Why is carbon pricing so hard?

by John Quiggin on March 13, 2019

I’ve just published a piece in Aeon (an excellent and free online magazine) drawing on the analysis in my (about to be published) book Economics in Two Lessons. I make the case that carbon pricing, whether through a tax of an emissions trading scheme, is the most cost-effective way to stabilize the global climate. Moreover, it’s straightforward to offset any adverse effects on low-income earners, displaced workers and others.

That raises the obvious question: if carbon pricing is so good, why is it so hard to implement, compared to less efficient alternatives like mandatory renewable targets. One factor, which I discuss, is that the creation of property rights over previously open-access resources creates obvious, and often powerful losers.

I was limited by space, so I couldn’t discuss the more puzzling problem of why regulations are more politically salable than prices even in the absence of income effects.

{ 33 comments }

1

MFB 03.13.19 at 10:14 am

I hate to sound negative amid such boosterism, but after glancing through the article I am none the wiser (and no, I am also no better informed).

I noticed your conclusion to be: If we are to stabilise the global climate without hampering efforts to end the scourge of global poverty, some form of carbon pricing is essential.

Why should this be?

Firstly, it is not clear that it is possible to stabilise the global climate without hampering efforts to end the scourge of global poverty.
Secondly, it is not absolutely clear that ending the scourge of global poverty is necessarily linked to stabilising the global climate.
Thirdly, it is not clear that carbon pricing is the only way to do any of these things.
Fourthly, your article doesn’t actually show that carbon pricing is even a way to do any of these things. This is simply a hope which you have developed and which you are repeating endlessly.
Fifthly, carbon pricing has to be enforced by governments, which are easily co-opted by special interests groups who are interested in making money, and this distorts the efficacy of any carbon pricing agreement.
All in all, you don’t really seem to be addressing the issue effectively, Dr. Quiggin.

2

Peter T 03.13.19 at 10:38 am

I can see two problems:

One is that taxes are suited to flows, but carbon pollution is a stock problem (there’s a an upper safe limit, past which we do not want to go. So some form of cap is inevitable).

A second, less wonky issue is that many people see taxes on pollution as inequitable. The rich can pollute and pay, the poor end up next to the (taxed) landfill or polluted river or tailing dump. Even if you get compensation, you are being bought off (think of the reaction to Larry Summers’ remarks on poor countries and waste). People see this as a justice issue, and buying justice is deeply unpopular even if routine.

3

Lee A. Arnold 03.13.19 at 11:15 am

Why puzzling? Regulation is simpler, and morally more defensible.

A Pigouvian tax on an unhealthful product like cigarettes which can be avoided by individuals is comprehensible and now well-accepted. Taxing something you are stuck with using like gasoline seems not on target; seems roundabout.

Carbon pricing is complicated and hidden: You are going to tax me here, but, give me back the money over there? Because I am poor? But he is rich — is he emitting more carbon because he has more money? That is unfair. Or is someone else over there, cheating? Can you trust this system at all? …You cannot know any of these things, when you walk out your door in the morning.

Carbon pricing is laggardly and circuitous: We are going to increase the cost, so investors on Wall Street see a few extra pennies in investing in a non-carbon product? Or else, so people in a jam find better ways to do things? Or else, they see a future of greater personal income in getting an education to invent something new that doesn’t use carbon? …This might have had an impact 50 years ago, but now? are we daft?

The justifications of economics are becoming overrated: Cost-effectiveness and efficiency have decreasing moral force upon individuals who are swimming in the evidence of a post-scarcity economy. Strapping them to the money wheel in an era of surplus savings seems quaint. Economists like to lay claim to the great effectiveness of the industrial economy over the last 250 years for their proof of the virtues of price markets, but what really happened was an unprecedented era of technological invention which markets merely aided.

It’s a critique of economics in a nutshell. The supplanting of morals by economic reasoning that was effected by Hayek, Stigler, Friedman, Becker etc., has led to economics’ disregard for how people think about many things. Instead economists have advanced a construction of consumer “preferences” in a complex system like Ptolemaic epicycles to “nudge” behavior.

