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Why we need to pollute the energy industry with taxes



April 04, 2008 – Comments (10)

Before I get blogged out of existence with hate posts, Please allow me to continue. First let me state - I use energy! I drive a diesel car, I use electricity to heat and cool my house, I eat food, I invest in oil, gas, and coal stocks - I like energy.

Energy companies are not good, bad or ugly. Attaching human adjectives to an equity is just plain dumb. Peabody Energy Corp, and ConocoPhillips are no better or worst than Apple, or Goggle. These firms are all the same, with thousand of great employees trying to maximize shareholder wealth.

As much as I like energy - I hate pollution. The US contains 4% of the world population, but produces about 25% of the carbon dioxide and other polluting emissions. Why is this?

My argument is fairly simple - The US does not allow free market economics in the energy sector. There are two important factors.

1) Cheap or free inputs. Many energy firms are VAR's(value added resellers). Where does oil, gas, and coal come from in the US? Public land. We all own these natural resources. Do these energy firms bid on the inputs they need to make profits? Can I bid for some natty gas? Apple needs memory chips for their consumer devices, and they pay the current market prices for these inputs. Does Peabody Energy pay current market prices for its input - coal? NO.

2) Negative externalities and the public good. Public goods would be public health, clean environment, roads, national security, etc....Externalities happen when one firms actions affect another firms or persons well-being or profits. Unless firms pay for the pollution they produce - no free market.

How does the US move towards free markets in the energy sector? By addressing the two above issues, we would have more open, free and fair energy markets.

The most efficient way the solve the pollution issue is to install per unit pollution taxes.

As a start, the US should tax the following pollutants:

Sulfur dioxides
Nitrogen oxides
Carbon dioxide.

This would be a consumer tax. Higher gas prices at the pump, higher electric bills, etc. This is the only way to encourage conservation, reduce our dependence on foreign energy sources, reduce pollution, and enable fair energy competition.

I know the fear mongers will scream - This will kill the US economy!!!! We will all die!!! I wont be able to drive my V-16 12,000 lbs behemoth from my McMansion to McDonald's!!! Calm down, breath deep, and try and think.

Here are the facts. There is no correlation between large increases in gas prices and the economy. Between 2004 and mid 2005, US gasoline prices more than doubled! During this time, US GDP rose on average 6.3% well above its long term average.

This new tax shift would actually lower taxes on working Americans. How can this be you ask? For every 1 dollar of consumption tax received, the US could lower the income tax by $1.30 - this is my estimate. The beauty of consumption taxes vs income taxes is three fold.

1) Worker participation rate:
From a high of about 67.5, we are now falling to 65. This dynamic will continue due to the retirement of the baby boomers, and global outsourcing. This means that 35% of adults are not paying w-2, and income taxes. Pollution taxes would broaden the tax base from 65% to close to 100%.

2) Efficiency:
Our current system is one of volunteering tax amounts to the government, then having the US verifying if these amounts are correct. If the government disagrees, legal procedures may follow. Long negotiation, and settlement process to finalize the amount. Usually the US will spend more in expenses during this process than it finally collects. Also think of all the lost productivity of individuals preparing these tax returns.

3) Underground economy and tax avoidance:. This has been underestimate for decades in my opinion. 20% of GDP is my current estimate. Every illegal alien, drug dealer, prostitute, independent contractor, and tax cheater will now finally pay taxes.

As an economist, I firmly believe that the proposed pollution taxes would create an enormous number of new high paying US based energy jobs, and increase GDP. Currently, venture capital is not funding alternative energy concepts, due to the uncertain, and low future cash flows of these unproven technologies. If all the polluting competing energy producers are taxed, then these clean ideas can finally charge a higher fair price for their products.

This would be a good start towards replacing the income tax with consumption taxes. The regressive nature of consumption taxes could be avoided by eliminated all w-2 taxes starting from the low end, then moving up.

I am hoping to start an intelligent dialog about this issue on CAPS. I value the thinkers of this community.

10 Comments – Post Your Own

#1) On April 04, 2008 at 12:37 PM, ricoy5 (25.64) wrote:

Interesting point. 

you are completely right, that the only way to get people to stop polluting is to give them an economic incentive. 

