Yet more carbon tax

TL;DR: nothing new to see here.

Anyway, I was pushing my favourite theme, How to decarbonize? More free market! and to my absolute astonishment it didn’t go down terribly well. A number of questions in the comments were re-hashing stuff from Carbon tax now but no-one ever re-reads old blog posts just because I link to then, so I’ll repeat myself.

When I say, or rather imply, that everyone hated it I’m not being accurate. Eli offered The goal is a system which can minimize gaming. Trading schemes maximize gaming, A broad tax does does a much better job of minimizing it which is a pretty good summary.

Disclaimer: I’m going to have to venture into economics, which I don’t understand. If you don’t like that, go argue about carbon taxes with someone who does.

Free markets

In the course of comments, rc made what was (to me) the novel assertion that a carbon tax wasn’t very free market; for example “If you don’t consider ETS a “free-market solution” then neither is a carbon tax, which is arguably less free-market”. That seems to me obviously wrong, but perhaps not everyone agrees what a free market is. I’ll use Wikipedia’s definition

A free market is a system in which the prices for goods and services are set freely by consent between vendors and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority. It is a result of a need being, then the need being met. A free market contrasts with a regulated market, in which government intervenes in supply and demand through non-market methods such as laws creating barriers to market entry or price fixing. In a free-market economy, prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy…

Adding on a tax to prices is clearly an intervention, but arguably the minimal possible one; in particulalr I think it satisfies “Friedrich Hayek argued in The Pure Theory of Capital that the goal is the preservation of the unique information contained in the price itself”. So before you read free from any intervention too literally, look at Laissez-faire where we have

Laissez-faire (/ˌlɛseɪˈfɛr-/, French: [lɛsefɛʁ] ( listen)) is an economic system in which transactions between private parties are free from government interference such as regulations, privileges, tariffs, and subsidies.

Note that taxes are not one of the things being listed as transactions having to be free from. And note that no-one (apart from the most wild-eyed of libertarians) is proposing markets that are entirely unregulated; most would accept, say, food safety standards quite happily. “Free market” is short hand for either “desire for minimal govt intervention” or “less govt intervention”, in most discourse. Like here.

By contrast to a carbon tax a carbon trading scheme requires more government intervention. But, as wiki says, it is still a market based approach. The problem is that it either requires pre-allocation of permits – which is inevitably gamed, and is subject to pols interfering, see the ETS – or an auction every now and again, and has the problem of who sets how many permits are to be issued. I don’t think the generally perceived success of the US Acid Rain Program can be used to conclude that a similar scheme for CO2 would be effective1.

But it might not reduce emissions!

KON says the goal is to reduce emissions & virtually *eliminate* the externalities – not make them simply economically pay for themselves. If producers and consumers are willing to pay the tax *without* reducing emissions has the tax succeeded?. This I did my best to cover in CTN so if you didn’t like what you read there you won’t like what I’ll say here, but never mind.

With cap-n-trade the Great and the Good get to decide what level of emissions is acceptable, and in theory permits are issued to this level. The ETS shows how badly this can work; arguably the Common Fisheries Policy shows similar. Allowing pols to set acceptable emissions levels seems to me to be doomed to be gamed to failure. But anyway, once you’ve done that, your job is done, and anyone worrying that the price of permits has fallen to low is stupid and has failed to understand what the system is for. That doesn’t stop people saying it; the sort of people who like ETS-like schemes like to keep fiddling, which is yet another reason for not having it.

With a carbon tax you work out what the externality is and charge people that (yes, I know it isn’t possible to work it out exactly, any more than it is possible to work out the correct emissions levels for permits exactly; it isn’t a problem; just set a level and (slowly) ramp it up (inevitably; in theory down is possible too) as required). In which case, people are paying up front the cost of their emissions, and you can no longer complain that they are getting a free ride. In this case, unlike cap-n-trade, you are not guaranteed emissions reductions. But anyone who thinks that cap-n-trade would actually guarantee reductions is fooling themselves.

Worrying that this might not reduce emissions is reasonable in theory but not in practice; no-one doubts that carbon tax levels of, what, $50 per tonne CO2, would reduce emissions.

But I’m still skating over the question of “what if you really do want to reduce emissions”. I think – but am not sure; I told you I don’t understand economics – that this really becomes a non-economics question. Wanting to reduce emissions, as a goal in itself, is non-economic. If you re-frame it into economic terms – say, wanting to avoid future damage to the Earth – then you’re back to the externalities. And all economics can do is require you to pay those externalities. Deciding you’re not happy with that – that you want the damage to be guaranteed not to occur – is a non-economic requirement. I think. Cue “ha ha that just proves economics have no soul” etc etc. But as a useful practical argument I think this is meaningless, per previous paragraph.

Timescales for externalities

In theory, externalities are calculated by integrating costs out to infinity, deflated by appropriate discount rates. In practice, no-one bothers, because so many other unknowns intervene that it would be a waste of time. I can’t see any point of trying to go beyond 2300, and indeed even that seems too far. We can’t possibly usefully try to plan that far ahead, except in the most vague and general terms. Even 2100 is pushing it. See discussion from 2009.

Notes

1. You might find carbontax.org/cap-and-trade-problems more convincing than my hand waving.

Refs

* From the Carbon Tax Center, A Call to Paris Climate Negotiators: Tax Carbon via VV’s twitter feed.
* The Problem of Carbon Tax Border Adjustments from IER. Disclaimer: I haven’t read it and I think they’re just trying to put you off.
* MMM makes some points I like in #15 about when you might prefer tax or cap; or even when you might prefer reegulation.
* Polluters’ Profits and Political Response: Direct Controls versus Taxes. James M. Buchanan, Gordon Tullock. The American Economic Review provided by DZ who also offers his Pigouvian taxes do NOT produce deadweight losses.
* Praise Canada, Finally Someone Does The Right Thing – Timmy, Forbes, 2016 / 10.

Advertisements

76 thoughts on “Yet more carbon tax”

  1. Actually history proves that efficiency will increase. Going a long way back recall that James Watt worked to increase the efficiency of the steam engine because the Newcomen engine was only economic at coal mines. Or look at books like the Catechism of the Locomotive that discuss how to run a steam locomotive in the most coal efficient manner possible, and hint that engineers were rated on this.
    Or look at the replacement of steam engines with steam turbines early in the 20th century taking the efficiency of conversion from 5-10% to the 20% range. (part of the reason the cost of hours worked per kwh has fallen so much)
    Also high oil prices made folks look at more efficient cars. So raising energy prices with a carbon tax will serve to push more efficiency accross the board, as the historical examples (all be it not taxes but…) show.

    Like

  2. Carbon tax schmarbon tax.
    Regulations, windmills, … whatever.

    It’s not about science and saving the planet.
    It never was.
    And once in a while, the science-y samurai accidentally open their kimono:

    “As Ottmar Edenhofer, the then co-chairman of Working Group III of the U.N.’s Intergovernmental Panel on Climate Change, put it a few years back:

    “We REDISTRIBUTE de facto the WORLD’S WEALTH by climate policy.”

    [He said it, but that doesn’t make it true; per https://en.wikipedia.org/wiki/Ottmar_Edenhofer he prefers cap-n-trade, which makes him silly -W]

    [2017 update: see-also VV’s http://variable-variability.blogspot.co.uk/2017/08/ottmar-edenhofer-climate-politics-redistribution-wealth.html -W]

    Like

  3. Um William, I’m pretty sure “tariff” and “tax” refer to the same thing: a government-imposed increase in the price of the item. David Roberts has been writing some good stuff lately at Vox on this stuff (look up drvox on twitter), particularly on what people seem to actually want in terms of policy. Nothing is ideal, and carbon taxes, while possibly part of the mix, maybe shouldn’t be the first priority…

    [I looked up tariff – did you? A tariff is a tax on imports or exports (an international trade tariff) -W]

    Like

  4. Arthur Smith has the right of it: tariff is just another name for tax.

    [No, it isn’t. I gave him wiki’s defn, you can have OED: A tax or duty to be paid on a particular class of imports or exports. How can we have an intelligent discussion when sensible people fail in their due diligence so badly? -W]

    If the tax is a percentage of the price then the information is preserved and this is certainly still a free market, although because of the tax presumably less of the item will change hands as the buyers’ costs have increased.

    Therefore a tax on carbon dioxide will have the desired effect. But a tax on carbon, a completely different substance which is solid at STP will have unwanted effects such as lowing the quantity of pencils and Boeing Dreamliners.

    Like

  5. In your discussion of how to best reduce emissions you never compare government regulation to either a tax or ETS. Did you just ignore that option because it’s ideologically impure?

