Successful Uses of a Carbon Tax and a Sovereign Wealth Fund

We’re back from a lovely vacation in France and are ready to resume our exploration of the Green New Deal from a practical point of view.

Those who have read earlier posts can be forgiven if they start shaking their heads at the amount of money each individual portion of the GND seems to cost. The Green New Deal will cost a lot of money, although much of it will be obvious investments with an expected and forecast-able return.

But housing half a million homeless and offering tax subsidies for solar panels and electric cars doesn’t come cheap. And that’s just two of the initiatives we’ve discussed.

We’ll add up the totals later, when we’ve gone through all of the separate initiatives of the GND. But let’s talk about financing some of it now, before we get too scared of the big numbers involved.

We, along with everyone else who has both studied the climate issue and is comfortable with numbers, strongly support a carbon tax to be levied on emitters (and perhaps producers of fossil fuels). We have long held that a carbon tax should be revenue neutral–that the money raised from the tax should be refunded in full to the citizens. This has seemed the only way to make such a tax palatable to Republicans.

But one way of rebating the money raised by a carbon tax is financing the economic initiatives of the Green New Deal, which can be expressed in shorthand as ‘feed the poor, house the homeless, treat the sick,’ at least in part.

One of the most interesting parts of discussions about a carbon tax is what the tax should be. Pure economists look at the lowest level needed to change the behavior we want to change–what’s the minimum level that will cause emitters and producers to look at alternatives to fossil fuels. And that’s a legitimate point of view.

But we could also look at the revenue required to finance the economic parts of the Green New Deal and decide what level of carbon tax would be required to raise that revenue, or at least part of it.

There’s a reason to do that and also a a reason to hypothecate the revenues to economic relief, as opposed to financing the parts of the GND dedicated to fighting climate change.

There’s very little doubt that a carbon tax would work–that emitters and producers will make intelligent decisions about moving to green energy as quickly as they can, so as to avoid paying the tax. And that will fight climate change by itself. But as it succeeds, the money raised by the carbon tax will decrease. And quite quickly, especially if the tax is set at a high level.

We argue that the early windfall produced by a carbon tax is needed most to alleviate the economic plight of 40 million Americans and that most of the poor, homeless and sick need the money now. Further, we think that intelligent use of the money will actually work–that giving the homeless a place to live will solve homelessness. That paying for the sick to get treatment will heal them. That educating and training the unemployed, incentivizing employers to hire them, will drop levels of poverty to a far lower level. And hence, that the need for revenues will diminish even as the revenues from a carbon tax fall.

It should also be more acceptable to the body politic–even its conservative members–to use a carbon tax to raise the standard of living of 12% of Americans to a decent level.

But then how will we pay for the equally expensive initiatives of the GND that deal with climate change?

We call for the creation of a sovereign wealth fund that increases the royalties currently charged on extraction of fossil fuels. That all of the royalties (including present royalties) be used for mitigation (and perhaps pre-adaptation) measures designed to bring America to (or close to) zero emissions by 2050. That we tax imported fossil fuels at the same rate as the royalties.

A sovereign wealth fund works best if it is allowed to grow and the income from the fund’s investments is used, rather than the capital itself. Were a sovereign wealth fund to be started in 2021 with a new administration, and if it were invested as wisely as, say, Norway’s fund is, by 2030 it would have grown enough to finance the heavy lifting required to push the Green part of the Green New Deal across the finish line in 2050.

What that would allow for (and actually require), is that the period between now and 2030 be more concentrated on the enabling infrastructure to support a green economy–the smart grid, the charging stations, the improvements to mass transit. We should continue to fund subsidies for take-up of renewable energy, electric vehicles, energy efficiency, and even increase those subsidies. But we should be laying the groundwork for the following 20 years as well, using existing funding mechanisms to do so.

We can set levels for a carbon tax and extraction royalties as we like. (We could even change them if it seems the right thing to do.) We can hypothecate the revenues as we see fit.

In reality, it is doubtful that these two revenue sources would be sufficient on their own to finance the Green New Deal. But it seems apparent that they could make a significant contribution.

14 thoughts on “Successful Uses of a Carbon Tax and a Sovereign Wealth Fund”

  1. Welcome back.
    Attaching, as a rider, to climate policy every liberal wish list that people have refused to fund for 50 years is a surefire way to kill your climate policy. It’s also an invitation to the rational conclusion that you aren’t serious about the climate policy- I note you suggest addressing homelessness etc etc first, climate later.
    Doing it with a regressive tax also means losing support on the left (Bernie and Elizabeth are, after all, promising all the these free social goodies, and then some, at no cost whatsoever to anyone who earns less than filthy rich territory).