Wasn't there was a study about the 'carbon credit' that has been floated numerous times... 

a. Set a benchmark for pollution.

b. Businesses above that mark pay a tax, businesses that invest in cleaner technology (and subsequently fall below that benchmark) get a tax credit.

c. Let there be a free market to sell those tax credits. 

d. The cost of buying a tax credit will rise (fairly quickly) to meet the cost of installing the cleaner technology.  This will make polluters indifferent to whether they pollute and buy a credit, or invest.

e. Limited supply of tax credits will be the incentive to invest in technology that limits pollution.

in theory, this will spur investment in finding cleaner fuel sources (and methods to consume polluting fuel cleaner). 

However, it seems like easy pickings for speculators, though, which leads to regulations, which opens the door for lobbyists for the 'dirty' bunch to get the benchmarks raised (which lower the demand, thus price, for the credits), which leads to less incentive to invest in clean technology.

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#2) On April 04, 2008 at 1:49 PM, chk999 (99.96) wrote:

The chinese coal mine fires produce about the same amount of carbon dioxide as the US car and truck fleet each year. Are they going to be taxed to put those fires out?

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#3) On April 04, 2008 at 2:52 PM, ATWDLimited (< 20) wrote:

I don't really like it, because it harms American business, and just aggravates the already weak economy.

Warning The Following May be Inappropriate for those who are swayed by Global Warming is Man Made Crowd: 

  Secondly, CO2 is not a problem, it is a natural and b not the real cause of the recent relative, key words recent and relative, ie last oh 200 years and relative when compared to the previous 150. Ok, so what is the real cause of the warming, the answer is... you guessed it solar radiance from sunspots. Thats right folks, the real cause is that solar radiation increases as the number of sun spots increases. In fact, in about 1850, we reached what is known as the Mauder Minimum. As years progressed, the sunspots increased and released more energy to the earth, Even a small increase rising ever year is huge, the sun releases a lot of light and is 100x bigger than the earth. In about 2000 we reached what is known as the modern maximum. From that point on ward, the sun spot levels has dropped, but the heat is held in by mainly water vapor and methane, not CO2, because the other two are much better at creating the greenhouse effect. At any rate, the pattern of sunspots and temperature match perfectly in almost a linear fashion, unlike those idiotic CO2 charts which use a trended curve, sunspot increases and decreases are very much inline. In fact during the medieval warm period, the temperatures were 5 degrees warmer still, not because of CO2 or pollution, but because of the solar cycle. After years of warming, the oceanic belts started to break down. The newly melted fresh water was sinking and the the less dense salt water could not go under and loop back around tot he equator. This in turn caused cooler whether in Europe and Asia, as well as in the Pacific. This age was called the mini ice age. And just as things were cooling off, the sun spots started to decrease, so less radiation was warming the now cooling earth. After about 200 years, and the brutal winters of Valley Forge, Napoleons defeat etc, in 1850, the low point in temperature was reached, just as the solar cycle had bottomed out. Just so happens man got smart and industrialized, at the same time.

So what does this mean  for our future, the Solar cycle of sunspots has already peaked, the ice is melting as planned and the convection of the ocean currents should begin to slow. THan it will cool, because if you put an ice cube in water the whole thing cubes. Rain etc. will cool off the land and the sun spots will continue to decrease in number. Less radiation, cooler whether and another mini ice age is coming. So please don't fall for the trap of man made CO2 doing it, its actually a natural cycle thats happened over and over again.

*For more information, WAtch the History Channels 3 hour Documentary Little Ice Age Big Chill and google sunspots vs earths temperature and compare the charts to the CO2 ones. LIberate yourselves from the shackles of irrationality and idiocy. Note: CO2 does help warm , but only accounts for about 15% or less of what happens.

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#4) On April 04, 2008 at 2:57 PM, ATWDLimited (< 20) wrote:

On the economic aspects, stop trying to tax more, taxes= bad for the economy, cut government spending, no wars, no national healthcare/mediare/social security and waste full spending. Erect tariffs to tax foreigners not Americans. Let America supply ourselves with our own goods and use what ever fuel the market choses. Its called Capitalism.

