Quotulatiousness

November 3, 2019

Colby Cosh on the origins of carbon taxes

Filed under: Economics, Environment, Government — Tags: , , , , — Nicholas @ 05:00

In response to a column by Andrew Coyne in the National Post, Colby Cosh outlines the intellectual origins of carbon pricing:

As Andrew knows, the intellectual origins of carbon pricing are purely classical-liberal. Maybe you have to belong to our club to spot that he has carefully not called it an invention of the “left.” When I was an undergraduate, it was the unfashionable libertarian and Hayekian zanies, not the despondent post-Cold-War Marxists, who were preaching what would become mainstream environmental economics. The left has been slow rather than fast to accept the idea of putting a mere price on what they regard as an inherent evil.

British economist Arthur C. Pigou (1877-1959).
Photo via Wikimedia Commons.

All of the foundations of carbon pricing were developed by economists that the left, in all varieties, now regards as cartoonish modern-day demonoids. The gentle Arthur Pigou, who developed the concept of economic externalities and the idea of taxing them, might still pass muster. But Pigou’s reformer-reviser Ronald Coase is deeply suspect, having pioneered an amoral analysis of externalities that tackles social-cost problems like environmental pollution without assigning blame to, or even necessarily acting against, the polluters.

In his paragraph Andrew almost explicitly outlines the theory of the “double dividend” from replacing bad, economically distorting taxes (like the one we impose on incomes) with taxes laid directly on externalities like carbon. The double dividend is pure Gordon Tullock, who is now a hate figure on the left for his role in creating public choice economics.

You can see that this analysis gets pretty complicated in a hurry. The idea of carbon taxation isn’t really of the right or the left. The best term for it might be “neoliberal,” although some people think there is no useful place for that word. To the degree that the left has accepted carbon pricing, they have done so as a (perhaps mostly unwitting) compromise with otherwise abominable thinkers like Coase and Tullock. Total state command-and-control of the economy isn’t an option in today’s Western world, and since there’s a neo-Malthusian crisis in the atmosphere around us, we had better try to solve it without having to execute a global socialist revolution first.

But if instinctive suspicion of the state is a feature of the conservative mind, carbon pricing doesn’t solve the problem completely. Canadian carbon tax designs have been given redistributive features, which makes them more acceptable politically to people who aren’t instinctive or innate conservatives, but creates confusion and distaste for those who are. And to the degree conservatives are inclined to doubt that the state will cut other taxes to make carbon prices revenue-neutral, they have been partly justified, so far, by the history of Alberta and B.C. The “double dividend” is a good idea: can governments be trusted to actually let us collect it?

In a nutshell, that lack of trust is why I’m generally opposed to the federal carbon tax system, even though the idea of carbon taxes (when properly implemented) are far less distorting to the economy than the hodge-podge of taxes and regulations we have now.

February 9, 2019

QotD: The global utility of a national carbon tax

Filed under: Economics, Environment, Government, Quotations — Tags: , , , — Nicholas @ 01:00

James Griffin [of] Texas A&M’s Bush School of Government […] is a carbon-tax advocate who begins by acknowledging what everyone knows but hardly anyone says: that, absent subsidies and mandates, renewables and so-called green energy could not begin to compete with oil and coal, and the market would be entirely dominated by fossil fuels.

The carbon tax is one of those policy ideas that is largely sound in theory but runs up hard upon the shoals of reality. I am not convinced that a national carbon tax would change U.S. consumer behavior to such an extent that it would have positive effects on what is after all a global phenomenon, nor am I convinced that the U.S. government would use the revenue from a carbon tax to invest in real climate-change mitigation. That makes the carbon tax a very expensive way of demonstrating good intentions, which does not seem to me like a very fruitful way to work. And compared to more direct programs, such as clearing the way for the development of new, modern, nuclear-power facilities, a carbon tax is even less attractive.

Kevin D. Williamson, “The Case for a Carbon Tax”, National Review, 2017-03-08.

