The only thing we can be sure of about the future is that it will be absolutely fantastic. So if what I say now seems to you to be very reasonable, then I have failed completely. Only if what I tell you appears absolutely unbelievable, have we any chance of visualizing the future as it really will happen.

- Arthur C. Clarke (h/t Brin)

Saturday, July 30, 2011

The Problem with a Carbon Tax

Fuel is a luxury, sometimes. And sometimes it is a necessity.

If we rely entirely on a "price" on carbon, and carbon remains fungible, what happens?

Well, in a sense we already know. We in the US have encouraged the use of farmland to produce corn to produce ethanol. This notoriously contributes to the rise in prices of the coarsest, meanest foods (as does climate disruption). This in turn means that the poorest people in the poorest countries starve because, and to the extent that, the market in the US "prefers" driving "safer" and more comfortable and enjoyable large vehicles. The market for large vehicles as opposed to vehicles is unambiguously a luxury market. A tenth of what a typical Yukon driver spends for gasoline (i.e., the agriculture-based component) is more than the poorest Haitian or Egyptian can afford for food. (Leaving aside the fact that corn ethanol is not a real biofuel in that its EROEI is arguably less than 1. That's a topic for a different time and place.)

The "free market" is distorted in this case, but the ethanol vs food story still delivers an important moral.

Suppose we found a farmland biofuel that really did have a positive energy return and a significant profit. It's not in the cards as far as we can tell, but that turns out to be a good thing. Because if it were possible, here is what the free market would do. All suitable farmland would be converted to fuel until food prices rose to the point where food becomes equally profitable to grow as fuel. And more people would starve.

Now, we can mitigate the free market with charity or international aid. There is no sign that charities allocate funds in a globally optimal way, of course. So the demands on international food aid go up, as they have. Perhaps these demands remain small enough that the international community will step up to the plate. Under the present circumstances of widespread political incompetence, perhaps not. Americans seem totally uninformed about the present Somali famine, for instance, but even if they were, the congress is too busy destroying our own country to bother with poor people.

What causes the problem is the huge difference in available money between the Yukon owner and the gruel subsistence family. The Yukon owner, having access to capital and perhaps having some abstract skills, can outbid the starving people for a luxury even though the starving people's desire and willingness to work for the resource is much greater (it being a matter of survival). The Yukon owner is kept innocent. There isn't a picture of the Somali child that you are starving to death at the gas pump. Fifty dollars a tank doesn't slow the well-off SUV owner.

OK, the corn ethanol thing is insane, just another symptom of the bizarre state of US governance, a meaningless capitulation to the special status somehow acquired by Iowa.

The carbon tax has a similar problem, though. Suppose we raise prices, with a revenue-neutral tax, as Hansen sensibly suggests, on fossil carbon enough to start limiting demand, with the intention of gradually turning the screw until fossil carbon goes away. Who cuts back?

I became aware of this problem when my wife told an anecdote of going on a hundred mile photography field trip with a woman she knew slightly through a photography club. Irene showed up to their rendezvous in an early model Prius, and her companion showed up in an RV motor home. Guess which vehicle they ended up traveling in?

It turned out that the other woman was in the RV business. Inevitably the price of gasoline came up in conversation. The RV vendor was unconcerned. "My customers can afford gasoline," she said.

The person who is going to be forced to cut back is the person who needs the fuel to heat their house, or to visit their customer. People living on narrow margins in an energy-intensive infrastructure get squeezed. People who revel in their capacity for waste will not.

I still think a tax is the best way to proceed, but a simple tax may not work. I'd much rather hit the motor home traveler (who was offered a seat in a Prius, mind you) much harder. Somehow the price has to be progressive in the early stages. Making matters even more difficult, as if they weren't difficult enough already.

Yes, the urban poor, who can resort to busses and who have less heating and cooling bills, can adapt. So the burden will fall exactly on the people who are most suspicious and hostile in the first place. Bother.

The people forced to adapt by price mechanisms are not going to be the people who should adapt first.

This is sort of ironic, isn't it? The free market solution works best if the distribution of wealth is roughly even. The more the difference between the rich and the poor, the more price mechanisms are unfair ways to adjust collective behavior.

Libertarianism leads to concentration of wealth, which leads to regulation. Or at least would, if people were sane. In a world where so many people outsource their thinking to Rupert Murdoch, who knows what in hell happens.

46 comments:

Belette said...

> a simple tax may not work. I'd much rather hit the motor home traveler... much harder

Aieee, no! The last thing we need is a carbon tax riddled with as many exemptions as your ridiculous US tax code, and that is what you are asking for. It needs to be a flat tax, and that's it. Anything else and you'll be crawling with lobbyists. Oh yes, *you'd* put in just "good" exemptions, of course: but you won't be in charge of it.

Also, could you explain again why the US raising a tax on petrol starves children in Somalia? I missed the logic flow somewhere.

> What causes the problem is the huge difference in available money between the Yukon owner and the gruel subsistence family

That doesn't sound right. If you're a subsistence farmer, you live off your own produce. If the US, somehow, causes the price of world food to rise, then that doesn't affect you (other than giving you the option to sell any surplus at a higher price; it isn't quite clear to me why you think that would be bad).

Michael Tobis said...

P1a) Yes, I know. But having a tax designed to make relatively innocent low-rent rednecks miserable is exactly what we don't need politically, and it's also, actually, unfair.

P1b) 10% of "petrol" in the US is actually corn ethanol, for stupid reasons that nobody outside the corn growing states likes. It is widely alleged that this demand on corn drives prices up of low-grade agricultural products. It's probably at least marginally true.