    [No; because I think it is a bad idea. Inefficient, prone to capture by special interests, bad for the planet -W]

    I said that a carbon tax was a charade. A feelgood solution. After your previous post I’m more confident of that than I was before. You support a tax, but throw around discount rates of 5% while apparently not understanding what the discount rate is or how it’;s calculated. Here you use $50/ton as if that is somehow a ‘good’ tax.

    This would equate to a discount rate somewhere around 2.75%. Yet a survey of economists reveals this number is likely too large. From Drupp et al, Discounting Disentagled, 2015:
    “…our survey seeks the opinions of experts not only on the SDR itself, but also on the values of its components and determinants (r, δ, η, and g). This allows us to disentangle expert disagreement on the SDR into some of its fundamental constituent parts.

    The responses make for interesting reading. The mean (median) recommended SDR of our experts is 2.27 percent (2 percent). This is substantially lower than the mean (median) values 3.96 percent (3 percent) reported in the seminal survey by Weitzman (2001), yet the modal value of 2 percent is the same.”

    A discount rate of 2.27% would mean a tax closer to $75/ton – and that assumes the expert survey *itself* isn’t still biased low. We’ve seen their opinion halve the mean preferred discount rate in less than 15 years and recent work shows it could/should likely be lower yet. Moore and Diaz argue that the social cost of carbon may actually be closer to $220/ton. And Moore and Diaz worked under the assumption we would keep global warming below 2C – pretty optimistic if you ask me.

    BTW, your argument is very weak on the whole ‘free market’ idea. Of course it’s government intervention. The market is energy and fossil fuels are just one of the options. Taxing carbon obviously confers a competitive advantage on wind, solar, etc. The idea that a carbon tax is a ‘free market solution’ is laughable nonsense. You really need to lose the Austrian sunglasses – you might see reality a little more clearly.

    Now, when those supporting a carbon tax start talking about realistic discount rates and realistic tax numbers, then maybe I’ll be a bit less skeptical. As of now I see the proposed carbon taxes or an ETS as baby steps in the right direction when what we need are giant strides.

    Like

  6. Arthur – Hank Roberts and I both referred WC to the drvox columns on emissions policy in the previous post’s comments. WC’s response was : [But, why should I believe DR’s unsupported opinion? -W]

    Obviously he never read Grist.

    Like

  7. WC writes: “And all economics can do is require you to pay those externalities. “

    What? Economics isn’t a physical law. It’s a *social* science. Every economic policy is a political policy. Dozens of decisions in using an IAM are purely subjective. What’s the cost of a human life? What value do we use as pure time discount rate? How do we account for income inequality? Between nations, within nations? How do we account for past contributions to the problem versus current contributions?

    And economics can’t require anyone to pay the externalities – it requires a government to do that. A working government – not one of the failed states or libertarian fantasy states.

    Like

  8. Again recommending an alternate universe:
    http://clarkesworldmagazine.com/liu_11_14/

    “… the law imposed a heavy tax on goods entering the United States based on the carbon footprint of the method of transportation (since the tax was not based on the goods’ country-of-origin, it skirted the WTO rules against increased tariffs).

    Combined with rising fuel costs, the law created a bonanza for zeppelin shippers….”

    Like

  9. To explain this economics bit:

    “But I’m still skating over the question of “what if you really do want to reduce emissions”. I think – but am not sure; I told you I don’t understand economics – that this really becomes a non-economics question.”

    The point is not that we want to reduce emissions. We want the “right amount of emissions”. The Stern Review goes through this in great detail (as it also does this point: “In your discussion of how to best reduce emissions you never compare government regulation to either a tax or ETS. Did you just ignore that option because it’s ideologically impure?” As W says, it’s inefficient).

    There are damages from emissions, yes. We would therefore like to reduce them. But there are also benefits from the activities which lead to emissions. And we’d like as many of those benefits as we can while avoiding as much of the damage as we can.

    Thus set the tax at the damage from the emissions: this gives us the optimal amount of emissions. Note “optimal”, not none.

    Try the following mind experiment. I currently drive to get my sandwich every lunch time. This produces emissions. An ambulance taking a pregnant woman to hospital for a magnesium injection for pre-eclampsia. Same emissions as my lunch trip.

    The benefits of those emissions are in one case my lunch, in the other two lives saved.

    Now add a bit more: the value to me of driving for my lunch is less than the damage my emissions do. The value of those two lives is higher than the damage those emissions do. Now add our tax at the level of the damage of those emissions. I use yesterday’s bread to make toast for my sandwich. My emissions cease. The ambulance continues to run.

    We now have the optimal level of emissions. Things which produce more value, more human utility, than the cost of the emissions continue to happen. Things that produce less value, less human utility, than the cost of the emissions cease. We reach optimality.

    Sure, you can say that 95% of all emissions are like the lunch run not the ambulance. Which means that you’re arguing for a high carbon tax but you’ve still not changed the central insight: optimality.

    It’s all there in Stern.

    Like

  10. lyle:

    Actually history proves that efficiency will increase.

    Perhaps, but that doesn’t necessarily solve the problem – as William Jevons showed back in 1965, improved efficiency in the utilisation of a resource (in his case coal) very often leads to increased use of that resource. If we had never improved the efficiency of engines beyond that of the Newcomen engine, we probably wouldn’t be worrying about climate change, because we would never have bothered burning enough coal to make it an issue.

    Now, this is not to say that improved efficiency is not a good thing in itself – being able to achieve more utility for the same level of emissions is clearly a good thing.

    Like

  11. See Neovo,

    “We REDISTRIBUTE de facto the WORLD’S WEALTH by climate policy.”

    He wasn’t describing a goal. He was pointing out an obvious truth: Energy is big money. If you adopt policies which change energy production and consumption habits, that will very likely alter the distribution of wealth in the world. Much like the emergence of oil in the Middle East altered global wealth distribution.

    Like

  12. [I looked up tariff – did you? A tariff is a tax on imports or exports (an international trade tariff) -W]
    Yes, of course that’s what a tariff is, narrowly defined (or at least one of several definitions, and the closest to intended meaning). But are you seriously arguing that a “tax”, if not applied to imports and exports, is compatible with “laissez faire”? The phrase you quoted stated “free from government interference such as regulations, privileges, tariffs, and subsidies” – tariff and tax are close enough (tariff being a subclass of tax) that the “such as” phrase surely includes taxes of all kinds? Or is there some way in which a tax on imported goods is fundamentally different? I don’t see it!

    [are you seriously arguing that a “tax”, if not applied to imports and exports, is compatible with “laissez faire”? – do I look like an economist who is familiar with the exact technical definitions of things like LF? But seriously, LF is not one rigidly defined concept; it admits of degrees. Arguing that any tax anywhere within the economy makes it not-LF is equivalent to saying that nothing in the real world can be meaningfully LF; I can’t see how that is useful for discussion. tariff and tax are close enough – I’m dubious about that. Why say “tariff” if they meant “tax”? is there some way in which a tax on imported goods is fundamentally different? – of course: a tariff on imports discriminates between locally produced and foreign produced -W]

    Like

  13. Do you get less interference with a carbon tax? It occurs to me that pensioners spend much more of their income on heating. So if you just distribute carbon taxes equally per person, pensioners are worse off and cannot afford to live so you end up interfering giving a larger winter fuel allowance or something like that to pensioners. Doubtless other groups will complain they are also adversely affected. Do you end up with lots of interference that risks bringing you back to the previous situation but with lots of administration costs for the carbon tax and distributing that carbon tax money?

    [distribute carbon taxes equally per person – I don’t think you quite mean that. Assuming you mean: distribute taxes proportional to CO2 emitted: yes, there will be winners and losers. In this county pensioners get a pretty good deal in general so I wouldn’t want to see them bought off any more in reward for voting -W]

    Obviously you should try to make the distributions fixed amounts and not of some form that varies with fuel use, but would that succeed? To avoid varies with fuel use, you may have to give large fixed amount to pensioners to ensure you don’t make a lot unable to afford to live but this will make some pensioners a lot better off which might annoy the rest of the population.

    [I’d favour lots of things rolled up into a Basic Income. And, if I’m allowed to be idealistic, a society that doesn’t end up with pensioners shut up in their own houses all day -W]

    Like

  14. First, up front: I’m in the “tax and…” camp myself (e.g., a tax coupled with some amount of command-and-control regs, plus fundamental research, plus some other stuff).

