Where's the Price Signal?

I recently saw a documentary "Earth 2100" where you, John Podesta and Amory Lovins were speakers. Although I do not think our worldwide energy and environmental future will necessarily unfold as that documentary implied, I think something like that future is very likely. Unfortunately, I think the inertia to continue our business as usual modus operendi cannot abate fast enough even if there were a unified international effort to do so. I do not think our Congress or our world leaders are anywhere near working on the crises the Earth 2100 foretold. We are stuck and world overpopulation will become self-correcting in a matter of a few decades. Our generation is leaving a dismal legacy for our children and grandchildren. I wish somehow our world leaders could be shocked into corrective action.

Dear Mr. Friedman,

I have read, enjoyed, and been informed by all of your books.

As you point out, a carbon tax is a necessity. The billions upon billions of decisions that U.S. households and businesses need to make to convert to a sustainable economy—(just consider one individual’s housing decisions: how large a residence, located where, how insulated and sealed, with what fuel, at what room temperature, etc.)—cannot be effectively motivated or implemented without a clear price signal that reflects the associated environmental damage. Such corrected prices contain the information to allow the decentralized network of private transactions that is the market to do what it does best: to allocate resources seamlessly and efficiently.

Below are a few additional points relevant to a carbon or non-renewable fuel “tax.”

(1) I put “tax” in quotation marks because the term should be reserved for government levies whose primary purpose is to provide revenue to finance government activities. That is the reason the government taxes personal income and corporate profits, for example. The problem with taxes such as these is that they create market distortions and efficiency losses by discouraging income-earning and profit-making activities. On the other hand, economic “charges” (such as those on carbon emissions), introduced to correct for negative externalities, are the perfect public finance mechanism in that they remedy rather than create market distortions and efficiency losses. Thus, a charge on carbon emissions has the desirable effect of reducing them.

(2) The way to introduce carbon or non-renewable fuel charges in a politically palatable way, particularly during recessionary times, is to package them with a corresponding tax reduction—say, by reducing or eliminating payroll taxes. Sweden adopted such a revenue-neutral strategy in 1991 when it introduced a tax on carbon emissions while reducing income taxes by a similar amount. By the way, carbon or non-renewable fuel charges also generate an ancillary benefit by diversifying the sources of government revenue—thereby increasing revenue stability and fairness, and reducing incentives to evade taxation.

(3) As some have glibly suggested, why not use (politically attractive) subsidies rather than taxes or charges to promote clean, renewable energy? In fact, government subsidies may make sense, in a limited way, in terms of developing a renewable energy infrastructure or stimulating the successful development of renewable energy technologies. However, relative to a carbon/non-renewable fuel tax, subsidizing every unit of renewable energy produced and used would be a fiscally disastrous mechanism to encourage renewable energy. The reason is that such an economic subsidy would not only fail to provide the revenue-generating benefits of an economic charge; the subsidy itself would generate further debt that would have to be financed by an increase in government taxation of some type, with attendant market distortions and efficiency losses.

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On another subject, on pages 272-3 of HF&C, you refer to the theory that “appropriately planned environmental regulations will stimulate technological innovation…” as “the 'Porter Hypothesis,' first expounded by the Harvard Business School professor Michael Porter in 1991.”

Actually, that theory was previously developed by Nicholas Ashford and others at MIT (myself included) in the 1970s and 1980s in various studies and published research. See, for example, Nicholas A. Ashford, Christine Ayers, and Robert F. Stone, “Using Regulation to Change the Market for Innovation,” Harvard Environmental Law Review, Vol. 9 (1985), No. 2, pp. 419–466, and the MIT references cited therein. (Several writers in the field have noted that the so-called Porter hypothesis was preceded by the work of Ashford, et. al. See, for example, page 154 of Adam B. Jaffe, Steven R. Peterson, Paul R. Portney, and Robert N. Stavins, “Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?” Journal of Economic Literature, Vol. XXXIII (March 1995), pp. 132–163.)