P2) I mean someone who subsists on marketplace gruel, not someone who manages to raise it from a gruel plant

Belette said...

P1a) It isn't designed with that purpose, as you know. Why say it is? Over here, we have petrol prices something like 2* yours. Society has not collapsed. And why exactly is it "unfair"? By what measure?

P1b) Yes, your corn ethanol is insane. The solution is to stop subsidising it. You have a political problem. But what has that got to do with carbon taxes?

P2) Ah, OK. I misread you to mean "subsistence farmer". But I'm still missing the point, obviously: why does the US raising carbon taxes increase world food prices? Is it because a tax on petrol increases the amount of corn ethanol, somehow?

Grypo said...

Funny, I was thinking about ways around this problem today. At first, I thought it could be fixed through breaking down the US by region, but no, that only causes states to cooperate forcibly, and that wouldn't work, especially if you put California with any state east, or other such issues.

Then I remembered Hansen's ideas of power to the individual, and how he wants to set up the revenue returns. I was never comfortable with it, because I know how politically impotent the individual is. Action can only be taken through the collective. And the power base for the individual, at the federal level, is representation in Congress. So why not set up tax regions by district? You set up a low carbon tax (varies by carbon intensity, coal higher than gas) with very slow, but known (important!), increases, at the federal level (no matter where the energy is piped in from). Eventually the demand for low carbon replacements will be clamored for by the voting base. Energy infrastructure will change as a result. This allows for people with like living situations to decide their collective fate on their new energy. They can even join with other districts and not even have state boundaries as a hindrance.

It gives people power, Congress power (this is important for legislation), and loosens the noose that people feel from federal power making decisions for them. People really would be deciding what energy they use with their votes and pocket books.

Pangolin said...

We can pay the carbon tax or we can pay the climate tax.

A carbon tax and rebate system could simply tax all fossil fuels at the point of entry or wellhead and rebate 90% of that directly to adult citizens on a per-capita basis. The other 10% could go to direct subsidy of residential solar, wind and geo-exchange/HVAC systems.

Of course the rural residents will complain that the carbon tax unfairly penalizes them because they drive more and heat with fuel oil. At the same time the urban residents will complain that solar, wind and geo-exchange systems require land and space to install that is not available in multifamily housing, townhouses or small suburban plots.

Which is exactly what I want. Everybody gets taxed. People who can't install energy producing equipment get rebated. People who can install energy producing and saving equipment get smaller relative rebates due to high energy use and are subsidized for energy saving systems installed.

Michael Tobis said...

These are interesting ideas but I think all somewhat miss my point, so I guess I wasn't clear.

The point is that when rich people and poor people have an interest in the same good, and the good becomes scarcer, the rich people get a larger share, even if their uses are luxuries, or even frivolous waste.

The case of corn ethanol was used as a lead-in to the possibility of real farmed biofuels, which would be a disaster for the reason that the RV customers wanting enormous supplies are nevertheless able to outbid the people wanting a tiny amount of food.

By the way, a small tank of gas, 10 gallons, contains 1 gallon of corn ethanol. About 4 liters or 4 kg at 7 kCal/g or 28000 kCal, which amounts to subsistence for an adult for almost a month.

The point is certainly not that there isn't enough food to go around. There is and probably will be. The point is that rich people bid up the cost of agricultural products, and it is unprofitable to make food that poor people can afford. This in turn is because of the enormous disparity in wealth between the poor and the middle class.

The case of carbon taxes is not the same case. But within the US, where there is a huge disparity of wealth, and where most of the consumption is by well-off people (quite rich by world standards), a carbon tax imposes burdens on the wrong people: the less well off people in rural areas, small cities, and exurban fringes.

They are the wrong people on two accounts.

First, messing with their lives is messing with the wrong people. It is RV lady who needs to change her ways. Much as some days I'd like to screw it to the jerk with bad driving habits and offensive bumper stickers and all, he's not the one actually causing the problem. It may be his wealthy aunt twice removed, sure, but she already told us, she doesn't care how much gasoline costs.

That is, to discourage large frivolous uses of fossil fuel by taxes will cause great hardship to those who cannot easily avoid smaller and more reasonable uses.

Second, they are the people who for whatever historical and cultural reasons are most suspicious of authority which in the case of carbon policy means us. We must win them over, and we have things in common with them that the dominant commercial culture doesn't share: a love of nature, a belief that money isn't everything, an interest in eternal truths, and a strong sense of ethics.

Pangolin said...

Michael_The people you are concerned with are trapped by the free market system.

The guy who drives 30 miles one way to work, 25 miles to church, 10 miles to his kids school and 40 miles to the nearest WalMart is going to get shafted.

His workplace, church, school and house are not changing positions to accommodate him. Somebody might open a closer store but prices will surely be higher. Recall that his roads are turning into gravel and he hasn't had a raise in a decade or more.

Now look at the iEA 2010 report and tell me his fuel costs are going anywhere but up.

To save it you have to give him a plug-in-hybrid SUV, solar panels, heat pump, stove, retrofit his walls and get around his road decay. You have to find employment for him closer to home. You have to do all of this while not raising his taxes because he's enmeshed in the pioneer myth.

Not. Going. To. Happen.

That lifestyle is a dead parrot; a norwegian blue if there ever was one.

