Where's the Price Signal?

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.

Why not set up a stock exchange that is only focused on trading "green companies" and/or green investment funds and financial instruments (e.g. like a mortgage company that only holds mortgages on homes with solar and businesses with LEEDS certification or a company involved in recycling activities).

This bourse could provide a central trading location for green companies and green funds. Its rules for listing would be geared towards green criteria. Consumers and investment houses would have a place to direct their savings and investment funds towards green initiatives.

Then lets see if this green bourse outgrows and outperforms the NASDAQ or NYSE, etc... or not?

We let the free market decide on which green companies and funds survive within the Green Bourse.

Sustainable Energy Commercialization Authority

A Federal Sustainable Energy Commercialization Authority (SECA) must be established. It would have the following elements:

▫ 35 Sustainable Energy and Bioscience Innovation Centers (SEBIC) created at major universities throughout the U.S., each receiving annual research grants of $2 billion. Collectively, by 2020, the following could be achieved by these centers after their inception in 2009:
o 12 Nobel laureates
o 5,000 patents
o 10,000 Ph. D.’s awarded
o 1,500 FTE faculty appointments
o Courses provided to 1.5 million students

▫ 15 Component Breakthrough Science Authorities (CBSA’s) each established with annual grants of $3 billion. Collectively, the following could be achieved by these authorities by 2020:

o Cellulosic biomass production of alcohol fuels (ethanol and methanol) at < $7 / MM Btu and currently in excess of 20 billion gallons annually, or 12% of U.S. transportation energy consumption;
o Solar PV efficiencies achieving 95% of the theoretical maximum efficiency of 1.367 kw / m2 annually;
o Wind power generation available commercially at 1.2 ¢ per kWh;
o Decentralized H2 production from electrolysis at < 8 kWh / kg;
o Replacement of 50,000 MW of non-sequestered coal power generation with renewable energy in the U.S. and Canada (20% of current coal use);
o Reversible low temperature solid-state metal hydride H2 storage within 2 x of the commercial cost threshold;
o Cost effective reusable hydride H2 slurry within 3 x of commercial durability requirements;
o Single and double wall nanotube H2 storage innovations equivalent of 500+ mile vehicle range within 4 x of commercial cost and manufacturability thresholds.
o Inherently safe battery chemistry with >30 MJ / liter volumetric energy density, > 1,500 Wh / kg gravimetric energy density and > 5 kW / kg
o PEM FC durability for vehicles in excess of 150,000 miles and within 4 x of commercial cost benchmarks.
o 4,000 small research refueling stations deployed;
o 8,500 research FC vehicles deployed, including hybrid FCV’s
o Technology transfer of 2,500 patents relevant to E-100 Flexible Fuel Plug-in hybrid vehicle commercialization to major OEM’s.

By the year 2030, these annual investments, if sustained, could achieve the following:

▫ GHG intensity equivalent to 2010
▫ GHG emissions equivalent to 2015
▫ 97% phase-out of non-sequestered coal-based power generation
▫ 45% Renewable Portfolio of total U.S. generation
▫ 20% replacement of transportation fossil fuel use
▫ 98% E-100 P-HEV FFV penetration in the light duty segment nationwide;
▫ 35% hybrid penetration in the heavy duty vehicle segment nationwide.
▫ 5% of new car sales in 2030 as H2 FCV’s

By continuing the momentum of SECA’s programs through 2040, the following are realistic options for the U.S. economy:

▫ GHG emissions stabilization by 2040
▫ Retail high volume H2 availability at 15,000 locations throughout North America
▫ Credible prospect of reaching year 1990 levels of GHG emissions by 2050

The success of the SECA will not be possible without the unprecedented vision of the Congress to provide substantial long-term funding to achieve the science breakthroughs necessary for a viable non-fossil fuel economy for the nation. The investment of $1 trillion over the next 15 years would represented less than 1% of the nation’s GDP growth during that period, and less than 12% of its total defense budget. The climate and energy vulnerabilities of our economy should now be recognized as the major risk factor now faced by the nation. The SECA, if adopted, would owe a great debt to the resolve of the 2009 Congress for sidestepping the traditional impasses which has surrounded the debates about energy policy.

The expertise, motivation and new science tools germinated over the next 15 years could served the nation well. We could soon be within a generation of being able to establish, for the first time in the nation’s history, a truly sustainable energy and environmental future.

I think that for gas prices to have a real effect on driving behavior and on the consistent demand for high mileage and hybrid vehicles, the price of gas has to be really painful. And it has to stay painful. At even $5 a gallon it seemed as though most drivers just whined and perhaps called their Toyota dealer to ask about buying a Prius. They decided not to bother when they heard that the Prius was on backorder.

The price of gas has to go up and stay at the point where drivers have no choice but to change their behavior. Nothing else will work. We are moved by our pocketbooks - and a less painful change will only make us feel smug about becoming more efficient in our errand running etc. That sort of change, while necessary and helpful, does not represent a true and lasting shift in perception or acceptance of reality.

This recent drop in gas prices has been a real setback to the permanent change in outlook that is needed to convince the public of the seriousness of our situation.
The next time that prices go up it will be easier for drivers to convince themselves it is only a temporary situation.

A permanent floor on gas prices has to be set at a behavior changing level and the public has to know that gas prices will never fall below that level again.