Build a climate fix coalition by cutting taxes on wages. This is the sugar. Medicine is the fee on carbon.
The climate problem is a political problem. It will take a coalition to break the climate legislation logjam. Start building it with a large tax cut for workers and their employers. Then use a carbon tax to offset the lost revenue to maintain neutrality. The goal is political feasibility; coupling a price on carbon with a real tax cut for the working middle class puts two very large constituencies in alignment, everybody who earns a paycheck and everybody who is worried about future habitability. A third, smaller but vocal group of allies is business owners. Owners and workers like lower payroll taxes. Starting the conversation with a tax cut proposal is a familiar strategy that works for both political parties. It's the spoonful of sugar to make the medicine go down. Almost everyone knows that we need to gulp the medicine—a price on CO2.
- Cut FICA tax rates by a third, an immediate raise for 85% of American households. Employers will get a break too and the economy a $333 billion boost. Big bang-for-the-buck, because workers spend paychecks and generate consumer demand. This isn't just sugar. It’s real nutrition for an economy still struggling to recover from the Great Recession. This 5% reduction to the labor component of the cost of production in the U.S. will make American goods immediately more competitive on world markets.
- Raise the offsetting revenue with a carbon tax. $60/ton of CO2 will bring in the balancing $333 billion annually. Recognizing that this will impact some low income individuals who don’t benefit from lower payroll taxes, there may be need to offset but not exempt this increase in their energy expense.
This proposal would upset a lot of apple carts: retirement funding, the existing energy economy, huge stores of wealth, and on top of all that, an explicit tax increase. Acknowledging that change on this scale rarely happens quickly, a faster, parallel path alternative is offered. Alt 1 is a quick first step that is immediately doable.
What actions do you propose?
Cut FICA tax rates by a third, or if that is not quickly feasible, proceed with a virtual FICA cut at the state level. See Alt 1 below.
Institute a $60/ton CO2 tax. Economists and scientists—and a growing number of politicians and business leaders agree, we have to tax these emissions or the planet is cooked. 2.5-3¢/pound from coal and oil and 1-2¢/pound from natural gas will do.[i] That means 60¢ a gallon[ii] additional for gasoline and perhaps $20 a month tacked onto the consumer’s electric bill—a pinch but not a bite. Revenue—$333 billion.
Economic performance and political stability will be served if more economic benefit is directed toward the middle class, and everyone agrees it’s smart to make it more profitable for workers to work. The payroll tax cut makes it more profitable for both workers and employers.
Tax policy is generally the preferred tool of conservative politicians for addressing any issue with an economic component. Two big ones demand attention now, climate and economic stress on the middle class. The biggest-ever problem is climate change, and although Republican politicians have until now had difficulty acknowledging it, there is a growing chorus calling for recognition of climate related high risk. Using tax policy, to enable the market to address this risk, is the method acceptable to the most fervent free market proponents.
Conservatives are correct to remind that Americans value freedom highly. It is human nature to prefer making one’s own choices. Bargaining to acquire the things we want is a habit we learn as children. The market is natural to us. However, we also have expectations regarding what is a “fair deal.” The perception now is that the American middle class isn’t getting a fair deal because wealth has become too concentrated. In fact, dangerous concentration is the judgment of some students of economic history. Cutting significantly the tax burden on labor, will restore some sense of fairness and faith in the market system.
The necessity of reducing greenhouse gas emissions is becoming accepted across most segments of the population, certainly among the majority of opinion leaders. The debate is quickly becoming what to do rather than whether to do something. There is a growing consensus for a carbon tax as the tool of choice. Ironically, one inhibitor to development of an action plan is the question of what to do with the very substantial revenue that will be raised. The answer? Simply pass it back to the working middle class and businesses that have been hurt by changes in the economy—and are still struggling.
Climate change is a global problem that puts the entire global population at risk. No part of the world is likely to escape completely. The global solution however, may be out of reach for the foreseeable future. Sovereignty issues and parochial economic interests make fixing any global problem extremely difficult and time consuming. The climate problem is no exception.
Action on a national level in this country will continue to be difficult too. Regions and communities heavily invested in the production of fossil fuels will fight to hold onto outsize influence in the political arena. The problem is intractable because roughly half the states are fossil fuel producers who have reason to keep the old paradigm going for as long as possible. Bottom line, Washington will not act quickly.
