Just tax carbon vs. the great ethanol scam

/. is running the following:

"Over at BusinessWeek, Ed Wallace is creating quite a stir, reporting that not only is ethanol proving to be a dud as a fuel substitute, but there is increasing evidence that it is destroying engines in large numbers. Before lobbyists convince the government to increase the allowable amount of ethanol in fuel to 15%, Wallace suggests it's time to look at ethanol's effect on smog, fuel efficiency, global warming emissions, and food prices. Wallace concedes there will be some winners if the government moves the ethanol mandate to 15% — auto mechanics, for whom he says it will be the dawn of a new golden age."

Yes, and a comment by gravesb cooks right to the solution:

just tax carbon

Stop the subsidies, tax carbon to account for externalities, and then let the market decide. The negative effects of biofuels have been on display ever since the Dutch dropped palm oil. Instead of the government pushing this obviously failed product, they should make sure that consumers bear the entire cost of their decisions and let companies develop a way to reduce fossil fuel consumption. And less biofuels means the price of my beer goes down, dammit! Won't someone think of my beer?

Toyota: Higher Gas Taxes, or Not?

Toyota asks:

What do you think about the idea of increased taxes on fuel? Should we pay more in gas tax? If so, why, and if not, why not? And if so, what should the per-gallon tax be, and what should the resulting revenue be used for?

Kitchen Linker says YES, much higher, general revenues.

Many notes on the kitchen board explaining WHY.

KUDOS to Toyota for asking. Now make it happen!

San Francisco Mayor follows Al Gore: Tax waste not work

San Francisco mayor Gavin Newsom is in the kitchen:

Mayor Gavin Newsom plans to ask voters next year to approve a "carbon tax" on businesses that he says would provide a financial incentive for conserving energy and motivating workers to use public transportation.

The ballot measure would increase the city's 5 percent commercial utilities tax by an as-yet-undetermined amount to encourage energy-saving steps by hotels, offices and other nonresidential buildings, Newsom said in a recent interview with The Associated Press.

To keep the higher rates from becoming an economic drag on the city, the initiative would carry a corresponding decrease in the 1.5 percent payroll tax on for-profit businesses in San Francisco, according to the mayor.

Nice, just like Al Gore.

Fural to be green VI: Frugal tax policy

If the shortest path in the kitchen to being green is being frugal, what is the obvious green tax policy? Consumption tax! Why Not Shift the Burden to Big Spenders? doesn't cover the environmental implications but is good background.

However, Kitchen Linker has concerns with the way this proposed tax is cooked. It requires reporting of income and savings: new frontiers in zero privacy.

Far better to concentrate consumption taxation on carbon, which has no privacy concerns and very directly attacks the number one global environmental concern (global warming, of course).

Realtor cooking

Highly Entertaining: Realtors Suing Other Realtors.

Yep.

Kitchen Linker searches kitchen for a grinding instrument to use on the guild, then a sharp knife to remove the anti-environment mortgage interest tax deduction.

Q.E.D.

Powerful editorial in the New York Times from the Pigoufather:

Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D.

Save the Environment: Repeal the Mortgage Interest Deduction

That's the title of a great Tax Policy Blog post:

Powerful U.S. Rep. John Dingell revealed Tuesday new details of his plan to cut global warming, including adding a 50-cents-a-gallon tax on gasoline and ending the mortgage tax deduction on what he called "McMansions," homes larger than 3,000 square feet.

On the same blog, France rejected a mortgage interest deduction.

Apology to David Friedman

Kitchen Linker is honored to have David Friedman commenting here, even if the comment is a justified accusation of making a base assertion. Kitchen Linker has now actually read The Coal Question and Climate Change cited by David Friedman rather than taking a quick glance and throwing it into the frying pan.

A strong case is made that most long term global warming scenarios assume much more hydrocarbons will be burned than are available to burn. Unless we trigger a major change now, the long term (year 2100+) impact on the climate from humans releasing carbon into the atmosphere will be relatively small and transient, because we'll run out of oil and coal.

