March 27, 2008
Tuesday Interview with Taxation Expert Monica Prasad
Monica Prasad, an assistant progessor of sociology and a faculty fellow at the Institute for Policy Research at Northwestern University, is the author of "The Politics of Free Markets." She is currently studying attempts to use taxation as a regulatory tool, and recently wrote an op-ed in the New York Times, "On Carbon, Tax and Don't Spend."
Which do you think is easier to accomplish politically: a carbon tax or cap-and-trade?
I think it's actually easier to put a price on carbon than it is to cap it. A cap is more visible than a tax. We know from the experience of Europe that companies protest to get the cap lowered, which defeats the purpose. Firms will also lobby to get exemptions to the tax, but that can be done in a way that strengthens the purpose of the tax, namely, if you give exemptions to firms that invest in clean technology, as Denmark did.
But there is a lot of public opposition to a carbon tax as well.
People always argue that you'll never be able to get high enough taxes through the political process, but if it's a tax only on corporations, it's definitely possible to sell politically. Punishing dirty corporations and rewarding clean ones is a good sell - a recent Gallup poll found that 71 percent of people said that corporations pay "too little" in taxes.
If the corporations are on board, then they don't run attack campaigns to shape public opinions.
The politics of taxation are more malleable than we give them credit for. You don't have to call it a tax; you could call it a "fee." Then you have a utility company use that fee to reduce their customers' footprint.
What do you think is a reasonable price for carbon?
I don't have a specific price recommendation, but I think it should be a lot higher than the $7 - $12 range.
So then what is the point of a carbon tax if you can't price it high enough because of political opposition?
The tax will do something if the firms have a way to avoid it easily. If they can, then they will. The question is really about getting to that point where the firms can avoid paying the tax. You have to do it in a way that fosters alternative technologies and that makes coal unprofitable.
If a tax is supposed to create an incentive NOT to pollute, why do some countries see their emissions rise after implementing a carbon tax?
Firms can't reduce their emissions if they don't have the technology to avoid producing the emissions. Denmark gave firms some place to go: from coal to wind power.
In the history of taxation, taxes often start out as a way to reduce a certain practice, like alcohol consumption, but then end up being used to raised revenue. You have to be careful what incentives you give to government in how to deal with the tax revenue.
How do you think revenue from a carbon tax could best be put to work?
It should be used to fund new, alternative technologies. I don't think existing technologies will be enough.
There is an argument that if we just nudge people to reduce their footprints, that will be enough. There was an article recently in the New York Times about how showing people how much they use their thermostats results in decreased use. Let's say that by doing that, you can get people to save $50 a month on their energy bills. What happens to the money they save? It doesn't just disappear; maybe it gets used to buy an airplane ticket, which emits even more carbon.
Carbon savings might not all be used for high-carbon consumption activities, but some certainly will. The only way you can go that route is if you're trying to get society as a whole to use less. Even if that is possible in the U.S. - which I doubt - it's definitely not possible in developing countries.
What are the limitations of a carbon tax?
You definitely need government investment in technology - a carbon tax is not enough. The role of the carbon tax is to make itself go out of existence. Ideally you lower the revenue gained from it over time, until eventually you don't collect any revenue.
You write about non-market barriers to innovation, like people wanting to stick with what they're used to. Do you think that will be, or already is, a problem with clean energy?
Yes, defintely. This is something we need a lot more research on. One reason Denmark was so successful is that they instituted "Voluntary Agreements," in which firms could be exempt from the tax if they signed an agreement to reduce their energy consumption. The agreement had the very important social effect of calling attention to the energy issue in the firm.
Denmark is the only country to have seen a large decline in CO2 emissions between 1990 and 2005, and it does not seem to have sacrificed economic growth. What do you think was the most important factor in Denmark's success?
Definitely the wind power. You need to have a substitute source that firms can turn to, so that when the taxes gave a push, there is also a pull.