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Global Warming and Tax Shifting

A tax shift off wages and onto non-renewable energy is a key solution to global warming.

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ALCOHOL, CIGARETTES, AND BTUs:
MOVING BEYOND SIN TAXES TO SHIFTING TAXES
How Tax Shifting Can Address Global Climate Change
and Other Problems

Cheap energy in the 20th century allowed mechanization of many facets of life. For the average Joe and Jane in western countries, the energy revolution reduced the relative cost of "the necessities" (food, water, shelter) and created more free time that could be spent on personal growth, civic participation, and study of the world around us. No matter that most of us squandered the opportunity watching reruns of Gilligan's Island.

The energy revolution was not without negative side effects. The greenhouse gases we increasingly pumped into the atmosphere in the 19th and graphic of smoke-stax 20th centuries—and continue to pump into the atmosphere at record levels today—are setting us up for a catastrophic "mass extinction event," the kind that happens every hundred million years or so. Add to that other forms of pollution (like acid rain, polluted waterways, widespread air pollution) and a broad variety of worsening economic problems (like stagnant wages, off-shoring, loss of manufacturing base, trade deficit, budget deficit), and it becomes clear that we have converging crises.

What can we do about it? Three things: Learn, discuss, act. We can get a start on the first two of those things with today's guest article from Paul Riehemann, who hosts the blog discussion site Solve 4 Biggies.

~    ~    ~

picture of Paul Riehemann Solving “Four Biggies” by Shifting Taxes, by Paul Riehemann, solve4biggies.com

We are on the doorstep of environmental and energy crises. In 2003, the fourth hottest year since 1880, thirty-five thousand Europeans died in a heat wave. Today we watch as glaciers recede and ice shelves break off into the sea. In the US, we import over 60% of our oil. Energy has been the primary motivator for two wars resulting in thousands of American armed forces deaths and hundreds of thousands of civilian deaths in the Middle East. Hurricane Katrina exposed our energy supply/demand vulnerability—petroleum and natural gas prices skyrocketed, causing economic upheaval after just this one storm. In 2006, the US trade deficit set a record for the fifth straight year. This is not sustainable and leaves the US vulnerable to a sell-off in US stocks and bonds that would stall the economy. Finally, fossil fuel combustion has caused mercury in fish, acid rain, and increasing incidence of asthma.

These are effects and risks that can be grouped under four categories, which I call The Four Biggies:

  • Global warming (global climate change)
  • Dependence on foreign energy
  • Trade deficit
  • Pollution from non-renewable fuels

These serious problems are all related to the combustion of fossil fuels and our dependence on the finite supply of these fuels. The sooner we address this underlying issue, the easier it will be to fix The Four Biggies.

Global Warming and Tax Shifting

WHAT TO DO?

Society gets enormous benefits from small amounts of fossil fuels. However, the market does not internalize (account for) all the costs of fossil fuel trade, masking the true cost of "cheap energy" and giving false signals on environment and energy problems. Simply put: Non-renewable sources of energy should cost more.

We need a market-based solution to set the stage for our ingenuity, drive, and marketplace to fix our energy problem and solve The Four Biggies. We need a solution similar in function and scope to our patent and antitrust laws—that is, we need to change the "rules" for the long-term benefit of all.

One very effective approach is tax shifting—that is, lowering taxes on beneficial activities (like labor) and raising them on negative activities (like burning fossil fuels), with the net effect on the average consumer being a financial wash.

To apply this concept to The Four Biggies, Congress would cut federal income taxes but raise taxes on non-renewable energy sources like oil, coal, and natural gas to replace the lost revenue. This tax shift should be phased-in over 10 years. For individuals and families, the shift should be as close to cost-neutral as possible. Those that pay no income tax or currently receive a credit—that is, those whose increased energy costs could not be offset by lowering their income taxes—would be reimbursed for their additional energy costs in other ways, such as a larger credit and/or subsidized transportation.

SHIFTING AWAY FROM "THE ANTI-TAX"

The very first things that should change under a tax-shifting plan to address global warming (and other problems) are the massive federal subsidies given to US companies that operate in the arenas of oil, gas, nuclear, coal, and mining.

Examples of such institutionalized subsidies include:
-- waivers of insurance requirements for nuclear power plants and the massive annual government spending on US nuclear-power management and infrastructure via the Department of Energy's annual budget;
-- pricing of mining concessions on federal lands based on a US law that is more than a century old;
-- financial incentives to oil companies to "go out and find more" at the same time these companies are raking in record profits and cutting exploration and development budgets so they can reinvest their cash in their own stocks as they anticipate further supply constriction, price increases, and even higher profits in the future;
-- weak pollution laws for all extractive and energy industries and lax enforcement of the regulations that do exist.

Eliminating such giveaways and dirty profits—with the changes being reflected in the prices of the products produced by these industries—would be an easy first step in any effort to shift taxes from workers' paychecks to polluters' products.

    — Grinning Planet

The resulting higher prices for fossil-fuel energy will reduce our use of it and stimulate the US alternative (renewable) energy industry by "leveling the playing field." As consumption of non-renewable energy decreases, an automatic "ratchet" mechanism would further shift taxes from income to energy to maintain the incentives and the tax base.