October 12, 2018

Carbon taxes may be efficient, but let’s not rush into it quite yet…

Filed under: Cancon, Economics, Environment, Government — Tags: , , , , — Nicholas @ 05:00

Terence Corcoran says we shouldn’t jump at the chance to kill our economy just because carbon taxes are efficient:

It didn’t take long for federal Environment Minister Catherine McKenna to tweet out the news implying that the Nobel committee supported the government of Canada’s carbon-price scheme. The Montreal-based carbon-taxing NGO, the Ecofiscal Commission, hailed Nordhaus for having “demonstrated” that a universal price on carbon was the most “efficient” way to curb climate change.

Before jumping aboard the Nordhaus bandwagon, however, carbon-taxing politicians and all Canadians might want to take a closer look at what they are being led into.

[…]

Nordhaus and his co-winner of this year’s Nobel in economics, former Stanford economist Paul Romer, are great believers in “incentives.” As Romer said in a post-Nobel interview (tweeted by McKenna, naturally): “I believe, and I think Bill (Nordhaus) believes, that if we start encouraging people to find ways to produce lower carbon energy, everybody’s going to be surprised at the progress we’ll make as we go down that path. All we need to do is create some incentives that get people going in that direction, and that we don’t know exactly what solution will come out of it — but we’ll make big progress.”

But why a tax? If all we need to do is deploy the price mechanism, why impose a tax? Let’s ignore for a moment the dubious assumption that the science and economics of climate change are sound and settled. Would it still not be better to have the government set the carbon price, require the energy companies to charge it, but allow the revenue to flow not to government but through to energy companies and their shareholders, and others in the supply chain? That’s where market forces and the above-mentioned miracle price mechanisms — rather than government planners — would determine where to invest and what energy alternatives are best. (No gas retailer could possibly eat the cost of a 90-cent-per-litre carbon tax, so they’d have no choice but to pass at least most of it along to the customer).

One of the ironies of carbon taxation is the enthusiasm for “market mechanisms” and “prices” among politicians who otherwise abhor and resist market pricing of everything from roads to health care to rental housing to public transit to education to broadcasting and telecom and the internet and the price of cannabis, not to mention the Canadian price of milk and chickens. With carbon, market pricing is suddenly a great idea, no matter how fanciful the analyses and speculative the projections.

August 15, 2018

QotD: State economic intervention in theory and practice

Filed under: Economics, Government, Quotations — Tags: , , , , , — Nicholas @ 01:00

The economic theory: the state intervenes in the economy in order to prevent free-riding – in order to internalize externalities – in order to better ensure that all private parties pay the full marginal costs of their activities, and that all private parties reap the full marginal benefits of their activities – in order to promote competition – in order to protect the weak from the strong.

The political reality: the state intervenes in the economy in order to promote free-riding – in order to externalize costs and benefits that the market has reasonably internalized – in order to better ensure that politically powerful private parties escape the full marginal costs of their activities, and that politically disfavored groups be stripped of much of the marginal benefits of their activities – in order to promote monopoly – in order to render some people weak who are then pillaged by the strong.

Don Boudreaux, “Economists’ Normative Case for Government Intervention is a Very Poor Positive Theory of that Intervention”, Café Hayek, 2016-09-26.

March 13, 2018

The economic argument for carbon taxes

Filed under: Economics, Environment, Government — Tags: , , , , — Nicholas @ 05:00

Tim Worstall explains what a carbon tax is supposed to do, as opposed to what many environmental activists want it to do:

The essential economic analysis is that carbon emissions are an “externality.” There are costs to third parties of the freely chosen activities of consenting adults. If there aren’t such third party costs then the adults get to consent – as long as your bedroom contains only those freely consenting adults then what goes on there is up to you. But if there are those third party costs – say, the noise from the enjoyments causes lost sleep among the neighbours – then some societal power to force an adjustment seems reasonable enough.

Again, economics analyses here by suggesting that we’ll get too much, or too many, of those third party costs if people aren’t paying for them. If we’ve not got to pay to soundproof the orgy then we’ll have more orgies than if we do. It’s fair that we insist upon such soundproofing perhaps. But sometimes we cannot insist upon such direct actions – then we’ve got to try and change the price system. Which is what the carbon tax does.