However, Kitchen Linker does not really believe people are concerned about the year 2100 and beyond, at least not very much (and they shouldn't be--if we survive, people then will have incredible wealth and tools to face down the pedestrian challenges of today). People are concerned about the possibility (admittedly small) of near term catastrophic climate change and/or collapse in oil production.

Frankly, any policy implemented now is going to only slightly tweak the probability of either near term disaster scenario. But that is not an excuse for doing nothing, in particular because people want something done, and that something could be very, very bad, such as anti-technology terrorism and/or resource wars.

Let's ward those off with policy that is good and addresses climate change and energy depletion. In a comment on his own blog post, David Friedman has sage advice:

The conclusions I want to reach lead me to conclude that the future is sufficiently uncertain so that it is almost always a mistake to bear large costs now in or to avoid problems in the distant future. For more on that, see the webbed draft of my current writing project, Future Imperfect.

Yes, but a green tax shift does not involve bearing large costs. To the contrary, it costs less than equivalent taxes on production.

Readings from the Pigoufather

He recommends The Tax Free Lunch by Charles Krauthammer.

He also recommends A Green Employment Tax Swap: Using A Carbon Tax To Finance Payroll Tax Relief by Gilbert Metcalf.

Both recommend swapping the payroll tax for a carbon tax, same as Al Gore. Kitchen Linker could not agree more.

He is of course Greg Mankiw. Podfather, Pigoufather, get it? Ha ha.

The Price of Gasoline SHOULD Go Up

Tom Evslin (on the kitchen blogroll) has a must read post on why The Price of Gasoline SHOULD Go Up:

Suppose we were to raise the tax on gasoline and diesel used as motor fuels by $.50/gallon every six months for the next three years. We could immediately end the $.50/gallon subsidy to ethanol producers without discouraging production. We could remove the stupid restrictions on importing ethanol made from sugar since there’s be plenty of demand for both foreign and domestic ethanol. We could stop the tariffs which protect the sugar growers as they find a market – as corn has already done – as a fuel source.

Even more expensive biofuels would become economical without subsidy. The government could stop playing the pork barrel game of trying to decide which alternative fuels to subsidize how much and let the most efficient producers replace gasoline.

Putting aside the politics, there are still two enormous problems with this proposal:

1. The tax is extremely regressive – the working poor pay much more of their income in gas tax than the rich.
2. The government will withdraw huge sums from the economy and legislators’ll invent vote-buying programs to spend it.

Both problems could be solved, however, by reducing or eliminating social security taxes – also regressive – at lower income levels, maybe after keeping a little of the surplus to make sure that social security and Medicare are actually funded for when the baby boomers retire.

Absolutely, though Kitchen Linker will argue that a gas tax is not regressive on a global and long term scale.

Peak Oil vs. Global Warming

David Friedman points out an apparent contradiction in the arguments of those who believe both peak oil and global warming are problems:

A recent post on FuturePundit cites some interesting calculations by CalTech professor Dave Rutledge. Using the estimation approach on which current, widespread concerns about running out of petroleum are based, he finds that the IPCC global warming calculations overestimate future hydrocarbon burning by a factor of at least three or four--because the hydrocarbons are not there to be burned.

Nice try, but Kitchen Linker illustrated how both could be problems in Dangerous conflation of global warming and peak oil:

Clinton to Start $1 Billion Renewable Energy Fund, quote from WaPo:

"The Earth is warming at an alarming rate, we are running out of fossil fuels, and it is long past time for us to take action to correct these problems," Clinton said.

I applaud these efforts, but ain't the symmetry ... ironic, dreamlike, unlikely, ??? Actually there is no symmetry and the above is a gross oversimplification -- we're nowhere near to running out of coal or low quality oil sources (tar sands and shale), each of which is worse for the environment and global warming in particular than high grade crude that we are slowly running out of. So yes, efforts like Clinton's and Branson's are desperately needed, but they undersell the case!

