Tag Archives: Freedom Tax

A New Tax Policy for the 21st Century

The following was published in the Spring 2011 Issue of Northeast Sun, the journal of the Northeast Sustainable Energy Association.

A New Tax Policy for the 21st Century

Let’s revitalize the US economy by replacing all federal revenues with a simple energy tax

America needs new answers regarding energy, economics and the environment. There are no real solutions on the table. And everybody knows it.

One radically simple proposal could work: Replace all federal government revenue with a simple energy tax. That may sound impossible. But it is a far more realistic approach to the problems our country faces than the pseudo-solutions that make their way through Congress these days.

This idea could inspire and appeal to Americans across the political spectrum while igniting an unprecedented era of economic prosperity. Along with radically reducing energy waste and pollution, it could release our society from the burdens and economic distortions of our current tax system, make our economy vastly more efficient and our industries far more competitive internationally, and provide the security of greater energy independence.

The numbers work

According to the US Energy Information Agency, in 2009 our country consumed about 18.8 million (18,771,400) barrels of petroleum a day, the equivalent of more than 287 billion (287,765,562,000) gallons of petroleum a year.

The Congressional Budget Office reports that all federal revenues for fiscal year 2010 were about  $2.2 trillion ($2,162,000,000,000). That includes all individual income tax, corporate income tax, investment taxes, social security tax, disability insurance, hospital insurance, unemployment insurance, excise taxes, fees, energy and transportation taxes, and every other form of federal government revenue other than debt.

Doing the math, if we replaced every source of government revenue with a tax on petroleum, that tax would be only $7.51 per gallon. And if you add the average mid-December 2010 cost of premium gasoline of $2.85 a gallon (before taxes), the total price on gasoline and other petroleum products would average about $10.36 per gallon.

That isn’t a whole lot more than average prices for premium gas in Europe in mid-December 2010, as reported by the US Energy Information Agency: Belgium, $7.42; France, $7.15; Germany, $7.39; Italy, $7.19; Netherlands, $7.93; UK, $7.31. And those countries are burdened with massive taxes on top of high energy prices.

Along with paying far more for petroleum, in 2009 Europeans paid about twice what Americans paid for natural gas and coal. If our federal energy taxes roughly doubled the price of both the billion-plus short tons of coal and the 23 trillion cubic feet of natural gas we consume each year, that could partially offset and reduce taxes on petroleum, leaving our overall level cost of energy around the same as Europeans currently pay—while replacing all other forms of government revenue completely.

To keep American industry competitive, the feds should also collect a tariff on goods from countries that don’t implement similar levels of taxation on energy. That unilateral action would do far more to spur responsible energy policy worldwide than well-intentioned but unenforceable international treaties. At the same time it could further reduce energy taxes or help offset the federal budget deficit.

Most sensible people would favor the opportunity to adopt a European level of energy prices in exchange for no government interference with business revenues and personal income: no IRS, no income taxes, no payroll taxes, no business taxes, no inheritance taxes, no government fees.

The obvious pushback

Many will argue that high price signals will encourage energy conservation and alternative energy resources, thus putting government revenues at risk.

Radically reducing energy waste and pollution is one of the fundamental benefits of this proposal.  Reducing the need for military adventures and compromised foreign policy to secure oil are other intended benefits. With the Congressional Budget Office reporting that federal expenditures are now more than twice what was spent in the year 2000, most Americans are also ready to see the excesses of government spending and intrusions into the economy constrained.

As the idea of tax shifting is taken seriously and refined, we can likely find consensus to tax other wasteful or counterproductive activities. With a shift to rational taxation, we can balance our federal budget and pay down our out-of-control federal debt, while more appropriately aligned market forces improve our lives and the environment.

We should begin the tax-shift conversation by recognizing how affordable it could be to align rational revenue policy with sensible market mechanisms that would encourage economic prosperity, job and business growth, broadly shared environmental and clean-energy goals, and the basic principles of personal freedom and liberty that our country was founded upon.

Big changes for big challenges

Minor adjustments to the sclerotic, contradictory patchwork of public policies that have emerged over the decades won’t address the massive challenges that confront our nation. As we face continuing economic stagnation and pass the era of peak oil production, it’s time to get serious about transforming our economy and restoring our economic productivity. We need to rethink the role of government and how we fund it.

It is clear from polls that most Americans are fed up with Congress, the federal government, and politicians from both parties. Everyone hates the complexity, irrationality, and obvious corruption of our tax system, which discourages work, productivity, entrepreneurship, job creation, and almost every other goal and fundamental value that our economy is purported to be based upon.

Think of the productivity gains that would be unleashed if businesses could make decisions based on common sense rather than manipulations of the tax code.

Think of the jobs that would be created if we no longer imposed punishing taxes on working and productive investment, if we eliminated the insane tax subsidies for shifting industrial productivity overseas, and if we eliminated the payroll tax penalties on hiring.

Think of the time, money, and talent that would be freed up if we no longer had to spend countless hours and dollars reporting our personal business to the government. The IRS itself estimates that about 7.75 billion hours of human labor went into completing 2009 tax forms—and that doesn’t include the vast amounts of time and money spent figuring out how to game the system and avoid taxes.

Making the transition

Change this profound couldn’t and shouldn’t happen overnight. We should plan a transition over at least fifteen years, first replacing the most regressive and counterproductive forms of taxation, like payroll taxes, with energy taxes, and then phasing out other forms of taxation while increasing energy taxes. The transition period would give businesses and individuals time to make appropriate plans and investments for the future. The certainty associated with substantial energy taxes would do far more than any other solution being proposed to encourage investment in energy conservation and clean energy.

