Why Shift to Carbon Tax Lowers Global Warming Faster at Less Cost
Discouraging Fossil Fuel Energy is More Efficient Than Promoting CO2-Free Energy
Promoting Energy That Does Not Produce Carbon Dioxide
The great majority of energy being used today is from fossil fuels. And there is a very large installed capacity for it in existence, such as gasoline and diesel cars, coal and natural gas power plants, etc.
If government subsidizes wind and solar energy, and electric cars, rather than shift taxes to fossil fuels, it can encourage consumers to buy new electric cars or businesses to build new power plants that use solar panels. But it does not discourage people from driving fewer miles or use less electricity than what their true costs justifies when we include the cost of negative environmental effects in fossil fuel prices. Therefore, the subsidies to CO2-free energy are totally missing out the opportunity to reduce emissions from the current use of fossil fuels, which is where most of the immediate potential for greenhouse gas reductions lies. Therefore, promoting CO2-free energy is delaying the reduction in CO2 compared to my proposed tax shift.
The additional government spending of promoting CO2-free energy also increases the already-serious level of government debt. Or, if it is paid by raising taxes, it has an adverse effect on productivity because it incentives time-consuming actions to avoid them or evade them.
Discouraging Fossil Fuel Energy
Shifting the tax burden to fossil fuels starts reducing the miles driven by those with gasoline powered cars and the overuse of electric power from power pants that use fossil fuels. And it still encourages the purchase of electric cars and the use of solar and wind energy since their fuel costs will be made comparatively lower than the increased cost of fossil fuels. In other words, the shift to fossil fuel taxes covers all fronts, it applies to all of the situations where there is a potential to reduce fossil fuel use.
Plus tax shifting does not require increase in government spending or taxes, while subsidies to CO2-free energy do.
In addition, transportation has serious congestion problems. Subsidizing CO2-free transportation can make this problem worse because it makes the driving cost per mile cheaper, encouraging people to drive more miles (specially since electric cars don't pay gasoline taxes). Shifting taxation towards fossil fuels makes the fuel cost per mile of most cars on the road today much more expensive (but makes other products whose taxes are reduced cheaper or leaves people with more after-tax income). Therefore people will drive fewer miles, reducing CO2 and CO1 emissions pollution, auto accidents and congestion.
Reducing congestion from driving fewer miles brings additional benefits because: (1) small amounts of reduction in congestion have disproportionately large effects on the speed at which vehicles can move (5), (2) stalled and slow-moving cars and stop-and-go driving reduce gas mileage and generate more unhealthy pollutants, such as carbon monoxide, per unit of energy used, (3) it saves valuable time to the people in the cars and (4) it reduces the need to widen roads, which cuts government spending needs and prevents the additional damage to the environment from increased paving of the land.
If part of the tax shifting is in the form of charging a price for road use that rises during peak traffic times at peak traffic places, it reduces congestion much more. This would make the benefits of this proposal even greater (5).
Shift to Fossil Fuels Taxes Leads to Lower-Cost Choice of CO2-Free Fuels and to Lower Tax Collection Costs
Government Subsidies and Regulations Favoring CO2-Free Fuels
Subsidies and regulations to promote CO2-free energy involve a wide variety of laws applied to many different industries that use cash payments, complicated tax breaks and/or regulations to promote various different kinds of alternative forms of energy (6). As is typical with governments, this is done at different times, influenced by political considerations, uncoordinated with each other and with little regard to their comparative cost effectiveness.
The electric car subsidies and the requirement to mix ethanol with gasoline discussed above are only a couple of examples of these subsidies and regulations. Other major ones are the minimum mileage requirements on cars and the subsidies to wind and solar energy.
But each of these categories is not just one subsidy or one regulation. They involve thousands of pages of laws and regulations with many specific types of complicated tax breaks, subsidies and conditions required for the recipients to qualify for them. Therefore, large government bureaucracies and private company compliance departments are needed to administer them.
These actions are not just low in cost effectiveness but they are much more likely to invite corruption because their legislation and administration are focused on several narrow business interests that receive relatively large amounts of money. So they have a large incentive to lobby for these subsidies and can easily organize to benefit from them (as has been the case with corn farmers lobbying for pro ethanol regulations subsidies). And the complexity of all the subsidies and regulations makes corruption more difficult to detect.