The hamlet, village, town, city succession of civilization was universal everywhere until the mass production of cheap automobiles made it possible for the U.S. to abandon it. It was efficient. The buckshot settlement of the rural U.S. is dead. It can't survive in a low per-capita energy environment.

Michael Tobis said...

Pango, sadly, true. But pulling the rug out from under him too quickly just makes for more trouble than is necessary.

It rankles, though, that this guy who means well and is scraping by is going to get dinged a lot harder than the people who are ostentatiously wasteful.

And it looks like the upshot will be that he blames us and not the wasteful rich.

Pangolin said...

There's going to be more than enough tough luck to go around in the next few centuries. We can only hope that at some point Joe Sixpack looks up at the latest incarnation of a malevolent sky and says.....

"You know, maybe those crazy global warming scientist guys were right."

And then starts doing something about it.

Belette said...

> The point is that when rich people and poor people have an interest in the same good, (and the good becomes scarcer), the rich people get a larger share, (even if their uses are luxuries, or even frivolous waste).

Well, that is what Rich and Poor mean. How could it be otherwise? (assuming you accept living under a free-market system. BTW I put irrelevancies in what you said into brackets; because it looks to me like you're committing the usual sin of trying to tell people what they should spend their money on, which will get you nowhere).

Economically, I think your entire post is broken. But I'm not an economist, so find it hard to tell exactly where. What you have written is (I strongly suspect) pretty well the kind of thing you get when economists try to write about GW and we so decry. Did you try showing it to any economists?

Anyway, I'm going to ask one and see what he says.

Pangolin said...

Belette_ The problem with consulting with economists is that your average economist starts with a bunch of assumptions that have little or no foundation in physical reality.

Take economic growth. At some point economic growth will be constrained by hard physical limits due to the fact that we live on a planet.

Most economists cannot accept that fact. Then it gets worse.

Tim Worstall said...

I think you're confusing several very different things and that's garbling the logic of your argument.

Corn ethanol, that's not a free market result. So we cannot use it as an example of what would happen in a free market. It's actually the opposite: it's an example of the way in which the buying of the political process will undermine any political, as opposed to market, attempt to solve the problem.

As to a straight carbon tax. Yes, this sort of "Pigou Tax" is exactly what eonomists say is the answer. It's a well known, well worked through and, within academe, entirely uncontroversial solution. Been around or nearly a century now, nothing heterodox or out of the mainstream about it.

Do note two points about it though. The aim "is not" to either raise revenues nor is it to choke off the use of gas (or whatever it is that is being taxed).

We are agreeing that there is an externality (emissions) to fossil fuel use. Currently users do not pay for those externalities. Thus they use more than the socially optimal amount of fossil fuels. Thus we need to intervene in the market pricing so as to reach that socially optimal amount of use.

This is, by definition, when the costs of the emissions are equal to the benefits received by the users. We know the costs: the $80-$120 a tonne CO2-e from the Stern Review. We know the emissions from a gallon of gas: 8.8 kg. This gives us a gas tax of $1 per gallon.

People will only be willing to use gas when taxed this amount if the benefit they get from using the gas is higher than the cost they have to pay for it. Thus we get the socially optimal amount of gas usage.

We're done in fact, on the changing fossil fuel consumption side.

Which is where we bring in hte fact that we're not in fact trying to raise revenue here. We're trying, as above, simply to adjust the market pricing system to acount for externalities. So, we've now got an income stream which is entirely irrelevant to our solving the problem: the price change has already done that.

So, we then come to the nasty fact about Pigout Taxes: they are regressive. No way around it, they are. What do we do with regressive taxes? We attempt to compensate for them. And note, we've got that revenue stream which is not needed for our solution.

Thus we return the revenue in a progressive manner. Hansen says as in a citizen's dividend. I'd argue by raising the tax free allowance, perhaps the FICA threshold, but they're all much of a muchness.

As to the poor in other countries being affected more than us relatively rich western types. Well, yes, but there ain't no way out of that. Except, of course, for the poor of other nations to become as rich as we are.

And there's terribly good news there too. The whole of the global warming prediction assumes, right at the start, that the poor are going to become rich. The economic models (in the SRES, the foundation of all of the IPCC reports)we use to prove that climate change is going to happen already assume that by 2100 the global economy is between 5 and 11 times the 1990 global economy. So the poor do become rich.

Phil said...

There's another, little discussed problem with taxation used as a supposed deterrent.

The government, whilst paying lip service to the idea that increasing taxation will reduce consumption, is addicted to the revenue stream.

And thus it has a huge conflict of interest, usually resolved by applying taxes which aren't sufficient to change behaviour enough to substantially reduce their revenues.

William T said...

@Phil - that's one of the strengths of Hansen's proposal - the carbon tax is all redistributed direct, so no chance for the govt to get addicted to the revenue.

@MT - you need to include the effects of redistribution (as per Hansen's model or any other system) in the eventual effects on poor vs rich. Whether there is a carbon tax or not, the rich are going to afford far more fuel than the poor - look at the strife poor old Gore gets. But you've got to do more than hand-wave in order to really understand the new equilibrium after perturbing the system with a tax (+rebate)...

Gail said...

Simple. Ration fuel. Every adult gets exactly the same monthly allotment, a minimum that is non-transferable for necessities like heating and cooking and commuting, plus a modest excess to allow for differences in location and so forth, which can be sold or bartered. The first two children in a family get 1/2 ration. This would encourage population stabilization.

Many governments rationed many products during WWII. This is a greater war, and the ONLY alternative it total destruction of civilization, including RV's.

Grypo said...