To minimize the cost, complexity, and impacts of tax collection, energy taxes should be implemented at the wholesale level, at the mine, well, or port of entry. Another technicality that could help ease the transition would be a ratchet mechanism on energy prices. Whenever market forces pushed energy prices up, they would be allowed to rise, but as energy prices declined, energy taxes would rise at a matching rate. This would have the added benefit of discouraging unproductive speculation in energy trading markets.

Change this fundamental would affect every American. Inevitably, the winners and losers will lobby madly to turn a simple idea into the complicated sausage making that is the hallmark of Congress. But if we insist that its simplicity and transparency are critical to its success, perhaps a bold proposition like this could gain enough support to overcome the corrupting influence of lobbyists.

Why tax fossil fuels?

Energy is the lifeblood of a modern economy. The highly concentrated energy available from fossil fuels is a precious resource both for us and for future generations. Unlike metals or other materials that can be readily recycled in a prudent society, once mined and burned, fossil fuels are gone forever. They shouldn’t be squandered but rather husbanded wisely, as higher prices would encourage. Balance of trade deficits, compromised foreign policy, pollution, the cost of military entanglements, and other challenges resulting from our fossil fuel addiction offer clear reasons to focus taxation on fossil fuels. It is far past time to put a fair price on the costs of the traditional energy industry’s “economic externalities.”

Arguably, irreplaceable fossil fuels that have taken millions of years to form should be considered common resources that provide benefits for the common good. Although we begrudgingly accept being forced to pay such taxes today, government funding through the confiscation of the fruits of citizens’ work and investment is actually far less rationally or morally justified.

Finding broad-based consensus

We all need to overcome our fear of sensible change. This proposed tax shift represents a real test for clean-energy advocates, environmentalists, and political liberals, conservatives, and libertarians to all match our rhetoric with good policy solutions. Are conservatives really willing to effectively promote liberty, economic efficiency, and fair free markets? Are liberals able to admit that like so many federal policies they have supported, our convoluted tax system is completely failing to meet their progressive goals? Are libertarians able to admit that there is a role for government and that collecting taxes rationally is better than the corrupt irrational system of taxation we have today? Are environmentalists ready to support policies that are economically sensible? Are clean-energy advocates ready to compete in a fair marketplace rather than begging for government subsidies? Rather than blaming others for our nation’s problems, we all need to focus on finding solutions sensible enough to garner broad support.

Let’s start taxing waste and pollution instead of punishing people for working, creating jobs, and making productive investments.

Let’s try real market-oriented solutions and restore the economic competitiveness our nation enjoyed before every aspect of the economy was micromanaged by the government and manipulated for tax reasons.

Let’s encourage conservation of our limited fossil fuel reserves so we don’t impoverish our children, grandchildren, and planet with our profligate waste.

Let’s fundamentally reform the American economy with a government funding system that doesn’t undermine the most essential ideals and principles of our national heritage.

Let’s support an idea bold enough, simple enough, and compelling enough to actually work.

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Waxman Markey – Legislating Guaranteed Failure

In his July 1 editorial, “Just Do It”, Tom Friedman is exactly right when he says regarding the recently passed Waxman Markey climate bill: “It is too weak in key areas and way too complicated in others. A simple, straightforward carbon tax would have made much more sense than this Rube Goldberg contraption. It is pathetic that we couldn’t do better. It is appalling that so much had to be given away to polluters. It stinks. It’s a mess.”

He goes on to describe some of the completely counterproductive compromises made to buy votes for the bill that will in aggregate absolutely guarantee that the bill fails to provide any of its climate related goals.

But he really misleads the American people in describing Republican opposition to this massive pork barrel bill in saying: “What are Republicans thinking? It is not as if they put forward a different strategy, like a carbon tax.?”

In fact, two Republicans Representatives Ingliss and Flake along with their Democratic colleague Daniel Lipinski have proposed H.R. 2380, The Raise Wages, Cut Carbon Act of 2009, which is exactly the solution that Friedman has been advocating for several years. It puts real inescapable prices on carbon emmission starting immediately, that are far greater then the EPA and Congressional Budget Office estimate Waxman Markey will provide ten years from now. And it helps the economy by reducing payroll taxes, the most regressive form of taxation in the country, rather than handing out hundreds of billions in corporate welfare the way Waxman Markey does.

Sadly, instead of providing the real leadership the nation needs and serious solutions like the Ingliss bill, Friedman caves in after years of being a true leader on these matters by calling on the Senate to push forward the wasteful and completely counterproductive corporate pork that the House just passed.

Greenpeace has chosen to take a far more practical and principled stand suggesting: “the Waxman-Markey bill sets emission reduction targets far lower than science demands, then undermines even those targets with massive offsets. The giveaways and preferences in the bill will actually spur a new generation of nuclear and coal-fired power plants to the detriment of real energy solutions. To support such a bill is to abandon the real leadership that is called for at this pivotal moment in history.  We simply no longer have the time for legislation this weak.”

In their Philadelphia Enquirer editorial entitled “Cap-and-Trade Does More Harm Than Good”, public sector environmental attorneys Laurie Williams and Allan Zabel with experience in California’s Cap and Trade law start by stating: “We would support legislation in Congress to address climate change if it were capable of accomplishing that goal. Unfortunately, despite the best intentions of its proponents, the bill known as Waxman-Markey would disable our ability to reduce greenhouse-gas emissions for at least a decade”

After clarifying several of the fundamental reasons this legislation will completely fail to meet its purported goals, they go on to conclude: “The Waxman-Markey approach would not only guarantee a decades-long failure in the United States; it would also undermine U.S. credibility in international negotiations on climate change.”

“Those who favor Waxman-Markey as a political best-case scenario lack faith in the American people. We believe the American people can understand and support a more effective and fair approach.”

