Tuesday, May 7, 2019

Ip on carbon tax

Over the weekend, Greg Ip at WSJ wrote a  nice piece on the carbon tax.

Greg addresses some common objections.
This urge to stop at nothing to find an effective solution is understandable. How can you put a price tag on the future of the planet?
..Green New Deal backers make another powerful argument: Global emissions levels are still rising, and to reverse them, carbon prices would have to be so high they’d be politically toxic. Better, the activists argue, to simply go straight to a massive, government-directed transition. 
This attitude is common. But there is no evading economics. Either you have visible economic damage (carbon tax) of $1,000 per ton or invisible economic damage of $10,000 per ton.  Prices are better than restrictions because you can see where you're wasting $10,000 per ton, which money could reduce 9 times as much carbon properly deployed.

There is also a political judgment here that people will not stand for a visible tax, but will stand politically, or perhaps be too stupid to notice, the much larger shadow price of direct controls. They won't pay $5 at the pump for gas, but will stand for banning cars. I don't think that's true. I don't think the left thinks it's true either. The way the Green New Deal and even the IPCC reports now bundle carbon reduction with a vast left-wing political agenda, and a rather Orwellian drive to silence criticism confirms it.

"Experience demonstrates that these methods work. In 2013, the U.K. levied a tax on carbon dioxide emitted in electricity generation. Within four years, British emissions dropped 20%, while the European Union’s fell by just 7%. Last year, coal accounted for only 6% of British electricity generation, down from 44% in 2012. 
How did the British do it? Their carbon tax was just high enough to give natural gas and (to a lesser extent) wind and solar power an advantage over coal,
...To many Green New Deal advocates, this isn’t good enough. Replacing coal with natural gas only reduces carbon-dioxide emissions; it doesn’t eliminate them. This misses the point. The climate doesn’t care if we eliminate a ton of carbon dioxide by replacing coal with natural gas or solar power..
Green New Deal enthusiasts correctly note that simply reducing carbon emissions isn’t enough: To save the planet, renewable and nuclear energy will eventually have to replace most oil, natural gas and coal." 
I think here too Greg misses that climate policy advocates have gone far beyond a technocratic idea of simply, well, reducing carbon. "And nuclear energy" is usually noticeably absent. Carbon capture technologies, equally good at reducing carbon are usually noticeably absent. Other agendas like "climate justice" creep in -- worthy or not, anything else that creeps in means less carbon reduction per dollar. A carbon tax reduces carbon any way that reduces carbon, which is really good at, well, reducing carbon, and not getting distracted with other agendas. That is a strong reason why carbon taxes, and especially such taxes in return for less regulation are resisted on the left.

A quibble
"So market purists should acknowledge that government subsidies and regulations have a place: They can create sufficient demand for low-carbon technology to achieve the manufacturing economies of scale necessary to compete with fossil fuels. In 2000, Germany began requiring utilities to dramatically boost their use of renewable electricity, which spurred so much investment in solar manufacturing that prices have fallen for everyone. It is now often competitive with coal and natural gas."
In the long history of subsidizing and regulating industries, the usual outcome has been gross inefficiency and the demand for more subsidies. Technology is global too. The decline in, say, solar panel prices is not caused by Germany's subsidies. It came from China. The US promptly put in tariffs against cheap Chinese solar panels, and regulatory barriers make solar installation outrageously expensive, even in green and sunny Palo Alto. The climate does not care where solar panels are produced, but US producers and unions do, and they are able to channel subsidies and regulations their way.  Carbon taxes deny politicians the opportunity of big ribbon cutting ceremonies.

Subsidies and regulations have an even longer history of backing the wrong horse -- switchgrass, bio fuels, and high speed trains, say. A hefty carbon tax has exactly the same incentive to innovate and lower prices for non-carbon alternatives. This market purist needs a lot more persuading. (I think Greg was fishing hard to find something nice to say, in order to sound balanced.)
"the opposition that has resisted carbon prices—rooted in short-term self-interest or skepticism about climate change—would likely sink the Green New Deal. No senator from West Virginia will vote to put coal miners out of work."
This is a great point that needs more attention. In any large-scale project, we need to form a coalition of people who agree, I give up my benefit if you agree to give up yours. A carbon tax forms such a coalition automatically -- it guarantees equal pain across carbon emitters, and equal benefit across low-carbon alternatives. Any regulatory or subsidy response is negotiated bit by bit. Regulations on coal, oil, fracking, and cars; subsidies to solar, wind, nuclear (ha!), capture, buses, and trains, each clamor separately. If you want to see the result of this approach, look at the tax code. It is much more effective to say "the limit on coal production from West Virginia needs to be expanded to save my constituent's jobs" than it is to say "the national carbon tax must be reduced to save my constituent's jobs," or even "we need an exemption to the carbon tax to save my constituent's jobs." The visibility of a price rather than controls is a political advantage too, in forming this coalition.

Greg also misses two huge points about carbon taxes. First, How do you know if, after accounting for carbon used to make the batteries and to make the electricity, a Tesla really is greener than a BMW? It's really hard to find out. But carbon taxes build all that into the final product and the cost itself is the guide. Prices are the signals in the economy (Hayek) -- and they are really the only signals that work.

