The Trouble With Carbon Taxes

David Roberts’ caveats about carbon taxes as a panacea are a bit scattershot.

The question is how to steer civilization as rapidly as possible away from net carbon emissions (not to mention other risky behaviors). The sane libertarian view of course is that externalities are inadequately represented in the marketplace, and proper pricing would magically fix everything. This is more true than false; incentives in the right direction are surely better than incentives in the wrong direction.

The trouble is that either way (well-designed incentives, ill-advised undesigned incentives) can be argued to favor an elite.

A comment by “Stuki” on an otherwise fascinating diatribe by Stuart Saniford distinguishing between environmentalism and socialism is germane:

As for entrenching hierarchy, I can hardly think of a more crass example than environmentalists’ campaign to free up entire highway lanes for use by those who, like themselves, can afford the latest in low emissions vehicles. Being of the opinion that by far the best way of reducing car emissions would simply be to stop funding and maintaining roads on the taxpayers dime altogether, I’m not saying this is “wrong” per se; just noting that it is a pretty crass display of milking privilege for all it is worth. And the same goes for most other schemes to reward “environmentally conscious” behavior, as it almost always devolves into simply rewarding those who can afford to put themselves in a position to be rewarded.

In short, economic incentives intrinsically favor those with means to make long-range decisions. There is a reason that the poorest people drive lubricant-leaking gas-guzzlers despite their obvious incentive to do otherwise. Creating change by creating economic incentives is always a shift away from social justice.

Regulation may or may not do so as well, to be sure. There is no guarantee that regulatory actions are suited for purpose and they are rife with unintended consequences. (That’s why a considerable amount of agility and cognitive capacity is required in the legislative sector, something we sorely lack at present in America and elsewhere.)

The path that does not amount to a concentration of power is well-designed, finely tuned regulatory action.

Here’s an anecdote that illustrates the point. Early model Priuses were basically Corolla shaped, and we owned one (recently traded up for a new model). One day, Irene was meeting another member of a photography group she was involved in for a road trip a good 90 minutes down the road. (This is Texas, mind you, so it’s not considered a long distance for a day trip.) She pulled up in her tiny, road-beaten Prius, and her companion pulled up in what in America is called an “RV”, basically a rolling apartment. Which vehicle do you think ended up making the 180 mile round trip carrying two people and two cameras?

It turned out that Irene’s companion was a vendor of RVs as well as an enthusiast. This happened during the oil price spike of ’08 when peak oil was on everybody’s mind. Irene asked her companion how these prices were affecting her business, and she got the response that it hardly had any effect at all. It turns out, according to the RV vendor, that people who can afford to carry their houses along with them on a regular basis, for instance on a day trip for a photography project, have enough money that pump prices have no impact on them whatsoever.

So here is the problem in a nutshell – prices which are tolerable by the bulk of the population do not impact the most wasteful users of a given commodity. Indeed they provide, in conspicuous-consumption cultures, a perverse incentive.

The more extreme the inequalities, the less effective prices are as a mechanism to disincentivize waste of necessary resources.

Comments:

  1. Well, you know my opinion on carbon taxes. Which is, said in a way that is relevant to this post, that everything else is too gameable.

    > The path that does not amount to a concentration of power is well-designed, finely tuned regulatory action.

    Then you're stuffed, because what we do no very well is that we're not going to get "well-designed, finely tuned regulatory action". Its all very Platonic: wouldn't it be really nice if we could have well-meaning philosopher kings? But no: we need a system that can survive being run by the fool/corrupt/bound/timid/beholden pols we do elect (many people, but Popper I think).

    Of DR's points: 1 is just stupid; 2 isn't a downside, and is anyway irrelevant if they're revenue-neutral, as they should be; 3 is stupid and shows he doesn't even understand the problem (he needs to read Timmy, who I ref'd here only recently (I'm pushing that a little hard, but I think he does need to at least understand the point); 4 is just wrong (again, he needs to read Timmy); 5 may well be true, if so: tough. If you care enough, use some of the tax revenue for redistribution; 6 is at least half wrong (see Timmy, again) and not a short term problem anyway; 7 is correct but good: yes hopefully it can replace some regulation; 8 is also true but good; 9 is half right (yes it will be set too low to start with, but then again all the other stuff won't be phased out to start with, either). And he still needs to read Timmy; 10 is dubious.