I should mention that, although Ashford and Porter agree that properly designed regulations can have a positive effect on innovative activity, productivity, and competitive position, they do have some fundamental differences about the workings of the innovative process. Ashford’s group at MIT developed both a “weak form” and a “strong form” of regulation-induced innovation theory. The “weak form,” which focuses on modest or incremental innovation in pollution control and, to a lesser extent, on significant pollution prevention, is more or less what Porter’s work emphasizes. The “strong form,” embraced by Ashford’s group at MIT, argues (1) that the source of the most important innovations is new entrants that replace dominant technologies rather than existing technology providers offering incremental change, and (2) that stringent regulation (including the imposition of significant economic charges) can bring about such dramatic innovative responses.

the "net-positive" gas tax

The "net-positive" gas tax is a quadruple-win - a way to suppress gasoline consumption, restrain the escalating price of oil, win majority voter support, and increase consumer spending, all with one very simple gas tax/rebate policy. Read on...
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Richard Lugar, in the February 1 issue of the Washington Post[1], supported Charles Krauthammer’s so-called “net-zero” gas tax idea.[2] This net-zero idea is an eminently fair and painless way to combat our looming oil crisis. What makes the idea so great is that the taxes collected are given back to tax payers in the form of an income tax rebate. And to sweeten the deal, the rebate can even be given before the tax is collected.

By artificially raising the price of gasoline, the net-zero gas tax uses highly effective market forces to channel usage and investment away from oil and toward alternative sources of energy. This market-based approach demonstrated its effectiveness in response to the surge in oil prices last year: gasoline consumption subsided and gasoline prices plummeted. During the surge, it was the Saudi’s pocketing the dough. Net-zero puts the dough back into U.S. taxpayers’ pockets.

The most compelling reason for a net-zero gas tax was neglected by Lugar and Krauthammer, though. The fact is that, on a household-by-household basis, net-zero is actually “net-positive”, and progressive. This is because there is a strong positive correlation between household income and household gasoline consumption.[3] Thus the net-zero tax gives a net positive financial benefit to a significant majority of households, because households with the greatest income tend to be extravagant while households with the least income tend to be frugal. The result is a financial windfall for a substantial majority of taxpayers, especially those with the greatest need. This will then also serve as an added economic stimulus, with immediate and continuing benefit to the economy.

There is urgency in implementing this net-positive gas tax idea, however, because of accelerating declines in global oil production.[4] Oil prices (and political tensions) will escalate in response to the inexorable increases in the global demand for oil, most notably in China and the developing world. Thus if a net-positive gas tax is to be imposed it must be done now, before natural free-market forces drive the price beyond our ability to bear an additional tax. This in fact already happened, last year. Fortunately, the current recession has given us a reprieve, one final window of opportunity it seems. But we must act immediately to hold down the price of oil, or else prepare to open our wallets to OPEC.
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[1] http://www.washingtonpost.com/wp-dyn/content/...

[2] http://www.weeklystandard.com/Content/Public/...

[3] http://www4.ncsu.edu/~rhhaefen/Auto051808.pdf

[4] http://www.business24-7.ae/articles/2009/2/pa...

I've been trying to learn more about how the 'green sector' plans to acclimate consumers to the 'true cost' of things. When slavery was the only economically viable system for continued prosperity and growth, people thought they knew the true cost of a bale of cotton. After the civil rights movement began and sharecroppers lost their free labor, the cost of cotton changed and consumers adapted.

Well, our materials economy hasn't changed too much. We still have slave labor. The slaves are just in a different country. Plus, we now have environmental considerations, not just human rights considerations.

How can we convince consumers that they need to pay more for everything? Especially in the low- to middle-class income families? How do we convince people that they need less?

I pose these rhetorical questions to provoke thought on these chat boards. What can anyone do to help acclimate the general consumers of the country to a higher cost of goods, services and energy?

A gas tax and related price signals will be hard for the general public to stomach unless they really start to understand the 'true cost' of the American way.

Cap-n-Trade or RPS are not enough......we need a FiT and/or DG-R

I am a large commercial solar project developer for a company called Solar Power Partners, one of the biggest solar developers in the US. We have in excess of $200M in funding available this year to invest but are having a very difficult time finding clients. The reason is that even with the Federal ITCs and State rebates, it is very hard to be able to offer solar energy at price parity with the retail energy rates from the utilities. Simply establishing RPS mandates or Cap-n-Trade systems will still enable the utilities to control the renewable energy market and stifle its growth if they want to.

