Wednesday, January 23, 2019

The Nobel Economists Petitiion on Carbon Tax And Dividend Plan

As many now know, a large group of prominent economists, led by a large group of Nobel Prize winners, has published a petition in the Wall Street Journal.  This petition declares the idea of putting a tax on carbon and then returning the receipts from it to the population on an even per capita basis to be the best and most efficient plan for dealing with global warming.  This group continues to encourage more professional economists to sign this petition.  I had previously received an invitation from Janet Yellen to do so, and today one came from Larry Summers.  I kind of doubt that either specifically directed that I receive the invitation or, less likely, actually sent the message, although I could be wrong as I do know both of them.  This petition shows how powerful this revenue neutral carbon tax fad has become.

As it is, I have not signed it, and my use of the word "fad" indicates my attitude.  I really do not get why so many proiment and clearly highly intelligent economists have signed onto this proposal as being the one and only way to deal with this problem.  Why are these people not mentioning cap and trade as an alternative (formerly known as "tradeable emissions permits").  There are multiple reasons to believe that cap and trade is at least as good if not better than this tax dividend proposal, both in terms of effectiveness and also in terms of the politics of getting something done.

The most famous cap and trade plan was that enacted in the US in 1990 for SO2 emissions.  This plan eventually got superceded, but until that point it was universally viewed as a successful program, substantially reducing such emissions in a manner that did not trigger noticeable economic pain.  There are now a substnatial number of carbon cap and trade systems in place, with the first one out the door being that of the EU, put in place to obey the Kyoto Protocol, which actually favored such systems.  That system has faced criticism and had a major decline in its price in 2006, but has since stabilized, a fact not widely reported. Very recently the system has been put in place by the world's largest emitter, China.  Other nations or major sub-national units adopting cap and trade for carbon include South Korea, California, and Ontario,  The closest we came ot having a national program to deal wiith carbone emissions in the US was early in Obama's first term when he  got a cap and trade plan passed by the House of Representatives, only to have it blocked by Republicans in the Senate.

I note that that the Paris Climate Accords do not favor ither taxes or cap and trade.  Nations are free to use whatever policy they want to meet targets, either one of those or just plain old commands or anything else.  The adoption of those Accords led some advocate of taxes to get all bent out of shape that they did not insist on only taxes as the proper policy, with perhaps the most ridiculous complaint coming from climatologist James Hansen, who denounced cap and trad as being a "capitalist" system, even though taxes also use markets to achieve their results.

In any case, theory says that there is no obvious reason to favor one over the other.  In princople the efficient solution is to set equal marginal social costs and marginal social benefits of pollution removal.  One does this by approaching this from the price side and the other side from the quantity side.  An old paper by Martin Weitzman says one should use one or the other based on whether there is more uncertainty about costs or quantities.  As it is, I would say that the uncertainties are greater on the quantiy than the cost side, which argues for a preference for a quantity approach.  That would be cap and trsde.  Another approach is to use both in what have been called "Lerner markets," following on the Greenwald-Stigliz thorem.  Curiously Stiglitz is one of those Nobelists who has so far not signed this petition, although in the past he has supported using taxes.

Certainly taxes can achieve favorable results in pollutions policy, although the most dramatic cases known have involved somewhat smaller problems.  META in Eruope lists the following as the most successful taxation approaches to environmental problems: a 2002 plastic bag tax in Ireland, a 1994 Finland tax on beverage bottles, a 1996 UK landfill tax, a 2007 fishing licesnse in Iceland, and a 1992 NOx tax in Sweden.  The latter has led to a reduction of 30-40% of such pollution in Sweden, which iis certainly successful, alrhough a bit less than the SO2 reductions in the US from the cap and trade program.

Nations adopting carbon taxes, most of these so recently we have not yet seen results, include Chile, Portugal, UK, Ireland, Australia, Sweden, Finland, New Zealand, and France.  As it is, the latter has brought out the potential political problems with this approach, the outbreak of jilets jaunes ("yellow vests") protests against the tax in France, although those protests, still ongoing, have morphed into something much broader against President Macron.

So this uprising in France should have given some pause to all these eminent petition signers, but especially given how many of them are Americans it is more surprising that they do not seem to have taken into account this politicsal reality: raising taxes is especially hard to do in the US, especially given the overwheming opposition of thr Republican Party to raising taxes, and especially for something that they do not approve of.  Now in France it is true that there was not dividend or other payyout to citizens from the tax.  But even in Wasington State, dominated by Democrats and posted on here previously by Peter Dorman, referenda on a carbon tax with payout have failed, with part of the problem arising from disagreements over the form of the payout.