There are benefits to using fossil fuels – transport, heat, cooking and so on. Given current technological levels immediate banning would mean billions die – commonly thought to be a Bad Thing. But there are those costs imposed upon others as well in the climate change the emissions cause. The answer is that we look to that greatest good of the greatest number, the utilitarian answer. Where emissions produce more value than the damage they cause – including over time – then we want them to continue. Where they don’t then we want them to stop. That way we get the maximum possible value being created and thus all humans – over time – are as rich as we can be given current technologies.

Calculating what this number is, this tax rate, is also known as determining the social cost of carbon emissions. The Stern Review may or may not have exactly the right number but it’s a good enough starting point, $80 per tonne CO2. Say 50 cents or so per gallon of gas. Slap that tax on and we’ve corrected the price system. People who use gas are now paying the environmental costs of their use. So, anything they use it for must create greater value than the damage being caused. We’re copacetic at this point, we’ve the optimal level of emissions.

Note that this logic still works whatever you think of the rate. 1 cent or $100 a gallon, the logic is still the same, we’re only arguing over what is that social cost of carbon. Stick a tax on of whatever it is and we’re done.

Even if climate change isn’t a problem, or isn’t happening, we do still need some tax revenues somewhere. It’s also better to tax consumption than incomes or capital, better to tax things inelastic in demand with respect to price than those elastic. Fossil fuel consumption taxation is a consumption tax and the demand for fossil fuels is, in the short to medium term at least, inelastic. We’re fine with fuel taxation therefore.

For a quick backgrounder on the concept of externalities, MR University did a video on this a few years back. For reasons to worry that your government might not be quite as revenue-neutral in imposing a Pigouvian tax, Warren Meyer also has doubts.

October 15, 2017

David Suzuki’s (incomplete) economic understanding

Filed under: Cancon, Economics, Environment — Tags: , , — Nicholas @ 05:00

Several years ago in the Literary Review of Canada, Joseph Heath explained how he tried “being green” and in the process discovered that Canada’s secular environmental saint David Suzuki literally didn’t have a clue about economics:

David Suzuki’s most recent, The Legacy: An Elder’s Vision for Our Sustainable Future, is billed as an attempt by “one of the planet’s preeminent elders” to “sum up in one last lecture all that he has learned over his lifetime.” Suzuki is, of course, one of the most influential public intellectuals in this country. Like most Canadians of my generation, I grew up watching The Nature of Things, and so tend to think of Suzuki as a constant in the universe.

Suzuki was also an environmentalist long before it was cool to be an environmentalist. Perhaps because of this passionate commitment to the cause, it is startling to discover that Suzuki is oblivious to the logic of collective action. What’s worse, he does not even know what an externality is, and seems unwilling to learn. In The Legacy, he repeats the same incorrect definition that he has been using for years (he equates externalities with anything that is not part of, and hence external to, an economic model, and then claims, on that basis, that economists ignore them). Elsewhere, he even provides a detailed account of where the misunderstanding arose. It was apparently based upon something that the instructor said to him, on the first day of an economics class, which he evidently misinterpreted and never bothered to double check.

It is worth pausing for a moment to reflect upon this. It means that Suzuki does not know the first thing about environmental economics. It means that in 38 years as a university professor, public intellectual and environmental activist, he did not once take the time to find out what social scientists have to say about the problem of global warming. It means that he has never even glanced at the Wikipedia page on environmental economics.

Because of this, Suzuki winds up committing the core fallacy of environmental activism. He thinks that if people only understood the consequences that their actions were having on the environment, they would each be motivated to change their behaviour. And so, to the extent that we are not changing our behaviour, it must be because we do not understand, or that we have not been telling ourselves the right “story.” Yet this is manifestly not the case. My wife understands the science of global warming perfectly well. But she also does not like dandelions growing by the side of the road. And when push comes to shove, the desire to kill dandelions wins over environmental peccadilloes. It is not particularly mysterious. It is called free riding; people do it all the time.