Second, an observation from my daughter, then age 8: "Dad, if they make everyone drive high mileage cars, won't people just move further from work and drive more?" The most carbon-efficient car out there is a Chevy suburban, with all the seats filled, operated by someone who chooses to live a lot nearer to work. The same technology can use a lot of carbon or a little carbon. You can replace all the lights with LEDs, or just turn them off more religiously.   Behavioral responses by consumers, and careful process responses by companies are the thousand points of light in carbon reduction, and they cannot possibly be achieved by regulation.

Also, Greg ends
"Whether greenhouse-gas emissions are slashed via a Green New Deal, a carbon price or both is a secondary challenge. The main one is for political leaders to accept the problem of climate change and invest political capital to tackle it. Once they do, they will ask, “What’s the cheapest way to do this?” Markets will win, hands down."
I think this is flat out wrong. The main problem is not for "political leaders to accept the problem of climate change." We don't just need more crowds of young activists singing songs at protests.

The main obstacle to substituting carbon taxes for regulation right now comes from the left. The left has bundled climate change with a vast other agenda, of which the Green New Deal is a good but not the only example.  They certainly are not asking "what is the cheapest way to do this?"  The Green New Deal is not a minimalist, technocratic, policy package aimed narrowly at reducing carbon, marred only by command and control rather than market techniques. It is, and reflects the widespread movement for, a total overhaul of society, of government, and of political power, with green only a minor element. Opposition to carbon taxes is not just "deplorable" gillets jaunes too obtuse to understand greenhouse gases, or nefarious oil companies.  Resistance to climate policy is not pig-headed anti-scientism, needing only for "leaders" to "accept the problem." It flows from resistance to the rest of the now-bundled political agenda.

Climate policy was headed to this kind of bipartisan technocratic resolution in the 1990s before it became a tool of partisan warfare. The challenge, from both sides, is to remove the political baggage that climate policy has accumulated. And frankly, that challenge seems to me mostly to fall on climate policy advocates right now. Those genuinely concerned about climate have made allies with a far left wing. Resistance to that far left wing agenda now imperils necessarily bipartisan progress on climate policy. Hoping that this far left will quash its political opposition for the two generations needed to advance a climate agenda seems pretty hopeless. At least, being in the freedom-oriented political camp, I hope so.

To my climate-skeptic friends: Given that the government is going to regulate carbon, this is the way to do it with least damage. To my green-warrior friends, if the government is actually going to reduce carbon, not just subsidize cronies and engage in worthless value-signaling gestures, a trade of carbon taxes for absurdly costly regulations and subsidies is the only way to get anywhere.


  1. Ask Macron about carbon taxes. It's a great theory, but the politics are, and will be pure poison.

    1. This is because the French government did not even think of redistributing equally the proceeds of the carbon tax, which would have cut the grass beneath the gilets jaunes' feet. The reason for this mental block is that the government badly needed more tax income and was thus mixing fiscal policy and pigouvian tax policy

    2. One thing the French government is particularly good at is redistributing. So good that it has been redistributing the carbon tax proceeds many years before even imposing the tax.

  2. People need to understand that there are already sorts of CO2 taxes. The ethanol program and CAFE standards drive up costs.

  3. Greg Ip apparently also has no background in science. It is a very big issue how the climate change advocates avoid discussing uncertainty in climate science. The entire discussion is one of cost vs. benefits (damage avoidance). The entire climate science community avoid honestly addressing this. But "capital S" Science is foremost about uncertainty - the term "uncertainty principle" applies although the original usage of the term is in particle physics re the fact you can't predict both the position and momentum of a particle, tehrefore one can only make probabilistic judgments. The uncertainties of costs are far more easily predicted than the value of future benefits, which are based on models that are in fact very imperfect and deterministic and do capture / quanify all known variables let alone adddress the issue of unknown variables. Add to that politics which you can only judge from our politicians in nightly news and talk shows by people wiht zero background / understanding of science. I do not call myself a skeptic but celebrate skepticism but have both science background (PhD) to understand its importance. Calllng someone a skeptic illustrates ignorance of science. Labeling people has always been one of the maxims of propaganda Dr. Goebbels demonstrated in Nazi Germany. Dan Wolfe, PhD, MBA (Chicago/Booth XP54, BGS).

    1. I don't think serious scientists in the field deny that there is a large amount of uncertainty regarding the costs of climate change. But: (1) the average or median of these costs still looks large, (2) larger uncertainty combined with risk-aversion (or even ambiguity aversion, depending on the nature of uncertainty) makes these costs look larger, not smaller.

