Carbon pricing: solo or combined?

2008-07-08

in Economics, Politics, The environment

Road bike against brick wall

The basic idea of putting a price on carbon is this: whenever you undertake an activity that results in the release of carbon dioxide (or another greenhouse gas with a similar effect), you are imposing costs on those who will suffer from global warming. Since people in other states and future generations are paying most of the cost, the emitter does not properly take it into account. The cost is ‘external’ to that person’s decision about how to behave. Making the cost ‘internal’ requires imposing a tax that increases the cost of the behaviour for the person undertaking it.

Actual carbon pricing schemes (whether tax based or cap-and-trade based) also need to choose between an approach based purely on internalizing the cost of carbon and one that also seeks to advance other goals. One motivation for the second option is political; it can be used to defuse opposition to carbon pricing within groups that are politically influential. Another motivation is the ethical notion that different people should pay more or less the same amount to combat climate change. Another motivation is the pure redistributive preference that exists within some political views and ideologies.

In the end, I don’t think any of these arguments is terribly strong. It makes sense to charge more to those who pollute more. Not only is that a matter of fairness, it is a matter of prudence. Knowing that the group is going to split the bill in a way that renders shares more even, a selfish diner will consume an above-average amount, counting on those who consume a lesser quantity to subsidize him. A revenue neutral carbon tax achieves the opposite: with heavy polluters paying dividends to those who are more restrained. Granting special treatment to politically influential groups also risks reducing the effectiveness of the carbon pricing scheme, partly because it becomes more worthwhile to try to game the political system, rather than cut emissions.

A carbon price should be a mechanism through which socially optimal behaviour is encouraged and the transition to a low-carbon society is advanced. It does things best when it is not also a vehicle for income redistribution on the basis of facts not relating to carbon, such as employment sector, family status, or income. Those things can best be addressed through other areas of taxation and policy, leaving carbon pricing focused on the achievement of environmental outcomes.

{ 10 comments… read them below or add one }

Anon July 8, 2008 at 1:53 pm

1) A carbon tax should not increase the net tax burden of the poor in the first instance.

2) It should allow low-income people to cut their taxes further through lifestyle changes and efficiency investments.

3) It should provide similar incentives to those who are wealthier.

This is the only way for it to be both fair and effective.

Milan July 8, 2008 at 2:19 pm

I disagree. Why do the poor have the right to harm others through their pollution?

A period of time for transition makes practical sense, but I don’t think it can be argued that those with low incomes have a never-ending right to emit greenhouse gasses.

Ed July 9, 2008 at 11:30 pm

Milan, I wish politicians would actually come out and say what you just did. In terms of environmental policy, no, the poor shouldn’t have a greater right to pollute than the rich.

Sarah July 10, 2008 at 8:38 am

The particular problems regarding the poor, I think, mostly refer to whether the capacity to change your emissions depends on your income. For example, if you are living in bad rental accomodation then you likely pay your fuel bills but are not responsible (indeed are generally not allowed to make) changes to the building which would increase energy efficiency eg. better insulation. How, then, does paying more tax give you an incentive to insulate? Mightn’t you end up with more poor people dying due to an inability to afford heating?
Alternatively, if you are poor and living in a rural area then how does a high tax on your old and inefficient vehicles help you reduce emissions? Presumably you still need to travel and an inability to do so will make your poorer; further, you may be unable to afford a more efficient vehicle and become ever less unable to afford a new vehicle as your tax burden rises.
Or, if you are living on fixed benefits and already barely subsisting on the lowest possible rent in the area, cheapest possible food, clothing etc then how are you supposed to absorb the extra costs? What behavioural changes can you be expected to make, save for stealing food or becoming homeless?
If the intent is to promote “socially optimal behaviour is encouraged and the transition to a low-carbon society” then imposing more taxes on the poor may not be the best means to achieve this. At minimum, policymakers need to think about whether other means would be more effective eg. providing grants for landlords to fit better insulation in buildings rather than penalising people for draughts that they cannot fix.

Milan July 10, 2008 at 10:19 am

Sarah,

I absolutely agree that carbon pricing is insufficient. There are very real problems with people facing constrained choices, and there are lots of situations in which the person with the power to made emission reductions lacks the incentive to do so.

On transport, there are huge network effects at work. Individuals cannot choose what the overall structure of the transportation system is, so it is necessary to do work on it at the systemic level.

That being said, I think a broad carbon tax is still an essential tool in the overall collection.

Milan July 10, 2008 at 10:20 am

Or, if you are living on fixed benefits and already barely subsisting on the lowest possible rent in the area, cheapest possible food, clothing etc then how are you supposed to absorb the extra costs? What behavioural changes can you be expected to make, save for stealing food or becoming homeless?

The handouts to low-income people associated with many politically sensitive carbon taxes do not target the very poorest, who do not pay income taxes. They tend to offer breaks to low income families and the like.

Litth July 11, 2008 at 10:50 am

The real reason carbon pricing needs to give breaks to the poor is simple: otherwise, fossil fuel firms and their representatives will use feigned concern about the poor to block the implementation of the plan.

It is disingenuous for Exxon to say “but this will hurt the poor!” but that certainly will not stop them from using an effective tactic.

The same is true of the need to prevent gas price rises. They are politically unpopular enough to sink the whole deal.

. July 14, 2008 at 12:48 pm

Harper reiterated Conservative criticisms that the Liberal plan would simply shift tax dollars out of Canadians’ pockets back into federal government coffers, boosting the cost of just about everything.

“It will stop the economic progress of the Canadian middle class dead in its tracks and it will make the cost of living unbearable for fixed income seniors and low-income seniors.”

Harper said the Liberal plan doesn’t even set a target for emissions reductions.

“Why? Because Dion’s carbon tax is not an environmental policy. It is just a wealth redistribution program disguised as an environmental policy.”

. September 2, 2008 at 11:43 pm

Liberal’s Green Shift to include tax breaks for farmers, truckers

Juliet O’Neill, Canwest News Service
Published: Tuesday, September 02, 2008

WINNIPEG — Liberal Leader Stephane Dion plans to propose extra breaks for farmers, truckers and fishermen to buffer the impact of fuel price hikes under his Green Shift carbon tax proposal, an election campaign centrepiece.

. March 18, 2009 at 10:29 am

Eat the rich or beat the poor
The choice of what to do with carbon revenue is a clear-cut issue of justice
Posted by David Roberts at 10:58 AM on 16 Mar 2009

Here’s the takeaway:

* Auctioning permits and rebating the revenue, compared to freely allocating permits, produces the same macroeconomic effect, but
* auction-and-rebate is vastly more progressive, favoring low-income taxpayers, while freely allocating permits overwhelmingly favors the rich.

As the debate over climate policy heats up, it’s crucial to understand this. Right now Republicans are accusing Obama of using cap-and-trade revenue as part of his “social program” because he proposes rebating most of it to taxpayers. They would prefer that more of the permits be given away. But that’s part of a social program as well — a program to transfer wealth from low-income Americans to the rich.

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