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Carbon Tax Offers Super Powers to Super-Committee

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With a $1.5 trillion budget “canyon” to leap across, the new “super-committee” would be wise to summon the special elastic power of a gradually-rising carbon tax.

After prolonged high-wire suspense and partisan brinksmanship, President Obama and Congress agreed in early August to establish the twelve-member “Joint Select Committee on Deficit Reduction” to tackle the budget deficit and the national debt. The “super-committee,” as the JSC was instantly dubbed, comprises six Representatives and six Senators, three chosen by the leadership of each party in each chamber.

The JSC’s mission is to agree on $1.5 trillion in deficit reduction steps to be undertaken over the next decade. These spending cuts or revenue enhancements are to constitute a second installment beyond the $917 billion in cuts agreed to in the bargain to raise the debt ceiling. The JSC is to deliver its recommendations to Congress on Nov. 23, with the House and Senate required to vote the entire package “up or down” a month later. If the JSC cannot agree on deficit reduction steps of the required magnitude, or if Congress fails to adopt them, that will trigger $1.2 trillion of automatic cuts divided equally between domestic and military spending.

To be sure, Washington’s obsession with putting our faltering economy on an austerity diet is deeply troubling to Keynesians, including the Carbon Tax Center. Nevertheless, the fix is in, so let’s examine how a carbon tax could be made part of the debt and deficit solution.

The JSC’s options fall into three categories:

1) More budget cuts, which would contract the economy, compounding unemployment and speeding our descent into another recession,

2) Raising revenue by reforming the tax code, for instance by closing loopholes or reducing tax “expenditures” (i.e., tax exemptions that function as government grants), or

3) Finding new sources of tax revenue.

Given the Herculean dimensions of the super-committee’s task, the JSC may find itself pressing all three buttons. In the revenue category, there’s been some discussion of a “value added tax,” but less about a carbon tax or a Tobin (financial transactions) tax both of which have strong policy advantages.

Last year, William Galston of Brookings and Maya MacGuineas of the Committee for a Responsible Federal Budget included a carbon tax in their report, A Balanced Plan to Stabilize Public Debt and Promote Economic Growth. Also in 2010, Congressional Budget Office founder Alice Rivlin reportedly suggested a carbon tax to both the Simpson-Bowles commission, and the Rivlin-Domenici commission. Unfortunately, her recommendation didn’t make it into either final report, even though well-known economists Gilbert Metcalf and William Nordhaus conveyed the same recommendation to the Simpson-Bowles commission. Now the advent of the JSC with its $1.5 trillion mandate and short deadline has dialed up the pressure to look for revenue sources.

How much would a carbon tax reduce deficits? In May, the deficit-hawkish Peterson Institute hosted a fiscal summit in Washington, at which four out of six leading think tanks, including the conservative American Enterprise Institute, suggested pricing carbon as a way to raise government revenue. AEI recommended a carbon tax starting at $26 per ton and growing by 5.6 % per year after that. According Peterson, the proposal would raise $161 billion per year by 2020, enough to reduce the federal budget deficit by 22% that year. They point out that this is greater than the savings from raising the national retirement age to 70 and would reduce the deficit the same amount as eliminating all foreign aid and federal funding for education.

The Carbon Tax Center’s model shows that a more aggressive carbon tax proposed by Rep. John Larson, rising each year by an average of $12.50 per ton of CO2, would generate about $475 billion of new revenue by the tenth year. This would eliminate around 80% of that year’s CBO-projected deficit while reducing U.S. carbon emissions by 30%. Moreover, the mere expectation of a gradually-rising carbon price will reduce the risks and increase the returns to investors in low- and zero-carbon energy and energy efficiency, as former Federal Reserve economist Alan Blinder pointed out last winter in the Wall Street Journal. In other words, simply enacting a carbon tax – even one with a “grace period” prior to startup – would provide a stimulus to a key technology sector (not to mention one in which the U.S. is falling behind China and Germany).

