A Tactical Error on Cap and Trade?
March 3rd, 2009Posted by: Roger Pielke, Jr.
President Obama’s budget has a cap and trade proposal in it that would raise considerable revenue for the government. Such policies are often called taxes. I am on record supporting a carbon tax. However, I do wonder if the Administration has committed a serious tactical error in its proposed plan.
1. By directly linking the cap and trade program to wealth redistribution the Obama Administration has opened the door for some very strong political opposition, with nothing to do with carbon. They have enlarged the scope of conflict and this cannot help in the political battle over carbon policy.
2. A better approach would have been to clearly separate the implicit carbon tax from the wealth redistribution. They could have done this by making the C&T program fiscally neutral (i.e., the funds would go to the general treasury with an across the board reduction in existing taxes, such that there was no redistributive effect). They could have then presented the redistributive tax policies as a separate policy proposal.
3. This approach would allow policy makers to debate C&T separately from tax policy. Unfortunately, these are now joined together. The Obama folks may be thinking that they can get two birds with one stone. Their opponents now can think the exact same thing.
The net result, in my judgment, will not be pretty. All the more reason for a straight carbon tax at whatever level can be sold politically, the debate would then be over the level of the tax, and not all of the accompanying ideology and linked policies.
March 3rd, 2009 at 12:18 pm
After reflecting on the consequences of the proposed cap and trade tax on the reduction of carbon and the redistribution of wealth we can either:
Assume that reduction of CO2 was the motive and conclude that President Obama made a bone headed error.
OR
Assume that President is an intelligent man with very bright advisors and conclude that the motive was redistribution of wealth.
March 3rd, 2009 at 1:15 pm
Fiscal (or revenue) and distributional neutrality aren’t the same thing. Your proposed mode of achieving revenue neutrality would probably be regressive, due to the distribution of carbon consumption discussed a few posts back. The carbon tax burden would fall disproportionately on the lower quintiles, and the tax relief would benefit primarily the upper.
March 3rd, 2009 at 1:21 pm
-2-tomfid
Yes, you are correct. But a carbon tax could be designed to have more or less distributional effects. I think that separating out the need to put a price on carbon from redistributional tax policies would be tactically smarter.
But as Maurice points out there are a lot of motivations here. And of course, there is an awful lot going on in the budget that has nothing to do with carbon, and selling these parts of the package are important as well.
March 3rd, 2009 at 4:40 pm
Roger: I think that a carbon tax could not help but be used as a wealth redistribution program, by any politician.
In our last election in Canada, Dion, as candidate for Prime Minister, promised the Green Shift. Supposedly it was revenue neutral, but even Dion’s own candidates called it a “wealth distribution” program. The largest in Canadian history, to boot.
The web site for the program showed it to be ostensibly revenue neutral, but when parsed, showed most of the proceeds going to low income families.
I do agree, though, that if we actually do need to reduce CO2, then a carbon tax is the way to go. More specifically, Mckitrick’s TTT Tax, where tax is dependent on the tropical tropospheric temperature.
The old adage applies:
If you want more of something, reduce the taxation level on the item. If you want less, increase the taxation.
March 4th, 2009 at 5:05 am
Not so sure it’s an error. a) they need all the revenue they can get — this budget still has big deficits in the out years from what I’ve seen. If they genuinely plan to push on cap and trade, then they might as well count the money on the assets side. b) this means, if the administration can do the framing, that opponents to cap and trade need to explain where they will get extra compensating revenue — ie “what tax will you raise if you don’t do this our way?”
March 4th, 2009 at 6:12 am
-5-Oliver
Yes, perhaps.
However, I think that the Rs have a stock answer for this question:
“what tax will you raise if you don’t do this our way?”