    • "we need a system that can survive being run by the fool/corrupt/bound/timid/beholden pols we do elect":

      Such a system is possible in an underpopulated world where impacts do not tightly couple. We no longer have such a world. Perhaps we are "stuffed" as you put it. But as with the dramatic cuts in carbon emissions that started the conversation, we need what we need, and we had best try to get it, even though it's hard to imagine.

      But there is no denying that a carbon price sufficient to make a difference is severely regressive in the richer countries and will cause suffering without much alleviating waste. The simple capitalist solution works better in the more complex, less capitalist societies. It is as though we have already used up all our selfish incentives over here, which given the way things have worked for the past three decades shouldn't be a great surprise.

      • > there is no denying that a carbon price sufficient to make a difference is severely regressive

        Well not really, I can deny it. I can certainly deny you've demonstrated it. But anyway, the answer to this and so many other "regressive" problems is, I think (as I said) to use the revenue to remedy the regression, if that's what you want to do. Presenting it as the major, or an insurmountable, obstacle seems odd.

        As to the other stuff, what I'm trying to say is that good regulations are much harder to get right than a good carbon tax. We should try to choose policy responses that are harder to get wrong.

      • A carbon tax without remedying the regression is wrong and certainly unworkable in North America; and remedying the regression without getting that wrong is not easy.

  2. How much more regressive is a carbon tax?

    Any meaningful climate policy will have naturally regressive effects unless otherwise compensated for. A carbon tax may in fact offer easier mechanisms for compensation since the money all ends up in a big pile and we can do with it whatever we think is best (progressive redistribution for example).

  3. Revenue-neutrality is partly just making a new carbon tax politically palatable. Sure, you need to compensate for the regressive nature of carbon taxes by giving money to the poor, but you don't need to give it all back to everybody, especially not to the better off. I speak as a better-off person who is a net beneficiary of British Columbia's revenue-neutral carbon tax.

    Worstall's analysis is all very well, but he seems to assume that the idea of a carbon tax is to discover some sort of Goldilocks world where we trade off the variables until we get both the carbon tax and the warming we can live with. Except that the "we" is different in both cases. The "we" who pay the tax are rich older people who live in temperate climates. The "we" on the other side of the trade-off are poor, young (and unborn) people who live in intemperate climates. Let's guess who will continue to prevail. This isn't just a matter of Econ 101 cost-benefit equilibration, but also an issue of international and intergenerational justice.

    I'm reminded of the old Lone Ranger joke: "Tonto, we're surrounded by indians"--"What do you mean 'we', white man".

    http://www.forbes.com/sites/timworstall/2012/11/22/in-which-brad-plumer-asks-the-wrong-question-about-a-carbon-tax/

    • Actually, I'm obliged to admit that (given that GW will have winners and losers) the only way to make our response "fair" would be to cease emitting CO2, because there is no way that those emitting most are going to compensate the losers. Carbon tax is only fair if the costs are shared equally, which they aren't.

      However, I think this is just letting perfection stand in the way of doing good. There are many unfairnesses in the world, costs of GW is not a major one.

  4. All sales taxes are regressive, so I'm not sure what William is denying. His next statement is certainly correct, in fact, there is no reason why a carbon tax can't be both progressive and revenue neutral, it's all about what percentage is returned to whom and where.

    Of course, a revenue neutral tax means adaption to the initial effects and changes will likely be be underfunded and therefore botched by the inept pols and business class.

      • Adaption is likely to be so cost prohibitive that a revenue stream attached directly to the cause of the problem is the only reasonable and politically possible option.

        The other option is using the defense budget which is too good of idea to actually be considered in the US.

  5. So the point is that people with more money can afford to do more things and buy more stuff and mitigate increased costs and have a greater set of goods and services for which their demand is relatively price inelastic?

    Whodathunkit?