Yes, MT, I did miss the point, as I was more thinking about satisfying the need to bring together people of similar backgrounds, per you last few blog entries about southerners and rural people.

But I think my idea gets at the poor/rich problem sideways. For one, it gives people political power to decide how to redistribute the rebates inside their own, well, I'll just call them carbon tax districts. This is why I like this idea more than Hansen's. In order to get people what they need, it'll take more than just purchasing power. It'll need collective resource distribution and the power to make collective decisions.

Second, just the presence of a revenue neutral tax, forces people that waste to pay, with the resulting rebates given to those that do not, in a regressive tax situation.

I understand the psychological problem here that you are describing. But if we give people the power of direct decision making through democracy, you can alleviate it to a point.

Michael Tobis said...

Tim, thanks for stopping by. It would be good to have a real economist putting the brakes on me once in a while. On the other hand, I remain highly, sorry this is the word, skeptical of much of mainstream economics. (Indeed, this is why I advocate patience with those who don't believe climatology.) So expect me to be a difficult customer.

In this particular case, my main objection is that Stern's number is ludicrously low; in the end it will not leave any fuel in the ground. Most of the fuel has to be left in the ground. The correct price on carbon is the price which causes all economically important use of fossil fuels to either stop or be balanced by effective sequestration.

If we were talking about a dollar a gallon we would be done by now. The market has already added a dollar a gallon since we started talking about this. Yet fossil carbon not only continues to accumulate in the biosphere, but to accumulate in an accelerating fashion. I think Stern's number is already refuted not just by prediction but by observation.

Michael Tobis said...

Thanks, Gail. Yes, I think rationing needs to be on the table. It's not an easy sell, though.

Tim Worstall said...

"It would be good to have a real economist putting the brakes on me once in a while."

I'm not actually an economist: I justy play at it on hte internet once in a while. So I'm not speaking "ex cathedra" as it were.

"In this particular case, my main objection is that Stern's number is ludicrously low; in the end it will not leave any fuel in the ground. Most of the fuel has to be left in the ground. The correct price on carbon is the price which causes all economically important use of fossil fuels to either stop or be balanced by effective sequestration."

Ahhh.....I'm not sure you've quite appreciated the subtlety of the economists' position here.

Leaving the fuels in the ground is definitely a solution to climate change. And that's what you're arguing for, a solution to climate changhe.

That isn't what the economists are arguing for at all. They're arguing or the most human utility we can manage to get out of the system. Which is a very different argument, of course.

For example, we could keep all the carbon in the ground simply by killing anyone who makes any emissions after 3 pm Tuesday. Drastic, yes, but it would slove the carbon/climate change problem. But an economist (as well as a few other people probably) would point out that you'd have a rather large number of dead people: not something known to be conducive to human happiness.

OK, let's be less drastic, let's whack up the price by $100 a gallon. Certyainly, we'd get many more windmills etc. But we'd also have a huge loss of wealth: again, nto something conducive to human happiness. In fact, we would probably argue that we'd lose more in human happiness in the brutality of the changeover to low carbon than the happiness we'd get by that change over.

So, what we're trying to do is maximise the happiness we get from the changeover while minimising the unhappiness of having to do the changeover. Or maximising utility as the economists say.

And that's what Stern tried to calculate. Maybe his number is too low: but he and anybody else isn't trying to calculate the number which gives us no climate change. He's trying to calculate the number which gives us the same pain from the amount of climate change we get as the pain we get from trying to lower emissions to only have that amount of climate change.

It's a very, very, different calculation. To be crude, we're trading off 1, 2, 3 oC, the loss of some habitats, some species, against the deaths of some people, pain to more people, by having a poorer economy.

Which is why we get a diferent answer. We're not trying to "stop" climate change. We're trying to have the "right amount" of it.

Michael Tobis said...

The maximum utility solution is clearly and unambiguously very near zero net emissions within the century; possibly even negative net emissions are going to be in the cards.

Economists who get numbers that don't go down on the order of 80% by 2050 (the usual rule of thumb these days) are obviously getting the wrong answer. I am interested in whether the wrong answer is due to wrong methodology or wrong numbers.

I realize this is just armwaving from your point of view, but I am responding in haste. I would like you to appreciate that I am already trying to maximize utility when I say that most of the carbon has to stay in the ground. The quantitative issue reduces to "how much more can we allow to leak" to optimize utility.

Slowing down the leak achieves nothing unless the slowing is by several orders of magnitude.

I suppose we will be talking about the discount rate very soon. I promise you I have heard of it.

Belette said...

> The maximum utility solution is clearly and unambiguously very near zero net emissions within the century

Is it? Why? You're entitled to disagree with Sterns numbers - I do - but don't you have to have something to put in their place? I wouldn't assert that my solution is "clearly and unambiguously" correct - things are far too messy for that.

William T said...

> The maximum utility solution is clearly and unambiguously very near zero net emissions within the century

The assumption underlying this statement is that we should be considering the "utility" of all those people who will live in the 22nd century and beyond, at anywhere near the level that we consider the utility of people presently alive. If we discount the utility of those far future people, then it seems that most of the costs fall on us (rich carbon users) and hardly any benefits...

Michael Tobis said...

Making the case is not a matter for an afternoon's diversion.

To be honest I don't have chapter and verse to point to, but this certainly is the consensus of the people I know who know what they are talking about.

The best outline of the argument that I know of is the Copenhagen Diagnosis.

http://www.copenhagendiagnosis.org

Michael Tobis said...

