Greenhouse Gas Revenues in the Budget

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Just an initial reaction to how the Obama administration's new budget treats the revenues it plans to raise through cap-and-auction limits on greenhouse gas emissions. The New York Times reports that the Obama administration intends to auction off all greenhouse gas emissions permits eventually raising about $80 billion in new revenues per year. Some $15 billion will be earmarked annually for federal renewable energy reseach and development programs and $65 billion will be returned as tax credits to the public. The goal is to cut U.S. emissions by 14 percent below 2005 emissions by 2020.

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As it happens, a Congressional Budget Office analysis in 2007 calculated the income effects of a 15 percent cut in carbon emissions: the average household in the lowest one-fifth of income earners would pay about $560 per year more and households in the highest quintile would pay $1,800 per year; however, $560 represents 3.3 percent of the average income of households in the lowest fifth, while $1,800 is just 1.7 percent of income for households in the top fifth.

The CBO then looked at what would happen if the federal government were to return all of the net auction revenues as an equal lump sum rebate to every household. Such a rebate would more than fully offset the burden that increased prices would impose on the lower two income quintiles. Their household incomes would rise by $310 and $140 respectively. 

The CBO also calculated that if all the revenues were used to cut payroll taxes, then after-tax household incomes of the bottom quintile would drop by 2.6 percent. In fact, 80 percent of households would see lower incomes, while household incomes in the top quintile would rise by 0.4 percent. 

More to come. 

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  1. Is it listed in the budget as a tax?

    If not, how is this different from an tax on carbon emission?

    I am in favor of Pigovian taxes, but I just think they should be called taxes.

  2. If not, how is this different from an tax on carbon emission?

    The difference is that this sets as a target value the total amount of emissions, and guarantees that we will be at that emissions level or lower, no matter what the cost. (Assuming that the caps don’t get filled with loopholes if they show signs of working.) It can have $0 cost if emissions collapse anyway due to economic weakness (as in Europe), or it can have tremendous cost if emissions rise more than expected.

    A tax, OTOH, reduces all the emissions that cost $X to reduce, regardless of the amount. It can reduce a lot of emissions, or, if emissions are unusually expensive to reduce, it can reduce none but just impose costs.

    A tax set at exactly the value needed to reduce emissions to the level set by a cap and trade system will have exactly the same effect. (If allocations are auctioned.)

    Cap and trade is favored by those who believe that we can determine about how much we need to emit, and that absolute catastrophe happens soon over that level of emissions, so that we need to reduce to that level nearly no matter the cost. A tax is favored by those who believe that the marginal cost of extra emissions is relatively flat, so that we should reduce all the emissions that are cheap to reduce, but not both with the emissions that are really expensive to reduce.

    There are other differences, like the ability to game the system, and the ability for either to be dropped if things change.

  3. Some $15 billion will be earmarked annually for federal renewable energy research and development programs and $65 billion will be returned as tax credits to the public.

    Shouldn’t the money be used to ameliorate the alleged future damage associated with climate change? Otherwise what is this other than a land grab?

  4. Isn’t preventing better than ameliorating?

  5. Isn’t preventing better than ameliorating?

    Yes.

    But it’s a fairly mainstream, if unproven, assertion that climate change (due to anthropogenic factors) is inevitable

  6. Isn’t preventing better than ameliorating?

    Often, but not always. There exists preventative medicine that is much more expensive than simply treating the symptoms.

    You can prevent children from getting injuries from bike riding by never letting them learn to ride, but most people would say that ameliorating the scratches from the times that they fall is better.

  7. They haven’t proven that there is anything happening that needs to be prevented in the first place.

  8. So in the case of climate change, under many plausible analyses amelioration could indeed be cheaper than prevention.

    I believe, however, that swillfredo pareto was saying that we should both prevent and then ameliorate with the funds raised from prevention.

  9. IIRC, wasn’t there an idea floated sometime ago about carbon credits? I seem to recall thinking that countries like Brazil could make out like bandits by getting paid by corporations (and maybe countries) to NOT cut down the Rainforest.

    If this actually worked out, would my friend, who has about 2,000 acres in Costa Rica, be eligible?

  10. We’re fucked.

  11. But we have to do *something* to punish ExxonMobil for being so damnably effective at making money!

  12. Isn’t preventing better than ameliorating?

    Carbon output should be reduced to the point where the loss of welfare from decreased carbon-generating activity starts to exceed the cost of the climate change. It is real easy to see what the cost of the tax is, not so easy to give any realistic estimate of the cost of not reducing carbon dioxide output.

    A carbon auction lets the market decide the efficient allocation of CO2 generation, but the government should be spending the money collected specifically on the problems associated with climate change. Otherwise there is no justification for the tax in the first place.

  13. I would be OK with it if they balanced the carbon auction revenues with a concomitant decrease in income taxes.

  14. “I would be OK with it if they balanced the carbon auction revenues with a concomitant decrease in income taxes.”

    Keep in mind that this administration’s idea of “tax cuts” includes giving checks to people who don’t pay any income taxes in the first place. And some of them effectively don’t even pay any payroll taxes becuase the earned income tax credit they’re already getting offsets it.

  15. Gil,
    I meant reducing the tax burden of people who actually pay taxes.

    Perhaps I should have clarified.

  16. economist,

    That would be fine but what happens when the carbon tax income falls away because we find another way to do things without emitting carbon? Will the income tax come back up?

  17. Also, isnt part of the point up above that the carbon tax is very regressive? Do we really want to replace progressive tax with a regressive one? I would prefer neither, but that seems like a bad idea.

  18. “The CBO also calculated that if all the revenues were used to cut payroll taxes, then after-tax household incomes of the bottom quintile would drop by 2.6 percent. In fact, 80 percent of households would see lower incomes, while household incomes in the top quintile would rise by 0.4 percent.”

    Well then the secret must be to make it bigger! If we’re losing money with every sale, then I guess we’ll have to make it up with volume!

    Last time I tuned it, I remember Mr. Bailey being an unbeliever in replacing income and sales taxes with a carbon taxes, and I think part of that opposition was about this issue. …that in order to make a dent in the consequences of global warming, if that’s even possible, it would be such an enormous burden that it would crush our economy under its weight.

    While that might be so, I think it should be drilled into our leaders heads that whatever they introduce in terms of carbon taxes, be it cap and trade or something else, the burden of any general sales tax ultimately really does hit the people on the bottom of the scale the hardest, and any scheme to tax carbon will eventually require accompanying deep cuts in marginal tax rates.

    …and it isn’t about gross dollars to the government and whether cutting marginal rates will make a big difference to the government. When I was young and poor, I remember how an additional $5 one way or the other could make the difference between running out of food on payday or running out of food two days before payday.

    Cut marginal rates, otherwise, for me, it’s “How dare the Democrats put the cost of their environmental agenda on the backs of the poor?!”

  19. Some $15 billion will be earmarked annually for federal renewable energy reseach and development programs and $65 billion will be returned as tax credits to the public.

    IOW, boondoggles for politically connected crony capitalists, and redistribution of wealth.

    That, my friends, is how you jump-start an economy.

  20. But, R C, they’ll be different politically connected crony capitalists.

    CHAAAAANNNNNGE!!!!!

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