Month: August 2014

Tax expenditures and the complexity of the tax code

One constant in tax policy-making is efforts by organized interests to obtain exceptions from the code. This has become especially pervasive in the U.S. corporate tax system:

America’s corporate tax has two horrible flaws. The first is the tax rate, which at 35% is the highest among the 34 mostly rich-country members of the OECD. Yet it raises less revenue than the OECD average thanks to myriad loopholes and tax breaks aimed at everything from machinery investment to NASCAR race tracks. Last year these breaks cost $150 billion in forgone revenue, more than half of what America collected in total corporate taxes.

(Note that I don’t necessarily agree that corporate taxes in the U.S. are too high, just that the tax code is too complex and favours the politically influential and well-connected.)

Science and replicability

The basic claim made in published science is that something about the nature of the universe has been uncovered. That makes it distressing when other researchers attempting to isolate the same phenomenon are unable to do so:

For social ‘scientists’ with aspirations of matching the rigour of their peers in the ‘pure’ or ‘natural’ sciences. If different groups of scientists using true double-blind controlled experiments can’t reach compatible conclusions about the world, what hope is there for people trying to deduce causality from historical data?

Rationality and the compatibility of preferences

In political science, there are a huge number of models of individual and group behaviour that are predicated on the assumption of rationality: basically, that people have a set of preferences about how the world and their lives should be and they make choices that raise the odds of outcomes they favour while reducing the odds of outcomes they oppose.

There is probably an even larger literature pointing out the flaws in this categorization. People don’t know everything, and even the information they do have is costly to acquire. It can be empirically demonstrated that people sometimes have sets of preferences that are not neatly ordered (they may prefer A to B and B to C, yet somehow prefer C to A). Many quirks of human psychology have been demonstrated, in which small or irrelevant details affect the choices people make.

Another important challenge to rational accounts is uncertainty about the compatibility of objectives. Wanting to live an open and flamboyantly homosexual lifestyle may be obviously incompatible with wanting to run for office as a conservative Republican in some jurisdictions, but there are many possible preferences for which it isn’t clear if achieving objective X necessarily requires sacrificing objective Y. That uncertainty is overlaid upon uncertainty about which objectives you actually can achieve (you may be unable to become an international swimming champion, even if you do sacrifice your aspiration to go the medical school in order to raise the odds). In many cases, outcomes could go either way. Maybe implementing an ambitious climate change agenda will doom your odds of re-election… or maybe it will improve them.

None of this is to say that rational models of decision-making are necessarily useless, or that they have no place in political analysis. Nonetheless, bearing these limitations in mind may contribute to a useful form of humility.

Limits to a social cost of carbon

In some ways, the idea of a social cost of carbon is fundamentally sound. Adding CO2 to the atmosphere harms people around the world in various ways which can be measured and quantified. Applying that in the form of a carbon price should allow us to better adjudicate between activities where the total benefits exceed the total costs (including climate damage). It should also help us identify where the most cost-effective options are for reducing emissions and mitigating climate change.

At the same time, there are some issues with the approach. For one, it suggests false confidence and draws attention away from the possibility of abrupt, irreversible, and catastrophic outcomes. There are climatic thresholds out there where increased concentrations lead to dramatic global changes and major impacts on human life. Adding $50 (or whatever) to the cost of an activity that adds a tonne of CO2 to the atmosphere conceals these dangers, suggesting that the harm imposed will always be incremental and manageable. Another tonne of CO2 in the atmosphere isn’t essentially equivalent to a little fine everybody pays. Rather, it represents a threatening degradation to the stable climatic regime that has accompanied the existence of human civilization. Moving from relative stability into a realm where global weather patterns are rapidly and violently shifting involves experiences that cannot be easily equated to simple monetary costs.

The social cost of carbon approach also conceals some of the costs of carbon that aren’t easily quantifiable in financial terms. It’s a lot easier to work out the additional cost of desalinating drinking water than it is to estimate the financial value we should assign to losing an ecosystem or having an important cultural site permanently immersed in the sea.

Further, using a single price suggests that the damage from every tonne of emissions is the same. This is essentially true for emissions that happen at the same time – the tonne of CO2 emissions you produce by running your gasoline lawn mower affects the climate as much as the tonne of CO2 I produce by running my gas furnace. However, climate science has convincingly demonstrated that the total harm done by carbon accumulating in the atmosphere isn’t linear across time. Warm the planet by a degree or two and human and natural systems can adapt comparatively easily. By the time you are going from 5˚C of warming to 6˚C, you will probably be experiencing catastrophic new forms of harm that nobody can really adapt to. Using a single social cost of carbon may make this idea harder to grasp, a well.

Applied properly, a social cost of carbon may be a useful tool for helping individuals, firms, and countries internalize the climate damage associated with their choices. In the big picture, however, the challenge for humanity is to control fossil fuel use and land use change such that we don’t cause catastrophic damage to the planet’s natural systems. Achieving that requires a sustained effort to abandon fossil fuels as sources of energy, while protecting carbon sinks. Insofar as a social cost of carbon helps encourage that transition, it is to be welcomed. When it contributes to the miscategorization of the problem as a whole, however, there is cause for concern.