William T., the discount rate is important, as is what you decide to value. But in the absence of climate stabilization, dire consequences within the lifetimes of people now living are probable.

By dire I mean beyond disastrous to history shaking. Disasters already appear to be happening.

Eric L said...

I am increasingly convinced that one of the big problems with the left today is that we all went to college and took economics. That seems to be a factor here in a few ways.

First of all, economists do not seek to get "the most human utility" out of the system. If your microeconomics class went like mine, you learned about utility in the first few days, only to show how someone's "willingness to pay" for a good can be derived from its utility, other goods' utilities, and the person's budget. After that lecture, you never hear about utility again, only "willingness to pay," and sometimes you pretend it is the same thing. But utility can't be measured in dollars; it does not provide a consistent measure between people or even for one person with a changing financial situation. But utility can't be measured at all in any units, so it gets very little attention in economics.

What markets are supposed to maximize is "consumer surplus," the difference between what each consumer was willing to pay for what they got and what they actually paid, summed over the population. The efficient markets hypothesis states that goods will be produced by whoever can do so most cheaply and go to whoever is willing to pay the most for them. I cringe at the word "efficient" being applied here because it's a value-neutral word covering up a value judgement about what we should seek to optimize. If pharmaceutical companies devote far more resources to finding a cure for baldness than for malaria, there is no market failure, resources are "efficiently" being allocated to their most profitable uses. The basic assumption that this is what we should want isn't often discussed in economics or in neoliberal circles.

There are also political problems that go along with the left's obsession with economics. Most of the country was never forced to take economics, so you have to forget all this to understand how these ideas play politically. But so much of the left will only take seriously those policies which they could sell to their econ teacher. We only consider economically correct policies, rather than looking at all options that would solve the problem, and in the process leave out politically easier solutions. We talk about raising gas prices that are going up anyway; meanwhile every other policy you might consider to reduce gasoline consumption sounds better in the light of high gas prices. And we dismiss "command and control", forgetting that almost all transportation infrastructure in the developed world was planned, built, and funded by governments, not markets. We pretend just pricing the fuel correctly will get the market to make decisions about all sorts of things it has rarely bothered itself with before.

Anyway, that's enough of that rant for now. I certainly consider a carbon tax preferable to doing nothing, but I'm not at all convinced it is the least bad option, and even less convinced that it is the most politically palatable.

Michael Tobis said...

Thanks, Eric. While I do not identify myself as left (rather "liberal" or "centrist" or "pragmatist") I agree with much of what you say. The baldness vs malaria pioritization is exactly the sort of thing I am talking about here.

I think that the wider the range of individual resources over the population, the more likely these dysutilities will be chosen. So in global problems they are severe, as well as in socially less progressive countries like America.

In such situations, the price signal works counterintuitively, and the whims of the rich take increasing precedence over the needs of the majority.

A Siegel said...

Couple things:

1. RE Tim, the carbon emissions of 8.8 kg per gallon of gas is a stove-piped look. That is the carbon emission just out of the tail-pipe and doesn't count the full system-of-system (drilling, transportation, refining, etc ...). More appropriate to consider each gallon of gasoline in the range of about 12.3 kg / 25 lbs with that additional system carbon load. (Which, of course, varies based on source / etc, but the 25% 'tax' for the system is a reasoned, but not perfectly exactly, rule of thumb.)

2. However, imagine a carbon impact fee that goes in gradually. Starting at $15 ton (a typical start point in discussions), we're talking less than 20 cents per gallon. Compare that figure to the major fluctuations we've seen in fuel prices over the past decade. This is nearly a rounding error. And, well, getting to $1 / gallon over a decade -- the reduced fuel usage due to institutions and individuals reacting to the tax would end up reducing fuel use such that the overall oil/fuel price would likely be lower than BAU due to that reduced use. (Hard, of course, to do the specific calculation but there has been excellent work done on how much past shortfalls have driven up prices. A carbon fee that drove US oil use down 20% from a BAU case, or in the range of 3.5 mbd, would likely have a significant impact on global oil prices.)

3. I have to say that I take exception with calling it a "tax". We really should be discussing a "fee". If I have an old mattress and want to take it to the county dump, I pay a tipping fee for getting rid of my waste. We pay trash companies fees, not taxes. When I want a permit to use a public space, I pay a "fee". This is about put a cost on something that is using and abusing the public domain. We should talk of a waste fee or such. (See, for example, http://getenergysmartnow.com/2011/07/31/engage-the-debt-via-win-win-policies/ and http://getenergysmartnow.com/2010/06/30/a-simple-set-of-thoughts-for-a-carbon-fee/

Tim Worstall said...

"The efficient markets hypothesis states that goods will be produced by whoever can do so most cheaply and go to whoever is willing to pay the most for them."

Maybe you should check your old college textbooks. That's not what the EMH says at all. What it does say is:

"In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.

There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". Weak EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. Semi-strong EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. Strong EMH additionally claims that prices instantly reflect even hidden or "insider" information. There is evidence for and against the weak and semi-strong EMHs, while there is powerful evidence against strong EMH."

It doesn't say anything at all about the allocation of resources.

Further, there is no general theory stating that markets are more efficient at allocating resources than any other system. For we all agree that there are externalities and public goods (which is a special sort of externality). We might use the example here of negative externalities, emissions and pollution.

Yes, there have been market solutions to some examples (copper gangues and spoils in Arizona I think it was) but the entire profession agrees that there are some which need public solutions, ie non-market ones.