    Having said that: there’s a literature on when taxes are appropriate, and when cap-and-trade is appropriate. It has to do with a couple of factors (beside political feasibility). The most important one is the relative uncertainty in the appropriate price vs. the appropriate emissions level: for example, if we know that there is a strongly non-linear damage function such that emitting 2.01 units of the pollutant is doomsday, but 1.99 is sunshine and cookies, then a cap beats out a tax hands down. A secondary issue is the question of stock vs. flow pollutant: e.g., if you emit too much one year, can you make up for it by emitting less the next year?

    In the case of CO2, I think both factors point to tax: we are uncertain as to the optimal level of emissions (even more so than we are as to a temperature target), and as a stock pollutant, if we underprice CO2 in early years, we can mostly make up for it later, whereas overpricing CO2 in early years leads to economic shocks that have permanent consequences.

    There’s also a thinner literature on the use of economic instruments vs. command and control: for example, the latter can be favored when it is very difficult to monitor emissions, but easy to monitor solutions. E.g., if we know that two methods of growing rice result in similar yields but different quantities of methane emissions, it might be simpler to just require that rice growers use the better method rather than trying to calculate the appropriate tax to charge.

    Of course, I did say “ignoring political feasibility” which is always the elephant in the room. I think there was a nice pair of papers by Stavins & Metcalf, where Stavins was assigned to defend cap-and-trade: see the policy paper links at http://www.hamiltonproject.org/events/a_climate_of_change_economic_approaches_to_reforming_energy_and_protec – in any case, I went to a talk by Stavins that indicated that in the process of writing the paper, he actually came to believe that cap-and-trade was a superior approach.

    Okay, back to work with me, but thanks for providing a forum to talk about this,

    -MMM

    [Thanks for that. I think those are worthwhile points, so I’ll add them as a ref -W]

    Like

  15. >”[distribute carbon taxes equally per person – I don’t think you quite mean that. Assuming you mean: distribute taxes proportional to CO2 emitted: -W]”

    Err no. I assume a carbon tax will be proportional to CO2 emitted (possibly with higher rates for CH4, CO, …). If you then distribute money raised from those carbon taxes proportional to CO2 emitted, you achieve nothing other than incurring administration costs.

    [Oh, sorry, you meant distribute the revenue raised by carbon taxes equally per person. It isn’t at all obvious that should be done. The default is to just throw the carbon tax income into the general tax pot. It doesn’t get redistributed equally any more than income tax revenue does -W]

    Like

  16. To PaulS #11:

    “He wasn’t describing a goal. He was pointing out an obvious truth: Energy is big money. If you adopt policies which change energy production and consumption habits, that will very likely alter the distribution of wealth in the world. Much like the emergence of oil in the Middle East altered global wealth distribution.”

    Here’s another obvious truth:
    Organized crime is big money. And organized crime adopts (coercive) policies which change production and consumption habits, that will very likely alter the distribution of wealth in the world.

    Also, your Middle East oil analogy is invalid. The only reason the ME produces oil is to make money, and in a free market other people and countries are willing to pay for that oil because they want and need it. This exchange, *freely engaged in*, is *not* a zero-sum game but rather a win-win. It fuels an oil-reliant industrial boom that has *increased the wealth* of the entire world.

    Like

  17. Organized crime is big money. And organized crime adopts (coercive) policies which change production and consumption habits, that will very likely alter the distribution of wealth in the world.

    So?

    Also, your Middle East oil analogy is invalid.

    It’s completely valid for the point you introduced. You may be trying to change the subject, but that’s another matter.

    The only reason the ME produces oil is to make money, and in a free market other people and countries are willing to pay for that oil because they want and need it.

    That’s clearly not the only reason. If it were, why don’t other regions of the world produce lots of oil? The reason the ME produces oil is an accident of geography/geology, which has diverted a flow of wealth into a region which was previously very poor – wealth redistribution. I suspect most countries would prefer not to be purchasing oil from the Middle East, dealing with countries which have questionable human and civil rights records. They are coerced by this accident. Is it somehow preferable to have an accidental coercive redistribution?

    This exchange, *freely engaged in*, is *not* a zero-sum game but rather a win-win.

    Countries are freely signing up to engage in climate policy. Whether something is a zero-sum game is irrelevant to whether it redistributes wealth.

    Like

  18. IANAE but if a market activity generates a negative externality , then (by definition) the external cost is not reflected in the price and will generate an inefficient market outcome, because the market activity is (effectively) subsidised. A carbon tax just corrects this and makes sure all the costs are included in the price.

    Like

  19. So I thought the “tariff” vs tax business was crystal clear, but apparently not to WMC. I know this is a bit of trivia, but I think it’s helpful to illustrate that what we may commonly assume may not actually be so.

    Let’s delve into the question of ‘Why say “tariff” if they meant “tax”?’ with first – who is saying this? From the wikipedia article’s history, the word “tariff” (under various spellings) has been there with no citation to back it up since this edit by one Rick Norwood, October 31, 2009 – where the original wording stated: ” … allowing industry to be free of government restriction, especially restrictions in the form of tarrifs and government monopolies.” Monopolies seem to have disappeared in the definition since then and been replaced with a list of other items like regulations and subsidies, but “tarrifs” or now “tariffs” has remained. Wikipedians are a conservative lot, I’ve found (i.e. if a word or phrase is adequate, there’s no need to replace it).

    So is a tariff really considered a special form of taxation for free-market purposes? What do other sources say? Investopedia puts it this way: “Government involvement, according to this economic theory, would include any type of regulation, minimum wage, taxation, or oversight. Laissez-faire economists see taxation on companies as a penalty for production.”

    USLegal.com states somewhat ungrammatically:
    “Laissez-faire economic theories resist government intervention in setting economic policies through it laws, regulations, subsidies, tariffs, taxes, and other trade barriers.” which smacks of being partially stolen from wikipedia, but note that “taxes” was added to the list.

    The very wikipedia page WMC pointed to says, further down, “To maximize freedom and allow markets to self-regulate, early advocates of laissez-faire proposed a Impôt unique, a tax on land rent to replace all taxes that damage welfare by penalizing production.” with a citation this time. It also includes the statement “Following World War I and the Great Depression, the United States turned to a mixed economy, which combined free enterprise with a progressive income tax,” – both of which indicate any tax on production or income is incompatible with laissez-faire.

    I could go on, but I think the evidence is clear: to free marketeers, a tax is definitely on the list of unacceptable government interventions.

    [I think that’s all rather odd; let’s just say we disagree to avoid further unpleasantness -W]

    Like

  20. I’m an enviro economist, and you’re discussion looks fine. In terms of “we want to reduce carbon JUST BECAUSE” you may have more of a claim for a political intervention to protect a non-excludable good (the atmospheric carbon commons) than an intervention in markets in which people are consuming “too many shoes”. It is the externalities that matter, and they can be reduced under “right pricing,” as you say. I say more here: http://www.aguanomics.com/2013/01/pigouvian-taxes-do-not-produce.html

    [Thanks; I’ve linked to that in my “refs” -W]

    Like

  21. Dr. Connolley,

    I think I can summarize my issues raised in the last thread by pointing at the title: “How to decarbonizes? More free market!”. My two issues were directed towards the two different sides of that title. My first issue, which was more semantic, had to deal with the latter part of the title – I could not see how a carbon tax was “more free market!”. My second issue, which was more significant, had to deal with the former part of the title – a carbon tax alone will not lead to net zero emissions (i.e. decarbonizes).

    With regards to the first issue, I feel I understand your position better. I think part of my confusion stems from thinking about our “base case” market as a market with neither a cap-and-trade system nor a carbon tax (i.e. most markets outside of Europe). In this case, going from that market to a market with a carbon tax (or cap-and-trade) is clearly not “more free market” but less. It seems your “base case” market is a market with cap-and-trade (i.e. a European market). In which case, I can accept (with some grumbling about details) that going from your base case market to a market with a carbon tax but no cap-and-trade might be “more free market”.

    Nevertheless, the point remains the same – the market requires some form of intervention to guide it towards decarbonization. Well this might be “fine” from a free market perspective, to argue it’s “more free market” is still strange to me. But, as I said, this is mainly semantic, so I’ll drop it.

    My second issue is perhaps more pronounced after reading this post. You went from saying: “How to decarbonizes? More Free Market!” to “Wanting to reduce emissions, as a goal in itself, is non-economic.” I suppose you mean that it’s not just reducing emissions but reducing damages caused by emissions.

