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Techno-Socialist

Carbon Tax: an Epic Defense

by doconnor

To prevent run-away climate change it will likely require an 80 to 90 percent reduction in greenhouse gas emissions by 2050. This large reduction will require virtually all consumption of fossil fuels be either replaced with a different energy source or eliminated. Mere energy efficiency will not be enough.

Most people agree to achieve this will require “carbon pricing”. This can be either in the form of a carbon tax, cap and trade or a combination of both. In this article I will compare them and suggest an implementiom of a carbon tax that will address most of the concerns people have with it.

Carbon Tax

A Carbon Tax would tax fossil fuels based on the amount of carbon dioxide they release when burnt. The tax would be applied at the point when they are extracted or imported making implementation relatively straight forward. In addition, methane released by livestock and landfills would also be taxed based on the warming effect of methane in the atmosphere.

Every source of greenhouse gasses from industrial to residential would be treated equally. The tax would be passed through to consumers, increasing the cost of products in proportion it the greenhouse gas emissions. Through competition it would give manufactures an incentive to reduce their emissions and it would give consumers an incentive to reduce their use of products that produce high emissions. This allows the reductions to occur in the most efficient way possible and give individuals the most control of how they reduce their emissions.

The tax rate would be set so that it would reduce the demand for fossil fuels to the level that meets the country’s greenhouse gas emission goals. This rate would have to be estimated by economists. While it doesn’t guarantee the emission goals will be met, emission reductions are as likely to exceed the goal as fall short. Estimates of the rate and a maximum rate would be presented five years in advance (At first it would have to be less, as we can’t afford to wait five years to get started.) The final rate would be announced a year in advance. This would give the carbon tax predictability. The only thing business hate worse the taxes it unpredictability.

A dramatic increase in the price of oil is expected in the next few decades due to Peak Oil. However, it is the total price of oil, including the market price and the carbon tax, which determines demand. As the cost of oil rises, the carbon tax can be lowered. The problem of excessive oil company profits in not related to climate change and climate change solutions should not be expected to solve it. While I support the nationalization of the oil industry, we cannot wait for that to happen. If demand for oil is reduced world wide as part of addressing climate change, demand for oil will likely fall faster then the drop in supply caused by peak oil, limiting the rise in oil prices and profits.

To be effective the carbon tax rate would have to be quite high. Much higher then any carbon tax proposed in Canada. During the gas price hikes of 2007 and 2008, despite the doubling of gas prices, there was only a modest trend to buy smaller cars and use more transit. The carbon tax rate would have to rise so that gas would be $1.25 to $1.50 a litre in the first year and continue rising at that rate for the next 40 years. By 2050 gas may be $30 or $40 per litre but by then the idea of using fossil fuels to power a personal automobile will be considered ridicules.

Cap and Trade

Cap and Trade involves the government auctioning off or giving away carbon credits which would have to be bought by greenhouse gas emitters before they burn fossil fuels.

Cap and trade could be practical for industrial emitters. There are relatively few of them and most of them could afford the expertise to keep track of the carbon credit market. However, allocating the credits is problematic. Giving them away based on current emissions would have the effect of punishing those who tried to lower emission on their own and rewarding those who didn’t. Even using industry averages would punish industries that lowered their emissions. It would also increase costs to successful, growing businesses and give failing businesses an incentive to shut down and sell off their carbon credits.

Auctioning all of them off would be the fairest way to distribute them, but that would cause the same high prices for fossil fuels as a carbon tax. Basic economic theory says that the average cost of a carbon credit would be the same as a correctly set carbon tax.

One of the biggest problems with cap and trade is the trade. It would be a whole new item for traders to speculate on. The supply of credits would likely be close to demand and for products with inelastic demand that can result in extreme price swings. If supply is below demand the price becomes very high, but if demand slips below supply the price can suddenly drop. This is the effect we experienced with oil prices over the last few years.

There may end up being more effort put into making money trading credit then in trying to reduce emissions. All this would make the price very unpredictable, which would be bad for business.

Attempting to extend cap and trade to individuals would be impractical. It would require setting up an entire parallel currency so people would surrender their carbon credits when they pay for fuel or natural gas. Setting up the logistics involved would probably delay action by years.

A great many regular people would be temped to get involved in trying to make money in the carbon credit trade because everyone would own some and most people would have to buy or sell them to meet their own needs. With a fluctuating price the temptation to try and find a way to make money would be great. Many little old ladies would probably loose all their credits to con artists and there would be pressure on the government to release more credits to those in need, resulting in emissions exceeding the country’s goal.

Individual responsibility

It is important to include the emissions of individuals under any greenhouse gas control system. This is not only because they produce a significant percentage of emissions, but because individual emissions are among the easiest to reduce. The owner of a coal-fired steel mill would not waste their money on an inefficacity furnace; however people often buy vehicles that are excessively large just for the perception of safety or with an excessively powerful engine for higher acceleration. For many industries the best solution is not for them to change their processes to be more efficient, but for individuals to choose to consume less of the products from that industry.