Aside from the carbon tax rate, what other design criteria need to be weighed for a carbon tax to reduce both deficits and CO2 emissions? Economist Gilbert Metcalf recommends a tax covering not just CO2 but other greenhouse gases: methane, nitrous oxide, fluorinated gases and sulfur hexafluoride. Metcalf, a Tufts University economist now serving the Treasury Department, argues that this more broadly-based tax would achieve much greater emissions reduction, particularly in the early years, by inducing replacement of climate-damaging refrigerants and solvents with more benign substitutes – an easier task than rapidly phasing out fossil fuels.

What about the potentially regressive effects of carbon or GHG taxes on modest-income households? When Chad Stone, chief economist at the Center on Budget and Policy Priorities, analyzed the Waxman-Markey cap-and-trade bill in 2009, he concluded that only 15% of the permit revenues would be needed to compensate households in the bottom 20% of the income range for the price increases induced by carbon pricing. Presumably, this finding holds for a simple carbon tax as well. (The revenue could be distributed in a monthly or even weekly “lump sum” by electronic funds transfer). To build in this protection for the most vulnerable, we should reduce estimates of revenue available for deficit reduction by about 15% to provide funding for low income assistance.

If legislators choose to compensate a larger income range from the effects of a carbon tax, then of course, a greater share of revenue will be needed. But because of the strong upward skew in carbon use over the income range, the revenue needed to compensate lower and even modest income levels is substantially less than their proportion of the population, leaving a large portion available for deficit reduction.

Both the Domenici-Rivlin and the Simpson-Bowles deficit commissions considered a so-called “Value Added Tax.” A VAT is a sales tax applied at every level, which would particularly burden retailers and is likely to be even more regressive than a carbon tax. Europeans routinely refer to the EU’s VAT as a nuisance to business – it must be factored into virtually every business transaction – and punishment of the poor. Moreover, VAT’s have no climate or other social benefits, aside from being a source of revenue. When the energy and climate benefits of a carbon tax are compared to gumming up our economy with a VAT that “sticks” to everything, a carbon tax looks sleek, maybe even sexy.

A carbon tax should also be structured to protect energy-intensive industries in relation to overseas competitors. In their 2009 paper, “Design of a Carbon Tax,” Gilbert Metcalf and David Weisbach articulated a simple structure for harmonizing border tax adjustments that, consistent with the WTO’s prohibition on discriminatory taxes, would apply a carbon-equivalent import duty to energy-intensive commodities such as steel, aluminum, paper, chemicals and cement, along with finished products containing them. If a foreign manufacturer could show that its process is less carbon-intensive than production in the U.S., then its harmonizing carbon tax would be reduced.

Harmonizing taxes would incentivize our trading partners to enact their own carbon taxes – in effect, we would be taxing their carbon-intensive exports for them until they enacted their own carbon taxes. With a rising U.S. carbon price, the incentive for our trading partners to enact carbon taxes would rise as well.

In summary, a rising carbon tax offers the JSC an attractive revenue stream for deficit reduction, obviating the need for more onerous and regressive levies such as Value Added Taxes. Low income households could be protected from disproportionate regressive effects by setting aside 15% of carbon tax revenues. And with WTO-sanctioned border tax adjustments, a carbon tax will not disadvantage U.S. industry and will spur much-needed innovation, investment and job growth in low-carbon energy and efficiency in the U.S. It will also encourage establishment of a global carbon price with commensurate global emissions reductions.

The super-committee will need nothing short of super powers to leap across a $1.5 trillion chasm. A carbon tax can provide the extra “bounce” of a substantial and growing revenue stream along with the clear, predictable price incentives needed for sound climate policy and a healthy and growing clean energy sector.

Photo: Flickr — Chanchanchepon

Help Make Our November Conference A Turning Point for Climate Action

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Dear Friend —

A carbon tax was always going against the grain — against the presumption that the most straightforward and effective approach to carbon emissions pricing couldn’t prevail over America’s special-interest politics and tax aversion — and against the smart money that insisted on hiding the price and buying off the opposition.

Well, the insiders’ cap-and-trade strategy has crashed and burned, but we carbon tax advocates are still standing and still facing a headwind. But we see a shift on the horizon: we’re convening a national conference next month at Wesleyan University in Connecticut designed to rally public and political support for effective and fair carbon taxing. And we’re asking you to help us make the Nov. 19-21 Pricing Carbon Conference a turning point at which a growing coalition of U.S. climate advocates unites under the banner of a revenue-neutral carbon tax.