    I would like to have a clear definition of what everyone's (well, of course, not really everyone's, maybe the consensus if that word isn't tainted by the dark side) idea of what constitutes "social justice," The libertarian ideal, I would speculate, would be "equal opportunity to participate in every aspect of the market with results solely dependent on the effort, creativity, persistence, etc. of the individual, i.e., no societal guarantee of outcome." I suppose the opposite extreme is "from each according to his ability, to each according to his needs." Of course "needs" means something different to you than to me, and something radically different to a subsistence farmer in Africa. Or maybe it's Michael Albert's Participatory Economics (yeah, that dog'll hunt).

    In any case, anything that costs money in any way (goods, services, taxes) will be more easily handled by people that actually have money, and the more they have, the easier the handling will be (though not necessarily the softer the whining).

    But this is a long winded way of saying "I agree with Mr. Connolley.

    • The odd thing here is that I am the one defending the white rural American (Australian, Canadian) energy intensive lifestyle, or at least the people caught up in it.

      The simple "externalities" argument really is a threat to them. Their ideology argues against their interests, unless "global warming is a lie". And it's crucial that they understand that it isn't. So in essence my question is whether they will abandon their ideology or their interests first.

      The white rural English-speaking culture really is important in the grand scheme of things, much though people like to put it down.

    • Also, my opposition to Mr. Albert's vision is not limited to impracticality. The fact is that the world has dropped us in a situation where we cannot cope without some central planning, and an ideological framework which abhors the idea.

      Note that while the world abhors the idea of central planning, it doesn't particularly abhor the practice. We have the WTO and the World Bank doing the job the UN was intended to do. When there's money at stake somehow the world manages to pull together.

      In one of the few bits of good news on this front, the de facto (as opposed to de jure) global government agencies are finally taking note that we have a problem.

      • > the world abhors the idea of central planning, it doesn’t particularly abhor the practice. We have the WTO...

        No, that's an error. The WTO doesn't do central planning (certainly not in the sense I think you mean, and which the old Soviet-type folks used: someone in the centre deciding what is going to be made, and in what quantity). The WTO attempts to set the frameworks for global trade. Even the World Bank doesn't do central planning in that sense, though you might be on slightly less weak ground there.

        In any vaguely sane world, of course, the TWO would be redundant, because no-one would have any import barriers. But that's another argument.

      • MT: When there’s money at stake somehow the world manages to pull together.

        As the Canadian Green Party leader, Elizabeth May, said once: "Trade treaties have teeth, climate treaties only gums".

  6. Here in Germany we got a huge tax on gasoline. This is no problem. I'm almost poor, yet drive car daily. My half rotten Volkswagen is 15y old, has 375000km and vaporizes quite an amount of lubricant. Yet I can sleep and possibly even live in it, plus it has far better mileage and astronomicly simpler maintenance than any Mercedes, BMW, Audi, etc. produced in this stupid century. (And these absurd contraptions still have better mileage than U.S. cars...) A rule of thumb with Tsherman cars is: The older ones are more effective. I dread the day when my beloved micro RV breaks and I have to spend 2000€ on a newer but more absurd car.

    • Martin, I miss the days when I could understand every circuit and every line of operating system code in a computer, so I sympathize. But I am not using CP/M on a Z80 anymore regardless, though in a pinch I could manage it and be happier in many ways. It was an exciting thing to have complete command of a powerful machine.

      The complexities exist in modern systems for good reasons in both cases.

  7. It's important not to generalise here. For a lot of historical reasons, the US is pretty bad at bureaucracy. It's also bad at redistribution. So any tax the US writes is going to be poorly-written, easily gamed, and have very little compensation for impacts on the poor. Regulation is likewise problematic, for much the same reasons (I know, the New Deal was quite effective - but it was 70 years ago, involved several political crises, an exceptional president with a large majority, and much of it has been undermined over the last 30 years). But that's not necessarily the case elsewhere. French and Australians, for instance, are pretty good at bureaucracy, and better than the US at redistribution. So regulation or a carbon tax may make more sense there than in the US. What the US needs to come up with is some radical set of incentives for private enterprise (probably involving a huge diguised subsidy, as is traditional) that can be sold as thoroughly free eneterprise.

  8. But there's also the reverse. If a rich person is building or renovating a house, they can choose the cheapest long term heating solution. With carbon taxes, that will be something that produces less CO2.

    If a poor person is building a house, they might choose lower capital investments.

    So rich people have more choice - both in the good and bad sense.


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