Avoiding the fiscal cliff: Why not a GHG tax?

Economically sensible and politically bulletproof once it passes: what’s not to like?

1. The Federal government needs some revenue in medium and long term but we still need fiscal stimulus in the short term.
2. The planet needs a decrease in greenhouse-gas (GHG) emissions.
3. The right way to control GHG emissions is to tax them.
4. The ideal GHG tax would phase in slowly to allow the economy to adjust.
5. A phased-in tax is also easier politically, because the pain is mostly in the future: i.e., after the next election, whenever that is.
6. But when the time comes for the tax to start or increase, the political pressure to avoid that could become intolerable: cf. the Alternative Minimum Tax and the “Doc Fix” under Medicare.
7. If economic decision-makers don’t believe – or at least aren’t sure – that the tax will kick in and rise as promised, the benefit of the phase-in is lost.
8. Therefore, you want a phased-in GHG tax that is politically bullet-proof.
9. While a GHG tax has attractive efficiency features, distributionlly it’s more or less a value-added tax: it hits poorer people harder because they spend a larger fraction of their incomes.
10. Social Security and (especially) Medicare are a big part of the long-term budget problem.
11. They are also political sacred cows.
12. The Social Security tax is regressive: it’s on labor income only, and capped.

Therefore, I propose a steep but slowly phased-in GHG tax dedicated to the Social Security and Medicare trust funds, tied to the elimination of payroll tax on the first $X of annual income. The formula relating X to the GHG revenue stream would depend on how much additional revenue the feds need in the long term.

But the key point is the political one. If reducing the GHG tax as it’s about to hit means either raising payroll taxes or raiding the trust funds, Congress won’t want to do it. That would make the phase-in credible.

I know this isn’t on the table in the current negotiations. What I don’t know is why.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

23 thoughts on “Avoiding the fiscal cliff: Why not a GHG tax?”

  1. based on my experiences as a teacher these past 18 years, whenever i and other teachers see a a policy alternative that could be both useful and helpful which never gains any traction we generally assume that it is precisely the fact that it is logical and reasonable that makes it impossible to happen. this may fall into that category.

  2. Mark:

    Great post, although I see some caveats to your proposal:

    A GHG Tax would, over the long-term, result in a decreasing amount of revenue, which would mean lower revenue for Social Security and Medicare, in a way exacerbating a lot of the problems with both programs, and perhaps not recuding taxes on low-medium wage income as much as hoped.

    I think a simpler, better way to institute a GHG tax would be the Australian model: Implement the tax and make the first $20,000 or more of wage income tax-free.

    I think, a la the Robert Frank model, increasing sin and pollution taxes, while decreasing income taxes on low to meidum income would be a boon for Democracts.


  3. While your suggestion of a GHG tax undoubtedly has merit, the way you’ve framed it seems remarkably Republican, and I don’t mean that as a compliment. Please resist the temptation to say that Social Security is a big part of the long-term budget problem. Social Security has never added a penny to the budget deficit, and there’s no reason that it ever should. Medicare, per se, is also not a big part of the long-term budget problem; the problem is health care costs, of which Medicare is a victim. “Our side” has grown weary of pointing this out, but we must continue to do so. And never, ever refer to “raiding the trust funds”. That’s a trope employed by the right wing to call the future of Social Security into question, with the ultimate goal of destroying it. The surplus in the trust funds is invested in U.S. Treasury bonds, which are the safest investment in the world. Perhaps in the history of the world.

  4. I know this isn’t on the table in the current negotiations. What I don’t know is why.

    Politicians make policy, which is different from making sense.

  5. Funding social insurance with a GHG tax is a terrible idea because if we care about future generations the revenue will eventually be zero.

    Ideally we’d fund social insurance by just allocating four or five percent of GDP to it every year and stop pretending about trust funds.

  6. The claim that GHG tax revenues must fall with time isn’t analytically sound. The volume of emissions will fall, but the tax rate should continue to rise, pushing the economy to be more and more GHG-efficient. Not at all clear what happens to the product of volume times tax. In any case, that’s a problem with a 50-year time horizon, not a reason to avoid a GHG tax now.

    1. I have real doubts that we could increase the GHG tax rate over time, have more GHG-efficiency, and have revenue increase enough for adaquate social insurnace spending, both political and economic reasons.