Thus when Suzuki writes “we say we are intelligent, but what intelligent creature, knowing that water is a sacred, life-giving element, would use water as a toxic dump?” he seems genuinely not to know. The answer is easy: we are intelligent creatures who care just slightly more about ourselves than we do about other people. For example, like most residents of Toronto I do not use the water on my land as a toxic dump; I use Lake Ontario for that purpose. Saying that “we are water, and whatever we do to water, we do to ourselves” sounds very nice, but all the “we” talk actually encourages a very serious confusion. What I do to water, I primarily do to other people, not to myself, which is why I care about it just ever-so-slightly less.

In the end, and somewhat contrary to all expectations, Suzuki winds up coming off as a science chauvinist. There are basically two bodies of knowledge that he respects. There is physical science — genetics, biology, the stuff that he studies — and there is what he calls “traditional knowledge” — by which he means the wisdom of aboriginal and indigenous peoples. Conspicuously absent is any interest in what social scientists might have to say about how human beings work, about the political process, about the economy and about how societies mobilize to address collective action problems. As a result, he knows a lot more about the nature of things than he does about the nature of people.

H/T to Andrew Potter, via Stephen Gordon for the link.

June 22, 2017

Words & Numbers: The Population Boom Could Save the World

Filed under: Economics — Tags: , , , — Nicholas @ 06:00

Published on 21 Jun 2017

In 1798, 95 percent of the world lived in poverty. Today, less than 10 percent do, in spite of the world’s population growing by 700 percent in that same time.

The common thought among young people is that this 700 percent population growth is going to overpopulate the earth. But given the number of people in poverty, it looks like population growth is actually good for poverty – more people means more brains, which means more ideas, inventions, and innovations.

This week on Words and Numbers, Antony Davies and James R. Harrigan talk about how and why the world is improving despite widespread negativity towards the idea of a growing world population, and why that negativity persists regardless of the prosperity we see every day.

May 16, 2017

How service companies might respond to a mandated increase in the minimum wage

Filed under: Business, Economics — Tags: , , , — Nicholas @ 05:00

At Coyote Blog, Warren Meyer discusses how real world service companies that employ a lot of minimum wage workers are likely to respond when the minimum wage is raised:

When I discuss this with folks, they will say that the increase could still come out of profitability — a 5% margin could be reduced to 3% say. When I get comments like this, it makes me realize that people don’t understand the basic economics of a service firm, so a concrete example should help. Imagine a service business that relies mainly on minimum wage employees in which wages and other labor related costs (payroll taxes, workers compensation, etc) constitute about 50% of the company’s revenues. Imagine another 45% of company revenues going towards covering fixed costs, leaving 5% of revenues as profit. This is a very typical cost breakdown, and in fact is close to that of my own business. The 5% profit margin is likely the minimum required to support capital spending and to keep the owners of the company interested in retaining their investment in this business.

Now, imagine that the required minimum wage rises from $10 to $15 (exactly the increase we are in the middle of in California). This will, all things equal, increase our example company’s total wage bill by 50%. With the higher minimum wage, the company will be paying not 50% but 75% of its revenues to wages. Fixed costs will still be 45% of revenues, so now profits have shifted from 5% of revenues to a loss of 20% of revenues. This is why I tell folks the math of absorbing the wage increase in profits is often not even close. Even if the company were to choose to become a non-profit charity outfit and work for no profit, barely a fifth of this minimum wage increase in this case could be absorbed. Something else has to give — it is simply math.

The absolute best case scenario for the business is that it can raise its prices 25% without any loss in volume. With this price increase, it will return to the same, minimum acceptable profit it was making before the regulation changed (profit in this case in absolute dollars — the actual profit margin will be lowered to 4%). But note that this is a huge price increase. It is likely that some customers will stop buying, or buy less, at the new higher prices. If we assume the company loses 1% of unit volume for every 2% price increase, we find that the company now will have to raise prices 36% to stay even both of the minimum wage increase and lost volume. Under this scenario, the company would lose 18% of its unit sales and is assumed to reduce employee hours by the same amount. In the short term, just for the company to survive, this minimum wage increase leads to a substantial price increase and a layoff of nearly 20% of the workers. Of course, in real life there are other choices. For example, rather than raise prices this much, companies may execute stealth price increases by laying off workers and reducing service levels for the same price (e.g. cleaning the bathroom less frequently in a restaurant). In the long-term, a 50% increase in wage rates will suddenly make a lot of labor-saving capital investments more viable, and companies will likely substitute capital for labor, reducing employment even further but keeping prices more stable for consumers.

