https://www.wiley.com/en-us/Making+Climate+Policy+Work-p-978...
If we treat all industry as spherical cows, a common carbon price comes out as a great way to incentivize industrial change.
However, once we get into the particulars of different industries and the varying levels of difficulty they have in decarbonizing, and the very different levels of lobbying power they have to influence that price, and the difficult of enforcement across different sectors, a common shared policy across all sectors starts to be far less efficient than tailoring the solution to each industry.
For example, steel is pure commodity, very difficult to eat any cost from stranded assets, and has far less ability to call up capital to solve the problem than, say, natural gas. So the price will have hugely different consequences for steel than natural gas production, and there are different tailored industrial policies that will make the transition happen much more time- and cost-efficiently.
If a ship burns the filthiest high sulphur bunker oil then it pays no more tax than a sail boat.
We can't fix climate change with exceptions for everyone.
By the way, I'm working on the assumption of a carbon price applied on fossil fuels at the source, such as the Energy Innovation Act would include.
That customers will feel price pressure from their most-carbon-emitting activities and commodities is precisely the point. This will encourage finding alternatives. No demand is entirely inelastic.
Squeezing extra tax out of poor people who have literally no alternative is not going to be a popular plan. Allowing for a hint of nuance in your public policy would incentivize switching to alternatives where possible, while also incentivizing the development and adoption of alternatives where they don't currently exist.
I am highly skeptical that is it possible for American legislation's 'nuance' to tilt a simple tax law in any direction but towards enriching the rich and powerful.
I feel like carve outs would be great for lobbyists and the politicians they pay patronage to, but it would destroy the effectiveness of the carbon tax: the industries with enough political power would negotiate exemptions because "there are no economically feasible alternatives" but making carbon-expensive activity economically infeasible is the core purpose or the carbon tax.
Exempting any industry in particular is just corruption.
I think a carbon tax with dividend actually fits the criteria you are describing pretty well.
If the amount of the tax were fixed, the dividend would decrease over time, but the tax gradually increases as we get better and better at doing things without emitting greenhouse gases. The eventual target being net zero carbon. Based on the tax level in the Energy Innovation Act as an example, this is predicted around 2050.
As to your second point - moving the goalposts every time progress is made eliminates any incentive to improve. If you're committing to keeping the dividend the same over time, that means you need to keep the tax take the same. And if you're gonna take the same amount of money off me regardless, why should I pay attention to my emissions? In the limit case, of zero carbon, the carbon tax rate is infinite and you're taking a bunch of cash off people for nothing. Somewhere along the way, something has got to give.
You could also have tax paid off over time. E.g. a concrete building that lasts 60 years, vs a stick build that lasts 20. Bricks are frequently recycled, >100 year lifetime.
I'm open to hearing counter-examples, i.e., where there is an external cost to not manufacturing a high CO2 cost product. The examples I've seen so far are really arguments about competition with BRICS economies, and their bizarre exemption from controls.
The downside to having separate laws per industry is that you’ll get insane workarounds (see import tariff law). Carbon is carbon — so workarounds are easy. For example if natural gas is taxed higher than steel, you’ll have natural gas companies producing just enough steel to be qualified as steel production companies so that they get the lower rate. Or something like that.
Choosing policy is tremendously difficult. We could deliberate all day. despite what I’ve said, a carbon tax is better than doing nothing, and we would be wise to start creating/increasing carbon taxes already.
1. In the short term it makes steel more expensive. But because steel is essential, we still use it, it just costs a little more. If you're building a clean energy power plant, or making a generator for a hospital, some of the tax revenues could go to you, to make those things still affordable.
2. In the longer term, there are now huge financial incentives to either reduce the carbon consumption of steel production, or to replace steel with something which uses less carbon. Which is what you want.
Your implicit assumption is that companies are willing to pay more for steel. An increase of just a single digit percent more to the price of steel is enough to be completely uncompetitive with overseas steel production, which would inevitably lead to the closing of all local manufacturing capacity of steel.
Steel production is also a commodity critical to national security. Losing access to foreign steel due to war or other concerns would literally bring the country to its knees for the duration of the encounter.
Shifting all local manufacturing capability overseas to where there is less regulation sounds good, until it doesn't... as we saw during the pandemic. The world would have looked a lot different today if Chinese manufacturing had closed or decreased for more than a few weeks (roughly Jan-Feb, much of which coincided with the usual Chinese New Year shutdown that is typically planned for).
2. Replace steel? I see how this rationale works, we strive to replace X for something that generates less carbon, this ought to work to some extent until nothing more carbon neutral exist.
