Wednesday, 17 December 2014

A State Carbon Tax?

Washington State Governor Jay Inslee has announced that he will propose some sort of a carbon pricing program to help raise revenues for his state's starved budget, which is currently about $2 billion in the red (over two years, and out of a total budget of about $33 billion), and which includes a Washington Supreme court-mandated increase in school funding. The details remain sketchy at this point, like whether it is a carbon tax or a cap-and-trade program (Greeenwire is calling it a "carbon  fee" and the Seattle Times is reporting it as a cap-and-trade), but the Governor is hoping that it will produce $400 million per year. He has tied it to transportation funding, which both parties in Washington state would agree is badly needed.

Inslee is a Democrat and Republicans have a majority in the Washington Senate, and are just barely a minority in the State House, so prospects of passage might appear dim. But this is a state where the parties still seem capable of working together. Republican state senator Curtis King of Yakima (the hometown of Justice William O. Douglas) criticized the Governor's plan for linking such a tax to general spending projects like transportation projects, but praised the Governor for proposing something in advance of January budget negotiations. (Can we get some of those Republicans down here in Florida?)

I have one problem with this. Washington State still has to figure out a way to comply with the Obama Administration's Clean Power Plan to reduce emissions from the electricity generating sector. Washington's goal is already a heavy lift -- 1,379 lbs./MWhr down to 215 by 2030 -- this is a state with only one coal-fired power plant so it does not have much low-hanging fruit to pick. I would save my political capital for when I needed to propose something for the Clean Power Plan, which is going to really cost Washington State. What Washington could do, much more directly if it truly wishes to fund transportation projects, is just raise its gasoline taxes, currently at 37.5 cents per gallon. That is high (ninth among states) but Washington is one of seven states with no state income tax. If I am a motorist in the Emerald State, I would accept a gasoline tax as the price of having good roads and bridges (a major and important bridge collapsed in Northwest Washington in 2013), and could separate that from carbon reduction measures. Washington State consumed about 64 million barrels in 2013, or 2.7 billion gallons. A tax of 10 cents per gallon would raise $270 million dollars, and 15 cents would raise about $400 million, the hoped-for amount raised by the carbon "fee," or permit price, or whatever it is going to be. Do it now, when gas prices are low!

Thursday, 4 December 2014

House Republicans: One Million Dollar Deduction for Big Trucks, $4,000 for College

There is an op-ed in Wednesday's New York Times on the push by some Republicans to extend a stimulus tax incentive, a "bonus depreciation" provision that allows businesses to deduct the full purchase price of qualifying equipment, essentially deducting it as a business expense (like a luncheon or business travel) up to, in some cases in the past, 50% of the value of the equipment. The provision is part of a tax extenders package in H.R. 5771 which passed the House on Thursday 378-46. That is a bipartisan vote, but make no mistake: it was House Republicans that have been pushing for this provision. In comparison, the maximum deduction for higher education expenses would be capped at $4,000 for an individual whose maximum adjusted gross income can be no more than $65,000 (or $130,000 for joint filers). $500,000 for business equipment, $4,000 for higher education. Qualifying property includes vehicles heavier than 6,000 lbs., off-the-shelf software, office furniture, equipment, and property not part of a structure.

However, there is something else that is moving forward as part of H.R. 5771. Even before you get to bonus depreciation, under section 179 of the Internal Revenue Code businesses can take a first-year deduction of up to $25,000. That means that business, whatever and whoever they are, can expense up to $25,000 of equipment right away. The limit had been, as part of a 2008 economic stimulus package lifted up to $250,000 on capital equipment having a total value of no more than $800,000. That generous limit expired, and House Republicans are now seeking to lift that limit from the current level of $25,000 up to $500,000. That's a total of $1 million for business capital, $4,000 for higher education, in case you were keeping score.

There is actually a website,, that spells everything out for anybody, most prominently small businesses, to figure out exactly how the bonus depreciation works. It is not complicated. For qualifying capital equipment, you can basically expense anything up to $25,000, which becomes $1 million if the House package becomes law.

What is the effect of these tax provisions? These provisions have gone up and down over time, and Eric Zwick and James Mahon have looked at these provisions and their effects on business investment, and how changes in these rates over time have changed investment from year to year. They found that bonus depreciation raised investment by 17.3 percent from 2001 to 2004 and 29.5 percent from 2008 to 2010. They carry out a number of robustness tests, leading them to conclude that these provisions really do work. In fact, insofar as the up-and-down movement of the limits of section 179 and bonus depreciation create "kinks" in the optimal investment levels of firms, firms are observed to be investing right up to the kinks, in effect taking full advantage of these provisions. Firms tend not to take full advantage if they do not have the ordinary income against which to take these deductions (though bonus depreciation has, in past years, been used to create losses which can be carried forward to offset income in future years).

That said, what kind of capital are we subsidizing, and what good is it doing? Even if we ignore the distributional impacts of this disparity between funding business equipment and higher education, what good is this increased business investment doing? This we do not know.

Thursday, 20 November 2014

Why the U.S.-China Climate Deal May Be a Tipping Point

The Obama administration announced a climate agreement with China last week, which was immediately criticized by congressional Republicans. Putting aside partisan churlishness however, this climate agreement may be a turning point.

As I wrote three years ago, and international climate negotiations are, above all, a game-theoretic process. For an international climate agreement to be durable, there must be sufficient confidence on the part of all parties that all of the other parties are committed to mitigation of greenhouse gas emissions. For any individual country, it is likely that the benefits of mitigating greenhouse gas emissions are much greater than the costs. However, this is predicated on other countries also performing their own self-interested cost-benefit analysis and arriving at the same conclusion. It is a fragile agreement indeed, when there are numerous parties, all of which must trust that all of the other parties will reach the same conclusion and will refrain from free-riding. Ironically, a country that makes great strides in mitigation or geo-engineering may actually undermine cooperation, as this would sow doubt among potential partners that such a country may not reach the conclusion that the benefits of reducing greenhouse gases exceed the costs. In an environment of such fragile cooperation, signaling is extremely important. This US – China deal may just be the strongest signal yet that the two largest emitters in the world recognize that the benefits of climate policy exceed the costs.