“Many observers across the political spectrum agree that carbon fees or taxes, with rebates to consumers, would be a more enforceable and effective alternative. While cap-and-trade-and-offsets will enrich special interests and delay the transition away from fossil fuels, carbon fees with monthly rebates could be the centerpiece of an affordable, equitable, rapid transition to a clean-energy future.”

White House Budget Director Peter Orszag was absolutely clear in his March testimony to Congress saying: “If you didn’t auction the permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States”.

By giving away 85% of the credits, offering completely unverifiable offsets for all sorts of sheer nonsense, and removing the EPAs role in regulating greenhouse gasses, Waxman Markey will do more to set back any real solutions than just about any policy imaginable.

In “The Cap and Trade Giveaway” Alan Viard  suggests “under a system of free permit allocation, the stockholders of companies that receive free permits would receive windfall gains. A cap-and-trade system with freely allocated permits is equivalent to a carbon tax in which the tax revenue is given to stockholders.”

Is this corrupt pork barrel corporate welfare really the best Congress can do? Do they really think nobody is paying attention, when after giving trillions of dollars in direct and hidden subsidies to the “too big to fail” banks at the center of the global financial meltdown, they are now handing out hundreds of billions more to the companies most responsible for the environmental problems facing the planet. Do they cynically think we citizens are all just stupid or that nobody is paying attention to what they do? Is empty rhetoric really all that is needed to buy  support of most of the mainstream environmental organizations and cover up such a total failure of Congress?

Friedman is right in his conclusion that “We The People” are the only hope for a real solution with his call to “get out of Facebook and into somebody’s face. Get a million people on the Washington Mall calling for a price on carbon. That will get the Senate’s attention. Play hardball or don’t play at all.”

But he is completely wrong to suggest that we should accept and promote the corrupt politics currently masquerading as a solution to anything at all. The massive fraud being perpetrated in Waxman Markey will do exactly what Williams and Zabel suggest – it will set back any real solution by at least a decade. With its inevitable costs to the economy in the trillions of dollars and its failure to impact carbon emissions in a meaningful way, it will also essentially end all credibility that the environmental movement has to later advocate for real solutions.

Hopefully we can expect more of the Senate than the cynics in the House are apparently capable of.  Let’s hope we can expect them to treat us with the respect of at least trying to be honest and serious about this issue.

Instead of caving on this issue for political expedience, Tom Friedman, President Obama and everyone else seriously concerned about this issue need to stand up and call on the Senate to reject Waxman Markey completely and start over from scratch with a real solution like a straight forward carbon tax that puts a significant and inescapable price on carbon emissions right now.

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Sensible Incentives For Solar Energy

Thanks to a post by Michael Giberson at “Knowledge Problem”, I discovered a great discussion of solar policy initiatives. In “Doing Solar Incentives Right” Tom Conrad provides one of the clearest summaries I have seen yet regarding the advantages and disadvantages of various ways that government policy has been tried to encourage the development of solar energy.

But I don’t fully agree with the conclusions of Conrad’s analysis in a presentation to the recent conference of the American Solar Energy Association, in which he suggests that “in a perfect world” he would like to see a combination of:

“Investment (not production) incentives (ITC, etc.)

Time-of-use pricing (not flat or demand-charge based) (Peak)

Incentives for Distributed installation based on existing T&D infrastructure

Carbon Pricing”

My own strong opinion is that if we really want to see solar reach grid parity soon and want the solar industry grow profitable and sustainable businesses, then near term subsidies should focus on production incentives like Renewable Energy Portfolio Standards,  while the long term (and more politically challenging) answers lie in a combination of:

1) simple, high and universally applied carbon taxes reflecting the “economic externalities” of our fossil fuel addiction.

2) time of use electricity pricing providing real price signals to the market.

3) utility price decoupling that eliminates the perverse incentives for utilities to pump more electricity from centralized generators to consumers and instead pays them to keep the network operating.

4) requirements that utilities pay the cost of infrastructure and information systems upgrades necessary to enable the distributed, multi-directional energy and information flows of the “smart grid” of the future.

It should be noted that this combination of policies does not require direct subsidies, can have neutral impact on government revenues and expenditures and provides universal comprehensive incentives for energy conservation, smart grid solutions and a broad range of distributed generation solutions without the need for the government to pick winners and losers in the race to a sustainable energy future.

It should also be noted that because it will eliminate all the counterproductive  incentives currently embedded in utility regulations, these policies will be generally opposed both by business and consumer groups who would see their current subsidies altered. Long term, such policies would be advantageous for both business and consumers, but unfortunately despite the rhetoric, real legislative politics rarely addresses either long term issues or common sense solutions, especially when they involve substantial change impacting powerful entrenched interest groups like utilities.

There are many reasons it will be very hard politically to enact sensible regulation. Not the least of these challenges is that politicians tend to like policy solutions in which they can support their political supporters or those they perceive to have aligned interests. In a more sensible policy environment, politicians would avoid picking winners and losers and instead create a more sensibly designed economic playing field and  allow economics and market forces sort out the successful solutions.

And it is important to recognize that some of these policies are best implemented at the national level while others require changes in state utility policy. Perhaps the biggest challenge is developing plans at the state level that enact these critical reforms while not putting the leading states at perceived short term economic disadvantages compared to those slower to adopt progressive energy policy.   In the near term holding out for idealized coordinated state and federal policy will be impossible if solutions like solar are to overcome embedded obstacles to the biggest advantages of the technology.

Some practical examples of policy implications are in order. Solar production is c0incident with maximum peak demand and maximum wholesale energy costs, thus making a real time retail electricity pricing environment a critical policy support for the very real economic advantages that solar can offer as an economically competitive generation solution today. Consumer groups wedded to outdated policy solutions will fight against real time pricing for consumers which are not subject to strict utility commission regulation. At the same time, in most states, residential rate payers actually pay more for both electricity  and for transmission and distribution charges than business and industrial users on a unit cost basis and thus subsidize the costs of electricity for those larger users. Businesses will fight against changing those rules and threaten to move to more “business friendly” states.