The climate threat cannot wait for a solution to emerge at a glacial pace at the international or national level. Is there an alternative or a faster path? Yes, harnessing market forces through incentives created by state and local government action. This is a particularly promising strategy in states that don’t produce fossil fuel. These are net importers of energy and exporters of massive amounts of dollars. Because these regional interests have much more potential net gain from moving quickly away from fossil fuels, they are the most promising targets for carbon policy implementation. This is the low-hanging, ripe fruit.
Alt 1 — State Carbon Tax to fund a Virtual Payroll Tax Cut.
A carbon tax at the state level will benefit energy importer states more than a tax collected at and proceeds distributed from the national level. In the case of a state like Florida, essentially all energy is imported. This results in a substantial economic outflow. Florida, if it transitioned to solar energy for most of its conventional electricity needs and for most of its transportation energy, could keep a large portion of the approximately $30 billion annual import expense. Of course, investment is required to make the transition, but most of an investment in efficiency and renewable generating capacity can stay inside the state’s economy. The renewable energy infrastructure gets put into place through payments to in-state companies and workers. Invested money stays home, and the recurring fuel purchase expense goes down.
In-state tax policy to reduce CO2 pollution and reduce labor cost won’t impact Social Security or Medicare trust funds. It also can’t change the burden imposed by FICA tax collection that services these trusts. In Alt 1, to capture the economic boost from a labor cost reduction a different mechanism must be used, perhaps direct payment to employer and employee of a shadow amount equal to the amount proposed above, i.e. a 5% shared reduction in the enterprise’s labor cost line item. It should be done in a way that results in no increased income subject to the federal income tax. This payment should be revenue neutral within the state and neutral between the state’s economy and the federal government.
Precision in estimating the most desirable size for these tax changes is probably not possible. However, some useful reference points offer guidance. First is the amount now collected as FICA withholding—about 7.5% of worker gross wages and a similar amount from employers, roughly $1 trillion a year.[iii] The second reference point is the $50-60/ton on CO2 emissions frequently suggested as the target needed to reach 2050 reduction levels to limit global temperature rise to 2°C.
These two reference points are significant to the discussion of the feasibility and efficacy of the proposal. Both references are attractive because they’re easy to remember. This is important because the concept must spread widely—more likely if easy to understand, remember and pass on. These numbers are important too because they are substantial, and if a tax collection and distribution of the proceeds plan is built on them, there will be material desired effect.
The climate problem is no longer a scientific problem. It is a political problem. This is key for strategy development. The challenge is to build sufficient political will to make a fundamental change in how humans acquire and use energy. This requires essentially abandoning the energy technology that has defined how humans live in most of the world for the last 100 years. Sufficient will requires a coalition of parties that see a win for their own most pressing wants. What might be the makeup of that coalition?
- Most obviously, everyone who understands the threat to habitability, now quite visible in climate changes already taking place, is a candidate. Opinion polls report differing levels of concern and enthusiasm for aggressive steps to limit the damage, but it’s safe to say that a huge number of Americans want action because they worry about consequences for future generations.
- Another group is the portion of middle class America that recognizes its losses from the recent Great Recession and its aftermath and connects the dots to exceptional and increasing wealth disparity. Americans are starting to understand the need for progressivity in taxation, one of the outcomes from a reduction in payroll taxes. This mass wage earner class may be ripe for embrace of a package plan that directs more of the economy’s output directly to their paychecks, even if it costs a little more at the pump and for electricity.
- Domestic businesses, would be logical allies because a 5% tax reduction is a 5% increase in competitive advantage on the world market. In the case of Alt 1, in-state businesses would be more competitive on national markets and world markets if there is a state level cut in wage costs. Of course, the carbon tax is a burden, but it is a burden shared by all participants in the local or state economy, including those selling from outside. All of the carbon tax would stay inside the state economy, even that amount collected from external participants. In-state business advocacy groups should accept the revenue neutral tax on its carbon emissions because net revenue will be positive for the state’s economy as a whole. Over time, revenue outflow to purchase fuel will be reduced as lower cost renewable energy replaces the old fossil fuel convention.
- Some Republican politicians who know their party’s orthodoxy of climate change denial will crumble, and that they must find a way to jump clear, may welcome a vehicle for their escape. Marketing and making this plan revenue neutral while building it to function with free market mechanisms, is key to bringing this faction into the coalition. Recruitment of “purple state” Republicans will be a major strategic goal.
