The Little Engine That Could: Revenue Neutral Carbon Fee and Dividend by CitizensClimateLobby

To our esteemed judges Adele Morris, George Framptom, Jonathan Pershing: In response to the feedback we received from the judges, we integrated answers to the key issues contained therein. We deleted a couple of sections dealing with the employment effects and regional equity of our proposal. We included as much discussion of what we regard as the relative values of tax swap measures and the full dividend as structural limitations would permit. The notes below elaborate somewhat further on our responses to the judges. We trust they are useful. A few friendly critiques: 1. Not everyone gets a dividend larger than their higher energy expenditures. By construction, there is redistribution in this policy. For some, it's a feature, for others it's a bug. Response: Suggesting that an equal dividend per household is redistributive is like saying that the gasoline price is unfair--or that gasoline taxes are unfair. I could argue that I drive a lower emission vehicle and should not be burdened by a higher price that "subsidizes" those driving less fuel-efficient models. Likewise, I imagine we could find inequities at virtually any level we wish to examine. Large disparities in the fairness of tax policy should be addressed. We are trying to correct a long-term and massive economic distortion and must ask what is truly significant. At some point we have to apply a cost-benefit view to ensure that we continue to move in the direction we need to go. While the highest income quintile may spend a relatively lower percentage of their disposable income on energy, they also tend to emit more CO2 because they buy more “stuff” with higher embedded carbon footprints. If their dividend does not fully compensate them for such energy expenses, they may consider it as their personal price signal to lower their emissions rather than as a subsidy to lower income levels. 2. Be mindful that CBO imposes a 25% reduction in estimated gross receipts when scoring a policy like this to account for the effect of the policy on other non-carbon tax revenues. Response: This scoring convention devised by the CBO does not apply if the government does not keep the money, if the dividend is given freely, without condition to all “emitters,” or if it is treated as taxable income. From a paper by Stone, Greenstein and Horney(2008): The only circumstance in which there would not be a 25-percent offset is when the allowances are given away, without condition, in a form that effectively makes them taxable income to the recipient, such as when existing emitters [consumers] are given allowances for free.“ Likewise, the CBO article referenced below states: If auction proceeds were granted to firms without conditions being imposed on how those proceeds were spent, or if the proceeds were transferred to individuals in a way that showed up in their taxable income, no offset would be involved. This is precisely what our proposal is-- a “free” allowance to an “emitter” that has no value to the government nor requires any federal outlay. Put very simply, the dividend return is the mechanism that protects both producers of goods and consumers from the conditions in which this 25% convention applies. References: -Woodward, G. Thomas, The Role of the 25 Percent Revenue Offset in Estimating the Budgetary Effects of Legislation, Economic and Budget Issue Brief, January 13, 2009, https://www.cbo.gov/sites/default/files/01-13-25percentoffset.pdf -Stone, Greenstein and Horney, How CBO Estimates the Cost of Climate-Change Legislation, Center on Budget and Policy Priorities, May, 2008.http://www.cbpp.org/research/how-cbo-estimates-the-cost-of-climate-change-legislation 3. The results of the REMI study are not consistent with most modeling results in the literature. I recommend that CCL not get quite so wrapped around that study and instead embrace the broader peer-reviewed economic literature. In particular, studies in the economic literature show positive net economic results only for tax swap scenarios (where a carbon tax substitutes for other revenues. Response: We acknowledge the efficiency of an Across the Board (ATB) tax swap, the increased investment, improved GDP, trade balance and the improved incentive to work. CCL is choosing 100% revenue-recycling because it meets additional criteria that are commonly used to evaluate tax policy: simplicity, implicit fairness (equity) and its transparent accountability (effectiveness) and because it will drive consumer spending. We also believe full dividend return will promote long-term public acceptance similar to the Alaska Permanent Fund, and that political stability will reassure markets that the program is here to stay. Mainline economic literature does not show negative results for full dividend return. It has barely addressed this scenario at all. Scott Nystrom, the principal REMI author, argues that fighting over the relative effects of a direct dividend vs a tax swap misses the point. We can contend the finer points of the different revenue allocation methods and certainly the distributional costs; but for him, the border adjustment is the principal innovation. In his words, "The border adjustment is the large difference. Remove the cost advantage of import substitution (and [foreign] domestic substitution against American exports) and, all of a sudden, the decline in market share or imports/exports no longer happens. This allows the final demand effect between an imported commodity [and a domestic product] in general consumer spending (more localized and labor-intensive) to dominate the results. Take away the border adjustment, and REMI gives you the “textbook” answer, more-or-less. [meaning it aligns with conventional economic research]" Add to this the net global effect on emissions and we have a powerful economic driver for domestic stimulus, international trade equity and climate sanity. For further information on REMI policy design and methodology, we refer you to p.6 & ff of the report. REMI documentation is available online: http://www.remi.com/resources/documentation