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To Reduce Carbon Emissions, Any Policy Must Change Behaviour. To Ask Otherwise is Absurd.

posted Dec 10, 2014, 11:24 AM by Joel Wood   [ updated Dec 10, 2014, 11:58 AM ]

The latest in carbon tax scare-mongering occurred last week when The Province published an anti-carbon tax OPED by my former colleague Ken Green of the Fraser Institute. (Aside: I do have a ton of respect for Ken and he is an all-round nice guy).  The piece aims to review the problems with carbon taxes, but ultimately fails to identify any actual problems if our policy goal is to reduce Canadian greenhouse gas emissions.

Ultimately, I think my major disagreement with Ken about carbon taxes is not in regards to carbon taxes themselves (though, most of his article is focused on fear-mongering about how a carbon tax is a tax on everything), but with respect to whether Canada actually ought to reduce greenhouse gas emissions. Ken actually doesn’t think that anyone at all should reduce carbon emissions, though he doesn’t state that in his OPED. If you start from the assumption that Canada shouldn’t do anything to reduce our greenhouse gas emissions, then even a revenue neutral carbon tax is probably not welfare enhancing. There are studies that do predict that they are welfare enhancing depending on which taxes you cut; here is one from my PhD supervisor Ross McKitrick. But more recent studies that take into account the tax interaction effect, generally show them to be not welfare improving (the welfare loss is usually very small though). But again, this is only if we ignore the potential welfare gains from the resulting GHG emissions reductions.

If we instead start from an assumption that Canada needs to reduce greenhouse gas emissions- which is the official position of the federal government and all provincial governments- the anti-carbon tax rhetoric does not stand up to scrutiny. A revenue neutral carbon tax is, based on my reading of the rigorous academic and policy literature, probably the least costly way of achieving these reductions. If the assumption is that we need to reduce emissions, the valid policy alternative is not Business As Usual (Ken’s preference), but more heavy handed regulations such as fuel economy standards, sector-by-sector regulations, or in every economist’s worst nightmare, technology based standards.

Ken bemoans that economists are too focused on efficiency and cost-effectiveness and are ignoring how the tax will alter people’s choices and penalize people who have carbon intensive preferences. That is kind of the point. If emissions reductions are the goal, then peoples’ behaviour needs to be changed regardless of which policy you implement. 

Ken seems to think that the appropriate test for a carbon policy is that it changes nothing for anyone in anyway.  He wants it to impact low emitters and high emitters equally. This is absurd; you cannot have emission reductions without changing peoples’ behaviour. Basically, he wants not a single person to be made worse off by the policy (a Pareto Improvement in econospeak). Whereas, the usual bar in policy analysis is that society is made better off and thus has the potential, though is not required, to compensate anyone made worse off by the policy (a Potential Pareto Improvement). I wonder if he thinks his stronger criterion should also be applied to Canadian pipeline policy?

A carbon tax and associated tax cut package that makes nobody worse off would require an excessive amount of information that certainly is currently not recorded in any government database; and I doubt many at the Fraser Institute would be interested in the government collecting that information. Policies like Alberta’s Specified Gas Emitters’ Regulation (what he incorrectly refers to as a carbon tax) or a cap and trade system with freely allocated permits would probably come closer to meeting his equity requirement, but this is purely because they allow so many emissions for free. But these policies would still change behaviour and definitely still not be equity neutral at the individual household or firm level.

That said, it is obviously important to consider the equity impacts of carbon policy on different impact groups, with special attention on low income households. In fact, economists have studied this and the most recent evidence predicts that the impact of BC’s revenue neutral carbon tax is progressive.

Furthermore, almost all taxes other than lump-sum taxes alter behaviour. What would we rather tax, greenhouse gas emissions or work effort? If you think Canada should be a global free-rider or that greenhouse gases are the greatest thing ever, then I guess you’d have to agree with Ken and prefer to tax work effort.

The bottom line is that to actually result in emissions reductions any policy must change behaviour. Carbon taxes are just a tool to achieve a stated policy goal. If you disagree with that policy goal, then focus on critiquing that, rather than using populist rhetoric to bash what the research suggests is the best tool for the job. In response to a comment from me on twitter, Ken said “Gov’t: I want serfdom. Economist: Let me show you the most efficient road”.  Bashing carbon taxes is like bashing the road engineer’s best schematics rather than the idea of serfdom itself.

 

Aside: I am baffled by the use of sneer quotes around “bipartisan” in reference to the EcoFiscal Commission. EcoFiscal has ex-politicians from several political parties, as does the Fraser Institute; they even share one in common: Preston Manning.

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