- Other perhaps strange bedfellows under this “big tent” could include people from seemingly opposite ends of the political spectrum. Occupy Wall Street is no longer in the news, but there are people who responded to that call to action who would certainly support any project to bring wealth down from its highest residence, energy industry financiers being prime targets, and pass it out more equitably in the working class. The Tea Party movement is consistent in opposition to concentrated power. It seems less willing now to give a pass to the powerful established energy industry and even makes explicit calls to address the problem of climate change. Witness support for solar energy legislation by the Green Tea Coalition in Georgia and Florida.[iv]
[i] Energy Information Administration Frequently Asked Questions How much of U.S. carbon dioxide emissions are associated with electricity generation? http://www.eia.gov/tools/faqs/faq.cfm?id=77&t=11
[ii] About 20 pounds of CO2 is produced in the combustion of a gallon of gasoline.
[iii] One page summary of federal tax receipts from Treasury Dept. press release. http://www.treasury.gov/press-center/press-releases/Documents/2014%20Receipts%20by%20Source.pdf
[iv] Yale Environment 360 interview with Debbie Dooley of the Green Tea Coalition and Chairperson of the Atlanta Tea Party, Mar 26, 2015 http://e360.yale.edu/feature/debbie_dooley_interview_why_this_tea_party_leader_is_seeing_green_on_solar_energy/2859/
Who will take these actions?
Coalition building for legislative action at the national level, for the “spoonful of sugar” along with the medicine strategy, can be integrated into the activities of established environmental advocacy organizations. Sierra Club, World Wildlife Fund, Natural Resources Defense Council and many others would logically follow this strategy to consolidate political will.
Action on Alt 1 at the state level requires funding of lobbying work in targeted state capitols. Initially five to ten states with the heaviest fossil fuel economic burdens should be high priority. The lobbying strategy is to counter forces for the status quo that operate on behalf of fossil fuel powered utilities and the fossil fuel companies themselves. Alt 1 paid employees would include individuals with marketing experience and organizing and communicating skills to bring grassroots pressure to bear on state legislators. These lobbying efforts need to be done professionally, but by individuals who are personally totally committed to the mission.
Alt 1 funding should come from philanthropic organizations or wealthy individuals who have expressed interest in encouraging action to combat climate change. Names such as Gates, Steyer, Bloomberg and others could enable the state level effort with quite modest financial contributions.
What challenges will be faced in implementing this proposal and how will they be overcome?
Climate action is blocked by energy incumbents like the Koch Brothers who spend freely to support tacitly agreeable politicians. They have to be overwhelmed with grassroots pressure.
How much will emissions be reduced or sequestered vs. business as usual levels?
In the case of coal, a tax will add 5-6¢/kWh onto the cost of electricity. That makes coal non-competitive, since the levelized cost of energy from PV solar is already less than 6¢/kWh on commercial rooftops in Florida, without incentives. In a relatively short time (five years), coal use could drop in half and CO2 emissions drop by 750,000,000 metric tons per year.
$60/ton will bump up the price of gasoline about $.50-.60/gal and accelerate electric vehicle adoption, particularly if it coincides with reductions in the cost of batteries. When the EV sales rate hits one million per year, gasoline consumption will be lowered by 600,000,000 gallons and CO2 emissions by about 5,500,000 metric tons per year.
Alt 1 reductions in emissions will be smaller, but some of the likely target states are also large population states and large fossil fuel consumers, for example, Florida, New York, Georgia. CO2 reductions in these states will have substantial impact on the global problem.
What are other key benefits?
- Over time, national security expense for protecting access to foreign fuel sources and the protection of shipping lanes can be reduced.
- Making renewable energy even lower cost relative to fossil fuel energy will lead to a more distributed system for generating electricity. System vulnerability to natural disaster or terrorist attack is reduced because single point failures can impact only a much smaller footprint.
- Symbolic effects as well as a real reduction in emissions will restore a sense of American leadership on the world stage.
- Capital redirected away from fossil fuel extraction investment will become available for other needed future-focused purposes.
- Reducing fossil fuel extraction will reduce the level of its other (than CO2) related environmental and health damages.
- The American economy will enjoy improved long-term competitive advantage due to its lower economic operating cost.
What are the proposal’s costs?
There is less than zero net cost. The tax cuts proposed are matched exactly with new tax revenue. Because, on balance the revised tax schedule is progressive, consumer demand, a still sluggish indicator of economic health, will increase and produce growth. The tax changes will be profitable to the economy.