The moral judgment on climate is coming in strong. Regulations are the simplest response. Perhaps it is best to tout a package that gives primary focus to a new era of non-carbon R&D across the entire range of goods and services, so people can see and point to the results; along with regulations that enforce the easiest compliances? Save the carbon pricing for targeted efforts to clean up the laggards?

4

Rapier 03.13.19 at 11:45 am

I propose an axiom. No market is ever going to fix the problems caused by markets. I will leave it at that.

5

Omega Centauri 03.13.19 at 12:47 pm

Speculation warning.

IMO the average Joe see’s regulations as only impacting fat cat bosses, and not himself. People don’t do systems analysis tallying up costs. Also as you alluded to, the losers have an outsized influence on the political process. And general lack of trust in the system figures in as well, “you are going to make me pay more at the pump, but you claim you will give me my money back through other means? I don’t trust you to keep the second part of that bargain!”

6

MisterMr 03.13.19 at 12:50 pm

In the article, you say that the impact of regulations is more regressive than the effect odf a direct carbon tax would be; this is true if we assume that the business which is taxed cannot dump the price increase on consumers, but since all businesses are taxed together competiton will not prevent the increase in prices.

You speak of the losers from these policies as, for example, workers who migh lose their jobs, but if we look at the most obvious example of carbon taxes we have the taxes on fuel, much higer in EU countries than in the USA.
An increase in these taxes was the proximate cause of the Yellow Jackets in France, and I think that an increase in taxes of vehicle fuel in the USA to the level they are in France or Italy would kill any american politician.

So the immediate cost to consumers of these policies is the most immediate problem: suppose, for example, that we place a tax on agricultural pollutants so high that businesses might start to go “organic”, but this means that the price of all food will crawl up to the price of organic food, that for some consumers would be a problem.

Furthermore, the whole point of the carbon tax is to force businesses to stop polluting, so that if we place a carbon tax, businesses increase prices of stuff, but then we redirect the income from the tax to poor households so that they then can buy the same stuff that they could buy before we are not actually limiting pollution: the government takes with one hand and gives with the other.

We actually need people to consume less polluting stuff, there is no way around this.
But also less polluting stuff is more expensive than more polluting stuff (if we ignore the negative externality of pollution), so if we change from more polluting technology to less polluting technologies apparent productivity will go necessariously down.

(I say “apparent” productivity because it’s productivity calculated without accounting for the negative externality of pollution).

So the problem is not really the “regressivity” of anti-pollution laws, but rather the fall in apparent productivity due to the change of production technologies, that if not mediated by a redistribution in income will be an extreme problem for the poor parts of societies, and also a big fall in apparent real income for the richer part, but less dramatical personally because at high level of incomes they will not have problems buying necessities.

So I think that:

1) Carbon taxes will always have a “regressive” effect (they will bite more harshly the poor parts of society), but that is unavoidable because them too are polluting and have to stop polluting;
2) we should contemporaneously have a less unequal society through redistribution of various sorts, not linked to enviromental policies, this was true in any case;
3) But I don’t think the two things can be threated together, it’s more that, since we are forced to make the “regressive” anti pollution laws, then it’s even more necessarious to have redistributive policies.

7

Matt 03.13.19 at 5:23 pm

I was limited by space, so I couldn’t discuss the more puzzling problem of why regulations are more politically salable than prices even in the absence of income effects.

I totally expected to see this more puzzling problem discussed below the fold here. Why do you think that regulations are more salable?

I live in the US state of Washington. I have seen a couple of voter initiatives for carbon taxes fail by large margins. I’m also seeing a “100% clean electricity by 2045” bill easily sail toward the finish line. Why isn’t a more comprehensive plan that encompasses non-electrical emissions likewise politically easy in this state? Is it all about vehicle fuel prices?

I have seen a surprising number of otherwise-environmentally-minded people complain when gasoline prices go up. But high fuel prices for a prolonged time are exactly what we need to cut the emissions from vehicular traffic and encourage the use and public funding of alternatives to the automobile. (Or, second-best, at least encourage the uptake of non-combustion automobiles.)

