A Simple Climate Tax Scheme

The following guest post is by Bob Findlay, a self-employed open source software engineer who lives on a small farm just outside Toronto.
On 07 Apr 26 an Oil Drum blogger named Squalish (http://www.theoildrum.com/node/2499) wrote a response to a debate about government’s role in climate change policy. In that piece Squalish described an idea whereby all CO2 taxes would be pooled into a separate fund and “rebated annually in an equal amount to every US taxpayer”. This got me thinking. What a clever idea but why not bypass the government coffers entirely? Here is how a simple scheme might work as illustrated by the story of Joe Average and Jane Median. Joe and Jane live in different jurisdictions. Both use 1000 liters (250 US gal) of gasoline per year, which coincidentally happens to be the average for all drivers in their areas. Both Joe and Jane pay $1 per liter ($4 US gal) for gasoline at the pump which amounts to $1000 per year each for fuel. Joe and Jane’s governments see a need to reduce fossil fuel consumption to help combat climate change. As such, each government will enact legislation to put a price on carbon. Joe Average lives in a jurisdiction where the government introduces a revenue neutral carbon tax of $1 per liter, with vague promises to offset his pain at the pump with equivalent income tax reductions. Jane Median lives in a jurisdiction where the government has also introduced a carbon levy of $1 litre. However, Jane’s government has appointed an arm’s-length non profit agency to collect all this levy. This agency’s sole mandate is divide and refund the total amount evenly amongst all registered drivers of which Jane is one. Once the legislation is enacted both Joe and Jane are now paying $2000 per year for their motor fuel. Neither is happy about it. Nonetheless, unhappiness is a powerful (albeit negative) motivator to make the desired changes: to use less fossil fuel. Meanwhile Joe is still waiting for his government to enact legislation to lower his income tax by $1000 per year. He is in a higher income tax bracket, so he doesn’t hold out much hope that he’ll see that deep a cut. Jane, on the other hand, is already receiving her refund check for $83 each month, which almost totally offsets her carbon levy ($83×12=$996). Jane’s cash reward is a powerful positive motivator. Jane is certainly in the better frame of mind than Joe. Now both Joe and Jane are environmentally savy consumers and they embark on a conservation campaign which saves them 10% on their annual fuel usage, ie. each drops to 900 litres (225 US gal) per year. Let us suppose that Joe and Jane are ahead of the curve and the average driver in their respective jurisdictions is content for the time being to continue consuming 1000 litres (250 US gal) per year. As a result of their conservation efforts both Joe and Jane are rewarded by an annual savings of $200 each at the pump. However, each is still paying $1800 per year at the pump, substantially more than before the carbon tax. Joe is the least happy. He is still spending $800 MORE for fuel than before his enlightened government introduced the carbon tax. Jane meanwhile still experiences the pain when she fills up at the pump. However, she is still receiving her $83 refund check each month. So her net outlay is now $800 per year or $200 LESS than she was spending before her enlightened government introduced the carbon levy. Jane feels like the program is paying her to conserve. Both governments are of the view that to be effective, the price of carbon needs to be escalated in a predictable and scheduled manner going forward. In both cases the next scheduled increase brings the carbon tax/levy to $2 per litre. Both Joe and Jane are now going to be paying $2700 per year for fuel. They are good conservers but they are finding it difficult to conserve more than the original 10%. Fortunately, now that fuel is $3 per litre ($12 per US gal) lots of non fossil alternative fuels are price competitive. Joe and Jane switch vehicles to take advantage of an alternate fuel which is priced at $2.50 per liter ($10 per US gal). Joe saves $450 per year by switching to an alternative fuel. However, he is still paying $1250 more per year than before the carbon tax as introduced. He is still waiting for his income tax offset to kick in. Jane, on the other hand, is still ahead of the curve amongst her fellow drivers. She also saves the same $450 per year at the pump by switching to a cheaper alternative fuel. However she now receives $166 per month in refund cheques from the carbon levy fund. Her net outlay has dropped to an amazing $250 per year or $750 less than before the carbon levy was introduced! What is even more amazing is that Jane’s alternative fuel producer is receiving the full $2.50 outlay at the pump. In fact Jane’s government is able to collect a fair tax on that $2.50 alternate fuel as well. No need for profit or tax holidays to stimulate the acceptance of the alternative fuel. The question is which of Joe or Jane would be more likely:

  1. to tell a friend about their fuel conservation/alternative fuel strategy
  2. to live in a jurisdiction which sees total fossil fuel usage drop
  3. to vote for their government next time round.

