Saturday, December 13, 2008

Of Blind Spots Left & Right / Dr. Chu / Europe's Green Tax Cut

Yesterday, for the first time, the European Council adopted a new policy of green tax cuts for a broad array of energy efficient products, from boilers to automobiles. The measures are part of the €200 billion Economic Recovery Plan announced by the European Commission on November 26, and reported here. The Council also adopted a new climate change plan, featuring concessions in a revised emissions trading structure that allows poorer countries that are heavily dependent on coal to get a large amount of free pollution permits.

Remarkably, almost none of the major media have even mentioned the new green tax cut policy in their coverage of the Council's actions yesterday. Likewise, no one covered the original announcement of the policy, except this blog. It is as though the Congress passed a carbon tax for the first time, and the New York Times neglected to mention it.

So why the blind spot? Commenting last week, one reader, John Banner, offered the following plausible speculation:
One possible reason for that omission may be that this aspect of the recovery plan was deliberately released without fanfare by the European Commission for political reasons, in order to downplay the role of Britain and France in proposing the policy. Possibly, the EC felt that other Member States would more willingly adopt the policy if it was not perceived as simply a British/French triumph.
Could be. But the blackout goes beyond this one story. This idea has not emerged from either the left or right in America, as it did in Europe, until now. My guess is that, for the media and both the American right and left, the fact that green tax cuts combines elements from both camps, rather than making it interesting, makes it seem like some half-breed mutant idea, best scurried past with eyes averted. It is not pure enough for ideological comfort. So they ignore it, rather than examine it as a fresh alternative.

This is a speculation, mind you. I'd rather hear policy wonks speak for themselves. But my sense is that many liberals and some progressives are unlikely to get excited about a tax cutting policy proposal because they have spent years or decades denying that the Reagan and Bush tax cuts had any stimulus effect. They distrust the claims of supply-side economics that tax cuts can increase tax revenue by stimulating economic growth. Some are far more ideologically comfortable with policies that raise taxes (like a carbon tax or trade systems, windfall profits tax, etc.) with the prospect that any revenues can be spent on regulation, research, Federal eco-investments or some other favorite program. They are largely tone-deaf to criticisms that such tax-hikes can cripple the economy or cause widespread suffering, and instead rationalize that shifting green will create jobs, spur innovation, and stimulate the economy through cost saving from energy efficiency. While progressives largely support the existing and very successful limited tax incentives for hybrid cars and renewable energy, the idea of pushing this approach to the next level runs afoul of their basic American liberal ideology on taxation.

Interestingly, Europe's green tax cuts were first proposed by the center-left British Labour Party. Perhaps this was possible because the European left has not spent three decades denying the stimulus effect of tax cuts, and instead accepts the classical liberal view that tax cuts do act as a stimulus. As I will discuss below, I believe this view is gaining acceptance among the highest level of Obama's advisers, who are ahead of the ground troops in this respect.

For some conservatives, their lack of mind-share available for green tax cuts lies in that that they simply don't see a problem that needs solving. Many are global warming deniers. This is certainly true of many at conservative think tanks. Others, with the exception of people like Frank Gaffney and James Woolsey, even deny that oil dependence is a problem. So the argument goes, why do anything that creates an economic distortion, if there is no problem to fix in the first place?

The answer to conservatives is simple: hello, it's a TAX CUT. As Milton Friedman once said, "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible." A green tax cut will have all the same benefits of any tax cut, plus the added stimulus of reducing energy costs by expanding supply and reducing demand. So, if you want, forget global warming, forget oil dependency. One problem conservatives should agree needs solving is rising taxes and an economy sliding into depression, and the best conservative answer to that is a tax cut, particularly one reducing spike-prone energy costs. Among themselves, conservatives should agree a green tax cut would be far more beneficial than many of the tax, spend and regulate enviro-policies currently on the table. Besides, a green tax cut is probably the best chance they have of seeing a major tax cut in at least four years because of the popular interest in shifting green. By championing aggressive green tax cuts, conservatives could help save the economy, the auto industry, the planet and capitalism itself. (If they weren't so busy shooting their own feet.)