David Friedman, in this kitchen doing nothing (still) is a false choice.

Tax global warming

Kitchen Linker loves this idea to impose high carbon taxes to the extent there is evidence for anthropogenic global warming, quoted via EconLog, as the original source is behind a paywall, so they don't get linked into the kitchen:

climate models predict that, if greenhouse gases are driving climate change, there will be a unique fingerprint in the form of a strong warming trend in the tropical troposphere, the region of the atmosphere up to 15 kilometres in altitude, over the tropics, from 20 degrees North to 20 degrees South. The Intergovernmental Panel on Climate Change (IPCC) states that this will be an early and strong signal of anthropogenic warming. Climate changes due to solar variability or other natural factors will not yield this pattern: only sustained greenhouse warming will do it.

...Suppose each country implements something called the T3 tax, whose U.S. dollar rate is set equal to 20 times the three-year moving average of the RSS and UAH estimates of the mean tropical tropospheric temperature anomaly, assessed per tonne of carbon dioxide, updated annually. Based on current data, the tax would be US$4.70 per ton...

This tax rate is low, and would yield very little emissions abatement. Global-warming skeptics and opponents of greenhouse-abatement policy will like that. But would global-warming activists? They should -- because according to them, the tax will climb rapidly in the years ahead.

The IPCC predicts a warming rate in the tropical troposphere of about double that at the surface, implying about 0.2C to 1.2C per decade in the tropical troposphere under greenhouse-forcing scenarios. That implies the tax will climb by $4 to $24 per tonne per decade, a much more aggressive schedule of emission fee increases than most current proposals.

Really neat idea, but Kitchen Linker still supports high carbon taxes, now, for two reasons: 1) prevention better than cure and 2) a carbon tax would be a big improvement over production taxes even if global warming did not exist.

We can do better than Sunstein predicts

Cass Sunstein predicts a cap-and-trade program in the U.S. within five years:

I am predicting, then, that the United States will adopt a domestic program that imposes significant domestic costs for insignificant domestic gains.

Kitchen Linker says that we could adopt a domestic program with significant domestic cost reduction instead -- a carbon tax with a corresponding reduction in anti-growth income or payroll taxes.

Ronald Bailey: "carbon taxes is the way to go"

Ronald Bailey writes about To Spur Energy Innovation,Tax Carbon, Says Newsweek Editor Zakaria. Bailey's conclusion:

Just a heads up--I have done a lot of reporting and just completed an article for The American on carbon markets versus carbon taxes. As a generally market-friendly guy, I've nevertheless concluded that carbon taxes is the way to go. I will link to the article when it appears this summer.

It must be really lonely over at the NoPigou Club.

European commissioning smarts

Greg Mankiw points out that the European Commission is considering doing the right thing for the environment and its torpid economy:

The Commission will on 28 March present ideas for “green taxes” to save energy and cut greenhouse gas emissions. It says that such an ‘ecological tax reform’ could increase the bloc’s competitiveness by shifting the burden away from labour taxes.

Could the EU lead down the smart path?

Convenient Truth

Jonathan Rausch makes the obvious point that a carbon tax is the best way to deal with global warming and has good side effects:

Just as conveniently, the most efficient way to get started is also the simplest, albeit not the easiest politically: tax carbon emissions. "At around $30 per ton of CO2 over a 25-year horizon, experts seem to think this is the kind of price that will encourage the kind of technologies that are necessary," says Billy Pizer, an environmental economist at Resources for the Future, a Washington think tank. That would translate into an additional 27 cents or so on a gallon of gasoline and about a 20 percent increase in residential electricity bills (more like 34 percent for industrial users). Unpleasant, but hardly radical. Perfectly do-able, in fact.