At the end of the day the purpose of any carbon pricing scheme is to reduce fossil fuel consumption. The success of any program hinges on a buy in from the consumer. The consumer has to do the conserving or switching. There are a number of reasons why this simple scheme would have a better buy in than alternatives.

  • There is a widespread mistrust of governments and government programs. Jane’s government is acting as the enabler and not the doer. The fact that this scheme is administered at arms length should lead to better public acceptance. Better public acceptance should translate into better results.
  • The collect, average and refund math naturally rewards consumers who position themselves below the average and penalizes those which are above the average. Those consumers at the average are revenue neutral. This scheme will be perceived as fair. Schemes which are perceived to be fair have a better acceptance.
  • The only way to game the system is for the consumer to reduce their fossil fuel consumption below the average. That way they’ll get a bigger refund check than they spent in the carbon levy. This motivates the consumer to do exactly what the program set out to accomplish: to reduce fossil fuel consumption or encourage a switch to non carbon fuel sources.
  • Furthermore as more consumers try to conserve their way to below the average that average itself will drop. This naturally nudges the consumer to redouble efforts to continue fossil fuel conservation or replacement. This can be further amplified if the carbon levy is itself escalating in time.
  • The monthly refund check will be viewed in a positive light. When a taxpayer overpays income tax and receives a refund check upon filing, they don’t typically think of it as the government giving them back their money but simply as the government giving them money. This extra positive reinforcement should amplify the effectiveness of the program.
  • Alternate non fossil fuels are naturally rewarded in the scheme. First of all the price of fossil fuel is raised to help new competitors enter the picture. If the consumer were to switch to biofuel, electric or hydrogen vehicles they would still receive the rebate check to offset that higher alternate fuel cost. The fossil users subsidize the non fossil users. This should accelerate the uptake of alternative fuel sources. This should help naturally sort out the alternative fuel sources which scale well from those which don’t.
  • This scheme has a natural end point. Once all the consumers have conserved to zero or converted to non fossil fuel sources there would be no carbon levy collected and no refund administered. The program will have achieved its objectives and could be disbanded without any impact on government revenues. There is no incentive to run this program beyond its natural end point.

Left on its own, price induced rationing can be very unfair. Unfairness on this global scale can lead to many undesirable consequences which are worth avoiding. The pricing scheme that Jane’s government adopted attempts to address this fairness issue by naturally rewarding those who do the right thing while at the same time penalizing those who choose not to. The beauty of this scheme is that this reward and penalty occurs regardless of your ability to pay. This is not to say that Jane’s government would find it easy to implement such a scheme. Jane’s government would have to address two vulnerable areas:

  • registry fraud
  • cross jurisdiction shopping

There are technical solutions to registry fraud (eg. biometric smart card, encription) but the political will and cost to implement them may be a problem. The cross jurisdiction shopping is a problem common to any carbon pricing scheme. Unless neighboring jurisdictions implement similar programs, consumers will purchase fuel in the lower cost jurisdiction if possible. Some jurisdictions have examples of a government enabled arms length organizations created for the purpose of collecting and redistributing funds: eg. the state run lotteries. However, the US currently consumes 1.55 billion liters of gasoline per day (388 million US gal). At a $1 per litre levy Jane’s non profit would be handling close to $1.6 billion/day. This flow of money is orders of magnitude larger than lottery proceeds. This is a non trivial float of money and by definition will difficult to administer cleanly. The world is facing two fossil fuel challenges going forward: carbon dioxide induced climate change and Peak Oil. Fortunately, the solution to both is the same: consume less fossil fuel. The two crisis are different, however. In the climate case, if we fail to act fossil fuel rationing will not be a natural consequence. In the Peak Oil case, if we fail to act we’ll get fossil fuel rationing regardless. The way to mitigate the climate crisis dictates that we collectively organize to artificially ration fossil fuel. Peak Oil on the other hand dictates that we collectively organize to smoothly ration a geologically declining supply of a fossil fuel (oil). The price we pay for fossil fuel is a powerful lever in determining how much we consume. It follows that intervening in the market to put an artificial price on the carbon in a fossil fuel will induce us to consume less. This is at the heart of most climate proposals (including that employed by Jane’s government). In theory putting a price on carbon would ration fossil fuels and we’d simultaneously address the needs of climate change and Peak Oil. However, as with all artificial market interventions the devil is in the details. There are no perfect solutions here. As Ginsburg’s Theorem dictates: you can’t win, you can’t break even, and you can’t even quit the game. Doing nothing about these challenges is a choice. I believe that Jane’s government offers us a better choice.