I really do not get it.  Do not alll these eminent economists, especiaally the American ones, not realize this hard reality, that it is essentially barking up a hopeless tree to call for a carbon tax in the US, even one with some system of returning the receipts to the population in some form or other.  Why are they simply ignoring cap and trade, despite its clear successes including here inthe US?  Is it beause of the defeat in Congress of Obama's plan?  Heck, it got pretty far along, a lot farther along than any tax proposal is likely to get.  Really, these people should have supported cap and trade as an alternative, although perhaps they think that would be distracting.  Maybe, but their position has them simply making nonsense statements, namely that this tax and dividend plan is clearly the best way to go.  That is very far from being the truth, especially given the old and well-known arguments of Weitzman from his famous "Prices and Quantities" paper.

(I must note that I may be biaed in favor of cap and trade as I was partly involved in setting up the very first cap and trade program by a government anywhere in the world, an effort led by prominent environmental economist, Tom Tietenberg, this being by the Wisconins Department of Natural Resources for BOD emissions into the Fox River in the mid-1970s, a program still in place and viewed as a success.)

Barkley Rosser


Magpie said...

For the record:

Australia kills off carbon tax

Senate makes good on prime minister's ‘pledge in blood’ to ‘axe the tax’, with nation unlikely to meet 5% emissions reduction target

Lenore Taylor, political editor, Thu 17 Jul 2014

2slugbaits said...

I suspect that part of the political problem with a fully rebated carbon tax is that most proposals have the tax being rebated in a progressive way; viz., a fixed per person amount. Put another way, those with the most political power and the highest propensity to vote (i.e., the wealthy) see that as a redistribution of wealth. Now I happen to see that redistributive aspect of the carbon tax rebate as a feature not a bug, but then again I'm not a wealthy plutocrat who funds political campaigns. But whichever way we go, carbon tax or cap-and-trade, let's just get on with it.

Unknown said...

2slug - more on Australia:

Yes they did axe the carbon tax even though it was scheduled to shift to cap and trade. This tax was accompanied by some income tax reductions and some increases in welfare payments. In other words, the proponents tried to do this the right way. And it did not last. Sad.

(signed PGL)

Unknown said...

The initiative by the Nobelists and others was simply intended to put another "respectable" alternative into the public discussion. AOC was getting all the attention and actually getting some followers. Better to have something else to talk about so GND doesn't go anywhere. Not to imply that I think the GND should go somewhere.

Anonymous said...

" AOC was getting all the attention and actually getting some followers. Better to have something else to talk about so GND doesn't go anywhere.... "

Do explain AOC and GND. said...


I am in the same place as Gene Coyle. I do not see any conflict between the GND and either the Nobelists' favored tax-dividend plan or the most obvious cap and trade alternative. The GND seems to be much more about pushing alternative technologies and a lot of other matters. Does she push simply plain old quantity command reductions? That would be the most obvious third alternative, and is, frankly, what most of US pollution control policy looks like.

reason said...

I think it is a good idea ecause I don't think we will even start to take serious steps for political reasons unless we do something like this. I would extend it to taxes on packaging as well. It is also a step on the way towards a universal basic income. If you really think about the politics, this is the way forward.

reason said...

This will reversed at the next election. Conservative politics is in crisis throughout the Anglo Saxon world.

Demographically damned.

reason said...

Put it this way, it is easier to sell we will reward you for being good then it is to sell we will punish you for being bad. You get less outraged opposition.

Mythbuster said...

As Barkley says, there are circumstances in which cap/trade should be expected to work better than a tax, and other circumstances where the opposite is true. He gives an example. It is also true that there are circumstances in which mandated performance standards will work better than any market-based system. As Barkely says, most of environmental regulation in USA is performance standards, and (I would add) almost all of the emissions reductions since WWII have been achieved by performance standards and not by any type of market-based program.

When are market solutions likely to fail and performance standards to succeed? One answer is when the environmental goal cannot be achieved unless all technically available control measures (Best Available Control Technology "BACT") are implemented. It appears that carbon emissions/global warming is exactly such a case: If we promptly put BACT on everything, we will still be falling short of reasonable goals.

An example: In the 1990s, the South Coast Air Quality Management District was set to impose NOx and SOx performance standards on refineries, power plants, and other major sources. Instead of doing that SCAQMD changed course and adopted a cap/trade system called RECLAIM. In 2000-01 RECLAIM imploded because of a huge price surge in permits caused by the fact that not enough total emissions reductions had occurred in the air basin. SCAQMD suspended RECLAIM and imposed the originally-contemplated performance standards on the major sources. The market failed because too many sources decided to buy permits instead of reducing their emissions, and too few sources decided to implement excess emission reductions and sell permits. Opponents of RECLAIM had (presciently) warned that the market was very likely to fail because the basin-wide emissions cap could not be achieved without applying BACT to almost everything (and/or shutting down sources).

In contrast, the Midwest acid rain program (mentioned by Barkley) worked because the goal was to reduce basin-wide emissions by only about half of what could have been achieved by imposing performance standards on all sources. If there is no such gap between BACT and the environmental goal, there is nothing for clever and lucky players to exploit, and the markets and market makers themselves add costs to the system.