Tax cuts visualized

Much has been made of the fact that Trump’s revised tax plan cuts its implications for deficits in half (from ten to five trillion). Oddly, there’s less attention to the equity implications, which border on the obscene. Trump’s plan gives the top bracket a tax cut ten times bigger (as percentage of income) than that given to the bottom three fifths of the income distribution.

That makes the difference in absolute $ tax cuts between the richest and poorest pretty spectacular – a factor of 5000 to 10,000:


Trump tax cut distribution, by income quantile.

To see one pixel of the bottom quintile’s tax cut on this chart, it would have to be over 5000 pixels tall!

For comparison, here are the Trump & Clinton proposals. The Clinton plan proposes negligible increases on lower earners (e.g., $4 on the bottom fifth) and a moderate increase (5%) on top earners:


Trump & Clinton tax cut distributions, by income quantile.


The RGGI budget raid and cap & trade credibility

I haven’t been watching the Regional Greenhouse Gas Initiative very closely, but some questions from a colleague prompted me to do a little sniffing around. I happened to run across this item:

Warnings realized in RGGI budget raid

The Business and Industry Association of New Hampshire was not surprised that the Legislature on Wednesday took $3.1 million in Regional Greenhouse Gas Initiative funds to help balance the state budget.

“We warned everybody two years ago that this is a big pot of money that is ripe for the plucking, and that’s exactly what happened,” said David Juvet, the organization’s vice president.

Indeed, the raid happened without any real debate at all. In fact, the only other RGGI-related proposal – backed by Republicans – was to take even more money from the fund.

… New York state lawmakers grabbed $90 million in RGGI funds last December. Shortly afterwards, New Jersey followed suit taking $65 million in the last budget year. And “the governor left the door wide open for next year. They are taking it all,” said Matt Elliott of Environment New Jersey. …

This is a problem because it confirms the talking point of “cap & tax” opponents, that emissions revenue streams will be commandeered for government largesse. There is a simple solution, I think, which is to redistribute the proceeds transparently, so that it’s obvious that a raid on revenues is a raid on pocketbooks. The BC carbon tax did that initially, though it’s apparently falling off the wagon.

Stop talking, start studying?

Roger Pielke Jr. poses a carbon price paradox:

The carbon price paradox is that any politically conceivable price on carbon can do little more than have a marginal effect on the modern energy economy. A price that would be high enough to induce transformational change is just not in the cards. Thus, carbon pricing alone cannot lead to a transformation of the energy economy.

Put another way:

Advocates for a response to climate change based on increasing the costs of carbon-based energy skate around the fact that people react very negatively to higher prices by promising that action won’t really cost that much. … If action on climate change is indeed “not costly” then it would logically follow the only reasons for anyone to question a strategy based on increasing the costs of energy are complete ignorance and/or a crass willingness to destroy the planet for private gain. … There is another view. Specifically that the current ranges of actions at the forefront of the climate debate focused on putting a price on carbon in order to motivate action are misguided and cannot succeed. This argument goes as follows: In order for action to occur costs must be significant enough to change incentives and thus behavior. Without the sugarcoating, pricing carbon (whether via cap-and-trade or a direct tax) is designed to be costly. In this basic principle lies the seed of failure. Policy makers will do (and have done) everything they can to avoid imposing higher costs of energy on their constituents via dodgy offsets, overly generous allowances, safety valves, hot air, and whatever other gimmick they can come up with.

His prescription (and that of the Breakthrough Institute)  is low carbon taxes, reinvested in R&D:

We believe that soon-to-be-president Obama’s proposal to spend $150 billion over the next 10 years on developing carbon-free energy technologies and infrastructure is the right first step. … a $5 charge on each ton of carbon dioxide produced in the use of fossil fuel energy would raise $30 billion a year. This is more than enough to finance the Obama plan twice over.

… We would like to create the conditions for a virtuous cycle, whereby a small, politically acceptable charge for the use of carbon emitting energy, is used to invest immediately in the development and subsequent deployment of technologies that will accelerate the decarbonization of the U.S. economy.

Stop talking, start solving

As the nation begins to rely less and less on fossil fuels, the political atmosphere will be more favorable to gradually raising the charge on carbon, as it will have less of an impact on businesses and consumers, this in turn will ensure that there is a steady, perhaps even growing source of funds to support a process of continuous technological innovation.

This approach reminds me of an old joke:

Lenin, Stalin, Khrushchev and Brezhnev are travelling together on a train. Unexpectedly the train stops. Lenin suggests: “Perhaps, we should call a subbotnik, so that workers and peasants fix the problem.” Kruschev suggests rehabilitating the engineers, and leaves for a while, but nothing happens. Stalin, fed up, steps out to intervene. Rifle shots are heard, but when he returns there is still no motion. Brezhnev reaches over, pulls the curtain, and says, “Comrades, let’s pretend we’re moving.”

