Explaining the ‘trade’ in ‘cap and trade’

David Osterberg
David Osterberg

“Cap and trade” is a term growing in use but still needing explanation. We all get the “cap” part. The way to clean our water and our air is to “cap” the amount of pollution entering it. The “trade” part is a little more confusing.

The ‘cap’
Let’s assume that we see health or aesthetic damage from all the pollution in the air and that we have identified 121 tons of it being generated by a finite number of factories and other sources. Assume that good science says that we need to cut those identified emissions by half — 50 percent — to have an effect. Because it will be easier to get to that goal by giving the polluters some time to put in the pollution control or close down heavily polluting plants, we decide to reduce emissions by 10 percent a year over the next five years. The identified firms are told they need to cut the entire 121 tons to 110 tons by the end of the first year. That is the “cap” part of cap and trade.

The ‘trade’
The trade part of pollution reduction lets firms choose how to get to the total reduction. A firm with 10 plants equal to 11 total tons can decide to cut a quarter-ton from each of its four newest plants to reduce the 1 ton it is required to meet, and let the other plants produce as they formerly did. This works because we are interested in the total number, and it allows the company to meet the mandate to cut emissions by choosing the cheapest way within the company. A 10 percent reduction from all 10 plants would also get us the 1 ton, but this might be more expensive.

Firms also can trade with each other to help the economy achieve the desired reduction in emissions. The company that chooses to concentrate pollution in a few plants might want to go further than the 0.25 tons in each new plant. Its managers know that next year there will be another 10 percent reduction and 10 percent the year after that, so they might want to cut emissions just once and begin the process of eventually reducing even more. Going further than required this year will earn the firm credits, which can be saved for the next round of reductions, or purchased by a firm with mainly old plants that are hard to refurbish. This creates a market in which a broker agency sets up something like a stock exchange to trade the extra credits of one firm to the firms that want to purchase them. It is assumed that this marketplace will produce a cheaper solution to getting the same 10 percent total reduction in pollution that a simple mandate for each company, or even each plant, to reduce emissions by 10 percent.

The credit marketplace
The price of the credits is not known at the beginning. A firm might plan for a reduction on its several plants when learning that the price of credits is cheaper than first thought. The firm would then buy credits and do the plant cleanup next year. Alternatively, a firm might find the market for credits is so high that it can cut more emissions immediately and pay for part of the job by selling extra credits. That is how markets work and it shows how the trading part of cap and trade can address pollution from the big-ticket generators.

Posted by David Osterberg, Executive Director

Pay Attention to Tax Breaks Behind Curtain

Taxpayers are protected by more transparency on tax-credit spending for businesses that don’t pay taxes.

Iowa took a couple of positive steps — small but important steps — in 2009 to assure greater accountability in economic development subsidies.

While it is important to note those steps, it also is important to note well-funded forces already are using baseless arguments to undermine them in hopes of overturning the strides made in 2009. Iowans not only should reject these efforts, but they should expect improvements in 2010 to build upon 2009.

What went right? Lawmakers at the end of the legislative session approved greater transparency on tax credits, specifically the research activities credit (RAC) that sends multimillion-dollar secret checks to companies that do not pay income tax in Iowa. Under legislation passed in the closing hours of the session, recipients of RAC benefits over $500,000 will be identified publicly so Iowans and their legislators can begin to evaluate whether these tax expenditures are benefiting the state.

In addition, legislators approved a cap of $185 million on certain tax credits, including a “supplemental” RAC program that allows a doubling of the regular RAC credit.

There is much more the Iowa Legislature and Governor Culver should do, but those two steps in 2009 may help show Iowa residents the value of future bigger steps. Part of that making that case involves vigilant attention to false claims, distortion and spin against the kind of transparency that taxpayers deserve.

Victor Elias of the Iowa Fiscal Partnership wrote a cogent summary knocking down the bogus claims in a letter to the editor published in the Des Moines Register.

Long and short: Despite contrary claims by business advocates, businesses will be able to keep all trade secrets private — but their taxpayer investors also will be protected by being let in on the secret of how much money they’re tapping from the Treasury. No information about the nature of research being conducted with public subsidies will be disclosed as a result of the new legislation.

As Elias writes:

The only secret made public by this legislation is finding out the largest corporate recipients of $43.8 million in research-activities credits granted in 2006, $34.1 million of which were checks from the state general fund to companies that paid no Iowa income tax that year.

