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Archive for the ‘Environment’ Category

Climate change is hot. From the pope’s encyclical to the upcoming United Nations conference in Paris, leaders are debating how to slow and eventually stop the warming of our planet.

We economists think we have an answer: put a price on carbon dioxide and the other gases driving climate change. When emissions are free, businesses, consumers, and governments pollute without thinking. But put a price on that pollution and watch how clean they become.

That’s the theory. And it’s a good one. But translating it from the economist’s whiteboard to reality is challenging. A carbon price that works well in principle may stumble in practice. A real carbon price will inevitably fall short of the theoretical ideal. Practical design challenges thus deserve close attention.

To help policymakers, analysts, and the public address those challenges, Eric Toder, Lydia Austin, and I have published a new report, “Taxing Carbon: What, Why, and How,” on putting a price on carbon.

Some highlights:

  • Lawmakers could put a price on carbon either by levying a tax or by setting a limit on emissions and allowing trading of emission rights. These approaches have much in common. Politically, however, a carbon tax is on the upswing. Cap and trade failed in 2010, while interest in taxing carbon is growing, including three bills in Congress and endorsements from analysts of diverse ideological stripes.
  • Carbon prices already exist. At least 15 governments tax carbon outright, and more than 25 have emissions trading systems. Those efforts have demonstrated that the economists’ logic holds. If you put a price on carbon, people emit less.
  • Figuring out the appropriate tax rate is hard. The Obama administration estimates that the “social cost of carbon” is currently about $42 per metric ton. But the right figure could easily be double that, or half. That uncertainty is not a reason to not tax carbon. But it does mean we should maintain flexibility to revisit the price as new evidence arrives.
  • Taxing carbon could reduce the need for regulations, tax breaks, and other subsidies that currently encourage cleaner energy. Rolling back those policies, in particular EPA regulations for existing power plants, may make policy sense and will likely be essential to the politics of enacting a carbon tax. But the details matter. Rolling back existing policies makes more sense with a carbon tax that’s high and broad, than with one that’s low and narrow.
  • By itself, a carbon tax would be regressive: low-income families would bear a greater burden, relative to their incomes, than would high-income families. We can reduce that burden, or even reverse it, by recycling some carbon revenue into refundable tax credits or other tax cuts focused on low-income families.
  • By itself, a carbon tax would weaken the overall economy, at least for several decades. That too can be reduced, and perhaps even reversed, by recycling some carbon revenue into offsetting tax cuts, such as to corporate income taxes.
  • Unfortunately, there’s a tradeoff. The most progressive recycling options do the least to help economic growth. And the recycling options that do the most for growth would leave the tax system less progressive.
  • A global agreement on carbon reductions would be preferable to the United States acting alone.  Given the nation’s size and contribution to global emissions, a unilateral tax would make a difference, but would damage the competitiveness of some US industries. Special relief for these sectors could reduce the benefits of the tax, but may be necessary both practically and politically.

A carbon tax won’t be perfect. Done well, however, it could efficiently reduce the emissions that cause climate change and encourage innovation in cleaner technologies. The resulting revenue could finance tax reductions, spending priorities, or deficit reduction—policies that could offset the tax’s distributional and economic burdens, improve the environment, or otherwise lift Americans’ well-being.

The challenge is designing a carbon tax that delivers on that potential. We hope our new report helps elevate what will surely be a heated debate.

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Case Western Law Professor Jonathan Adler just released an interesting paper setting out a conservative case for environmental protection. Here’s his abstract:

The existing environmental regulatory architecture, largely erected in the 1970s, is outdated and ill-suited to address contemporary environmental concerns. Any debate on the future of environmental protection, if it is to be meaningful, must span the political spectrum. Yet there is little engagement in the substance of environmental policy from the political right. Conservatives have largely failed to consider how the nation’s environmental goals may be best achieved. Perhaps as a consequence, the general premises underlying existing environmental laws have gone unchallenged and few meaningful reforms have proposed, let alone adopted. This essay, prepared for the Duke Law School conference on “Conservative Visions of Our Environmental Future,” represents a small effort to fill this void. Specifically, this essay briefly outlines a conservative alternative to the conventional environmental paradigm. After surveying contemporary conservative approaches to environmental policies, it briefly sketches some problems with the conventional environmental paradigm, particularly its emphasis on prescriptive regulation and the centralization of regulatory authority in the hands of the federal government. The essay then concludes with a summary of several environmental principles that could provide the basis for a conservative alternative to conventional environmental policies.