We need to look at methods to regulate the utilities down to a level of granularity that will prevent them from sabotaging renewable energy. Intentionally or not, the major utilities are stifling solar development by increasing the "Demand" potion of their bills relative to the "Consumption" portion. Since solar energy (via Net Metering) can only offset the consumption charges, the portion of their bills we can offset keeps getting smaller and smaller, making it even more difficult to reach price parity. A nationwide solar friendly DG-R (Distributed Generation - Renewables) tariff will prevent the utilities from playing with the tariff structures to keep solar energy from becoming competitive with their fossil-fuel retail energy.

FITs (Feed-in-Tariffs) could immediately launch the development of utility scale solar energy sites to provide wholesale solar energy to the utilities. It would only add a few dollars to the every utility bill (hopefully on the consumption charges, not the demand charges).

Bret Crochet

Mr. Friedman,

I read and enjoyed Hot, Flat, and Crowded. I think you were successful in making the argument that only by first modifying our market’s price signals that we can make true lasting progress in moving our economy from a carbon-based one. I also agree that the West has no right to lecture advancing economies on the errors of their carbon-based ways, when they are simply attempting to raise the quality of their lives by following our example. This is all the more true as we do nothing serious to mend our ways. Our only option, in my view, is to put our own house in order and by our example lead the way.

I believe that correcting our market is the first, most important, and possibly the only necessary step to bringing about a change from a carbon dominated economy. If the prices of our products and services accurately reflected their cost to the environment, people would change their behaviors. There is no greater force for the cooperation of masses of people toward any goal than their own financial self-interest. This is all the more true in times of economic austerity. There could be no greater force than eight, nine or ten dollar a gallon gas prices to bring about a demand for carbon-efficient transportation and to create a market for efficient transportation solutions.

There is, of course, an obvious political drawback to proposing a seven dollar a gallon carbon tax on gasoline (not to mention the related but equally necessary taxes on coal, heating oil, and other carbon intensive sources of energy). But I believe that the drawback arises not from being too bold, but from being too timid. Our recent brush with bankruptcy in California is an apt example. Despite the fact that the state is nearly broke and the fact that state policy is to drastically cut our greenhouse emissions, our green, Republican governor was unable to get a twelve cent a gallon gas tax passed. The problem, I think, is that twelve cents is too little to be seen as a disincentive for gas use, but large enough to be seen as simply another added tax on a tax weary population. Desperate times call for bold measures.

I therefore propose a theme for your consideration in a hypothetical Chapter 18 to your book: A new compact among and between the citizens of the United States. The compact is simple: That our society will raise money for our mutual purposes only through the taxation of our negative effects on the natural environment, beginning most urgently with greenhouse gases. The corollary to the compact is this: As we tax carbon and environmental pollution, we eliminate income taxes, sales taxes and property taxes, beginning with the most regressive.

I believe such a compact could change our society in positive respects, would be popular with the populace and is practical. The most important benefit is obvious. By correcting market signals in the United States to account for the damage of greenhouse gasses, 200 million people would commence searching for solutions to the problem, rather than the hundreds of thousands of present day true-believers. They would do so because it would make economic sense to do so, for the good of themselves and their families. As was demonstrated in the oil shocks of the seventies and the oughts, a rise in the price of gas can result in the immediate demand for efficient transportation and other alternatives.

The compact would apply much more broadly than to carbon pollution. The same effect should be expected for any environmental impact that was appropriately taxed. Habitat destruction, as you point out in your book, is at least as large a problem as climate change. A tax system under the new compact would no longer tax land on its value, but on how its use impacted on nature. Thus, no tax would be levied on land kept in its natural state. Taxes of increasing amount would be imposed on land used for grazing, farming, and yardscapes, with the largest tax on land that was paved over. There would be no greater tax levied on land for utilizing it more intensively, once it had lost its ecological value. It is not difficult to imagine multitudes of suburban residents linking their large yards together and reverting them to natural habitats, in order to lower their property taxes. Neither is it difficult to imagine large investors deciding to more intensively utilize land whose natural characteristics have already been destroyed rather than destroying the ecological value of undeveloped land.

