Monday, July 02, 2012

America != Europe. How's that for insight?

I'm planning to write a post on how a revenue neutral carbon tax might, just might, have a shot in the US in the medium term.  First though I have to disagree with William's argument that a revenue-neutral carbon tax is the only way to go - or to be more fair, is the best political approach.

I'll just sycophantically second Eli's first comment to William's post that both taxing and regulating can work.  The other main point I'll make is that taxes are sticky in the US - they don't like to go up.  Saint Ronnie approved a rate increase in the US gas tax from 5 cents to 9 cents in 1983, and it's now 18.4 cents, a net decrease after inflation.  Regulations by contrast do get tougher - not only the CAFE standards that Eli talks about at length, but also the nickel-and-dime increases in regulations on coal plants that are helping natural gas in putting a squeeze on that industry.

It's a fact of life in the US that we accept regulation more readily than taxes and especially tax increases.  Seems like it might be a little different elsewhere.

I suppose regulation is somewhat less transparent, but you could also think of it as a solution to a coordination problem.  A tax approach makes the solution appear as painful as possible, and because we'll underachieve the solution regardless, we might consider a solution that doesn't highlight the pain and therefore gets more done.

Three other points.  It's helpful to clarify assumptions in any discussion, and in this case are we assuming the people are economically rational actors divorced from real world psychology and politics, or are we having a meaningful discussion?  Personally I prefer the latter, but it's helpful to identify your assumption if you want to talk about the former.

Second, at least in the US, a significant carbon tax that has any remote chance of passing political muster will have some balancing combination of exemptions and financial support for those interests and people/constituencies most affected by the tax.  The exemptions will distort the economics, and the financial support raises the question of where the money will come from if your carbon tax is revenue neutral.  These aren't easy political issues.

Finally, William points out that putting a floor on the price for carbon allowances in a cap and trade system contradicts the argument that allowances let you set right emission levels, something that's a lot harder to do with taxes.  He's right, but this gets back to initial assumptions - the cap-and-trade isn't a platonic ideal but an assessment of what's politically and economically achievable.  Putting a floor (or ceiling) on the price is a way to correct for misjudgments at the beginning as to what would be achievable in the future.

UPDATE:  William responds in the comments.

12 comments:

William Connolley said...

You've done nothing to convince me that I'm wrong and you're right.

* "cap-and-trade isn't a platonic ideal but an assessment of what's politically and economically achievable." - cap-n-trade is a disaster in Europe and appears to be a non-starter in the US. Despite your professed pragmatism, you don't seem to be able to take that in.
* the US love of regulation appears to be because of the illusion that regulation is free, but taxes cost. Both halves of this are wrong. Proceeding on the basis of being wrong isn't going to go right in the end.

Anonymous said...

This tax supposes that CO2 plays some role in global warming and that taxing carbon will reduce global warming. This is where the tax argument fails, not at the revenue-neutral stage.

Taxing broccoli could be revenue-neutral, as well. So why not tax broccoli?

Hardy Cross

Anonymous said...

Patrick 027

Re Hardy Cross - fortunately, large Broccoli fragment aerosols have very very short residence times in the atmosphere, are not produced in large amounts, and thus have a negligible effect on climate. :)

Brian said...

William - I agree cap-and-trade will go nowhere on the US national level for the short term, and also nowhere in the medium term unless filibuster rules are limited and everything else turns out right. However, we do have a brand new cap-and-trade system in California and a utility-sector version in Northeastern US states. Other countries outside of Europe are also working on their own version:

http://www.washingtonpost.com/blogs/ezra-klein/post/around-the-world-cap-and-trade-is-still-alive-and-kicking/2012/06/05/gJQACSKVGV_blog.html

All this has a lot more to show for it politically than a carbon tax. And even at the US national level, cap and trade got close to passage.

And no one thinks regulations are free, just easier to do in the US.

William Connolley said...

Well, how depressing. I guess the point is with cap-n-trade that there is piles of money to be made in the trade, so you have a nicely pre-built group prepared to lobby for it; and the pols, of course, know there will be lobbying, so there is juice available for them.

And it looks like the Californians have got it wrong (http://blogs.sacbee.com/capitolalertlatest/2012/05/california-assembly-passes-controversial-cap-and-trade-auction-bill.html): their "tax" (ie auction) isn't revenue-neutral, they're spending the (fairly small? Its hard to tell from a distance) money on env projects; another source of lobbying funds.

cRR Kampen said...

Nah, Europe has become Goldman Sachs, now let's go figure.

Brian said...

The California law wasn't intended to be revenue neutral.

Revenue neutrality has political advantages but environmental disadvantages. California had the political willpower, barely, to use some of the auction money for environmental benefit that includes greenhouse gas mitigation.

William Connolley said...

Its rather disappointing that no-one else wants to chime in.

I'm not sure there is much more to say for the moment; RD's comment (http://scienceblogs.com/stoat/2012/06/27/the-melting-north/#comment-20904) gives me the chance to diss your "irrationality" strawman above, though.

BTW, although I hope I don't really need to say this because you know it, but my take-no-prisoners "robust" blogging and commenting style doesn't imply any personal disrespect.

EliRabett said...

[Likewise]

Anonymous said...

"Its rather disappointing that no-one else wants to chime in."

What, you thought that maybe some actual economists read this blog?

Brian said...

No offense taken, of course.

Andrew said...

You've done nothing to convince me that I'm wrong and you're right. * "cap-and-trade isn't a platonic ideal but an assessment of what's politically and economically achievable." - cap-n-trade is a disaster in Europe and appears to be a non-starter in the US. Despite your professed pragmatism, you don't seem to be able to take that in. * the US love of regulation appears to be because of the illusion that regulation is free, but taxes cost. Both halves of this are wrong. Proceeding on the basis of being wrong isn't going to go right in the end.