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.

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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?

Europe Moves to Adopt Green Tax Cuts

Last week, in a dramatic about face and historic first, the European Commission, which drafts legislation for the EU, embraced green tax cuts as part of its European Economic Recovery Plan. The heretofore non-existent policy had been proposed only in just the last year by prominent politicians from both the left and the right, notably British PM Gordon Brown and French President Nicolas Sarkozy.

The Commission proposes "reduced VAT rates for green products and services, aimed at improving in particular energy efficiency in buildings," and indicates it will "urgently draw up measures for other products which offer very high potential for energy savings such as televisions, domestic lighting, refrigerators and freezers, washing machines, boilers and air-conditioners." The plan also calls for "Member States to provide further incentives to consumers to stimulate demand for environmentally-friendly products." In particular, "Member States should [reduce] property tax for energy-performing buildings" and also reduce taxes for "lower emission cars."

This same green tax cut proposal was first put forward by center-left British Labour Prime Minister Gordon Brown just a little over a year ago, and quickly garnered the support of center-right French President Nicolas Sarkozy. Brown argued strongly that "Lower taxes can make a big difference to whether people buy environmentally friendly goods." However, the European Commission quickly shot it down just last March. Since then, however, Sarkozy has become President of the European Union (with an ambitious green agenda) and the world economy has entered its worst crisis in decades. The EU is now willing to consider all means of economic stimulus at its disposal, and green tax cuts are now, for the first time ever, part of that mix.

The speed with which this proposal has gone from introduction to acceptance at the highest levels of the European government, in just about one year, is remarkable. While clearly the EC could be bolder and go even further with this concept, such as VAT (and other) tax reductions directly for ultra-high-mileage vehicles and green energy from renewable sources, it is likely that this is just the start, and there is more to come. That it has been championed by politicians from both the left and right is also noteworthy. Indeed it begs the question, if the European left and right can so quickly agree on the value of this policy, particularly as one of the few green policies that doubles as an aid to economic recovery, why isn't it even on the radar of their American counterparts?

If anyone has any ideas as to why, I'm all ears...

How to Save the Auto Industry (Without a Bailout)

Ever since the Big Three auto companies flew in with tin cups and private jets seeking a $25 billion bailout loan from Congress, the media and most pundits have been fixated on three extreme alternatives: bankruptcy, bailout, or government takeover. But there are other alternatives that avoid these extremes, if only folks would ask the right questions.

First, let's think through the problem. Has anyone else noticed the irony that the Treasury Dept. is spending $700 billion to encourage the credit markets to loan more money, but the auto companies, instead of going to the private debt market as they should -- are coming straight to the Congress? Aren't we bailing out the credit markets so that they will make exactly this kind of loan?

The right question to ask here is NOT should we bail them out, take them over, or let them go bankrupt. That is what everyone is asking. The right question, which nobody is asking, is: what can we do to encourage the private sector to finance the Big Three?

What is the problem? Detroit's labor costs are too high, and they are not producing the right kind of cars for the current market -- affordable, extremely fuel efficient vehicles, not the expensive gas-guzzlers they produce -- so their business model is unprofitable.

Logically, then, to encourage private financing, we need to find ways to help Detroit become profitable, either by reducing their costs, or by helping them produce affordable, green-powered vehicles profitably, or both. We also need to look for ways to make loans and other financing more profitable to investors.

Too bad the media, Congress and the punditocracy are all focused on extreme, unpalatable and not-so-helpful solutions: bailout, bankruptcy or government takeover. No one in these opposing camps seems to be asking how we can avoid such extremes: fix the problems, encourage normal loans and investments, and make the auto industry greener and more profitable without all the drama.

Here's one way:

We can spur both new loans and new equity investment if we make it extremely profitable and attractive for the auto industry to move in the right direction, towards producing and selling advanced green energy vehicles. We can do that in short order if we make the entire business of producing such green vehicles 100% tax free. To reduce costs and boost sales, revenue from green vehicles should be free of all state and local sales taxes, and all federal income tax. Further, the cost of all materials and components needed to build such vehicles should be tax free as well, to reduce costs and increase green vehicle profitability even more. Interest on loans or bonds to finance the development, production or purchase of such vehicles should be income tax free, making such loans more profitable. The stock and dividends of companies producing green vehicles should be capital gains tax free, in proportion to the percentage of revenue derived from such vehicles in the previous year, attracting more equity investors and encouraging management to shift green to escape taxes. All the above should hold true for businesses producing the infrastructure needed to support green vehicles, such as electric, hydrogen and natural gas fueling stations, all 100% tax free.