It’s true that support for climate action is polling at near-record lows. But while part of that is due to the economy along with the highly orchestrated campaign of climate denialism, the spectacle of polluter giveaways under cap-and-trade has also convinced many that there’s no equitable way to price carbon emissions. We aim to turn that sentiment around, and show Americans that a national carbon tax with the revenues returned equally to U.S. households via “green checks” — carbon “fee-and-dividend,” as James Hansen terms it — can arrest the climate crisis while enhancing most families’ financial well-being. (Coupling those green checks with strategic “tax shifting” would be equally fair and effective.)

We’ve lined up an impressive and diverse roster of speakers for the conference, including Jim, Bill McKibben, Juliet Schor, Brent Blackwelder, Peter Barnes, Bill Shireman, two nationally known leaders from the environmental justice community, Cecil Corbin-Mark and Angela Johnson Meszaros, and members of Congress from both sides of the aisle. (A more complete list with links to speaker bios is here.)

As co-host of the conference, Wesleyan’s College of the Environment is providing additional experts including economist Gary Yohe along with world-class facilities for the conference presentations and discussion forums.

Now we need your help: to pay for speakers’ travel and lodging; for buses to bring delegates from New York, Boston and Washington; and for advertising and publicity to ensure that the halls are packed and the proceedings are communicated far and wide. We’re also eager to assist a growing number of young climate activists seeking “scholarship” assistance with travel and lodging. These are the people whom we will be counting on to take our mission forward. And they are also the people who will likely be most inspired by participating in the conference.

Your check, made out to “Wesleyan University” and mailed to The Price Carbon Campaign, P.O. Box 125, South Lee, MA 01260, will go entirely for conference organizing and will be tax-deductible. To contribute on-line, go to www.citizensclimatelobby.org.  On the right, select the lower donate button (tax-deductible donation).  Please fill out the form in its entirety.  In the second address line, enter: pricing carbon, then hit continue. (Citizens Climate Lobby is a conference sponsor.) As always, you can contribute to the Carbon Tax Center via the “Donate Now” button elsewhere on this Web site.

Every successful revolution — in policy as well as politics — has begun with a small band of people who nurtured a new idea that went against the grain. A carbon tax that transparently and unmistakably builds the costs of climate damage into the price of fossil fuels is no different. This is our moment, and the Wesleyan “Pricing Carbon” conference is our vehicle for seizing it. Please write your check today and be as generous as you can.

Best wishes … and thanks!

Charles Komanoff (director, Carbon Tax Center)

PS: Of course, we’d love to have you join us at the conference. To register, click here: www.pricingcarbon.org or click the REGISTER NOW button higher up on this page. You can also call (413) 243-5665.

Photo: Flickr / Carlos Gotay Martínez

Arising from the Senate’s Ashes?

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And now, ve may begin?

Readers of a certain age, and a certain literary bent, will recognize the words of Alexander Portnoy’s psychiatrist, spoken at the close of Philip Roth’s transgressive 1969 novel, Portnoy’s Complaint.

After lo these many years, they popped into my head today as I read that Senate Democrats had finally thrown in the towel on an energy bill that would have included a partial cap-and-trade provision for limiting carbon emissions from power plants. The bill, written by Senators John Kerry and Joe Lieberman, was touted by Washington insiders and some major environmental groups as this year’s last hope for federal climate legislation. Yet it would have relied on carbon offsets and other dodges to postpone the day of reckoning with true, visible carbon emissions pricing — the cornerstone of meaningful climate policy.

Instead, reported the New York Times, Senate Democrats will pursue a limited bill aimed at increasing oversight of oil drilling and tightening energy efficiency standards — with no direct assault on climate-destabilizing CO2. (For a later Times story amplifying the first, click here.)

Yes, now, we may begin — “we” being Americans who care about climate, sustainability, and Earth — to unite around a climate approach that is effective, equitable and transparent enough to win the support of our fellow citizens and a Congressional majority.