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#5) On April 04, 2008 at 3:43 PM, Hezakiah (51.13) wrote:


Changes in solar radiation as well as variations in Earth's orbit certainly may be reponsible for the majority of global climate change, but to conclude that manmade global warming is 15% is quite preemptive.  I do not think scientists can accurately isolate all of the contributing variables at this point.  We are nowhere near a firm conclusion to this question. 

Also, salt water is MORE dense than fresh water.  As far as your comment: "... if you put an ice cube in water the whole thing cubes," this is obviously not true in general, and I don't even want to do the calculations to figure out how big and how cold such an ice cube would have to be relative to the body of water for this to happen.


bellard -

Back to the main topic of your article...  I have also thought for some time now that eliminating the income tax might be a great idea.  My thoughts were that if it were completely nonexistent, we would need a sales tax of somewhere in the neighborhood of 30%.  Does that sound about right?  I had thought this would save some money from eliminating most of the IRS as well as a ton of individual free time (not having to file taxes).  It would provide more of an economic incentive for thriftiness instead of overconsumption.  Also, the rich could not bitch about being overtaxed.  I had not even considered the benefits of taxing black markets.  Are there any other major drawbacks from such a system... other than implementation?

You mentioned taxing pollution only via the sales tax though.  How does this provide incentives for companies to make their production processes cleaner?  Would companies with cleaner processes be allowed to sell their products with a lower tax attached?

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#6) On April 04, 2008 at 3:53 PM, Energypartners (97.01) wrote:


Thanks for the reply. The proposal I made was a tax decrease. Shift taxes from income taxes to pollution/consumption taxes. So US taxpayers will pay less in taxes. Users of polluting inefficient energy would pay the highest consumer tax - but their income tax would be reduced more than the increase in pollution tax. Please read my blog again.

I am not a global warming fear monger. The main pollutants to tax are SOx, NOx, amd mercury. We could ignore CO2 - I am OK with that, but it is a great way to get revenue for the US, and hence less income taxation.



A cap n trade system would work to reduce pollution, but it raises no revenue for the government. It also does not really encourage conservation. The price the consumer pays needs to be high enough to encourage behavior changes......


We need to play hardball with other countries like China that ignore pollution, and fix their currency. Just shut down the US market from China until they live by world wide environmental standards. Currently, this is difficult since our US admin. is bankrupt and needs to borrow from the Chinese...... 

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#7) On April 04, 2008 at 4:49 PM, Energypartners (97.01) wrote:


"My thoughts were that if it were completely nonexistent, we would need a sales tax of somewhere in the neighborhood of 30%"

I think the actual consumption tax rate would be much lower. I envision a tax system as follows. Move most pay to w-2 pay. Then we would have a flat % SS fund of 12% of w-2 starting after 12-15K of w-2 income. Then above 100K move this flat % to 15% up to infinity. No income tax withholding. So the very poor would get 100% of their w-2. Middle class would get about 90% of their w-2. No tax returns to file.

 So we would still automatic collect nice chunk from w-2, so the consumption tax % would not be that high. My estimate would be an average of 15%. But one could change these % on different goods very easily - no so with our tax code!

  "How does this provide incentives for companies to make their production processes cleaner? "

With high pollution taxes all energy firms would invest to make their products cleaner and not be taxed. If coal fired plants have to pay huge taxes - their customers would pay for this - and they would scream!. The coal utilities would quickly remove the 30-50 year old plants, and build new ones - maybe CTL type plants with pollution sequestration..... This would be great for our economy. The US needs to invest in our energy infrastructure.

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#8) On April 04, 2008 at 5:48 PM, Hezakiah (51.13) wrote:

Yeah... I guess I was looking at completely eliminating the income tax. 

In your system... for highly fragmented markets, there would be little incentive for an individual company to clean up its act if the end product was still taxed at the same rate as the rest of the industry.

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#9) On April 04, 2008 at 6:43 PM, Energypartners (97.01) wrote:


I think we could eliminate the federal income tax. We would still need a % taken for funding health care and SS.....

 Taxing pollution for small companies may be problematic, but again all firms would investigate methods to reduce their pollution. Now they do nothing - there is no economic incentive to be clean. This would create huge demand for new technologies IMHO.

