Adrian College political science professor James Hanley, responding to this editorial in the Washington Post, wrote the following on Facebook and gave me permission to use it as a post.
Here’s James. (What’s in the box is what James is quoting from the Washington Post editorial.)
Advocating a carbon tax of $75, the author writes:
Electricity prices would rise 70 percent on average — though only 53 percent in the United States — and gasoline prices 5 percent to 15 percent in most places.
But that’s the picture before one considers what the money raised by a carbon tax could do. If governments recycled the revenue back to low-income and vulnerable people, and cut economically inefficient taxes — such as income taxes — a $50-per-ton carbon tax would feel to the economy more like $20 per ton. The plan would help low-income households and place a higher burden on the upper-income bracket. There could also be money for essential research and development to aid the energy transition.
Stop right there. This “simple” direct plan for controlling CO2 emissions just got really complex. IF government recycles the money back to low income people, and IF the government cuts economically inefficient taxes, THEN the plan won’t run into insurmountable political opposition or hurt the poor so badly no person could in good conscience support it.
This is like saying you’re going to cut your travel time by driving faster, and all that’s necessary is that there be no traffic, no police, and no bad weather. Just as you cannot control those things, the advocates of a carbon tax – not only outside of government but inside it – cannot control the decisions about how to distribute that money and what other tax adjustments to make.
Their theory of government is not how the thing works. Government does not rationally make all the proper adjustments that will make something work. Government is not a conscious entity that has an incentive to do any such thing, but a conglomeration of individuals with various interests in varying offices responding to the demands of various individuals. And the tug of war between all those varying interests pulls pieces off of policies here, slices there, and so on. And that additional policy on which your primary policy’s success (political or technical) is predicated has its own wholly separate legislative path to tread.
Could a carbon tax reduce CO2? Absolutely. Can it so simply be made politically palatable and unharmful to the poor? Not remotely.
That’s James.
Now this is David. I agree that a carbon tax would reduce the amount of CO2 relative to what it would have been. As regular readers of this blog know, that doesn’t mean I favor such a tax. And that’s for reasons other than public choice reasons. But James Hanley does one of the nicest jobs I’ve seen of succinctly pointing out the public choice problems with a carbon tax.
READER COMMENTS
Jon Murphy
Oct 22 2019 at 2:50pm
Good stuff. I was actually thinking about precisely this topic this morning in the shower. The folks who make the decisions are so far removed from the actual costs incurred, and coupled with the fact that a carbon tax would impose real pecuniary costs on many real people who then have an incentive to lobby against/reduce it, the costs of such a tax are likely to be much, much higher than the benefits.
Pigouvian taxes, like a carbon tax, were developed under the assumption of a benevolent dictator (that government can just act as an individual and cares about the well-being of the citizens). For a long time, I had thought that simply a simplifying assumption. But now I am coming around to the possibility that, for any optimal tax scheme to work, you actually require a dictator.
Alec
Oct 23 2019 at 2:53am
This argument would be much more compelling if we didn’t already have examples from e.g. Canada of this being done successfully. The frontier of governance quality is good enough to get this done, and if you think a carbon tax has potential issues, try pushing the problem off until the Green New Deal advocates argue that carbon taxes haven’t been politically palatable and therefore something more radical must be done. Advocates of free markets do an extraordinary disservice by ceding such ground to the economically illiterate.
Jon Murphy
Oct 23 2019 at 7:47am
Sorry I’m not following you. What is “this” that’s being done successfully?
Further, who is ceding ground to the economically illiterate? Those of us arguing for public choice analysis aren’t
Dylan
Oct 23 2019 at 11:52am
Jon,
I assume he is referring to the fact that Canada passed a carbon fee and dividend policy that went into effect this year in provinces that didn’t already have a compliant carbon policy in effect. The nation wide plan is a carbon tax starting at $20 a ton, with 90% of the revenue going back to tax payers in the form of a dividend. I believe the dividend part is the part that makes typical public choice issues less likely, as it can be difficult to take money away from people that are used to getting a check, and funnel it into a politicians pet project.
As for the economically illiterate comment, I believe the idea would be that we’re at the “something must be done” stage of debate, and that your choices are either support something along the line of carbon pricing, or else we’re likely to get more command and control type policies aimed at fighting climate change.
Jon Murphy
Oct 23 2019 at 12:27pm
No one is arguing that a tax cannot be passed. The question is whether or not it does what it promises to do.
