« Inflation and the Debt/GDP ratio | Main | The Federal Debt of the United States, 1791 to 2018: A Presidential Ranking »


Feed You can follow this conversation by subscribing to the comment feed for this post.

I'm not an economist, but isn't it possible to explain using a world with two consumers: consumer A flies a ton, where consumer B flies not at all. Assume consumer A emits 3 tons of carbon, and consumer B emits 1 ton of carbon. Assume the carbon tax is $100/ton. So consumer A pays $300, consumer B pays $100. And they both get back $200 each. Consumer A is out $100, and has an incentive to reduce his carbon consumption -- it's that simple. Consumer B could use his extra $100 to emit more carbon, but he could also use it for other things. Like mass transit. Or a new bike.

So a key point is that the rebate is -flat- to all taxpayers, not prorated by how much tax one paid, or how rich one is, or anything like that.

I think statement five adds the defeating twist to the carbon tax.

Statement five reads "V. To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in “carbon dividends” than they pay in increased energy prices."

You see, American families already receive more benefits than they pay in taxes. This because the American government borrows each year to enable it to pay out more than the limit of taxes-collected.

I think the public looks at a carbon tax as it would a tax on tobacco. Yes, it would increase the cost to the consumer, discouraging some. It would also discourage some production to the extent that government is capturing some of the potential income from the macroeconomic income stream. Some reduction of carbon should occur, but which income group would shoulder the inconvenience of fuel switching?

So to summarize, is it realistic to assume that an increase in payments to the low carbon consuming group would shift average fuel consumption in the macro economy away from the present borrowing-based economically-distorted average? I would suggest that we could look at the effects of tobacco taxes for guidance.

Instead of comparing different consumers, why not just point out that a carbon tax just makes more polluting products more expensive, so consumers and producers who want to do the right thing can do so without putting themselves at a disadvantage.

And because we don't want to penalize people when there is not low carbon choice, the average tax take I'd refunded.

The tax increases the relative price of greenhouse gas emitting activities, and the rebate serves to offset the income effect of the tax. The reduction in emissions is brought about by a substitution effect induced by the new price signal.

Other readers:
The phased-in carbon price gradually discourages purchase decisions by companies and individuals that lead to pollution. The accompanying rebate to all citizens keeps the marketplace working like normal, with the same amount of cash flowing as income and as consumer purchases.

-BF Nagy, author of The Clean Energy Age

I don't actually think the basic concept is that hard to get across to people; it's more that the scale of the system makes the dynamics less intuitive to people.

I've had some modest luck explaining it to people in terms of a swear jar at work - in a public-facing office, everyone agrees they need to swear less in front of the clients. The 100 employees set up a $5 swear jar system, but they can't figure out what to do with the money, so they just evenly divide the money at the end of the week. The good news is that at the start, those other foul-mouthed fiends I work with are giving me coffee money for the week. And if I swear I get 5 cents back, but it cost me $5, so I try to be careful...

Of course, this isn't completely fair; some people work directly with the team in the warehouse, and they curse like sailors in there. There's no way they'll be able to just go to zero swears in the office immediately. So the team there to start with get 2 or 3 swears for free, and only after that do they pay the $5; of course the idea is to slowly wean that down over time.

It's like a competition, where all the competitors put an equal amount of money into the pot, and the amount of prize money they get out of the pot depends on how quickly they ran. So each has an incentive to run more quickly. Except in reverse: they all get an equal amount of money out of the pot, and the amount of prize money they put into the pot depends on how much carbon they use. So each has an incentive to use carbon more slowly.

Not to disagree with the larger point here, but this post seems to be conflating Output-Based Allocations and the cash transfers to households. Is there something I'm missing here?

Federal Liberal here. I try to explain it something like this - the key point is in bold.

The carbon price starts relatively low (at $20/t or 2.2 c/L) and steadily rises each year, to give people time to adjust. The idea is that first we look for ways to cut emissions that are worth less than $20/t, then emissions between $20/t and $30/t, and so on. So we're always cutting the cheapest, least valuable emissions, wherever they are. We're not singling out one province (Alberta) and demanding that they bear all the costs.

Carbon pricing isn't the only part of the national climate framework - for example, Canada is also phasing out coal-fired power by 2030 - but it's definitely a big part of it.

For provinces like Ontario which don't want to do carbon pricing themselves, Ottawa will do it for them. Ottawa doesn't keep the money from the federal carbon tax: in fact it estimates in advance how much revenue it's going to collect from the province over the coming year, divides it up, and sends it directly to households at tax time.