If we take these steps, we will vastly reduce the costs and increase the profitability of producing green vehicles. We will also make loans for producing and purchasing such vehicles more profitable and attractive to lenders, simply by making the interest tax free, but also by making the underlying business more profitable. Overall, we will immediately spur enormous debt and equity investment in a revitalized, highly profitable Big Three dedicated to selling as many green vehicles as possible, in order to maximize profits and minimize taxes for each company and their shareholders. Essentially, we would be creating a green goldmine for investors, one that is good for both America and the Earth.

The benefits of this approach extend well beyond the auto industry. A study by the Pacific Northwest National Laboratory estimates PHEVs have the potential to cut US oil imports by 52%, or 6.5 million barrels per day. Plug-in vehicles can reduce energy costs nationwide by using underutilized, off-peak energy, which is generally cheaper and would otherwise go to waste. Local trips could cost as little as the electric equivalent of $1/gallon of gasoline. These savings and benefits could be even more dramatic if combined with a smart grid and renewable energy sources, such as wind and hydro power, further reducing emissions and allowing the PHEVs to act as an on-demand power storage system, storing cheap off-peak power from an increasingly green grid, for use during expensive peak-load times -- with vehicle owners pocketing a profit. If tax freedom were extended to ALL green energy technology (vehicles, clean/renewable energy sources, smart grid development, etc.) that would supercharge investment in green energy, reducing overall energy costs, while stimulating the economy and creating millions of new jobs.

And of course, one of the nicest aspects of this approach is that it does not require a dime of upfront federal spending. Further, it lets the market (not the government) decide which green auto technology wins.

Is this somehow an unfair subsidy of green over gasoline vehicles? Many economist argue that oil, coal and gas guzzling vehicles are already heavily subsidized in a number of ways, such as the infamous $25,000 Hummer tax credit, but even more fundamentally in that these vehicles contribute heavily to the social costs of global warming, foreign oil dependency and oil-related wars, but get a free ride by forcing the taxpayer to pick up these costs. But raising taxes on carbon fuels and carbon producing technologies, such as automobiles, while correcting the free ride problem, would be disastrous for a struggling economy and a struggling auto industry. Tax freedom for green energy and green vehicles is another way to correct the free ride problem, but one that stimulates the economy, rather than depressing it. Instead of a carbon tax, we can implement a no-carbon tax cut for a much better pro-growth outcome.

Are we going too far with 100% tax freedom for green vehicles? Not at all, because Detroit and the American economy are in dire straits right now. There is no excuse to not pull out all the stops right now. Our economy is dangerously vulnerable to wild spikes in the oil market, which vulnerability can only be reduced by reducing demand for oil. This we must do fast, at full speed, not half-speed, or more oil spikes will greet us if and when our economy begins to recover, possibly choking off any rebound. We have a long, long way to go before 100% of American vehicles are highly fuel efficient, and an even longer way to go before 100% of vehicles use 100% renewable energy. We can always reassess and maybe throttle back later when we have reached a reasonable midpoint goal, when say the auto industry is profitable again and 50% of all vehicles sold are plug-ins and deliver 100 mpg or better. But right now, we need a profitable, green auto industry and less dependence on foreign oil. It is a rule of economics: if you want more of something, tax it less. Ergo, no tax on green autos.

Tax freedom for advanced green energy vehicles is manifestly in the national interest, not just to save the automobile industry and millions of jobs, not just to avoid economic depression, but in order to reduce the ongoing strategic, economic, environmental and security risks posed by foreign oil dependency and global warming. But even disregarding the larger goals, it is nice to know there is a sensible alternative to bailouts, bankruptcy or socialism, and one that lets the markets work as they should.

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Given the unattractive options being floated by the punditocracy, one worse than the next, I hope this original proposal can help move the national debate in the right direction. If you agree, please help by forwarding this link on to your friends, elected representatives, the Obama Transition Team, the media, the blogosphere, and anyone you know who might be interested and helpful. And thanks!

Since You Ask...

Today I received an email video link from John Podesta, leader of the Obama-Biden Presidential Transition Team asking that I (and millions of others, no doubt) send my policy suggestions to the Energy & Environmental Policy Transition Team leaders, Heather Zichal and Carol Browner.