    2. Re "serious scientists don't deny there is uncertainty" ... one reason why climate modelers use deterministic models is ease of use: in deterministic models the output is specified by a "selected" group of independent variables, parameter values and initial conditions. the models are tuned to CO2 / greenhouse gases, while some known varables (e.g., solar forcing, particulates are not represented. Stochastic models reflect inherent randomness in the process they are trying to describe. Stochastic models produce a probablistic range of outputs. Using stochastic models for climate change admittedly would be hard but also problematic since it describes the accuracy / likelihood of model predictions. The climate modelers and agencies approach this by presenting an ensemble of e.g., 15-20 selected (deterministic) climate models and comparing the range of output predictions..that is very misleading and questionable since the models are deterministic and do not cover all of the known forcings / independent variables. Millennial scale (100-200 year) predictions of the ensemble of models are presented graphically without stating that there is no null comparison. Models can be tested by back casting and comparing vs. actual (historical) data. In this re: it is also true that the agencies for some time have been adjusting past temperature records ... generally downward, e.g., 1950s - 1990s and this effectively amplifyies recent rates of increase ... it fits the storyline presented in reports and news releases, etc. 97% of "scientists agree that" climate change is real.. I would agree with this, but let's talk about what we really know and understand.

  4. The folks in Germany pay a lot for electricity without paying an explicit tax. If they are willing to pay double without complaining, they would probably pay 10X, if the change was slow and comparisons were not available (global price rise).

  5. "Read my lips, no new taxes!" Any Carbon tax or Gasoline Tax is polictical suicide for any Republican/Conservative Independent!

  6. The heavily subsidized rural states are against gasoline taxes, as they drive vehicles a lot. Each rural state gets two senators, which is why rural states are so heavily subsidized to begin with.

    I guess to get a carbon tax, which is also a fuel tax, passed in the US we will have to promise an even more heavily subsidized and pink Rural America.

    Still, if it is a choice between taxing fuel or taxing earned income, I would choose catching fuel.

    1. > The heavily subsidized rural states

      Heavily subsidized in what sense(s)?

  7. German CO2 emissions per person has stayed pretty flat since 2006 despite adding the solar infrastructure. Coal usage is actually up in Germany. Central planning is ain ineffective and inefficient approach but it makes technocrats feel like they are in control and provides lots of incentives to pad packets along the way.

  8. "There is also a political judgment here that people will not stand for a visible tax, but will stand politically, or perhaps be too stupid to notice, the much larger shadow price of direct controls. [...] I don't think that's true."

    I'm not sure. Carbon taxes have been losing bets, while more subtle ways of limiting carbon emissions such as restrictions on utilities' energy mix have succeeded even in red states. The NYT Magazine had a good piece on that a few weeks ago: https://www.nytimes.com/interactive/2019/04/09/magazine/climate-change-politics-economics.html

    Also on "A hefty carbon tax has exactly the same incentive to innovate and lower prices for non-carbon alternatives. This market purist needs a lot more persuading." There's a 2016 JPE paper making the point that subsidies are better than carbon taxes when technical change is directed: https://economics.mit.edu/files/11668

    They write: "Though it is intuitive to expect that carbon taxes should do most of the work in the optimal allocation—because they both reduce current emissions and encourage R&D directed to clean technologies—we find a major role forboth carbon taxes and research subsidies. [...] Research subsidies are powerful in redirecting technological change, and given this, it is not worth distorting the initial production too much by introducing very high carbon taxes"

  9. On a related subject, Mankiw many years ago proposed a 1.00 tax per gallon;10 cents a year increment over 10 years...


    Well, in California:


    This barely passed in 2017. Then Prop 6 came around to try to repeal it in 2018:

    Some background. If you're CA resident, you know ALL about this:


    This barely *didn't* get passed.

    Negative externalities are real. There's now an entire sector of the economy devoted to identifying and removing them, any which way you can: Taxes, regulations, subsidies, tradeable permits (internalizing the externality); a hodgepodge of policy tools.

    What works best when people and business don't like taxes, and businesses cry crocodile tears if there's regulations and standards, hmm?

    Our current economic activity causes harm to ourselves. Sustainable economies appear to be a sort of utopian dream and get branded as communist, extreme leftist, and wasteful, etc. I don't think that's entirely a fair classification. ;)

  10. "The main obstacle to substituting carbon taxes for regulation right now comes from the left."

    It's your blog professor, but I'm a little dumbfounded that you had the temerity to write that and what followed. I don't think you are being fair or honest here.

    I'm struggling to even grok your reality. Are you suggesting that Republicans could enact a new tax policy to address climate change if the left got of the way? Only a tiny minority of Republicans can even publicly admit that climate change is a pressing issue.

    If you had to place a climate sized wager on convincing Democrats or Republicans to pass a carbon tax you are going with Republicans? How many Republican led states do you see in this map (https://www.c2es.org/document/us-state-carbon-pricing-policies/) of states with carbon pricing?

    I didn't become involved in politics until 2000, so I will allow that perhaps I missed a lot in the 90s. Sure, the far left often have less than great proposal and is prone to over reach, but they are generally trying to do something to move the needle on this issue. I'm willing to have my mind changed that the left is the problem here, but I'm not buying what you're currently selling.

  11. The point is pretty easy. Climate change solutions need consensus since they (one way or another) require consuming less. By unnecessarily mixing carbon reduction with a whole bunch of leftish policies totally unacceptable to the rigth, the left is making this consensus just imposible.


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