Ethanol subsidies live another year

NOOOOO!!! Despite promising earlier signs, the ethanol tax credit renewal managed to sneak into the tax bill, so it's been extended into 2011 at least. Very disappointing, even though Geoff Styles thinks the subsidy won't last past next year.

Amusing sentences

Biodiesel and soybean industry leaders are urging the U.S. Senate to pass the American Jobs and Closing Tax Loopholes Act, which retroactively extends the biodiesel tax incentive through Dec. 31, 2010.

From Biofuels Business.

CFC reduction: a success story

Also via Tim Haab at Environmental Economics:

CFC reductions are often hailed as an environmental policy success story. The reason CFC reduction policies have been so successful is Congress taxed the bejesus out of CFCs.

The Clean Air Act (Title VI) established caps on most CFC's as agreed upon under the Montreal Protocol, with a complete phase out occurring around the year 2000. The tax on CFC's was $1.37 a pound in 1990 and 1991, about twice the then current product price. Recycled CFC's were exempted from the tax.

The tax was raised in 1990 and again in 1992. The tax raised to $3.10 per pound in 1995 and to $4.90 per pound in 1996, raising the price six fold.

The lesson: economic incentives change behavior.

I find the subsequent news item about taxing overgrown lawns in Jupiter, Florida entertaining, but not very relevant. And unfortunately the "tax the bejesus" strategy isn't as viable for massive emittants (is that a word) like CO2, NOx and methane.

Is taxing debt a good idea?

Paul Volcker thinks so; I don’t know, but it’s an interesting idea that would be a sea change in U.S. corporate finance. Here’s a great WSJ chart on how the U.S. has one of the highest corporate tax rates in the developing world, but collects a relatively small share of revenue.


I’m not sure I get how this math works, though:

Headed by former Federal Reserve Chairman Paul Volcker, the bipartisan presidential tax-policy panel also is examining the way multinational corporations pay taxes. The group is considering whether to replace the current system, which taxes global income, with one that taxes only profits generated in the U.S. Such a move could provide more revenue for the Treasury by simplifying a system that has provided multinationals multiple ways to navigate transborder tax rules to minimize payments to the government.

Such changes could raise tens of billions of dollars in tax revenue.

Via Felix Salmon.

Many views on fuel subsidies

There are a lot of possible angles on fossil fuel subsidies. It's easy to draw a chart like this that makes them seem way out of proportion with renewable fuel subsidies in the U.S.:

But there are also other ways to cut the data, like in proportion to total energy consumption, which give the opposite picture - according to Downstreamtoday.com, fossil fuels receive 71% of subsidies while providing 86% of U.S. energy in 2007 (94% if nuclear is excluded). Oil and gas taxes also far outweigh subsidies, so counting only the subsidies provides a distorted picture.

Geoff Styles argues that the "level playing field" argument is misleading, because of the strange economics of oil and other subsidies for renewables. He calculates the gasoline subsidy on a per volume basis and compares with that corn ethanol; ethanol subsidies are higher, unsurprisingly, but this alone isn't a generalizable argument, because corn ethanol subsidies don't have much support from greenies either.

Enough about the U.S., how about developing countries? According to The Economist, they spend an order of magnitude more than developed countries on fuel subsidies ($310 bn vs. $20 bn):

Ultimately, I find The Economist quite sensible on this issue - they applaud the recent G20 resolution to phase out fossil fuel subsidies (although being appropriately skeptical of the vague "medium-term" timeline) because ultimately, subsidized fuel consumption is both bad for energy efficiency and not particularly effective as an investment in poverty alleviation. And if developing countries eliminate their subsidies, the paying field levels, weakening at least one of the arguments against doing the same here in the U.S.

PetroSal's raison d'être

The concept has been much-discussed, but it looks like now the government of Brazil is moving forward with plans to create a separate state oil company called Petrosal to control its heralded potential oil reserves in the pre-salt geological layer of the ocean off the Brazilian coast.

I haven't seen much understanding in the English-speaking media of the purpose of PetroSal. It will not be an operating company (Petrobras is already among the best in the world at deepwater exploration and production, private oil majors included). Rather, it will be a separate legal and financial entity that will "own" the reserves and interface - legally speaking - with foreign oil majors interested in the pre-salt area.

Why is this necessary? For one, Petrobras is publically traded, and while the government controls voting through golden shares, any profits to Petrobras would be distributed widely to international investors, rather than kept entirely within Brazil.

Second, there are little-understood tax implications. Under existing contracts, royalties for offshore accrue mainly to the states of São Paulo and Rio de Janeiro - two of the richest states in Brazil. President Lula's goal is to use the proceeds to fund massive social spending to rise the standard of living in the poorest parts of Brazil, and a new legal structure for oil royalties would channel more of the proceeds to the federal government.

This points to a third reason for Petrosal, which in my mind is a good one - separating social goals from business ones. We've seen in Venezuela how Chavez has used PdVSA as his private piggy bank for social programs, and its oil-related investments suffer as a result. This has hit Venezuela's overall oil production; Petrosal could be a step in the right direction to avoid that fate.