I’m referring of course to the idea advanced by climatologist Jim Hansen as fee-and-dividend and by the Carbon Tax Center as a revenue-neutral carbon tax, by which fossil fuel extractors and importers pay the U.S. Treasury fees pegged to the carbon content of the coal, oil and gas they take from the ground or bring into U.S. ports, and the Treasury distributes the revenues to all Americans via equal monthly dividends (“green checks”), or by tax-shifting from regressive taxes such as payroll taxes.

The Senate’s antipathy to even the partial cap-and-trade proposed by Sen. Kerry will doubtless be spun as indicating that for the foreseeable future the well for climate legislation has been poisoned. The Carbon Tax Center says that the opposite may be true: with cap-and-trade out of the way at last, the political well can begin to be de-toxified so that the effective, equitable and transparent carbon fee-and-dividend can be seriously considered.

For this to happen, however, the Big Green groups like EDF and NRDC that for years have dominated climate discourse among environmentalists, and that convinced Congressional Democrats and the White House that the only way to “put a price on carbon” in America was via carbon cap-and-trade, will have to abandon that approach and allow others, and themselves, to try a fresh start.

It will be said that cap-and-trade failed because Fox News and other climate deniers branded it as “cap-and-tax” and, therefore, a carbon tax (or fee) cannot possibly succeed. And it is true that carbon cap-and-trade was looked to, years ago, as a way to build on the success of acid rain cap-and-trade, win over Republican free-marketers, and put a price on carbon without having to parade the dreaded t-a-x word before the public.

In the event, though, carbon cap-and-trade did none of these things.

Instead, Big Green’s pursuit of carbon cap-and-trade tethered the climate movement to complex financial instruments and branded us as servants of Wall Street elites. It opened the legislative floodgates to off-the-charts Beltway deal-making that rightly repulsed the public. Perhaps most importantly, the co-optation of climate advocacy by the cap-and-traders robbed us of the high moral ground we might have shared with abolitionists, suffragists, labor agitators and civil rights workers — true American heroes who fought to liberate our society of oppression and injustice.

If you’re in the climate movement, you recognize that fossil fuels’ assault on Earth’s climate is an ultimate form of oppression and injustice: of rich against poor, of the profligate against the frugal, of the present against the future. Ending this assault will require concerted action on many fronts; and it starts by internalizing the climate-damage costs of coal, oil and gas into their prices, so that the free ride for fossil fuels is ended and all of the alternatives, from energy efficiency, renewable energy and low-carbon fuels to conservation-based behavior and mindfulness toward energy consumption, may compete fairly and effectively.

Political action to accomplish this must be done in bright sunlight, not in Beltway shadows.

Cap-and-trade, let us hope, is dead. And now, we may begin!

Photo: Flickr / generica.

Action Alert: Overhaul or Scrap ACESA

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The House of Representatives is scheduled to vote later this week on the “American Clean Energy and Security Act of 2009” (H.R. 2454, “Waxman-Markey” or “ACESA”). We cannot endorse the bill. The hundreds of provisions in ACESA’s 1,000-plus pages do not add up to the steps needed to avert catastrophic climate disruption. Moreover, the bill’s emissions trading provisions create vested interests that would block future reforms.

A growing chorus of environmental and progressive voices is urging Congress to overhaul or scrap the bill. For example, the Progressive Democrats of America and Friends of the Earth are urging their supporters and members of Congress to oppose Waxman-Markey. To see their action alerts, click here and here.

pigs_at_trough_james_dennettThere is little hope of shifting to a low-carbon economy without a clear, transparent price on carbon emissions. While ACESA’s proponents claim that its cap-and-trade provisions “put a price on carbon,” the Congressional Budget Office (CBO) estimates that CO2 allowances would rise to only $26 per ton a decade from now. That equates to a puny 26 cents a gallon of gasoline — in ten years! And ACESA neutralizes increases in the price of coal-generated electricity by giving 35% of the pollution permits to local electricity distribution companies (LDCs) with instructions to pass on that value to consumers.  If utilities pass through allowance value to customers, that will suppress the all-important price signal, and if utilities keep the free allowances they’ll reap a windfall.