Ok, but that false dichotomy is itself economically illiterate. Public choice tells us why.
Dylan
Oct 23 2019 at 1:33pm
It is not the fact that a tax was passed that is interesting, it is the fact that it is a tax and dividend approach that (at least as currently implemented) minimizes the public choice issues that you refer to. Sure, it could be that over time the law will be amended in various non-optimal ways that will reduce efficiency and try to siphon off more of the revenue from the tax in all sorts of ways, but it seems that at the moment, it is doing exactly what it intended to do, which is making CO2 emissions in Canada more expensive.
David Henderson
Oct 23 2019 at 4:48pm
Alec,
I tried to find details on Canada’s carbon tax and was unsuccessful at either confirming or refuting your statement about dividends. It’s hard to find details. Justin Trudeau says that 90% of the funds will be rebated to households and the other 10% to hospitals and other entities.
The crucial question I was unable to find the answer to: How is the rebate structured? Is it an equal amount to every household in the province? (I say “province” because the plan is for the 4 provinces–Saskatchewan, Manitoba, Ontario, and New Brunswick–that have not imposed their own carbon tax.) Is it based on income? These are the kinds of questions that need to be answered.
Thaomas
Oct 24 2019 at 1:30pm
My point exactly. Even it one believes that the optimal (given public choice problems of implementation) carbon tax is zero, one still ought to consider whether some positive level might be useful in preventing some amount of even less optimal (given public choice problems of implementation) alternatives.
Fred Foldvary
Oct 22 2019 at 5:31pm
Price subsidies have a deadweight loss, and the absence of a payment compensating for pollution damage is an implicit subsidy. The replacement of income taxes with pollution taxes, revenue-neutral, would reduce the DWL of the income tax and prevent the DWL of the implicit subsidy.
Thaomas
Oct 22 2019 at 8:29pm
Still, it all comes down to does it not make sense to advocate for the best policy (which I take as a revenue neutral tax on net CO2 emissions, your mileage may differ) if a) an even badly imperfect carbon tax better than the harm it would prevent and b) and if even badly a imperfect carbon tax is better than the alternatives that are likely when (and it’s not WHEN not IF, if climate harm is real and cumulative) the dam breaks and people do start panicking about the effects of CO2 accumulation.
Jon Murphy
Oct 22 2019 at 9:31pm
True. All the more reason to keep public choice in mind. The best policy may be no policy at all.
To keep the metaphor going, “I’ll get there faster if I only go faster. We just need to assume no cops, no other cars, no weather…”
But if there are cope, cars, weather, going the speed limit is likely the best way to get there fastest!
Same with a carbon tax. Sure, a “revenue neutral” tax may be best under certain assumptions, but if we weaken those assumptions (for example, assume revenue neutral is not possible given political incentives and pecuniary externalities), then the best policy may be nothing.
See Buchanan & Stubbline’s paper Externality, as well as Carl Dahlman’s response “The Problem of Externality.” Further, Sobel and Holcombe’s paper “Public Policy Toward Pecuniary Externalities.”
Thaomas
Oct 24 2019 at 1:48pm
I was inviting you to consider the possibility that the optimum your analysis yields, carbon tax = zero, may not be on the menu and > zero may be second best.
But if you think it is, then you need to actually show that zero IS the optimum. This is not accomplished by showing that zero MIGHT too large, and even less by showing that the arguments for non-carbon tax measures are sub-optimal.
I drove back from Canada yesterday with the cruse control set at about 5 mph above the speed limit. 🙂
Jon Murphy
Oct 25 2019 at 8:34am
That’s possible, but not in this case. We’re already at the situation where a carbon tax = zero, so it is on the menu. “Maintain the status quo” is always on the menu.
But to a larger point you raise, yes, “optimal” depends very much on the model and assumptions being used (all the more reason to be highly skeptical of any “optimal” active policymaking)
Max Goedl
Oct 22 2019 at 9:10pm
“I agree that a carbon tax would reduce the amount of CO2 relative to what it would have been.”
Really? What makes you so sure?
