“Scratching the Surface: An Analysis of Vermont’s Surface Water Policy” By Elliot Wilkinson-Ray4/29/08PA 395: Valuing Common Assets for Public FinanceInstructors: Gary Flomenhoft and Amos Baehr1It is important that we tax surface water use in Vermont. The majority of surface water taxes would be collected from hydroelectric, public supply, and thermoelectric1 power generation. Why Tax?Most importantly, we must tax surface water because it is ours. While much of ournations history has been defined by the privatization and enclosure of natural resources, the citizens still legally control surface water. Yet, the people have failed to assert their control over this lucrative resource and legal birthright. Currently, industry enjoys free reign to use and abuse our surface waters without compensation, accumulating huge private profits. At the same time, many of our waters are polluted with toxins and invasivespecies. Why is the private sector enjoying windfall profits from our surface water, while the public sector is struggling to fund its clean up? This paper will outline strategies for the state to efficiently levy public funding from surface water use. 1 Water for thermoelectric power is used in generating electricity with steam-driven turbine generators.2You may be wondering why it is the state’s responsibility to tax surface water in place of towns or counties? The Public Trust Doctrine2 declares the state as the trustee of Vermont’s surface water. The citizens of Vermont are the beneficiaries in this public trust relationship. Therefore, the state government has a fiduciary duty to manage the state’s surface water in the most responsible manner.Therefore, a company, landowner or entity cannot own the real property rights 3 ofsurface water in Vermont. Bob can own the land around a pond but he does not have any special right to the actual water. Basically, we all own the water, yet no one owns it individually. Most of the United States uses the same Public Trust Doctrine. Another important concept is economic rent. Economic rent, in its most basic form, is unearned economic profit. Usually associated with land, economic rent can also be applied to other resources where use leads to unearned profits. The interesting quality of taxing economic rent is that it doesn’t negatively impact the consumer or the producer. The producer is a price-taker and cannot increase the price, thus protecting the consumer. Furthermore, economic rent is the additional unearned profit above a reasonable return to investment, maintaining a profit for the producer. Another way to understand economic rent is any payment above the reservation price of the producer.4 2 Originally from English Common Law, the Public Trust Doctrine designates navigable waters to the public good.3 Real property or realty is the property right to land and the structures and improvements on land 4 Daly, H. E., and Farley, J. C., 2004. Ecological economics : principles and applications. Island Press, Washington, D.C.3A truly efficient taxation system would capture economic rent, without impacting the profitability of Vermont’s surface water industries. Many economists see the capture of rent as an essential element in an equitable economic system. “Only then will we achieve real justice and start to repair the damage wrought by this age-old violation of ourelementary right of equal access to our common heritage” (O’Brien, 2000:5). The challenge is how to effectively capture rent in an efficient manner. HydroelectricHydroelectric power generation is an industry that benefits greatly from its ability to collect economic rent. Vermont hydropower currently has a capacity of 578.5 megawatts. This is close to the generating capacity of Vermont Yankee that provides 1/3 of Vermont’s energy, whereas in-state hydro only provides Vermont with 9% of its power5. Therefore, the majority of Vermont’s hydroelectric power is sold out-of-state. Total hydro sales generated roughly 165 million dollars in revenue in 2005. This value can be partially attributed to the river itself, indicating the presence of substantial rent collection. In addition, Transcanada Corporation was able to repay their investment on 8 dams, at an annual revenue rate of $150 million, in a mere 3 years. The only way these 5 Vermont. Vermont Department of Public Service. Utility Facts 2006. Aug. 2007. Feb. 2008 <http://www.publicservice.vermont.gov>.4dams were able to generate such large amounts of revenue was their ability to collect rent from a public resource. Hydroelectric dams are investments with relatively large fixed costs (initial payments) and relatively small operational costs. Hence, after the infrastructure investment has been paid off, the owner enjoys large profits and small costs.The state has a responsibility to tax excess profits and give them to the people of Vermont. Although it is difficult to estimate an appropriate rent percentage, 10% of hydroelectric revenue would total over $16 million. There are different theories on the best way to tax hydroelectric generation. EntropyMason Gaffney says that to understand the “consumption” or “use” of water we must think in terms of entropy. Although entropy is a concept that can be used in many different contexts, economic entropy is essentially that “use” will lead to higher entropy and less efficiency. Water, for example, begins as clean water at high elevations. The moreit is used, the less energy it possesses and the more dirty it gets. Certain uses naturally lead to the degradation or the increase of the entropy of water more than others. When we consider water in the context of entropy we must think about it in two ways. First we have the more traditional concept of the decrease of available free energy: as water moves from mountaintops to the sea, its potential for generating energy from gravity diminishes. Secondly, we must consider the degradation in water quality as it is used. In practice, one could tax the free energy in water by creating an electric generating 5tax on all hydroelectric dams. This tax could be adjusted to capture only the economic rent without impacting profitability. Yet, hydroelectric producers would need to accurately report their cost structures in order to determine this tax rate. Currently, Transcanada is a private corporation selling to other private corporations, thus it is not required to publicly report its costs. Passing legislation
View Full Document
Unlocking...