Green taxation critics have a point?

If you take fuel duty (which has been around since the ark) and re label it all as a green tax then the figure seems to be ~29bn. But, if fuel duty is a green tax why wasn't it a green tax twenty+ years ago?

Incidentally I wonder who funded the study...

"Of course, calculations of social costs are always going to be contentious - how do you quantify the future cost of millions of people dying from drought or the world's financial centres being inundated by rising flood waters - but even if you accept the argument that green taxation should be set at a level to match the annual social costs arising from CO2 there is little consensus amongst economists to work out what these social costs should be."

Quite. But that's exactly what Stern set out to do: measure the future costs of millions dying etc. And came up with $85 per tonne CO2. And then said that the solution is Pigou taxation. Not taxation to change behaviour, but taxation to include those costs in market prices, so that we get the socially optimal outcome.

"Not taxation to change behaviour, but taxation to include those costs in market prices, so that we get the socially optimal outcome."

What is the "socially optimal outcome"?

So you still get those costs (as behaviour isn't modified, the same amount of CO2 gets emitted), but instead people pay a little bit extra for their energy which makes it all okay? Or is that revenue raised supposed to be put aside and used to offset the effects of the resultant warming in the future (one can guess whether that's actually happening)? Or the money goes into reducing emissions in some other way?

[It depends a bit on your viewpoint. The classical green objection to, say, burning petrol in cars is that people don't realise the full costs - there are externalities, in terms of climate change, deaths, or noise pollution. The classic economic solution is to internalise the externalities by appropriate taxation. Economically, it then doesn't matter if the offending behaviour is reduced or not, because its "paid for". In reality, of course, it isn't: no-one gets compensation for traffic noise from govt taxes (except very indirectly).

What this study says to me is that although Green taxes are at about break-even point from the externalities viewpoint, they are doing little to modify behaviour. Of course using them to modify behaviour under the guise of green taxes amounts to a trojan horse -W]

This kind of discussion unfortunately seems to go straight over the head of many internet commentators whose views are expressed as "All taxes are evil and lead to socialism", or "Green taxes don't work, therefore global warming is a myth and it's just an excuse for the gvt to tax us".

[Sadly so. And this is perhaps a place to say that I forgot to mention that the social costs aren't well known, so in fact the problem really can't be well solved -W]

"Of course using them to modify behaviour under the guise of green taxes amounts to a trojan horse"

Assuming that behaviour is to be modified, the only other ways to modify behaviour are to persuade people to reduce emissions, or legislatively limit emissions. It'd be interesting to see which of those alternatives the critics feel is likely to be more successful and/or acceptable. Unless I've missed a fourth method?

[They key point is "Assuming that behaviour is to be modified". To internalise externalities is defensible. To do it because you don't like people driving is questionnable. In that case, you should be persuading people that they are driving too much. If a majority then agree, but because of prisonners-dilemma can't change starting with themselves, then you can either raise taxes to force change or legislate (or stop building new roads and start closing old ones (anyone for a "shut the M11 campaign"?). But I'd rather see it being done honestly and transparently -W]

"To internalise externalities is defensible."

But only if you pay for those externalities in reality, surely? If not, then others gain from someone else's costs.

Actually looking again at what I wrote, and your reply, I suppose the "Assuming that behaviour is to be modified" part is linked to the persuasion method of modification. That is modification should only be deemed necessary if society has been persuaded that it needs modification. Are we even at that point yet?

I thought the prisoners dilemma was about whether to rat on your pal or both stay silent, the punishment changing depending on which you do. What you mean by people not being able to change starting with themselves is more a structural issue, and one that is all too often overlooked. Why else want to build many more houses in flood plains? I think there is a huge issue here that people prefer not to tackle, which is how the current economic setup dooms us to travelling long distances, huge food miles, and inefficient housing.

[Its a PD issue, in that optimal behaviour can't be achieved by local selfish behaviour -W]

"What is the "socially optimal outcome"?"

W deals with the rest of it above. But here socially optimal is taken to mean the best possible result given the resources available to us: As many as people as possible get to do as much as they wish to subject to the limitations of both resources and the damage they do to other people.

