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Climate solutions and carbon dividends
Peter Barnes, Climate Solutions: A Citizen's Guide is the full title. This simple book is written in the form of punchlines and cartoons but it's still one of the more insightful treatments of the topic. He is skeptical of a carbon tax:
A carbon tax will never be high enough to do the job.
A low carbon tax would create the illusion of action without changing business as usual.
His alternative proposal has four steps:
1. Carbon cap is gradually lowered 80% by 2050.
2. Carbon permits are auctioned.
3. Clean energy becomes competitive.
4. You get an equal share in the form of permit income.
The "carbon dividends" of course are intended to make the tax politically palatable. Naturally I am worried by the idea of revenue addiction, not to mention the general practice of redistributing income from business to citizens simply because it is popular to do so. It might feel pretty good at first but we don't want to encourage Chavez-like behavior on the part of our government.
A broader question is whether the carbon dividends in fact make the citizenry better off. First there is the question of the incidence of the initial carbon tax, which of course falls on individuals one way or another. Second, does just sending people money, collectively, make the populace better off? Aggregate demand effects aside, will the fiscal stimulus make the citizenry as a whole better off? No. Will printing up more money and sending it to everyone, even if that is popular, make people better off? No.
(As an aside, does the Humean quantity theory experiment redistribute wealth from corporations -- which don't sleep on pillows and thus cannot wake up in the morning to "more money" -- to individuals, who do sleep on pillows? Or is the corporate veil fully pierced? Just wondering...)
I fear versions of this idea whose (possible) popularity rests on tricking voters. Being pro-science also means being pro-economic science.
The general point remains that most discussions of global warming focus on prices and technologies alone, without incorporating realistic models of politics. By the way, if you think John McCain is a straight talker, try this for yikes.
Posted by Tyler Cowen on April 18, 2008 at 05:49 AM in Books, Economics | Permalink
Comments
I don't see the relevance of the comparison with printing money. Printing money is roughly a redistribution from people with accumulated wealth to people without, but sending people the money from a carbon auction scheme is a redistribution from heavy carbon 'producers' to light producers. It is not the redistribution itself that is supposed to increase welfare, but the resulting incentive to produce less carbon.
Posted by: greatzamfir at Apr 18, 2008 7:11:22 AM
How is "not high enough" defined in regards to a carbon tax? Does a tax need to be high enough (1) to stop global warming, or just high enough (2) to capture the cost of global warming? My guess is that he is using (1), but high enough should be defined as (2). Once you capture the cost of the externalities of driving in a carbon tax, then global warming will be stopped if it is economically efficient to do so.
Another way of looking at it is this - if the cost is of global warming is so high that we would never support a tax to stop it, why wouldn't we revolt at other measures of stopping global warming that are just as costly. Ultimately, won't we pay the same for electricity whether we cap and trade or have a carbon tax? Whether you return to the people permit income or carbon tax revenue, what is the difference?
Posted by: Rob at Apr 18, 2008 8:27:17 AM
You want to be "pro economic science" but at the same time have a realistic model of politics. What does that model look like?
Posted by: John Horowitz at Apr 18, 2008 8:35:15 AM
greatzamfir makes a good point.
But I favour a tax (at least in my own country). Sure, a tax is politically difficult and it will probably take some time to get the price right. Taxes are adjustable though, and I doubt any serious claim that an auction system will get the price right straight out of the box (potential for gaming etc).
Having said that, I take it as a given that any such tax should be revenue neutral, which might make it a little more politically palatable.
Posted by: Clinton McMurray at Apr 18, 2008 8:46:12 AM
The general point remains that most discussions of global warming focus on prices and technologies alone, without incorporating realistic models of politics.
-Posted by Tyler Cowen
This true not only of this debate but of a large swath of the normative arm of the field of public economics (with the notable exception of the Virginia school and Political Economics school).
You want to be "pro economic science" but at the same time have a realistic model of politics. What does that model look like?
Posted by: John Horowitz
Mayhew laid it out in the 70's, you can have a pretty good model of politics by assuming that politicians are single minded seekers of re-election. There are plenty of good models out there. The point is that policies have to be good from an economic point of view and politically sustainable for them to have any of the desired impact. Far to often economist propose market solutions that commit the same sins of the command and control solutions of the past. The assume that important agents in the system will sacrifice their goals for the good of the whole. This is a silly assumption when it comes to producers and consumers and it is a silly assumption when it comes to politicians.