The answer to progressives is that the looming depression squeezes out proposals that might damage the economy, as carbon tax or trade systems would by hiking energy costs up front. The Obama administration needs pragmatic green policies that are pro-growth in every respect, from the start, not just as a by product of eventual energy efficiency. As the world slides into depression, eco-wonks should ponder why (a) green tax cuts are part of the European Economic Recovery Plan, but carbon trading is not; and (b) why many poor countries, like Poland, would not go along with the carbon trading system unless their pollution credits were free. The reason is that the green tax cuts really are a green economic stimulus, and a carbon trade pseudo-tax system is, up front, a drag on the economy, however laudable in other respects.

Some commentators lament that Europe's climate goals are insufficient and were weakened by political opposition. That is because carbon trading and mandates cause pain, anger and opposition. These policies will never get us to the goals we need to reach because of the political/economic backlash they create. Eco-wonks need to focus on incorporating and preferring policies that are genuinely pro-growth from the get-go, like green energy tax cuts, if they wish to reach the right targets.

* * * * * * * * *

Commenting on my last post, Tim Reed asked a great question:
What do you think of this? Chu mentions improving the tax environment for green energy without specifics, then goes right on to carbon caps and trading.
Here is the quote Tim is referring to:
Q. What is your vote for the best role of government in shaping long-term efforts? (Is FutureGen the right kind of model? If not, what is..? is N.I.H. a good model? Is the Energy Department the wrong venue?) A lot of economists say industry is just not able to focus that far forward in R and D. Do you agree?

A. We need to alter the playing field with tax and fiscal polices (such as a carbon cap and trade with a minimum trading value so that companies could plan for sensible, long-term investments). This has to be done in order to account for the so-called “externalities” - real costs that are not yet included in the price of various forms of energy. Developed countries have made this step with air and water pollution by enacting outright regulations and installing a cap and trade system.

Once industry is assured that the bottom will not fall out (such as price of oil, gas, or the trading value of avoided carbon, etc., suddenly plummeting) long-term investments will be made. The wind industry in Denmark and Germany proceeded in this way. Off the top of my head, $70/avoided ton would work wonders in spurring long-term investments and innovation.
Dr. Steven Chu, who is reported to be the top choice for Obama's energy secretary, is right about negative externalities and the need to adjust the playing field through tax policies. However, the tax policies he favors (a cap and trade pseudo-tax) could act as a significant drag on the economy, by effectively hiking taxes and energy prices. He has apparently not yet realized that the same incentive to shift green can be put in place, with a far more pro-growth outcome, by employing an aggressive "un-carbon" green energy tax cut.

However, I hold out great hope for Dr. Chu, and think he is at least friendly to the idea of tax incentives. In August, the Obama campaign made a significant shift towards supporting tax incentives for clean vehicles and renewable energy. As a high level advisor to the campaign, Chu was at least part of the team that gave their blessing to that change. Further, Dr. Chu's Berkley colleague Prof. Daniel Kammen, among others, is a leading proponent of the innovative BerkleyFIRST program that provides municipal financing for private solar power installations. The program greatly lowers the cost of such installations in part because of some hidden green tax cuts: first, municipal bonds are triple tax free, and Berkley pays no taxes, so the borrowing cost can be much lower than privately available; second, the loan payments are turned into a part of the home owner's property tax, and so become tax deductible from income, further reducing costs beyond what private financing could accomplish. I intend to post more about BerkleyFIRST soon, but the point here is that I believe some of Chu's close colleagues are increasingly aware of the value of green tax relief as part of an integrated solution.

Perhaps this is wishful thinking, but I believe that at the highest levels of the Obama team, there is a developing, sotto voce awareness of the potential of green tax cuts, but it is still brewing. However, despite European developments, there is little or no awareness about the policy among the media, or rank-and-file left or right in America.