If the price is set on carbon, I’d expect it to be proportionate.
For the rest of the word, we are having that massive technological innovation right now that will increase quality of life globally. For electrifying the developing world, micro grids with renewables and storage will be immensely cheaper than building our massive transmission grids and large centralized production.
Industrial sectors have the least clear path to decarbonizations, as well as sea-freight and flight, but if we can solve electricity and transportation in the next decade we have a few years so solve these far smaller sources of emissions.
There is a lot of reason to be worried, but there's also a ton of reasons to be hopeful. GDP is already decoupling from emissions, and I think as we decouple it further, we will find a higher quality of life for the vast majority of people, both in developed or developing nations.
But if we have to drastically reduce ground freight and shipping emissions to reduce co2 emissions enough, which we do, goods will be more expensive. And it's also not free to switch private cars to EVs. If goods in general are more expensive, then peoples' money goes less far.
To be clear, I am in favor of this. Maybe you can make the very wealthy eat the cost, but somebody has to pay for it, and I can't see how it doesn't result in lower mean quality of life.
Average age of a car in the US is 12 years. The fleet gets swapped out naturally pretty quickly, and slight incentives would accelerate that. It's faster than swapping out electric generating capacity.
If we are at 100% of new vehicles being electric in 2030, I'd be surprised but also ecstatic.
I don't think that's necessarily true. It will be expensive to switch to renewables, certainly, but the ongoing externalities and subsidies for fossil fuels are already extremely expensive to society. Even if you completely ignore climate change, the costs in terms of healthcare and QALYs just due to air pollution alone are tremendous.
We have the technology we need to solve climate change already, the problem is not that people aren't willing to make the necessary sacrifices, the problem is that it's hard to get past societal inertia and overcome entrenched special interests.
Not really, that’s why it’s an externality. The damage in the US caused by climate change is maybe a few billion annually in increased hurricanes right now. That’s only like $10/person a year.
This is why it requires getting people to understand the future damage that will be caused. What’s happening now isn’t enough to justify doubling electricity costs, etc because most citizens aren’t feeling any pain from climate change.
> the costs in terms of healthcare and QALYs just due to air pollution alone are tremendous.
CO2 != “air pollution” in the sense that causes health problems.
In France we had a Citizen's Convention for Climate (CCC), basically a citizen's jury of 150 people tasked with finding solutions for the climate crisis.
One thing was extremely clear from their proposals: people are absolutely willing to have strong climate laws passed as long as they only constrain other people. Usually these other people being vague shapeless corporations, because it feels like any cost that they bear isn't a real cost.
Maybe a climate change solution won't reduce anyone's standard of living, but maybe it will. If we're content to say "we have to stop polluting activities unless someone's livelihood depends on it in which case we'll do something else", we're screwed. Every polluting activity has someone's livelihood depending on it.
See https://rooseveltinstitute.org/wp-content/uploads/2020/07/RI... for more of that.
If anything, it's actually this sort of nuclear subsidy that could be too hands off --- if it's like a 1990s throw money at ISPs for fibre with no strings attached tpye thing. I would say Carbon tax and nationalize the nukes.
So it seems to me the authors of carbon pricing proposals agree with this book, and pivoted accordingly.
* First, academic economists have basically ignored the topic. A survey of top economics journals found that, out of 77,000 total articles published, only 57 (0.074%) were about climate change.
* Many of the most cited papers have turned out to be crap, with basic calculation and data coding errors the authors have had to publish corrections for. Smith argues that this is partly because economists don't collaborate with other researchers much, especially natural sciences like climate change.
* The most important model for integrating climate change into macroeconomic analysis is the DICE model created by Richard Nordhaus. But the DICE model has big problems, the most important of which is that, due to discounting of future economic effects, it basically ignores the welfare of future generations. The DICE model also assumes that preventing climate change will be very expensive, and hasn't adjusted for recent technology advances on that front.
* Last, economists have been obsessed with carbon taxes, and haven't dealt with how politically unpopular they are, especially in international negotiations. This is, IMO, similar to how economists love to promote free trade, saying that the losers can be compensated via money from the overall economic gains, leaving everyone better off, and ignoring that this never, ever actually happens.
I'm in the camp that thinks that economists haven't earned a ton of credibility on the specific topic of climate change. Our best shot, IMO, is massive R&D efforts and CO2-removal geoengineering (especially wave-powered olivine weathering, as promoted by Project Vesta). Accompanied by crippling taxes on heavy emissions industries, but I think people will have an easier time accepting those if it's clear that governments are pursuing alternatives to taxes too.