I also believe that such a compact could become popular now. In fact, this is the point in history to bring such change about. Our current tax system raises the vast majority of its money by creating disincentives for activities that society should encourage, and activities we desperately need. Our system discourages work by seizing a portion of people’s incomes; it discourages spending by taxing sales; and it discourages property ownership by taxing the value of people’s property. Eliminating such a system could have broad appeal to conservative and liberal alike and serve to bring people together, rather than to move them apart. Doesn’t it seem that, whenever a legislature considers new programs or initiatives, or providing help to those that need it, the debate degrades to a routine argument about who the necessary money will be taken from, rather than the necessity for and the good the initiative would do. Such a debate would no longer be necessary. The money would be taken from those of us who pollute and would not create a disincentive for positive behavior. We would have a tax system in which every person would know, by the very fact of paying the tax, that they had contributed to their own survival. And, we would have a tax system in which every person would have a degree of personal control over the amount of taxes they pay. Discussions about how to spend the tax money could become more rational. In the short term, as the price of carbon pollution increased, the reduced income, sales and property taxes would remain in people’s pockets to help them finance alternative solutions to burning carbon.

Finally, I believe such a tax system is practical and could be instituted almost immediately. If there is any single thing at which a government can be efficient and effective, it is the collection of revenue for its operations. The institutions are in place to tax pollution and habitat destruction. Only a change of emphasis is needed. The federal government has the ability to address greenhouse gasses . State government might raise money by addressing air, water, and soil pollutants of more regional significance. County government (my employment and interest) is ideally suited and currently in the business of levying taxes on property. Government need not grow to address our climate and environmental challenges, it need only do what it does best, but with a different emphasis.

I am not so completely naïve as to think that such societal change would be easy. Change is never easy and is always frightening. However, we live in frightening times. Drastic action is needed and is needed now, both to alter our relationship with our environment and to stimulate our economy. I can think of no more effective way to bring about such change than to use the market, and no better way to use the market than to adjust prices through taxes. The hard part is to convince people there is a better way. We need opinion leaders such as yourself to articulate the possibilities and lead the conversation. I know you do this daily through your books, columns and activities. I can only encourage you to keep up the good fight.

Make it sexy to go green!

If there's demand, investors will come. Make it sexy to go green! Let the desperate housewives talk about going green. Let Oprah talk about energy saving lamps. Let two and a half man joke about it. Let the janitor in scrubs get on a crusade at the sacred heart hospital to reduce energy costs.

You will get a movement out of things like that much easier than by taxes.

It should be noted that the oil companies have deliberately cut back on oil processing [1/09] at a time when there are oil tankers anchored in the oceans all over the world because there is nowhere to deliver the oil. Also,the number of active rotary oil rigs drilling for crude in the US in 1988 was 554; in 1999 it was 128; and in 2007 it was 297. Although the American public is being led to believe the oil companies need more drilling rights, they are not drilling where they have rights now.

This is what you get with monopolies. Excess profits, which are always penalized by governments such as Great Britain, where BP was hit with a 30% excess profits tax in 2001, are being rewarded in America by giving the same profiteers a tax cut. Deregulation has lead to this economic breakdown. And regulation can get us out of it.

In other words, regulation of the oil companies could bring the price of gas down to where it was in 2000 $.89 per gallon and then we could attain revenue by applying an increased gas tax.

More importantly, can a democracy exist with monopolies and without regulation?

Why can't we start by practicing a lot of Western Europe's time worn and proven "Price Signals"? I'm sure the Germans would love to be as wasteful a society as we are, but they can't afford it. When I was an exchange student in Germany 25 years ago I was amazed that a family of four could get by with one of those "college sized" mini fridges, and that the garbage can they left on the curb each week was slightly bigger than a grocery bag. The also had this strange practice called "recycling", so there was a lot of stuff that you weren'y legally allowed to throw into your trash can. Whenever someone left a room, they always turned the lights off. Further, the family drove one small car and used the bus as much as possible because gas was ridiculously expensive. We need to penalize waste and excess, just like they have been doing for decades. We also need to reward conservation, because a lot of times it just costs more to be green. A really stupid example from just North of us: In Vancouver Canada they have a light rail system called the "Skytrain". I was staying with my family in the nearby suburb of Burnaby for a sporting event, and we decided to go Downtown for the evening. We took the Skytrain, which was about a quarter mile walk away from our hotel. We were in the cheapest "off peak" time period, and it cost my party of four people $20 to travel the five miles to downtown Vancouver and back. Once in the heart of downtown, we noticed that there was plenty of parking available at a flat rate of $10 for an evening. So taking public transportation cost us twice as much as it would have to drive ourselves and park, and was much less convenient. Since that trip, whenever I am in Vancouver I always look at the Skytrain cars as they go by, and except at rush hour they seem to be very sparesly populated. now I know why. The system is so high priced it's cheaper to drive. And since the system is too expensive to use, there is the added farce of empty or nearly empty train cars shuttling around the city all day long. If the trains run regardless of whether anyone is on them or not, why not make them cheap enough so people will actually use them?

