Carbon Tax Analysis


Interesting. Always nice to get some data on issues normally debated as pure theory.

On a practical level, I think it would be a good idea to see how carbon pricing works out in Alberta before trying it here (Saskatchewan). Their economy is very much like ours and we have a perfect no-risk opportunity to see how it is affected. If, by the next election, the economy is a disaster and a party wins by promising to repeal their cap-and-trade scheme, it was probably a bad idea. On the other hand, if the economy is doing well and all parties intend to keep the cap-and-trade system, we should probably adopt it as well. Ideally, we could even join into the same system, for minimal effort and bureaucracy.

On a theoretical level, I see 4 problems with a carbon tax. Luckily, however, they are probably all fixable.
  1. How does it fit in with attempts to remove carbon dioxide from the atmosphere? This would cover everything from sophisticated technological solutions to just not cutting down trees.

    The way that I would fix this is by making the carbon tax a "carbon deposit". The government charges a rate of $N per ton of carbon put into the atmosphere, and pays a rate of $N per ton taken out. It's simple, intuitive, and covers pretty much everything. It also helps that the government is paying out plenty even at the beginning, so it doesn't look like they are just trying to extract more money. Even better, this makes the whole invisible do-we-count-all-carbon-emissions-or-only-those-from-non-renewables question irreverent.

  2. It depends on a lot of political will. Suppose that we had a carbon tax of $50/ton (Green Party proposal, 2015). Inflation means that, even if we are OK with current emission levels, the effect of the tax will keep decreasing. To fix this, we will need politicians to periodically raise taxes for the rest of time, and almost any tax raises are a political no-no.

    My "carbon deposit" scheme above would hopefully fix this, as the politicians could always bill their tax hikes has "increased aid to the environmentally conscious" or something like that.

    Alternatively, we could fall back on the cap-and-trade system. This is economically equivalent, but the bookkeeping is more awkward. I think it also has a bad name in some environmental circles, but I am not sure on why. It's true that many existing cap-and-trade schemes don't have a lot of impact (through high caps or special exemptions), but that is not inherent to the approach. You can have equivalent problems with the tax.

  3. A certain amount of carbon emissions come from an socio-politically inconvenient source: people breathing.

    The direct response to this would be a breathing head tax (about $16/year). However, I don't think anyone wants that. Ever-increasing civilization already makes us pay for a) food we find growing, b) land to live on, c) water, d) wood, and e) the right to marry, all of which were once free. I don't think anyone wants to add air to the list.

    A better solution would probably be for the government to extract the cost out of their normal tax income. That way the cost could be distributed however the politicians want, and we wouldn't have to hear people ranting about environmentalism being a government plot to oppress the poor.

  4. The costs and benefits are uneven. Some people do really well, and others do really badly. This is the case with most (all?) changes to the structure of society, but, as this is a big change, the effect would be bigger than normal. The disparity is a problem because people normally feel a lot more strongly about what they lose than what they gain. In truth, utility curves (from economics) suggest that this is not (only?) an error in reasoning; it accurately reflects reality.

    I can also see a moral point here: it isn't fair for one group to decide to enrich themselves at the cost of another group. We typically call such things theft, corruption, war crimes (when done in large groups), and similar. Simply claiming that it is for the greater good doesn't change anything: Chairman Mao said that. Of course, the greater good does require sacrifices, and often uneven sacrifices at that. I don't know what the right balance is, but the modern world has generally agreed that the powers that be should try to mitigate the unintentional harm they cause.

    In this case, my carbon deposit idea ends up making things worse. Most people are in cities, while most carbon dioxide comes out of the air in the countryside. Of course, it's not that simple: you have to look at the net change. A tree in forest grows, taking carbon out of the atmosphere, but it also decomposes, releasing it back into the air. Some winds up in the ground, but its a lot less than a simplistic calculation would suggest. All the same, though, I would end up transferring a fair amount of money to farmers, and even more to the north. Given that the government owns some of this land (e.g. parks), some of the money would also go to them.

    I think the best solution here has 2 parts:
    1. Phase in the tax slowly, according to a well-publicized plan. This will give people a time to adjust and allow them to plan. Based on BC's experience, raising it (from $0) by $5/ton each year might be reasonable. This matches their average rate increase from 2008 to 2015 ($30 over 7 years). That is slower than many environmentalists would like, but should give businesses with big investments (like factories) time to adapt. An economic collapse won't help anyone.
    2. Programs to help current carbon-heavy industries and their employees adapt. The obvious one is retraining for workers, but more research into green technology for the field might help. We will still need to build things, so a low-carbon equivalent to concrete would be very nice to have. Even better, if we developed it, we could export it all over the world.

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