WhyTheHeck

THE GREEN DIVIDEND:  HOW TO END OUR FOSSIL FUEL ADDICTION WITHOUT PAIN

 

No one talks seriously about reducing our dependence on carbon-based fuels by taxing them, which would be the obvious way to reduce consumption.  The conventional wisdom is that such a tax would be expensive and unpopular, politically dead on arrival. And if the tax is just simplistically considered as a tax, the conventional wisdom would be right.

 

However, a little tinkering with and repackaging of the gas tax concept could make it so palatable that the country could significantly reduce its dependence on fossil fuels without most people feeling the slightest pinch in the short run.  Within another year or two, most people could actually be better off.  This brighter future can be ours if we institute a high and increasing tax first on gasoline, and then ultimately on all fossil fuels…but offset it by sending everyone a “green dividend” check to pay for it.

 

 How a “green dividend” would work

 

The “green dividend” in concept is very simple as applied to gasoline.  At the beginning of each year (or each quarter), the federal government issues a check to almost everyone, not unlike it did early in 2008 to stimulate consumer spending, and like it will do again someday soon.  The difference between this annual check and the one-time 2008 check is that the former will be paid to offset an increase in a tax on motor fuels and ultimately all carbon-based fuels.  (There are two reasons to start with gasoline.  First, it is easier to change driving behavior and buy new cars than change living behavior and buy new houses.  Second, oil-derived fuels, used mostly for transportation, are far more likely to be imported than other fuels. )

 

Especially because the economy needs stimulation anyway and “revenue neutrality” is not a central requirement, the size of the check would be large enough so that most people – even if they drove the same amount in the same car despite much higher gasoline prices – would be no worse off if not better off.  Of course, there will always be a few people who are worse off with any policy change, but most people were made worse off by $4/gallon gasoline not offset with any “green dividend” but survived. 

 

Here’s how a “green dividend” would work.  Suppose the average driver uses about 1000 gallons of gasoline per year, and the starting gasoline tax was set at $1.00 a gallon, so that the tax would raise the average person’s cost of fuel by $1000.  By sending every driver a $2000 check to offset this $1000 tax, any driver using less than 2000 gallons (about 35,000 miles/year’s worth or more) would be “made whole” even if they purchased the same amount of gasoline with the tax as they did before the tax.  Common sense and experience, of course, strongly suggest that most people would try to make do with less fuel as the price rises.  

 

Obviously the greater the number of people whose expenses are “covered” by this check, the greater the net expense to the government, but whatever the size of the subsidy, it would pale in comparison with the long-term cost of doing nothing. 

 

The check is the first part of the “green dividend.”  Really, it is just “cap and trade” on the consumer level, made very tangible and understandable by sending a sizable check to offset a higher price.   Each year, the fossil fuel tax would be expanded in size and in reach, offset each year by a higher check.

 

 The no-surprises “shock absorber” to keep prices predictable

 

Equally as important as the nexus between check and tax is the other major component of the “green dividend” – the “shock absorber.”      The “green dividend” check itself is sent once a year, but the gasoline tax would vary during the year, inversely according to the underlying price of oil.  The goal would be to keep the end-user price of fossil fuel gently rising – never falling but never spiking.   If the underlying price of oil spikes, the tax would fall, to absorb the shock.  If the underlying price of oil falls, the tax would rise to prevent people from even thinking about returning to old habits.

 

Why is this “shock absorber” feature so important?  Because just like the actual price of fuel itself, uncertainty around that price is a cost, too.  And since no one except a few speculators benefit from this uncertainty, why not eliminate it?   Consider the dislocations caused by the 2008 “bubble” in oil prices.  Imagine if the shock absorber had already been in place.  The gasoline tax might have gotten eliminated for several months at the peak of the bubble, but today, as of this writing, it would have been hugely increased.  Consumers, as a result, would have seen gently rising prices throughout the year but would have been prepared for them, and would been spared both the surprise and magnitude of the rapid price run-up.

 

Imagine what would have changed in 2008 if everyone had known in 2007 how the price of gasoline and ultimately other fossil fuels would rise this year — and (due to the shock absorber) next year and for years thereafter.   People would have started buying smaller, more efficient cars earlier.  But automakers would not have been caught off-guard by this shift and have been forced to quickly retool their assembly lines, creating shortages of and higher prices for small cars, and the American carmakers would probably be in better financial condition without that retooling expense.  They could focus their development efforts on fuel efficiency for years to come.  Ford, for example, announced that they were going to build an assumption of $4 gasoline into all future plans…and now that gasoline is $2.50 again, they once again missed the market.

 

Think of what you heard in the recent Senate hearings about bailing out Detroit.  The arguments were that Detroil “wasn’t ready” for the shift to small cars.  They weren’t, because no energy policy like this had been in place.  They should have been, yes, even without it, but these auto executives are not rocket scientists.  (If they were, they would have been making rockets, which no doubt are way more profitable.)

 

It may now be too late for the carmarkers, but imagine what could change if this “shock absorber” were enacted starting in 2009.   The price of fuel would essenitally be set and stabilized by government tax/refund policy for years ahead.   What happens as a result?