Increasing the price of fossil fuel by adding the carbon tax will encourage investment in renewables. This will reinforce the continuing downtrend in renewable technology prices. The renewable option will become even more profitable. At current prices if the cost of renewable energy over the life of its necessary equipment is compared with the cost of fossil fuel over the same period the renewable alternative is lower cost. With conventional fuel as the zero reference line, the renewable cost is less than zero.
Implementation of an action plan at the national level should require no incremental cost. This is already the activity of national environmental organizations like those mentioned previously, Sierra Club, World Wildlife Fund, Natural Resources Defense Council, etc. All that is required is adoption of this as a strategy for getting results that they’re already working toward.
Alt 1 will require seed money. $10,000,000 would be a good starting point to fund a five year, five state effort. In each state a director/chief lobbyist, some staff support and a sufficient media and communications budget could be funded for $300,000/year. State level activity should be low cost because of minimal need for office space or to incur other office expenses. Staffing expense should be relatively low because would-be employees will accept the mission itself as part of a compensation package. In addition to the state level effort, a national director and staff should function as coordinator for the whole program and provide research services for the individual state efforts. The national director/coordinator function could operate on a $500,000 annual budget.
4th quarter 2015:
- Identify would-be allies for national coalition building for the tax-cut and carbon tax combined strategy.
- Identify and contact philanthropic organizations/individuals that could fund the initial Alt 1 state level project.
1st quarter 2016:
- Acquire $100,000 grant to fund a one year contract and small operating budget for an interim national coordinator to start the process of building a 5 year budget for Alt 1 and to start the personnel search for national staff and for the state level lobbyists.
- Acquire expressions of interest for funding of the 5 year, 5 state Alt 1 project.
2nd quarter 2016:
- Identify lead partner environmental advocacy organization and hand off responsibility to that organization for carrying through with the national level strategy.
- Acquire letter of intent-to-support from a philanthropy or group of philanthropies to fund the 5 year, 5 state Alt 1 project.
- Complete necessary steps for recognition as a non-profit organization.
3rd quarter 2016:
- Sign contract and accept funding for 5 year, 5 state Alt 1 project.
- Begin staffing at state and national level.
- Create website, social media presence and preliminary “brand” collateral.
4th quarter 2016:
- Complete organization formation for 5 year, 5 state Alt 1 project.
- Create operational plan to commence operation with beginning of 2017 state legislative sessions.
1st quarter 2017:
- Begin active legislative influence work in targeted state legislatures.
The Little Engine That Could: Revenue Neutral Carbon Fee and Dividend
Sweeten the Carbon Deal proposes a large reduction in FICA taxes as the vehicle for returning 100% of collected carbon taxes. The funds return would be immediate and reported in every pay statement. The only administrative expense on the distribution side would be for programming new rates for payroll taxes and possibly for SNAP payments (food stamps) if that is the vehicle chosen for distribution to poor non-payers of FICA taxes.
The author believes the payroll tax cut additional benefit from directing the funds to the labor cost line item is significant. It creates competitive advantage improvement while simultaneously delivering worker income improvement.
A Carbon Tax in Pro-Growth Fiscal Reform
Who doesn’t pay taxes? http://www.taxpolicycenter.org/taxtopics/federal-taxes-households.cfm
Includes a simple chart of emissions since 1990 http://www.epa.gov/climatechange/ghgemissions/gases/co2.html
Energy Information Administration Frequently Asked Questions How much of U.S. carbon dioxide emissions are associated with electricity generation? http://www.eia.gov/tools/faqs/faq.cfm?id=77&t=11
One page summary of federal tax receipts from Treasury Dept. press release. http://www.treasury.gov/press-center/press-releases/Documents/2014%20Receipts%20by%20Source.pdf
Yale Environment 360 interview with Debbie Dooley of the Green Tea Coalition and Chairperson of the Atlanta Tea Party, Mar 26, 2015 http://e360.yale.edu/feature/debbie_dooley_interview_why_this_tea_party_leader_is_seeing_green_on_solar_energy/2859/
Senators Barbara Boxer and Bernie Sanders on their proposed carbon tax legislation. http://www.sfgate.com/opinion/openforum/article/Congress-should-put-a-price-on-carbon-pollution-5125722.php
Ferree, Bill. Empty Tank Empty Wallet: For Those Who Don't Own an Oil Well. N.p., 2013.Print. http://amzn.to/1Ioffbt