Carbon Tax Revenues and Fiscal Multipliers

Resources for the Future issued a report this summer, Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts. In it, they analyze four revenue-neutral carbon tax proposals: using carbon tax revenues to: (1) reduce capital taxes, including corporate income and personal income for capital investments, (2) reduce personal income taxes and social security taxes, (3) reduce sales taxes, and (4) provide a lump-sum distribution to every adult. They model the effects of each of these separately, and graph the path of the effect of the program on GDP over time, and also, somewhat uniquely, the intergenerational effects of each of the policies, i.e., the effect of each of the four programs on each cohort of people by birth year, reaching out to look at economic effects on the unborn. They then compare each of these with some deficit-reduction proposals, i.e, proposals in which carbon tax revenues simply enter the U.S. Treasury to pay down the national debt.

It is a critically important discussion to have, even if it is politically taboo to even consider a carbon tax that does not somehow recycle revenues. My interest in this blog post, however, is to raise questions about the four revenue-neutral proposals. The conventional wisdom, borne out by this report, is that in terms of effect on GDP, the proposals descend in effectiveness from 1 (capital taxes) down to 4 (annual lump sum distribution to every adult). In terms of trying to reverse the regressive impact of carbon taxes (yes, I am talking about redistribution, that dirty word!), it goes the other way, with 4 going the furthest to not only ease the impact on the poor, but make them better off, and 1 being the most regressive, and in fact making a carbon tax even more regressive.

I try to remain catholic about the value choices implicit in choosing from the 4 revenue-neutral options, and respect the fiscal conservatives that insist that capital taxes are the most growth-maintaining use of carbon tax revenues. But here is the economic question: won't carbon tax revenues recycled back to poor households have a higher multiplier than that recycled back to rich households and corporations? Corporations are currently sitting on huge stockpiles of cash, so if anything, the economic equivalent of disastrously putting cash underneath a mattress would seem to be returning money to corporations. Moreover, we have good reason to suspect that money given to poor individuals gets spent immediately, because of their higher marginal propensity to consume (these people do not have enough as it is) and pumped back into the economy. I am not a macroeconomist, but that sounds right. Mark Zandi at Moody's did an analysis in 2008 looking at multipliers for different uses of federal stimulus money. Below is what his model estimated. I have ranked his hypothetical proposals from highest multiplier to lowest. Proposals highlighted in blue are what I characterize as being close to capital taxes (1), green as labor taxes (2), orange as consumption taxes (3), and red as lump-sum distributions (4):

1.73 Temporarily Increase Food Stamps
1.64 Extend Unemployment Insurance Benefits
1.59 Increase Infrastructure Spending
1.36 Issue General Aid to State Governments
1.29 Temporary Payroll Tax Holiday
1.26 Refundable Lump-Sum Tax Rebate
1.03 Temporary Across the Board Tax Cut
1.02 Nonrefundable Lump-Sum Tax Rebate
0.48 Permanent Extension of Alternative Minimum Tax Patch
0.37 Make Dividend and Capital Gains Tax Cuts Permanent
0.30 Cut Corporate Tax Rate
0.29 Make Bush Income Tax Cuts Permanent
0.27 Temporary Accelerated Depreciation Tax Deduction

The RFF model does not distinguish between households in terms of income or wealth, but rather only has a representative household. This is not to say that using carbon tax revenues to temporarily increase the food stamp program (which has been cut) is literally six times as effective in stimulating spending as a temporary accelerated depreciation tax deduction. But collapsing all households into a representative household seems to me to miss the huge amount of variation in the effectiveness of recycled revenues given to persons of different wealth and different marginal propensities to consume. The pattern shown above seems to bear out what we already suspect about giving money back to people: that money given back to poor people produces a much stronger economic response that money given back to rich people and to corporations.

Can EPA Allow States to Implement a Carbon Tax Instead of Federal Standards?

A recent proposal by Adele Morris of the Brookings Institution suggests that under the forthcoming Obama Administration Clean Air Act rules for existing power plants, the Environmental Protection Agency could, instead of making states implement those rules, allow them to adopt a state carbon tax instead. I think that would be too adventurous an interpretation of this part of the Clean Air Act.