    [No, that’s not it. This is a point that people find very hard to grasp, it seems. See what I said, and what Timmy said (he knows this better than me). A carbon tax means that you have to pay for the damages upfront. It means that the complain that you’re polluting “for free” no longer applies. It doesn’t, of itself, reduce damages (other than by making it rather likely that people will choose to emit less CO2). But the point is they get that choice. Try reading Timmy’s excellent example again -W]

    Ok. So a carbon tax makes you “pay” for those damages. Those that are willing to pay, can pay. Those that can’t, can’t. Unfortunately, those that do the majority of the consuming (i.e. direct and indirect emitting) aren’t the ones that have to live with the damages. Those that don’t, are.

    [Yes, but if the people that do the emitting have paid upfront for the costs of those emissions, the complain that they “aren’t the ones that have to live with the damages” doesn’t mean very much. I tried to express this in a previous post, but I’ll try again: there are two ways you can in law try to deal with people doing damage: you can forbid them from doing so, or you can make them pay for it. For example, if you kill someone, you can’t pay weregeld and get let off the damages. There’s a strand of thought that wants to apply that kind of thinking to CO2. That isn’t necessarily wrong – though its not the approach I want to take – but if that’s how you’re thinking, its important for you to realise it -w]

    At best, we could use revenues of carbon taxes to pay for the adaptation (…and wouldn’t this be considered a very non-free market redistribution of wealth?).

    [Yes. Again, people get confused and assume that carbon taxes would be hypothecated for pet projects; that’s probably a bad idea. A better idea – particularly for selling it to the public – is to make them revenue neutral: promise to reduce general taxation by the amount that carbon taxes bring in -W]

    However, it’s hard to throw a cheque at, for example, future mass forced displacement caused by climate change and claim everything ended up fine. That’s where this becomes a problem for the free market to solve.

    [Indeed. None of the argument I’ve presented so far deals very well with the problem that costs and benefits are unevenly distributed in space and time -W]

    Let me wrap up with three questions:
    1 Do you feel getting to near net zero emissions should be a societal goal?
    2 Do you feel that a carbon tax alone will get us to near net zero emissions? (if “yes”, how?)
    3 Assuming that you don’t, do you feel that additional reductions in emissions can be better achieved by instituting more free market or more regulation?

    I don’t mean to try and back you into a “yes” or “no” answer but I have yet to get a clear answer on these questions.

    [I think we’re currently so far away from 1 that its not worth getting tied up in disputes about ideological purity; the best is the enemy of the good and so on. I think (even with how badly messed up the world’s, the EU’s, and in particular the USAnian’s, pols are the best thing to argue for is a carbon tax, which is why I do. And to partially answer your last point, I find it hard to imagine any intervention more free market than a carbon tax; in particular, cap-n-trade is far more intrusive -W]

    Like

  22. Tim Worstall @9:

    Two problems with the thought experiment – (1) a carbon tax doesn’t necessarily lead you to the “optimal amount of emissions” and (2) there’s a fairly clear way to get near zero emissions and be able to do both in that scenario.

    To the first problem, a carbon tax doesn’t stop me from driving to buy lunch, it just means I have to pay a little more for it. Frankly, right now I still have to pay a little more for it than not doing it. A carbon tax might persuade some to not drive to buy lunch (which is why I think a carbon tax is a good first step) but it doesn’t necessarily (which is why I think a carbon tax, alone, isn’t enough). I think we need to remind ourselves that consumers are not the perfectly rational agents economists sometimes treat them as. The value of convenience is a powerful(ly irrational) thing.

    To the second problem, neither trip requires a gas powered car (or an electric car plugged into a gas powered grid). They likely do now but that’s kind of the point. Incentivize the development of electric powered cars and renewable powered grids and de-incentivize the use of gas powered cars and grids (through carbon tax) to the point that electric cars and renewable power are a suitable replacement and you can start ramping up bans on gas powered cars and gas powered grids. That ain’t “more free market!” though. That does, however, get you closer to a decarbonized society AND you can both drive to buy lunch and have the ambulance save lives.

    Like

  23. Decarbonize? No more pencils, diamonds or Boeing Dreamliners?

    How about stating what you really mean and give up the misleading slang? End excess carbon dioxide emissions.

    Like

  24. To PaulS #18:

    Me: “Organized crime is big money. And organized crime adopts (coercive) policies which change production and consumption habits, that will very likely alter the distribution of wealth in the world.”

    You: “So?”

    So, my analogy wasn’t clear enough, apparently.
    The Climate Change Cabal, is not only like Organized Crime, it also is big money.
    And the Climate Change Cabal, like Organized Crime, adopts (coercive) policies which change production and consumption habits, that will very likely alter the distribution of wealth in the world.

    It is a forced, unfair, zero-sum, destructive redistribution of wealth.
    It is the opposite of the fair, non-zero-sum, wealth-building flow of money and wealth in a free market.

    Me: “Also, your Middle East oil analogy is invalid.”

    You: “It’s completely valid for the point you introduced.”

    No it isn’t.
    The ME oil market is in line with what I said directly above.
    It is not like the Climate Change Cabal’s forced, unfair, zero-sum, destructive redistribution of wealth.
    It is the opposite – a fair, non-zero-sum, wealth-building flow of money and wealth in a free market.

    All wasted words, I guess.
    You apparently are unable to distinguish the profound difference between forced wealth redistribution and free wealth creation.

    Like

  25. Tim Worstall writes: “Things which produce more value, more human utility, than the cost of the emissions continue to happen.

    Do they? Really? Ever heard of wealth inequality? Perhaps the wealthy will continue to drive to lunch while poor women die waiting for the bus to take them to the hospital.

    This is typical of theory versus reality. In theory, people are rational – even politicians (and maybe economists). We don’t live in this theoretical fantasyland.

    In theory a pigouvian tax is more efficient – not more moral, not necessarily better for society, and most assuredly regressive. If this is the best justification for a carbon tax – that it’s more efficient – then when did efficiency become our new Mammon?

    I asked a simple question in the previous thread. The simple answer is, no. We’re not interested in efficiency. We’re interested in preventing global temperatures from reaching dangerous levels. We can only do this by reducing emissions (or waiting for the carbon removal fairies).

    You would think that recent history would give some people pause in glorifying the price setting ability of markets. Complete market failure is apparently a feature – not a bug.

    Like

  26. Kevin –

    Indeed. Worse than that is a simple lack of information. As in ‘How much does it cost me to drive to lunch’. Or even more meta ‘Will spending more to get a fuel efficient car be worthwhile given my expected driving patterns combined with expected fuel tax rates over the next decade?’.

    We already know from real world experience that it takes quite drastic fuel taxes – equivalent to something in the region of £300/tonne CO2 – to shift fuel economy modestly over a couple of decades. Timmy’s ‘mind experiment’ has actually been performed in the real world, with poor results (at least as far as decarbonisation goes).

    I’m an energy geek – I have real time monitors for both consumption and generation at home, but even then I’d struggle to say how much a particular action costs me, and timing usage for peak generation is often a pain. Let alone natural gas usage; with direct debits varying by +-30% due to the whims of the power company and annual usage varying by a similar amount due to the weather, a carbon tax would have to be pretty extreme – amounting to a 50%+ bill hike – to even be noticeable, let along actionable.

    Quite simply, for domestic energy use in the real world, the price mechanism is a poor driver of behavior and inefficient transmitter of information. Industrial users may tell a different story; they can pay people to analyse energy use and costs and tailor behavior accordingly.

    So.. a carbon tax by all means, it’s going to shove things in the right direction. But to expect it to achieve significant decarbonisation on useful timescales is unrealistic.

    Now, if we use carbon tax revenues to directly build zero-CO2 infrastructure – nuclear plants, electric cars, electric home conversions, grid upgrades, synthetic fuel plants etc – then it would work. But apparently, picking the only solutions that are physically likely to work is inefficient.

    Like

  27. Quite simply, for domestic energy use in the real world, the price mechanism is a poor driver of behavior and inefficient transmitter of information.

    That’s a very good point – for example, we know that many people pay well over the odds for their domestic energy simply because they can’t be bothered with the hassle of finding a better deal, so taxation is probably not a good way to encourage them to undertake significant (and expensive) home improvements. (If they can even afford them in the first place.)

    It’s also worth bearing in mind that people’s practical ability to reduce their emissions is limited in many ways. You simply can’t retro-fit the typical British house to passivhaus standards, no matter how much money you have to throw at the problem (and a great many people have exactly no money to throw at it). The ever-growing ranks of renters can’t do a damn thing to improve the energy efficiency of their housing, and very few landlords will do so, because for them, it’s a cost with no benefit. Many people can’t easily reduce their transport needs, because of the way we’ve constructed our towns and cities. Until these sorts of structural issues are addressed, all the carbon taxation in the world isn’t going to change anything.