Of course, absolutely anything I do has a cost to someone else. My eating bread raises the price of bread (infinitessimally, to be sure) for everyone else on the planet. However, if I pay the full and true costs (ie, including externalities) of the bread that I eat then we've got a method of working out whether the damage I do by eating bread is greater or less than the utility I get from eating bread. If bread, because of its external effects costs £50 a slice then I won't be eating it. There'll be a very few who do, who love bread so much that they will pay that much, but the vast majority of us won't. But the price system allows us to weigh this.

This applies to all and anything. Even murder: we could stop that by insisting, forcing, all people to live in locked boxes: most of us tend to think that having a life (and being able to create new ones) is worth not doing so.

Similarly, when we're trying to balance emissions or not emissions we want to add up the utility of those making emissions and compare it to the costs that will be bourne by those affected by said emissions. Where costs equal benefits is where the socially optimal outcome is: we've maximised utility across the entire society.

There is some argument about what those costs are: what is the cost of Bangladesh disappearing below the waves? Of polar bears? Nordhaus thinks $2.50 a tonne CO2 (or whatever his latest number is). Stern $85 per tonne. Others perhaps higher. But once we have the number the next step is the same for all: get that number into the price system and we'll end up at the social optimum: the maximum of human happiness (technically, utlity) we can have over time, given the resource constraints we face.

Bangladesh and the bears still might go: but we've added up the preferences of everyone and in that summation they've (if they do go) decided that other things rather than the existence of those two make them happier.

To simultaneously entertain the thoughts that taxes are too high because they exceed social costs and too low because they fail to modify behavior is a bit silly, at least in an economist's idealized world.

If the tax is set at (or above) social cost, and behavior doesn't change, then that behavior must be so valuable as to be worth paying the tax. The tax then becomes just a good way of collecting revenue without deadweight loss to the economy. If you don't like that outcome, then what you're really saying is that the social cost of the behavior is higher than you thought, and you should ratchet up the tax until you get the behavior you want (assuming you can justify that on a social cost basis).

In the case of air travel, no one expects behavior to change much, particularly in the short run where demand is extremely inelastic and there's essentially no low-carbon fuel substitution potential. The presence of the price signal at least creates the potential for a long-term change (e.g., from innovation or infrastructure change, both of which are slow). That's why green (e.g., carbon) taxes need broad coverage, so that behavior does change in other sectors of the economy.

If you think that you're not living in an idealized world, and thus that the behavioral response to correct social costs could be inappropriate, then you should leave the tax at your best guess as to social cost, and go looking for the information or institutional changes that will get the behavior right.

There is no good reason to look for balance between green tax revenue and green spending in any world. What you'd like to see is the marginal tax rate equal to the marginal benefit of spending, but that could happen with very different total money flows. Any excess revenue should be used to reduce other distortionary taxes, to compensate the bearers of the social costs (difficult), or rebated as a lump sum to all citizens (the latter being the tax equivalent of allocating property rights to all citizens in a trading scheme).

Getting the social cost right is indeed hard. However, it's important to remember that there are multiple sources of conflict: uncertainty over the laws of nature and the economy, and disagreement over values. The former, including climate sensitivity and interfuel substitution elasticities, are reasonable to leave to experts, and in any case can be managed with sufficiently adaptive policies. However, the latter, in the form of discount rates and weights to interests of various groups, actually dominate the social costs calculated in most climate assessments (including Nordhaus', cited in the article). Such ethical choices should be made with wider input.

What Tom Fiddaman said. Sounds like my career choice.

Best,

D

As Tom put it...better than I did.

WHAT COSTS???

There are no costs to industrial-CO2-release.

If evidence emerges that it has some weak greenhouse effect that will save everyone money. Reducing the severity of heat waves and cold spells both. Reducing extreme weather events and reducing heat differentials more generally. Making plants more productive, making nature more robust, reducing the plants susceptibility to both drought and frosts.

There are no costs to industrial-CO2-release.

There are only benefits.

"Such ethical choices should be made with wider input."

