How should we spend emissions fee revenues?

[miniboes]

There is a broad consensus among Dutch environment-friendly parties that whoever pollutes should pay for doing so. As a result, they favor an emissions fee*. Of course, if such a fee were to be implemented the government receives quite a substantial pile of money. What to do with that money is what I'd like to discuss here.

One important thing to note here is that several studies** have concluded that a carbon tax would have a regressive effect on income distribution; the poor pay a higher amount relative to their income and therefore get even poorer relative to the rest of society. I'm afraid that failing to compensate for regressive income effects would quickly deteriorate public support for any policy.

Regardless of which option is picked, I think a government should send everyone a message once or twice a year in which the receiver is informed of how much he is paying for the carbon tax and how much people living close to him/her are paying. We hate doing worse than others and love doing better than others, so it would probably serve as a good psychological incentive.

Three options stand out to me, and I'll give my thoughts on each:

#1: Investing in clean energy

This is the most straight-forward idea; use it to invest in clean energy, speeding up the decarbonization process. This can take the form of subsidizing low carbon energy sources and/or through R&D funding. It's consistent with the goal of the emissions fee, so it makes intuitive sense. I personally worry about the regressive income distribution effect I described above.

Someone attempted to reassure me by pointing out that investing in clean energy will bring down electricity prices, compensating for the regressive effect. I was not reassured, because there would be a significant period of time in which the carbon tax would be active but electricity prices are not (yet) coming down; clean energy investments may compensate for the regressive effect eventually, but not in the short term. More importantly, that particular person was not in favor of expanding said investments to nuclear energy, which means that if he got his way electricity prices would probably not come down at all due to the expenses of compensating for renewable energy intermittency. Instead, they'd skyrocket as we see in Germany and Denmark (see graph below).I could see the clean energy investment option compensating for the regressive effects if it was used to facilitate a nuclear energy boom (like Sweden/France), but that seems unlikely.

europeelectricprice.png

#2: The basic-income-ish option

At this point, this option seems the most promising to me. You simply divide the total amount of money gained from the emissions fee, divide it by the population count, and give every citizen that amount. It could either feed into a larger basic income, or serve as a small basic income in itself. It seems extremely counter-intuitive and the firs time I raised it to a group at least two of them started shouting in confusion immediately.

It's counter-intuitive because the average citizen would pay €X for their emissions and receive €X as a basic income. However, it means that a relatively "dirty" person lose money while relatively "clean" people save money, creating a strong financial incentive to emit less than others. The same studies that conclude a carbon tax is regressive normally conclude that returning the revenues results in a progressive distribution effect (the rich pay a higher proportion of their income, probably because they emit more than poorer people).

#3: The Jacoby option

I name this after economist Henry Jacoby, whose plan was figured in the episode of the Planet Money podcast** that introduced me to the idea of a carbon tax. He proposes a similar option to #2, but instead of simply giving people the money as a kind of basic income you subtract the money from a tax you don't particularly like.

The example he used was the income tax. Economists don't particularly like income taxes because working is something we want people to do (unlike emitting GhG's). Reducing income taxes would result in cheaper labor, resulting in more jobs, resulting in more consumer spending, etc. Economists think that subtracting emissions fee revenues from income taxes would be so beneficial to the economy that it would completely compensate for the reduction in economic growth that would result from rising energy prices. Economic growth would accelerate with this policy rather than decline.

I really like this policy. However, I'm concerned about how it may play out in the future as AI continues to replace humans in the labor market. Sure, the policy results in cheaper labor, making humans a bit more competitive compared to AI. But I don't think that's enough to stop huge unemployment rates. If a lot of people are without a job, they would not benefit at all from income tax reductions but still pay for the carbon tax. Those people would get poorer and poorer as the carbon tax ramps up in cost. You could implement a hybrid of this policy and policy #2, where unemployed people get a basic income while employed people get the tax cut. I suspect that may have some bad side effects though.

Where do you think the revenues should go?

*More often referred to as a carbon tax, but I dislike that name because a) we'd want to tax other greenhouse gasses too, especially methane, b) 'tax' has a lot of negative connotations and c) it seems to me 'fee' is more accurate than 'tax'.
** https://en.wikipedia.org/wiki/Carbon_tax#Distributional_impacts
*** http://www.npr.org/sections/money/2013/07/12/201502003/episode-472-the-one-page-plan-to-fix-global-warming

[brimstoneSalad]

The poor aren't so stupid that they can't change their behavior when presented with new options, and industry will create them.

When there's a 400% price difference, McDonalds will roll out a low carbon veggie burger because people will finally be compelled (by economics) to seriously consider it.

Transit is another matter: public transportation should be subsidized to the point of being free.
That helps the poor in particular, but also encourages others to move away from less efficient cars.

The change shouldn't have an enormous impact on housing, but it may be smart to throw subsidies into high rise apartments anyway. City living is more efficient in other ways, and we don't want to drive urban sprawl because the cement and steel in apartment buildings has increased in price.

When it comes to food, I prefer programs that provide dedicated food stamps (such as ONLY for the purchase of fruit, veggies and whole grains) compared to a blank check. People use food stamps to buy candy and other junk food if they can; we need to drive consumer behavior better, and there's no better place to do that than with limits on the use of public funds.

[Jamie in Chile]

Returning the money to the population might be worth considering if it was more politically popular, and became the only way to align populist sentiment with acheiving needed environmental objectives (i.e. if my preferred method below was not acceptable to the public). However, I'd slightly prefer to not use this method. It is less efficient to take money and return it back.

I'd primarily prefer the method of having an environmental tax instead of other taxes. I'd remove some other taxes entirely, in the UK for instance you might get rid of inheritance tax and council tax, and then reduce income taxes until the total tax burden was the same.

You'd then need to carry out an exercise determining whether or not you have over-penalized the poor and if yes change the income tax bands or amounts of benefits or something to even it out. However I am not necessarily in favour of a precise per kilo carbon tax. This is complicated. You might instead choose to place a certain fixed amount of tax to purchase a petrol/diesel vehicle of a certain size, or a flight of a certain distance. And then you might choose to place no tax on fuel for domestic heating which is needed by the poor.

I said primarily - I'd allocate a smaller amount of the money made to investment in green tech and subsidies in green tech.

[Jamie in Chile]

To add to my above post, I think it's critical that once the taxes have been enacted they make it cheaper to do the green option (or the same price).

Let's say you are choosing whether to choose solar/wind power from an electricity provider for your home, or another electricity provider from fossil fuels. The consumer should find the price is the same aproximately, or the green energy is cheaper.

Now let's say a consumer is choosing whether to buy an electric car or a petrol car. The electric car, assuming similar performance and quality, should be cheaper or the same. Whatever taxes need to be added to the petrol car to achieve this goal should be done, even if that means adding a huge tax.