Is Australia’s Carbon Tax Repeal Really Market Enhancing?

Some libertarians cheer whenever there is any tax repeal. However, we need to distinguish taxes in form versus taxes in substance. Taxes in substance have no relation to a benefit or penalty attached to the payment. Taxes in form, but not in substance, pay funds to the government, but are tied to some benefit or compensation for damages.

It is standard economic theory that the best way to prevent pollution, as with other negative The effects, is to make the polluter, hence also the buyer of its products, pay the social cost of the pollution. The economist Arthur Cecil Pigou provided a thorough explanation in his 1920 book The Economics of Welfare. A tax on pollution has since then been called “Pigovian.”

One of the most discussed Pigovian taxes has been on the use of carbon-based fuels such as coal, natural gas, and oil. A “carbon tax” can be on the fuel inputs or on the emission outputs. The most effective Pigovian levy is on the emissions, as that provides an incentive to reduce pollution such as by capturing the carbon before it gets spewed out. If the polluter does not compensate society for dumping on the commons, then in effect it gets subsidized, as it sells its output at less than the total social cost of production.

Many countries have been confronting pollution with inefficient policies such as regulations, credits for offsetting pollution with purchases of forest lands, and permits that can be traded. Australia enacted what was called a “carbon tax” with the Clean Energy Act of 2011, implemented in July 2012. But this was not a Pigovian tax. The Act created a “carbon price mechanism,” a cap-and-trade emissions trading scheme that at first set a price per ton of emissions. This mandated price had the effect of a ‘carbon tax’. But after 2015, the mechanism would have transitioned to a trading scheme.

However, in 2013 the newly elected prime minister sought a repeal of the “carbon tax” emissions trading scheme. In 2014, parliament passed the repeal.

The opponents of emissions taxes claim that this increases costs to business and households. This is narrowly true, but policy should consider the total costs to society. The pollution imposes a social cost on Australia and the rest of the world. This is not a cost paid in explicit money, but costs in the form of illness, a less productive environment, and possible effects on the climate.

The opponents of emission levies overlook that the absence of compensation for the pollution costs is in effect a subsidy to the polluters and their customers. A pollution charge is not a tax in substance, but rather the prevention of this subsidy, and compensation for dumping toxic materials on other people’s property.

The repeal did not provide a replacement, and this creates uncertainty for business about any future anti-pollution policy. This policy uncertainty reduces investment and growth.

The best way to implement a pollution tax is as a replacement of other taxes. Taxes in income, sales, and value added impose the excess burden of higher costs and less output and employment. If politicians are concerned with tax costs, why are they not repealing these taxes? When a pollution tax replaces such market-hampering taxes, the total costs paid by consumers does not increase, but rather shifts in favor of less- polluting products.

Actually, the revenue obtained from Australia’s brief carbon tax was used to compensate taxpayers and affected companies. But the most effective policy would have been to have an explicit tax on pollution instead of a trading scheme, and to lower other tax rates, along with a transitional compensation to those with net losses.

Some opponents claim that Pigovian charges would be good if applied globally, but in a single country, would put its industries at a disadvantage. But that would not happen with a “green tax shift,” the replacement of inefficient taxes with a “green tax” on pollution. A green tax shift would reduce the environmental cost of pollution while not increasing the total tax costs for the country’s economy.

Thoughts on climate change

Last week I heard a sermon on climate change (no, it was an actual sermon). I’m roughly agnostic on the existence and degree of climate change, but I err on the side of assuming it is a large problem of externalities with no obvious property rights solution and will have costs. And I think that under those assumptions there is an important moral element to it. With that in mind, below are some of my thoughts on the weak points of the sermon:

1) Authority is only a starting point; we cannot defer ultimate responsibility to authority. If an expert or someone I trust tells me something about X, and I don’t have any prior knowledge about X, then I believe them. In the case of global warming there are two basic sorts of information you will get from information: a) diagnosis (temperatures could rise X degrees in the coming century), and b) prescription.

The climatology involved in a) is well above my pay grade, and so rather than undergo the costs of informing myself on the existence or importance of climate change, I just figure the truth is somewhere in the middle of what reasonably informed people say and instead focus my effort on my areas of comparative advantage. Now the actions in b) are typically about reducing waste and that’s well within the realm of economic thinking, so I’ll comment on that!

1b) Blindly deferring to authority to assuage your guilt is wrong and bad. Someone says you should drive an electric care to save the environment? Don’t do it before thinking through the matter, this is a big decision for most people. Where’s the energy coming from to power that car? (Coal. That is burned hundreds of miles away from your car… that’s like having a car with a hundred mile long drive shaft.) How much energy and material does it take to make the car? (Hint: look at prices.)

