Apr 28th, 2016 by Prof. Coplan, Karl S.
David Robert’s second installment of his ruminations on carbon taxes is out here, and is worth a read. Shorter David Roberts: a $10 per ton carbon tax based on low estimates of the social cost of carbon is still well beyond what U.S. households would be willing to pay to address climate change, but political resistance fades if the revenues are used to promote clean energy. Ten dollars a ton works out to about ten cents per gallon of gasoline.
Even shorter Roberts: $10/ton too much (politically) to pay for climate. Much as I’d like, I can’t disagree with his political economics conclusion.
Roberts also asserts that
A consensus has formed among economists, climate wonks, and progressives that a carbon tax is the best way to address climate change. In some quarters, rhetorical support for a carbon tax is seen as a litmus test for whether policymakers are serious about climate change.
Roberts then assumes that a carbon tax would or should be set at the social cost of carbon, per ton, even while acknowledging that estimates of the social cost of carbon almost certainly understate the true economic costs of climate change.
I think that even if one could calculate and monetize the true social cost of carbon, basing a tax on social cost would simply reinforce the imposition of climate harms on the global poor. Basing a tax on the social cost of carbon does not seek to prevent severe climate harm; rather, it simply seeks to reach the economically optimal rate of severe climate damage. In other words, a “social cost of carbon” tax is simply cost-benefit in disguise – wealthy carbon emitters would rather pay the tax to continue their profitable carbon based economy, seeing the cost of compensation for the cheap social costs to poor people as a cost of doing business. To add insult to injury, these “social cost” taxes would not be used to compensate those suffering the most severe climate harms, but rather would (in the best case) be recycled into making renewable energy cheaper in the developed economies best able to adapt to climate change
Let me explain. Under cost benefit analysis, the decision to impose an environmental limit is based on comparing the polluters’ cost of compliance with regulation against the dollar value of the environmental, economic, and health harms avoided by the regulation. If the dollar cost exceeds the dollar “benefit,” the regulation is rejected and society as a whole is richer, even if lots of individual people end up worse off. There are huge problems with cost benefit analysis – chief of which is the fact that there is no reliable way of monetizing environmental and health values for which there are no markets. The best critique of cost-benefit analysis out there is a book by Frank Ackerman and Liza Heinzerling, appropriately entitled “Priceless.”
Cost benefit analysis-based regulation is also highly regressive — when regulation is foregone because it would cost more to avoid the harms than it would to compensate the victims of the harms, the regulations is not imposed, industry (generally wealthy) saves the cost of avoiding the harms but the victims of the harms (generally poor) do not receive compensation. My current research project is an argument that CBA should always consider the availability of compensation to the victims of environmental harms before regulation is foregone.
So here’s the problem with a social-cost based carbon tax. This approach does not seek to avoid catastrophic climate change; it only seeks to avoid catastrophic climate change the dollar cost of which exceeds the dollar cost of avoidance. Look at it this way – let’s say that uncontrolled climate change will wipe out the entire GDP of Bangla Desh, about $175 billion. Suppose that climate harm (combined with similar harms in developing nations) would translate into a social cost of carbon of $10 per ton (I am making no representation that these numbers actually work out). And let’s say that at $10 per ton of carbon (around 10 cents per gallon of gas), it is much cheaper to pay the tax and keep using fossil fuels, accepting the global loss of the entire Bangla Deshi economy. End result: governments in industrialized nations collect ten dollars a ton in carbon taxes, spend that money domestically, and the Bangla Deshi economy and people disappear. Same result as under cost benefit analysis, as the “cost” of switching from fossil fuels in the industrialized nations exceeds the dollar “benefit” of preserving the Bangla Deshi economy.
Yes, this approach is highly reductive, and ignores the human costs of climate change. But any attempt to put a dollar cost on human suffering to calculate the “social cost” of climate change shares this defect. Just like cost benefit analysis.
Economists might cheer this result as it maximizes global wealth, at least as measured in dollars. Neo-classical economics sees an improvement when the wealthy get wealthier and the poor get poorer, so long as the wealth added to the wealthy exceed the losses to the poor. Distributional justice is someone else’s problem; if society is richer, it could always redistribute the wealth.
But it doesn’t. And a social-cost based climate tax would not pay compensation to the biggest losers in climate change.
That’s why I would favor a cap-and-trade approach — under cap-and-trade (if done correctly, which is doubtful) the cap could be set at the level necessary to avoid catastrophic climate change. As Paul Krugman explained,
In practice there are a couple of important differences between cap and trade and a pollution tax. One is that the two systems produce different types of uncertainty. If the government imposes a pollution tax, polluters know what price they will have to pay, but the government does not know how much pollution they will generate. If the government imposes a cap, it knows the amount of pollution, but polluters do not know what the price of emissions will be.
So if we want a certain amount of carbon reduction – say, perhaps, enough to avoid super-catastrophic 2 degrees C warming – then cap and trade is the way to go. If we must go with a tax, then the tax should be based on the best estimate of what it would take to get widespread fuel switching away from fossil fuels. The only estimate I have seen is more like $1,000 per ton ($10 per gallon of gas) in order to achieve an 80% reduction in emissions. That’s what it would take.
But a tax based on the “social cost of carbon” just maximizes the wealth of the wealthy at the expense of the global poor.