As you can see, in our example we don’t need to know anything about bargaining power and the fairness of wages. Simple math tells us that the typical low-margin service business that employs low-skill workers is going to have to respond with a combination of price increases and job reductions.

March 5, 2017

The political Trojan Horse of “Pigouvian taxes”

Filed under: Business, Economics, Government, Politics — Tags: , , , — Nicholas @ 03:00

Warren Meyer used to be quite positive about the introduction of Pigouvian taxes, but recently his opinion has changed:

Here is the Wikipedia definition of a Pigovian tax:

    A Pigovian tax (also spelled Pigouvian tax) is a tax levied on any market activity that generates negative externalities (costs not internalized in the market price). The tax is intended to correct an inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. An often-cited example of such an externality is environmental pollution.

The Left often tries to justify new taxes based on their being Pigovian taxes. The classic example is a carbon tax — it is claimed there is a social cost to carbon-based fuel combustion (e.g. CO2 production and resulting global warming) that is not taken into account by market prices. By adding the tax, these other costs can be taken into account, likely raising the price of these fuels and thus both reducing their use and providing a higher price umbrella for alternatives.

For years, I accepted these arguments at face value. I might argue with them (for example, I think that the Left has tended to spot 10 of the last 2 true negative externalities), but I accepted that they really believed in the logic of the Pigovian tax. I am now becoming convinced that I was wrong, that the Left’s support of Pigovian taxes is frequently a front, a way of putting a more palatable face on what is really a naked grab for more taxpayer money by public officials.

Soon after discovering the concept of Pigouvian taxes, I suspected that — even if the economics were sound — no human government was going to implement such a tax in the pure form: there would always be “good reasons” to make the new tax non-revenue-neutral, because once a revenue stream has been established, it’s unlikely the government will actually shut it down afterwards. I have yet to be disappointed in this expectation.

October 7, 2015

A Deeper Look at Tradeable Allowances

Filed under: Economics, Environment — Tags: , , , , , — Nicholas @ 03:00

Published on 18 Mar 2015

Since the passage of the Clean Air Act, SO2 emissions have decreased by 35%. Part of this is due to tradable allowances, which created a market solution to the external costs of SO2 emissions. In this video, we look at the lessons of tradable allowances for SO2 and see if a similar market-based solution could work to decrease other pollutants, such as CO2.

September 30, 2015

The Coase Theorem

Filed under: Economics — Tags: , , , , , — Nicholas @ 03:00

Published on 18 Mar 2015

In this video, we show how bees and pollination demonstrate the Coase Theorem in action: when transaction costs are low and property rights are clearly defined, private arrangements ensure that the market works even when there are externalities. Under these conditions, the market properly manages externalities.

September 16, 2015

External Benefits

Filed under: Economics, Health — Tags: , , , , — Nicholas @ 04:00

Published on 18 Mar 2015

What can the flu teach us about economics and externalities? In this video, we go over how vaccines produce positive externalities that help people stay healthy. When someone receive the vaccine, they pass along the positive benefits of the vaccine to others, generating positive externalities. However, when someone gets a vaccine, they bear all of the costs and only reap some of the benefits of the vaccine. The social value is larger than the private value, resulting in an an undersupply of flu shots. One solution to this problem is a Pigouvian subsidy — a subsidy on a good with external benefits.

September 14, 2015

An Introduction to Externalities

Filed under: Economics, Health, Science — Tags: , , , , , — Nicholas @ 04:00

Published on 18 Mar 2015

What are externalities and what are the different kinds of costs? And what does this have to do with the rise of “superbugs”? This video is an introduction to externalities, including the concepts of private cost, external cost, and social cost. Using the example of antibiotics and viruses, we take a look at how costs are passed along to different members of society beyond the producer and consumer. We’ll use a chart to illustrate how to calculate the effects of a Pigouvian tax, and we provide definitions for the other key terms that will be used throughout this video series.

