Sunday, March 11, 2012

Tornado Relief? Bad Policy

I would be castigated as a heartless idiot by the liberal media, but I think that the disaster aid system is screwed up.  Case in point: Obama offers disaster aid to Indiana counties hit by tornadoes.  "Assistance can include grants for temporary housing and homerepairs, low-cost loans to cover uninsured property losses and other programs, according to Daniels' office."  This is a very shortsighted policy that is only going to cause long-term harm.  It is exactly the kind of government intervention that was opposed Climatopolis.  While I certainly think that people affected by the tornado should get some help, they should not simply be left to go back to business as usual.  They are living in high-risk areas that have a significant possibility of being hit with future storms.  People should be encouraged to move to a safer location.  They should not assume that the government can pick them up whenever a predictable storm happens.  I am not completely familiar with the area, but a quick Google search indicates that Jefferson County is a common home of tornadoes.  And if homes are going to be repaired, they must be repaired to withstand a tornado, not merely to survive until next year.  I also don't think that rural areas should be subsidized at all, but that's another story.

Monday, March 5, 2012

A Carbon Tax isn't Politically Feasible? BS

Although Republican politicians now seem vehemently opposed to any and all climate change policy, there is a smattering of conservative support for carbon taxes. This includes some previous support from politicans, some support from ex-politicians, and a multitude of businessmen and conservative economists who enthusiastically embrace energy taxes.

As far as economists in general are concerned, 60% of economists in Australia support the carbon tax bill passed (25% are opposed).

Republican House candidate BJ Lawson: "We should also explore a carbon tax on nonrenewable energy as a complete replacement for our federal income tax. We want more jobs, productivity, and income – so it doesn't make sense to tax jobs, productivity, and income."

Greg Mankiw (see more on him here) has a Pigou Club manifesto  outlining a very coherent analysis of the benefits of a carbon tax.  

Conservative University of Chicago Economist Gary Becker
Former Federal Reserve Chairman Alan Greenspan
Bill Gates
Freakonomics author Steve Levitt
Former Republican Senator Bob Ingliss
Alan Mullaly (current president of Ford and former Boeing CEO)

Current Republican Senator Lindsey Graham's 2010 proposal: "He proposes “putting a price on carbon,” starting with a very focused carbon tax, as opposed to an economywide cap-and-trade system, so as to spur both consumers and industries to invest in and buy new clean energy products."

Conservative columnist Charles Kraughthammer
Conservative columnist George Will

The conservative think tank American Enterprise included a carbon tax in its deficit-reduction bill:
"In fact, the irony is that there is a broad consensus in favor of a carbon tax everywhere except on Capitol Hill, where the 'T word' is anathema."

Former Bush economic adviser Lawrence Lindsey

Former Bush economic adviser Glenn Hubbard: “But businesspeople don’t innovate because it feels good; they innovate because there’s a return to that innovation. If you want a return to that innovation, you will have to price it – you will need to put a price on carbon, which means having, either through a cap-and-trade system or an explicit tax, some incentive to innovate carbon-saving technology.” 

Supply-side economist Art Laffer 

Former Reagan Secretary of State George Shultz

Exxon-Mobil CEO Rex Tillerson: “He said he favors a carbon tax to curb greenhouse gas emissions — rather than a cap and trade system using pollution credits — because the tax is more effective, less costly and easier to administer.”

Exxon-Mobil International Chairman Robert Olsen: "Achieving a uniform and predictable cost for carbon across the economy would enable market mechanisms to work effectively to this end. Uniformity ensures economic efficiency, whilst predictability facilitates good decisions affecting energy consumption today, and investment in the technologies needed to reduce emissions over time."

Sempra Energy (natural gas operator) CEO Donald Felsinger: "I think the most effective way to deal with carbon pollution is to have a carbon tax."

Conservative NY Times columnist David Brooks: A crusade for economic self-restraint would have to rearrange the current alliances andembrace policies like energy taxes and spending cuts that are now deemed politically impossible. But this sort of moral revival is what the country actually needs.”

