The Most Sensible Tax?

July 5, 2012

We have a new so-called group of “conservatives” here in the US that Ike Eisenhower, Barry Goldwater, and even Ronald Reagan would not be able to recognize.  There is among them, apparently, the belief that roads, harbors, airports, militaries, police and fire protection, hospitals, and schools were all created by God on the sixth day, and require no ongoing input from citizens who derive benefits from them.

For those who actually understand how the world works, its a useful exercise to occasionally revisit how best to tax ourselves so as to keep this enterprise of civilized democracy running. One great idea is to tax, and thereby discourage, activities that will destroy the life support systems without which no civilization can survive. Some of our states and provinces, the “laboratories of democracy”, have been working on various versions of the idea, and showing the way.


ON Sunday, the best climate policy in the world got even better: British Columbia’s carbon tax — a tax on the carbon content of all fossil fuels burned in the province — increased from $25 to $30 per metric ton of carbon dioxide, making it more expensive to pollute.

This was good news not only for the environment but for nearly everyone who pays taxes in British Columbia, because the carbon tax is used to reduce taxes for individuals and businesses. Thanks to this tax swap, British Columbia has lowered its corporate income tax rate to 10 percent from 12 percent, a rate that is among the lowest in the Group of 8 wealthy nations. Personal income taxes for people earning less than $119,000 per year are now the lowest in Canada, and there are targeted rebates for low-income and rural households.

The only bad news is that this is the last increase scheduled in British Columbia. In our view, the reason is simple: the province is waiting for the rest of North America to catch up so that its tax system will not become unbalanced or put energy-intensive industries at a competitive disadvantage.

The United States should jump at the chance to adopt a similar revenue-neutral tax swap. It’s an opportunity to reduce existing taxes, clean up the environment and increase personal freedom and energy security.

Let’s start with the economics. Substituting a carbon tax for some of our current taxes — on payroll, on investment, on businesses and on workers — is a no-brainer. Why tax good things when you can tax bad things, like emissions? The idea has support from economists across the political spectrum, from Arthur B. Laffer and N. Gregory Mankiw on the right to Peter Orszag and Joseph E. Stiglitz on the left. That’s because economists know that a carbon tax swap can reduce the economic drag created by our current tax system and increase long-run growth by nudging the economy away from consumption and borrowing and toward saving and investment.

Of course, carbon taxes also lower carbon emissions. Economic theory suggests that putting a price on pollution reduces emissions more affordably and more effectively than any other measure. This conclusion is supported by empirical evidence from previous market-based policies, like those in the 1990 amendments to the Clean Air Act that targeted sulfur dioxide emissions. British Columbia’s carbon tax is only four years old, but preliminary data show that greenhouse gas emissions are down 4.5 percent even as population and gross domestic product have been growing. Sales of motor gasoline have fallen by 2 percent since 2007, compared with a 5 percent increase for Canada as a whole.

A group of Northeastern states in the US has taken a slightly different approach, The Regional Greenhouse Gas Initiative, (RGGI) based on the cap and trade model. A recent study of the economic effects of that effort shows positive trends.

The Analysis Group: 

What happened to the dollars? First, RGGI produced $1.6 billion in net present value (NPV) economic value added to the ten-state region.4 The region’s economy – and each state’s as well – benefits from the RGGI program expenditures. When spread across the region’s population, these economic impacts amount to nearly $33 per capita in the region.

This economic benefit reflects the complex ways that RGGI dollars interact with local economies: the states’ use of RGGI auction proceeds on programs leads to more purchases of goods and services in the economy (e.g., engineering services for energy audits, more sales of energy efficiency equipment, labor for installing solar panels, dollars spent to train those installers and educators, and so forth). Together, these dollar flows have direct and indirect multiplier effects locally and regionally.

RGGI has also produced changes in consumers’ overall expenditures on electricity. Although CO2 allowances tend to increase electricity prices in the near term, there is also a lowering of prices over time because the states invested a substantial amount of the allowance proceeds on energy efficiency programs that reduce electricity consumption.6 After the early impacts of small electricity price increases, consumers gain because their overall electricity bills go down as a result of this investment in energy efficiency. All told, electricity consumers overall – households, businesses, government users, and others – enjoy a net gain of nearly $1.1 billion, as their overall electric bills drop over time. This reflects average savings of $25 for residential consumers, $181 for commercial consumers, and $2,493 for industrial consumers over the study period. Consumers of natural gas and heating oil saved another $174 million.

12 Responses to “The Most Sensible Tax?”

  1. Our failure to implement an economically beneficial and climatically critical carbon pricing system is one of my biggest frustrations.

    • otter17 Says:

      Hey, at least we have the EPA’s endangerment ruling under the Clean Air Act. Now there is a foothold. That has lifted my spirits recently.

  2. daveburton Says:

    Sin taxes are an old concept. However, they used to be applied to destructive or unhealthy activities, like drinking, smoking, gambling, etc. The Climate Movement wants to apply that concept to CO2 emissions, which are not merely harmless, but are actually beneficial to agriculture.

    • greenman3610 Says:

      Corn shrivels in midwest

      Deniers – “all it needs is more co2”.