The Carbon Tax Center advocates revenue recycling to protect consumers, particularly those with lower incomes, while still providing an effective price signal. In contrast, ACESA’s free allowances to LDCs would not only mute the price signal, but would enrich commercial and industrial firms that use 60% of electricity.

Effective climate legislation is urgently needed, and the upcoming Copenhagen treaty negotiations plus EPA’s process to regulate greenhouse gas emissions have created a much-needed sense of urgency in Congress. But ACESA’s complex, opaque and volatile cap-and-trade provisions are the wrong way to start an international system of carbon pricing. Trying to link cap-and-trade systems across borders would lead to instability, incentivize lax regulation and enforcement, and promote outright fraud as countries compete to become the cheapest supplier of allowances and offsets. We believe that clear U.S. commitments to specific emissions reductions and to funding for international efforts would set the stage for meaningful negotiations far more effectively than trying to build an international treaty around the convoluted structures embodied in ACESA.

As if these major flaws aren’t enough, ACESA has these as well:

1) Weak cap further weakened by offsets: ACESA’s greenhouse gas pollutant standard represents reductions of only 1-4% below 1990 levels by 2020, and 68-71% below 1990 levels by 2050. The Intergovernmental Panel on Climate Change concluded that the industrialized nations must cut far more aggressively to maintain atmospheric CO2 levels at or below 450 parts per million to avoid severe climate impacts including widespread drought, deadly storms, pervasive flooding, and sea level rise inundating entire cities and triggering massive refugee crises.

Weak greenhouse gas reduction goals in ACESA are further undermined by the two billion tons of carbon “offsets” available annually — up to two-thirds from international sources. If fully utilized, these offsets will allow U.S. emissions to keep increasing until at least 2040. Moreover, carbon offsets are difficult to monitor and enforce, raising serious doubt about their environmental value. [Ed note: As of 6/24, ACESA’s offset provisions have been further weakened by the Agriculture Committee.]

2) Weak Renewable Energy Standard: ACESA’s Renewable Energy Standard (RES) appropriately focuses on electric utilities and originally mandated that 25% of U.S. electricity come from renewable sources by 2025. That made sense, since the coal-fired electricity sector is the U.S. largest emitter of greenhouse gases. The bad news is that the mandate has now been watered down to just 15% by 2020, a level barely greater than “business-as-usual.” In addition, ACESA now defines “renewable energy” to include waste incineration and also authorizes a “Clean Energy Deployment Administration” to fund dirty energy like nuclear power and coal.

3) Handouts for the Coal and Oil Industries: Through free allowances and a hidden utility tax, the coal industry would receive approximately $150 billion over the lifetime of the bill for “deployment” of carbon capture and sequestration (CCS) technology that presently doesn’t exist and for technological and economic reasons may never materialize. Even if feasible and economical, CCS would require far more coal to be mined, transported and burned to produce the same amount of electricity. Coal mining is destroying communities throughout Appalachia and in other coal mining regions. In addition, ACESA would also give approximately $24 billion to oil refiners under the pretext that the world’s most profitable industry needs still more financial assistance.

4) ACESA over-compensates trade-exposed energy-intensive industries: ACESA allocates 15% of allowances to energy-intensive trade-exposed industries at least through 2025. While some industries merit protection from competitors in unregulated markets, a number of studies indicate that these industries can improve energy efficiency within a few years and that ACESA’s assistance is roughly double the additional cost that energy intensive firms would face.

5) Pre-emption of EPA Authority: ACESA would pre-empt EPA’s authority to regulate sources of greenhouse gas emissions under the Clean Air Act, while also overriding stronger laws at the state and regional levels. By disabling this regulatory backstop, ACESA thus ensures that its failure as climate policy will be catastrophic.

Overhaul or Scrap ACESA

The need to address climate change is urgent, but that urgency should not be used as an excuse to pass seriously flawed legislation. Congress should skip ACESA’s complexities and go back to the drawing board to develop a revenue-neutral carbon tax, managed price or cap-and-dividend approach.

Photo: James Dennett / Flickr.

Is the Moment Ripe for a National Carbon Tax?