Posted by: goodnessOfFit at Apr 18, 2008 8:59:30 AM
Surely that McCain policy is fully compatible with the Rooseveltian agenda that Peter Huber recommends in "Hard Green"?
Posted by: Chris at Apr 18, 2008 10:13:45 AM
People who say this:
A carbon tax will never be high enough to do the job.
...only look at the output side of the equation and ignore the other side which is taking co2 from the air. Biochar holds great promise for removing co2 from air and keeping it out of the air for a long time. Biochar could be done without huge expense. There are also other schemes that remove co2 from air so that if the tax is payed out to people who remove co2 from air you can reduce net co2 without too much expense.
Posted by: Floccina at Apr 18, 2008 10:13:56 AM
Arguably, paying dividends is the MOST libertarian approach. Think of it as extending property rights to the atmosphere. The initial allocation is that we all get an equal share. When polluters use some of "my" air, they have to pay me. To minimize transaction costs, I and other owners have a common agent (the government) license carbon permits on our behalf, with the proceeds paid to me and other owners pro-rata.
According to Coase, this should help get us closer to the optimal allocation.
As with most corporations, the shareholders can periodically vote to license more or less of their property, using a majority rule. We could call it an "election".
It also happens to be politically attractive, which doesn't hurt.
Posted by: a student of economics at Apr 18, 2008 11:13:28 AM
Slightly off topic, I thought of something encouraging. Ultimately, the solution to climate change will come through new technologies. The problem is the delay for adopting regulations that will encourage the adoption of environment friendly technologies, especially in the US and China.
But here is the good news. In the technology market, the first mover has a great advantage over its competitors. So even though no truly binding regulation has been adopted yet, there is already a good amount of research in progress. When governments wake up, quite good technology should be available already.
In the mean time, the important thing is to look credible when promising future regulations.
Posted by: Nicolas at Apr 18, 2008 11:30:07 AM
Look at how angry people get when gas prices go up! Or when food prices go up! It isn't going to be politically viable to implement a CO2 tax or cap, unless the consumer sees no change in prices... and when you successfully explain how you are going to tax CO2 or cap emissions without an increase in prices, I am sure there would be a committee in Stockholm that will be very interested.
I don't expect to see any sort of significant CO2 tax or CO2 cap in my lifetime.
Posted by: Rex Rhino at Apr 18, 2008 11:55:52 AM
"In the technology market, the first mover has a great advantage over its competitors."
Tell that to Excite/AltaVista/DogPile/Yahoo.
Posted by: meter at Apr 18, 2008 12:02:48 PM
But here is the good news. In the technology market, the first mover has a great advantage over its competitors. So even though no truly binding regulation has been adopted yet, there is already a good amount of research in progress. When governments wake up, quite good technology should be available already.
I hear that scientists have been making great strides at splitting the atom, and one day it might be possible to do so on and industrial scale to produce cheap clean energy. Obviously, when such technology becomes available, governments will be quick to adopt regulation that would make the use of this energy source widespread!
Posted by: Rex Rhino at Apr 18, 2008 12:06:15 PM
I don't think this is redistribution from business, as businesses will pass higher carbon prices along to consumers (auction revenue would be funded by all carbon emitters, which is all of us). Rather, it would protect consumer income/spending while creating the correct market incentives (higher carbon cost).
Posted by: Sam at Apr 18, 2008 1:11:46 PM
To be more efficient, wouldn't the proper policy involve distributing the carbon dividend to those that utilize carbon sequestration technologies, like land trusts?
Posted by: Nate at Apr 18, 2008 1:24:32 PM
"McCain is the recipient of plenty of back patting just because he's a Republican who actually believes global warming is real."
Just because he believes GW is true doesn't mean he's taken the great leap that it involves CO2.
Posted by: Tom at Apr 18, 2008 1:50:51 PM
I am in favor of either (do something!), and they are equivalent in theory. With caps, carbon output is known and prices fluctuate; with a tax, output fluctuates and prices are known. The important point is that people want to change behavior (hence a cap -- or VERY aggressive tax). Another important point is that rebates of "excess" revenue on a per capita basis do make the caps or taxes politically palatable -- in a democracy.