Even though the combined policies would ultimately reduce and stabilize energy costs for both business and consumers, overcoming existing policy preferences will be politically challenging at best. Thus it is important that state level leaders focus attention at least as much on coordinating regional and nation policy solutions as they do on trying to solve the problems on a state level.

It is important that policy makers think clearly beyond whether to encourage clean energy solutions to thinking much more clearly about how they encourage clean energy if these industries are really going to be sucecssful and create all the new green jobs everyone seems to want. Every policy choice has consequences and as with all policy, many of the consequences can be unintended if not carefully thought through.

The  solar subsidies of the Carter administration did far more net harm than good regarding the long term development of renewable energy. Through their naive overly generous investment subsidies, the Carter policies set back the solar industry by a generation. We should be more thoughtful and careful this time around.

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Waxman Markey – Greenwashing Corporate Welfare

As the Waxman Markey Carbon Cap and Trade bill winds its way through Congress, our government is finally about to take action on our unsustainable addiction to fossil fuels …….. Or so it would seem.

But we should be paying attention not to the rhetoric, but rather the realities of the legislation. What matters is not the pretty sound bites or the presumed good intentions of the supporters behind legislation, but rather the actual legislation itself. As always in the legislative sausage making process, “the devil is in the details”.

The current Waxman Markey legislation is another truly audacious handout to the Wall Street traders and speculators, and to the nation’s largest carbon emitters, the two groups who stand to benefit most from this legislation. And unfortunately, the political compromises that evolved to give carbon free offsets to refineries, utilities and other major polluters along with all the other give aways will render the overall cap and trade effort effectively useless in actually reducing carbon emissions, as the European system has already proven to be.

What is being proposed in this legislation is one of the world’s largest derivatives markets, with complex rules being made up in a mad rush and Wall Street lobbyists very heavily engaged in the rule making. US Commodities Future Trading Commissioner Bart Chilton is quoted by the Financial Times as predicting carbon markets would become ” the biggest of any derivatives product in the next four to five years.”

One would have hoped Congress learned something from the fiasco created by the derivatives market for subprime mortgages. Unfortunately it seems they haven’t. There is a very good reason that environmentalist organization Friends of the Earth titled their report on Cap & Trade “Subprime Carbon”. In a CNBC video on “The Carbon Challenge”, former Governor and DNC Chairman Howard Dean declares “I am terrified of a Bernie Madoff in the Cap and Trade business who is selling stuff that doesn’t exist”.

This legislation is evolving to be even worse than the Washington solutions for the economic crisis, a record of terrible public policy that I thought would be impossible to challenge. After looting our children’s future handing trillions of tax-payer dollars to the Wall Street firms most responsible for the worlds worst economic problems since the Great Depression, our leaders in Washington are now about to hand additional hundreds of billions of dollars in direct subsidies to the companies most responsible for carbon emissions.

President Obama’s proposal for Cap and Trade was for all allowances to be auctioned to the highest bidder and proceeds largely used to offset the impacts of higher energy costs to citizens, an inevitable near term reality of effective emissions policy. Though not as effective as a straight carbon tax, that would be decent policy. However instead of following the President’s guidance, Congress is now deciding to hand carbon allowances out for free to the industries that currently emit the most carbon.

The Wall Street Journal quotes the President saying just in March “If you’re giving away carbon permits for free, then basically you’re not really pricing the thing and it doesn’t work — or people can game the system in so many ways that it’s not creating the incentive structures that we’re looking for.” White House Budget Director Peter Orszag was even more clear in his March testimony to Congress: “If you didn’t auction the permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States”.

Under Waxman Markey, eighty five percent of initial carbon allowances would be simply given away. Estimates are that those initial allowances could be worth hundreds of billions of dollars annually. This is a massive handout. Effectively, instead of rewarding utility companies and independent power producers who have led the utility industry in developing wind and other clean energy projects over the last decade, Congress is proposing to hand a large portion of these huge subsidies to their competitors who stuck with the dirtiest possible technology. In a report on Cap and Trade, the Congressional Budget Office has estimated that some of these companies could see their market capitalization double and triple almost instantly on the receipt of these free handouts. That’s not a bad reward for companies that maintained the worst emissions policies absolutely as long as possible.

As a real solution, rather than Cap and Trade, a straightforward carbon tax is favored by the vast majority of economists, as well as Greenpeace, Friends of the Earth, NDN, Tom Friedman, James Hansen, Paul Volker, Joseph Stiglitz, William Ruckelshaus, Al Gore, Ralph Nader and a huge majority of knowledgeable people on all sides of the political spectrum who have actually explored the issue. Energy Secretary Stephen Chu also favored a carbon tax up until his political appointment. A straightforward carbon tax is also favored by almost all business groups other than utilities and other polluters angling for massive free carbon credit handouts.

So the fundamental question is the one the New York Times asked: “How did cap and trade……. become the policy of choice in the debate over how to slow the heating of the planet? And how did it come to eclipse the idea of simply slapping a tax on energy consumption that befouls the public square or leaves the nation hostage to foreign oil producers?”

“The answer is not to be found in the study of economics or environmental science, but in the realm where most policy debates are ultimately settled: politics.”…………….

“[Cap and trade] is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee, which has used such concessions to patch together a Democratic majority to pass a far-reaching bill to regulate carbon emissions through a cap-and-trade plan.”

Bottom line, as Greg Mankiw, Harvard economist and author of the economics text book used in the majority of university economics courses points out: “Cap-and-trade = Carbon tax + Corporate welfare.”

