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On March 28, E2 and Resources for the Future co-sponsored an Ecosalon at PG&E in San Francisco to delve into the prospects for a carbon tax in the context of budget reform. Bob Epstein led off the presentations with a discussion of public attitudes on pricing carbon. His in-depth analysis appears in a separate article in this issue of the E2 Newsletter.
Phil Sharp, President of Resources for the Future
, presented his assessment of the political landscape going into the elections. He began by reviewing recent Congressional actions on energy: phase-out of incandescent light bulbs, expiration of ethanol tax credit and the failure, so far, to extend the production tax credit for wind.
He also briefly discussed regulatory actions on energy: EPA regulations on existing power plant emissions (mercury but not yet CO2), new power plant CO2 emissions, and fuel efficiency standards for medium and heavy-duty trucks. One of the dangers for the environmental community is that Congressional factions and some business groups are trying to eliminate EPA's power to regulate CO2. A future carbon tax, they can argue, will take care of the problem.
The biggest recent development in energy, according to Phil, is the dramatic fall in natural gas prices as a result of shale gas development over large parts of the U.S. This is driving electric power generators to switch from coal to natural gas to fuel power plants. If a carbon tax is adopted it will accelerate that trend.
Phil sees a carbon tax coming up in the context of budget and tax reform. For the environmental community, pricing carbon is an excellent way to recognize the economic and societal cost of climate change, but as a revenue source it can also have significant economic benefits if the revenues are spent wisely. Phil's view is that now is the time for analysis and discussion away from the limelight so that when the subject comes up in the political arena the options will be clearer.
Regarding the legislative process to come, Phil observed that that budget and tax reforms, and a carbon tax, will not be enacted as a grand package. Instead, it will be a multiyear step-by-step process. The carbon tax process will probably be just as messy as the Waxman-Markey cap and trade bill was in the House. The advantage of present budget circumstances is that special interest pleadings that reduce revenues will be more difficult.
Ray Kopp of Resources for the Future told us that a likely value for a carbon tax would be $25 per ton of CO2, which would raise about $125 billion in annual revenues. To understand what such a tax would mean for primary energy prices - natural gas, electricity and gasoline - see the article by Tony Bernhardt elsewhere in the issue
. This sum is not enough to eliminate the deficit
but it would provide enough revenue to promote economic growth and offset the harmful effects of higher energy prices, provided it is spent in one or more of the following ways:
1. reduce tax rates on business and/or personal taxes
2. fund spending of infrastructure or R&D
3. reduce the Federal budget deficit (thereby reducing the need for other taxes or reductions in public spending)
Ray elaborated on the first point because its effect is enhanced if distortionary tax breaks are eliminated in favor of tax reductions on desirable activity. For many in the audience tax breaks on oil, gas and coal came to mind for elimination, but Ray also mentioned that subsidizing renewables is also be an ineffective way to promote economic growth. An example of a popular candidate for more favorable treatment is the payroll tax - hiring should be encouraged not discouraged.
Kristin Eberhard of NRDC ended the presentations of the evening in a philosophical vein. She acknowledged that $25 per ton of CO2 is not enough to cause reductions of greenhouse gas emissions to levels required by 2030, let alone those required by 2050. It is, however, a good start to a social process required to rebuild Americans’ confidence and trust in one other and in their common government. She alluded to the Tragedy of the Commons in which individuals are incentivized to exploit a common resource until it is used up, even though those individuals would benefit from sustaining the resource over time. E2, NRDC, coastal states and the Federal government have all dealt with this problem in efforts to sustain healthy fisheries in US coastal waters. Kristin regards a healthy atmosphere as a common good that is currently being exploited, but that could be sustained through joint agreement and management.
Right now American society is particularly divided, in terms of education, attitudes and incomes, and it is now pessimistic about the future. This state of affairs is a departure from our history. In a striking chart Kristin showed the ratio of CEO pay to the pay of the average worker. In the US in the 1950s the average CEO made 50 times what the average worker made. In the 1990s the ratio was about 100. And in 2009 the ratio exceeded 450. Another chart divided family incomes into quintiles, from the lowest 20% of family income to the highest 20%. From 1947 to 1973 the increase in family income in all quintiles increased by about the same amount, around 100%, with the lowest quintile increasing by 117% and the highest by 89%. From 1979 to 2009 incomes from the lowest 20% to the highest increased by -7.4%, 3.7%, 11.2%, 22.7% and 49%, respectively. This trend toward extreme disparity is neither 'fair' nor is it good for the economy.
Fairness is a value shared by conservatives and liberals with only slightly different interpretations. Equal opportunity and reward according to contribution/achievement/ability are fairness concepts. Taxation brings concepts of fairness (taxation in proportion to income) in direct conflict with self-interest ("don't tax you, don't tax me, tax the guy behind the tree"), recalling the Tragedy of the Commons.
The solution to the Tragedy of the Commons is to create rules and norms to manage common resources. These rules will be respected if people feel that the rules are fair. Kristin believes that a discussion of a carbon tax in the context of fiscal reform will establish that it is fair to require payment for polluting our common atmosphere.
 The deficit drops to about $200B by 2015 if the Bush tax cuts are not renewed and the automatic spending cuts associated with the failure of the Super Committee are triggered at the end of this year. Otherwise the CBO estimates that the deficit will likely hit about $800B by 2015 and increase from there. See http://www.cbo.gov/doc.cfm?index=12699