One example of what he thinks ought to be a conservative approach to resource protection: property rights in fisheries (footnotes omitted):

The benefits of property rights at promoting both economic efficiency and environmental stewardship can be seen in the context of fisheries. For decades, fishery economists have argued that the creation of property rights in ocean fisheries, such as through the recognition of “catch-shares,” would eliminate the tragedy of the commons and avoid the pathologies of traditional fishery regulation. The imposition of limits on entry, gear, total catches, or fishing seasons has not proven particularly effective. Property-based management systems, on the other hand, have been shown to increase the efficiency and sustainability of the fisheries by aligning the interests of fishers with the underlying resource. A recent study in Science, for example, looked at over 11,000 fisheries over a fifty-year period and found clear evidence that the adoption of property-based management regimes prevents fishery collapse. Other research has confirmed both the economic and ecological benefits of property-based fishery management. The recognition of property rights in marine resources can also make it easier to adopt additional conservation measures. For instance, the adoption of catch-shares can reduce the incremental burden from the imposition of by-catch limits or the creation of marine reserves. A shift to catch-shares would have fiscal benefits as well. Yet in recent years, the greatest opposition to the adoption of such property-based management regimes has not come from progressive environmentalist groups, but from Republicans in Congress.

He also endorses a carbon tax, which combines responsibility (the polluter pays principle) with a move toward consumption taxation.

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Here’s a good laugh line if you find yourself in a policy meeting about how to reduce gasoline use: suggest increasing the gasoline tax. During my time in the White House, I attended several meetings on this topic, and inevitably someone (sometimes me) would offer that simple idea. Everyone would then chuckle at its political insanity, and the conversation would turn to Washington’s policy of choice, increasing fuel efficiency standards for autos and cars.

Those standards certainly can reduce future gasoline usage. But they are an incredibly inefficient way to do so. For some new evidence of just how inefficient, let’s turn the microphone over to the aptly-named Valerie Karplus, an MIT researcher, writing in the New York Times:

Politicians of both parties understandably fear that raising the gas tax would enrage voters. It certainly wouldn’t make lives easier for struggling families. But the gasoline tax is a tool of energy and transportation policy, not social policy, like the minimum wage.

Instead of penalizing gasoline use, however, the Obama administration chose a familiar and politically easier path: raising fuel-efficiency standards for cars and light trucks. The White House said last year that the gas savings would be comparable to lowering the price of gasoline by $1 a gallon by 2025. But it will have no effect on the 230 million passenger vehicles now on the road.

Greater efficiency packs less of a psychological punch because consumers pay more only when they buy a new car. In contrast, motorists are reminded regularly of the price at the pump. But the new fuel-efficiency standards are far less efficient than raising gasoline prices.

In a paper published online this week in the journal Energy Economics, I and other scientists at the Massachusetts Institute of Technology estimate that the new standards will cost the economy on the whole — for the same reduction in gas use — at least six times more than a federal gas tax of roughly 45 cents per dollar of gasoline. That is because a gas tax provides immediate, direct incentives for drivers to reduce gasoline use, while the efficiency standards must squeeze the reduction out of new vehicles only. The new standards also encourage more driving, not less. (Emphasis added.)

A gas tax wouldn’t be a win-win all around, of course. People would pay more in taxes immediately. So you might well want to pair the tax with other policies (e.g., offsetting tax reductions) to ameliorate that hit. (The same concern applies to carbon taxes.)

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Two great tastes often taste great together. Chocolate and peanut butter. Oreos and milk. Popcorn and butter. Could the same be true of carbon taxes and corporate tax reform? Done right, each could be flavorful. But would they be even tastier together?

My Tax Policy Center colleague Eric Toder and I explore that question in a new paper. We find that using a carbon tax to help pay for corporate tax reform has several attractions and one big drawback. A well-designed tax swap could combat climate change, make our corporate tax system more competitive, and reduce long-term deficits, but would be quite regressive, increasing tax burdens on most Americans while cutting them on those with the highest incomes.

Let’s start with the good news. Putting a price on carbon dioxide and other greenhouse gases would be an efficient way to reduce future emissions, encourage greener technologies, and reduce future risks of climate change. A carbon tax would make real the adage that you should tax things that you don’t want–like pollution–rather than things you do.

A carbon tax could also raise substantial revenue. One common proposal, a $20 per ton tax rising at 5.6 percent annually, would raise north of $1 trillion over ten years. That money could help reduce future deficits, pay for offsetting tax cuts, or a combination of both.

Which brings us to corporate reform. Just about everyone wants to cut America’s corporate tax rate, now the highest in the developed world. President Obama wants to lower the federal rate from 35 percent to 28 percent. Many Republicans, including House Ways and Means Chairman Dave Camp, hope to get down to 25 percent or even lower. But they are all having a hard time finding a way to pay for such rate cuts. It’s easy to talk about closing “loopholes” and “special interest” tax breaks in the abstract, but in practice it’s difficult to cut back enough to make such large rate cuts.