Rebates are good for conserving lots of stuff, e.g., water
Posted by: David Zetland at Apr 18, 2008 2:11:02 PM
What are the problems with refunding the whole of the carbon tax revenues on a per capita basis? Everyone gets a check every year with the proceeds from the tax. They can spend that on carbon emission if they like but that's relatively more expensive than other untaxed goods, so people would substitute high carbon goods and services for those that could be delivered more carbon efficiently.
We need not worry about the government being addicted to the revenue and incentivizing the government to keep a high carbon status quo. It also alleviates concerns about increasing the size of government. It's not regressive because people are charged relative to their consumption and reimbursed at a per capita level (everyone gets the same sized check). And on average if a person don't change consumption they won't even see there lifestyle change, they will just be encouraged to shift consumption to other products.
It's also simple and easy to explain.
There are still obviously losers - high carbon emission businesses will see sales decline - so they would still be against it. But it removes a large number of everyday folks from being impacted negatively by the tax and makes the politics much easier to swallow.
It can also be ramped up to target the right amount of efficiency. It might start at $300 per year, as we got better at modeling we raise it to the target level to get where we want to be. If we go too high we can even pull it back. Even at a fantastically high level of $3000 per capita, it's still a tolerable tax, because if you want to drive to work you still can, but if you can make lifestyle changes you can save that money for other things.
Posted by: josh m at Apr 18, 2008 2:25:21 PM
Something about carbon markets smell like "artificial market" since it is based on and created by complicated government regulations as opposed to a real market that spontaneously grows and evolves.
This "market" is similar to the "California utility market" and thus people will decry the "failure" of this program to "market failure" once someone figures how to game this zero sum game.
Posted by: jack at Apr 18, 2008 4:59:24 PM
As hinted at by "Student of Economics", Coase would argue that there is no difference between a "carbon tax" and "cap and trade" except for the initial allocation of the burden/rewards.
To argue that we can't have a high enough carbon tax so let's use cap and trade is silly.
Posted by: TomHynes at Apr 18, 2008 8:10:09 PM
As hinted at by "Student of Economics", Coase would argue that there is no difference between a "carbon tax" and "cap and trade" except for the initial allocation of the burden/rewards.
To argue that we can't have a high enough carbon tax so let's use cap and trade is silly.
Posted by: TomHynes at Apr 18, 2008 8:10:41 PM
TomHynes: "There is no difference between a "carbon tax" and "cap and trade" except for the initial allocation of the burden/rewards."
I agree, and since cap and trade often (usually?) includes initial allocations to large polluters, I have tended to prefer the carbon tax.
However, Tyler's post may change my thinking. If the idea that we all have property rights to the air can take hold, then the idea that we are all entitled to our share of the revenues might make the cap+trade+dividend idea superior to a straight carbon tax. Instead of having the gov't decide what to do with the revenues, have the people get the money directly. The people can then decide where to send it, including back to the gov't via other taxes that they vote on.
It's a bit analogous to when the US gov't created other property rights, e.g. radio spectrum or even on the frontier in the 1800s.
Posted by: a student of economics at Apr 18, 2008 9:57:50 PM
To be more efficient, wouldn't the proper policy involve distributing the carbon dividend to those that utilize carbon sequestration technologies, like land trusts?
Posted by: Nate at Apr 18, 2008 1:24:32 PM
Nate, I'm not an economist, but common sense tells me that carbon sequesterors should get the proceeds, as you propose.
The world's ocean currently absorb about 2 billion tons of carbon a year. Since those oceans are held in trust, they would logically provide a base credit in any carbon market system.
I propose that the rest of the earth's sink capacity, which is forests, be auctioned by the owners, governmental or private, for those who want to use more than what the ocean allocates for free.
Sink capacity is still a science in flux, but surely we could start grading forests using sat data and some sort of checklist method like tax assessors use on homes to arrive at something close to their sink capacity.
If sequestration is fould to be viable and sustainable, that could be added to the mix as well.
Posted by: Joel at Apr 19, 2008 1:21:16 PM
Good to see 'cap and dividend' being debated so vigorously. For anyone interested in more explanation of this simple, market-based climate solution, check out http://www.capanddividend.org.
I agree with sam, josh m and student of economics. Cap and dividend does not redistribute from businesses to consumers; it redistributes among consumers, with over-consumers paying conservers (which is as it should be). Further, it is a libertarian Coasian solution with property rights to the atmosphere distributed equally to all, rather than grandfathered to historic polluters.
Posted by: Peter Barnes at Apr 24, 2008 1:01:11 PM