      Again, something similar like eliminating income tax on the first 20, 30, 50 grand of income with a GHG is politically more feasible and I think more economically realistic…

      See the wisdome Down Under…;)

  7. A Pigovian tax on GHG (a carbon tax) is so obviously good that it’s amazing somebody hasn’t put it on the table. I guess the Republicans are so anti-tax that they don’t even want to do the obvious, which is to tax things we don’t like (burning fossil fuels) instead of what we do like (working).

    1. Yes! A CO2 tax is a good idea, economically, environmentally, and even politically. There have been bills to create such in Congress for years, it has been supported by James Hanson (NASA’s premier climate scientist, http://www.nytimes.com/2012/05/10/opinion/game-over-for-the-climate.html ) by Peter Barnes (entrepreneur who brought us CREDO long distance, http://paulsuckow.blogspot.com/2008/07/peter-barnes-atmospheric-trust.html ,) and by Bill McKibben (environmental activist, http://www.rollingstone.com/politics/news/global-warmings-terrifying-new-math-20120719 .)

      There is even a grassroots movement, the Citizen’s Climate Lobby, ( http://www.citizensclimatelobby.org/ ) fighting to publicize the idea and push Congress to act on it. You can join. I did. I’ve been writing letters to congresscritters for over a year.

      Added to a small transaction tax on financial trades and election reform, a carbon tax would save the world and the economy at the same time it reduced economic inequality. Win, win, win.

  8. I’m not sure this is politically bullet-proof in the future. The right hates the idea of a GHG tax, and they also hate our social insurance programs. As of now they find it difficult to cut our social insurance programs, but if this proposal passed I think that when the tax phased in they’d cut it and then, five years later, use the resulting shortfall as an excuse to cut Social Security and Medicare.

  9. And the Democrats don’t like it, as Mark says, because it’s regressive and would hit low-income people harder than high-income people. But maybe if it was framed as a way to tax corporations and make them more socially responsible (which it would be) the Democrats would come on board.

    Make big corporations pay for their pollution! That should resonate with Democrats.

    Stop taxing work! Tax what we want to discourage instead! That should resonate with Republicans.

  10. matt w, Republicans don’t like Social Security and Medicare and want to cut them. This will be true with and without a GHG tax.

    Maybe if we called it a fee rather than a tax– a GHG fee, to cover the externality– Republicans could pretend Norquist’s pledge didn’t apply.

  11. There’s a technical problem with taxing GHG emissions rather than fuels, which are much easier to locate. So carbon taxes are usually imposed on fuels, at mines, refineries and power stations, not chimneys. That leaves out methane leakages and fluorocarbons, which need to be taxed (punitively) separately. These are of course trivial problems compared to the political ones.

    In the long run we need to go for net sequestration to return to 350 ppm. That means a subsidy not a tax. I’d put in a sequestration subsidy earmark in my carbon tax, as a marker. Initially it would not cost much.

    1. I didn’t follow all of this. I gather you want a subsidy for whoever figures out how to put the carbon back underground somewhere? Is that right?

      I just didn’t get how a subsidy earmark works inside the carbon tax, as a marker. Do you mean that you set the subsidy and the tax together, so that overall you get to this 350 ppm? Confused!

  12. A gradually escalating fuel tax has seemed like a good idea to me for years. If I drive a gas-guzzler, I don’t have to unload it right away, I can afford to wear it out and then buy a more fuel-efficient car. If I sell cars, I don’t have to have a fire sale, I just have to start promoting the fuel-efficient cars in my fleet and emphasize fuel economy in my R&D. In general people with the inefficient equipment—or a dependency on that equipment for heat or transportation—aren’t ruined, they just have to make some rational long-term plans.

    I wouldn’t handcuff it to any spending program, I’d put the money in general revenues. And I’d make sure there was a compensating progressive shift in income taxation to make up for it.

  13. What harms the environment is fossil carbon atoms being dragged from the quiet bowels of the earth into the biosphere and oxidized into CO2 molecules. In principle, it’s dead easy to count the fossil carbon atoms being extracted: there’s so many per ton of coal, so many per barrel of petroleum, so many per 1000ft^3 of natural gas. It’s much harder to count CO2 molecules being emitted from millions of chimneys and tailpipes. Not every fossil carbon atom extracted from underground is destined to become a CO2 molecule in the air, but the fraction is close enough to 100% for tax policy purposes.

    So the sensible thing to do is to tax the carbon content of every bit of fossil fuel mined, drilled, or imported into the US, as if it will be used for fuel. There’s your tax revenue. Then, you refund the tax revenue on a per-capita basis: every resident of the US gets an equal share of the gross revenue, in cash. The reason for divvying up the proceeds PER-CAPITA is this: every person has an equal ownership stake in the atmosphere. Republicans may argue that “job creators” have a greater right to use the atmosphere than job consumers do, but Republicans are nuts anyhow.