18 thoughts on “A Simple Climate Tax Scheme”

  1. From a UK perspective this type of scheme would have another advantage.

    1. The rebate would only be paid to eligible drivers, i.e. have a car that is taxed and insured. Uninsured drivers would therefore be paying for those who were insured. So long as the rebated were less than the minimum cost of car tax and insurance there would be little incentive to defraud the system.

  2. The problem is that it is too complex. If it can’t be explained in a paragraph you have much less chance of getting it passed. Maybe an executive summary?

  3. I have to agree with my namesake, Ben.
    Keep It Simple, Stupid (KISS).
    A national gas tax of 50 cents a gallon, rising annually by 50 cents a gallon for the next eight years.
    We can eliminate all federal income taxes on those earning $100k or less, in exchange.
    No mileage meters, no fancy schemes. Sheesh, biometric confirmation? How much more government intrusion do we want?
    Imagine a tax code in which a majority submit back a one-line form, “I made less than $100k, therefore I pay nothing.”

  4. Benny, the problem with your solution is that it’s extremely regressive. There are already many people not paying taxes, yet, you’re going to charge them $0.50/gallon on gasoline? These are the people that can least afford it.

    You need to have some sort of refund mechanism in order to maintain some sort of fairness.

  5. Other than such a system being complicated, bureaucratic, and regressive, a big flaw I see is sending rebates to “registered drivers”. Who qualifies as a registered driver? Anyone who has a license? Anyone who owns a car? Anyone who drives a minimum amount a year?

    Why should drivers receive an incentive but not people who structure their lives so they don’t need a car at all?

  6. I like it. It accomplishes all the goals it sets out to much more efficiently than other schemes (whether or not you think those are worthy goals is another discussion).

    As for the question of complication. I think its simpler than any income tax refund. The tax code is already complicated enough- people don’t need something else to think about. People don’t have to do anything with Jane’s scheme and the monthly check would be a big bonus. The author also broke it down much more so then he needed to- this could be explained much more quickly.

    As to who should get the checks- anyone eligable to drive. People who don’t own cars (perhaps they bike or take a subway) should be rewarded if the goal is to reduce gasoline consumption. Those people would have to pay for part of the scheme as well- the price of taxis, buses and services like zipcar will all increase.

    The only downside is for people whose livlihood(sp?) is dependent on gas prices. Something would have to be done for them (putting 20% of the tax aside and refunding more to them?)

  7. Also- if you only include car-owners you will get wierd behavior on the margins. For example- at what point will it make more sense for someone to own a crappy car that they almost never drive then to not own one. This would be a side affect we don’t want.

  8. In fact Dr. Hansen’s proposal is to expand the eligible pool to all taxpayers rather than just a registered set of drivers. This too would work. The data set may be fairer, but the issues of gaming the system and cross jurisdictional buying remain. The sums of money involved are truely staggering.

    The challenge Mafiosa identifies of those that need to “burn to earn” is a real one. What do you do with ambulances or fire departments? I would argue that perhaps separate tax credits would be the way to handle these cases. Presumably the high price of polluting fuels would encourage these vehicles to be switched to carbon neutral alternative fuels sooner than otherwise would be the case.

  9. Dan-
    Yes, gasoline taxes are regressive, but somewhat avoidable, especially if phased in over an eight-year period.
    Even poor consumers can alter their consumption patterns.
    Your valid concerns are are why I would balance much higher gasoline taxes by wiping out taxes on people making less than $100k. Or, employee contributions to Social Security.
    In the end, though, higher energy prices are going to hurt poor people, but I see no other way to seriously reduce fossil fuel consumption. Poor people are going to get whacked if we keep consuming, and OPEC gets another crack at gaming markets to $147 again.
    You want to see poor people suffer? Watch how they fare in a recession and $200 a barrel oil, and no way to get a job without driving a car. We might face that in the future unless we crank down on oil consumption now.
    We can send the money to petro-thugs, or try to keep the money in the USA.
    Consumers respond to simple, easy-to-understand price signals. Like $5 gasoline.

  10. “a self-employed open source software engineer”

    Yikes! A doubly-hard row to hoe.

    I'm not going to comment on tax or cap schemes. I want to step back one level. It is my firm belief that the average citizen buys into climate plans only insofar as that citizen is sure that they will not change his or her lifestyle.

    That is, they hope to keep the car (or SUV) and have someone else, somewhere, do the savings.