2) It’s called climate change, not climate universal and uniform worsening. If climate change means a warmer climate for Canada and Russia, that will come with extended growing seasons and savings on winter heating costs. Burma? It’s probably going to suffer a lot. Climate change will surely have the biggest impact on the poorest people in the world, and this is where I see the real moral issue because…

3) We can respond to climate change in a way to reduce suffering. Specifically, we can open borders. First off, that would increase human well being, with an enormous benefit to the world’s poorest people. Second, the effects of climate change won’t harm the poor as much as they could. Is climate change still a bad thing if we do this? Sure, but if a building is burning, why not help people get out?

Loose ends:

Should I recycle everything? Only if it will actually help. Recycled aluminum is chemically identical to virgin aluminum and uses fewer resources to produce (which is why it’s cheaper!). Recycling paper creates a lower quality product, uses a lot of energy and creates pollution.

Paper bags are brown, that’s good, right? Plastic bags are almost ethereal; they use a fraction of the material per unit of carrying capacity resulting in big savings. Yes, there are offsetting costs to using plastic, but it isn’t as simple as “this brown, it must be natural and therefore good!” And while we’re on the topic, brown M&Ms are stupid. There’s a layer of white sugar between that brown outer layer and the actually brown chocolate. Brown M&Ms are as unnatural as any of the other colors.

Should I buy local? Maybe if you live in California, but not if you live in Massachusetts. The biggest environmental impact of food is growing it; plowing fields, planting, watering (outside where the water could just evaporate!), and harvesting use a lot more energy than transportation. So if you live in a place with poor growing conditions, then buying local only does more harm. That said, fresh food tastes better, so by all means pay the cost if you value the flavor, just don’t delude yourself into thinking you’re reducing energy usage by doing so.

Consider opportunity cost and present value! So you’ve got a solar panel and now electricity is free for the next 20-30 years! Or you’ve installed new modern insulation for your home. Or you bought a car that costs less to run (and you’ve promised not to increase your usage). But at what cost? If your solar panel used 40 years worth of energy to build and install, then you’ve done more harm than good. And you’ve done that harm upfront. Even if one of these investments has a positive return (it saves more resources than it uses), you should still consider whether it’s a good investment. We don’t have unlimited resources, and that means that if you spend $10,000 on insulation that will give you a 0.4% ROI then you’ve given up the chance to invest that money into something that will generate more good.

The Civilization Bubble

There have been many financial and real estate bubbles during the past few hundred years, and there have been empire bubbles, but never before has there been the global civilization bubble in which we are now in. The bubble will collapse within a few decades. It will be the end of civilization, and will result in world-wide violence, deaths, and chaos.

Empire bubbles can last several hundred years, as for example the Mayan civilization or the Roman Empire. What brings down empires is invasion, bad economic policy, environmental exhaustion, or weakened tyranny. The Soviet Union, for example, was a statist bubble that was brought down by economic decay and weakened tyranny.

Most of the world is now in a global civilization. There are two enemies of this global order. One enemy is terrorist pseudo-religious supremacists. They could bring down the global civilization with electromagnetic bombs that would wipe out the storage and transmission of data that the world’s economy depends on. Very little is being done to protect the global electronic infrastructure from attack, thus the bubble.

The other threat to global civilization is internal, or as scientists say, endogenous. Global civilization is rushing towards an environmental collapse. There are hints of this in the plastic contamination of the oceans, the depletion of fresh water, the destruction of fish and corals, the eradication of forests, and possibly accelerated climate change. What will most likely bring down global civilization is the plundering and poisoning of the natural infrastructure of the earth. Continue reading

The Pigou Club

Professor N. Gregory Mankiw of Harvard University initiated and hosts “The Pigou Club” of economists, journalists, and politicians who have favorably written about pollution levies as an efficient way to reduce emissions. Arthur Cecil Pigou was the economist who was the first to deeply analyze externalities (uncompensated effects on others) in his 1920 book The Economics of Welfare.

Pigou proposed a levy on negative external effects equal to the social cost, so that buyers and users pay the full social cost of products. The most common applications are tolls to prevent traffic congestion, parking meters that vary by time of day, and pollution levies.

The policy of charging those who create negative externalities is named Pigouvian, or Pigovian. Mankiw advocates higher gasoline taxes, but that would also tax those car owners with cars that run quite cleanly and are driven in roads that are not congested. The best Pigovian policy is to focus the charge on the negative element such as harmful emissions.  Continue reading