The Obama Administration's rules will be issued under section 111(d) of the Clean Air Act, which is titled "standards of performance for existing sources; remaining useful life of source." In Clean Air Act-speak, "standards of performance" would probably mean an emissions rate, like the one that the Obama Administration has proposed for new fossil fuel power plants. A performance rate standard is generally an emissions limit couched in terms of a maximum amount of air pollution per unit of production. For example, the Obama Administration's new power plant rule dictates that no gas-fired power plant may emit more than 1,000 lbs of CO2 per megawatt-hour produced (which should be easy), and that no coal-fired power plant emit more than 1,1000 lbs of CO2 per megawatt-hour produced (which will be impossible with current technology). But in section 111(a), "standards of performance" is defined as

a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements) the Administrator determines has been adequately demonstrated.

Does "best system" allow for a carbon tax? I wish it were so (given my book) but I doubt it. For one thing, if a carbon tax were proposed, there would be no guarantee of any specific quantity of emissions reductions at all, since emitters could pay a carbon tax instead of complying with a standard. One could be agnostic about whether this is a good thing, and still realize that legally, this flies in the face of the history of the Clean Air Act. The Clean Air Act was passed in 1970, when Congress was barely aware of even things like emissions trading, let alone emissions taxes. Everything else about Title II of the Clean Air Act has been about rate emissions standards as "performance standards," and only marginally have market-oriented concepts seeped in, like EPA's early (and generally unsuccessful) experiments with "bubbling" or "offsets." For forty some-odd years, EPA and the states have worked with emissions rate standards, and it seems unlikely that it all of a sudden, "performance standards" could mean something completely outside of the Clean Air Act box.

You could argue that once the rules for existing sources get issued, they will be so onerous that states will all of a sudden find themselves embracing a carbon tax. Even the carbon tax knaves would wake up and say, "yes, this is a common sense approach, and an alternative to Obama-Air." Well, that could be, but there will always be someone who doesn't like a carbon tax, some group that will object to it on the grounds that it is regressive, or some emitter that is even more put out by a carbon tax than regulations, and decides to sue. It is my guess at that point, that they would win, and that even a moderately textualist court will strike it down.

Fossil Fuel Corporate America, Waaay Ahead of Congressional Republicans

The Tennessee Valley Authority announced yesterday that in addition to the shuttering of 18 coal-fired power plants they agreed to as part of a 2011 settlement, they will close down an additional 8. But these are 8 large plants in Alabama and Kentucky that account for 3,000 megawatts of capacity, a fifth of the TVA's coal-fired generation capacity, so this is a big deal.

Let us not be naive. TVA, like others, sees the future in cheap natural gas. No green group has done a tenth as much to phase out coal as has the explosion of natural gas development in the United States, an environmentally mixed bag, but a carbon boon. Yet at least publicly, the TVA says that it plans to generate its electricity from a mix of nuclear (40%), coal (20%), natural gas (20%), and renewable energies (20%). TVA cites environmental and economic concerns, and the prospect of greenhouse gas emissions regulations for existing power plants.

But it is telling that the old guard of power generation, the "big dirties," the large investor-owned utilities such as TVA and the American Electric Power Company, are moving ahead even without current binding greenhouse gas regulations or carbon pricing. It is equally telling that they are choosing to get ahead of the curve, rather than pushing the curve back through litigation (though that is always a part of every utlity's policy portfolio). These firms are so far ahead of the conventional wisdom (such as it were) in the Republican Party that you'd think you were talking about Swedish companies and Kenyan politicians. Yesterday, Congressman Steve Scalise, from Louisiana, told EPA Air Administrator Janet McCabe, that she is "not living in the real world." Her delusion, in the eyes of Scalise and his Tea Party compatriots, is that carbon capture technology will help coal-fired power plants comply with forthcoming regulations. The bottom line is that it will be very difficult to build a coal-fired power plant in the United States from now on. But you can count on the fingers of one hand the investor-owned utilities that are planning to build new coal-fired power plants. They do not include the likes of TVA and AEP, and almost all of the large investor-owned utilities. Steve Scalise is very irked on their behalf. Gosh, maybe it's Scalise and his monosyllabic buddies that are a little lost. This dynamic is the kind of echo chamber that has held up Ted Cruz as a hero instead of a laughingstock.