 

Why high and steady fuel prices are exactly what the country needs to get out of the recession…and stay out

 

The country needs a new industrial sector, not just a few new companies, to begin the next boom.  Removing all hidden and indirect subsidies from gasoline, and keeping the price where it “should” be yields a “level playing field” allowing the next generation of technologies to develop, an industry which will put the US at the cutting edge of the science, and create many knowledge-based jobs.  It isn’t going to happen if we allow fossil fuel prices to fluctuate at low prices.

 

Investors in alternative energy and conservation would be able to raise funds and make many more investments at a much lower cost of capital due to the increased certainty of the future price of fossil fuels.    For instance, suppose an alternative energy technology becomes competitive only when oil prices reach $200/barrel.  Right now, such a venture would probably not be funded, or – due to the market risk involved — would be funded at a cost of capital which itself would add significantly to the cost of the technology.  Imagine how much more likely it is that such a technology would reach the market in, say, 2012, if the business plan could state with certainty that tax-adjusted end-user gasoline prices would be, with 100% certainty, between (for examples) $6 and $7/gallon.

 

Raising the price of fossil fuels sounds like an “economic solution: to global warming.  There are those who are relying on technology as a solution for high energy prices and global warming, as though a technological solution is an alternative to an economic one.  However, the green dividend, especially with the shock absorber feature, unites the two approaches.  Technological solutions become a much more attractive investment if this “green dividend” economic policy is adopted.  If we want to create a new economic driver to sustain a growth rate and end the recession, the obvious new industry is alternative energy.    But only if it is attractive enough to enough investors to be more than a home science project.

 

 

It’s not just investors and drivers who would appreciate greater certainty.  Consider other benefits.  Municipalities now trying to decide whether the recent interest in mass transit is likely to be sustained now that gas is cheap again, will be able to expand their networks without worrying whether last summer’s higher level of ridership and revenues will suddenly evaporate, as it appears to be, leaving them with a fleet of underused buses and a higher level of debt service.

 

If homeowners and developers knew that fuel was going to be an increasing expense in the future, houses would become more efficient and would perhaps be located in more sensible clusters. 

 

In total, the business environment and the purchasing environment would soon be much more user-friendly because much of the guesswork would be removed from prediction.  An environment of certainty would create lower prices for and a greater supply of energy-sparing goods and services, and would expedite their adoption of conservation measures.

 

While in the short run people will buy less fossil fuel because the price will increase relative to everything else, in the longer run they will buy less fossil fuel because –thanks to an environment of certainty creating the ability to plan and invest accordingly — they will need less fossil fuel.  This is the outcome we all want to achieve, and this is what the “green dividend” and its “shock absorber” feature provide, perhaps not totally painlessly but much more painlessly than any other way of getting from here to there.

 

 It’s not just about global warming

 

No doubt some readers of this posting are saying, “What’s the fuss?   This guy wants to massively increase gas prices to surb global warming and yet there really isn’t much evidence for global warming.”

 

One ”hidden subsidy” on today’s gasoline pricing may indeed be that we are poisoning our environment.  But the larger and non-arguable subsidy is that the US defense budget is devoted largely to protecting our oil supply lines, a point driven home by the movie W, in a scene – allegedly accurately depicted — in which W points out to his cabinet where all the oil wells are in the Mideast and says that our strategy is to protect them.  The defense budget should be financed in large part through gas taxes since that is what is being defended.  Sure, some should get paid through regular taxes as it does today, but the need for much spending would go away if the develoepd world weren’t importing fuel from unstable areas of the globe.

 

However one views it, reducing use of fossil fuels in an imperative, whose economics should be self-evident from this description.  The details of implementing this imperative are political and logistical.  How high should the tax be and how quickly should it cause the underlying price of fuel to rise (offset by higher green dividend checks each year, too)?    When does the “green dividend” shift from covering just gasoline to all carbon-based fuels?    How is it determined who gets the checks – all drivers or all taxpayers or all adults?   And how often are the checks sent out?  And how are existing differences in gasoline consumption by state taken into account? 

 

Yes, these are real issues and there are many more of them, no doubt.  But these political and logistical issues should not suffocate a debate over the green dividend, just influence details of its outcome.  They are second-order effects which will never be addressed perfectly because no market intervention, however well-targeted and well-designed, gets an “A” for equity or efficiency.  Nonetheless their potential for backlash should not obscure the big picture that there are two costs in weaning ourselves from carbon-based fuels.  The “green dividend” makes a necessary fossil fuel price increase painless for most people, and should also turn the “cost” of future uncertainty into a significant source of economic advantage through much greater certainty.

 

Combined, there simply is no more palatable way to reduce carbon emissions in the next few years…and jump-start America’s next new growth sector.

Email

Tags: energy policy, fossil fuel tax, gas tax, gasoline tax, global warming solutions

This entry was posted on Friday, November 21st, 2008 at 5:35 am by Al Lewis (alewis) and is filed under Editor's Choice, Energy, Fossil Fuels, Environment, Ideas, Long-term economic recovery, Readers' Choice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.