8

RichieRich 03.13.19 at 6:06 pm

In your Aeon article, you write

More ambitiously, a truly just system of global property rights would give everyone equal rights…

This doesn’t strike me as self-evidently true. This paper by philosopher Simon Caney’s worth a look. On p262 Caney writes

In what follows, I shall criticize the principle at the heart of all of these versions of the equal per capita view. I should perhaps add that though I am criticizing the claim that emissions should be distributed in an egalitarian fashion, I am not criticizing equality in itself (either as a global or as a domestic ideal). In fact, I endorse an egalitarian account of global and domestic distributive justice. I object here to the application of equality to this one particular item.

9

billcinsd 03.13.19 at 6:39 pm

Moreover, it’s straightforward to offset any adverse effects on low-income earners, displaced workers and others.

What makes you think this would actually happen. It is straightforward how to offset the adverse effects of global trade, yet that has yet to occur

10

Tim Dymond 03.13.19 at 9:54 pm

Maybe it is easier to build a political coalition around a measure such as a regulation, which may be crude and blunt – but has a tangible and obvious goal and outcome. E.g. Don’t dump toxic wast in a river you factory owner – I can easily support that and do so publicly. Whereas a price signal, which is supposed to have a more comprehensive effect, is more diffuse and subtle in its benefits. Lots of people might get upset by a price increase, but it is hard for me to stand up and say ‘its for the good because eventually the prices will change demand for emission intensive projects which will …’ I would send people to sleep before I convinced them.

11

hc 03.13.19 at 11:06 pm

The main losers are import competing carbon users and carbon exporters and this is the basis for the opposition to pricing. You can minimise the role of these losers by defining the carbon tax base appropriately. It is unfair for domestic producers of alumina to cop a carbon tax but for exporters from Japan who also use carbon-based electricity to sell their goods tax free in the local market. Not only unfair but self-defeating because carbon leakages will occur as users will shift to cheaper untaxed imported products with the lost competitiveness. So tax the imports at the border as many have suggested. Carbon exports – coal and coal-using products – should be exempt from taxes except for the emissions involved in producing their products – e.g. fugitive emissions associated with mining or other activities.

The answer to your main question relates mainly to these two issues – they were repeatedly raised during previous attempts to price carbon = “we will damage local manufacturing, “what about our exporters”? BTW I am not saying leakages are a major issue but they were certainly made to appear to be by previous opponents to pricing. You give the game away if you tell people you want ignore carbon-based exports when there are plenty of other coal substitute producers out their and you will justifiably outrage business if import competing industries are left out to die to the (apparent) advantage of foreign firms.

I blame the inept package of pricing policy proposals that were put forward in the past the inability to price carbon effectively. The “destination pricing” approach has now been supported for the US by Alan Greenspan, Ben Bernanke and Janet Yellen. It has a clear theoretical rationale and if mutually applied by the US and China would create strong pressures for a international consensus to price carbon. The key obstacle to this is Donald Trump.

12

John Quiggin 03.14.19 at 3:37 am

@1 At least you spelt my name correctly. Otherwise a perfect illustration of this post https://johnquiggin.com/2014/10/06/my-dear-mr-quiggan/

@7 Apologies for disappointment on that. I plead shortage of time. Tim Dymond @10 is pretty close to my view.

13

Cole Haus 03.14.19 at 5:20 am

I also wrote a post on pretty much exactly this topic! Why the popular opposition to Pigouvian taxes?

Some of the possibilities that I looked at are:
* Visible costs, hidden benefits
* Distributional impact
* Status quo bias
* Distinction between doing and allowing harm
* Discount rate and population ethics

14

faustusnotes 03.14.19 at 6:35 am

John, I won’t waste our time reiterating my position that prices and taxes are not enough, but I do want to ask you: why do you write “arguably” in the first sentence? Is this another example of your pollyanna-ism? Global warming is not “arguably” the worst challenge facing humanity. It absolutely is the worst challenge facing humanity and nothing in the history of human civilization compares to it.