We should also recognize that as part of the Waxman Markey deal, Congress will require state and regional emissions programs like the Regional Greenhouse Gas Initiative (RGGI), that were carefully designed and negotiated over years, will be put on hold for at least five years. It is truly unfortunate that just as the RGGI program is getting off the ground, it will be derailed in order to enable corrupt political shenanigans like this.

It is hard to imagine how congress can pretend to justify enriching the worst polluters in the country and entrenching the market positions with the massive handout now working its way through Congress.

As I argued here, it seems to me a far better response is to endorse the alternative bipartisan bill: H.R. 2380 The Raise Wages, Cut Carbon Act of 2009 which was recently introduced by Representatives Inglis, Flake and Lipinski.

The Miami Herald reports that that H.R. 2380  “would initially impose a tax of $15 a ton of carbon dioxide on the producers and distributors of gasoline, natural gas and coal, with the tax rising to $100 a ton over three decades. The tax increases would be offset by equivalent cuts in payroll taxes, with employers and employees sharing the reductions equally.”

Inglis, Flake and Lipinski calculate that under their bill, customers of coal fired utilities would see cost increases of 83.5 percent in the first year.  They address that direct impact to consumers with an offset to the regressive payroll taxes that impact people and jobs most directly.

Unlike Waxman Markey, The Raise Wages, Cut Carbon Act is both rational and real market oriented legislation. The fundamental premise of the Inglis, Flake and Lipinski bill is to dependably and significantly reduce carbon emissions and realistically stimulate the economy and job growth – all with no net increase in taxes. Perhaps the details around the specific numbers should be debated more. But unlike Waxman Markey, the fundamental principle is sound environmental policy and sound economic policy. And at the very outset it is far more serious than Waxman Market in actually putting a real and very predictable price on carbon emission.

A meaningful carbon tax at the federal level coupled with encouraging ongoing experiments in Cap and Trade at the state and regional effort, like RGGI, would be a far more rational approach to these issues than the original Waxman Markey bill and certainly far more rational than the cynical counterproductive corruption that it has evolved into.

I find it disheartening when very knowledgeable leaders that I usually respect seem eager to accept an ineffective policy based on political expediency. My own idealism suggests that we should hold out for real solutions, less subject to manipulation and corruption. That idealism is born from very real experience of a project developer trying to build good projects in the face of the morass of unintended consequences coming out of the traditional cynical process of political horse trading.

Over the years, the environmental and clean energy communities have been comprised of very practical idealists. If we are to settle for lousy solutions merely because they are politically expedient when they in fact have no practical value, then we well on our way down the slippery slope and are just another part of the problem rather than part of any solution.

In “Is Cap and Trade a Dead Policy Walking?”, Robert Shapiro of the progressive think tank NDN suggests that “after Wall Street’s meltdown, the proposition for another round of the financial merry-go-round that produced the worst economic crisis in our lifetimes seems either very naive or very cynical”. He also suggests that “for years, many politicians and environmental leaders have believed that any kind of tax to deal with climate change would be dead on arrival. That may be changing, especially if the tax is paired up with rebates to take away much of its political sting. More importantly, the costs and lessons of the financial crisis may effectively swamp the prospects for cap-and-trade. If cap-and-trade has become a dead policy walking, those who care deeply about climate change will find that a carbon tax system has become the last, reasonable policy standing”.

In an article entitled “Coal, Electric Industries Big Winners in Climate Bill Deal” , the Washington Independent points out that organizations who signed on to support Waxman Markey just weeks ago are already pulling away as they see the problems with the emerging legislation: “Janet Keating, executive director of the West Virginia-based Ohio Valley Environmental Coalition, said in a statement Friday. “There are some costs that are too high to pay when it comes to the environment, clean air and clean water. We urge Congress to either fix the Waxman-Markey bill or dump it and start over.””

In “Subprime Carbon: Environmentalists Warn About the Next Big Bubble” the Wall Street Journal suggests that “one possible side effect of the financial-market fallout and concerns about more toxic assets” is  “growing support for a straight carbon tax, rather than a complicated cap-and-trade plan.”

Once we get the “economic externalities” of fossil fuels somewhat accounted for in the marketplace that everyone participates in, we will start making real progress. Rather than supporting Waxman Markey’s politically created markets in which only specialized elites can play, truly effective policy would be simple, understandable and implemented in a manner that is very direct and clear in the normal economy that everyone makes transactions within. A straight forward carbon tax is the most effective and efficient way to do that.

Waxman Markey will massively increase costs of electricity and other major carbon emitting processes, but instead of providing a mechanism for average people to cover those costs, the benefits are all being handed to the carbon polluters for free. What single policy could more effectively turn citizens and voters away from trusting anything labeled with an environmental agenda in the future? It is insanity.

Despite the rhetoric, Cap and trade is not market driven policy, won’t reduce carbon emission and will never create what any real alternative solutions to carbon emission actually need to be successful – predictability in the market place.

Unfortunately, it seems that Simon Johnson, the former Chief Economist of the International Monetary Fund may be right in his Atlantic article, “The Quite Coup”, regarding who is really running both political parties of our government these days. But clearly Sen. Dick Durbin (D-Ill is exaggerating when he is widely quoted saying “The banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place”.  Clearly the banks don’t own Congress outright. The utilities and oil companies still have significant ownership and control of our government.

In a recent blog post entitled Then and Now, Harvard’s Greg Mankiw points out very conflicting realities:

“From a Obama-Biden campaign position paper:

Barack Obama and Joe Biden’s cap-and-trade system will require all pollution credits to be auctioned. A 100 percent auction ensures that all large corporate polluters pay for every ton of emissions they release, rather than giving these emission rights away for free to coal and oil companies.

From the Wall Street Journal: “Pollution Politics and the Climate-Bill Giveaway:

Under the House bill, only 15% of the emission permits will be auctioned initially. The rest of the permits will be given away — 2% to oil refiners, 5% to free-standing “merchant” coal plants, 9% to regulated natural-gas distributors, and so on.”