I applaud you for writing this book. I hope it will be read by enough people, as well as understood, to ignite a "Revolution". That's truly what needs to happen...and soon. I believe in keeping it simple so implementing a permanent federal gasoline tax of $1.00 per gallon would let the “market” take care of the rest. Hoping Obama has the balls to push it through!

Hello Tom:
I just finished reading Hot, Flat, and Crowded. The part that really brought tears to my eyes was about the U.S. solar tech company that became a German success story.
This drives home the point that the U.s. market, as currently constructed, with the "all-you-can-eat" buffet of cheap (cheap because pollution, and carbon emissions, our being held hostage to foreigner influences are not factored into the cost) fossil fuels will not reform itself without a change of incentives. Leadership has to provide these incentives by taxing carbon. I agree that incentives need to be he form of 1) substantial gas-at-the-pump taxes (i.e., a fluctuating tax that keeps gas at, say, $4.00+ per gallon or whatever the economists agree is the change incentive) and 2) a carbon tax in the utility bill (talk of “clean coal”,an oxymoron, is just a delay tactic).
We should be looking at what has been accomplished in Sweden (see letter, above), Denmark, Germany, as well as policies taking shape China, as you noted in your book.
I agree with other writers that once the long-term market incentives are put in place, the technology will take care of itself.
My biggest fear is that complacency, due to ignorance, as well as resistance to change, due to entrenched interests, will perpetuate business as usual. Let's find out where each and every one of our elected officials stand on these issues, and work to dispel the political obstacles to change. Your analogy is astute, when you say that with the fluctuating price of gas, every time the price goes up, we are paying "taxes" to the Saudis and terrorists – taxes that could have been used right here in the U.S. to promote energy efficiency, energy independence, conservation, and noncarbon fuel and power sources. We need to get this point across to our elected officials.
You are also right that a grass-roots movement can be instrumental. I’m beginning my letter-writing today.

Thank you for your books and columns.

Diana Dakey
Millersburg, PA

Dear Dr. Friedman;

As someone who has just returned to the US from Europe (where up to 80% of the cost of gasoline is tax), I agree - broadly - with your 12 / 29 / 08 "Win, Win, Win, Win, Win" article proposing a gas tax increase of $0.10 per gallon per month over the next two years........ but there are two big problems:

FIRST, this level is probably too high to be politically acceptable. In two years time, oil prices are likely to be back over $100 per barrel (which will equate to a gas price of over $3.00 per gallon at the pump), and will mean over $5.40 per gallon to the consumer under your system. Not nice.

Also, as we've seen, oil prices can go up and down dramatically. How about modifying your proposal to a tax increase of $0.05 per gallon per month so long as average prices at the pump (including the tax) stay below - say - $4.00 per gallon. Once average prices hit $4.00, the monthly tax increase stops; Once average prices at the pump increase to $5.00 per gallon, the tax drops by $0.05 per gallon. This could be a nice way to help even things out, and add some stability to an uncertain world.

[I think AAA publishes average gasoline prices monthly, and the Treasury could easily re-set the tax monthly]

SECOND (and this remains a problem in Europe), this tax will generate a lot of revenue. The temptation will be for the Government to put this into the general coffers (as it does in most European countries).

If this tax is to be broadly acceptable to Americans, the revenues should be used only for specific, pre-agreed items such as improved transport infrastructure or development of green technology. NB, both of these items are in the new administration's spending proposals, so this would help balance the budget.

What do you think?

We must set a price signal high enough to push ourselves away from foreign oil dependency and toward sustainable energy sources, but it simply won't be done during this economic crisis. What if the Obama administration attached green strings to stimulus packages for both businesses and citizens in the immediate future, funding strategies that move us toward energy independence and greater global competitiveness? During the stimulus period, they also should announce a large fuel tax to take effect in 18 - 24 months. By then, the pendulum likely will be swinging back toward a strengthened economy and, even if is not, that would give each of us time to prepare. Announcing the tax now would keep us focused on what must be done to get off our self-destructive path. The proceeds from the taxes could fund expanded jobs in the energy and infrastructure sectors as well as be rebated to those who give back to our society by making their homes or businesses greener and themselves better ready to compete in the global market through education and training. For the smart citizen, such a tax could be a wash.

