Feebates aren't anything new

Last week, reader Jim Smith sent us a message about a post at centrarian.com on an alternative to carbon cap and trade systems for reducing carbon emissions: feebates.  The idea behind a feebate is fairly simple:  Tax costly behaviors and use the revenues to subsidize beneficial behaviors with the kicker that the total tax revenue will exactly equal the total subsidy outlay.

Centrarian lays out the benefits of the feebate system:

The resulting feebate has a number of advantages. As with a carbon tax, incentives can be set at an affordable level and then the market allowed to find the best solution. In contrast to the cap-and-trade which does not provide continuing incentives to reduce once the cap has been achieved, the feebate does. If lower cost ways of achieving reductions emerge, companies have the incentive to take advantage of them up until the new marginal cost equals the feebate rate. In contrast to both the carbon tax and the cap-and-trade which provide little flexibility in determining the distribution of costs among companies, the feebate...allows vertually [sic] any distribution.

The problem with any externality--like pollution--is the relative price of the costly behavior to the beneficial behavior is wrong.  A tax on pollution--set equal to the marginal damage of the last unit of pollution--adjusts the relative price of the costly behavior and provides the incentive to achieve the social welfare maximizing level of the pollution.

The feebate, is the equivalent of a tax, just spread out a little different.  Instead of just raising the price of the 'bad' behavior, it both raises the price of the bad behavior and lowers the price of the good behavior.  The outcome is the same as the tax, a lower relative price of the good behavior, and incentive to switch.  This may be a more palatable alternative, but there doesn't seem to be an economic gain to a feebate versus a tax.

As for the distributional issues, there is again no difference between the tax and the feebate.  The criticism of taxes appears to be that they unfairly raise prices to those that have to undertake the bad behavior--you know, because we don't have any other choice--and doesn't go far enough to reward those who out the goodness of their heart undertake the good behavior.   The feebate somehow redistributes the costs and benefits more fairly.

First, fairness is WAY overrated.  Second, the feebate is no more or less equitable and no more or less distributionally flexible than the straight tax.  This is the fundamental reason why many economists--me in particular--are reluctant to try to decide what the best distribution looks like:  Each of us has a different opinion of the better distribution and none is best.  Somehow it is the judgment of the proponents of the feebate that the distributional outcome created by subsidizing the good behavior is better than just taking the tax revenue and giving it to the poor.  I'm not saying one is better because I don't know, I just don't think anyone can either.

So in short, feebates are interesting wordplay, but in the end are economically no different than a  tax. 

Comments

[Centrarian]

First, thanks for the post on the feebate - although I do think this feebate is something new - and for that reason is very easily misunderstood. What makes it new is that by having losers (with high emissions) in effect pay winners (with low emissions) a competitive environment is set up in which they race each other to low emissions.

Second, you say, "The feebate, is the equivalent of a tax, just spread out a little different." That might be true if you were comparing a tax of $10/ton to a feebate of $10/ton. But the whole idea of a feebate is that because it is not a tax - imposing an extra burden on companies above the cost of control - it is politically feasible to have a much higher incentive rate. That means you really need to compare a $1 tax to a $10 or $20 feebate. When you do that you come to realize that it is much more effective in reducing emissions.

But thanks for the attention. The feebate needs to be given much more attention than it has so far.

[Will Hertling]

There is an article in the Australian Canberra paper about a new feebate program for water consumption, where users who go over a limit are charged extra, while users who stay under the limit get extra savings: http://canberra.yourguide.com.au/detail.asp?class=news&subclass=environment&story_id=569616&category=Environment

They don't call it a feebate, but that's what it is.

Feebates certainly aren't new. We studied feebates in my MBA program at Bainbridge Graduate Institute (http://www.bgiedu.org) in 2002.