I wish there was some discussion of carbon tax and dividend though. Like I absolutely agree that the orthodox "supply constraints and everything is a tradeoff" macroeconomics is nuts, and climate resilience doesn't need to suck, but we also can't just have electric-car are way there.
We simply need to make driving suck more, separate from making taking the train suck less, and Carbon tax + dividend is a great way to do that fairly and with minimal pain.
As a quick example, free trade has allowed more developed nations (like the US) to leverage the labor markets in less developed nations, like China. As a result, money has flowed into those labor markets and increased the quality of life in those areas.
To be clear, those labor markets aren't perfect, and free trade as a universal good is a ridiculous idea. My point is just that free trade has led to a lot of good the world over and the referenced statement is over simplifying something that is very complicated.
As far as convincing people, the way Canada gives taxpayers a big carbon tax refund is a good way to sell it. People love getting a summer bonus, and it still pushes people towards better solutions.
Because "no hope" in politics can become "certain outcome" with only a few switches in influencers. The US is subject to minority veto in all of its national legislation, so if the Koch influence were to cease, or if there was a (shocking) change of heart from that huge influence on the minority political power that is the roadblock to a carbon tax, that could all change.
Carbon tax is different from other taxes as the primary purpose is not to raise money for govt, it's to reduce carbon producing activity.
So take all the proceeds and distribute directly to every citizen to use as they want - e.g to buy petrol if that's their choice.
When people see those checks arriving they'll be more positive.
The Washington state plan included this redistribution. People didn't go for it.
Say you are choosing between 2 otherwise identical apartments that include utilities in rent. One building is more energy efficient than the other thus can charge less in rent and still make as much profit. Even though you are getting a dividend check you will still choose the lower priced apartment (if you are a rational economic actor).
Multiply this scenario across the billions of economic decisions across the economy and it adds up quickly.
In your specific scenario, since the initial tax is low a few pennies in added cost won't really matter, gas prices go up and down already. But you know that the price will continue to rise, so if you are a rational economic actor, the next time you buy a car you will take that into account. And by the time you need a new car the price of EVs may have declined enough to be cheaper than a new gas car, as they are predicted to be by the middle of the decade (fuel and maintenance are already significantly cheaper).
In the US we are not in a situation where drivers are a small enough minority that they can be ignored.
They drive in a group of 4 or 5 families half way across the country towing their rally cars and entourage, let alone the actual racing part. It's a huge gas guzzling event.
Yes, they probably consider that they need to keep up this hobby "to live".
One of them said to me that she did feel bad about the environmental impact, but she had no way to offset it.
In her eyes, higher petrol prices would be good - unpleasant but good - because she could then be guilt-free about her carbon-spewing lifestyle.
This to me is the true beauty of a carbon tax.
Sounds like I need to read about that.
Also, shit. There goes one of my last hopes. Really hope Project Vesta pans out, because I don't see much else.
Anyway, that's about what I see happening if you try to tax carbon. There is no legibility into what causes pollution from the outside - you can't look at the good itself, you must know the history of all inputs down to the raw goods and then some! If you just tax the creation of carbon domestically, you will encourage offshoring everything that necessarily pollutes to places that will pollute way more. If you just tax big players, businesses will split off divisions to be under the limit. If you just tax certain industries, you will send them offshore (apart from air travel). The righter solution would be to implement a carbon VAT, so that you align the incentives of producers and consumers. Now, you are in the business of taxing grain from peasants! How much pollution goes into foreign steel? Who knows? Are their carbon offsets real? Do we just put a tariff on foreign steel which feels sorta right? That will violate trade deals and will doubtlessly punish the honest players the most, once again encouraging more pollution.
It’s a revenue neutral tax increase on carbon, returned to the people who are now paying more for just about everything.
Poor people who don't use much carbon will net benefit. The rich who are now paying a bit more to re-fuel their private jets will pay a bit more.
I would make a bit of of a change, though--make the carbon tax refundable. Lets say you tax CO2 emissions at $100/ton. You then pay $100/ton to anybody who effectively sequesters CO2.
In fact, I would pretty much scrap the emissions rules and replace them with taxes of this sort. There should be no acceptable level followed by fines, there should be a cost from the first gram.
In this fine-based policy, the price is set by policy and quantity by the market.
That would have been the plan 30 years ago.
Right now, we can either turn it up to 11 when the scheme starts, or face horrible consequences.