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(This post first ran on Gristmill, under the headline,
Can the Promise of a New Political Landscape Include a U.S. Carbon Tax?,
with the subhead, Advocates launch the Price Carbon Campaign.)

What do the defeat of the Lieberman-Warner cap-and-trade bill, the burst of the oil-price bubble, the Wall Street meltdown, the promise of a new political landscape in the wake of the fall elections, and the exigencies of the climate crisis have in common

To the Carbon Tax Center and our partners at the Climate Crisis Coalition, these events together augur for a resurgence of interest in, and potential political support for, the “gold standard” for carbon pricing: a national, revenue-neutral carbon tax.

Tornado_Dash___patrix.jpgConsider:

  • The ignominious defeat of Lieberman-Warner, which collapsed in June under its 800-page weight, made crystal-clear that any carbon cap-and-trade system will be dysfunctionally complex, will take agonizingly long to put in place, and will fall prey to massive special-interest ripoff.
  • Political prospects for creating trillions of dollars’ worth of tradeable carbon emission permits have been further damaged by the Wall Street debacle and the resulting backlash against insider speculation and profiteering.
  • Retreating prices for oil and other fossil fuels strengthen not just the need, but also the political wherewithal for taxing fuels for their carbon content.
  • The success of the movement to elect Barack Obama to the presidency signals an era of new possibilities in which, just possibly, shibboleths such as “no new taxes” may get tossed into history’s dustbin — particularly if carbon taxes are made revenue-neutral via tax-shifting or revenue distribution.

To pivot off this moment, CTC and CCC today, with other allies, have launched the Price Carbon Campaign.

The campaign begins with three elements:

  • an online petition to the Obama administration and Congress calling for serious consideration of a national carbon tax during the first hundred days of the new Washington regime;
  • a letter-writing campaign to members of Congress. Your letter will be directed not only to your Senators and member of Congress (keyed by your zip code), but also to House and Senate leaders who hold sway over climate and tax legislation; and
  • a congressional briefing on carbon taxes focusing on the environmental, economic, economic-efficiency, logistical, and political benefits of a national carbon tax.

The briefing, featuring NASA lead climatologist (and carbon tax advocate) James Hansen, economists Gilbert Metcalf and Robert Shapiro, and Canadian public affairs expert James Hoggan, and hosted by Rep. John B. Larson (D-Conn., 1st district), is set for a House Ways and Means Committee hearing room (Rayburn H.O.B., Room B-318) on Tuesday morning, Dec. 9.

For further details on the briefing, click here.

We hope to generate thousands of signatures and letters between now and Dec. 9, so please visit the Price Carbon Campaign now.

Photo: Flickr / patrix.

Could Palin Pick Spotlight "Alaska Dividend" Solution to Climate Crisis?

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Note: On Oct. 15, the Alaska Permanent Fund Corporation wrote CTC with helpful details that clarify and correct some of the representations in our Aug. 29 post. The APFC graciously granted permission for us to print their e-mail in full, which we have done at the foot of this post. — C.K.

John McCain’s pick for vice-president isn’t shaping up as a win for Teddy Roosevelt-style conservation. A list of Alaska Gov. Sarah Palin’s positions on key environmental issues posted by the folks at Grist includes these anti-green stances:

  • Opposed a statewide ballot initiative to prohibit or restrict new mining operations that could affect salmon in the state’s streams and rivers.
  • Has pushed to build a natural-gas pipeline from Alaska’s North Slope
  • Sued the Interior Department over its decision to list the polar bear as a threatened species
  • Has proposed eliminating Alaska’s gas tax
  • Has pushed to open Arctic National Wildlife Refuge to drilling

But the Grist list also includes this:

  • Got the state legislature to pass a bill to provide each Alaskan $1,200 to help with energy costs

Gov. Palin_1.jpgWhich naturally brings to mind the Alaska Permanent Fund, the 49th State’s long-established program that annually sends every Alaska resident an identical check drawn from the state’s North Slope oil royalties.