The creation of Petrosal and other new rules alone will not be enough to avoid the resource curse, which as Moises Naim points out in the FT can result from both macroeconomic factors (Dutch disease) and political ones (corruption and lack of government accountability). But I remain optimistic that Brazil will be able to walk the delicate line between attracting enough foreign investment in exploration and giving away too many of the proceeds. As for the efficacy of the resulting social spending, on that only time will tell.

P.S. For anyone interested in the many manifestations and implications of "the resource curse", I highly recommend Escaping the Resource Curse, a collection of essays from diverse points of view (academic, government, legal, business) on the resource curse. Oh, and both Joe Stiglitz and Jeff Sachs are editors.

P.P.S. Apparently the markets didn't like the announcement too much, shaving $7bn off of Petrobras' ~$180bn market cap. I'm not convinced the market really understands what's going on here, though. Bloomberg certainly doesn't.

So much for the plastic bag tax

Via Green Sheet, Seattle voters appear to have rejected its plastic bag tax:

Seattle voters have rejected a 20-cent fee for every paper or plastic bag they get from supermarkets, drug stores and convenience stores... With about half the ballots counted in the all-mail vote, the bag fee was failing 58 percent to 42 percent in Tuesday's primary.

The sad thing is:

Observers predicted that [with] a failure for the bag fee in an eco-conscious city like Seattle, such proposals would be an even tougher sell elsewhere.

This illustrates a broader frustration for environmental movements in general - nothing changes behaviors like price signals, but when it comes down to taxes on negative environmental externalities, consumer often vote down even the smallest increase.

Given that, a higher explicit gas tax seems highly unlikely to be passed in the U.S., despite low taxes rates by international standards and many great economic arguments for it. Which is one reason to root for the undercover gas tax better known as the Waxman-Markey bill...

Dear Greg, Why Waxman-Markey is minimally distortionary

Greg Mankiw, whose style and wonkiness I love, posts a simple model of how he sees a cap-and-trade bill or carbon tax functioning.

The trick is how to fix the second distortion [inefficiently high carbon intensity of consumption baskets] without making the first one [work/consumption decision distortions via taxes] worse.

This is a fair way of framing the problem.

The basic problem is that a new tax on carbon-intensive products C1 is also an additional tax on consumption C, unless there is some other offsetting tax change.

This is where the Rorschach test comes in. A carbon tax without a compensating income tax cut makes one problem better and one worse. The question then is which problem is bigger.

Stop there - what I think the crucial point he is missing is that Waxman-Markey will effectively function as an income tax cut for the most part. Let's review the Waxman-Markey allowance allocations and split them into those which will effectively function as consumer rebates, and those which will not.

- 46% to electricity generators and local natural gas distribution companies, "which they must use to protect consumers from price increases" (REBATE)
- 15% to low- and moderate-income households to "protect them from other energy cost increases" (REBATE, although implicitly redistributionary)
- 17% to domestic energy-intensive, trade-exposed industries and refining (REBATE unless there is some collusion in pricing to increase prices beyond the cost increase)
- 11-16% to energy efficiency and clean energy technology (NOT A REBATE)
- ~10% to other public purposes like avoiding deforestation, adaptation and international clean tech transfer (NOT A REBATE)

So almost 80% of the "giveaway permits" are effectively consumer rebates, and the remaining ones, which will be largely purchased by oil refiners, amount to a gasoline tax whose proceeds will be used for energy efficiency, clean tech and other public purposes.

So in addition to Robert Stavins' conclusion that “the appropriate characterization of the Waxman-Markey allocation is that more than 80% of the value of allowances go to consumers and public purposes, and less than 20% to private industry,” I would add that ~80% are effectively rebated to the consumers, mitigating the majority of the distortion which Mankiw laments in his post. Waxman-Markey is in fact, for the most part, a carbon tax with a compensating income tax cut.

Is cap-and-trade a tax?

He probably has little else in common with Sarah Palin, but Warren Buffett is not a fan of cap-and-trade either, earning his position a debunking by Eric Pooley at Bloomberg. I won't belabor his points #1 and #3, because it's cliché at this point to point out that no, Waxman-Markey is not regressive (because of rebates), and no, just because allowances aren't auctioned doesn't mean the permit costs won't be effectively rebated to consumers anyway.

However, on an intellectual level, I don't agree with Pooley's point #2, where he says cap-and-trade isn't a tax:

In spite of the Republican Party’s relentless “cap-and-tax” talk, cap and trade isn’t a tax. It is a dumping fee for greenhouse gases.

(Actually he has a snappier line):

A new tax means more work for accountants. Cap and trade unleashes the engineers.

A "dumping fee for greenhouse gases" is a financial penalty imposed on an activity with undesirable externalities, which happens to raise revenue for the government - that sounds like a tax to me. And explain to me why cap-and-trade won't create "more work for accountants", or what cap-and-trade does to "unleash the engineers" that a carbon tax with proceeds directed partly to efficiency and renewables research would not?

Politically it makes sense to try to stave off Republican efforts to brand cap-and-trade as a tax, but intellectually it is hard to argue what else cap-and-trade could possibly be (unless we create a whole new taxonomy for policies that walk and talk like taxes). But even so, if Buffett continues to oppose cap-and-trade he'll have to find two new legs for his argument to stand on.