I have maintained repeatedly for years on this blog that economists simply don’t understand how serious this issue is. That “arguably” is a prime exhibit in support of my position. When will your field (including, perhaps, you) start to take this problem seriously?

15

John Quiggin 03.14.19 at 7:17 am

Faustusnotes @14 In my case, I’m at least as worried about nuclear war. Unlike the case of climate change, where I can at least do my bit, I don’t see anything useful I can do about it, but I’d say there’s at least a 10 per cent chance of a major nuclear war this century.

As you will have noticed, I’m a naturally optimistic person, but these two issues keep me awake some nights, and the nuclear war nights are worse.

Then of course, there are the billion or so people who still don’t have enough to live on. Climate change will make that worse, so I don’t usually separate the issues.

16

faustusnotes 03.14.19 at 7:51 am

This is exactly my point John: you are completely failing to apply your own discipline’s risk analysis to this problem. There is a 10% chance of a nuclear war that won’t wipe out industrial civilization, versus a 100% chance of global warming that will (if we don’t do something). These are not “arguably” comparable risk profiles. The only way they are comparable is if you don’t understand the damage that global warming is ultimately going to do, or think it is so far in the future that it doesn’t matter.

17

bad Jim 03.14.19 at 8:20 am

Having read the article I’m inclined to retort that the problem is that no one owns the air or the water. Water rights have historically been regulatory in nature, treaties rather than markets, dealing more with extraction than waste.

Awareness of the extremes of inequality inevitably sparks anger against the imposition of a market solution: once again, only the jet-setters will be able to afford international travel or the safety and comfort of large automobiles.

If this is an emergency, and it is, then we’re in this together.

18

soru 03.14.19 at 11:00 am

The problem with taxes is they raise money.

Economically that may be good, but politically you have the problem of what to spend the money on. Right and left will never agree on that, more or less by definition.

The right pretends not to believe in global warming, in order to make it seem like dealing with the problem at all is a concession. In return, they demand to have all the money raised by the tax. Of course, some particularly stupid foot-soldiers on the right are actually fooled by their own side’s lies, but everyone important knows the truth.

The left resents this tactic, perhaps because they didn’t think of it first. And so under polarized political systems there isn’t a viable governing coalition that would support it.

In contrast, the only ones opposing regulation are those who directly lose out, so it is much easier to assemble a majority coalition in favor.

19

Zamfir 03.14.19 at 11:03 am

People mention fuel taxes, and the French yellow jackets, as examples against the political viability of carbon pricing. That might be the wrong way round.

After all, there is already a fuel tax in France. In terms of carbon, it’s about 200 euro/tonne, way higher than most current proposals for carbon pricing . This might not be popular (few taxes are), but it is widely accepted, and it is not going away. The same goes for quite some other countries.

The protests in France are not sparked by increased fuel taxes, but by increased fuel taxes while the government lowered taxes on rich people. Outside of that particular context, fuel taxes are politically very viable. If anything, the question is: why are carbon taxes so difficult, given that fuel taxes are so much easier to implement? Most of John’s argument seems to apply to fuel taxes just as much as to carbon taxes. Yet they exist anyway, at quite high levels.

Personally, I think hc (post 11) has the core answer. It’s about competition worries (justified or not). The car industry and the oil industry (with their powerful lobbies) might not like fuel taxes, but they can live with it. Fuel taxes lower demand for their products, but it’s still a level playing field. Exports are not taxed, and imports face the same tax.

20

SamChevre 03.14.19 at 12:48 pm

One factor, which I discuss, is that the creation of property rights over previously open-access resources creates obvious, and often powerful losers.

This is true–it’s a classic enclosure of the commons problem–but it’s largely a solved problem; assign property rights to current/customary users, and then let the rights be traded. This is how effective land reform worked in multiple countries (S Korea and Taiwan iirc).

The key thing is not to make people pay to keep their customary usage; that strategy has provoked revolt back to the time of Captain Pouch.