Also, by including individuals it allows them much greater choice in how they reduce their emissions, both directly and indirectly. They can choose among taking transit instead of driving, living in a smaller house or buying fewer products that produce a lot of greenhouse gasses when being manufactured. The reduction in greenhouse gasses is so great more efficiency is not going to be enough. Individuals are going to have to make changes and sacrifices. Individuals would be isolated from the choices being made if reductions where only imposed on industry or exclusively through regulation. While there are collective decisions to be made, much of the reduction can be made by individuals deciding how and how much to reduce. The environment does not care if one person reduces emissions more and another less or how each person does it.

A carbon tax or auction based cap and trade would increase the cost of almost everything and have a large impact on how people live what they buy. The effects would be most noticeable to people with low incomes. Even if they are more then compensated for the additional costs, because the money saved through reducing their greenhouse gas emissions has more impact on them then it does on people with high incomes they would be more willing to sacrifice. This means that people with low income will do a disproportionate amount of the reduction.

This problem is not the result of the emission reduction program. It is the result of the inequality inherent in our capitalist system. While I would support a socialist revolution there is no sign it is going to happen anytime soon. Even electing an NDP federal majority is likely decades away and even that would not overturn the capitalist system. We must address our greenhouse gas emissions within the next few years. Waiting and hoping for a socialist revolution will take too long. We have to work within the system we have now and deal with its problems as best we can.

Regulation can have unintended effects. For example, requiring cars to have better mileage would result in lowering their operating cost thereby encouraging their use. The result would be little reduction in greenhouse gas emissions.

Distribution of the Funds

An effective carbon tax will generate a great deal of revenue. It would likely be larger then could be spent on energy efficiency programs. It would be high enough people would have to be compensated or face serious financial problems.

The traditional method is income tax reductions. This causes several problems. First, people with lower income pay no income tax so other programs would have to be created or enhanced to compensate them. This results in the uneven distribution of the compensation. For example the Federal Liberal Green Shift left low income single person households with no compensation. The second problem is that the revenue from a carbon tax will be variable. It will rise in the first few years and then start dropping as fossil fuel use drops. Because governments are generally disinterested in raising taxes, the government will end up with significantly less revenue then when the carbon tax started because of the income tax cuts.

An alternative would be to separate the carbon tax revenue from general government revenue. It would be all distributed back to Canadian residents on a monthly basis. Everyone would get the same amount, although a lower amount could be allocated to children. As the revenue from the carbon tax dropped, the payments would drop without dramatically impacting government revenue. The payments could be counted as income for tax purposes. That means some of the payments would go back to the government giving them revenue to apply to energy efficiency programs. It also means people with low income would end up with the whole payment while people with a high income would pay tax based on the income bracket they are in, so they would end up with less.

Electricity

Elect icy generation is unique. It is a major source of greenhouse gas emissions, yet it is the key to reducing them. The greenhouse gas emissions produced by electricity vary dramatically from province to province, from Manitoba with very little emissions to Nova Scotia where the majority of electricity is generated by coal fired plants. Also, in most provinces, electricity generation is government owned.

Most fossil fuel based energy generation that cannot be eliminated will have to be replaced with electricity. Gas powered cars will have to replaced with electric powered cars and transit. Household gas furnaces will have to be replaced with electric heat or geothermal, both of which require a significant amount of electricity. Industrial processes that require heat, like steel smelting, will have to be replaced with electric heat sources.

It will be necessary to quickly phase out the generation of electricity with coal and oil. In the mean time, there should not be excessive penalties for switching from fossil fuel based energy to electric energy.

The carbon tax on electricity should be based on the average greenhouse gas emissions of all electrical generation across the country. This would be conditional on provinces that produce a lot of their electricity using fossil fuels agreeing to rapidly reduce their emissions. This would also encourage people in provinces with low emissions to conserve electricity so it can be sent to provinces where there are high emissions.

International consideration

When importing goods the Carbon Tax would have to be applied using an estimate based on the type of good, the country of manufacture and the method of transportation. If the importer can provide evidence of the actual greenhouse gas emissions produced in the manufacture of the product, the tax can be based on that instead. While estimating this would be difficult and there could be problems with fraud, a similar system would be needed for any method of controlling greenhouse gas. Imports from counties that have emission reduction schemes with similar goals from ours could be excluded from the carbon tax.

The carbon tax would be refunded for goods that are exported to countries that don’t have an emission reduction scheme or apply their own system to imports.

Political considerations

Many claim a carbon tax would never be accepted because tax increases are an anathema to Canadians. A cap and trade system is considered more acceptable despite the fact it would cost individuals just as much to achieve the same reductions.

However, under my plan, all revenues would be returned to Canadians, rather then disappearing into general government revenues. That would go a long way to making it more acceptable. When the mired of details that would be required for a cap and trade system is considered, the simplicity of a carbon tax would be appealing.

Cost posted to Rabble.

"Carbon Tax: an Epic Defense" was published on August 2nd, 2009 and is listed in Climate Change.