There is no valid argument to keep that kind of information secret from those who are paying the bills, or from those who set our state’s spending priorities each year during the budget process.

Posted by Mike Owen, Assistant Director

Education pays in Iowa

Lily French
Lily French

Give people access to higher education and a myriad of benefits will surface for individuals and the state of Iowa.

Our new report on the return on investment of workforce education shows the benefits and potential benefits from such investments.

At each level of education beyond high school, Iowans work and earn more. For example, those with a bachelor’s degree earn on average $7.26 more an hour than those with only a high school diploma. Families headed by a parent with a college education are also much less likely to live in poverty — and better set to recover in hard times from a job loss.

So, whether you look at unemployment rates, wages, or poverty, it is undeniable that education pays for Iowans. It also pays for the state, because better-educated people on balance earn more, and pay more in taxes, which benefits the state budget.

Our analysis finds that investing in postsecondary education for low-income adults returns tax revenue more than double the state’s program costs. The return: $3.70 in increased tax revenue for every dollar invested in an associate’s degree for low-income adults, and $2.40 for every dollar invested in a bachelor’s degree.

Other strong reasons support investments now in workforce education:

  • First, the declinine in wages for less-educated workers means more Iowa families are struggling to cover basic living expenses;
  • Second, Iowa will face a labor shortage in the future due to our state’s slow population growth and the impending retirements of the baby boom generation; and
  • Third, employers in Iowa had already identified a shortage of a skilled workers as a problem before the recession, and the top 10 fasting growing occupations in our state all demand workers with postsecondary education.

To summarize, Iowa needs an increase in skilled workers to grow our economy after the recession ends and families in Iowa need higher wages to fully support themselves.

With forward-thinking policy moves now, Iowa can increase education and training opportunities for low-income adults, improving their futures and those of all Iowans who will benefit from a stronger economy.

Posted by Lily French, Research Associate

Watch step in talking about Iowa jobs

This month, high-school seniors step onto stages across Iowa, accept a diploma and a handshake, and leave as graduates. Iowa’s job picture shows more than ever that they had better watch their step as they do.

When Iowa’s unemployment rate hit 5.2 percent in March, it was at its highest place in over 21 years.

News reports in recent days noted that rate fell in April — but it was only to 5.1 percent. It’s certainly better than the alternative, but let’s take a breath. While that rate seems low in comparison to the national rate of 8.9 percent, rates above 5 percent are high for Iowa — again, higher than at any point since these new grads were born.

IPP has been tracking job trends in Iowa every month since 2003. Our “JobWatch” project, as well as our “State of Working Iowa” publications, have attempted to inject some important historical perspective in the examination of job numbers.

While we all want to be hopeful for a better economy and better opportunities, we need to watch our path. No one should miss the larger implications of a one-month drop in the unemployment rate from 5.2 percent to 5.1 percent, or a smaller nonfarm job loss — 1,600 — compared with many times that in three of the previous four months. Those implications: The unemployment rate is high for Iowa, and in a very short time we have lost the meager gains achieved in nonfarm jobs in recent years.

As our latest JobWatch release points out, nonfarm jobs have declined in seven of the last eight months. Those jobs were down 32,800 over 12 months, almost two-thirds of the decline coming in manufacturing. Large drops in December 2008, February and March totaled over 28,000 lost payroll jobs. All figures are seasonally adjusted.

If we, too, watch our step in determining the importance of a statistic here or there, we might help our new grads watch their future steps a little better as well.

Posted by Mike Owen, Assistant Director

IPP Open House packs ’em in

Christine Ralston
Christine Ralston

Wow, what an event. Friday afternoon, the Iowa Policy Project hosted an open house and FRIENDraiser at our new office in Old Brick.

We packed the office with friends and supporters. Guests had the opportunity to meet and talk with IPP staff, old IPP staff greeted longtime friends and new staffers were able to meet many of IPP’s friends and supporters.

The event was an opportunity for IPP to show off our new, spacious office. The organization has increased from five to nine staff members in just two years, so our old space was getting a bit cozy.

Our new space has several private offices, a research room and a separate conference room which was dedicated in honor of IPP co-founder Mark Smith.