    • MorinMoss Says:

      Not working so well for the Michigan & Ontario apple harvest this year.

    • ecjohnson1 Says:

      A “true” conservative would know that Cap and Trade was originally a concept that came out of the Reagan Whitehouse when we conservatives were as concerned about conserving the environment as conserving the American businesses that employ individuals and pay taxes that support a government that serves us. I don’t believe in excruciating sin taxes either, but taxing fuel to pay for roads and bridges is not a sin tax. Hunting, fishing, vehicle licensing all could fit your negative classification of “sin taxes”. Too bad, your writings show an intelligent person, but your arguments lack depth and any objective, scientific thought – I might as well turn on most Fox news pundents, Glenn Beck, or Rush.

    • ktorsten Says:

      It’s not a sin tax. It’s more accurately described as a tipping fee. That is, we pay to use the atmosphere as a dumping ground for CO2. And did you get the part that it is revenue-neutral?

      Dave, since you state so confidently and without caveats that CO2 emissions are beneficial to agriculture, can you describe the effect of increased carbon dioxide concentration on rice production, even if CO2 does not contribute to global warming? (Hint: it’s a double-edged sword.)

      I live in British Columbia, and I can be described as an industrialist who understands the effect of CO2 on global temperature. I favour the carbon tax as we’ve implemented it here. The biggest irony of the tax is that it was introduced by a right wing government. There was an election shortly after its introduction. The opposing party, the left wing NDP, ran with the slogan “Axe the Tax!”. But the people ignored this bit of stupidity and re-elected the incumbents. My point in mentioning this is that it is possible to be on the political right without succumbing to the anti-science idiocy that pervades the Republican party today.

  3. rabiddoomsayer Says:

    Tax carbon at $30 a ton. When you look at the royalties for coal on public lands you see the coal is more valuable to the people in the ground than it is dug up.

    But no Dave would rather see us sell it to Peabody for a buck and a bit a ton.

  4. […] We have a new so-called group of “conservatives” here in the US that Ike Eisenhower, Barry Goldwater, and even Ronald Reagan would not be able to recognize.  There is among them, apparently, the belief that roads, harbors, airports, militaries, police and fire protection, hospitals, and schools were all created by God on the sixth day, and require no ongoing input from citizens who derive benefits from them.  […]

  5. I haven’t been a fan of the carbon tax approach to our massive energy and environmental problems, largely because even though the tax would lead to a degree of efficiencies and alternatives, in an of itself it’s unlikely to lead to the scale of conversion needed and because its end cost gets passed to consumers.

    The lower- and middle-classes pay an overall higher rate of taxes (despite the Federal income brackets), because of the percentage of net income used for incidental taxes – sales, gas, all the taxes applied to utilities, and so on. An additional tax would only be an increase on this burden.

    Now, if a region started carbon taxes and reduced its local sales tax (instead of the corporate tax), this would change the balance. It would also be of great benefit to that local economy.

    The “energy efficiency measures” described by the Analysis Group are energy audits, solar panels, energy saving devices (presumably LED, new Energy Saver appliances, etc). This is all good stuff, of course, but it’s also an expense to the average consumer, and the lower end wouldn’t be able to afford them. Did the Analysis Group enter this into the equation?

    They are saying there’s an added energy cost expense to the consumer, but a long-term gain because of the efficiencies. But I wonder if the average consumer wouldn’t already be incentivized to purchase the energy saving devices because of the continually rising costs of energy – with or without the extra tax.

    I’m not against taxation – obviously, we have to pay for those services we use. I’m just not a fan of increased burden on the lower and middle classes, and I tend to see few examples of this being factored into the discussion.

    • @Jim, who said that 1. “a carbon tax is unlikely to lead to the scale of conversion needed” and 2. that “its end cost gets passed to consumers.”

      About #2, you did get that this is revenue-neutral, right? It’s not an additional tax that will get passed on to consumers because it isn’t an additional tax at all. It’s a change in what is taxed (not the amount of taxation) so that things we do NOT want to happen are discouraged.

      About #1, of course a tax can have as large an effect as you like, but I think you mean that a tax of $30 per ton of coal would not raise the price of electricity enough to cause people to use substantially less, that the tax would have to be higher in order to do that. I think you’d be surprised at how quickly businesses in particular will respond to such a tax, but much more importantly, all the tax really has to do is make less harmful alternatives competitive.

      Right now we subsidize fossil fuels *far* more than sustainable energy technologies. Imagine that we stopped subsidies for fossil fuels altogether and imposed a carbon tax commensurate with the “externalities” (the hidden costs to our environmental future, public health, etc.) that accompany it. Suddenly solar, wind, and thorium salt reactors are competitive, so money gets diverted to those technologies and they improve rapidly. Soon coal is considered not only a harmful way to produce electricity but an economically non-viable one, in any market. Existing coal-fired power plants gradually give way to greener alternatives.

      My only regret is that we did not do exactly that 30 years ago.

  6. astrostevo Says:

    For a second there, I thought you were talking about Australia’s new and bitterly fought carbon price. (“tax”). Ah well.

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