With a rising carbon tax, total spending on gas will go down. For example, some people who drive larger vehicles will trade them in for smaller, more fuel-efficient ones. (Right now the most popular new vehicle in Canada is the Ford F-150.) We've seen this in BC, which has had a carbon tax since 2008.

The household rebate doesn't change this. Say you get $200 in April, based on Ottawa's estimate of how much federal carbon tax it'll collect in the province over the coming year. You're not going to spend the entire $200 on gas. You may spend some on gas, but you'll also spend some on groceries, etc.

So the overall effect is that total spending on gas goes down.

A second key point about the rebate is that most people (about 70% of households) end up with more money. Richer people spend more on fossil fuels: they spend more in general, they have larger houses to heat, and they drive more because they're less sensitive to the price of gas. In Alberta, for example, the highest-income 20% of households spend 2X as much on fossil fuels and electricity as the bottom 20%, and 1.5X the average household. So the richest households also pay a lot more of the carbon tax, while they get the same rebate as everyone else.

A third point is that Ottawa can't plan to start spending the money from the federal carbon tax instead of returning it to households, because the province can at any point in the future change its mind and decide to do carbon pricing itself, so the federal carbon tax no longer applies.

Finally, there's the rebate for large emitters (OBAs). It's a little complicated, but it's similar to the household rebate: in each sector, the firms which are dirtier (more emissions-intensive than average) end up subsidizing firms which are cleaner (less emissions-intensive than average). This protects the average profitability and competitiveness of the sector - we want to reduce the emissions intensity of the sector, not just move it somewhere else - while ensuring that the sector still has the same incentive to cut any emissions worth less than $20/t.

The explanation is pretty intuitive but also intuitive is that $200 into government hands does not equal $200 out.

What? No administration/bureaucracy costs?

Also, what's the deal with exceptions for big emitters?

I don't think this is a comprehension issue. It's a skepticism that it'll end up being at all like that. Just look at BC's carbon slush fund.

Sure, admin costs are important, but they should be pretty low, since the carbon tax is simple to set up and administer: it's basically just a sales tax on fossil fuels, paid by the fuel suppliers, with the rebates coming back via the tax system. (In BC, the Campbell government actually sent out an initial cheque to every household, which must have cost quite a bit in postage.)

"I don't think this is a comprehension issue."

Mistrust is probably also a factor, but I think Stephen Gordon is right - it's not intuitively obvious how the tax-and-dividend approach actually works to reduce fossil fuel usage.

If we taxed *everything* an extra $X, then gave this money back to everyone, then yes, that would have no effect. But if we tax *only carbon*, and give money back to everyone, then people have an incentive to use less carbon, as in the swear jar and Molson examples, because they get money even if they consume less carbon

Does that help?

...because they can avoid the tax by consuming less carbon/not swearing/drinking a different beer but still get the money

Are there any historical examples of tax schemes that have altered human behavior on a global scale within decades in a way that was both intended and predicted?

Same logic behind taxing income and transferring income. Less work. More other activities.

Most who oppose carbon taxes should get that.

@P Jako sen: taxing coffee by the British in the empire to stimulate tea consumption.

The Carbon Tax + Redistribution creates an artificial Prisoner's Dilemma situation, which should not be so difficult to explain to people. Economists presume that everyone always defects on the PD because economists have decided that local gradient-following behaviour is their definition of "rational". In practice, I suspect quite a lot of people would defect in a Carbon Tax scenario but you might be surprised... this is a deep issue and there's plenty of resentment on both sides. Gratuitous Star Wars: "If droids could think, none of us would be here".

A few more problems that economists should be aware of but most of them choose to ignore: first is that every tweak to the tax collection system is always strictly revenue neutral (long term) because government revenue is controlled by government spending. Only changes in spending matter to the overall total, but after that it's a matter of who pays for the spending (could be by direct tax now, indirect tax now, inflation-as-tax, or borrowing and taxing the unborn).

Second problem is that governments can never be trusted to keep promises ... therefore we have a "Hold Up Problem" constantly in operation. Thus, once they get the sniff of a new revenue stream they will inevitably increase spending (maybe not on the same day, but over time they have a proven track record of being unable to resist temptation). Most people understand this (either explicitly or at least intuitively) therefore it makes good "rational" sense to resist the building of new tax collection machinery at all costs. Dealing with the effect of a few degrees of warming will be a trivial effort compared with trying to survive under the weight of an ever-growing government apparatus. Therefore IMHO almost all the voters quickly discount the "carbon dividends" and see this only as a new tax ... personally I believe that is correct analysis, even if many people get that answer more out of gut judgement, and could not explain the details of a "Hold Up Problem" from the theoretical side.

