Simple Climate Tax Scheme

On 07 Apr 26 a blogger named Squalish wrote this paragraph on the Oil Drum blog site.

Ideas include:
A)Tax CO2 production significantly on an escalating scale.(10+2*year cents/gallon-gas-equiv)
B)Forbid anything that gets federal fuel tax money from drawing from general funds, and 'recommend' that states do the same in order to protect their matching funds (necessitating an increase of around something like 25-60 cents/gallon).
C)Tariff imported oil significantly(call it $1/gallon of gas equivelent).
D) Then deal with the repercussions in manufacturing, which will be a challenge and would necessitate backing off from the WTO a bit.
Put all the money from A and C into a seperate fund, and require that it be rebated annually in an equal amount to every US taxpayer. Not dissimilar from Alaska's rebate on production. This doesn't give the average person any burden in the near term. If they refuse to change their ways for a decade while the population shifts to conserve, they will be taxed for the privelege, while those who conserve will be rewarded. It presents a much better picture of externalities.

This got me thinking. What a clever idea but why not bypass the government coffers entirely.

Here is how a simple scheme might work.

An escalating gas carbon levy of 5 cents/litre per month is legislated onto gasoline purchases. This fee is remitted in its entirety to an arms length non profit organization whose sole mandate is to cut a straightforward monthly refund check to all drivers who register with the fund.

refund per registered driver = (total revenue - expenses) / number of drivers.

The onus would be on the driver to keep his/her registration details up todate. The non profit organization would have to access to government files to cross check those details for validity.

If you are an average driver this scheme would be essentially revenue neutral. In other words your refund would be equal to your extra outlay at the pump.

As this levy escalates the incentive would become increasingly large for individuals to conserve (or switch to carbon neutral alternative fuels) so as to put themselves below the average. ie. to get a larger refund than they would be spending in extra at the pump.

A reminder of the current amount of the levy could be posted at each gas pump and on the monthly refund cheque.

Lot of details to work out … but this might just be simple enough to actually work.

More thoughts …
The straight carbon tax scheme is a little like the used car salesman who jacks up the prices then puts the car on sale: consumer ends up paying more. The tax-refund scheme offers the same incentives to save without necessarily paying the jacked up prices first.

Certainly people always treat a cheque in the mail with a more positive attitude. You have to look no further than how most people view an income tax refund cheque.

Secondly since the tax-refund money doesn't go to the government coffers I believe it would be accepted better by the public than a vague promise to offset an increase in straight carbon taxes with lower income taxes.

Thirdly if you do reduce your consumption below the average in this scheme you'll actually get back more than you paid out in taxes. This I believe will accelerate the motivation to conserve. Conversely if someone drives more than the average, his excess tax goes into the pool to reward all those drivers who don't follow suit. ie. Hummer drivers subsidize the Prius drivers.

Finally, in order to maximize your savings you have to drop below the average. This means that you have to conserve more than the other guy. I believe this will result in an amplification of conservation across the board as the average moves downward.

Allow me to illustrate by way of example.

Our motorist is Joe Average. He uses 1000 litres of gasoline per year.

Since he is Joe Average he is using exactly the average for motorists in Ontario.

Supposing in both cases the price of gasoline at the pump is composed of $1 pre carbon tax cost + $1 carbon tax =$2.

Prior to the carbon tax, Joe Average is paying $1000 per year.

With the straight carbon tax scheme Joe Average is now paying $2000 per year for his fuel. ie. a jump of $1000 … he won't like it a bit.

With the tax-refund scheme he is paying out $2000 per year but getting a refund cheque of $1000 per year for a net equivalent to the pre tax status quo of $1000 per year.

Suppose Joe Average is environmentally savy and embarks on a conservation campaign which saves him 10% on his annual fuel usage. Suppose that he is ahead of the curve in that regard and the average motorist is content to motor along at the 1000 litres per year.

With the straight carbon tax scheme Joe Average now spends

900 x $2 = $1800 per year

for a savings of $200. However, he is still $800 higher than his pre carbon tax spending.

In the tax-refund scheme Joe Average now spends

900 x $2 = $1800 per year but gets back the average refund of $1000 for a net of $800 per year.

While the savings are the same $200, however, that is $200 below his pre tax fuel spending. I guarantee that most consumers will view this as the program giving him that money.

At the end of the day the government had to get heavily involved in the straight carbon tax scheme and Joe Average is initially out of pocket $1000 unless that government comes through with an income tax cut equivalent to the tax he is paying (unlikely if he is in a higher income bracket). Even after he does the "right thing" by the environment he is still out of pocket $800.

In the tax-refund scheme the government need only be involved as an enabler (eg. lottery corp). Furthermore Joe Average isn't out pocket as long as he stays at the average. Meanwhile he has powerful incentives to conserve so that he drops below the average. In our example he is able to pocket the full $200 in his fuel savings.


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