21

Hidari 03.14.19 at 1:14 pm

Surely the key point is not whether or not we have a carbon tax, but at what rate?

The devil is very much in the detail on this one.

22

TF79 03.14.19 at 2:51 pm

You’ve probably already read this article at some point, but Robert Stavins’ Grand Policy paper from way back discusses a number of relevant issues with respect to the SO2 Cap and Trade policy in the US, and speculates regarding how those issues would play out with carbon pricing, (‘Policy instruments that appear impeccable from the vantage point of Cambridge, Massachusetts, but consistently prove infeasible in Washington, D.C., can hardly be considered “optimal.’)

23

Hidari 03.14.19 at 8:23 pm

‘Abstract
Using difference-in-differences and a novel break-detection approach I show that the introduction of a carbon tax has not ‘yet’ led to a significant reduction in aggregate CO2 emissions in British Columbia, Canada. Despite the lack of detectable aggregate effect, there are heterogeneous emission reductions across sectors: the tax led to a reduction in emissions from transportation incl. personal vehicles (-5%), buildings (-5%), waste processing (-3%), and light manufacturing, construction and forestry (-11%). Introducing a new method to assess policy based on breaks in difference-in-differences fixed effect panel models, I demonstrate that neither the carbon tax, nor the carbon price and emissions trading schemes introduced in other Canadian provinces are detected as significant interventions in aggregate emissions. The absence of significant aggregate reductions in emissions is consistent with existing evidence that current carbon taxes (and prices) are too low to be effective.’

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3329512#.XIRM65K1Zks.twitter

24

faustusnotes 03.15.19 at 2:22 am

I think Zamfir has a key point buried in his/her comment – fuel taxes are already very high but they don’t discourage people using fuel. A carbon tax of $200/ton is bearable in rich countries, and even a tax of $1000/ton won’t necessarily discourage carbon emission in rich countries. A carbon price with a strict cap on total emissions gets around this problem by slowly lowering the cap, but it’s important to recognize that a cap requires a regulatory response, since it has to somehow punish people who breach the cap.

There is no taxation based solution that will work to solve this problem. You cannot tax your way out of a civilization crisis and you can’t price your way out either. You need something else – some regulatory framework – even if it’s just a strict punishment for exceeding a cap. But without that we will never reach carbon zero.

Economists want to believe that we don’t need this extra step because either a) they don’t really think that global warming is a serious issue so they see no need to get to carbon zero or b) they confuse carbon flows with carbon budgets so think that merely lowering rates of emission is enough or c) they have an ideological opposition to regulation.

I don’t think any economist is serious about global warming. They just don’t get it.

25

John Quiggin 03.15.19 at 6:39 am

@Hidari, I haven’t read the paper, but I’m surprised by the result and puzzled by the claim that there were detectable reductions at the sectoral level but not in aggregate.

The effect of a quite low carbon price ($A26 or about $US20) was obvious and immediate in Australia, and reversed on its removal.

@Faustusnotes Most of the economists I know think that we should and can achieve zero emissions by 2050 and stay within the IPCC carbon budgets in the process. Would a list of names, with links to statements to that effect, convince you? If so, I’ll be happy to provide it.

26

Collin Street 03.15.19 at 6:52 am

Carbon pricing is hard because of the byzantine generals problem: if more than a third of the control of an organisation falls into the hands of bad-faith actors, they can vote strategically to essentially prevent the emergence of any outcome.

If not carbon pricing then something else. Brexit isn’t actually hard either: greenland managed it without difficulty.

(Nor is the israel- palestine conflict, tbh).

Usually people find themselves in this situation because the intellectual framework behind a movement has collapsed without the population noticing: they still get the same votes, but because the framework’s collapsed there’s mobody with integrity in control of the political wing, and it becomes a channel for chancers.

27

Hidari 03.15.19 at 9:01 am

@25 that paper came from Tyler Cowen so that should be taken into account. It does support my hypothesis that the rate at which the tax is set is the key issue, however.

Also: carbon taxes are not popular, politically. The Gilet Jaunes revolt was sparked by a carbon tax.