Mankiw then goes on to ask: “So, Mr President, the bill now being considered in Congress is in direct contradiction to your campaign pledge. Will you now please stand up for principle and issue a veto threat?”

Instead of defending their very clear and sensible positions of only a couple months ago, President Obama and Vice President Biden both praised the passage of Waxman Markey by the House Energy and Environment Committee.

If Congress and the President are not willing to stand up for principle and real solutions, then the rest of us have to demand they do.

Perhaps the main reason we should all support solutions that actually make sense is because citizens nationwide are becoming increasingly skeptical and cynical about government as a solution to anything at all. Anyone with doubts about that should just look at the results of the recent ballot initiatives in California. If we allow completely ineffective carbon legislation like the Waxman Markey bill to pass, that is really just another massive handout to Wall Street and other corporate political campaign contributors, it could be decades before voters allow Congress to attempt to do anything useful about all the problems associated with our fossil fuel addiction.

These issues are too important to settle for a feel good, green wash, ineffective pretense of a solution. Now is the time for the environmental and clean energy communities to unite with the general business community around a real solution far less subject to corruption.

Let’s find the courage to regain both our practicality and our idealism. Lets support something that not only makes environmental sense but also makes economic sense. Let’s demand Congress provide a real solution rather than selling out to the oligarchs that Simon Johnson describes. Their lobbyists are being very well served. Its time we all call our congressional representatives and senators and demand our voices be heard.

Lets demand very predictable and dependable higher levels of carbon taxes on those that should be taxed more rather than giving them massive corporate welfare. And lets demand real reductions in employment taxes to help put regular people back to work and help them pay for the increased costs of living that any meaningful carbon solution must inevitably entail.

Anyone actually paying attention knows it is past time to dump Waxman Markey and demand a real solution. Let’s join a very broad politically and economically sensible consensus and unite behind demanding passage of H.R. 2380  “The Raise Wages, Cut Carbon Act of 2009”.

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World’s Largest Derivatives Market – Subprime Carbon

Nathan Martin calls attention to the worlds largest derivatives market in the Carbon Cap and Trade system. He links to a great CNBC video on “The Carbon Challenge”, in which former Governor and DNC Chairman Howard Dean declares “I am terrified of a Bernie Madoff in the Cap and Trade business who is selling stuff that doesn’t exist”.

Let me be clear that I believe effective energy and carbon policy is the single most urgent and important matter for government to address. I fully agree with President Obama when he suggested on January 26 that ” no single issue is as fundamental to our future as energy. America’s dependence on oil is one of the most serious threats that our nation has faced. It bankrolls dictators, pays for nuclear proliferation and funds both sides of our struggle against terrorism. It puts the American people at the mercy of shifting gas prices, stifles innovation, and sets back our ability to compete.”

The problem is that his proposed solution – creating a Cap and Trade Carbon Derivatives market is a bad idea. Its another huge hand out to Wall Street rather than a clear, effective and transparent solution to the problems the President cites. What is really needed is a large very straight forward carbon tax. And such a tax should be coupled directly with an equal economy stimulating reduction of regressive taxes on employment or perhaps a simple cash payment to citizens such as that Alaska provided for all its citizens for years from the taxes it imposed on oil exports.

Michelle Chan, director of Friends of the Earth Green Investments and  author of a FOE report called “Subprime Carbon“, cautions that there are already 130 Wall Street funded climate change lobbyists in Washington. According to her report, “today speculators do the majority of carbon trading, and they will continue to dominate as carbon-trading markets grow.” The report further suggests that “unfortunately, the federal cap and trade proposals put forth so far would create a system that poses almost identical challenges as those in the mortgage-lending industry.”

According to Carbon Offsets Daily, the chairwoman of the Senate Energy and Natural Resources Committee’s energy subcommittee, Sen. Maria Cantwell, D-Wash has suggested that “I have serious concerns about how a cap-and-trade program might allow Wall Street to distort a carbon market for its own profits,”

In a recent presentation at Dartmouth College, famous NASA climate scientist James Hansen was unambiguous in declaring “Cap and Trade is Not Going to work……in Europe it has been completely ineffective.” He instead advocates a major carbon tax sufficient to give every American a several thousand dollar a year direct cash rebate, making his proposal the most progressive form of taxation.

Unlike the successful SOx and NOx trading markets, with limited sets of players and trading opportunities, along with relatively straight forward rules, the proposed carbon markets promise to measure and pay for all manner of hard to quantify “carbon offsets” and huge numbers of players.

US Commodities Future Trading Commissioner Bart Chilton is quoted by the Financial Times as predicting carbon markets would become ” the biggest of any derivatives product in the next four to five years. And that would of course mean overtaking T-bills [Treasury] and any contract that is out there right now.”

The real challenge is not just one of carbon market regulation, as most of government folks seem to see as a solution to the challenges posed by this staggeringly huge new derivatives market. Some of the most fundamental premises and definitions in the proposed carbon markets allow  hard to value and potentially questionable “offsets” that leave lots of room for abuse and manipulation.

Bloomberg reports that “under a cap-and-trade system, the federal government would set an overall ceiling, or cap, on greenhouse gas emissions. The cap would be divided into billions of emission permits, each conferring the right to emit the equivalent of one metric ton of carbon dioxide.” It goes on to state that in the administration’s budget plan, President Obama proposed to “auction all credits for carbon-dioxide emissions, raising at least $646 billion from 2012 to 2019 that would be used for a tax cut”.

But already some members of Congress are proposing to simply  give “free allowance allocation to the utility sector of 40 percent, consistent with the sector’s share of CO2 emissions.”  It would be interesting to track utility company campaign contributions relative to the supporters of this proposal.