Climate change-denier Wall Street Journal writer Holman Jenkins Jr: "A carbon tax would be the efficient way of encouraging businesses and consumers to make less carbon-intensive energy choices. Government would not have to exercise an improbable clairvoyance about which technologies will pay off in the future."

Former George W Bush speechwriter David Frum: "You don’t have to believe that global warming is a problem to recognize that a carbon tax is the solution. Under the umbrella of a permanent disadvantage for fossil fuels, markets could figure out freely which substitutes made most sense."
Paul Anderson, former CEO of Duke Energy

Former American Petroleum Institute Chief Economist Michael Canes

Former Reagan Chief Economic Adviser Martin Feldstein

GM CEO Dan Akerson: “You know what I’d rather have them do – this will make my Republican friends puke – as gas is going to go down here now, we ought to just slap a 50-cent or a dollar tax on a gallon of gas.”

FedEx CEO James Hansen
Caterpillar CEO James Owens

There you have it.  That is an assortment of 25 businessmen, conservative economists, conservative politicians, and conservative pundits who have publicly supported a carbon tax.  Vocal supporters of energy taxes include two of the three American car company CEOs, the upper echelon of one of the biggest sources of emissions in the world (Exxon), two other energy industry executives, and a smattering of prominent Republican economists.  Is it really so politically suicidal for Democrats to show the widespread support of a carbon tax among some of the most prominent conservative businessmen and economists?  

Why We Should Replace All Federal Taxes with a Carbon Tax

I am actually writing my research paper for writing class on this topic, so please message me any comments/concerns.

Global warming may be the arching problem of the next few generations.  No, it will not bring about the end of human civilization.  However, there will be devastating tragedies, some of which we are already experiencing.  There is a legitimate choice that we need to make.  Humanity is going to pay for climate change whether we like it or not.  I am not going to harp on about the consequences, but if we want to minimize the effects, we need to drastically reduce pollution.  Now, even if the United States eliminates all of its pollution, there is still going to be a major problem if developing nations like China, India, Indonesia, and South Africa industrialize through coal and oil. 

Although some hope (and even believe) that we can simply innovate our way out of the problem with technology, the prospect of this is dangerously unfeasible.  It is going to require a complete transformation of the world economy.  It is going to take a whole lot more than buying compact fluorescent light bulbs, buying a hybrid car, going to the farmer's market, and getting energy efficient appliances.  Energy efficiency is great, but only if it actually leads to a decrease in energy consumption.  I am going to be blunt: it will cost us a lot of luxury to reduce our carbon dioxide emissions to tolerable levels.  It may not even be possible.  So why should we even try?

The basis of economics is the study of scarce resources.  And like it or not, the primary energy sources (coal, oil, natural gas) for today's society are limited.  Perhaps they will last a few hundred more years, but the cost is ever-rising.  We have already reached a peak of cheap oil, turning to tar sands and high sulfur crude.  Once again, we will have to pay eventually.  The only question is how to limit the damage, how to seamlessly transition for a high-pollution, fossil fuel-based economy.  It will not be as simple as replacing the grid with the elusive "too cheap to charge for" nuclear fission or pie-in-the-sky fusion.  And you are living in a fantasy land if you think that we can even come close to maintaining our current levels of consumption.  No, we are going to have to employ the scorned upon notion of conservation.  We have to cut back.  We have to drive less, bike more, travel less, eat more sustainable foods, move to cities, and use less electricity.  It does not have to destroy our quality of life.  But the path to such a society matters.  

The idea behind a pollution tax is simple: pollution is bad, so we should discourage it.  Arthur Pigou was one of the first economists to popularize the concept of taxing negative externalities.  In an ideal situation, the damage to society of a good is equal to its price.  In a free market, there is no value on the “external” costs of a product, such as the negative health effects of pollution.  Therefore, the price of “bad” products should be raised to the true societal cost.  Unfortunately, it is difficult to measure the true cost of global warming.  The necessary price of carbon dioxide to provide a sufficient revenue stream might well be higher than the harm that global warming will cause.  However, the increased chance of a completely devastating natural disaster may render action necessary at all costs.  Either way, taxing carbon dioxide will lead to lower overall emissions, which benefits society even at low levels of output.