Tax Shifting and Global Climate Change

THE POSITIVE IMPACT

Alternative-energy industries have been hindered by cheap fossil-fuel and nuclear energy, both of which are heavily subsidized. Between 1985 and 2005, alternative energy in the US grew by a mere 0.5%, according to the Energy Information Administration. Phased-in intentional increases in energy prices would make many alternative-energy projects economically viable. The renewable energy industry would grow rapidly, refining their technologies and achieving economies of scale. This would create an export boom, since other countries face similar problems and are already seeking solutions. A revitalized alternative energy industry will create technical jobs in the US and a mighty economic engine providing life-enhancing products for people all over the world.

This shift in taxes will improve our positions on trade, fossil fuel dependence, pollution, and greenhouse gases—The Four Biggies.

OVER THE FALLS IN A STATISTICAL BARREL

The statistics on renewables—hydroelectric, biomass, geothermal, wind, and solar—in the US are a little tricky. In aggregate, renewables barely grew at all over the last two decades: In 1985, we used 6.033 quadrillion BTUs (QBTU); in 2005, we used about the same amount, 6.061 QBTU.

The fly in the statistical ointment here is hydro. Electricity generation from hydro has been sliding in the last two decades. Further, there aren't going to be any new major hydro projects in the US—all of the best sites in the US were dammed up over the course of the last century. In the next two decades, hydro will do well just to stay where it is (but more likely will decline further as sedimentation, drought, over-allocation of river water, dam aging, and dam decommissioning continue to take their toll). In any event, hydro certainly can't be counted on to help increase renewables' share of US energy production in the future.

Some renewables HAVE been growing—especially wind power. But the slippage in the hydro sector has been of about the same magnitude as the growth in the rest of the renewables basket; thus, it appears as if renewables have been standing still. In reality, non-hydro renewables grew from 3.063 QBTU in 1985 to 3.346 QBTU in 2005, a 9.2% increase. That's still depressingly anemic growth, but it's more encouraging than 0.5%!

Related GP article: Real Energy Solutions

    — Grinning Planet

Some will argue that such changes will be difficult, and they may be. But we can be proactive now, or we can have disruptions thrust upon us later. When gasoline rises to $4 or $5 per gallon, what will we wish we had done when it was $2.50-$3.00 per gallon? The longer it takes to reduce our use of non-renewable energy, the harder the change will be and the greater the consequences we will suffer.

Global Warming and Tax Shifting

HOW MUCH OF A TAX SHIFT?

The amount of taxes shifted off consumers' paychecks and onto their bills for vehicle fuel, electricity, and natural gas would have to be high enough to stimulate reduced energy consumption and growth in the alternative energy industry but low enough to keep inflation in check. To avoid the worst effects of global warming, the Intergovernmental Panel on Climate Change suggests that we may need to raise the cost of gasoline by up to one dollar a gallon over the next several decades. picture of part of 100 dollar bill For a discussion on the potential impacts of such a plan—whether it is too aggressive or not aggressive enough, and why the tax increase could actually help your pocketbook—see this blog page: How much of a tax shift?

It is possible that increasing non-renewable energy prices and freeing up payroll cash for America's spend-happy consumers could cause some inflation in the short term, at least until renewable energy provides a larger percentage of our needs. But inflation is likely to be an issue either way. The question is, would you rather have:

  • a spike in fossil fuel prices similar to those due to the refinery and distribution disruptions caused by Hurricane Katrina—with the associated accelerated inflation when prices don't drop?

    --OR--
  • a planned, orderly, predictable series of phased-in price increases for non-renewable energy—with the potential for some limited inflation but also with the built-in offsetting effect of reduced wage taxes?

Remember, in scenario 2, your extra costs for energy would be offset by reductions in your personal income taxes. You can choose to consume the same amount of energy using your larger after-tax income, or you can use less energy and pocket the difference.

So, the next time you see an SUV or drive past a McMansion, think how nice it would be to be able to say, "OK, they're paying part of my income taxes!"

Paul Riehemann is a mechanical engineer and former energy industry employee with a master's degree in business administration. He hosts the blog discussion site Solve 4 Biggies.  

Tax Shifting and Global Climate Change

GRINNING PLANET WRAP-UP

Thanks, Paul!

We at GP would like to nominate a "Fifth Biggie"—Peak Oil. Ultimately, peak oil will turn into "peak energy," where the total basket of energy sources has gone into decline. First up, though, will be a decline in global oil production. Limited oil supplies in the future will make dependence on foreign oil even more problematic for the highly lubricated economies of the United States and other industrialized countries.

Our politicians know the energy tsunami is coming but are too cowardly to address it (with rare exceptions like Roscoe Bartlett)They are doing only slightly better at addressing global climate change. Shifting taxes from our payroll checks to oil and other non-renewable energy sources is one part of the real energy solutions we need to move us quickly towards energy sustainability—and away from energy wars and the approaching global-warming catastrophe.

For more good discussions on tax shifting, energy issues, and solving the global warming problem, check out Paul's blog at solve4biggies.com. Here a few specific pages to get you started:

Know someone who might find this article about Global Warming and Tax Shifting interesting? Please forward it to them.

Grinning Planet publish date: 05-JUN-2007

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"The need for tax shifting — lowering income taxes while raising taxes on environmentally destructive activities — in order to get the market to tell the truth has been widely endorsed by economists.... The Economist [magazine] has recognized the advantage of environmental tax shifting and endorses it strongly: 'On environmental grounds, never mind energy security, America taxes gasoline too lightly. Better than a one-off increase, a politically more feasible idea, and desirable in its own terms, would be a long-term plan to shift taxes from incomes to emissions of carbon.' "

— Lester Brown, author of Plan B 4.0


 

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