    Let’s walk through it a bit- as you know from your studies, coal use for power is a midwestern, factory town, and rural thing in the US. New York City, Philly, Washington DC are all nuclear powered (though they claim they wish they weren’t). Auto reliance is a middle class, surburban thing.
    You propose slapping a fee on this high enough make them stop (driving to work? heating in the winter in Chicago?) and “refunding” the money to homeless groups in the cities. Los Angeles recently put a special tax on themselves to end homelessness- they raised and spent $600 million last year. The number of homeless went up 12%. https://www.npr.org/2019/06/04/729599946/despite-increased-spending-homelessness-up-12-in-los-angeles-county
    Meanwhile, advocates- mostly from cities – will politely explain to the midwest that they are not allowed to avoid the carbon tax with cleaner natural gas, not allowed to do it with emissions-free nuclear power (it’s icky and stuff), and may only do it with solar panels and windmills, which they’ll get around to funding in a decade or so once the coastal city folk have collected enough mid-western and middle class carbon tax money to build themselves a big slush fund for their entirely unrelated political aspirations.

    If you’re wondering how “Brexit” happened, I’m picturing someone in Brussels reading that last paragraph and saying to themselves: “yes, yes, exactly! I do not understand this Jeff person, he understands exactly what we wish to do, yet it feels as if he suggests it is not so good a plan! Pierre, order the jet, we should hold a conference on this, somewhere the lobster is in season.”

    If this is really your plan, your first step will be to rewrite the constitution to abolish both the Senate (two Senators per state) and electoral college.

    Let’s propose an new (or addendum) “iron law”- the further climate policy proposals drift away from realistic political considerations, they less interested anyone becomes in climate change.

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  2. Since my last was all negative and no suggestions, here goes:
    – Phase in a carbon tax, make it perfectly clear in the legislation that all options for reducing emissions are equally on the table. A carbon tax is bi-partisan, but has genuine flaws- it’s geographically unfair, it’s regressive, and green advocates are adamantly opposed to functional alternatives to coal.
    – Separate your social welfare policies from climate policies. Your better argument for increased social spending is the fact that the economy is smoking hot right now and we can better afford it. The keepers of the anti-Trump narrative won’t let you say that, but if you want the spending it’s the right argument.
    – There’s a big damn deficit that needs to get knocked down before anyone goes hog wild on the spending.
    – Entertain an IPCC-level review of CO2 mitigation alternatives that includes cost and reliability. “Green jobs” can be found at dams, nuclear plants, gas pipelines, and on rooftops with solar panels.

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  3. Hiya Jeff! It’s good to be back.

    I like your second email much more than your first 🙂 . Our intention here is to show whether and how the Green New Deal is feasible–we leave the desirability of it to smarter brains than ours.

    The suitability of natural gas as a bridge fuel and nuclear as a baseline provider are very well discussed all over the internet–as they are not part of the GND we are not touching on them here, except to note that your points are not crazy and we hope they will be considered. However, subsidizing solar purchases and EVs at a larger scale is not a tax. A carbon tax on large emitters to be rebated to the citizenry may actually fly. I’ll be sure and tell Pierre 🙂

    But the economic parts we discuss are part of the Green New Deal and we do discuss them here–and we’ll be going into more detail as this effort progresses.

    The total effort will be expensive, no question about it. But when I see price tags floating around the internet of $30-$40 trillion, I don’t know where they’re getting it. That’s why we’re doing this–we’re fairly confident the price tag will be less than 10% of that–still eye watering, but hey–the US is a rich country and if we decide to do this, we can.

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  4. “….as they are not part of the GND we are not touching on them here, except to note that your points are not crazy and we hope they will be considered. ”

    I get that, but I suggest here that if the goal is climate action, it’s also reasonable to take a step back and ask if the GND is viable climate action policy. Senate Democrats voted present on it because they didn’t want to be associated with the social spending aspects.
    A question- do you think our options for climate action are GND or nothing? If not, prioritize.

    “But when I see price tags floating around the internet of $30-$40 trillion, I don’t know where they’re getting it.”