Enter the carbon tax. A reasonable levy could easily pay for cutting the corporate tax rate to 28 percent or even lower. In fact, such rate cuts would require only a fraction of carbon revenues if lawmakers also identify some significant tax breaks to go after. The remaining carbon revenues could then finance deficit reduction or other policies.

Cutting the corporate tax rate would boost the U.S. economy, reduce many distortions in our existing code, and weaken multinationals’ incentives to play accounting games to avoid U.S. taxes. The resulting economic gains might even be enough to offset the economic costs of the carbon tax. That’s a tasty recipe.

Except for one missing ingredient: fairness. Like other consumption taxes, a carbon tax would fall disproportionately on low-income families. Cutting corporate income taxes, on the other hand, would disproportionately benefit those with higher incomes. A carbon-for-corporate tax swap would thus be quite regressive.

Eric and I used TPC’s tax model to measure this regressivity for a stylized carbon tax that would raise revenues equal to 1 percent of American’s pre-tax income. As illustrated by the light blue bars in the chart below, that carbon tax would boost taxes by more than 1 percent of pre-tax income for households in the bottom four income quintiles—1.8 percent, for example, in the lowest fifth of the income distribution. The increase would be smaller at higher incomes. Folks with the highest incomes would bear a significantly lower relative burden—just 0.75 percent of their pre-tax income, for the top 20 percent of households.

carbonTax6-05

Pairing a carbon tax with an offsetting cut in corporate taxes would make things more regressive (dark blue bars). Lower corporate rates would benefit taxpayers at all income levels, workers and investors alike. But the biggest savings would go to high-income households. Cutting corporate taxes offsets less than a third of carbon tax burden for households in the first three income quintiles, but more than offsets the carbon tax burden in the highest-income group. The net effect would be a tax cut for high-income taxpayers, and tax increases for everyone else.

That regressivity is a serious concern. A carbon-for-corporate tax swap may be a recipe for environmental and economic improvement, but it isn’t a complete one. As Eric and I discuss in the paper, lawmakers should therefore consider other policy ingredients—per capita credits, for example—that could help protect low-income households and potentially make a carbon-for-corporate tax swap a more balanced policy option.

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Sea Turtles of Oaxaca

Back to economics soon. In the meantime, please enjoy this remarkable video of thousands of Olive Ridley sea turtles congregating on Oaxaca’s beaches to lay their eggs (ht: Deep Sea News):

 

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Creating property rights has helped protect fisheries while making the fishing industry more efficient, according to a nice blog post by Eric Pooley of the Environmental Defense Fund (ht: Dick Thaler). Writing at the Harvard Business Review, Pooley notes the success of the “catch share” approach to fisheries management:

The Gulf of Mexico red snapper fishery, for example, was on the brink of collapse in the early part of the last decade. Fishermen were limited to 52-day seasons that were getting shorter every year. The shortened seasons, an attempt to counter overfishing, hurt fishermen economically and created unsafe “derbies” that often forced them to race into storms like the boats in The Deadliest Catch.

This short window also meant that all of the red snapper were being caught and brought to market at the same time, creating a glut that crashed prices. Many fishermen couldn’t even cover the cost of their trip to sea after selling their fish.

A decade ago, the Environmental Defense Fund began working with a group of commercial red snapper fishermen on a new and better way of doing business. Together, we set out to propose a catch share management system for snapper.

Simply put, fishermen would be allocated shares based on their catch history (the average amount of fish in pounds they landed each year) of the scientifically determined amount of fish allowed for catch each year (the catch limit). Fishermen could then fish within their shares, or quota, all year long, giving them the flexibility they needed to run their businesses.

This meant no more fishing in dangerously bad weather and no more market gluts. For the consumer, it meant fresh red snapper all year long.

After five years of catch share management, the Gulf of Mexico red snapper fishery is growing because fishermen are staying within the scientific limits. Boats that once suffered from ever-shortening seasons have seen a 60% increase in the amount of fish they are allowed to catch. Having a percentage share of the fishery means fishermen have a built-in incentive to husband the resource, so it will continue to grow.

Please read the rest of his piece for additional examples in the United States and around the world. Catch shares don’t deserve all the credit for fishery rebounds (catch limits presumably played a significant role), but they appear to be a much better way to manage limited stocks.

One small quibble: Pooley refers to catch shares as an example of behavioral economics in action. That must be a sign of just how fashionable behavioral economics–the integration of psychology into economics–has become. In this case, though, the story is straight-up economics: incentives and property rights.

For another fun take on property rights and fish, with a very different slant, consider the fight against the invasive lionfish.

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Tom Toles - Carbon Tax - December 2012

Artist/Source: Tom Toles at Go Comics

h/t: Greg Mankiw, A Cartoon for the Pigou Club

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