Similarly, we can have positive externalities, say herd immunity from vaccination, the wealth created from the general literacy of the population. These again point to collective, not market, solutions. These points were first made by Marshall, in the 1890s, in the standard economics textbook of the day. They're not oddities in economics, they're at the heart of the subject.

However, before we conclude that market failue is so ubiquitous as to make them near useless, do remember that government failure is also fairly common. I point you to the ethanol program as an example.....

Eric L said...

A Siegel,

I think that's the right way to do a carbon fee if we're going to do one, but its basic shortcoming is the slow phase-in. Not that a fast phase-in would be preferable, but people don't really respond to future prices. Which has more influence when someone is buying the car, the price of gas, the price of the car, or anticipated future gas prices? I would say, in order, the price of the car, then current gas prices, with the eventual carbon fee having the least impact.

People generally aren't good at making decisions that involve trade-offs between the short term and long term. I'm not even sure economists would come to an agreement on the calculation they should be doing when buying a car or a house. So I don't think future price incentives on fossil fuel use are sufficient (I could go either way on whether they're necessary.) We need current incentives on decisions that can have a long-term effect on fossil fuel use. And we need not be restricted to price based incentives -- the new CAFE standards are a good start.

Eräs Henkilö said...

If you go to the physical effects <=> cost models, shouldn't it be so that per emitted kg, you start paying a fee every year for something like 1000 years?

And if major disasters appear, you'd (or rather you'd have to have a fund after you died, which would be subject to the tax. The CO2 heritage would be left to your offspring the same way as the monetary heritage.) be collected the money for the reparations in proportion to the total CO2 that you have emitted either directly or indirectly.

Like if you buy milk, you have to buy a CO2 burden or responsibility share of 100 grams for the next 1000 years, and if you buy beer, maybe 30 grams...

In reality you'd need CO2 banks for this to handle CO2 debts and funds like there are for pension payments or real estate that are often bigger than one person work career things.

:)

Gravityloss said...

Changed Google settings, I'm the same guy as above.

You could also have a small leak in your in-the air CO2 share, something like 20% of 2000-2009 emissions divided by current year world population.

This would control the amount, not the emissions.

Normally in control theory you have proportional, integral and derivative of control minus output based methods: adding proportional gain speeds up the control but can introduce overshoot and oscillations, derivative can reduce those problems and increase speed and integral gain removes fixed errors (ie finetuning) but can introduce oscillations. Well roughly that.

Perhaps a good way to optimize for most utility (climate impacts vs fossil usage benefits) would be to have both the derivative (yearly emissions) and the proportional (total emitted amount) in the cost equation.

Belette said...

> The maximum utility solution is clearly and unambiguously very near zero net emissions within the century... The best outline of the argument that I know of is... http://www.copenhagendiagnosis.org

Well, I looked at their summary. They say "To stabilize climate, a decarbonized global society – with near-zero emissions of CO2 and other long-lived greenhouse gases – need to be reached well within this century."

That seems to me to be a long way away from your claim. They don't even talk about maximum utility. If you've decided, a priori, that "stabalising climate" gets infinite weight, then your conclusion follows, but not otherwise.

Given that the title is "The Copenhagen Diagnosis, 2009: Updating the world on the Latest Climate Science" and the authors all look like climate scientists, it would be fairly odd if it talked extensively about the economics. Are you sure that is the source you meant?

Michael Tobis said...

Belette, good questions.

To my knowledge this hasn't been done effectively. But I always have the sense that what economics does get done misses the risk spectrum spectacularly.

I think that not stabilizing climate essentially does have effectively infinite cost. Indeed I find it obvious. But others don't, and that is a problem.

Looking for suggestions for people who explain this in language economists can understand.

Tim Worstall said...

"I think that not stabilizing climate essentially does have effectively infinite cost. Indeed I find it obvious. But others don't, and that is a problem.

Looking for suggestions for people who explain this in language economists can understand. "

Economists understand that quite well. Infinite cost means that infinte expenditure to stop it is therefore justifiable. And infinite does indeed mean infinite. Killing everyone who uses fossil fuels after 3 pm Tuesday is less than an infinite cost: but if the cost of climate change is infinite then it's justifiable.

But I doubt very seriously that you agree that killing all those people justifies not having climate change. Thus you don't think that the cost of climate change is infinite.

We could be less emotive about it. We could just say no new fossil fuel using technology, of any type, can be constructed. We've got to start, at least, to stop using those that we already have.

Millions would die, as they do die already from the absence of things like electiricty and fossil fuel based farming. Heck, the lack of refrigeration for vaccines kills millions.

This is a less than infinite cost to solve an infinitely costly problem and thus justifiable.

But if you're not willing to do that then you don't in fact think that the cost of climate change is infinite.

Which brings us back to: if the cost of climate change is less than infinite then so are the resources we are willing to dedicate to avoiding climate change. And the economist's logic at this point is irrefutable. We are willing to dedicate resources of a value up to the cost of what climate change will be.

If we use more resources (and this is in the widest sense, the death of someone now is a cost to be put against the cost of the possible death of someone in the future) to avert, then we are all poorer than we need to be. If we use fewer resources and thus have more climate change then again we are all poorer than we need to be.

So we still want to identify the socially optimal effort to be put into averting climate change.

Which leaves us with, what is that amount?

Now, clearly, you place a higher value on averting climate change than do many others. That, of course, means that others place a lower value upon it than you do.

And we don't run the world according to your tastes or valuations (nor to mine for which everyone is most grateful). Even if we were to be omniscient and benevolent dictators, we would and should be trying to run the world according to the average valuations of everyone.