Just finished Hot, Flat and Crowded and enjoyed it!

There needs to be more discussion of the "Crowded" part. Clearly some countries such as China (with their one child law) are making an effort to limit population growth. Other countries such as India and some African nations don't seem to be limiting population growth and are bringing children into the world who will suffer lack of basics such as food, clothing and education. There needs to be more emphasis on limiting population growth.

Rebate for high mileage cars - frought with possiblities for tomfoolery and unfair to other conservation efforts. Be more direct...
In these troubled economic times we all - not just new car buyers (even if it is a Prius) but other people who might be conserving by walking or bicycle or staying home or taking transit - need some money - say $2000 for everyone/family who files a 1040 followed the next day by Federal tax of $2/gal on gasoline to repay the government for the rebate.
We would be healthier, have better trade balance, less carbon footprint, have better global market leverage to increasing oil prices and save face and get credit from the rest of the World for FINALLY doing something meaningful
See:
www.geocities.com/dpierce3

Flat taxes would help reduce incentives for indirectly subsidized waste
such as unnecessary gas hogs. The first 40K or so of household expense could still be tax free (phase outs with larger incomes). Caps on corporate personal incomes. Reduced social security & medicaire benefits
for larger income beneficiaries/couples (or tax it). Incentives to keep foreign trained engineers, and the like, to work in the US. Getting rid of any corporate deductablility for large incomes, stock options, derivatives
& hedge income activity. Getting rid of capital gains taxes and gettng
rid of any write offs for capital losses. Close uneeded military bases.
VAT needed to help pay for technology and other infrastructure (mass transit et al). Phase out defined benefit retirement programs for governmental and nongovernmental entities. Let GM go bankrupt so courts
can get it reorganized. It's (latter) has been around for 100 years, no
welfare of any kind needed.

Dear Mr.Friedman,

I have read all your books but I must say that your latest "Hot Flat and Crowded" has got me think even more than your other books did. Your book " The world is flat " made me smile as I live in the city that made you discover just how flat the world is ( Bangalore) and this made me so proud being an Indian and at the helm of what every one considers ultimate progressiveness. This book of yours made me realise the politics behind everything!And having read it directly after the Mumbai blasts, a thought occured to me. The same group that owns the Taj Hotel ( Tata and Sons)also owns the largest auto manufacturing company in India ( Telco) and now Jaguar. The irony is that their cars are fueled on petrol from petrol producing nations that have played an instrumental role in funding the jihadis someway or the other. Isnt it ironic then that the group that gives them their funds in a round about way, has had to suffer the maximum material damage during these blasts ?

I wonder if we can actually use the funds we are all putting into securtitising ourselves into a programme heralded by an overwhelming number of senior citizens that we have in each nation( look at the US auto market that spends so much money on retired people ) and get them ( wise human capital) to spend their time "educating" and teaching people around the world the right way to live in peace and harmony. Can't we use the same carrots that motivate them to kill and destroy to motivate them to create and build ?

I dont know : I am confused : but all I know is that the biggest resource we have is our people and if we unleash this power in intense projects that spend time building human values and capital, may be we could create a better more peaceful place to live in. That itself would be a green revolution of sorts.

I love your books and I look forward to your next !
Regards

Dipali

Why not shift some of the current tax burden from income to energy consumption and keeping it revenue neutral. Reduce the income tax and transfer it to consumption of energy. You might pay an increased tax at the pump of to the utility but the real deal would happen on an annual basis on the 15th of April. Those who consume less energy would shoulder less of the tax burden.

Depending on how aggressive you wanted to be you could transfer more or less of the tax burden. It could be that initially an agressive transfer could be undertaken innitialy. once new habits were formed and new systems were in place the burden could gradually be returned to something more like the current tax system.

Most energy purchases are currently tracked and billed by utilities. Only gasoline can be purchased with cash with no personal record of purchase. A new system would have to be addopted to track these purchases. This method could also be applied to other precious resources where conservation is warranted, like water.