Incidentally, I think you are Faustnotes are arguing past each other. Of course we can (technically) and should achieve zero emissions by 2050. But at the moment the political will is just not there and whether or not it’s technically possible is irrelevant.

Of course this could change, and probably will, but we are running out of time.

28

Zamfir 03.15.19 at 9:46 am

@faustusnotes, fuel consumption per capita is several times higher in the US as in Europe(or most other high-income places), and low US taxes play a big role there. Both fuel taxes, and other car-related taxes. And that differential probably undersells the effect. US fuel consumption would be higher still, if not for efficiency improvements that are primarily developed for higher-taxed markets.

Carbon prices are not the alpha and omega of greenhouse reductions. But if all greenhouse gases had historically been taxed at the level of those fuel taxes, we would be in a much better place now.

29

Collin Street 03.15.19 at 10:23 pm

Carbon pricing isn’t particularly hard. It’s just that the byzantine generals theorem result demonstrates that a bloc representing more than a third of the effective control of an entity can prevent the emergence of any coherent resolution to any genuine dispute, through strategic shitstirring, and it just so happens that in the western context “carbon pricing” mechanisms represent a genuine dispute and it just so happens that in the anglosphere the right-wing of the right-wing parties represent more than a

But if it’s not carbon pricing it’d be some other difficult-but-solvable problem. Take Brexit, or even the israel-palestine dispute; multiple solutions are possible, but any of them involve some group taking a hit, and [if that group is acting in ill-faith] the affected group can switch between approaches to ensure none are ever agreed to.

[for a less-controversial example, easier to understand with emotions lower, transit developments are worth having a look at: the word “gadgetbahn” seems to be pretty useful]

It seems to mainly arise in situations where there’s a large group that’s had its intellectual underpinnings collapse in a low-key way some years back: the collapsed underpinnings mean that new sensible seekers-after-truth won’t find their way into the group as active members, but the passive support [voting, &c] will remain unchanged. Eventually the older seekers-after-truth [who made their way there before the path was blocked] will age out, and all the active membership / leadership will be made up of crazy people.

30

Hey Skipper 03.16.19 at 4:09 am

[Faustusnotes:] Global warming is not “arguably” the worst challenge facing humanity. It absolutely is the worst challenge facing humanity and nothing in the history of human civilization compares to it.

I presume you agree that within forty years, sea level rises from 2 to 6 feet, global temperature increases of 2 to 5 degs C, and up to 20 degs in polar regions are certain within the next forty or so years.

Right?

That’s a paraphrasing of This NYT article from 1988. All of those predictions above should have either happened, or been well underway by now.

Except none of them have happened. Not even close.

So, how about explaining why something so certain then is so disproven now, yet it certainly will be true. Eventually.

31

Peter T 03.16.19 at 5:58 am

It occurs to me that if you want to know why carbon pricing is so hard, you need look no further than the gilet jaunes demonstrations in France. One place to start:

https://www.lrb.co.uk/v41/n06/jeremy-harding/among-the-gilets-jaunes?utm_source=newsletter&utm_medium=email&utm_campaign=4106&utm_content=aunz_nonsubs

32

Cute Username 03.16.19 at 4:52 pm

The difference between regulation and taxation is pretty artificial. If you do thing you’re not supposed to do you have to pay some money, it’s just that in one situation we call it a fine and in the other we call it a tax. There’s administrative differences in which word you choose to use it, and taxation implies that doing the bad thing and paying the money is more valid an option, but it’s not like one is inherently some milquetoast neoliberal bullshit and the other is aggressive action.

Fighting global warming probably requires more than just disincentives, though.

33

Hey Skipper 03.17.19 at 5:36 pm

Why didn’t my comment make it through moderation? I’ve only just gone through the last batch of comments. I came close to deleting yours for stupidity, but decided to leave it as a general illustration of the kind of trolling that gets commenters banned. I don’t engage with rightwing talking points, not even to point out how desperate they are. Nothing more from you on my threads please. – JQ

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