    Like

  28. Dr. Connolley,

    From time to time it seems you are lumping me in with other posters with similar positions. Please note that I have repeatedly said I fully support a carbon tax, largely for the same reasons you do. I think it’s a great first step. I think it will reduce emissions somewhat. I look to British Colombia as a great example of revenue neutral tax. Where you and I differ is on the “and then what?” question.

    “A carbon tax means that you have to pay for the damages upfront.” – W

    Maybe. Yes, if you are using all the money to fund an adaption piggy bank or funding other emission reduction measures. No, if you are using the money to offset other taxes.

    [Ah, hold on, you’ve misunderstood “you have to pay for the damages upfront”. A carbon tax means that the person doing the damage has to pay the costs of the damage upfront. It does not mean that “you (the person / govt receiving the tax revenue) gets to pay for fixing the damage upfront”. that’s totally different -W]

    In the latter chase, the carbon tax is purely a deterrent. (FWIW, I’d advocate for a blend of the two). The problem then becomes that a carbon tax alone neither ensures emission reductions nor does it ensure financial support/protection/reconciliation for future damages (because you’ve already spent some/most/all of the money on other things).

    [The first is true, but I argue not very meaningful, because nothing else does either. Certainly not our toothless gameable cap-n-trade. The second is true, but not relevant to the points I’m making -W]

    Those are two of the main reasons I feel that a carbon tax, on its own, is not a solution to climate change – you need something more.

    “promise to reduce general taxation by the amount that carbon taxes bring in” – W

    See above. If that’s the case, then a carbon tax absolutely does not “mean that you have to pay for damages upfront” because your money isn’t being used to pay for damages nor does it guarantee that we have the money to pay for damages at the time.

    [Again, you’ve misunderstood what I wrote; see first reply -W]

    “Try reading Timmy’s excellent example again” – W

    Indeed I have. Perhaps you hadn’t yet seen my response to him. It certainly is in keeping with your view (and I think you’ve done a good job representing his). My issues with his post are much the same as my issues with your post.

    [I saw your reply, but I think it was besides the point. You said a carbon tax doesn’t stop me from driving to buy lunch, it just means I have to pay a little more for it to which the answer is “yes, exactly, that’s the point. It gives you the choice. Emit and pay, or don’t emit and don’t”. You still seem to be stuck on your-view-of-carbon-taxes which is that you seem to be insisting that they guarantee reductions. Since they don’t, then if that’s an absolute demand on your part, you’re obliged to reject carbon taxes -W]

    “None of the argument I’ve presented so far deals very well with the problem that costs and benefits are unevenly distributed in space and time” – W

    I appreciate this.

    “the best is the enemy of the good and so on” – W

    Agreed. That’s why I support a carbon tax. I think it’s a great, relatively simple, relatively effective first step. See my first point.

    “I think we’re currently so far away from 1…” – W

    I agree with most of this response but it largely ignores what I was trying to get at – what is your answer to “carbon tax now! and then what?”.

    [It *is* my answer to that point -W]

    Right now, by reading your posts (and Tim’s), I assume your response would be “nothing”. That might not be true – which is why I’ve continually tried for clarity.

    (For my own rough answer to that question, see my response #23, starting with “Incentivize the development…”. Of course it’s lacking in details but I don’t claim to have the answer. I do, however, feel strongly that we should very seriously start discussing the “and then what?” question.)

    Like

  29. Dunc,

    It’s also worth bearing in mind that people’s practical ability to reduce their emissions is limited in many ways. You simply can’t retro-fit the typical British house to passivhaus standards…

    Say we increase power costs. That makes renters more price-sensitive to the energy consumption of their rentals. I just moved to a new place, and you can be sure I asked the previous tenants about what their bills were like.

    If renters can’t ameliorate the costs (with, say, LED lighting), then higher-energy rentals will be in less demand. Landlords will have to lower prices or refurbish. And yes, you do see this in the US, where old houses with crappy insulation are able to charge less than newer places or apartments.

    This also drives changes in the real estate market for new houses and rentals. It’s much easier to make energy-use-oriented changes when you first construct a building than later, and higher energy costs for old buildings will drive demand for newer, more energy-efficient buildings.

    Those higher costs for refurbishing vs doing it right the first time is one reason we need to get started ASAP. Every new building constructed without good energy efficiency is essentially leaving money on the table.

    So, I really do think the price mechanism really is the best way to distribute the cost of emissions throughout the economy. Most people are price-conscious. Certainly the cost of gas influences what models of cars are sold.

    So I don’t think you can say both ‘people don’t have money to renovate’ and ‘people will be insensitive to cost changes’. If the money matters to them, people will do a better job of pushing for change by themselves than you or I can do by imposing it from above. And they’ll do a better job of finding the solutions, too, in collaboration with new business ideas that take advantage of the new markets created by higher energy costs.

    Like

  30. All laws are regulations, therefore, I would think all who chafe at regulations are saying, every law is an enemy of freedom.
    According to some people, anyway. It’s oversimplified.

    Like

  31. Dr. Connolley,

    The discussion has gone like this:
    (1) WC: “How to decarbonize? More free market! (i.e. carbon tax)”
    (2) RC: “I agree carbon taxes are a good start but X is a reason carbon taxes are not, alone, enough to address climate change. What else do you think is needed?”
    (3) WC: “You don’t understand. Carbon taxes were never designed to do that.”
    (4) RC: “I know it was never designed to do that, that’s the point. By not doing that, a carbon tax fails to be, alone, enough to address climate change. What else do you think is needed?”
    (5) WC: “But it’s better than ETS!”
    (6) RC: “I know, I’ve never disputed that. But that misses the point, a carbon tax alone is not enough to address climate change. What else do you think is needed?”
    (7) WC: “That’s besides the point.”
    (8) RC: “How? What is your point?
    (9) WC: “How to decarbonizes? More free market! (i.e. carbon tax)” (return to 2) or “ETS < carbon tax” (return to 5) or “carbon tax is good” (return to 2)

    Do you see how I might think you’re evading my main point?

    You have agreed that a carbon tax (1) won’t ensure emission reduction and (2) won’t ensure financial support for future damages. Do you then agree that makes a carbon tax, alone, not enough to address climate change? (KEEP IN MIND: we both agree that ETS < carbon tax and carbon tax = good start) If yes, explain how those two issues don’t contradict your “yes”. If no, what more needs to be done?

    [We both agree that carbon taxes are a good start. What I haven’t said explicitly, but which follows from the failure of e.g. the ETS, is that we are just starting. So, how about we just try to get to the good start, before worrying too much about what comes afterwards? -W]

    Like

  32. To Russell the Stout #33:

    “All laws are regulations, therefore, I would think all who chafe at regulations are saying, every law is an enemy of freedom.”

    Not really.
    Laws are passed by the voters’ representatives.
    Regulations, on the other hand, are written by un-elected bureaucrats.
    And regulations (like executive orders) can often pervert the original intent of the laws or contradict Constitutional rights. Example: http://www.washingtontimes.com/news/2011/aug/31/epa-regulations-violate-constitutional-rights/

    The regs get into the details.
    And, as they say, the Devil’s in the details.

    And the Devil never runs for office.
    At least not under that name.

    Like

  33. >”[ It doesn’t get redistributed equally any more than income tax revenue does -W]”

    In other words, the knock on effects of your nice clean non-intervening carbon tax mean you start intervening.

    http://www.vox.com/2016/4/26/11470804/carbon-tax-political-constraints

    “The obvious answer is that carbon pricing faces various political constraints”

    Article seems to be saying on its own carbon tax is unpopular – no real surprise there but suggests most popular use is for clean energy rather than reduce other taxes.

    “This bothers economists, who believe that carbon prices should be uniform across the economy, but as Jaccard says, that’s politically daft. If we can’t get to the carbon price we need explicitly, why not do it implicitly, where we can? Voters certainly seem more amenable to it.”
    seems interesting. Do you view that as intervening?

    [The article, in general, is rather rubbish, starting from its first sentence “A consensus has formed among economists, climate wonks, and progressives that a carbon tax is the best way to address climate change.” The consensus amongst economics has existed for ages. I’ve no idea what constituency “climate wonks” is. I don’t think progressives are lined up behind a CT. So, a poor start. It then continues with the vacuous: that to get a CT involves politics. The three options for why-opposition aren’t carefully thought out. As I read the article, it purports to “believe” CT but is actually just arguing in favour of regulation, which is dull. Its just yet another why-not-do-my-favoured-thing-rather-than-the-best-thing. I don’t really understand why people think DR is worth reading -W]

    Like

  34. rconnor,

    By not doing that, a carbon tax fails to be, alone, enough to address climate change. What else do you think is needed?”