So the death of a person is not infinitely valuable for example. It's the statistical value of a life: what value do we in fact place on life given what we actually do? For N America this is around the $5 million mark. In poorer countries it's less because poorer people value life less in monetary terms.

And so on and so on and we find ourselves rebuilding the Stern Review. Yes, we can shout about discount rates, add in Weizman on uncertainty, but this is essentially what Stern was doing.

What value do people, on average, put on the things that climate change will destroy and what value do people put on the things that we'll have to use or give up to beat climate change?

Which brings us, finally, to the comment that Stern's $80 is far too low. There are two possible reasons for the value being "wrong".

Tim Worstall said...

1) Stern's calculations are wrong of how people value things. OK, go prove that to be so.

2) Your valuation is higher than that of the average person.

Note that the possibility that Stern is wrong because an objective valuation would be higher is not there. Because there is no such thing as an objective value. We abandoned that idea in the 1870s: value is subjective, it's a function of the valuation that the human being doing the valuing places on matters. It is not possible to say that a lake is worth $x. Only that people value a lake at $x.

All of which means that, if 2) is the correct explanation for your valuation being higher than tyhe average valuation, is that it is you who is out of step.

But this can be cured: you just have to go convince 6.99 billion of your fellow humans that they are wrong in their valuations and you are right.

And when you have done so the average valuation placed upon climate change will agree with your own valuation: and thus more resources will justificably be used to avert climate change.

Good luck!

Gravityloss said...

Let's play a thought experiment. Let's say food costs one dollar per kilogram and the world's food production is one trillion kg. So the value of world's food production is one trillion dollars.

So what's the monetary value of the destruction of farmland that produces 1000 kg per year? Perhaps it's 1000 dollars per year. That money can be used to purchase the food from elsewhere. So the person who can make more money than that by using the farmland for something else is rational and does it.

What's the value of destroying half of world's food production? 500 billion dollars?
That's small peas, less than the US military budget. So it won't have much effect on the world really, right?

What about 99%? 100%?

Michael Tobis said...

Brilliantly stated, GL.

I think this can be expanded into a stronger argument. More to follow.

EliRabett said...

Brazil went to an ethanol economy and is prospering.

Stern was right. See for example "A Perfect Moral Storm" by Stephen Gardiner for why econometric models suck over long times and distances.

Michael Tobis said...

This looks relevant:

"Some economists and philosophers have even argued that in cases of environmental preservation 0 percent is the only ethically defensible number. That is, no discounting at all. But this debate over percentages may actually be a distraction from a more serious problem with the formulas used in discounting.

...

"Revising the assumption of a never-changing discount rate leads to results totally at odds with current economic practice, Geanakoplos and Farmer have shown. To understand their argument, consider the next half-century. Year by year, the true discount rate (which no one knows precisely) will probably fluctuate in some complicated way, following one of many possible up-and-down paths. Since we don’t know the future, to determine the effective discount rate for the 50-year period, we should average over all possibilities."

Michael Tobis said...

Eli, on the other hand, Amazonia is not prospering. There's some debate as to how large a direct climate forcing the decline of the Brazilian rain forest is, carbon neutrality notwithstanding.

Eric L said...

Tim,

Let's start here:

"what value do we in fact place on life given what we actually do? For N America this is around the $5 million mark. In poorer countries it's less because poorer people value life less in monetary terms."

This goes back to my comment about dollars not being a consistent measure of value across people. And so we get the absurdity that a multi-millionaire's mansion is worth many Bangladeshi lives, or one or two American lives, but not that multi-millionaire's life. But there is nothing special about money that makes it any more correct to measure how people value their lives in terms of money than it makes sense to measure how people value money in terms of their lives. In fact the latter would make more sense to me, but tell me, does it make more sense to you to say that the poor value their lives less or that they value money more?

This does suggest a potentially interesting way analyses like the Stern report could be done: If we can work out the relationship between dollars and human lives, perhaps we can convert dollar costs and benefits to "equivalent human lives"?

On the subject of infinite costs...

The problem with infinite costs is that not all infinite costs are equal, but you can't do math with infinite costs. $2000 dollars a day from here to infinity is clearly better than $200 dollars a day from here to infinity. If you apply discounting, these both get finite values and you can compare them. And you can compare more complicated things, like a million dollars now versus an income stream that starts at $10,000/year and rises at 4% a year. But then, if you try to compare an income stream rising at 10%/year to one rising at 11%/year and your discount rate is 10% or less, the math is no longer so wonderful, as both of these have infinite value. Fortunately the real world rarely presents us choices like that.

Once you've made the math possible, you can use it in analysis, and so there is a tendency to view it as correct. But there is no theory proving that this is the right way to do things, only that economics can be done this way. It's clear that people do behave as though they discount, but it also appears to be the case that they do not use the mathematically beautiful exponential curves when doing so. And the question gets thornier when you realize you're comparing values across different people. If we discount at 5%, while assuming the economy grows at 3% and the value of a human life in dollars grows at the same rate, then the value of human life is discounted at 2% a year. At that rate, the present value of my daughter's life when she reaches my age is less than 60% of the value of my own, and the value of her children are similarly discounted. If you add up her life, one of her kids' lives, one of theirs, and one from each generation on to infinity, in total all of their lives are worth just a little bit more than mine. That strikes me as an appallingly large amount to discount a generation, but economists are quite comfortable with larger discount rates in part because I would likely discount my future income by more than that.