The $1,200 per capita “resource rebate,” was proposed by Palin in July and enacted by the legislature on Aug. 7 “as a way for the state to share some of its multibillion-dollar oil revenue surplus with Alaska residents,” according to the Anchorage Daily News, effectively making it a hybrid of the Alaska Permanent Fund and the federal economic stimulus package that distributed checks to U.S. families earlier this year.

As we have long pointed out, the Alaska Permanent Fund offers a proven, straightforward model for distributing federal (or state) carbon tax revenues in revenue-neutral and progressive fashion: returning those revenues equally to all U.S. residents.

With carbon tax revenues distributed through pro rata dividends, the vast majority of poorer households, and a majority of middle-income families as well, would get back more in the dividends than they would pay in the tax. (For a federal carbon tax, the dividend checks should be provided at least quarterly and perhaps even monthly to keep households ahead of the budget treadmill.) This would cushion the impact of higher prices from carbon pricing while retaining the incentives for businesses, institutions and individuals to transist rapidly to a low-carbon economy.

This Labor Day weekend and beyond, the media will doubtless focus on Gov. Palin’s impact on McCain’s election chances. Let’s hope that a few enterprising reporters will use the selection of a candidate from the Last Frontier State as an occasion to focus on the “Alaska Dividend” as an equitable and politically palatable way of packaging a revenue-neutral national carbon tax.

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Oct. 15, 2008

Mr. Komanoff –

I saw your post today that you wrote in August mentioning the Alaska Permanent Fund.  I thought you might want to know that the Fund does not send out checks from oil taxes or royalties. The Fund invests 25% of the oil royalties that the State receives (no portion of any oil taxes come to the Permanent Fund) and then sends dividends from the income on investments. This includes rent on commercial real estate, stock dividends and bond interest.

Since 1977 the Fund has received $13.2 billion in oil deposits, which has grown through investments to a current value of $30 billion while paying out $16.7 billion in dividends since 1982.

This year was a little confusing because the dividend was $2,069 per person.  On top of that Governor Palin and the Legislature added an additional $1200 that came straight out of oil revenues (royalties and taxes) in the State’s general fund.

Since you are proposing our model as something that could have a broader US application, I thought you might want to know that it isn’t a straight redistribution of oil revenues. Please let me know if you have any questions.

Laura Achee, Director of Communications, Alaska Permanent Fund Corporation, www.apfc.org

*************************************************************************************************************************

Photo: Flickr / vincentd_indy.

U.S. Gasoline Demand Dropping (Finally!)

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On the same day that real crude oil prices broke a 28-year record, the Wall Street Journal heralded a long-awaited drop in U.S. gasoline consumption.

The Journal’s lead story today, Americans Start to Curb Their Thirst for Gasoline, was a powerful rebuttal of the notion that gasoline use is inelastic, and a vote of confidence in carbon tax advocates who have insisted that rising fuel prices will dampen energy demand.

Female_Bicycle_Commuter__NYC_2007.jpgHere are excerpts from the Wall Street Journal story, spiced with our commentary.

As crude-oil prices climb to historic highs, steep gasoline prices and the weak economy are beginning to curb Americans’ gas-guzzling ways.

In the past six weeks, the nation’s gasoline consumption has fallen by an average 1.1% from year-earlier levels, according to weekly government data.

That’s the most sustained drop in demand in at least 16 years, except for the declines that followed Hurricane Katrina in 2005, which temporarily knocked out a big chunk of the U.S. gasoline supply system.

This time, however, there is evidence that Americans are changing their driving habits and lifestyles in ways that could lead to a long-term slowdown in their gasoline consumption.

Economists and policy makers have puzzled for years over what it would take to curb Americans’ ravenous appetite for fossil fuels. Now they appear to be getting an answer: sustained pain.

Of course, unlike the pain of "market-driven" high prices, the pain of socially mandated carbon pricing would be offset by rebating the revenue or tax-shifting.

Over the past five years, the climb in gasoline prices, driven largely by the run-up in crude oil, hardly seemed to dent the nation’s growing thirst for the fuel.

Conventional thinking held that consumption would begin to taper off when gasoline hit $3 a gallon.

But $3 came and went in September 2005, and gasoline demand didn’t flinch. Consumers complained about the cost of filling their tanks, pinched pennies by shopping at Wal-Mart, and kept driving.