These subsidies and regulation also suffer from the disadvantage of not having a uniform subsidy per unit on CO2 reduced. For example, subsidizing solar energy is done by a separate law and criteria from subsidizing wind energy. But the cost-effectiveness of reducing CO2 of each of these varies by numerous factors, such as as their amount of subsidy, the amount of wind or sunshine, distance from the user and differences in installation costs. Choices can frequently be made primarily because the particular subsidy that applies to the user is higher for, lets say, electric cars than for solar panels. But, if there were a uniform tax for CO2 emissions per Kilowatt hour, maybe the better choice would have been for solar panels.
A Shift In Taxes To Fossil Fuels
The fossil fuel tax would be at the point where producers sell coal, oil and natural gas to users, such as refineries, distributors or power plants. This is far simpler and has much lower administrative costs than the myriad of specific subsidies and regulations to promote CO2-free energy. It also does not have all of the other disadvantages of subsidies and regulations mentioned on the above section. And the higher cost to consumers of the energy from fossil fuel will drive people towards making choices that replace them with the sources of energy that produce no carbon dioxide.
But the greatest advantages of a tax shift as opposed to subsidies and regulations are these:
Consumers can respond to the taxes in the way that fits their situation best, and they can change their response as the situation changes. For example:
Drivers can choose whether to: (a) buy more fuel efficient cars, (b) drive fewer miles, or (c) use bus or rail transportation.
Home owners and renters can decide to (a) lower their air conditioning temperatures in the Summer and raise them in the Winter, (b) buy, a more efficient air conditioner, light bulbs and appliances, (d) install solar panels, (c) improve their home insulation or (e) any combinations of these.
As consumers they (a) have an interest in making the choice that gives them the best cost reduction, where the cost, through the fossil fuel tax, includes the damage done to the environment, and (b) are in the best position to know which choices are the best for them in their situation. For example, those in areas with more sunshine will lean towards installing solar panels, those where it is very cold or very hot would lean towards improving their home insulation.
The same applies to businesses. The higher cost of fossil fuels will drive power plants to replace fossil fuels with wind, solar or nuclear power (hydroelectric and thermal are close to the limit or their expansion). Vehicle manufacturers will improve gas mileage to meet the increase demands for it by consumers, without the need for a government regulation to force them to do it. And they have the interest in doing this at the lowest possible cost in their specific situation, which they know much better than the government.
The business profit motive will not only lead to a switch to existing technologies that prevent global warming, but also to invent new technologies for that same purpose.
And, unlike the subsidy and regulation schemes, this tax-shifting proposal has little, if any additional, cost to the government. It is just a matter raising fossil fuel taxes and lowering other taxes, mostly income taxes. Since fuel taxes are simpler to administer and enforce than income taxes, this tax-shifting proposal will actually reduce the government's tax administration costs.
To the businesses and consumers there is a cost of transitioning from products that produce greenhouse gases to those that do not. But this transition cost also applies to government policies involving subsidies and regulations.
As with any large change in government policies, the tax shifting plan should be introduced gradually to allow consumers and businesses to adjust their plans in advance. For example, it should start three months after the legislation is passed and increase by intervals of thee months over a three year period. As long as the execution of this plan is credible, people will start making changes in their durable purchases (like cars or power generating systems) before the taxes go into effect.
Although there is no net change in total taxes or their progressivity in this plan, it cannot possibly affect everyone equally (but subsidies and regulation do not affect everyone equally either and they cost the public more). For example, those who have to drive more miles will complain about the higher cost of fuel. And I am aware of the many cases throughout the world where an increase in fuel taxes (or a reduction in their subsidy) lead to riots in the streets that resulted in the government reversing that policy. France and Nigeria are two recent examples. This is another reason why this tax shifting plan has to be introduced gradually.
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Footnotes
(5) We have all seen how congestion lasts for hours after the peak our traffic that created it. It takes a relatively small reduction in traffic to prevent the original congestion. The disproportionate reduction in cost from this prevention comes from avoiding all that extra time it takes for the congested traffic to clear out. See Cato Institute, Policy Analysis, Solution to Congestion, pages 3-7. Also see US Department of Transportation, Federal Highway Administration, Congestion Pricing
(6) Quotes from U.S. Energy Information Administration, Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2016, “The scope and complexity of federal financial and award activities are very large and spread over a wide range of sources, recipients, and time frames.” and “Most current federal subsidies support developing renewable energy supplies (primarily biofuels, wind, and solar) and reducing energy consumption through energy efficiency.“