    To “address climate change”, we just need to make sure that whatever we emit is worth the cost. Meaning, that the economic benefits are greater than the economic damages.

    And that’s what the carbon tax is designed to do. It raises the cost of emissions enough to cover their damages. When it’s still worthwhile for people to emit that carbon, they will. When it’s not, they won’t.

    That’s generally the correct way to approach economic issues like pollution. You don’t try to get rid of them entirely; you make the polluters pay for the cost of the pollution.

    Like

  35. Windchasers,

    “Meaning, that the economic benefits are greater than the economic damages.”

    This sounds nice and all but it gets a little tricky when your trying to put a price on the social, political and cultural impacts of the massed forced migration caused by the Indonesian Islands being underwater.

    “It raises the cost of emissions enough to cover their damages.”

    It becomes even more tricky when all that money you charged people (in the USA) for actions that led to having the Indonesian Islands underwater was spent on tax breaks (in the USA) decades before.

    It’s a good start but it ain’t going to “address climate change”.

    Like

  36. My post probably wasn’t necessary, pointing out Russell’s Law, that any sober discussion of economics will be invaded by anarchists.

    Like

  37. Krugman agrees with David Roberts and Krugman – unlike WC and TW – doesn’t mistake the tool for the goal:

    So I’m with Roberts here: do whatever is likely to work. Don’t insist that a perfect, Econ 101 revenue-neutral carbon tax is the only way to go. A mix of regulations, dedicated taxes, subsidies, whatever, as long as it makes a big difference to emissions is just fine.”

    That was the whole point of my question in the previous thread; if it doesn’t reduce emissions it has failed – econ theory be damned. We know climate-wise the situation we’re in and what’s likely ahead of us. Somehow believing we’ll actually pay for damages in a BAU world is a fantasy. The damages are obscene both morally and fiscally. Anyone that wants to contemplate a +3 or +4C world and tell me we can pay for the damages is smoking some good shit.

    No, the goal is to reduce emissions and economic policy simply offers tools (carbon tax, regulations, ETS, whatever) to accomplish the goal. Others see efficiency of the tool as the goal. Myopic.

    Like

  38. Kevin O’Neill, quoting Krugman:

    “So I’m with Roberts here: do whatever is likely to work. Don’t insist that a perfect, Econ 101 revenue-neutral carbon tax is the only way to go. A mix of regulations, dedicated taxes, subsidies, whatever, as long as it makes a big difference to emissions is just fine.”

    Exactly. The focus should be on “whatever is likely to work”, in the prevailing political environment. I’ve been advocating a revenue-neutral carbon tax in public fora, not because I think it’s the only way to go, but because I thinks it has the best chance of getting past the anti-regulatory, small-government ideology of the Republican majority in the current US Congress. Personally, I favor Hansen-style tax-and-dividend proposals, with some way to mitigate impacts on lower-income consumers; I was surprised by Dave Roberts’ contention that tax-and-dividend polled the lowest support of five uses for the revenue from a carbon-tax. I presume it depends on how the poll was conducted.

    In any case, I’m flexible. I’ll support “A mix of regulations, dedicated taxes, subsidies, whatever, as long as it makes a big difference to emissions”, that is, as long as it’s politically feasible. If “politics is the art of the possible”, then I see my role as helping to persuade US politicians that decarbonization is possible.

    Like

  39. WMC,

    What about the approach of the Clean Energy Finance Corporation (Aus)? Think you might find it acceptable.

    Gov corporation investing in, and facilitating (eg, providing analysis of projects to banks) investment into renewables and energy efficiency measures.
    Higher risk-reward ratio than private corps.
    Aims for profit. Actual average profit = 7%p.a. ~$200m/yr (Old figures (2013).)
    Addresses other market failures (imperfect knowledge, takes account of positive externalities).
    Gov spends $1 gets $2.20 in private investment.

    Unfortunately, conservative party has tried to kill it multiple times. So despite claiming a budget emergency, they want to throw away a handy $200m each year.

    From wiki
    “CEFC Chairperson Jillian Broadbent [begged] the government to “break an election promise” and keep the CEFC in operation citing a 7% profit. Senator Sinodinos said that if it’s making a profit, it should survive without the government* and essentially confirmed the government will shut the corporation down. In July 2015, Tony Abbott announced he would ban the corporation from investing in wind power and rooftop solar**.”

    * “The Corporation applies a commercial filter when making its investment decisions, focussing on projects and technologies at the later stages of development. THE FILTER IS NOT AS STRINGENT AS THE PRIVATE SECTOR EQUIVALENT, as the Corporation has a public policy purpose and values any positive externalities being generated.”

    ** These were the areas generating most profit (actually not certain about rooftop solar – just an assumption).

    Be interesting to know the success of similar organisations around the world. Just like the ETS, could be good or bad depending on the details.

    [There’s some role for this kind of thing, but as you see it is rather vulnerable to “if it’s making a profit, it should survive without the government” type arguments. $200 m isn’t a lot, so to do it as an experiment is reasonable. You have to be careful that it doesn’t turn into the govt channeling money into pet projects -W]

    Like

  40. Dr. Connolley,

    “So, how about we just try to get to the good start, before worrying too much about what comes afterwards?” – W

    Fair enough.

    Understand that my persistence (read: annoyingly long replies) is becomes I feel “what comes afterwards” is very important. Furthermore, I think it will almost certainly result in less free market, not more. This is pretty easy for me to accept but I feel you will have a much more difficult time. The “what comes afterwards” will undoubtedly pit your free market ideology against your desire to address climate change.

    I tried to press for your thoughts on that, as I don’t come across too many free market enthusiasts that are also avid supporters of climate change mitigation. Fewer still have a level of understanding of the matter that you do. So thank you for engaging my questions. Your time and efforts on this matter are much appreciated. I certainly learnt a fair bit about the free market perspective towards combating climate change.

    All the best.

    Like

  41. > I don’t come across too many free market enthusiasts
    > that are also avid supporters of climate change mitigation.
    > Fewer still have a level of understanding of the matter …
    > So thank you for engaging my questions.
    > Your time and efforts on this matter are much appreciated.

    +1

    Like

  42. Arrgh, post first, then read the other comments to find out you are the second ^w third ^w fourth ^w fourth(!) mentioning the same story. Sorry.

    [It is a good story and bears repeating 🙂 -W]

    Like

  43. rconnor:

    I don’t come across too many free market enthusiasts that are also avid supporters of climate change mitigation.

    There are at least a few people calling themselves libertarians who are not AGW-deniers. Former Cato Institute Vice President Jerry Taylor is the author The Conservative Case for a Carbon Tax. From the Executive Summary:

    Arguments that unilateral action by the United States produces little climate benefit, that a carbon tax will expand the size of government, that a carbon tax is regressive, that adaptation and geo-engineering is preferable to emissions constraint, that economists cannot confidently design a carbon tax that does more good than harm, that the legislative process cannot deliver a carbon tax worth embracing, and that promoting a carbon tax puts conservatives on a slippery political slope are explored and found wanting.

    Like

  44. Weasels are obviously far more powerful than i knew, and worse than the squirrels that kept chewing the hoses on an old Saab i had, but no longer drove very often.

    Like

  45. @Tim #9 “Thus set the tax at the damage from the emissions: this gives us the optimal amount of emissions. Note “optimal”, not none.”

    I can see why setting the tax to equal the damage caused by the emissions might result in the optimal amount of emissions in some cases. I doubt if it is true in the general case. I claim that CO2 and climate change isn’t one of those cases.

    Economic harm from climate change from CO2 is cumulative, delayed and non-linear. All of these cause problems for setting an optimal tax rate. Sure, Stern report, good try, thanks, but missed the target. To estimate the cost, need to pick a time period, need to estimate future emissions, need to estimate future economic activity, and to estimate the future discount rate, and all these interact with the tax rate chosen.

    What is the correct tax rate if emissions and thus the cost of emission are cumulative? Suppose that the current cost of releasing X pollution is function of the total release of X in the past. For a small past release, the pollution cost is small or even negative, and the net cost-benefit for all uses might be positive. For a large past release, the pollution cost is large, and the cost-benefit for all uses might be negative. In the latter case, the tax rate should be so high as to prohibit use. In the former case, the tax rate might be set to match the cost of emissions over some future period of time discounted at some rate, or maybe something else. This calculation is very sensitive to both unknown future emissions and to the chosen discount rate. How do you set one constant tax rate when the cost is cumulative, and thus increases with time? I don’t see how you could, so it seems to me that the tax rate would at minimum need to increase with time. I also don’t see how to get an optimal increase of the tax with time, a much more complex problem. If we pick too long of time period to estimate costs over, the early lower or even negative cost emissions might be taxed at rates that are clearly too high. If we pick too short of time period, or too low of discount rate, we might well overshoot the ‘optimal’ point of stopping releases.

