Green Taxes that Save People Money

1. Green Taxes that Save People Money David C. Denkenberger Green Engineering April 16, 2001

2. Contents • Introduction • The future cost tax concept • Quantative example • Worker retraining • Reducing income taxes • Implications

3. What People Buy • Products that pay back in less than 2 years • Imperfect information (bounded rationality) • Sticker shock • Distrust of advertising claims • Buying on credit • Future use uncertain • Future electricity price uncertain • Bad reputation from earlier products • Irrationality

4. Economics Literature Search • EconLit (economics database in LIAS) • (((imperfect or assymetr*) and information) or irrational* or (not and rational*) or (bound* and rational*)) and (tax* or subsid* or permit* or rebat*) • Nothing relevant

5. Environmental Literature • NRDC • Rebates for efficient appliances from electric utilities • Only profitable to utility if it reduces peak demand significantly (small participation) • Bold efficiency targets (uninformed)

6. Supply and Demand Price Supply Tax Demand Actual benefit Qeq Qopt Quantity

7. The Future Cost Tax Concept • Make the perceived cost = actual cost • Tax visible purchases to reach hidden costs • Tax maintenance costs to encourage a new efficient model purchase • Tax product purchase price representing future maintenance costs, e.g., energy • Tax product purchase price representing future product purchase costs: buying the product again

8. Future Cost Tax Example • Assume social cost = personal cost = $1.50/gal • Hidden costs (depreciation, etc) = $1.50/gal • Need a cost of $4.50 to convince people to get rid of old inefficient cars • Average = $3.75

9. Future Cost Tax Example • People consider one half of future costs • Benchmark: 150,000 miles, 40 mpg, $30,000 • Societal cost = $44,060; “sting” = $37,000 • Reference: 100,000 miles, 25 mpg, $20,000 • Societal cost = $52,500; “sting” = $36,250 • Tax each vehicle to equalize gasoline sting and societal cost in each vehicle’s life • Tax short-lived representing future purchase cost of that same vehicle

10. Other Markets • Don’t pay electric bills for each appliance • Don’t know efficiency • Electric bill not more visible than depreciation • “Simple” energy and purchase cost taxes • Subsidy for products longer lived than benchmark • Saved benchmark purchases • Saved energy if more efficient than benchmark

11. Benchmark • Industry can make a roadmap, so taxes don’t have to be adjusted every time the benchmark changes • The roadmap can be adjusted periodically • Companies have a clear incentive to do better than the benchmark

12. Reducing Income Taxes • Estimate, then statistically determine tax paid by each income group, and business size • Reduce withholding tax simultaneously with tax introduction • Taxes will be phased in to allow industry and consumers to respond

13. Worker Retraining • Campaign finance reform required • Industry estimates required incentives for: workers retrained = workers laid off • Penalties for erroneous estimates • Funded by benefiting industries?

14. How Much Saved? • NRDC studied possible saved energy for cost-effective technologies • Capital mobility • Assumed constant cost of efficient products • 32% reduction in energy use compared to reference case • $1.8 trillion saved in 40 years!

15. How Much Taxes? • $2.6 trillion on energy per year • Tax so that if the taxes were avoided, everyone would use the best technology • Some taxes even on benchmarks • Lag in industry and individuals => might pay 1/3 of avoidable taxes • ~ $400 billion per year ~ ¼ current gov’t spending • Greater because of future purchase taxes

16. Implications • ~ 30% reduced energy consumption • Lower resource use • ~ $1.8 trillion saved • Reduced income and capital gains taxes • Poor won’t pay any => less collection costs • Reduced trade deficit

17. Acknowledgements • Joe Geddes • Dr. Lakhtakia • Andy Lau • John Wheatley • Dr. Nelson

18. Questions?