Green Taxes that Save People Money

David C. Denkenberger

Green Engineering

April 16, 2001

Contents

• Introduction

• The future cost tax concept

• Quantative example

• Worker retraining

• Reducing income taxes

• Implications

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

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

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)

Supply and Demand

Price

Quantity

Demand

Supply

Actual benefit

QoptQeq

Tax

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

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

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

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

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

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

Worker Retraining

• Campaign finance reform required

• Industry estimates required incentives for: workers retrained = workers laid off

• Penalties for erroneous estimates

• Funded by benefiting industries?

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!

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

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

Acknowledgements

• Joe Geddes

• Dr. Lakhtakia

• Andy Lau

• John Wheatley

• Dr. Nelson

Questions?