Cap’n Trade: Don’t Cut the Gas Tax, Raise It—A Lot

By :: May 6th, 2008

Before you get the idea that a big increase in energy taxes is just the latest raving of an elitist, inside-the-Beltway policy wonk, you might want to know that I’m not the only one who likes this idea. So do John McCain, Hillary Clinton, and Barack Obama.

Yup, its true. McCain and Clinton would cut the gas tax before they’d raise it. Obama is, at least, more consistent. He’d raise energy taxes, through a windfall profits tax on oil companies, before he’d raise them some more.

All three candidates have endorsed what has become known as a “cap and trade” energy policy. Now, Cap’n Trade may sound like the name of a second-rate seafood restaurant. But it is really just Washington-speak for “really big energy tax increase.”

Cap’n Trade would work like this. The government would require companies to obtain permits that give them the right to emit a fixed amount of greenhouse gasses. The limit on emissions (the cap) would be gradually ratcheted down over the years until the overall amount of schmutz reached some agreed-upon level. A relatively clean company could sell (trade) its unused rights to pollute to a dirtier company.

Theere are basically two versions. The government could auction those mandatory licenses, a process which would look an awful lot like a tax. CBO figures that government revenues from these mandatory emissions permits would range between $50 billion and $300 billion annually. That money would not come from thin air (clean or not). It would be paid by consumers in the form of higher prices.

Or, Washington could give the permits away based on prior energy use, which would generate a massive corporate windfall. But the impact on consumers would be the same: The mandated reduction in supplies of fossil fuel would drive up prices, which would be passed through in the form of higher costs for gasoline, home heating oil and anything else made from oil, coal, or natural gas. The only difference is energy producers would get to keep the money.

Obama and Clinton like the auction. McCain has not said which version he favors.

Now, don’t get me wrong. Raising taxes on energy is the surest way to reduce demand, which in the long run may make for both a cleaner environment and lower energy prices. We can argue about whether Cap’n Trade or a direct carbon tax is a better idea, but that is for another day.

The point is that McCain, Clinton, and Obama all favor big hikes in the prices consumers pay for fossil fuels, including gasoline. Since these increases would dwarf the gas tax dollars they have been arguing about for the past couple of weeks, it might not be a bad idea if we started to pay more attention to the ol’ cap’n than to the pros and cons of a temporary gas tax holiday.

12Comments

  1. Anonymous  ::  10:32 pm on May 6th, 2008:

    I think that the politics of gas-prices are playing into the discussion of a cap-and-trade system, and that is the reason why cap-and-trade is not filtering into discussions of the gas-tax-holiday issue. Mainly, many people, including reporters, don't understand that the intent of the idea of a carbon tax or cap-and-trade system is to make polluting more expensive relative to cheaper alternatives, and therefore reduce the demand for the polluting activities. People are still generally under the silly mis-conception that rising energy costs are a “bad” thing; so the politicians are trying to pass a necessary piece of environmental legislation (cause everyone loves protecting the environment) without alerting the people that the same laws will cause that same “bad” thing (higher price at the gas pump). It's a quasi-hoax with lots of politicians and environmentalists trying to talk real quietly about the direct effect of the legislation, and your post on the silly contradiction between claiming to support a gas-tax-holiday and also support cap-and-trade will be met with mainly confusion from the half of the population that doesn't understand this issue. That half also unfortunately seems to include a great many reporters.
    What's funny to me is that I support taxing greenhouse gas emissions (through whatever means are deemed appropriate), I just don't like the deception behind how it's being presented.