Tuesday, 18 November 2014

Virginia Possibly Pushing For a State Carbon Tax Under Clean Power Plan

Adele Morris of the Brookings Institution reports that state of Virginia has submitted comments on the EPA's Clean Power Plan that call for additional flexibility in compliance options. Significantly, the Virginia comments were very similar to those that Morris has been advocating, in her push to get states to consider a state carbon tax, and to have a state carbon tax be an option for complying with section 111(d). Morris and others met with Virginia state officials three months ago to discuss a state carbon tax and suggested comments, so apparently that meeting went pretty well.

This is a potentially huge development, because Virginia is a very carbon-intensive state. Under the EPA proposed rule, Virginia is expected to reduce its emissions from a rate of 1438 lbs. of CO2/net MWhr to 884 by 2020, and to 810 by 2030. That a state that is politically purple and with a very important coal industry is considering a state carbon tax is much more significant then if this was under consideration in a state like Massachusetts or Washington.

Sunday, 16 November 2014

Land Use Law and Disability

Robin Paul Malloy's Land Use Law and Disability: Planning and Zoning for Accessible Communities has just been published by Cambridge University Press. Malloy argues that Land Use Planning should take greater account of people with mobility impairments and other disabilities that interfere with access. Planning with universal access design guidelines is superior to the de facto litigation-driven process of land use planning for accommodating persons with disabilities.

Thursday, 13 November 2014

The U.S.-China Climate Deal

Everybody, even people disinterested in the environment, has heard by now: President Obama announced a bilateral agreement between the United States and China for the United States to reduce emission 26 to 28 percent below 2005 levels by 2025, and China will peak its emissions by 2030. Those are the central pieces of the deal. There is also agreement to jointly pursue carbon capture and sequestration, funding for a new US-China energy research center, and other feel-goodies, but clearly something that speaks directly to emissions is the big deal.

Mitch McConnell and fellow Kentuckian Ed Whitfield proved again why the Republican Party deserves our scorn, by simply dismissing the deal because it was struck by Obama. If Obama's for it, then Republicans are agin' it. McConnell said that the deal "requires China to do nothing for 16 years." That is true. Of course, the alternative is no deal at all, as if McConnell expects China to cap emissions tomorrow. Rep. Ed Whitfield from Kentucky snarked, "Everyone who's ever dealt with China knows that they've made all kinds of commitments." That's Ed Whitfield, the noted Sinophile. As a more thoughtful commentator pointed out, what matters more is the level at which China peaks than when it peaks. Importantly, though, a 2030 peak will likely keep China below a BAU baseline. It also represents a step in that China is moving away from an intensity target -- which is no cap at all -- to a mass-based cap.

Everyone who reads the newspaper understands the inherent caution and conservatism of Chinese foreign policy, which is driven by the Chinese Communist Party's Politburo Standing Committee, the real decisionmaker, and which makes decision by consensus and under strict Chatham House rules. Policy changes slowly in China. There will be next step, and it will be the specification of an absolute cap, a "how much" and not just a "when."

Sunday, 9 November 2014

Direct Air Capture Technology About to Come Online

"Direct Air Capture" (DAC) is a term that has been used to describe a technology that seeks to suck carbon dioxide out of the ambient air. That contrasts with "carbon capture and storage," (CCS) which seeks to either suck carbon dioxide out of the flue stream of a fossil fuel combustion process, or to de-carbonize coal before combustion.

DAC has never been a mainstream technology, in large part because so much has been invested politically and economically in CCS technology. Senator Lamar Alexander once said "w[e] should launch another mini-Manhattan Project and reserve a Nobel Prize for the scientist who can get rid of the carbon from existing coal plants, because coal provides half our energy." But it would appear to deserve some attention, as an effective post-combustion technology could buy some time. David Keith, who moved from the University of Calgary to Harvard a few years ago, has been the primary agitator for this technology, and even founded his own startup company, Carbon Engineering, which counts Bill Gates as one of its investors. It is a Carbon Engineering pilot project that will begin operations in Squamish, British Columbia, next year. Keith claimed in 2009 that carbon dioxide could be captured at a cost of "closer to $100 per ton than $500 per ton." The American Physical Society came out with a withering criticism, offering its own less sanguine estimate of $600 per ton, at the very least. The physical problem with direct air capture is that carbon dioxide comprises such a small fraction of our ambient air -- 0.04% -- so that capture from ambient air is inherently less efficient than, say, capture near the source (a coal-fired power plant). Nevertheless, I'm going to borrow my Governor's go-to line when faced with uncomfortable scientific facts: "I'm not a scientist." Let's see how this pilot plant in British Columbia does.

The politics of direct air capture are simply that no politician has heard of it, and that David Keith or Carbon Engineering is not yet a major political or campaign contributing source. It has to get picked up by an AEP or a Duke. But given the century-long atmospheric life of carbon dioxide, this technology has to be seriously considered.

The one downside of this technology is highlighted in an article I wrote in 2011: that success would ultimately decrease the pressure to reach an international agreement to reduce emissions. Research on direct air capture could allow say, China and India, to simply free-ride off of the research efforts of Canada and the United States. We could build the massive carbon dioxide collector arrays, and China and India would then go on building coal-fired power plants and emitting. That might be politically unappealing.