Inevitably both at its inception and in inevitable continual tweaking of the rules, these kinds of artificially created markets will be subject to continual political pressure and manipulation.

The Bloomberg article reports that Jeffry Sterba, a former chairman of the Edison Electric Institute and the chairman of a major utility, pressed for free credits to utilities. He suggested that free permits for utilities are necessary because cutting greenhouse gases “will be costly and raise electricity prices substantially.” But the “problem” Sterba cites is precisely what is needed for clean solutions like solar, wind and other renewable energy resources to compete economically in the market and actually start addressing climate concerns in a serious way.

The theoretical benefit of Cap and Trade over a straight Carbon Tax like that proposed here and the Raise Wages, Cut Carbon Act proposed by Congressman Bob Inglis, is that Cap and Trade theoretically sets strict limits to carbon output, while Carbon Taxes very simply raise the price of carbon emitting activities and assumes that market forces in the real economy will provide appropriate carbon emission reductions.

The lack of clarity in the Cap and Trade Carbon markets could create the kinds of wild swings seen in Europe. The Wall Street Journal reports that in Europe, “prices for carbon permits have whipsawed from a high of 30 euros a ton to a low of 2 euros a ton.”

To address concerns about speculation, volatility and “cheating”, the Center for Clean Air Policy and several Democrats in Congress are calling for a “Safe Cap-and-Trade” with prices for carbon permits heavily regulated. Their faith in regulators overseeing unnecessarily complex government mandated  market interventions is typical of the divergence in thinking of those favoring Free Markets vs Intervention.

Most businesses and business oriented organizations generally favor a straight forward carbon tax, especially an economically beneficial and revenue neutral carbon tax offset by taxes on productive activity like job creation. With the “economic externalities” of fossil fuels more fairly accounted for with a straight forward tax, non carbon emitting solutions can compete more fairly in the real economy. With long term clarity and predictability on the price of carbon emission in the real economy provided by a clear and simple carbon tax, both businesses emitting carbon and those offering alternatives can plan around predictable real markets in the real economy.

The Carbon Tax Center offers a good summary of Carbon Tax vs. Cap and Trade.

Giving them the benefit of the doubt regarding regarding their good intentions, the thing the good government folks don’t seem to understand is that putting a price on carbon emission through a simple, clear straight forward tax will have a far more beneficial  impact on real carbon emissions in the real economy by spurring innovative solutions.  The creation of an artificial mandated market subject to endless regulatory manipulation and speculation that nobody can really trust can’t possibly reach the goal of carbon emission reduction nearly as well. What Governor Dean is most concerned with – “selling stuff that doesn’t exist” – pretty much sums up the very definition of mandated offset markets. It seems to me that in their insistence on the chimera of specific assured carbon emissions levels and theoretical predictability on future CO2 levels in the atmosphere, well intentioned environmentalists and politicians are paving the next road to financial hell with unintended consequences of their good intentions.

And with proposals like simply handing free carbon credits to the utility sector which is reported by the legislation’s own sponsors to be producing 40% of US carbon emissions, Cap and Trade would be ineffective in its intended mission right out of the gate.

A cynical view is that government folks really just want to impose a tax that doesn’t look like a tax and another way to give massive handouts to their friends.

Realizing, as US Commodities Future Trading Commissioner Bart Chilton clearly does, that what is being proposed is the worlds largest derivatives game, with the rules all being made up and Wall Street players all heavily engaged in the rule making, one could become even more cynical about the real intended beneficiaries of all this. Hopefully we haven’t already forgotten the hard lessons of the mortgage derivatives fiasco.

In “Is Cap and Trade a Dead Policy Walking?”, Robert Shapiro of the progressive think tank NDN suggests that “after Wall Street’s meltdown, the proposition for another round of the financial merry-go-round that produced the worst economic crisis in our lifetimes seems either very naive or very cynical”. He also suggests that “for years, many politicians and environmental leaders have believed that any kind of tax to deal with climate change would be dead on arrival. That may be changing, especially if the tax is paired up with rebates to take away much of its political sting. More importantly, the costs and lessons of the financial crisis may effectively swamp the prospects for cap-and-trade. If cap-and-trade has become a dead policy walking, those who care deeply about climate change will find that a carbon tax system has become the last, reasonable policy standing”.

The Wall Street Journal article suggests “one possible side effect of the financial-market fallout and concerns about more toxic assets” is  “growing support for a straight carbon tax, rather than a complicated cap-and-trade plan.”

One can only hope we have learned something from the sub-prime mortgage crisis. If we did, Congress would quickly debate and pass the Raise Wages, Cut Carbon Act, but with much higher carbon tax rates than currently proposed, while directly offsetting increased costs of energy from carbon taxes with decreases in payroll taxes, the most regressive form of federal taxation. Alternatively a simple and major rebate to all citizens as proposed by James Hansen would also be a great solution both to the climate and the economic problems we face.

But instead of supporting that kind of effective, progressive and economically rational solution, all indications are that Congress seems headed toward creating the next huge financial derivatives bubble and ultimately the Sub-prime Carbon Crisis. Whether cynical self serving greed  or naive good intentions are ultimately responsible for impending Cap and Trade legislation, the results will likely be the same.

The speculators on Wall Street must be pleased that once again, their servants in Washington are serving them well. And this time they have the environmental community doing their heavy lifting, lobbying and marketing for them.

It is past time to move beyond expedient political horse trading to develop serious solutions to our fossil fuel addiction. We need bold and serious leadership.

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The Raise Wages, Cut Carbon Act of 2009

Representative Bob Inglis of South Carolina has introduced the “The Raise Wages, Cut Carbon Act of 2009”

It appears to be about the best energy policy effort I have seen come out of congress ever, other than the fact that his proposed carbon taxes are far too low. Congress should be debating this legislation with a significant increase in the proposed levels of taxation on carbon.