Everyone would then have an immediate and ongoing financial interest in using less energy, in purchasing the most energy efficient products, etc...

This was my answer previously posted on Linked in:

I would use a creative but in my view effective solution: the poluter invests.

Consider the following idea: for every gallon of gas, the buyer pays i.e. 20 cents extra. Now this money does not go to the government but is placed on a environment investments account of this buyer (you'd have to use a card while paying so the money ends up there). On this account you therefor save up money. On a corresponding internet site, the accounts owner can then invest the money on (government) approved investment opportunities that help the environment such as windmill parks, companies researching better and greener methods etc etc. or even on personal green improvements such as solar panels for on your own roof. You can't spend the money otherwise, just in these investments. The shares or bonds etc. are however yours to use and benefit from as you please.

The result would be a huge amount of extra investment money available. It would not be an extra tax as you get to invest it yourself. So what you get is

- a lot of available funds
- the market decides (the (approved) companies selling stocks or bonds need to convince the public their investment will show results or the people will choose other options)
- no extra tax
- the more polutants are used, the more money gets available to find solutions
- a boost for the economy.

The reason I think this will boost the economy is that the current recession is caused by a decrease in demand based on nothing substantial. People are just afraid and keep their money in their pocket. To increase demand again you can:

- tax and spend, force the money out of the pockets and spend it for them
- lower taxes for the lower incomes: Lower incomes spend what they've got cause they've got no choice. Increase what they've got and they spend more. (This won't work with higher incomes)
- find a trick to make people spend/invest again

My proposed idea would do the latter. It's a good trick to make people invest.

It does not involve increasing tax. The market decides about the spending (regulated by the government as to what companies get to tap into this money), but the people get to choose. The result stays the property of the people that put up the money. And the poluter is the one that gets to pay.
The more someone is part of the problem, the more that someone gets to part of the solution.

Here is a way to provide a price signal or add a tax and have no effect on the economy!!

If we as a nation want to get serious about reducing gas consumption and thereby help alleviate the threat of global warming, there is a way that is quick, efficient, with virtually no negative effect on economy and will not unduly burden any group.
We all know that the most efficient way is through economics. The gas price spike last year showed us that consumption will drop significantly and that was when cost of gas was in the $4 range. Imagine if gas costs rose to European levels of at least double that.

Of course it would be politically impossible to just raise gas taxes as they have done in Europe and most of the world. The disruption to the economy and the burden on average Americans and especially the poor plus the idea of raising taxes would kill that idea. There is however a way to accomplish this without above drawbacks. Suppose we raised the tax so gas cost $6+ at the pump but every penny collected is returned as a tax credit with every taxpayer having a drivers license getting the same dollar amount. This tax should only be applied to pump gasoline. Diesel for commercial vehicles, heating oil, or jet fuel needs a little different treatment so that production and distribution costs would be minimally affected. The economy should not be affected since every penny collected from this gas tax is returned. Since everybody gets same dollar amount, if you consume more than average amount of gas in a year you will end up paying more at pump than you get back in tax credit. Conversely if you take a lot of transit and drive very little, you will come out way ahead. If you consume an average amount of fuel you should come close to breaking even. Cost of implementing this program would be virtually zero. The system for collecting this tax is already in place and it would only take a few lines of programming for IRS to compute the tax credit. Withholding from paycheck can be reduced to account for tax credit so that you don’t have to wait until tax time to get your money back. The idea is that even though your paycheck will be a bit bigger when you have to pay $6+ per gallon you will think twice about what type of vehicle you will buy and about how much you drive. Carpooling or transit will make more sense and we will be a little more careful in choosing to drive somewhere.
Now, the key feature of this is that every penny collected is returned so that there is no new tax to the government so even conservatives can support this idea and democrats don't have to worry about being labeled as tax raisers. The tax will not be regressive since the poor tend to use mass transit more and do not drive the big gas hogs, and since everybody gets same dollar amount in tax credit the poor will most likely come out ahead. The other very positive possibility is that without competition from cheap oil, developments into alternative fuels will expand. Biofuels can get preferential tax breaks based on how green each technology is. It would probably be best to phase the tax in at say 50 cents/gallon per year for 10 years to let industry and consumers adjust.
This should actually help the auto industry since everybody will want to phase out his or her old vehicles and buy a new fuel efficient one.

