Monthly Archives: March 2008

Hidden taxes and even more hidden subsidies

BusinessWeek has a recent article about the new law requiring improvement in automobile and small truck fuel efficiency (“The Road to a Stronger CAFE Standard“). Among other things, the article describes how the law changes the way that the CAFE (Corporate Average Fuel Economy) measurement is calculated. Under the old CAFE calculation, fuel economy is measured separately for each auto manufacturer. Under the new calculation, all manufacturers will be measured together, and a trading scheme is established so that companies beneath the industry-wide average must buy credits from companies that are above the average. Since American auto manufacturers produce a disproportionate share of minivans, pickup trucks, and SUVs (all lumped together as “light trucks”), the American companies are more likely to be on the buyer side of the credit buying while companies like Toyota and Honda will be more likely to be on the seller side of the scheme. Says one guy from the American company perspective,

it’s SUV and pickup buyers who will be stuck with the tab, suggests Chrysler Vice-Chairman Tom LaSorda. “It’s likely to be another big hidden tax on the consumer, as well as small businesses and building trades.”

What BusinessWeek’s writer fails to mention is the other side of the equation: this system also results in a hidden subsidy for buyers of efficient cars. If Honda is selling lots of relatively efficient cars, and therefore is able to sell credits to Ford (which is selling more in the way of trucks), then Honda can hold down the price of the cars while still making the same overall profit. The pressure on Ford that pushes up the price of trucks will be an “equal and opposite” pressure on Honda to hold down the price of their small cars. All in all, it could be a completely neutral system in terms of the overall effect on consumers. Of course, lots of details and corporate decisions might end up making it either more or less than perfectly neutral in the end, but BW’s article is misleading when it only highlights the one side of the equation. On this general concept, see more about “feebate” proposals.

Oh, and by the way, all of Detroit’s (and Toyota’s, the Prius notwithstanding) hemming and hawing about how hard it is to make more fuel efficient is pretty obviously a load of bunk, even if the people doing the hemming and hawing believe their own bunk.

Carbon labeling on my mind

[Crossposted at my work blog.]

BusinessWeek’s GreenBiz blog tipped me off to a recent BW article on carbon labeling. Carbon labeling means to label consumer products with an indicator of how much greenhouse gas was emitted in the production and distribution of each product to the point of having it on the shelf in front of the customer. The idea has been around for a while, but only recently have manufacturers (like Timberland shoes) and retailers (like Tesco, a British chain of mega-grocery stores) started to implement carbon labeling programs. As it turns out, according to BW’s article, carbon labeling is tricky for a few reasons. First, it can be tremendously difficult to squeeze all the aspects of modern, globalized manufacturing into a single numerical measurement of greenhouse emissions. Second, for such programs to work, there needs to be a fair bit of consumer education so that people will have any idea of what these carbon labels actually mean. (If a label says, “50 grams of carbon,” is that good or bad or what?)

Here are some thoughts suggestions that probably have been thought of by other people as well, but what the hey:

1) The ideal carbon label will be structured similarly to the energy guide labels on refrigerators and other appliances we see in the US. That is, on a line that shows the minimum-to-maximum amount of greenhouse emissions caused by similar products to the one in your hand (like all canned vegetables or all pasta products or all color televisions) as well as an indication of where on this line the individual product falls. If canned vegetables incur anywhere between 10 and 100 grams of carbon-equivalent greenhouse emissions (using made up numbers for sake of the example), and the can in your hand incurred 30 grams, then you’d see something like “10”””“30“””””””””“100″³. That’s the first part of the labeling scheme, and would be called the “Manufacturing & Distribution” count. For some products, like canned vegetables, that would be enough. For products like TVs that require the ongoing consumption of energy in use, there would be another line (like the existing energy guide labels on refrigerators and such) that indicates the relative use of energy going forward, based on the average greenhouse emissions of the electric grid across the country. This would be the “Usage” count. Finally, for products that have both counts on their label would be a third measurement line called “Expected Lifetime” which would be a combination of the “Manufacturing & Distribution” count and an estimate of the probable cummulative lifetime “Usage” count, for example the combination of M&D plus 10 years worth of normal usage of a TV. Some products might have high M&D counts but be more efficient in use, and therefore their lifetime impact would be lower than an alternative product that had a lower M&D count but was inefficient in usage.

2) I realize that this notion of an ideal carbon label still ignores the difficulties in actually figuring out accurate counts for greenhouse emissions; but if you can get decent estimates of the emissions, then I think that’d be a good way to do the labeling in a way that consumers could interpret and make meaningful choices between products. You have to have the relative position of each product on a scale for the number to mean anything.

3) If you want to educate the populace on how to use these things, teach 10 year olds about it. They will quickly and insistently instruct the rest of us, treating us like absurd fools until such time as we master the system as well as they have.

4) The trickiness of figuring out accurate and consistent greenhouse emission labeling is an argument in favor of using carbon taxes/cap-and-trade systems. Sorta. On the one hand, the financial tool of carbon tax/cap-and-trade “” implemented on upstream sources of carbon (and other greenhouse gases) “” easily introduce an effective alternative to the carbon label into the economy. Product prices will rise relative to the amount of extra cost their manufacturers & distributors face as a result of the greenhouse gas emissions incurred during manufacturing and distribution. The can of corn that involved more greenhouse emissions will incur a greater carbon-cost increase than the alternative can of corn that involved less emissions. However, this isn’t totally satisfactory, because so much else is involved in pricing: the “price signal” is terribly noisy and prone to distortion and/or misinterpretation. In addition, there are some “” how many? “” people willing, even eager, to pay more for products that they are confident involve less greenhouse emissions. Working the greenhouse effect of a product into the product’s price is a good thing, but that doesn’t obviate the usefulness of a more fully informed consumer as a second level for reducing carbon footprints. One further thought on this, though: it’s possible that if a carbon tax is implemented, the tax itself could be used as a tool for measuring the greenhouse emissions on a product and therefore be the basis of the carbon label. Businesses already keep track of the taxes they pay, and so the added burden of accounting should be less than trying to account for a new system of purely physical carbon emission counting. Right? Because the carbon tax itself is predicated (or should be) on a carbon-equivalent scale, it would be an easy translation to take the cumulative taxes paid on a product through its manufacturing and distribution lifetime and restate that as an amount of carbon emitted during the process. The increasing use of rfid chips in distribution chains only makes this easier to implement, as you have better tracking going on and the ability to link movement of materials and goods to the taxes those materials and goods incur for the businesses making and moving them. (Having said this, I still favor a Peter Barnes’ style cap-auction-trade-dividend approach over the carbon tax approach.)

5) I gotta get back to work!