A carbon tax only shifts the demand curve for fossil fuels. The actual quantity of fossil fuels produced (and consumed) also depends on the supply curve. And with a little bit of economics one can show that a carbon tax that increases over time has perverse supply-side effects, leading resource owners to produce more, not less, in the short run!
https://grazeconomics.wordpress.com/2019/09/27/some-unpleasant-carbon-tax-economics/
Jon Murphy
Oct 22 2019 at 9:26pm
Because demand curves slope downward
Mark Z
Oct 23 2019 at 1:26am
Presumably, the short run increase due to higher expected future production costs (due to the tax) would be cancelled out by the long run decline in production.
I think a more interesting argument is that, unless technology improves to the point of eliminating fossil fuels, then we’ll still eventually burn through the finite supply of fossil fuels, only it’ll take longer, so the carbon tax would merely spread out the fossil fuel component of emissions over a longer timeframe rather than reducing them.
Nick
Oct 23 2019 at 7:08am
Nuclear and renewables are very likely to get cheaper and make it rational to switch away from fossil fuels whatever. A tax, as you say, expedites that transition. A properly designed tax would also incentivize carbon capture type technology and it’s quite probable that that technology will get cheaper also leading to co2 decline, not just reduced rate of increase.
Jon Murphy
Oct 23 2019 at 7:47am
Key phrase there is “properly designed”
James Tolbert
Oct 24 2019 at 7:53am
Max,
First, fossil fuels are not the only source of power available. Substitution is a major path for significantly reducing CO2 emissions while not reducing energy demand. We are seeing substitution of natural gas for coal – and we are also seeing slower substitution of wind for either natural gas or coal as the cost of wind continues to drop.
Second, solving our waste disposal problem will reduce our CO2 emissions. Companies are currently exploring carbon capture technologies with sequestration – or reuse (though reuse takes additional energy to convert CO2 to useful molecules). These are like garbage collection costs – if no one pays them and we can dispose of all of our waste for free, anywhere we want to, then expect that there will be a lot of people dumping waste on the ground – and in the air. Carbon capture and sequestration does cost money – and if there is no fee or restriction on CO2 emissions, then this technology simply can not be developed. The current idea that tax credits or other tax payer incentives will push this technology over a development curve ignores the fact that there is no market for the technology if we can dispose of our waste CO2 in the air for free.
Thaomas
Oct 24 2019 at 1:52pm
Which leads you to conclude that the optimal tax on net CO2 emissions is zero in perpetuity?
David Seltzer
Oct 23 2019 at 5:25pm
Good Stuff. before we start imposing a carbon tax, it should be determined what our portion is relative to the rest of the world. If we produce 16% of the world’s total, how does the remaining 84% comply with reductions? Does the US only pay 16% of the cost as we only produce 16% of that externality? If public choice applies economic analysis to political behavior, how does that comport with foreign administrations.
Richard Sandor founded the Chicago Climate Exchange to facilitate the reduction and trading of six greenhouse gases. It failed as liquidity was a problem. Contracts specified carbon tonnage traded. If fines were imposed rather than a carbon tax, emitters exceeding a specified allowed tonnage would be subject to heavy fines so as to curb further violations.
Matthias Görgens
Oct 24 2019 at 8:48am
A carbon tax would work to reduce carbon emissions, even if no other country was having one.
David Seltzer
Oct 24 2019 at 9:20am
Fair enough but 84% of that externality would still exist. For example, there is evidence much of the fallout from Chernobyl was deposited outside of Belarus. Ukraine and Russia.
Where is the compensation for those affected?
Jon Murphy
Oct 24 2019 at 9:36am
The optimal level of an externality is not 0%. Would that remaining 84% 9or some portion of it) be worth the additional costs?
David Seltzer
Oct 24 2019 at 11:31am
Good question Jon. Only to the extent that the marginal increase in emissions over optimal could justify the increased cost to compensate those affected by that 84%. CCX carbon contracts tried to account for optimal emissions that the planet could support. The question remains. When other producers exceed the optimal level, who compensates those harmed? How does public choice theory work in those cases?
Thaomas
Oct 24 2019 at 9:19pm
There are two ways to think about this:
To what extent would a revenue neutral tax on net CO2 emissions (set to the level of global harm) imposed only on goods consumed in the US (implying a border tax adjustment on imports) lead other countries to shift from more costly climate change measures to a carbon tax?
There is still a carbon tax imposed on US consumption that is optimal for reducing only the harm of CO2 accumulation only for us that is better than other kinds of policy.