    The problem is somewhat worse as the harm from climate change is in some cases delayed. Similar in impact to cumulative, but different. For example, we have probably warmed the climate enough to melt Greenland’s ice cap, but it will take likely thousand of years or more before it melts, if we stop warming the climate.

    Non-linear matters a lot if there are significant discontinuities in the climate or in the harm caused by climate change.

    Setting this single tax at the ‘optimal’ point isn’t necessary the optimal tax structure for the whole economy, as a higher than optimal carbon tax may be less harmful in total if it allows a reduction in a higher than optimal (example) VAT tax, or an increase in lower than optimal spending on (say) police.

    All of this doesn’t mean I’m against a carbon tax, or think that a cap and trade system is necessarily better. A carbon tax is a good start.

    [I don’t see why you’re so hung up on this point. The standard approach, a-la Stern, is to integrate damages out into the future. So “cumulative, delayed and non-linear” is accounted for; or at least, a reasonable effort is made. “significant discontinuities in the climate” is a fair point; but evidence for such is weak (http://scienceblogs.com/stoat/2007/08/21/runaway-tipping-elements-of-no/ etc) -W]

    Like

  46. [The standard approach, a-la Stern, is to integrate damages out into the future. So “cumulative, delayed and non-linear” is accounted for; or at least, a reasonable effort is made. -W]

    This might be a fair estimate, but the claim is “optimal”. The problem is that the cost of carbon release depends on how far you integrate into the future, what future release of carbon you assume, and the future discount rate, and more.

    Suppose we are at 10,000 years ago, and integrate for 20,000 years. The assumed future of carbon releases is slow for the for start (mostly forest clearing), then all of fossil carbon is burned in 500 years or so in the middle of the period. I’m assuming a zero discount rate because I’m lazy and this is a lazy example. The cost of carbon releases will be dominated by the last 9500 years of the period, with most of the tropics uninhabitable, melting of almost all of the ice, and so forth. So we would then set a high tax on carbon releases.

    But if we do that, the carbon tax is clearly too far high for the first 10,000 years. Agreed?

    Such a high carbon tax would clearly prevent most if not all of the release of carbon over the period, and the actual cost of carbon release would perhaps be negative (search for Early Anthropocene) or at least near zero. So perhaps we should not tax carbon release, which might the correct answer for the first 10,000 years give or take a few, but would clearly be the wrong answer for the next 10,000 years…

    Clearly the tax rate needs to change with time. There isn’t a single cost of carbon release to make for an optimal tax rate.

    [This is technically true, but I doubt its even the biggest problem / detail to worry about -W]

    Like

  47. > tax rate needs to change

    By analogy, consider rolling downhill on increasingly steep terrain toward a precipice. The pressure on the brake pedal is the carbon tax. Obviously you don’t want to press too hard early on, when it would still be easy to stop and back away from the edge …..

    Like

  48. #56, slamming on the brake too hard and fast might hurt people in the car… Fast enough and not too fast is the optimum. A carbon tax might be part of that.

    Like

  49. “I asked a simple question in the previous thread. The simple answer is, no. We’re not interested in efficiency. We’re interested in preventing global temperatures from reaching dangerous levels. We can only do this by reducing emissions (or waiting for the carbon removal fairies).”

    We’re not interested in efficiency? Since when? We’re always interested in efficiency.

    The true cost of something is what you’ve got to give up to get it. The opportunity cost. If I’m resource constrained, and we are always all the time of course. Say I’ve got £20 for a night out. The true cost to me of the fourth pint is not being able to get a kebab on the way home.

    So, agreed, we want to reduce emissions. Thus we are concerned about the efficiency of the method we use to reduce emissions. Because we are resource constrained. The more inefficient the method we use then the more we must give up of other things to get to our desired emissions goal.

    Or, actually, as Stern points out, the more inefficient the method we use then logically the less emissions we should eliminate.

    How many emissions should we eliminate? Well, we should eliminate all of those that produce more damage to human utility than they add to human utility. That’s how we determine our carbon price. And obviously our goal here is the maximisation of human utility over time.

    Say we’ve policy 1 which eliminates emissions at $5 per tonne CO2-e. Say, iron fertilisation, which would be about that cost so I’m led to believe (and no, it’s not an entire solution and so on). Then we’ve another one, say CCS, which would be $100 a tonne.

    Are we worried about efficiency? Sure we are: we want to do more of the cheaper one and less of the more expensive. Either way around: if we use the cheaper method then we have to give up less of the other things we enjoy. Or if we’re willing to spend x amount in order to reduce emissions then we can reduce more emissions by using the more efficient method.

    We’re really desperately interested in efficiency in fact.

    Like

  50. [“significant discontinuities in the climate” is a fair point; but evidence for such is weak -W]

    Younger Dryas.

    Green Sahara.

    8.2 ka event.

    [Oh, sorry, I meant “in the future”. YD and probably 8.2 ka are associated with the ice sheets, no? Was the “Green Sahara” abrupt? -W]

    Like

  51. The many varied and contentious views about the carbon tax is surprising among a group that, for the most part, agrees on the need to reduce emissions. Maybe it’s not such a great idea after all.

    Tim Worstall writes: “Thus we are concerned about the efficiency of the method we use to reduce emissions.”
    The efficiency of the market aside, I submit the most direct and necessary method of reducing emissions is to replace fossil fuel use through the deployment of available technologies and efficiencies. Carbon pricing is, at best, an indirect approach. There should be a more efficient way. Now, no approach is efficient if it cannot even be put in place. There is no indication that the kind of taxes described here will be enacted in the near or mid term, or ever.

    Like

  52. > [Oh, sorry, I meant “in the future”. -W]

    Nice Snark.

    [It wasn’t intended as snark, but as a genuine clarification of what I meant and as apology for not having been more specific. Don’t let the tenor of the whole Denialism thing infect you -W]

    The past can be a guide to the future. Don’t ignore guides. You might get eaten by a grue.

    [Indeed, the past may be a guide. But it must be used with some caution. For example, we don’t expect a return to the ice ages -W]

    Yes, YD and 8.2 ka are probably associated with collapse of ice sheets, and we still have ice sheets.

    [We have ice sheets, but they’re rather different to the Laurentide. I don’t think a prediction of a YD or 8.2 ka event is mainstream, though Hansen’s recent stuff edges in that direction -W]

    Is there some reason why you expect that only ice sheets can cause discontinuities in the climate? Or is there some compelling reason why the remaining ice sheets can’t collapse?

    [You can propose others if you like. People have proposed THC type stuff, but it tends not to happen in more sophisticated models -W]

    The end of the African Moist period aka the Green Sahara was fairly abrupt, especially compared with the subtle and slow forcing of orbital change that seem to be the cause. A fairly tiny change in energy distribution seems to be the cause that changes the Sahara from desert to green and back again.

    [https://en.wikipedia.org/wiki/5.9_kiloyear_event perhaps? I’m not familiar with that -W]

    The human climate change isn’t subtle and slow. Climate models can’t reproduce the Green Sahara very well, so why would we expect them to warn of all future dangers? Recent geological history gives some hints what is possible.

    Like

  53. TW “And obviously our goal here is the maximisation of human utility over time.”

    That isn’t so obvious. The history of the USA over the past 40 years has been concentration of wealth and income into the hands of very few, while the majority has seen static or declining wealth and income. This clearly doesn’t maximize utility, a less unequal distribution would.

    Determining the carbon price isn’t simple, even if we agreed on the goal.

    Like

  54. Me: “Meaning, that the economic benefits are greater than the economic damages.”

    rconnor:

    This sounds nice and all but it gets a little tricky when your trying to put a price on the social, political and cultural impacts of the massed forced migration caused by the Indonesian Islands being underwater.

    We are always going to be put a price on those impacts, whether implicitly or explicitly.

    Would we be willing to spend $10 trillion on this? No? Then that’s an upper bound.
    And surely you can agree that the costs are greater than $0.

    What we can’t do is just say “well, these are worth preventing at any cost”. Because that’s just not true. There will always be limits to how much we’re willing to spend. It’s always a trade off of costs vs benefits.

    If we ignore costs, it doesn’t make them go away. The best thing to do is try to figure out how much we’re willing to spend to prevent or mitigate climate change and its impacts. Bring the costs into the system, quantifying them as best as possible, rather than just leaving them unquantified and as externalities. Because how else will you figure out how much is the “right” amount to spend to prevent climate change?

