a progressive energy tax

June 5, 2009

(cartoon by David G. Klein)

(cartoon by David G. Klein)

The recent American Clean Energy and Security Act (Waxman-Markey) bill proposes a host of new economic measures and climate mandates aimed at creating green jobs and reducing the flow of carbon into our atmosphere. Dan Weiss at CAP has a nice summary with good links if you’d like to read more about it.

While this legislation is all well and good and should have happened ten years ago, I can’t help but be troubled by its complexity and loopholes.

Now let’s get a few things straight before I throw in my suggestion. I don’t know a ton about environmental policy and know even less about the economics of it all. There are probably wonks out there who, upon reading my suggestion, will say, “Oh, that won’t work for x, y, and z…” That’s fine with me, but I feel that I must at least outline the thought on (digital) paper. So, here goes:

The plan is simply a progressive energy tax: People who use less energy will pay less per kilowatt-hour than those who use more energy. (For now, I’ll just consider electricity for simplicity’s sake, although it could easily be extended to other forms of energy.) I’m taking this notion directly from our progressive income tax system. Economists can figure out the pricing and scale of all this, but I can still talk about the general idea.

The two other major climate policy initiatives out there are cap and trade and an outright carbon tax. While I think both of these ideas have merit and probably belong in a pantheon of climate legislation, they each have some problems. Briefly, calculating how much carbon a product or service emits into the atmosphere so as to put a tax on it is quite tricky. Where do you draw the line with transportation, and other aspects not directly involved in its production. Scandinavian countries, who have implemented carbon taxes, mostly just place flat rates on major energy sources like oil, natural gas, and coal. I’ve already mentioned what I see as some weaknesses with the cap and trade plan in the Waxman-Markey bill.

Ok, so let me explicate this idea a bit…

As with all progressive taxes, the idea is to transfer the largest economic burden to the biggest users. The incentive, of course, is that the largest users of energy have the biggest impetus to become more efficient. One the other end of the spectrum, the tax would have a relatively low cost for small businesses or low-income families because they’d simply be using the least amounts of energy in the lowest tax bracket. While a carbon tax and cap and trade also encourage big users to cut back, a progressive energy tax is more aggressive.

The other main advantage is its (relative) ease of implementation and transparency. Quite simply, utility companies could submit something like a W-2 to the IRS, detailing how much energy we used in the year. We all pay taxes on that usage at the end of the year. We don’t need to create huge new regulatory agencies or government apparatuses in order to make it work.

Furthermore, and perhaps almost as important, it’s simple, transparent, and provides a real, tangible impetus for families and businesses–or really anyone who uses energy–to cut back and become more efficient. A good deal can be shrouded in complicated solutions like cap and trade and even a carbon tax. This energy tax is simple enough for everyone to understand and easy to see how direct measures you take reduce your taxes that year.

I recognize that, politically, no one likes taxes, that we prefer cap and trade because it seems more free market-ish (i.e. better for most people). But ultimately they’ll both end up raising the cost of using energy (which currently also usually entails putting carbon into the atmosphere), so the actual difference is small.

Once people get over the initial fear of “another tax” (the horror!), we can explain that an energy tax could just partially shift the tax burden from income to energy use. Both taxes are progressive, so the scaling could be similar, but the difference is that most people like having lots of income and grumble about the taxes, but no one likes using lots of energy, especially if there are high taxes involved.

I also recognize that this plan does nothing directly to benefit those using (or producing) alternative energy sources. Well, even if you’re using an alternative energy source, energy conservation is still important. And the government can always use this new source of cash to give some tax breaks to alternative energy companies and fund alternative energy research.

So readers, tear the plan apart. I want to hear all the objections. I’m merely throwing this idea out there to get some discussion going.

One Response to “a progressive energy tax”

  1. Excellent post, Drausin, and a much-needed digest of a complicated and jargon-heavy policy measure. I share your enthusiasm for the progressive scheme of this tax measure, and let’s face it, Americans (consumers and companies) often respond to penalties as readily as they do to incentives, and often more so. The tax scheme provides both. I haven’t studied the bill closely but I would hope that it includes provisions for how this new tax revenue will be spent, in positive mitigation, perhaps, of environmental degradation and pollution abatement. Also, if it were coupled with a “feed-in tarrif” that would allow consumers and companies to sell back to the utility grid energy produced using renewables (wind, solar, etc.), I think we’d really be on our way toward sound carbon regulation, and catching up to what most advanced societies achieved in the 1990s! In the meantime, thanks for your informative explication.

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