James Tolbert
Oct 24 2019 at 8:00am
This appears to be an argument by David Henderson that we should simply not restrict any waste disposal. I don’t see his alternative to addressing a real issue. We are disposing of our waste CO2 into the air for free and in unlimited quantities. We understand that these emissions, cumulatively, have changed the concentration of CO2 in the air over the entire world. We understand that this change has consequences, especially for upcoming generations. I do not see an alternative here.
It is as if David is arguing that we need to remove all restrictions on placing industrial waste into rivers where it is diluted and flows down stream – or maybe into the Great Lakes or the oceans. Or placing ozone depleting substances into the air since the ozone whole was strongest over New Zealand and southern countries more than over the US – so why care about it.
I’d rather see David’s approach with his analysis of how he would avoid driving the concentration of CO2 from around 400 ppm where it currently is up into the 600 to 900 ppm range over the next couple generations. We face choices that are complex. All solutions will have problems. That doesn’t mean we can not be responsible for our actions at this point in time.
Jon Murphy
Oct 24 2019 at 10:27am
There’s a lot to unpack here, James. First off, you have a contradiction:
These two contradict one other. Given there are restrictions on dumping in water, then the disposing of waste into the air is not free. Its cost is dumping it in the river (remember the definition of costs! The next-best alternative). The cost of these regulations already on the books needs to be taken into account when discussing carbon taxes (as well as other Coasian bargains and Pigouvian taxes).
Second: recognizing public choice issues does not imply “we need to remove all restrictions…” Those regulations may be justified, but merely citing the fact an externality exists does not in and of themselves justify the regulations. Public choice is not an argument for anarchy, but it is an argument for a high burden of proof for government involvement.
Agreed. Which is precisely the argument against ham-handed regulation and taxation. All solutions have trade-offs. And considering these, and the necessary requirements for the regulations to work, are important.
Agreed, but no one is saying otherwise.
One final point
That’s the problem. Locking yourself into a single approach is doomed for failure; this is not a “my way or the highway” situation. There are always alternatives (one of the great lessons of economics). Just because you cannot see alternatives does not mean they are not out there. A system that encourages entrepreneurship (both the discovery and acting upon new opportunities) will find new alternatives.
Dylan
Oct 24 2019 at 12:06pm
Speaking of unpacking, can you unpack this a little bit, as I’m not seeing the contradiction specifically here. Let’s say we’ve got a coal power plant, with no constraints (either in the form of regulation, or some kind of Coasian bargain) it will be best served by polluting in multiple ways, both through contaminant runoff into streams, and by CO2 and other pollutants in the air. We’ve now regulated it so that it can’t pollute into the streams, how does that add a cost to the air pollution part of its business? I’m not familiar enough with the details of coal power generation, but I’d imagine it is potentially possible that in the presence of regulation on stream pollution, but not air, that a factory could be converted and that some of what had previously gone into streams would now go into the air (much of which would eventually make its way back to water anyway). But I don’t see how imposing a new cost on the stream pollution does anything to change the cost of putting CO2 into the atmosphere. What am I missing?
I believe we had a similar discussion before, and the idea is that the cumulative regulation imposes a total cost on the business, and that will lead to a lower output than we would have with no regulation, and that needs to be taken into account. But what I don’t think I got an answer to, is, doesn’t current attempts to estimate the externality costs of CO2 emissions already take into account the status quo? Estimates are trying to figure out what the marginal cost of a ton of CO2 emitted into the atmosphere is, which by necessity has to take into account what is already in place.
James Tolbert
Oct 24 2019 at 12:45pm
Jon, I think we agree on a lot.
My analogies aren’t perfect – fully agree with that. There are similarities between collectively deciding what is permissible for air emissions and water emissions and ground emissions. Often viewing actions from a different setting helps bring new perspectives – and sometimes the analogies simply don’t work.
I fully agree that considering alternatives is important – that is why I expressed an interest in having David define what alternatives he would propose – and having some dimensions of how we would evaluate those options – are they effective at reducing emissions and other secondary consequences.
I hold that we need libertarian, free market supporters putting forward solutions that will lower emissions instead of simply putting out critiques. Again, just asking for the solution – or a clear statement by the author stating he does not think we need to act or that we are not responsible for the impacts on others that our actions cause.
Thaomas
Oct 25 2019 at 1:05pm
I do not see the contradiction in James statement that you do. He compares dumping waste products into a river with dumping dumping waste products into the air. Could you explain the contradiction you see?
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