Does that mean that (eg) Bangladesh gets a say in the social cost per tonne, then? They might value their land higher than Nordhaus or Stern do. How will their say compare to people who say are less likely to lose their land (in weighted terms)?

How wide should this input be? Universal or some subset? How would that subset be decided?

I don't claim to have all the answers, but Adam is asking the right questions.

Realpolitik of course says that Bangladesh doesn't get a say.

However, economists are coy about admitting where they are implementing realpolitik vs. maximizing welfare for an infinitely-lived benevolent agent representing all humanity on a fair basis.

In models, who gets a say is determined by discounting. Future consumption is typically discounted for two reasons: time preference (i.e. we just think our welfare is more important than that of future generations) and inequality aversion (if future generations will be richer than us, we should worry more about our own situation). It can be shown that (assuming a lot of things) the two choices should be made in such a way as to yield a combined discount that's consistent with observed interest rates. The Stern Review was attacked for an inconsistent choice.

There are two problems with reliance on interest rates to guide policy. First, market prices (including interest rates) don't reflect a fair and optimal world. They reflect inequitable allocations of property rights, cognitive and institutional failures, and environmental and social externalities. Second, even taking interest rates as a given, the market provides no guidance as to whether one ought to favor a myopic (discount for pure time preference) or equitable (discount for inequality aversion) origin of the interest rate. Ethics favor equitable treatment (unless perhaps you are sure the Rapture is imminent). Most studies of climate impacts and optimal carbon pricing choose myopia, with either no defense or flimsy arguments about paradoxes that arise when from zero time preference ("overprivileging the future"). The choice should in fact be in the hands of model consumers.

The question of who gets a say is even more sharply pointed in regional models, where large existing inequities in the distribution of wealth must be explained. If you're building an optimization model, and use a fair metric for welfare, the model will happily move capital around until it is uniformly distributed around the world on a per capita basis. That obviously won't do, so modelers use welfare weights to equalize the happiness produced by a buck around the world. Those weights say, in effect, that Bill Gates' happiness counts about as much as that of 100 million farmers in Bangladesh, which is possibly not a bad approximation of the current reality.

However, it's a big leap from using welfare weights to describe the current situation, to using them prescriptively to put a price on carbon. I think it's misleading to say, "the infinitely lived benevolent agent in my model says carbon is worth $15 per ton," without mentioning the fine print, "however, my agent is a strange god who worships the almighty buck and doesn't give a rat's patootie about the poor or anything that happens more than 30 years from today."

If you take an equitable approach, using uniform welfare weights, allocating explicit property rights to all regions and generations, or treating the situation as a game between an inequitable current order and a fair policymaker, you get vastly different results. In the case of climate, you get a carbon value that's much closer to Stern than to other, allegedly more internally consistent studies. Avoiding climate damage can be seen in such a context as a form of foreign aid that can't be squandered by receiving governments, and becomes an ethical imperative for the rich world.

I'm not deluded enough to think that reporting results both ways will change the world order. But it would at least dispel the illusion of legitimacy around results that are fundamentally driven by short-sightedness and crass self-interest, yet which claim to achieve some sort of social optimum, or worse, to promote growth at all costs in the interests of the poor.

Ummm, GMB, the only decent definition of a robust "nature" is when we have well functioning strong ecological systems. Unfortunately that is not the case due to human damage from land use changes, pesticides and climate change. So, you can strike that one off your list.

Adam/Tom: In both Nordhaus' and Stern's calculations, land loss in Bangladesh is calculated at Bangladeshi prices.

Frankly, using taxes for green spending is often a bad idea. The government often tends to pick winners and make bad investments. Also, if the tax is set correctly, it will internalize the social cost of environmental externalities in the absence of any additional dangling carrots.

A far better idea is to earmark all green tax revenue to offset other taxes (e.g. payroll and income taxes) such that the entire scheme is revenue neutral and has no net effect on the livelihood of the average person, other than creating the opportunity to save money through behavioral change.

As to Richard's prior comment, Stern sort of values Bangladesh's land at Western land prices in his equity weighting, though it is far from explicit.

Zeke: Stern did not use equity weighting.