The basic premise of a consumption tax is actually quite conservative.  One argument is the simplicity of a tax on the purchase of goods as opposed to taxing wages.  Income is difficult to measure and to keep track of, and the tax code is rife with loopholes and deductions.  Simplifying the code to a basic tax on the sale of products is going to reduce noncompliance.  Another criticism of the income tax is that it penalizes labor: taxing wages causes people to work less.  A consumption tax rewards investment and saving by raising the price of immediate consumption.  The combination of these effects leads to greater economic efficiency.  A carbon tax is basically a targeted tax on consumption. 

The magnitude of a carbon tax to replace federal revenues is hard to comprehend.   Imagine gas prices at $15 per gallon, electricity prices at $1 per kilowatt-hour, airplane tickets costing three times as much.  A carbon tax would effectively act as a national sales tax.  But therein lays the beauty of it.  Conservatives have already proposed replacing the income tax with a national sales tax.  If global warming were not such a politically contentious issue, then Republicans would enthusiastically embrace such a proposal.  Alas, this is not the case.  Al Gore's suggestion that payroll taxes get replaced by a revenue-neutral carbon tax was wrongly tossed aside.  I embrace his proposal and would like to take it significantly further.

A large carbon tax is not without its own set of complications.  Let us start by examining the liberal objection: any sort of a consumption tax is going to severely target the poor.  Yes, lower income people consume a far higher percentage of their earnings.  In addition, a carbon tax would even target people who have zero income.  This is concerning, but it would be far too complicated and simply unnecessary to leave the poor out of it.  After all, the planet does not discriminate as far as emissions are concerned.  However, there are still ways to make sure that the tax structure remains progressive.  One way is a lump-sum rebate: give everyone a bundle of money back.  This would necessitate a higher rate, but because the poor consume carbon disproportionately to their income, they would benefit more.  Another proposal is to only give money back to people making below a certain percentage of income.  The rebate system could be set up so that the overall tax progressivity is similar to today's structure.  A low-pollution, climate change-free world offers additional benefits for the less fortunate.  Climate change is likely to have a significantly greater effect on the poor, since they are less mobile and less able to adapt.  They cannot afford to move out of high-risk areas (like New Orleans) when the time comes.  A carbon tax is certainly not socialism, but it is not going to exacerbate income inequality more than simply allowing climate change to happen.

So what about regulations?  Why can't we simply mandate a reduction in emissions?  Why don't we require alternative fuels or renewable energy?  Why can't we provide rebates for "green technology" instead of raising taxes?  Well, we are already employing all of these tools.  The EPA has the authority to regulate greenhouse gases, but it is not easy to do.  And many states have adopted renewable fuel standards.  However, without economic incentives, these are impossible to meet.  The cost of renewables (and nuclear power for that matter) is simply too high for a large-scale transformation.  Mandatory emissions-reduction programs are not usually successful.  Even the enviable European countries are having trouble meeting their Kyoto targets.  Canada has pulled out of Kyoto in lieu of paying fines for failing to sufficiently reduce pollution.  CAFE standards require new cars to get 50 mpg by 2020.  This will help some, but it does nothing about the millions of cars that will remain on the road.  An increase in the usage of solar energy is not going to do anything to reduce pollution, only a decrease in fossil fuel use will.  Tax credits are simply not an efficient way to subsidize green technology.  They are too targeted and are highly regressive.  You aren't going to see families making under $50,000 a year buy a Tesla, solar panels, or even a new washing machine.  Tax breaks are also often wrongly targeted.  For example, corn ethanol is subsidized nearly $2.00 a gallon (including tariffs) when it provides little to no pollution benefits.  Simply raising the cost of pollution is a far simpler, far more effective method of encouraging new technologies.  Unlike with direct subsidies, technology is subsidized by its actual effectiveness in reducing pollution rather than the political clout of interest groups.  A carbon tax is also an extremely helpful motivator for conservation.  Sometimes, the best technology to use is no technology at all.  Drive less, use fewer lights, and hang up your clothes.  An extremely high price of energy would force middle class Americans to think twice before moving to the suburbs.  It would be a boon for urbanization and for public transportation.  These are all results that a simple sales tax, without regard to the harmfulness or benefits of the goods that are sold, cannot achieve.