  2. Anonymous  ::  2:50 pm on May 7th, 2008:

    I agree but to make it pass it must be a zero sum game for the average Joe…
    Read this proposal:
    Based on the fact that average family drives about 20000 miles a year in a 20 mpg(actual mileage) car = 1000 gallons –
    $2000 April 15 Federal income Tax rebate for each family
    Start April 16 with $2.18.4 per gallon Federal Gasoline tax.
    This is a zero sum game for the average family – but they get the money up front and may use the money to buy a higher mpg vehicle.
    Walk to work – make $2000
    Drive a Prius 20000 miles a year – make $1000
    Drive a Hummer 5000 miles a year – make $1000
    Drive a Hummer 20000 miles a year – lose $2000.
    The Federal gas tax has been stuck at 18.4 cents per gallon since mid 1990’s when gas was under a dollar – so this is really a return to previous rates and doesn’t bring us to World parity in price at the pump.
    The tax is really progressive in that:
    The rich have more cars boats planes and other gasoline toys
    The rebate will selectively benefit the less wealthy who tend to have older smaller cars and often can’t get a new car unless they had $2000 for a down payment.
    Everyone thinks they get better gas mileage and drive less than they do – so will pre-calculate this proposition favorably.
    Again – conservatives will like the idea of use tax as opposed to income tax.
    Law and order types will like the fact that those who don’t file will not get any benefit.
    Anti -illegal immigrant conservatives may be smart enough to notice that it will put significant pressure on undocumented denizens – though I suspect the effect will be very small based on their limited driving.
    Business can have the rebate (but not more than $2000) only against actual gas receipts – otherwise sham claims.
    Business will also benefit as Diesel would not be taxed and more should be available as gasoline use decreases and more crude in made into diesel and likewise into jet fuel.
    Phase in may be necessary to sell this but it will diminish the possibility of using the rebate to buy new technology.
    The car companies need to and could benefit and big oil can afford a slump in sales. The State and the Nation could use less wear and less congestion on the highway system.
    This brave step would increase respect for the ability to sacrifice the Americans have shown in the past with rationing and sacrifice in the wars and ability to come together for the common good as during the depression

  3. Anonymous  ::  8:26 pm on May 8th, 2008:

    How is giving away permits based on prior polluting levels a “massive corporate windfall”?
    Unless I'm missing something, businesses wouldn't profit from receiving free permits (at least, any more than they do now, from pushing negative externalities onto the public).
    If they had any permits to sell, it could only be from reducing their pollution through some process (which ostensibly cost money). So they would be rewarded for undertaking this renovation.
    It would all depend on the price of the permits, which would basically be set by the cost of avoiding pollution.
    There'd be no tax revenue of course, nor “internalizing” of the negative externality, so it's a second best scenario, but how is it a windfall?

  4. Anonymous  ::  9:31 pm on May 8th, 2008:

    The candidates have not said how they would distribute these permits.
    As Kevin Drum notes, that's false. Both Obama and Clinton have stated they would auction the permits. (McCain hasn't said.)

  5. Anonymous  ::  2:23 pm on June 28th, 2009:

    The government should offer tax breaks for companies that invest into new greener technologies ON THEIR OWN. Explicity taxing everyone will break down the economic structure that builds businesses. If there was a demand for less efficeint energy, it would exist, but there isn't, because it's less efficient. We still need carbon emissions to make other energy sources a reality. And by reality I mean cost effective in the energy produced vs. the energy and cost needed to produce it. All the feel goodedness in the world about reducing emissions and CO2 doesn't change basic economics and this plan will be a disaster because it forces people to comply even when it doesn't make sense.

  6. Anonymous  ::  10:13 am on May 13th, 2010:

    This is the first time I've read about Cap'n Trade and I sure don't like it. Dirty politics fooling the people.
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  7. Anonymous  ::  4:04 am on July 28th, 2010:

    The lead author of that bill, Henry Waxman, is openly telling reporters that at that stage he will reinsert the full-blown cap-and-trade program.
    Both as a function of the legislative calendar and of electoral politics, neither the House nor Senate is likely to vote on the conference report before the election. It will instead, Senate cap-and-trade point man John Kerry has said, be considered in a lame duck session of Congress.http://www.shopbigbig.com

  8. Anonymous  ::  3:01 pm on September 17th, 2010:

    Let's call cap and trade what it is. It is a tax. It is a hidden job killing tax that, if passed, will throw this country into a Cloward and Piven inspired full blown depression. American workers and American business can not stand any more taxes imposed on them by federal, state and local governments.

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