    Would this approach cause fuel prices to rise? Yes, of course. Would it be progressive tax policy? Yes, it would be. Even if the fuel suppliers could pass on 100% of the carbon tax, in the form of higher prices, your Average Joe would break even: his refund would just cover the extra cost of heating his house and filling his tank. But your Poorer-Than-Average Joe — the elderly widow on Social Security who only drives to church on Sunday, say — would come out ahead. And your Richer-Than-Average Joe — one of the Romneys, say — would pay more to keep his speedboat fueled than his (per-capita) share of the refund would cover.

    Would this approach cause a reduction in CO2 emissions? Yes, naturally. When the price of gas rises relative to the price of beer, say, your Average Joe will buy a bit less gas, a bit more beer — or so economists have led me to believe.

    Thus, taxing carbon at source and refunding the money per-capita would improve the environment via progressivity in the tax code — and divorce the issue from the “entitlements” argument, to which it had no business being married in the first place.


  14. It’s not being proposed because a GHG tax is intended to slow climate change. Most Republicans in Congress (and a few Democrats) contend that climate change is either not happening, or, if it is happening, reducing GHG emissions would have no effect on it. Why would these politicians embrace what they claim is a non-solution to a non-problem? Even if they were willing to give way in the face of the compelling evidence that climate change is real and greenhouse gasses cause it, they aren’t going to be eager to cross the powerful lobbies that have been funding climate change denial campaign.

    It makes sense, but it makes sense for reasons that too many politicians need to deny in order to keep their jobs.

  15. Care to support your assertion that “Social Security and (especially) Medicare are a big part of the long-term budget problem.” Please do so with explicit references and separate all the revenues and expenditures for (1) SS, (2) Medicare, (3) Medicaid, and (4) general federal government revenues and expenditure, including in (4) when transfers of general revenues are required for 1,2 & 3. Also, include in your work the separation of the Federal Government and the Federal Reserve. Be sure to indicate when 1 & 2 are collecting on the liabilities that make up their current trust-funds.

  16. No no no – Social Security is NOT part of the “fiscal problem”, I am so tired of seeing such claptrap. The fiscal problem is rooted in the corporate share of federal finances: their percentage has plummeted over the past 30 years, in fact. Trillion dollar tax expenditures to the corporates only add to the “fiscal problem”.

    Medicaid expenditures have a simple fix – Medicare for all. One page of legislation is all that’s required, but of course that would be inconsistent with the methods of “disaster capitalists” who excel at inserting needless complexity into the conversation to no end other than their own enrichment.

    I fully support a carbon tax — for without it we are doomed to extinction and we all KNOW THIS — but I don’t support conflating irrelevant issues. This article is yet another example of doing exactly that.

  17. With 1200 new coal plants being put on-line this year alone, an international carbon tax is an absolute necessity. The idea of phasing this tax in, to allow the economy to adjust, is malarkey — you all have had 20 years!!! to “adjust” since effects of GHG became widely known. The adjustment period is passed history.

    And where, exactly, has our wonderful capitalist system BEEN for the last 20 years — if it were truly such a wonderful system then the capitalists would have provided appropriate solutions long ago. But they have not, have they, because the system we have is geared to foster cronyism not to rooting out market inefficiencies.

    Will a carbon tax knock the hell out of Clinton’s “global economy”? You bet it will, and local organic farmers & small-item manufacturers will see their demand/supply curves thoroughly redrawn. Will a carbon tax knock hell in the air transportation industries? You bet it will, undergirding the calls for a new national railway. The work on these cannot begin soon enough. In the best of worlds, the present military-dominated capitalism we have would yield to a culture specifically intent on expanding the commonwealth — in that direction one finds maximums in general welfare economics.

    Bottom-line, a carbon tax will be passed over the dead bodies of the Republicans. I say: so be it, vote out the bastards whose dream is more a cushy corporate lobbying career. The American people are tired of the droughts and floods, the fires and casualty losses, the mitigations and their leaders doing little but greenwashing pathetic policies. It’s put-up time — bring on the carbon tax IN FULL and fix the damn problem — or shut-up time — and let us enjoy our fancy toys while we can. Let us rely on our wonderful military to ensure that United States citizens are the only left standing to see the end of human history — we paid for it, we have a right to see it put to use.

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