As far as commercial diesel costs are concerned I believe that we need to squeeze out more efficiency in transportation and heating oil. Therefore I propose that commercial diesel get a tax of 25¢ per gallon per year for same time period. I propose that the tax from commercial diesel not be rebated but used to fund transportation infrastructure. The extra cost will have to be passed on to the consumers but it will be minimal since the reduced demand will keep overall oil prices down.

For consumer diesel for cars and RV’s etc I think we should use 80% of gasoline tax or 40cents/gallon/year for 10 years. Vehicles using diesel are 20% more fuel efficient so it would be good policy to encourage its use.

Everything we do in this country has been based on cheap gas. The type of vehicle we use and how far we are willing to commute is based on cheap gas. Without an economic incentive to change our behavior, only marginal improvements will occur. Technology will only help us when it can compete economically with cheap gas.

We could so easily change our energy use patterns by using economics. Why doesn’t every single house in sunny Nevada and California produce 2-3 KW of solar electricity? The technology is there but it does not make economic sense when payback period is somewhere around 10+ years. If we can change the economics think of how much power would be generated if every house had a solar panel!

My country Sweden introduced a carbon dioxide emission tax in 1991. This tax has been raised several times since. At the same time income taxes have been lowered by similar amounts. We call this a "green tax switch". As an example, the CO2 tax today doubles the price of heating oil compared to the market price, and is a major driving force behind the switch away from heating based on fossil fuels to renewable heating, primarily district heating based on biomass for whole communities, and pellets heating for single homes.
From 1990 until 2007, the emissions of greenhouse gases in Sweden fell by 9.1 percent. GDP during the same time period grew by 48 percent. This is referred to as "decoupling". The use of biomass for energy grew by 79 percent.
I believe in PPP, polluters should pay for their emissions. High emission fees have to be introduced to internalize external environmental costs. Then the market will take care of the choice of technologies.
I work for the Swedish Bioenergy Association. Bioenergy today accounts for 28 percent of the end use of energy in Sweden. We have almost 500 heat plants for district heating using biomass in a country of 9 million people and the size of California. You are welcome to visit and see for yourself how carbon taxation works in practice.

Historically are most worldwide economic depressions of the scale and scope we are currently facing followed by war? If there is relationship between these two, what are the experts saying on the subject in the context of our current crisis?

Tom:

I agree with you that putting a price on carbon emissions during a major recession will not be popular and probably politically unachievable but what about using both a carrot and a stick? If a carbon tax was balanced out by an equal full 100% dividend return to everyone (or at least all that are here legally) then people could actually improve their financial position in these hard times by reducing their use of polluting energy below the per capita average. Is it possible that such an approach could be sold even in a recessions?

Tom
Thanks for stimulating the gray matter. I think a sliding tax may be a solution. Automobiles that get under 25 mpg get a full sales tax and the tax slides down to zero for cars getting over 38 mpg then converts to a a sliding tax rfund on autos getting over 38. For example a Ford F150 would get the full sales tax and Volt or Prius would get a tax rebate. The same could be done for carbon emissions. The same could be done for household energy used, water used.....

Tom,

I agree with you that we should put a price signal in (i.e. taxes on energy sources derived from crude oil) that is significant and painful enough that it drives consumer behavior towards conservation, and stimulates the investment in bio-fuels and other renewable sources. If we did this, I think its probable that you'll see many of the innovations towards fuel efficiency that you aspire to, and I would bet that many of these would come out of Detroit and the rustbelt and the big three, since this is an area where there are many people who actually know how to design and build these innovative and fuel efficient cars, and there would actually be a consistent economic incentive to do this, since consumers would actually be willing to pay for the technologies. I would also guess that many of the major innovations of any scale would not have anything to do with the things that you propose, since it's clear from your writings that you do not possess the basic knowledge in science, mathematics, and thermodynamics necessary to critically evaluate the ideas you support. Writing about what others do is a valid function; however, it doesn't make you an expert. Also, remember that its pretty easy to give advice and propose grandiose ideas, but it is much harder to work through the details and actually implement them.

Additionally, I would suggest that you tone down the rhetoric in your columns which tend to stereotype and paint negative pictures of groups of people you don't seem to like. Specifically, I see alot of your "modernized racism" directed towards people that live in the middle east and more recently people that live in Detroit. Try to think about how it would feel to walk a mile in someone elses shoes.