Economists who study the effects of gasoline prices on demand say consumers tend to look at short-term price spikes as an anomaly, and don’t do much to change their habits. They might spend less elsewhere to compensate, or take short-term
conservation measures they can easily reverse, such as driving slower or taking public transportation, but the impact is minimal.

Regular gasoline prices jumped to $2.34 a gallon at the end of 2006, up 62% from 2003, according to the EIA. Yet demand continued to grow at an average 1.1% a year. Consumers were better able to absorb the increase because it was spread over
four years, and the economy was doing fairly well.

Then again, annual demand growth of just 1% while the economy was expanding at 3% was strong evidence of at least some short-run price-elasticity.

Today, a weakening economy is intensifying the effects of high gasoline prices… The combination of forces is prompting Americans to cut back on driving, sometimes taking public transportation instead. It’s also setting the stage for what may be a long-term slowdown in gasoline demand by forcing Americans to become more fuel-efficient faster.

"If you think about the fact that U.S. motorists are responsible for one out of nine barrels of oil consumed in the world…and that consumption is no longer growing the way it used to, that’s a major structural change in the market," says Adam Robinson, analyst with Lehman Brothers.

The longer gasoline prices remain high, the greater the potential consumer response. A 10% rise in gasoline prices reduces consumption by just 0.6% in the short term, but it can cut demand by about 4% if sustained over 15 or so years, according to studies compiled by the Congressional Budget Office.

The implied 0.4 long-run price-elasticity noted above is precisely the level we (CTC) assume in our 4-sector carbon tax impact model, which may be downloaded here.

As consumers make major spending decisions, such as where to live and what kind of vehicle to drive, they are beginning to factor in the cost of fuel. Some are choosing smaller cars or hybrids, or are moving closer to their jobs to cut down on driving. Those changes effectively lock in lower gasoline consumption rates for the future, regardless of the state of the economy or the level of
gasoline prices.

Anne Heedt, of Clovis, Calif., has been moving toward a more fuel-efficient lifestyle for the past few years. She owns a Toyota Prius hybrid but takes her bike on errands when weather permits.

"We’re not always going to have the same accessibility to gasoline that we’ve had in past decades, so we do have to start thinking about what we’re going to do over the next 50 years," said the 31-year-old Ms. Heedt, who used to work at a
medical office but is between jobs.

Way to go, Anne. You should be CTC’s poster child!

The housing boom encouraged the development of far-flung suburbs, contributing to longer commutes. Now developers are building more walkable neighborhoods close to city centers and public transit, and Americans are beginning to migrate back toward their workplaces, city planners and other experts say.

David Hopper, who lives in the rural community of Markleville, Ind., is preparing to move to a new house in Plainfield, cutting his commute to Indianapolis to 15 miles from 47 miles. Mr. Hopper decided to move closer to the city last summer, when gas prices hit
$3.40 a gallon in his area.

Together, Anne’s and David’s examples suggest the broad range of ways in which individuals respond to carbon-pricing signals. It’s heartening to see this reporting in a major paper like the Journal.

Pinched consumers also are speeding up their shift to more fuel-efficient cars. Sales of large cars dropped by 2.6% in 2006 and by 10.5% in 2007. In January, they plummeted 26.5% from a year earlier, according to Autodata Corp.

Car dealers are selling fewer minivans and large sport-utility vehicles. In fact, only small cars and smaller, more fuel-efficient SUVs, are showing a rise in sales. Small-car sales in January were up 6.5% from a year earlier, while sales of crossover vehicle grew 15.1%, Autodata Corp. says.

These trends evidently deepened in February. The New York Times reports that sales of SUV’s and pickups in the U.S. fell 14% last month, vs. a 5% drop in car sales.

Music to our ears. Meanwhile, the The Times is reporting that crude oil prices finally surpassed the historical inflation-adjusted peak from April 1980. How sad for Americans that the record-high price includes fabulous "rents" for oil owners and extractors. How much better instead to tax carbon fuels and re-allocate the revenues to American families.

Photo: bicyclesonly / Flickr