clean air. “In the four years since California’s clean air standards were passed, clean energy investment has tripled. About three of every five venture capital dollars nationwide has been invested in California companies, with about $2.1 billion worth of clean energy investments in 2009 alone. “ Tom Friedman in the New York Times Sunday noted that China is making great strides in terms of encouraging green technology, at least in part as a jobs creation strategy. 

Demonstration Effect.  The real reason to make the first move is the hope that one can bring other jurisdictions on board by example.  If California can demonstrate that greenhouse gases can be reduced without large-scale job losses, it may make climate change legislation more appealing at the federal level.  Arguably, California’s tighter vehicle emissions helped the federal government impose stricter emissions regulations after auto manufacturers had already developed the technology and shown that it was possible to meet these higher emissions standard.  The Western Climate initiative is evidence that this demonstration effect may well be working.

What about leakage?  In a recent talk at the University of British Columbia, Stanford Economist Larry Goulder notes that policy options exist to mitigate against the leakage effect. The state could impose a form of border tax, or force utilities selling electricity to account for the emissions produced in the generation of that electricity regardless of where the generation occurs.  If these approaches ran up afoul of Interstate Commerce rules, California could tie the allocation of future permits to output of the good itself or the use of a input, implicitly subsidizing production.  Granting permits on the basis of using an input that substitutes for pollution in the production process may give firms an extra incentive to adopt pollution-reducing technologies.

Last, California is not really going it alone.  Along with multiple initiatives across U.S. states, two jurisdictions in Canada have bucked the tax cut trend and gone to the length of imposing an explicit carbon tax.  Quebec was the first North American jurisdiction to impose a carbon tax in 2007.  The tax itself is small (around $1.16 per ton of CO2) and limited to the use of hydrocarbons (petroleum, natural gas and coal).  A year later, British Columbia imposed a larger and broader-based carbon tax of around US$7.80 per ton of CO2, which is to increase to $23.50 by 2012.  Thus, despite the hold-up of legislation at the national level, other regions are pushing ahead with climate change legislation

One of the biggest arguments against national level climate change legislation has been that the United States or Canada needs to wait for a multilateral agreement before moving ahead. In short, that there is no advantage to unilateral action against this global environmental problem.  Other jurisdictions have argued with their feet that waiting for joint action is not the only solution.

Wind Power is a Lot of Wind

Filed Under (Environmental Policy) by Don Fullerton on May 19, 2010

You probably read about “Cape Wind”, a proposal to build 130 wind turbines off the coast of Massachusetts.  They will be 440 feet tall, covering 24 square miles of Nantucket Sound, with a cost of more than $1 billion. 

Yes, we need to shift from carbon-intensive fossil fuels to other cleaner renewable fuels.  But is this the way to do it?  An article in the NYTimes says “Opponents have argued that the venture is too expensive and would interfere with local fishermen, intrude on the sacred rituals and submerged burial grounds of two local Indian tribes and destroy the view.”

Yes, all those environmental costs need to be taken into account, but I think all those complaints are just a lot of wind.   I could care less about affecting the view of some rich Kennedy’s beachfront property.  No, for me, the problem is in later paragraphs, which say:

“The current price tag for a fully installed offshore wind system is estimated at $4,600 a kilowatt, nearly double the $2,400-a-kilowatt price for a land-based system, … .  By comparison, production tax credits and other incentives have driven the cost of land-based wind power to less than 5 cents a kilowatt-hour in some places, and that’s still more expensive than other sources like coal and hydropower.”

Coal is cheap!  Wind power is extremely expensive by comparison (and solar power is even MORE expensive).  Maybe those renewable alternatives are worthwhile, and maybe they are not.  But how can we ever tell, if policymakers keep trying to decide this issue for us??

Neither Barak Obama nor any other politician has the expertise to decide whether wind power is the right alternative, or something else.  They just want to “do something” about global warming.  Okay, fine, but the thing to “do” is to enact a carbon tax, or a permit price per ton of carbon dioxide emissions that reflects the true social cost of those carbon dioxide emissions.  THEN if wind is cheaper, we’ll get wind power!  And if wind power is still too expensive, then the true experts can get on with the business of finding what IS the cost-effective alternative to burning fossil fuel.

So ALL the arguments both for and against wind power are a lot of wind.   Any decision in the political arena will lead to excess costs.  A carbon price will allow the experts and the market to decide.