Fortuitously, a carbon tax could also reduce the U.S. budget deficit and the geopolitical leverage of sinister "petrocracies" such as Iran, Russia, and Venezuela. Policy prescriptions don't come any more convenient than that.

Al Gore's testimony

As reported at Reason, includes:

(2) I believe we should start using the tax code to reduce taxes on production and employment and substitute pollution taxes. We’re discouraging work and encouraging the destruction of the planet’s habitability. We should discourage pollution while encouraging work. Carbon pollution is not currently priced into the marketplace. I internalize air and water and I think that the economic system should too.

Great, but his other nine points consist of a mismash of regulation, prohibition, and subsidy.

Smart people need to advocate the best policy, doing nothing is a false choice (also see Greg Mankiw's criticism of accepting the worst policies by default).

Doing nothing a false choice

David Friedman comes out against carbon taxes (at least he's an anarchist, so that is a valid policy choice for him, not so for others). But Friedman really just opposes doing anything:

Finally, I suspect that widespread acceptance of the catastrophist view of global warming would result in quite a lot more than carbon taxes. It would provide a new justification for politically motivated interferences in a wide range of human activities. Anyone who questioned such policies would be labelled a denialist, accused of wanting Bangladeshis to drown and African children to starve. Again, look at the ongoing exchanges on Brian's blog.

Hence I conclude that serious efforts to combat global warming would have large costs, costs justified only if there were good reason to be confident that not taking such efforts would have catastrophic effects.

Not doing something sane (i.e., cabon tax) is going to lead to result in other practices Friedman will like much less, for example blunt regulation, crazy subsidies, and politically manipulated cap-and-trade markets -- also far worse than Pigouvian tax, as spelled out by Steven Postrel:

So the final score is: Permits get a moderate edge on political economy/public choice issues; taxes have a big advantage on institutional/governance issues; and taxes deliver a big can of whipass on traditional economic efficiency concerns. So conditional on accepting the weak case for CO2 emissions control, the Pigou people have a strong case against the cap-and-trade brigade. Maybe they should start making it.

Last quote via pointed out by Greg Mankiw.

The Friedman post comes via the NoPigou Club, which has yet to answer the question if not Pigou, then what?

Taxation six plus times more efficient than regulation

Econbrowser on CAFE standards:

Overall, Jacobsen estimates that a one-mile-per-gallon increase in the required average corporate fuel efficiency would increase the average fuel-efficiency of all new cars sold by 2.5%. However, since most of the older cars would still be on the road, Jacobsen estimates that during the first year, total U.S. gasoline consumption would decline by only 0.8%. He estimates the costs of this 1 mpg tightening of CAFE would be $20 billion in the first year, with these first-year costs shared about equally between U.S. consumers and producers. For comparison, Jacobsen claims that a gasoline tax could accomplish the same first-year effect at an efficiency cost of significantly less than $1 billion.

Over time, the fuel savings from tightening CAFE would of course increase, but even after 10 years, Jacobsen concludes that that a gasoline tax could accomplish the same thing at 1/6 the cost.

That's not even including that gas taxes produce revenue which can be used to reduce horribly inefficient taxes on labor and capital.

For the n'th time Kitchen Linker says Pigou means less planning, more growth, a cleaner environment, nor that OPEC pays part of any gas tax.

OPEC tax shift

Greg Mankiw provides some hard budget info:

For example, if I am reading it correctly, we could increase the gasoline tax by $1 (see revenue option 48) and reduce all ordinary income tax rates, AMT rates, and dividend and capital gains rates by 2 percentage points (see revenue option 1) to produce an approximately revenue-neutral tax reform.

That's a start.

But Kitchen Linker really likes a comment by "Mr. Mercy Vetsel" on Mankiw's post:

Amen! Now we just need to package that with a clever name that doesn't inspire thoughts of pork...

Preparing to join the "OPEC Tax Shift (Shift Taxes to OPEC)" club

Amen!