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#10) On April 04, 2008 at 8:15 PM, StockSpreadsheet (68.41) wrote:

I think the 30% sales tax is too high a number.  From the debates in the past on a flat tax, supposedly, if you eliminate most or all deductions, you would only need a flat tax of about 20% to pay for everything.  Now if you move that to a consumption (sales) tax, then you are broadening your tax base, so you could probably lower that 20%.  However, since we are running huge budget deficits and have massive underfunding of Social Secuirty, Medicare and transportation needs, (bridge repairs, road repairs, etc.), then keeping the consumption tax at 20% would probably be a good idea until we get a handle on all of our deficits and underfunded accounts.

If you also put in the NOx/SOx/C2H6/etc. tax, then you could even lower the general consumption tax even more.  You could even add this tax on vehicles during annual license renewal time.  If the vehicle gets 20mpg and has travelled 12,000 miles over the past year, then if it is a gas-powered car, you could assess a tax on it based on its calculated polution output.  If it is an electric car, then the tax would be zero or very low.  This would spur the development of electric cars as it would save the owners hundreds of dollars each year in taxes not paid due to low polution emissions on the electric car as opposed to a gas-powered car.  This would also tend to drive down the amount of oil the U.S. would import, which should reduce the price of oil and make it so that the U.S. could produce a higher percentage of its energy consumption than we do currently.

To offset all of these taxes, which would eat up a larger portion of the pay of the poor as opposed to the rich, (since more of the poor's budget goes to gas, electricity, etc.), you might have some type of rebate system, where each person gets a rebate check once a year of some flat amount, (say $5k or whatever is reasonable).  Since the $5k is a big bonus to a poor person, but is negligable to a CEO making $14M a year, the benefits from the rebates will disproportionately benefit the poor while giving the same benefit amount to every person.  To collect the check, the person would just need to file a simple tax form, (one that would make the 1040EZ form look grossly complicated), that would basically just contain the person's name, social security number, address, and maybe a bank account number if they want to money wired directly to thier checking account instead of a check being mailed out, (which would be a cheaper form of delivery than sending it through the U.S. Postal Service).  

As for ATWD's post:  I believe the name for what he is describing is the Thermocline Elevator.  I have seen the special he talks about.  Yes, he got his fresh water and salt water reversed.  The Thermocline Elevator moves warm water from the Gulf of Mexico along the Gulf Stream up to the Arctic Ocean and warms Northern Europe, (which is why England is as warm as it is as far north as it is).  Once the water reaches the Arctic Ocean and gives off its heat, it cools and sinks, moving along the ocean bottom through a big stream and eventually rises in warmer parts of the ocean, (like the Gulf of Mexico), to replace the heated water from that area that is moved away by the Gulf Stream.  

As the Earth heats up, it can melt the polar caps.  When that ice melts, (which is all fresh water), then the fresh water will flow out over the Arctic Ocean.  Since the fresh water is lighter than the salt water, the fresh water will not sink and will thus not be replaced with the warmer water from the Gulf Stream.  The Thermocline Elevator shuts down and Northern Europe then gets a climate like Siberia or Manitoba, much colder than it is used to.  Ice sheets start forming and we have an ice age.  This actiion has been documented in the scientific record, helped cause the "Year Without a Summer" that ATWD referenced, and was obliquely referenced in the movie "Day After Tomorrow".  

This shift can happen rapidly, as opposed to the gradual temperature shifts that are usually taken for fact.  Near the end of the last ice age, as the Earth was warming and the ice sheet was receding in North America, a lot of fresh water was building up behind the ice sheet in the Great Lakes region.  Eventually, the ice sheet receded enough and thinned enough that all that fresh water was able to push under the ice sheet and flood into the North Atlantic.  This shut off the Thermocline Elevator and plunged the world into another short ice age.  The change, (from what I remember from the documentary), happened in the span of a year or two.  Temperatures dropped several degrees, England had snowfall in the summer, and the ice sheets started moving south again.  I think that ice age only lasted less than 1,000 years, (as opposed to the normal cycle which is about 100,000 years), as the Earth was on a warming trend due to the sunspot cycle.  

So ATWD's thesis and rememberance of the Science Channel special was mostly correct, he just got some of his facts reversed.  It was a very good special though, and like him, I would recommend watching it if it ever comes on again. 

My two cents for the discussion.


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