The following is from the Congressman’s summary of the bill:

THE TRIPLE WIN: ENERGY SECURITY, THE ECONOMY AND CLIMATE CHANGE
THE RAISE WAGES, CUT CARBON ACT OF 2009

THE CHALLENGE

The economic downturn calls for action to stimulate the economy, such as reducing the amount of taxes taken out of each paycheck.

Our ongoing dependence on foreign oil from hostile nations also calls for action to reduce that dependence and move to fuels of the future.

Even if you disagree with the science of climate change, everyone agrees that less carbon in the atmosphere would not hurt us. By reducing payroll taxes (employer pays 6.2%, employee pays 6.2% on the first $106,800 of income) and taxing carbon dioxide (something we want less of), we can turn an environmental fix into a decisive, economy-expanding national security fix.

Here’s a plan, proposed by U.S. Rep. Bob Inglis (SC-4). Similar concepts have been advanced by voices across the political spectrum – from President Reagan’s economics advisor Dr. Arthur Laffer to Vice President Al Gore:

STEP 1: LOWER TAXES ON LABOR

  • Lower the payroll tax for employers and employees by an amount equal to a new tax on carbon dioxide.
  • Prospectively increase Social Security benefits to help seniors pay higher energy bills.

In the first year, payroll taxes can be reduced by more than 10%, funded by a carbon tax of $15 per ton that will generate as much as $88.7 billion. The Social Security Trust Fund will not be touched; the swap is handled in the General Fund of the Treasury.

STEP 2: ATTACH A PRICE TO CARBON

  • The proposed carbon tax starts at $15 per metric ton of CO2 in 2010 and increases to $100 by 2040, adjusted each year for inflation.
  • To provide businesses certainty and the ability to plan, the bill includes a clear schedule of rates.
  • The tax applies to fossil fuels as they enter the economy: at the mine mouth, the oil refinery and the natural gas. This upstream application of the tax will make it easy to implement and reduce administrative costs.

STEP 3: ATTACH THE SAME PRICE AT THE BORDER

  • In order to accord similar tax treatments to domestic and imported goods, imported products will be subjected to the same U.S. carbon tax.
  • As provided in the Constitution, the tax would be removed from goods destined for export from the U.S. Exporters would qualify for a rebate for the portion of their cost attributable to the carbon tax.
  • Consistently applying the same tax to all domestic and imported products will keep this border adjustment in compliance with existing WTO agreements.

STEP 4: ENSURE REVENUE NEUTRALITY

This bill starts with reducing payroll taxes and sending more money home with the American worker. To preserve that principle, the bill requires a Supermajority vote (2/3 votes in both House and Senate) to overturn revenue-neutrality and use carbon tax revenue for any other purpose.

IMPACTS ON ENERGY PRICES

The tax will encourage energy consumers to replace carbon-intensive forms of energy with low- and no-carbon energy alternatives.  Increasing demand for clean energy technologies will improve our environment, reduce our dependence on the politically volatile oil-producing regions of the world, and stimulate our home-grown innovation economy.

IMPACTS ON ECONOMY

With a commitment to reduce labor costs and internalize the cost of carbon in fuels, market forces will unleash innovation because of known costs and predictable returns for new technology. “Green jobs” would emerge from anticipation of cost competitive energy alternatives.

The Raise Wages, Cut Carbon Act of 2009 also leverages the double dividend, pursuing an increase in economic efficiency by reducing taxes on something we want more of (labor and income) and taxing something we want less of (carbon dioxide).

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How To Sell Carbon Taxes

In “Obama’s Economic Mirage”, Robert J Samuelson warns against the president’s social, health care and environmental agenda masquerading as economic policy that is likely to address the current economic problems.  He suggests that it is an illusive pretense that paying more for energy and health care will net more job creation. While arguing green energy policy is not necessarily good economic policy, he does however conclude that “I have long advocated a gasoline tax on national security grounds.”

This position comes to somewhat similar conclusions to the argument Thomas Friedman made in  “Show Us The Ball” in which he suggested that the administration should be pushing a straight forward carbon tax and have the chief spokesman for that policy not be someone from the environmental arena, but rather National Security Adviser General James Jones.

There is consensus in the environmental community the climate change induced by human energy use is an existential threat to humanity. And there is an argument from that quarter that scientific consensus on the issue is unquestionable. But there is inconvenient dissent from that opinion, like the Global Warming Petition Project, which claims it has the signatures of 31, 478 American scientists on a petition that states:

“We urge the United States government to reject the global warming agreement that was written in Kyoto, Japan in December, 1997, and any other similar proposals. The proposed limits on greenhouse gases would harm the environment, hinder the advance of science and technology, and damage the health and welfare of mankind.

There is no convincing scientific evidence that human release of carbon dioxide, methane, or other greenhouse gasses is causing or will, in the foreseeable future, cause catastrophic heating of the Earth’s atmosphere and disruption of the Earth’s climate. Moreover, there is substantial scientific evidence that increases in atmospheric carbon dioxide produce many beneficial effects upon the natural plant and animal environments of the Earth.”

Personally, I have come to believe that human activity is likely having a significant impact on climate, though I question the hyperbolic rhetoric around the issue of climate change.

But I very strongly agree with Samuelson and Friedman that the far stronger argument for the need to significantly increase the price of petroleum is on the grounds of national security.

Taxing carbon on general environmental grounds, in order to slow the waste of dwindling petroleum reserves and mostly on national security grounds all make really good sense.

As a side benefit, carbon taxes also address climate change and by pricing the “economic externalities” of fossil fuels more appropriately in the marketplace, they balance and stabalize the playing field to enable cleaner renewable energy alternatives.

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