Mark helped found IPP in 2001 in collaboration with IPP’s Executive Director, David Osterberg. Mark is perhaps best known as former president of the Iowa Federation of Labor, AFL-CIO. For 34 years, Mark worked tirelessly in education, organizing and advocacy for Iowa’s working families.

A short presentation included remarks by David about IPP history and Mark’s contribution to the organization as well as Mark’s remarks about the founding, work and expansion of the Iowa Policy Project.

David Osterberg speaks at IPP's Open House
David Osterberg speaks at IPP's Open House

The event was open to the public. Attendees included past and present members of the IPP board, friends and supporters of IPP’s work and several of our nearby elected officials: Congressman Dave Loebsack, State Senator Joe Bolkcom of Iowa City, State Representative Nate Willems of Mount Vernon, and Johnson County Supervisor Rod Sullivan.

Many, many thanks to those of you who took the time to come and speak with us, see our new offices and make donations in support of our work. We truly appreciate it.

Posted by Christine Ralston, Research Associate

Iowa reaches towering point on wind

Teresa Galluzzo
Teresa Galluzzo

Today the American Wind Energy Association (AWEA) released its annual rankings. These rankings showed Iowa moved up to second in the nation for installed wind capacity, after installing close to 1,600 MW in 2008. Iowa had a total installed 2,791 capacity of megawatts by year-end 2008, equal to 11 percent of the nation’s total wind capacity.

The Iowa Policy Project issued its own report this morning, to fill in some of the details about Iowa’s outstanding growth. The most impressive is that according to new estimates by the Iowa Utilities Board, wind fuels about 15 percent of the electricity generated in Iowa. This is a big increase from the 5 percent wind-powered generation estimated in 2006.

With this big jump, Iowa is now a world leader in the percent of electricity generated from wind power. To find comparable examples of wind production, we must look across the ocean to European countries. According to AWEA, Denmark leads the world, producing more than 20 percent of its electricity from wind energy.

Growth in wind production in Iowa, 1998-2008
Growth in wind production in Iowa, 1998-2008

Iowa’s outstanding growth in wind production calls into question the common argument that the costs of reducing our greenhouse gas emissions and addressing climate change are too high to justify action.

Looking at Iowa’s electricity prices since 1998 — the year before Iowa’s wind boom began — our electricity prices have remained below the national average and in fact have not increased as quickly as the national average price in the last three years (2005 to 2007). Assuming a somewhat similar portion of the wind-generated electricity produced in Iowa was actually consumed in Iowa, wind’s great expansion did not cause prices to spike.

Even as Iowa is leading the way in producing electricity from wind power, significant room remains to reduce our greenhouse gas emissions by increasing our use of renewable energy sources. On the upper boundaries, AWEA estimates that Iowa has the potential to generate 62,900 megawatts from wind power.

The new estimates of Iowa’s outstanding wind production, and its potential for new wind production, show that Iowans need not fear taking strong steps to address climate change. In fact, while still being thoughtful, Iowa should rapidly enact policies that continue to help our renewable energy production grow.

Posted by Teresa Galluzzo, Research Associate

Federal deductibility: the reality

The word of the month in Iowa tax discussions is “federal deductibility.” It means you can deduct your federal income tax from your state income at filing time. Only a handful of states let their residents do it.

Iowa is one of only three states that permit taxpayers to deduct the full amount of federal income taxes paid.

Make no mistake: Federal deductibility is a benefit targeted for Iowa’s highest-income families. Some others benefit, but mostly, it is those at higher incomes.

The last, best analysis of this we have shows that the wealthiest 20 percent of Iowa taxpayers receive 80 percent of the tax benefit from federal deductibility (2002 figures). For the other 80 percent of Iowans, the tax cut amounted less than half of 1 percent of their income. Using those 2002 numbers, by the way, the dollar amount of the average tax cut for the top 1 percent of taxpayers was about $13,900 — more than the income of people in the bottom 20 percent.

To understand why wealthier people get the greatest benefits under federal deductibility, consider this: You have to pay federal income tax to get the Iowa deduction. Many Iowans at moderate and low incomes simply do not make enough money to pay income tax to the federal government — but Iowa law still makes them pay income tax. some provisions in the tax-reform bill in the Iowa Legislature make that situation better for low-income families.

Remember these perspectives when someone defends “federal deductibility” as something to help low- or middle-income working families. For most of them, it’s just not so.