Perhaps the point is not that they need fresh energy policy ideas, but more to demonstrate their inclusiveness and openness to all viewpoints. Or is it? Maybe, just maybe, they really do want to hear some fresh energy policy ideas, as the looming economic abyss threatens to put all their best plans on hold. Now I don't want to be too cynical, because it would be nice if they really are open to new ideas. But think about it: with trillions going to the current bank bailout, and who knows how many other bailouts lined up behind that, how are they going to afford the $150 billion they plan to invest in the renewable energy industry? Further, since the current economic meltdown was precipitated in part by skyrocketing energy prices, can they really risk making matters worse by instituting a cap-and-trade carbon "tax" that would only make energy even more expensive? Will there even be any windfall profits to fuel this agenda -- as they hope -- if the economy is on a respirator?

Perhaps the smartest players in the transition are thinking, hey, maybe we need a plan B, something cheap, effective, but not economic suicide, and honestly wondering if anyone has any bright ideas.

Here is what I suggested:

Dear John Podesta, Heather Zichal & Carol Browner:

Thank you for sincerely seeking new ideas from outside the fold. Since you ask, I'd be happy to suggest a low cost but ambitious solution to many problems, one that you may not have considered.

All the biggest problems we face (the economy, jobs, the auto industry, oil dependency, global warming, the Iraq War) have at least one common solution, and almost nobody has figured it out yet:

MAKE ALL GREEN ENERGY TECHNOLOGY 100% TAX FREE.

It is that simple. We don't have to spend money, or hike taxes. Bailout or bankruptcy are NOT the only options for Detroit. We can create millions of new jobs and fix the environment/economy/auto industry/oil dependency with a smart, green tax cut. No sales or income tax on revenue from clean, renewable energy or technology (like plug-in, flex-fuel hybrids) that radically decrease oil consumption. No tax on the interest on loans for green energy investments. No capital gains tax on companies' stocks and dividends in proportion to the percentage of their revenue that comes from green energy technology. That simple policy will supercharge private investment in clean and renewable energy technologies... on the order of $300 billion per year, or more. That will create millions of new jobs fast -- many more than you could create by federal spending alone. That includes billions of new investment in the US auto industry, as investors see a greener path towards an increasingly tax-free auto industry. Further, it will encourage oil, coal companies and utilities to voluntarily go green, in order to escape taxes. A carrot frequently works better than a stick.

Slashing taxes on green energy will directly lower the cost of green energy, but also lower the cost of ALL energy. Economic law states that increased supply results in decreased price. So new green energy investment will increase the total energy supply, decreasing the price of all energy, including oil and coal. Increased energy diversification and competition will create a permanent downward pressure on energy prices. Cheap energy will in turn stimulate every other sector of the economy, creating millions of non-energy jobs as well. By contrast, a carbon tax, or cap-and-trade, would raise the cost of energy, crippling the economy, and putting more people out of work.

Take note: NO FEDERAL SPENDING IS REQUIRED. Further, any tax revenue reduction will be minimal initially -- since green energy is now just a small part of the economy -- and as it grows, revenues will grow from green energy payroll taxes and other sources. A focussed tax cut on this one sector of the economy can lift all others by keeping the price of energy low for all, and producing massive domestic employment. A tax cut here will produce a massive tax revenue surge from the rest of the economy. Tax freedom for green energy will make the US the world leader in green energy investment in President Obama's first term -- in fact, most world green energy investment will go through the US for the tax advantage.

So forget the $150 billion federal "investment" over 10 years -- that is PEANUTS compared to what is really needed here and now, and what the private sector can do if you make green energy technology tax free. And please forget the stupid cap-and-trade proposal that does not really work and will only raise the price of energy, and further depress the economy. Tax freedom for green energy technology provides the same tax differential as a carbon tax, with the same incentive to shift green, but will stimulate rather than depress the whole economy by pushing energy prices lower.

(Oddly enough, tax-free green energy is logically the double-negative of a carbon tax: the no-carbon tax cut. Similar but diametrical concept, superior result.)

A 100% tax cut for renewable, clean energy technologies, vehicles and infrastructure is the cheapest and most effective stimulus you could provide right now for our struggling economy in general, and for financing a green revitalization of the auto industry in particular. And it is the absolute best and fastest way to achieve your goal of creating a clean, green economy, and creating millions of new jobs.

Let's see if anyone is listening.

Oh, by the way: YOU, FRIENDLY READER, CAN HELP. Please email the link to this page (http://tinyurl.com/5g83bx) to your friends, family and elected representatives -- and let's not forget the Obama Transition Team! To anyone who might be interested, tell them, please, to take a look at the idea and the link, that Tax Free Green Energy is the best way to save the economy and the planet at the same time, and that we prefer our energy cheap, green and tax free. Then ask them, please, to feel free to raise questions or comment, and pass it on.

Maybe somebody will eventually tell the President.

We can do it. Yes we can!