Of course, if we said each generations' lives are worth just as much as the previous generations' lives, then we will likely find we are back in the world of infinite costs, and you can't do math with infinite costs, so that's clearly not right.

Eric L said...

A thought experiment I like to use here is the idea of a DDT tax. Right now we have a command-and-control approach: you can use DDT for malaria control, and nothing else. But my inner economist suggests, why do you think you can truly know which uses are valuable and which are not? Set a reasonable maximum limit, price it accordingly and let the market direct how DDT gets used.

Of course, this means the price of DDT has to rise to make it not worthwhile for most farmers to use it. Meanwhile a disease affecting the poorest parts of the world is costlier to address. Either fewer bed nets are made or people have to cut back in other places.

It seems obvious to me that a market based approach to dealing with DDT is a horrible idea. It's not so obvious whether it's a bad idea or a great one in the case of carbon. Given the wide variety of ways fossil fuels are used, the advantages of the market are bigger (at least until we get to the point where we can eliminate most uses of fossil fuels -- at some point regulating it down to the last few necessary uses becomes smarter than imposing a ridiculously high fee), but the downsides are similar.

Tim Worstall said...

Eric, with discounting, you're going through it as if no economist has ever thought of such things. Which simply ain't true.

For a start, basci governmental practice (at least where I come from) is to agree that humans are subject to hyperbolic discounting. Placing too much weight on the near future and not enough on the far future. Thus when looking long term, especially on matters environmental, we do not use market interest rates to discount, we use much lower ones.

And when we get to Stern, we end up effectively using a 0.1% one. For the quite simple reason that it's reasonable enough to assume that something other than climate change might come along and screw us all up instead: asteroid strike, super volcanoes, whatever.

So this has been thought about and adjusted for.

"In fact the latter would make more sense to me, but tell me, does it make more sense to you to say that the poor value their lives less or that they value money more?"

We're not meausuring money though so this piece of rhetoric rather passes by. We're actually measuring economic resources. As economic resources are what we will have to mobilise to beat climate change, this seems reasonable. Money's just the unit of measurement, not the thing itself that we are measuring.

Eric L said...

Okay, I can get behind a .1% discount rate.

"We're actually measuring economic resources."

I would think we are measuring the benefits and harms of employing those resources, and the forgone benefits and harms that could have come from employing them another way.

"Money's just the unit of measurement, not the thing itself that we are measuring."

Agreed, but money does not have to be the unit of measurement, and it does not provide a consistent measure of value across people. Economists know that; they argue in theory there is some underlying unmeasurable quantity called "utility" which cannot be measured in any units but which in theory could be used along with each person's budget to derive the person's "willingness to pay", a more concrete value which can be measured.

But there is no theoretical justification for assuming a benefit that a poor person is willing to pay $5 for has the same utility as what a rich person will pay $5 for.

You note the absurd result that the measurable dollar value of a human life goes up with their wealth. I am suggesting that if a poor person is willing to pay less to prevent some certain amount of risk to their life, that does not mean they value their life less, it could mean that the needs they would address with their money are more valuable. I am furthermore suggesting that if it is possible to work out the relationship between wealth and the dollar value of a human life, then it is possible to measure any benefit that you can measure in dollars in "equivalent human lives" instead, and this may provide a more consistent measure of value across people. Once again, we're not measuring actual lives here, or not just lives anyway, we can measure all the costs and benefits in this unit.

Of course, whatever units you use, the sum of value across people isn't the only thing that matters; justice/fairness are important too.

Gravityloss said...

But can we assume that the relationships between amount of money vs the amount of resource stay the same when we move beyond really small changes in local resource availability?

Ie the hypothetical, can you measure the effect in current food price if climate disruption destroys a significant portion of world farmland 50 years from now? (I don't think such a thing is likely, this is a thought experiment.)

Does it give any context? Is it useful? Is it misleading?

The 0.1% discount rate seems like a diversion. 0.999^50 is only 0.95. We're trying to estimate orders of magnitude here.

I dug up some of Stern's references from Mendelsohn 1998, country specific market impacts of climate change (available as free pdf at http://www.cetesb.sp.gov.br/userfiles/file/mudancasclimaticas/proclima/file/publicacoes/cenarios/ingles/countryspecificmarketimpactsofclimatechange.pdf ) and found some equations Mendelsohn used for the USA Agriculture (also forestry, residential energy etc are included):

1 Reduced-form

R = (-751+ 123.2 * T -4.52^2 + 49.627*P) * L_k/L_us

2. Riccatian:
R = r* L_a_k * (1639 + 171.9* T - 23.7 * T^2 + 91.7* P -75.7 * P^2) + 0.177 * ln(CO2)

etc etc

R s dollar value of agricultular land, T is temp in C, P precipitation in mm, CO2 is CO2 concentration. L_k is area of country k, L_a_k is farmland area of country k and r is the interest rate.

Comments?

Gravityloss said...

Sigh, second try with the equations:

1. Reduced-form

R_a_k = (-751 + 123.2 * T - 4.52 * T^2 + 49.627 * P) *(L_a_k/L_a_US)

2. Ricardian (not Ricatti!)
R_a_k = r*L_a_k
(1639 + 171.9 * T - 23.7 * T^2 + 91.7 * P - 75.7 * P^2) + 0.177 * ln(CO2)


T is temperature of the country in C, P is precipitation in mm. They comment that the reduced form might not be terribly realistic as they assume farming is impossible even now in places where it's done...

I realize the Stern review used some more advanced models too.