Third thing is, a good fraction of the population have now switched off any caring about the CAGW scenario, and do not consider any of this worth putting time and effort into. We have been warned of disaster for about 30 years now, every 10 years is our "very last chance" to do anything, so probably in another 20 or 30 years time it will still be our "very last chance" and we can worry about it some other time. They have more immediate issues like: keeping their jobs; hoping their boy comes back home from a foreign war; getting sick and not being able to afford treatment; paying the mortgage; rising interest payments; rising crime; and rising prices. Some people are also worried about the laundry list of SJW issues like racism, inequality, poverty, etc. Seriously look at the poll data and CAGW doesn't come up in the top 10.

In reply to Blake Schaffer's oversimplified summary: the bar would be losing money, that's not a revenue neutral proposal.

Also, this comment makes the same oversimplification:

If the carbon tax was only thing that was going on, households and firms would have to change their behaviour, simply because they couldn't afford to carry on as before. But if they received the appropriately-sized rebates, they could use use that extra income to pay the tax and carry on as before.

No that's not what was proposed in the original signed statement, read carefully: "all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates", the point is that if even one person does change behaviour then there will be less revenue and therefore the rebates will shrink. The rebates are not constant. Thus, for the people who choose not to change behaviour it does operate as a Carbon Tax and they are left out of pocket. The more people switch over to a low Carbon option, the smaller the total revenue and the greater the penalty on those who continue consuming Carbon.

If ALL individuals and firms carry on as before, then they ALL get rebates and it works out ... however if SOME individuals carry on as before while others do not, then you can see how this is a Prisoner's Dilemma situation (with many players, therefore making coordinated resistance difficult).


Blake Schaffer's tweet reads:

Don Braid walks into a bar: Price of Molson up $5!
Bar handing out $5 at entry
Don buy Molson; no harm
Others Switch Beer; pocket savings

Firstly, the maths seems wrong. The amount the bar hands out must depend on the amount of Molson people buy, not some negative cover charge.

Secondly, buying Molson (producing GHG) is a harm. Buty yes, no more so than without the $5 price hike.

Thirdly, pocketing savings (as opposed to spending them on other beer) is definitely a harm if this is the macroeconomic effect of the tax, no? > Lower effective demand. So that cannot be the intended effect.

My suggestion:

Molson is up $5
The more Molson people buy, the cheaper all beers become
Would you now buy Molson or another beer?

You write:

One criticism of the carbon tax - and again, it's not clear to what extent this point is raised in good faith - is that there's no point in trying to get people to substitute away from fossil fuels because there are as yet no feasible substitutes to take the place of fossil fuels in our society. From the marginalist perspective, this is a not a serious objection: there are any number of ways people can make marginal adjustments to their lifestyles in order to reduce emissions. You don't have to completely abandon fossil fuels, just reduce your consumption of them.

OK, so the gist is that by changing relative prices, people will find activities that produce GHG less attractive (because more expensive) while making others more attractive (because cheaper via the rebate). The mix of consumption will change but overall happiness won't go down. In fact, since the tax addresses an externality (global warming), overall happiness will actually increase. Win-win.

But I think one has to look deeper at what it is that people will substitute GHG consumption for and what it means for them. Look at the gilets - jaunes protest movement in France, for example. They went to the streets triggered by a minute hike in fuel prices. In a nutshell, and in my personal opinion, we're seeing the pushback for years of laissez-faire, more like criminally lazy, urban planning and underinvestment in infrastructure. People were sold the dream of owning their own home somewhere in the suburbs of small towns. But that came at the price of complete dependence on fossil fuels for the inevitable car commute to measily paid, precarious jobs. Those most sensitive to price hikes can't just cut their commutes willy nilly. And I think politicians intuitively know this which is why they're so reluctant to do anything, even if they talk the talk. Carbon taxes are the death of suburbia. (OK, so I've outed myself as an architect, here).

If you want look at taxes on fuel, I'll convert everything to US units for convenience. Most Americans pay around $2.50 per gallon for fuel (give or take a bit, depending on state tax). In contrast Australians pay approximately twice as much for the same fuel (about AUD 1.50 per L which comes out to $4.80 per gallon in USD when you convert) while the French pay approximately three times as much as Americans for the same fuel (approx €1.50 per L which comes out about $7.50 per gallon).

