Bill Drayton: Shifting the Tax Burden from Goods (Employment) to Bads (Carbon)

In Spring 2006 the President's Science Adviser, John Holdren (then at the Kennedy School), published an essay for Innovations titled "The Energy Innovation Imperative: Addressing Oil Dependence, Climate Change, and Other 21^st Century Energy Challenges:" Bill Drayton subsequently wrote a letter in response, published in the Fall 2006 issue of Innovations, arguing for the eminently sensible policy of shifting the tax burden from goods (employment) to bads (carbon)--see also Tom Friedman in yesterday's Times. Here is the full text of Drayton's letter:

I strongly agree with, and share, John Holdren’s intuition that accelerating the incentive for innovation is the most powerful and also politically feasible strategic avenue open [for addressing energy challenges].

That there is little investment in public research may not be altogether such a bad thing. The data I have seen about the efficacy of government research in either the environment or the energy area is quite discouraging—and not in the least bit surprising given the incentive structure prevailing in government laboratories.

You mentioned the leverage of emissions trading in a final sentence of your discussion of innovation. When we were working to create this system in the Carter years and before, in fact it was precisely this end that was my chief motivation and argument. If one can get every plant manager and engineer to have a powerful interest in innovation and in pollution abatement—especially in those elements where results are relatively low cost—one has achieved the best possible result. Once emissions trading is going full blast, every plant manager will have the same incentive (profit maximization) to innovate for the public environmental good as she or he does to increase the production of goods. (A July-August 1981 Harvard Business Review article I authored, titled “Thinking Ahead: Getting Smarter about Regulations,” outlines what we had then built. As you’ll see if you review the article, the basics today are what they were then!)

In contrast, the existing system gives managers a powerful incentive not to innovate lest that innovation becomes the new “best available technology.” Equipment manufacturers, most notably, sell to customers who very definitely do not want them innovating to raise the bar.

Strong incentives to reduce emissions help energy conservation; but, I believe, we need incentive tools that are aimed directly at energy as well.

In this regard, I would draw to Holdren’s attention a working paper [titled “Job Creation Tax Options”] that Get America Working [an organization of which I am the founder and chair] published several years ago. It outlines 20 natural resource taxes to demonstrate how easy it would be entirely to replace the country’s enormously destructive payroll taxes. The energy inefficiency tax, in particular, is politically low cost and would give managers a most powerful incentive continuously to seek out new energy technology “S-curves.”

Bill Drayton
Founder & CEO, Ashoka: Innovators for the Public
Founder & Chair, Get America Working

Editors’ note: Drayton was Assistant Administrator at the U.S. Environmental Protection Agency from 1977-1981, during which time he led the implementation of the first emissions trading system and the introduction of other mechanisms to sharpen incentives to comply with environmental regulations. Drayton and Holdren are both members of the advisory board of Innovations.