Regrettably, I am doing a whole lot of speculating about what a whole lot of people think or know or don't know. And some of them I haven't even met. I'd love to hear: what do you think abut the European green tax cuts? The press blackout? The blind spots of left and right? How far can the concept go?


Anonymous said...

May I suggest you simply ask Dr. Chu what he thinks of green tax cuts? I'd be interested to know.

Anonymous said...

Hell of a mess we've engineered ourselves into, and I think your insistence on thinking about fiscal policy and green policy as mutually reinforcing is highly original. In this time when conservatives are moaning about being in the wilderness, you couldn't be more on target -- "let's welcome a spell in the wilderness -- and save it and save capitalism too", there's your punch line. Keep it up. You have a very strong hand when you say this trend can lower taxes if properly done. The fear of course is that the Democrats are going to go in the opposite direction.

I find your question very interesting. Why can't conservatives get interested in major initiatives to attack problems as fundamental as growth and energy, so obviously linked as you say? Lower taxes: spur growth, increase freedom. But this is an idea that we keep having to re-learn. The American Revolution was a tax revolt, but how many people in the media, or anywhere else, think of it that way? So why should they get it when EU enacts a tax cut? But give it a little time. Sometimes policy ideas take a while to sink in. If this thing works and the EU policy wonks see that it is working, they probably will call attention to it.

Anonymous said...

There is no universal consensus on the matter of tax cuts here at the Cato Institute, so the opinion I am about to express should not be taken as a reflection of the opinions you might find elsewhere in this building. My take, however, is that the tax code should not be used to encourage this or discourage that because I do not believe in having the government direct capital flows in the economy and favor some
investments relative to others. Tax cuts are simply an indirect way of doing this and are in one sense worse than more direct interventions because tax preferences are less visible to third parties. Tax preferences increase the cost of tax collection, decrease otherwise desirable economic activity, create dead-weight losses, and produce less economic efficiency as a consequence.

Nor do I buy the argument that tax cuts are always a good idea. Why is it a matter of libertarian faith that it's better to pay for government spending with a metaphorical credit card than with cash? The former must be paid for in cash eventually ... with interest. That is, it will cost society MORE to pay for government via debt than via taxes. All that changes is the time in which the taxes are collected. Deficits simply borrow tax receipts from the future ... which, in a sense, is the same as borrowing economic growth from the future. It is not obvious to me that a political system that forces people in some distant future to pay for my government services today is somehow more libertarian than one that forces recipients of government help to pay the bills to some extent for that help.

Moreover, to the extent that taxes are reflections of the marginal cost of government to the average voter, cutting taxes while increasing spending reduces the marginal cost of government. It's no wonder, then, that public appetite for government spending goes up whenever taxes are cut. Do you doubt, for instance, that the $700 billion bail-out of Wall Street or the likely $125 billion bail-out of Detroit would never get off the ground if those programs had to actually be paid for by taxpayers in the here-and-now?

The usual defense, however, is that tax cuts starve government of revenues and thus, eventually, will starve-out government spending. Unfortunately, there seems to be no functional limit on the federal credit card and, thus, no empirical evidence that tax cuts = less spending. In fact, in-house regression analyses that we've performed on the matter show no clear relationship between the two ... an observation that we shared with Milton Friedman before he passed away and a finding
that convinced him (in correspondence with us) that his "starve the beast" hypothesis was likely wrong.

Regardless, there are less economically disruptive ways of promoting renewable energy. Direct subsidy from the Treasury is preferable because it avoids the inefficiency associated with a distorted tax code. Cap and trade or a carbon tax would be even better. But do not confuse that with a support for either policy. I do not favor a carbon tax or cap and trade programs in the energy sector because I am convinced (for the time being anyway) that focused adaptation is a less costly and more effective means of dealing with climate change than emissions reductions;

Jerry Taylor, Cato