So did we see "death of suburbia" in Australia or France? Heck no, Australians drive long distances. We hate the high price of fuel, but we pay it. When you consider there's also a high price for rail transport, large amounts of personal time consumed, high price for parking, many major roads are toll roads, and a tiny apartment in Sydney will set you back a million bucks (give or take, but overall not easily affordable) ... well just suck it up and pay for fuel.

My prediction is the opposite. I predict the "death of cities" and here is why: compare the improvement in commuter transport (all styles) with the improvement in communication ... most people I think would conclude that not only is communication winning but will continue to improve at a vastly more rapid rate than physical transport. Long ago cities were walled regions built for mutual defense ... that purpose is now thoroughly obsolete thanks to cruise missiles. Then cities turned out to be useful to provide concentrated labour for assembly lines and mass production factories ... many factories have now left the Western countries, but anyway flexible manufacturing is gradually displacing mass manufacturing since we no longer have a shortage of goods, but what we want is higher quality and more personalized goods with less waste. Finally, cities provide a centralized hub of business and commerce with closely packed office buildings ... well all that will move online. People can sit anywhere to take phone calls, exchange emails, and update records in a database (which is what 90% of office workers do) so they can either sit at home, or in a local workspace. There is no longer any physical need for cities, we have more efficient alternatives to the horrible daily mass transit commute, and since people do not enjoy being packed into small spaces with other people, they will naturally start to decentralize.

I understand that architects hate suburbia (don't fully understand why) but the people who pay for houses show a clear preference for living in more comfortable and lower density accommodation.

There's still some things that will only exist in cities. For example, maybe I want to see an opera and it's not going to be available in a small town. On the other hand I can put on a DVD at home. Maybe I want to go to a great restaurant ... but how great can a plate of food really be? I don't see any of the cultural attractions as deeply compelling for our current setup, although the physical transport of humans will never go away entirely, it will reduce significantly.

You're actually making my point. There is a level of fuel prices that people will tolerate without changing their habits. This is what we have seen so far in the three countries you mention. Taken together with the wage level, there seems to be a tipping point that has now been reached in France where the response is not reduction in fuel consumption along some nice little marginalist curve but rather a full blown protest movement the likes of which any democratically elected politician will seek to avoid at all costs.

As for cities, I'll say that at least our perception of the problem seems to be aligned when you speak of horrible daily mass commutes. And you're right that this is as much a function of the physiognomy of the inner cities (CBDs) as it is of the suburbs. In fact the two go together. It is the modern city, as envisioned in the 20th century, that was thought along the lines of functional divisions and the car, that I was deriding. I should have been more precise. So, when I speak of the death of suburbs, I actually mean the death of the modern city. I'm much less sanguine than you about the possibility of people working from home. We've been talking about the paperless office for decades. It hasn't happened. And even if so, there are many advantages of living in a community, not least economies of scale (think Bay Area, Silicon Valley, etc.). All services depend on a certain density to thrive... And, since this is about the environment, it is a pure and simple fact that denser housing (up to a building hight of about 5-7 stories), is much more economical than either high rises or single home sprawl. Think land use, sealing of the ground, freeing up agricultural land, infrastructure per person (roads etc.), heating / cooling, building material, public transport etc.. This may not be quite as apparent yet in large counties such as Canada, the US or Australia. Here in Europe, it is very clear. But then, just compare energy consumption across these regions and you'll see.

In all, I'm saying that the changes necessary to make a big impact will be very fundamental and so I don't agree that people will adjust along a nice little curve. They will cling on to the status quo (i.e. not consume noticeably less energy) until they can't, at which point they'll take to pitch forks.

I understand that architects hate suburbia (don't fully understand why) but the people who pay for houses show a clear preference for living in more comfortable and lower density accommodation.

People also have preferences for big cars, weekend flights, business flights, eating more and more meat, etc.. We've built the world around these preferences, but the world can no longer take it. So we have to change the preferences and that will involve changing the world we live in. Economists argue that one can do so without heavy handed regulation by nudging people through price signals. I argue that that is true to an extent but I don't think it will go down smoothly.

The part about Liberals bringing new carbon tax *and* keeping regulations is not trivial. And people like Jaccard are arguing that so-called "flexi-regulations" are perhaps preferable because less political push back. Nordhaus suggests dead-weight loss of existing carbon regs perhaps 20%, maybe more. This cost needs more prominent discussion.

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad