Carbon Tax and Spend

Via Kevin Drum, a useful report from the Center on Budget and Policy Priorities about how if we sell carbon permits (as Barack Obama wants to do) instead of giving them away (as John McCain wants to do), we can raise the necessary funds to help the people most in need adjust to the new environment in which energy is more expensive. It turns out that such compensatory spending leaves us with a big pot of money left over.

The things they suggest spending this money on are basically sensible, though I should say I'm not so high on the popular notion of plowing money into clean energy subsidies. For one thing, I think there's very good reason to be dubious about the government's ability to pick technologies effectively. For another thing, the mere fact of the auctioned carbon permits would constitute a large de facto subsidy to alternative energy sources so it's not really clear that further subsidy is needed. Last, in a lot of ways the whole idea of subsidizing energy consumption goes against one very promising path, namely using less energy overall -- lots of elements of current U.S. policy subsidize or encourage lavish energy consumption and that's part of how we wound up in our current pickle.

Rather than spend new funds on further entrenching overconsumption of energy, we should just try to invest it in productive infrastructure. The biggest problem with adapting to a reduced carbon environment won't be that it's impossible in the long run for people to live in a high-cost energy environment, it'll be that so much of our existing infrastructure isn't well-suited to such an environment. A short-term infusion of cash is a good opportunity to start changing that (and, of course, imagine what we could have done over the past six years if we hadn't spent $1 trillion in Iraq).

Comments

This is one of those things where I just trust that someone knows what they are talking about. Sure, they taught us about carbon-sinks and feedback loops and cap and trade in Environmental Science, but I pretty much forgot all of it after the class was over.

If it were just people like MY saying this, I'd be skeptical. He's always been kind of friendly to corporate stances. Given that many environmental types seem to endorse these ideas, I don't really have a lot of doubts that it's at least the best idea being put forth at the moment that has any realistic shot.

As an added note, I can't wait to see Petey's head explode in an hour and a half. God, I've never disliked someone who agreed with me about so much before in my life.

Posted by soullite | May 14, 2008 5:37 PM

But, it depends on the way you arrange things. You could just have the government buy assets that you could demonstrate would lead to lower CO2 emissions, on some scale based on how much you accomplshed.

Posted by Nicholas Beaudrot | May 14, 2008 5:38 PM

Petey: "D'oh!"

Posted by mwahaha | May 14, 2008 5:40 PM

Ah yes, Edwards and the Trust Fund Scumbag - reunited in their hatred of universal healthcare? - are both backing Obama.

Posted by otto | May 14, 2008 5:40 PM

I wonder what Petey thinks about the news that Edwards just endorsed Obama.
http://news.yahoo.com/s/ap/20080514/ap_on_el_pr/obama_edwards;_ylt=AhTYm0mWCKw7LKBlLKrTwr.s0NUE

On the cap-and-trade issue, a better use of the revenue raised would be to reduce distortionary labor taxes.

Posted by nbt | May 14, 2008 5:41 PM

JRE is just making the world safe for trust fund scumbags like Cate, Emma Claire and Jack.

Posted by Gabriel | May 14, 2008 5:45 PM

I wonder how long it will take Petey to scrape what's left of his head on the floor.

Oh, excuse me, I made the mistake of thinking Petey isn't actually a craven bastard.

Posted by mwahaha | May 14, 2008 5:46 PM

I wonder how long it will take Petey to scrape what's left of his head off the floor.

Oh, excuse me, I made the mistake of thinking Petey isn't actually a craven bastard.

Posted by mwahaha | May 14, 2008 5:46 PM

The president who enacts carbon cap and trade legislation will be a one term president - right or wrong. The effects will be quite burdonsome in an already teetering economy. Forcing people to obtain power from alternate energy sources like wind generated electricity at a multiple of the cost of coal won't sit well with John and Jane Q Public when they get the utility bill.

Posted by Tommer | May 14, 2008 5:52 PM

The president who enacts carbon cap and trade legislation will be a one term president - right or wrong. The effects will be quite burdonsome in an already teetering economy. Forcing people to obtain power from alternate energy sources like wind generated electricity at a multiple of the cost of coal won't sit well with John and Jane Q Public when they get the utility bill.

Posted by Tommer | May 14, 2008 5:53 PM

Oh, there's nothing like a happy blue pie chart to make ecosocialism seem like such a grand idea. I particularly like how the server, presumably the ever benevolent government authority, is doling out a gray slice of scrumptious billions to give to the industries that begged and lobbied hardest. Regulatory capture and command economy management have never been so appealing.

Mom and blueberry pie. God love 'em!

Posted by MarkG | May 14, 2008 5:54 PM

If cap-and-trade is your version of "ecosocialism," MarkG, I think you need to go live in China, preferably somewhere in the vicinity of Three Gorges Dam.

Posted by ugh | May 14, 2008 5:58 PM

"I think there's very good reason to be dubious about the government's ability to pick technologies effectively."

The government is extremely good at picking medical research to fund, and does so at low cost (The NIH). I see no reason why the same couldn't be true of funding research on energy saving technologies.

Public investment in science always pays off: see the Apollo space project. Matt is thinking about government competence through the lens of Bush's incompetence, and thus concludes the government could not effectively fund energy research. But this is falling into the trap Bush has laid: make government incompetent so that people do think the government is incapable of being incompetent. Now that the Dems will be back in power, we should not buy this trick. We need to demonstrate just how competent properly run government can be.

Posted by Blake Emerson | May 14, 2008 5:59 PM

"I think there's very good reason to be dubious about the government's ability to pick technologies effectively."

The government is extremely good at picking medical research to fund, and does so at low cost (The NIH). I see no reason why the same couldn't be true of funding research on energy saving technologies.

Public investment in science always pays off: see the Apollo space project. Matt is thinking about government competence through the lens of Bush's incompetence, and thus concludes the government could not effectively fund energy research. But this is falling into the trap Bush has laid: make government incompetent so that people think the government is incapable of being competent. Now that the Dems will be back in power, we should not buy this trick. We need to demonstrate just how competent properly run government can be.

Posted by Blake Emerson | May 14, 2008 5:59 PM

Petey's not going to comment on a thread about carbon cap-and-trade. We'll have to wait for Matt to actually post about the endorsement, then we can see his reaction.

I wonder...

Posted by Trigger | May 14, 2008 6:03 PM

There's plenty of R&D on alternative sources of energy now. The problem is that most of the alternatives are more expensive than current sources of energy such as coal, natural gas, nuclear, and oil (even at oil's high current prices). Is it worth making us all poorer on the off-chance that by paying two or three times what we currently pay for energy we might stop the earth from getting 1 degree warmer over the next hundred years?

I'm curious about something though, since, regrettably, both Obama and McCain seem committed to some sort of new Kyoto Treaty: Under such a treaty, would we get dinged for exporting carbon-emitting fuels? What if, by increasing our use of nuclear power, we were able to reduce our use of coal in electricity generation by a quarter. Could we export all the coal we didn't burn, and still get credit for reducing our national carbon emissions?

Posted by Fred | May 14, 2008 6:18 PM

I just got here after a while away. Since this is the latest thread, has anyone checked on Petey lately? I think his head exploded an hour ago.

Posted by Joe Klein's conscience | May 14, 2008 6:25 PM

Could we export all the coal we didn't burn, and still get credit for reducing our national carbon emissions?

I suspect they'll have to allow that, otherwise WY and WV will head an exodus out of the union, followed by PA, KY, SD, ND, MT, and others.

Posted by MarkG | May 14, 2008 6:32 PM

"I just got here after a while away. Since this is the latest thread, has anyone checked on Petey lately? I think his head exploded an hour ago."

Haha, I thought the same thing.

Posted by Kevin | May 14, 2008 6:32 PM

Matt,
private R and D only works for technologies that are going to generate returns very quickly 5-8 years max. for more speculative R&D you need government funding, especially anything that is more basic research. The government doesn't have to "pick winners" it just has to fund a broad spectrum of innovative technologies to the point where a venture capitalist is ready to pick a winner.

Using less energy is great, but don't kid yourself, we need a lot more clean energy sources to reduce carbon emissions.

Posted by Anon | May 14, 2008 6:36 PM

I don't suppose anybody knows of a station that is actually airing Obama's speech right now. I wonder what idiot at MSNBC thinks their high ratings recently have been due more to the brilliant bloviating of Andrea Mitchell, Pat Buchanan and Chris Matthews than to people actually wanting to hear from the candidates.

Posted by marc h. | May 14, 2008 7:07 PM

I don't suppose anybody knows of a station that is actually airing Obama's speech right now. I wonder what idiot at MSNBC thinks their high ratings recently have been due more to the brilliant bloviating of Andrea Mitchell, Pat Buchanan and Chris Matthews than to people actually wanting to hear from the candidates.

It sounds like you missed it. It aired around 6:30 EST.

