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 Q opt Q eq 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?