The other market-based proposal that has garnered some more political support has been cap-and-trade.  This would also set a price on carbon, one that would specifically target a certain level of emission-reduction.  Carbon credits would be exchanged between companies.  A company that reduces its carbon footprint can sell its credits to a higher polluter. Such a system worked in the 1990s to dramatically reduced sulfur emissions.  It would certainly be at least as effective in achieving its pollution goals as a carbon tax if executed properly.  However, cap-and-trade is difficult to regulate.  It is easier to levy the final tax on the consumer than to worry about how many credits manufacturers get and the specifics of selling pollution permits.  Cap-and-trade is going to raise prices just as a tax would, but none of the money would go to the government.  With a direct tax, the government gets more revenue, which can be used to offset the complicated and inefficient tax code.  A carbon tax is the simplest and most effective method of combatting global warming.

So can a carbon tax actually work at significantly reducing pollution?  On the technology side, the impact seems obvious.  Increasing the price of fossil fuels is implicitly a huge subsidy for renewable energy.  Tripling the cost of coal would make solar energy close to cost-competitive with current technology.  The idea that it would change people's behavior is less certain.  We learned in introductory economics that the price elasticity of gasoline is less than 0.01.  This means that raising gas prices by 100% even will result in only a 1% decrease in demand.  However, the long-term price elasticity is estimated to be closer to -0.5, although it is going to be lower in the face of large price increases.  Still, the response is significant.  Of course, a large decrease in emissions creates its own problems.

How are we going to collect enough taxes to fund the government if a carbon tax actually works?  Of course, if the pollution is reduced enough, the government may no longer have significant funds to run.  It does not make sense to further raise the tax rate beyond this point, as there will be little, if any, increase in revenue.  If pollution is low enough, it is not even causing significant harm.  In this scenario, I would favor a progressive consumption tax. It can be gradually phased in as revenues would otherwise decline.  It would maintain the current progressive nature of the tax code while providing conservatives with their ideal, simplified tax system.  A consumption tax still discourages the excess purchase of disposable goods, so there is still some environmental benefit.  We can only hope that this situation arises.

The real question that is going to decide the merit of a carbon tax is the value of time.  If this generation is all that matters, it is probably not worth it to reduce fossil fuel usage or significantly cut pollution.  If we are serious in our efforts, it is not going to be easy.  The idea of actually using less energy is not easy to tolerate for most Americans, especially the middle class.  The likely mass urbanization might forever end the suburbs, and will all but eliminate rural towns.  Hundreds of thousands of Americans might be permanently out of a job as coal and oil companies scale back on mining and refining.  New, disposable goods are going to be too expensive for most people to consider buying.  Given the limited supply of natural resources, the transformation to a more sustainable, less disposable economy is inevitable.  I do not think that we should immediately destroy the economy by implementing a full-blown tax now.  However, within the next ten to twenty years, the tax can be gradually phased in.  This will give time for technology to improve and for people to adapt.  Colleges are going to have to shift their major programs, and some people may have to go back to school in order to find a job.  Sure, there will be an influx in “green jobs,” but the job market is going to change forever.  The economic benefits of a shift towards a sustainable, low-pollution society are easy to see: better health, better efficiency, and more diverse and creative energy sources.  However, it is ultimately not the economics, but the social reality that will determine the ultimate policy.  If all you want is to feel good driving your Tesla, eating your veggie burger, and admiring your solar roof, then sit back and relax while the planet does not notice.  A large-scale carbon tax is the least costly, most efficient method of actually combatting global warming.  It will take more than just the United States to solve the problem, but we have to start somewhere.  In the end, the sacrifice will be well worth it.