Posted by Bill | May 14, 2008 7:24 PM

Give a chunk of that money to DARPA. They've picked some winners in the past and the military is always on the lookout for better power sources for all their killy gadgets.

Posted by daveNYC | May 14, 2008 8:04 PM

It's amazing how little people learn. Middle of a meltdown, and we get market worship as a response to systemic energy challenges. Prices don't do enough.

Posted by david | May 14, 2008 8:12 PM

Wouldn't a very simple policy just be to auction off all the permits and return 100% of the proceeds to the American public? The exact method could be debated, but something like the current rebate might make sense.
I think it would be more palatable for most Americans, many of whom are skeptical of putting more money in the government's hands. This would be pure redistribution of money from people who use an excess of harmful energy to those who use a below average amount.

Posted by cannatar | May 14, 2008 10:31 PM

A pretty sensible post -- I wonder if economists regard "suboptimal infrastructure entrenchment" as an externality.

But this part is not quite right:

For another thing, the mere fact of the auctioned carbon permits would constitute a large de facto subsidy to alternative energy sources so it's not really clear that further subsidy is needed.

There are two externalities with renewable energy. You are correct that a carbon tax straightforwardly deals with one externality: pollution/disease/flooding/etc.

The second externality is knowledge spillover: the fact that when institution A attempts to build a renewable energy system, or performs renewable energy R&D, companies X,Y,Z, etc. learn from A's mistakes/successes.

We should expect climate change innovation and novel engineering to be undersupplied in the presence of this externality. Innovation should be subsidized.

Now, you can argue that R&D subsidy in the real world means massive rent-seeking, and you're likely right. So it's not certain we want these subsidies, but in principle it is economically justified.

See this enlightening paper:
http://www.rff.org/~newell/JaffeetalEcolEcon.pdf

Posted by mk | May 15, 2008 12:18 AM

This is a loser. If the Democrats push this thru, they can kiss all their goodwill with the public goodbye.
A.: This is an example of the assumption that government does everything great as long as the program is huge and affect a large share of the US economy. We all know the track-record on that.
B.: There are complications related to the role of federal versus state responsibilities for taxation, enforcement and overlapping interests that will make this tidy little diagram you show here look like a ball of string after a hurricane.
C.: It's borderline socialist, if not fully over the border, and socialism does not sell in the US.
D.: This will inevitably hurt businesses that aren't really polluting, let ones that are off the hook and will not reduce greenhouse emissions on Planet Earth by any amount WHAT SO EVER!

This is a disaster. If you value a Democratic majority in congress, do not push cap and trade.

Posted by Nathan | May 15, 2008 1:16 AM

mk is right about the general reason subsidizing alternative energy research makes sense: there are other positive externalities to alternative energy sources that the carbon tax won't reflect.

And I would add at least one more to mk's list--one which I think can also help overcome some of the possible political resistance to a carbon tax--namely national security. Generally, diversifying away from oil could have large positive national security implications. Indeed, something like algae-based biodiesel could potentially supply all our vehicular needs with an almost entirely domestic supply chain. But if that happened, there is no way the producers could capture the resulting benefits from just the consumers. Hence, a public subsidy makes ample sense.

Also, I personally think people like Matt have to be very careful about how they promote energy efficiency. It is true we use energy inefficiently as a country and various public policies have encouraged that fact. So, something like shifting some subsidies from inefficient uses of energy to more efficient uses of energy (e.g., shifting subsidies from commuter highways to public transit) may be a good idea.

But if people like Matt try to force individuals to become more energy efficient on their own through policy decisions that make energy more scarce than it has to be (e.g. by refusing to offer rational subsidies for alternative energy research), they are going to dramatically increase the political resistance to their plans. So rather than doing that, I suggest Matt just lobby for rational subsidies (and perhaps even regulations) favoring energy efficiency, while letting energy supply policy be set on its own terms.

Posted by DTM | May 15, 2008 8:31 AM

Last, in a lot of ways the whole idea of subsidizing energy consumption goes against one very promising path, namely using less energy overall -- lots of elements of current U.S. policy subsidize or encourage lavish energy consumption and that's part of how we wound up in our current pickle.

Um, no. The point is to use less carbon, that's why they're carbon controls. I see no reason for us to worry about lavish wind power consumption. And I agree with other commenters that the way the money is distributed makes a big difference, if it's through a scientific NIH style board, chances are it will fill a real roll left open by the private sector. If it's done directly by congress it's likely to be fairly pork filled and inefficient.

Posted by AJ | May 15, 2008 10:37 AM