    Like

  55. Windchaser,

    Would we be willing to spend $10 trillion on this? No? Then that’s an upper bound. And surely you can agree that the costs are greater than $0.

    It’s worth repeating that I feel a carbon tax is a great start (for a rough idea for my answer to “and then what?” see #23). So, yes, I agree with this.

    What we can’t do is just say “well, these are worth preventing at any cost”.

    I never said that nor did I imply that.

    What I said was finding the cost at which “whatever we emit is worth the cost” requires you to quantify those damages. What I implied was looking at economic and political and cultural and moral and social impacts of climate change from a purely economic viewpoint is not appropriate.

    The primary reason we are so invested in mitigating climate change is not the risk of economic damages but the risk of hardship to humans. Hardship to humans does involve economic damages but it goes much further beyond that. Economics is a great tool to address and discuss mitigation but it is not the only tool required (much like how a carbon tax is a great to tool but not the only tool required). Climate change is a human problem with an economic facet.

    How about a thought experiment. It’s 2200. The developing world issued a carbon tax in 2016 and nothing else. The tax was successful at curbing consumption growth somewhat but we ended up following somewhere between RCP8.5 and RCP6 (do you agree that’s fair?). The tax perfectly captured and represented the cost of the damages (I’m giving you that). Revenues from the tax were used to offset other taxes and did quite a bit of societal good locally. However, now the Indonesian Islands are under water, droughts in Africa are causing large scale food shortage issues, outside work in the Middle East is causing increasing numbers of heat deaths, among many other problems (which follow from the RCP). There is no contingency funds as the revenue earned from taxing the “cost” of these damages was already spent by governments on offsetting (local) taxes. Is that a success? Did the carbon tax “address climate change”?

    From an economic point-of-view, the carbon tax was perfect. It perfectly internalized the externalities. We didn’t “over pay” to prevent climate change. We re-routed money to fund productive, beneficial local initiatives. Really, Indonesian should be congratulating us!

    There’s also the converse world – where mitigation measures are far too stringent and significantly hurt the lower and middle class. But, honestly, do you think that the current political environment (for almost any country in the developed world) would be more likely to pass overly conservative or overly aggressive mitigation policies? This fear of economic ruin from misguided, overly aggressive mitigation policies has very little support in the socio-political reality we live in.

    Because how else will you figure out how much is the “right” amount to spend to prevent climate change?

    This, again, misses the point. Even if we get the economic cost of climate change *perfectly* “right” and impose a carbon tax to reflect that, we aren’t really preventing climate change, we are “internalizing the externalities”. This is a good thing but, by itself, not enough.

    A carbon tax alone is not enough to address climate change for two main reasons :

    (1) A carbon tax doesn’t necessarily prevent emissions – “internalizing the externalities”, even if done perfectly, does not necessary mean your prevent the externalities, you’ve just made someone pay for them. That’s an important difference. (“…BUT it was never designed to do that!” That’s exactly my point, it’s not enough!)

    (2) A carbon tax doesn’t necessarily mean you have money to address damages – You take in revenues in proportion to the cost of the damages. However, if you use the revenues to offset other (local) taxes (or anything other than contributing to a “global climate change adaptation fund”), you don’t actually have funds to pay for damages/adaptation. Let’s say that our perfectly rated carbon tax produces revenues exactly matching future damages, meaning we have the exact funds to pay for the damages associated with sea level rise in the Indonesian Islands. However, 100% of the revenues from the carbon tax are being spent on offsetting (local) taxes then that leaves (let me get my calculator out) 0% available for actually addressing the damages associated with sea level rise in the Indonesian Island. (“…BUT it was never designed to do that!” That’s exactly my point, it’s not enough!)

    Does a sugar tax address obesity? Does a gun tax address mass shootings? Of course not. They, alone, could still be good ideas and good starts (to varying extents) but they, alone, aren’t designed to completely address the issues. The problem is not about getting the tax rate right (as you seem to be stressing), the problem is that even if the tax rate was *perfect* it still isn’t, alone, enough to address the issue.

    The real question is “and then what?”.

    Like

  56. Windchasers: I suspect the property market is rather different here in the UK… The typical lifetime of a property is quite long (I live in a building which is over 100 years old, and this is not unusual), there is comparatively little new-build, and the supply / demand imbalance is such that you can charge a truly silly amount of money for a mould-infested broom cupboard in some parts of the country.

    Like

  57. Timmy:

    How many emissions should we eliminate? Well, we should eliminate all of those that produce more damage to human utility than they add to human utility. That’s how we determine our carbon price. And obviously our goal here is the maximisation of human utility over time.

    Phil Hays:

    The history of the USA over the past 40 years has been concentration of wealth and income into the hands of very few, while the majority has seen static or declining wealth and income. This clearly doesn’t maximize utility, a less unequal distribution would.

    There are a couple of issues intertwined here, which people often gloss over… It’s important to distinguish between the maximisation of total net utility, and the distribution of that utility. It’s also important to recognise that there may be utility distributions that we are not willing to accept on moral grounds, even though they produce higher total net utility than can be achieved otherwise – you could call it “the Omelas Problem”.

    This is a particular issue when discussing carbon emissions, as the distribution of costs and benefits is significantly skewed – with most of the costs accruing to poor people in the developing world, and most of the benefits accruing to rich people in the developed world.

    Like

  58. Dunc,

    It’s also important to recognise that there may be utility distributions that we are not willing to accept on moral grounds, even though they produce higher total net utility than can be achieved otherwise – you could call it “the Omelas Problem”.

    Very good point.

    I’d echo your point by saying that the Rawlsian veil of ignorance might be another tool, in addition to economic cost/benefit, to measure climate change mitigation policies.

    Like

  59. > [We have ice sheets, but they’re rather different to the Laurentide. I don’t think a prediction of a YD or 8.2 ka event is mainstream, though Hansen’s recent stuff edges in that direction -W]

    Why do you think Greenland’s ice sheet is different than the Laurentide?

    [There’s no obvious prospect of large ice dams holding up lakes to be fw pulses -W]

    Also MWP1.

    https://www.researchgate.net/publication/262695955_Millennial-scale_variability_in_Antarctic_ice-sheet_discharge_during_the_last_deglaciation

    Like

  60. > [There’s no obvious prospect of large ice dams holding up lakes to be fw pulses -W]

    Good point, so perhaps no YD type events. Was perhaps just the redirection of melt water from Gulf of Mexico to Saint Lawrence, rather than the impact of a flood.

    Any comments on 8.2 ka type events?

    Any comments on MWP1 type events? Which of the ice caps do you think was the source? The above reference suggests Antarctica.

    [I think you’re misreading it. It says “…the first direct evidence for an Antarctic contribution to meltwater pulse 1A”. Contribution, not source for the whole thing. It continues “Climate model simulations with AIS freshwater forcing identify a positive feedback between poleward transport of Circumpolar Deep Water, subsurface warming and AIS melt, suggesting that small perturbations to the ice sheet can be substantially enhanced, providing a possible mechanism for rapid sea-level rise”. Which again is possible, but speculative. My only other comments are the ones I’ve made already -W]

    Like

  61. Perhaps I was too terse, but that’s not what I was saying.

    Wiki says “The source of meltwaters for meltwater pulse 1A and the path they took remains a matter of continuing controversy.” I probably should have started with that. You seem to be discounting Antarctica’s marine ice sheets and mostly blaming the Laurentide. If not, sorry for misreading your comments.
    3 cm to 6 cm a year or more would quickly make a mess out a lot of coastal areas.

    [Agreed; but we were talking about discontinuities -W]

    Notice that this was more than 3 cm per year of sea level rise caused by a slow and subtle climate change. The human climate change is not going to be slow nor subtle, well before the end of the century.

    Like

  62. > [Agreed; but we were talking about discontinuities -W]

    MWP1A looks to me like a discontinuity. A slow warming caused a sudden sea level rise.

    [Sorry, I misread your comment. Mine becomes meaningless, so ignore it -W]

    Like

  63. While a carbon tax isn’t an optimum way of handling the externalities involved with release of CO2, a carbon tax might be a politically workable way to start the process of reducing carbon release. Other possible politically workable ways to start this process include a cap and trade system, subsidies for alternative energy sources, subsidies for improved efficiency, and probably more.

    Never let the perfect get in the way of the good.

    The carbon tax can be good, not perfect. But like all human endeavors, the implementation can make it better, or worse. For example, the ballot initiative in Washington State, USA to implement a carbon tax and reduce other taxes is likely to fail to pass because it is not close to being revenue neutral, as it was promised to be.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s