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Carbon Tax: an Epic Defense: 8 Comments

  1. Russell O'Connor wrote,

    I’m definitely in favour of a Cap and Trade system. It is the more aggressive system that actually
    targets emmission ammounts directly. Of course, they would clearly need to be auctioned off as you note.

    “Basic economic theory says that the average cost of a carbon credit
    would be the same as a correctly set carbon tax.

    This is probably the most important reason to prefer cap and trade. It is essentially impossible for the
    goverment to guess future demand and correctly set a carbon tax. Better to let the market price it
    properly.

    “One of the biggest problems with cap and trade is the trade. It would
    be a whole new item for traders to speculate on.

    There isn’t actually a problem here. Specualtion is actually a good thing despite the bad rap it gets in
    the press. Speculation generally makes the market more efficent and less volotile. “Onions have no
    futures market, yet their recent price volatility makes the swings in oil and corn look tame.

    Obviously there would be no swings in price with a carbon tax. If the government actually wanted to
    target emmission amounts and updated the carbon tax daily, then there would be wild swings in the tax
    rate, wilder swings than with a speculative cap and trade market. Instead with a typical carbon tax plan
    we will end up with a failure to meet emmission standards (either too much or too little) leading to a
    less efficent deployment of carbon-reduced goods and services.

    I don’t see why a cap-and-trade system cannot be implemented on imports and production like with a carbon
    tax. I think where the tax is placed is totally independent of the cap and trade vs carbon tax question.

    Anyhow, the end results of cap and trade and a carbon tax are so similar that I’d approve of either
    system.

    Reply

    doconnor Reply:

    The error in the target itself may be greater then the error in the carbon tax rate. The target would be based on the cost of climate change verses the cost of energy use change, both of which are difficult to predict.

    For more precision, the Government could update the Carbon Tax daily, but stability and predictability is one of the goals of my system, so it would be set yearly, even if is somewhat less efficient.

    When they say that allowing speculation is more efficient, do they include the work needed to do the speculation? Today there are tens, if not hundreds, of thousand of people employed by doing speculation. Is the efficiency gained by their speculation really greater then the effort required to do the speculation?

    “Anyhow, the end results of cap and trade and a carbon tax are so similar that I’d approve of either
    system.”

    I agree.

    Reply

    Russell O'Connor Reply:

    I found a nice pro carbon-tax article in the WSJ: http://online.wsj.com/article/SB125011380094927137.html#printMode

    Reply

  2. T-Roy wrote,

    Too bad you never felt the same way last fall. We could have a carbon tax. Instead the NDP took sides with the conservatives purely for electoral gain which didn’t materialize. Now carbon tax is a dirt word and dead politically. And the NDP are good for what exactly?

    Idiots.

    Reply

    doconnor Reply:

    The NDP’s position during the last election was for a Cap and Trade system. It is a far cry from the Conservative’s Deny and Delay approach to greenhouse gas emissions.

    It turned out that a majority of MPs elected in the last election are from parties that support addressing climate change, yet it remains unaddressed. Which party is responsible for that?

    Reply

  3. Al in Cranbrook wrote,

    Darwin…

    First off, appreciate your non-confrontational response, which is not at all typical of so many on that forum.

    Might I offer a suggestion.

    I recently read a recommended book that had a tremendous effect on my world view, both politically and socially. I consider it one of the three most informative and important books I’ve read in my 59 year life…and I can’t think of the titles of the other two right now.

    It’s by Matt Ridley, “The Rational Optimist”. I learned so much about history and the role of economics and how it evolves, I could dedicate endless space to it here…but I won’t!

    Find a copy and give it a read. Please, please don’t merely just Google up other peoples’ criticisms one way or the other, as so many do these days until they find confirmation bias according to their ideological bent.

    You’re young (?), and you’ve got lots of years ahead of you, I’m sure you can spare the time to take it in, word for word, and draw your own conclusions.

    Soooo many people don’t do this any more! Instead they use the Internet to shortcut the process, and thereby pretty much let others do their thinking for them.

    It’s a game changer, you might even thank me for it.

    Reply

    doconnor Reply:

    I am more optimistic about the benefits of technology then many on the left (hence the blog’s subtitle “Techno-Socialist”). Many people believe that climate change will render the human species extinct, which is ridiculous as we colonized virtually all climates on earth with only stone-age technology.

    I will look into reading the book, but letting only free markets direct future technology may not work out any better then how free markets created fossil fuel technology. Externalities have to taken into account.

    Reply

    Al in Cranbrook Reply:

    That’s why this book is so amazing, if not essential, to bring an understanding of how modern civilization arrived to this point. He examines old paradigms and assumptions, and cuts to the basic core of how humans react and responds reflexively and naturally to needs and imperatives of survival.

    All the way through it I kept thinking to myself, “I didn’t know that!” or “Nobody ever told me that!” or “There’s some real good common sense!”

    And he’s completely neutral ideologically…a concept many can’t even imagine as possible.

    It is quite literally inspirational, particularly within the context of a society so obsessed with doom and gloom scenarios. It is not anywhere near a bad as many would prefer we think!

    Reply

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Darwin O'Connor | doconno@gmail.com