Carbon Money: A Data Point from Down Under

One of the long running disputes about policies to reduce the risk of catastrophic climate change is what to do about carbon revenues.  Whether you have a carbon tax or auction permits, businesses that get hit by them will pass along their costs to consumers.  That’s a feature, not a bug, since the point is to change the behavior of the entire society, and prices are a better way to do this than a plethora of regulatory directives and a mammoth enforcement machine.

Meanwhile, the taxes or permit fees generate a flow of revenue to the government.  What should you do with it?

Many environmental groups say that it should be spent on environmental programs and energy conservation.  Everyone loves these programs, they say, and they will be so happy about their expansion that they won’t mind the extra cost of paying for them.

Then there are doubters (me among them) who think that this is not a politically viable strategy.  No, outside environmentalist circles most people are not in love with environmental programs and will worry more about their own financial well-being.  Moreover, carbon revenues, like all sales taxes, are regressive: lower income groups will pay a higher percentage of their income, which is a lousy way to fund government programs.  The approach we advocate is giving the money back—having the government rebate carbon revenues on a per capita basis to the public.  This would shield most people from financial losses and turn a regressive system into a progressive one.

This has mostly been a shouting match, since there is little evidence about political sustainability one way or the other.  Nevertheless, we have just had a data point from Australia.  In the wake of an internal Labor Party coup, in which former PM Kevin Rudd ousted Julia Gillard to reclaim his old post, that country’s carbon tax was revoked and replaced with a watered-down cap-and-trade system, expected to slash carbon prices by about 75%.  That’s a pretty good predictor of how much the effectiveness of the program will go down.  (In the current range of carbon prices the elasticity of demand, whatever it is, is probably stable.)  Under the Australian system, carbon revenues were used to fund environmental programs, so these will be slashed as well.  The account of the backsliding published in this morning’s New York Times makes it clear that the motivation was strictly political: a general election looms in September, and public opposition to the tax was crippling the Labor Party’s campaign.

Out of the corner of my ear I hear some greens saying, “But the public was brainwashed!  Right wing interests in Australia spent gobs of money running ads denouncing the carbon tax and making all sorts of false claims!  It isn’t a fair test!”  No, it’s terribly unfair, but in what country do you think business interests will roll over and not fight tooth and nail against aggressive carbon policy?  Have you followed the politics of the European Trading System recently?  And do you think that the Koch brothers will just haul out the white flags the moment the US congress passes a meaningful climate bill (if that moment ever comes)?  The point of having a political strategy is to overcome opposition, not embrace martyrdom.

To be fair, this is only half a data point.  It shows the vulnerability of programs to raise prices and increase environmental spending, at least in the current economic environment, but it doesn’t tell us whether the rebate approach would have worked better.  Maybe they’re both doomed.  Maybe we’re all doomed, and climate catastrophe is unstoppable.  But half a data point is better than none, and I’d like to see more tough-minded thinking from greens about how they want to reconcile the price impacts of carbon policy with political realism.