    They use reasonable estimates, from detailed actual experience, to forecast the cost of free health care, free housing for 500,000 additional people, the estimated 10 million people the authors of the GND said would be added to the federal payroll for the guaranteed jobs, plus the known costs of the windmills, solar panels, new grid, backup storage, land, etc.
    You could, in fact, use these estimates to make an argument for how to pay for them. People agree to spend money for things and services daily. This is why stores put price tags on items, it’s information people need to make a decision. The lack of such information reduces the chance of decision. Policy without addressing cost is policy designed to fail.
    For example, Bernie and AOC like to talk about Scandinavian countries. Which means it’s reasonable to examine how those countries pay for their social welfare spending. Modern American progressive advocacy is the art of arguing you can have Scandinavian levels of spending without Scandinavian middle class tax rates (and lower class- they have big regressive VATs). Since nobody believes this, it doesn’t inspire. Until someone tries to make the argument for those tax rates, it won’t ever happen.

    This is policy designed to never be implemented. From a political perspective, it’s important to understand that some advocates like it this way. A 100% renewable mandate is an example. Nobody is actually going to do it, because the cost is obscene and the result is unreliable, but that’s okay because every day it doesn’t happen you get to blame Republicans for preventing something you have no intention of actually doing. This, FYI, is why I like to watch German policy- there is (was) no appreciable political opposition so the effort is a pure example of “what can we do that works- ie doesn’t create political opposition that currently doesn’t exist.”

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  5. The UBI and this one? Yes.
    Let me simplify my argument, the following is, IMO, a poor climate change action strategy for the reasons I laid out: “The planet is in danger from man-made greenhouse gas emissions, therefore we must take immediate action to tackle homelessness and inequality. ”

    Focus on the first clause, broaden your political coalition, prioritize your goals. There are enough reasons for people to dismiss climate change action as simply a stalking horse for another agenda, we don’t need more.

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    1. I’ll briefly add to that as I’m going out of town too. But not France- that sounded like a great trip!

      I agree basically with Mosher on one point- the debate over whether humans are altering the planet’s climate has been “won” by those who say it is. I would quibble that there are good reasons to believe that “consensus” ECS is going to keep going down below 3 C, but that’s just me.

      I think the real debate is over what to do about it and team warm is losing that one badly. Their list of “acceptable” alternatives is too narrow and unrealistic, their cost estimates are laughable, their willingness to fudge the numbers on catastrophism is deeply damaging to science, their idea of ignoring Chinese emissions (or worse- waving them off with “per capita emissions” when the globe only cares about total emissions) is unsustainable in a global economy.
      It’s reasonable at this point for people to question whether advocates actually want to reduce global emissions.
      It is in this context that I respond to your interest in talking first about UBI and the homeless as part of a climate policy.

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  6. Hiya Jeff–where are you going? (And yes, France is great.)

    All of your points seem valid–or at least cogent enough to have a good long discussion about. But bear in mind that we took on this task as a validation exercise, not to decide whether the Green New Deal is the right policy, but how it would play out in terms of costs, timelines and technical feasibility.

    If you start with the assumption that the GND is the right thing to do, what then? That’s our very limited scope. As I see it, all of the discussion is on whether it’s the right thing to do–and that seems to be your focus as well. We’re trying to figure out if it can be done, not whether it should be. And we’re about 5% done with our work.

    There’s a few posts we’ve done that might interest you on homelessness, solar power, electric vehicles, etc. If you have time and are looking at the internet on your trip, it might make for some nice airplane reading.

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    1. We went sailing in the Caribbean – good times!

      Good luck with the blog, I’ll be interested in reading it. I’m not convinced (yet) that figuring out if something CAN be done is always a useful exercise. Case in point from recent experience is that moving people and things from one place to another by wind-powered vessel can be done. How relevant is that to a discussion of modern global transportation? Couldn’t it be counter-productive for the UN to announce (as an aspirational discussion starter)- we will mandate all overseas transport of people and goods be done by sail?

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  7. Tom, it looks like I don’t have much to contribute here because I really don’t believe in your basic premise.
    I believe that human activity is causing havoc with the climate, but I also believe that the data is not pointing to a greenhouse gas model. I’ve elaborated before.
    The GND is a giant step an unnecessary way.
    If you want to reboot the blog, let me know.

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    1. Hi Marty

      Well, heck. I value your contributions and I want you to stick around. I know you could help sharpen these ideas. Only about 40% of the GND is about reducing emissions. Why not focus on the rest?

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      1. I could make a unique contribution on the fallacy of the 4mms /year sea level rise, or how land use/land cover model better fit the data, or the true history of climate science, but who cares?
        My med history is turning into a real curiousiy, I’ll fill you in sometime.
        I’ll finish my book and get back to you. Hey, you can write a review.

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