I translate the structure of Pielke’s argument like this:

Pielke Loops

Implementation of a high emissions price now would be undone politically (B1). A low emissions price triggers a virtuous cycle (R), as revenue reinvested in technology lowers the cost of future mitigation, minimizing public outcry and enabling the emissions price to go up. Note that this structure implies two other balancing loops (B2 & B3) that serve to weaken the R&D effect, because revenues fall as emissions fall.

If you elaborate on the diagram a bit, you can see why the technology-led strategy is unlikely to work:


First, there’s a huge delay between R&D investment and emergence of deployable technology (green stock-flow chain). R&D funded now by an emissions price could take decades to emerge. Second, there’s another huge delay from the slow turnover of the existing capital stock (purple) – even if we had cars that ran on water tomorrow, it would take 15 years or more to turn over the fleet. Buildings and infrastructure last much longer. Together, those delays greatly weaken the near-term effect of R&D on emissions, and therefore also prevent the virtuous cycle of reduced public outcry due to greater opportunities from getting going. As long as emissions prices remain low, the accumulation of commitments to high-emissions capital grows, increasing public resistance to a later change in direction. Continue reading “Stop talking, start studying?”

Carbon Confusion

Lately I’ve noticed a lot of misconceptions about how various policy instruments for GHG control actually work. Take this one, from Richard Rood in the AMS climate policy blog:

The success of a market relies on liquidity of transactions, which requires availability of choices of emission controls and abatements. The control of the amount of pollution requires that the emission controls and abatement choices represent, quantifiably and verifiably, mass of pollutant. In the sulfur market, there are technology-based choices for abatement and a number of choices of fuel that have higher and lower sulfur content. Similar choices do not exist for carbon dioxide; therefore, the fundamental elements of the carbon dioxide market do not exist.

On the emission side, the cost of alternative sources of energy is high relative to the cost of energy provided by fossil fuels. Also sources of low-carbon dioxide energy are not adequate to replace the energy from fossil fuel combustion.

The development of technology requires directed, sustained government investment. This is best achieved by a tax (or fee) system that generates the needed flow of money. At the same time the tax should assign valuation to carbon dioxide emissions and encourage efficiency. Increased efficiency is the best near-term strategy to reduce carbon dioxide emissions.

I think this would make an economist cringe. Liquidity has to do with the ease of finding counterparties to transactions, not the existence of an elastic aggregate supply of abatement. What’s really bizarre, though, is to argue that somehow “technology-based choices for abatement and a number of choices of fuel that have higher and lower [GHG] content” don’t exist. Ever heard of gas and coal, Prius and Hummer, CFL and incandescent, biking and driving, … ? Your cup has to be really half empty to think that the price elasticity of GHGs is zero, absent government investment in technology, or you have to be tilting at a strawman (reducing carbon allowances in the market to some infeasible level, overnight). The fact that any one alternative (say, wind power) can’t do the job is not an argument against a market; in fact it’s a good argument for a market – to let a pervasive price signal find mitigation options throughout the economy.

There is an underlying risk with carbon trading, that setting the cap too tight will lead to short-term price volatility. Given proposals so far, there’s not much risk of that happening. If there were, there’s a simple solution, that has nothing to do with technology: switch to a carbon tax, or give the market a safety valve so that it behaves like one.

Continue reading “Carbon Confusion”

Business & Climate – What to Wish For?

One observation from my recent experience with climate policy in California is that businesses – even energy intensive ones – are uncertain how to engage in the public debate. Climate policy is a messy space with many competing options, and it’s hard to know what to wish for. With that in mind, here’s a quick survey of what various business groups are saying.

Continue reading “Business & Climate – What to Wish For?”

It's the crude price, stupid

The NYT reports that Hillary Clinton and John McCain have lined up to suspend federal excise taxes on fuel:

Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season. But Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports.

Mrs. Clinton would replace that money with the new tax on oil company profits, an idea that has been kicking around Congress for several years but has not been enacted into law. Mr. McCain would divert tax revenue from other sources to make the highway trust fund whole.

On April 22, EIA data put WTI crude at $119/bbl, which is $2.83/gal before accounting for refinery losses. Spot gasoline was at $2.90 to $3.14 (depending on geography and type), which is about what you’d expect with total taxes near $0.50 and retail gasoline at $3.55/gal. With refinery yields typically at something like 85%, you’d actually expect spot gasoline to be at about $3.30, so other, more-expensive products (diesel, jet fuel, heating oil) or cheaper feedstocks must be making up the difference. The price breaks down roughly as follows:

Gasoline price breakdown
Continue reading “It's the crude price, stupid”