Model equations: http://www.remi.com/download/documentation/pi+/pi+_version_1.7/PI+_v1.7_Model_Equations.pdf Data sources and estimation procedures: http://www.remi.com/download/documentation/pi+/pi+_version_1.7/Data_Sources_and_Estimation_Procedures.pdf 4. We are skeptical of the politics of this steeply rising tax trajectory, in part because I think the economics are more difficult than your analysis suggests. CCL has adopted the "tax and dividend" as a religion and they are not interested in listening to changes or other approaches; unfortunately, it seems that this formulation has virtually no prospect of getting any traction in Congress. Response: CCL is fully aware that if and when the rubber meets the road in congress, there will be strong competing interests for what to do with carbon fee revenue. Our mission is to build political will for a livable world. Executing that mission requires that we listen to all points of view, build relationships with members of Congress of every persuasion (as we have done), continue to refine our message, look for common ground wherever we go and develop strategy based on meticulous information gathering in every venue. If it turns out that there are other ways of partitioning and directing the revenue that are consistent with the primary objectives of revenue neutrality, a steeply rising fee and significant emission reductions, while securing long term popular support, we may have accomplished our mission. But we must also ensure immunity to the political pressures that could derail the progress that rapidly melting ice demands. With all due respect to Congress, the maintenance of a strong, resolute, price signal might require protecting a carbon fee from “discretion.” Full recycling segregates and insulates the fee from “politics and business as usual.” One of the questions we hear frequently--let’s call it the Liberal Assumption--is “what if people spend their dividend frivolously? How can you make sure they direct it toward low-carbon alternatives?” Similarly, the Conservative Assumption is that if revenues are directed toward tax swaps, including corporate tax cuts, that business will spend that money wisely and have greater impact. Given recent history (see our comments at the end of the “What Actions Do You Propose” section), is there any reason to assume that business will direct their revenues toward a low-carbon economy any more than we can assume consumers will do so? Not really. But in an environment of certainty that the price carbon emissions will be rising sharply, unlike in the cap and trade environment of Europe or California, unlike the Boxer-Sanders scenario, the Van Hollen bill or even the winning proposal in this category in 2014, frivolous behaviors in either sector will become unsustainable. The complexity of the economics is an area of concern. Our focus has been on the macroeconomic efficiencies, the social and political economy of an emission-reduction policy rather than on the distributional complexity or costs. Raising the possibility of a distortionary effect of our proposal should be tempered by the knowledge that the economy in which we now live (having brought us to this critical historic juncture) is already distorted. Economic research, scoring and modeling rest in part on accounting and statistical conventions, ideological bias and behavioral assumptions that perpetuate this distortion and thus a status quo that is driving us off a cliff. We happen to believe that the climate issue is not a business as usual problem and requires thinking outside business-as-usual to arrive at effective solutions. 5. All that said, the judges give CCL members a lot of credit for their earnest work and ambitious political engagement. You've got a carefully crafted message, and we can see why it has garnered the support that it has. Response: This acknowledgment is gratefully received. I trust we are all on the same path with the same intention. We are grateful for the opportunity to collaborate in this manner. You have made us work and there’s much more work to be done. Scott Nystrom comments about the “Rapid Emission Reduction in 20 years” graph: The “how I got here” story is pretty simple. I took the projections from the study and the Department of Energy (the blue line), graphed it with the gold line for the alternative simulated in the study, and then added the brown line for the historical data series back to 1850. The historical series comes from the World Resources Institute (WRI) website, which you can find online at the links below. I am also going to link you to a Slate piece that does some cool heat mapping things with it, as well: http://www.slate.com/articles/technology/future_tense/2014/05/carbon_dioxide_emissions_by_country_over_time_the_worst_global_warming_polluters.html > http://www.wri.org/blog/2014/05/history-carbon-dioxide-emissions > From there, it was just a matter of overlaying the “lines” for the red (the historical data for 1966 approximated the projected alternative in 2025) and the green (1948 emissions by 2035). Nothing really complicated or special about those overlays, but they help give some context and pithiness to the overall presentation. > You can definitely see the various technological and macro trends in the brown line, too, for that matter: > · The run-up from 1880 forward during initial industrialization in the Northeast and Midwest > · A collapse and “rut” in the late 1920s and 1930s through the Great Depression > · Rapid growth through the World War and into the Korean War > · Very rapid growth in the 1950s and 1960s with fast population growth (the Baby Boom), economic growth, the Vietnam War, and the rapid increase in total VMT with the suburbanization of most major metropolitan areas > · Stagnation in the 1970s and early 1980s with the inflationary economy and the recession of 1982 and 1983 > · Growth again in the stronger economy of the 1990s and early 2000s > · Decline associated, temporarily, with the Great Recession and slow recovery thereafter > Hence, I do not see it as too good to be true—it is just fitting it within the history.