August 5, 2015

A report on phasing out nuclear power in Sweden

Filed under: Economics, Environment, Europe, Politics, Technology — Tags: , , , , — Nicholas @ 04:00

It may make politicians and activists feel empowered and righteous, but it has negative aspects that don’t seem to get the same level of attention as the “feel good” rhetoric does:

Nuclear power faces an uncertain future in Sweden. Major political parties, including the Green party of the coalition-government have recently strongly advocated for a policy to decommission the Swedish nuclear fleet prematurely. Here we examine the environmental, health and (to a lesser extent) economic impacts of implementing such a plan. The process has already been started through the early shutdown of the Barsebäck plant. We estimate that the political decision to shut down Barsebäck has resulted in ~2400 avoidable energy-production-related deaths and an increase in global CO2 emissions of 95 million tonnes to date (October 2014). The Swedish reactor fleet as a whole has reached just past its halfway point of production, and has a remaining potential production of up to 2100 TWh. The reactors have the potential of preventing 1.9–2.1 gigatonnes of future CO2-emissions if allowed to operate their full lifespans. The potential for future prevention of energy-related-deaths is 50,000–60,000. We estimate an 800 billion SEK (120 billion USD) lower-bound estimate for the lost tax revenue from an early phase-out policy. In sum, the evidence shows that implementing a ‘nuclear-free’ policy for Sweden (or countries in a similar situation) would constitute a highly retrograde step for climate, health and economic protection.

June 1, 2015

It’s time to end the US federal porn subsidy!

Filed under: Economics, Humour, Media, USA — Tags: , , , , , — Nicholas @ 04:00

At Real Clear Science, Alex B. Berezow issues a clarion call to stop the US government’s (hidden) subsidy to pornography producers:

You might be asking, What federal porn subsidy? Fair question. Technically, there isn’t a federal porn subsidy. However, if we borrow some of the logic commonly used by politically driven economists, we can redefine the word subsidy to mean whatever we want.

Pornography is enjoyed by many people, but it comes with a very real social cost: it can break up families and perhaps even become an addiction, which are profound losses of productivity. Economists refer to these as negative externalities — i.e., bad side effects that affect people other than the person making the decision. One way to deal with such decisions is to tax them. This should, in theory, reduce the negative side effects, while simultaneously forcing the decisionmaker to bear the “true cost” of his actions. Clearly, if anyone should have to pay for this societal cost, it should be porn watchers, in the form of a porn tax. If they don’t pay such a tax, they are getting an indirect subsidy.

As it turns out, we don’t have a federal porn tax. Thus, we could say that the American government has issued a federal porn subsidy.

Obviously, that reasoning is absurd. Not only does it dubiously redefine the word subsidy, but it unconvincingly claims to be able to accurately place a price tag on every conceivable externality created by watching porn. Accepting that argument would require a nearly complete suspension of disbelief.

Yet, that is essentially the argument that a group of economists at the International Monetary Fund (IMF) just made about fossil fuel subsidies. (See PDF.)

[…]

The Guardian, which penned the most influential coverage, began its article with an eye-popping statistic:

    “Fossil fuel companies are benefitting from global subsidies of $5.3tn (£3.4tn) a year, equivalent to $10m a minute every day…”

Wow. $5.3 trillion in fossil fuel subsidies? That sounds insane. But, how do they arrive at that number? The Guardian goes on to explain:

    “The vast sum is largely due to polluters not paying the costs imposed on governments by the burning of coal, oil and gas. These include the harm caused to local populations by air pollution as well as to people across the globe affected by the floods, droughts and storms being driven by climate change.”

Ah, okay. The subsidy isn’t a direct financial calculation, but is instead based on a bunch of externalities whose costs are nearly impossible to derive with any sense of believability. To give you an idea of just how much fudging exists in these kinds of calculations, a similar report issued in 2013 (PDF) concluded that the fossil fuel subsidy was $1.9 trillion. A discrepancy of $3.4 trillion should raise red flags in regard to methodology.

« Newer Posts — Older Posts »

Powered by WordPress