    It is sort of like the worst case offsets situation. They hope for carbon taxes they can afford (with their current car) or cap&trade that will operate off at the industrial level and be invisible to them.

    I say, with sad resignation, wake me when Joe Average pictures himself in a tiny little car, as his duty. Until then it's all fluff.

    Now, Bob Findlay and others may visualize plans with real teeth, but I'd warn them that their perceived acceptance by the mainstream will collapse .. basically when the mainstream figures out they've got to ride a bike.

    – odograph

  11. “I’d warn them that their perceived acceptance by the mainstream will collapse”

    Odograph — I don’t often agree with you, but when you are right, you are right.

    The plan has no chance anyway, because it does not deal with the main driver — the need of the political class to run other people’s lives. Politicians don’t care about global warming, only about their own power. No politician would vote for a scheme that disempowers him.

    But it does not matter that all these schemes will turn out to be as useful as the Kyoto Protocol. If Peak Oil is real, then there is no need to worry about Anthropogenic Global Warming. The “problem” will solve itself. Not that there really is an AGW “problem”, as every thinking person now knows.

  12. Never mind the rebate thing. We need to raise gas taxes 50 cents a gallon just to maintain roads and bridges. Getting that done will be hard enough.

  13. Let me get this straight: you want a private tax collector?

    Do you even begin to realize what kind of perversions that can introduce to the political system, “non-profit” (which in practice would actually mean “fixed-fee”)?

    Good grief, what a horror.

  14. Carbon has nothing to do with any of the real environmental problems facing the planet. Hacks like you are just pawns of the bankers and eugenicists, dreaming up endless schemes to implement a tax on all life. OH THE EEEEVIL CARBON DIOXIDE! We wont see you crusading against GMO, water fluoridation, ocean dead zones, murcury in the air and vaccines, chemtrails, heavens NO!!!! Its all about THE EEEEVIL CARBON DIOXIDE!!!! The anatomy of a shill…

  15. Well if you’re gonna focus on a car specific policy.

    Wouldn’t it make more sense to just have car insurance people check the odometer of the car, compare that to the average fuel economy of the car, and then collect a tax.

    And then use the collected money to offset Payroll Taxes, and issue “Carbon Reduction Grants”.


    Although I guess the “simplest” method would be just having a tax surcharge on Oil/Coal/Gas at the point of wholesale. (Not the point of purchase)

    And then use the collected money to offset Payroll Taxes, and issue “Carbon Reduction Grants”.

  16. Also,
    Peak “Light Sweet Crude” doesn’t neccisarily mean a transition to less carbon intensive fuels.

    Unchecked, it could just mean a transition to increased reliance on tar sands, oil shale, and liquid coal.

  17. There are additional facets to a revenue-neutral gas/carbon tax.

    I don't expect that Congress can pick winning technologies or have anything like the success of the market, once tasked with an objective. Money is the language that our society speaks, the medium we use to put priorities on things. Putting the onus on every energy consumer allows you to immediately gain a pool of three hundred million inventors and innovators who will find their own personal solutions to the problem. I don't see any other way to deal with something like sprawl other than legislative/zoning gridlock which itself has many negative externalities, whatever firm plan is picked. Disincentives are infinitely more flexible than prohibitions, and often more productive. What's a cheaper, faster way to make our population turn the lights off when they're not using them and fix a hundred million badly-insulated homes?

    This scheme is politically viable. To the libertarian right, we throw the benefits of the markets, we offer the xenophobes and the blue collar workers an economic solution to illegal immigration which is *entirely* acceptable to the left. People suddenly have a good reason to get 'into the system' & become citizens, and a good reason not to cross borders illegally when the cost of living is higher than meager wages. To the nationalists, we are acting to greatly reduce our reliance on a world market populated by dictators, who have a chokehold on us.

    The economic justice argument is a frequent attack against gas taxes, but it doesn't hold here. This is a weakly progressive tax, because the poor can't afford to use large amounts of energy in the first place.

    Plus, you can (with some modest measure of honesty) sell this as an attack on the oil industry, which Americans feel (sorry Robert) a great antipathy towards as the hands grasping our neck in the previous analogy. It buffers the gas price against dramatic changes in order to stabilize the costs of driving somewhat. Implemented on a massive scale, it's the only practical way I can come up with to limit the less-productive, more-destructive of the projects in countries which aren't under our control – a problem environmentalists unknowingly shifting the problem from ANWR to Kamchatka havn't given me a solution to.

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