This post, and most american commentary on carbon taxes, largely misses the point of why they are needed. There is too much focus on renewables vs. fossil fuels. There are many sources of emissions that don't compete in any way shape or form with renewables. One good example is production of cement, which counts for more than 6 percent of global emissions. That's more than the total emissions of Japan or Russia. Any technology to remove those emissions will come at a cost, and without a prices on carbon, it will never make sense to invest in and implement those technologies. Regulations won't work either, since you need to have the technology in order to mandate it.
The same thing applies to other industries such as steel (8 % of world emissions), aluminium production (roughly 3 % of world emissions), and many essential chemicals. Emissions from the energy sources of these industries are only a small part of the total emissions, and the easiest part. The difficult stuff is to decarbonise the actual production process. There are many promissing technologies, from hydrogen as a reduction agent in steel, to non-carbon based anodes in aluminiumproduction, to carbon capture from cementproduction. All of these are costly however, and require a carbon price to be economically viable.
Progressives in the US are still fixated on whether a moderate price on carbon helps decarbonise the power sector. Nevermind that the UK has shown that it is extremly effective at removing coal from the grid (combined of course with support for renewables). Nevermind also that a climate policy structured purely around support for renewables risks increasing energy usage, such that part of the renewable energy comes in addition to, instead of replacing fossil fuel use. More importantly it completly misses the point that decarbonising power production is the eazy part. The world needs to get to net zero ASAP, and the hard parts can't wait.
Thankfully Europe takes climate change seriously in a way that US progressives simply do not. Case in point, the price of carbon in the ETS is currently at 57 € and rising, with more ambitious EU legislation just around the corner. That's at a level where some of the "difficult" low-carbon technologies for heavy industry start to become profitable.
With respect, I think it’s you who is missing the point, which is that no matter how superior a carbon tax is as a technocratic policy, it’s just doomed in the current American political context, so people should stop pretending that it’s possible until a future when fiscal constraints force us to look for revenue sources. Ideas like tax-and-dividend founder on the reality that a carbon tax would hit in highly salient areas (like the gas pump) and American are irrationally averse to taxes.
To make progress on carbon policy we need to think about things like the car fuel efficiency standards, which are certainly not the most sensible way to implement their goal but have been extremely successful precisely because they are so opaque. So something like a “clean concrete” standard where x% of concrete must be made using cleaner processes is going to be more successful that a straight tax, and even that is probably too straightforward to survive industry and consumer pressure.
In short, to fight climate change Americans need to embrace janky policies that hide the ball as much as possible. It’s frustrating to a technocrat but it’s political reality.
Your point is only valid if you assume that a carbon tax has to be comprehensive and economy-wide and therefore hit the gas pump. That would certainly be the preferable outcome from a technocratic point of view, but a targeted carbon tax on highly polluting industries that don't affect consumers and voters directly, and a combination of mandates and subsidies for consumer-facing sectors, could be politically feasible. I don't know about you, but I rarely buy cement, steel or large quantities of industrial chemicals. Their price isn't very salient, and even a high carbon price would only have a limited (and hidden) effect on most finished products.
There is too much focus on the scope of carbon prices and too little focus on the level amongst carbon prices advocates in my opinion. Better a narrow scope and high prices, than a wide scope and prices that simply aren't economically meaningfull (or a price of zero like now).
Your answer also presupposes, as Matt Yglesias does, that the main arguments for carbon prices are its attractive fiscal properties and efficiency. My point is that while that's all very good, the more important argument is that there are no realistic alternative policies for many emissions. Taking climate change seriously means fighting for some form of carbon pricing IMO.
To be sure, it would be a heavy political lift, even with a narrow scope.
Maybe it needs to start at the state level, maybe it needs to be combined with carbon tariffs to protect industry from carbon leakage, maybe it needs to be paired with regressive tax cuts to sweeten the deal for "moderate". An economy-wide cap and trade nearly passed under Obama, so I don't see why a narrow one should be considered completly unrealistic now. The problem currently is that no one is trying, or even thinking seriously about the legislative trade-offs.
I don't understand why "there are no realistic alternative policies" to a carbon tax. The mechanism of the tax is that it makes lower-carbon alternatives relatively cheaper. You could instead subsidize the alternatives, mandate the alternatives, or cap use of the high-carbon technology. Why does it have to be a tax?
Sure, you could conceivably mandate a bunch of specific technologies (many of which are currently only at an experimental stage) across a multitude of industrial sectors, and hope that they catch on, despite having no advantage other than lower emissions. Its just much more complicated than promoting renewables, and unlikely to work very well. I don't think its a coincidence that most of the effort to develop low carbon steel and cement is taking place where there is a high carbon price.
Furthermore even for the relatively easy task of replacing fossil fuels in power generation with renewables, the current US strategy of mandates and subsidies has achieved remarkably little.
If you want carbon taxes to reduce GHG emissions, you have to tax the biggest producers of it. Going after cement and steel is nice, but you're going after tiny pieces of the pie. If you're not taxing gas, home heating and cooling, and food, you're basically wasting your time.
Not to mention the question of emissions from transportation, and if you think carbon taxes are unpopular wait until they start polling "no free parking ever", a good policy that is the only guaranteed way to get people to drive less.
What about direct spending on/subsidization of R&D? Not as efficient for sure, but couldn't you at least approximate the R&D that industry would be incentivized to do with a carbon tax?
I think you need both. Direct spending on R&D is important to get nascent technologies of the ground, but carbon prices are still needed to give private industry an incentive to contribute to the development and more importantly implement them at scale. The lesson from wind and solar is that it is large scale implementation that really gets the cost down, not early stage R&D.
I think there's a pyramid of carbon reduction, from the "easiest" (electrifying the grid) to the much harder (e.g., aviation fuel). Cement and the like are toward the harder end. So maybe it will be harder and take us longer to address these (relatively low %) sources of carbon. But let's not undermine efforts at easier parts of the problem by promoting solutions, like carbon taxes, that are needed to address the hardest parts.
What about a carbon tax that *ignores* emissions from combustion of fuels, and *only* taxes carbon from sources like cement setting, steel refining, etc.? I don't think this would disproportionately fall on rural people.
Opposition to carbon taxes extends far beyond poor people in rural areas. It's probably closer to a consensus. I mean, it was Jay Inslee's state of Washington that rejected not one but two carbon tax-centered voter initiatives in 2016 and 2018. That's a pretty climate friendly state! (In the meantime, though, the state legislature has been passing some pretty ambitious climate bills. We'll see how well they go down with a population that is on record as not being that supportive.)
No, but I can morally condemn them, and I can expect you to do likewise. White supremacy was good for the electorate that elected Theodore Bilbo, just as cheap fossil fuels are good for the electorate that elects Jon Tester; but Bilbo was a shitty human being, and we recognize him as such. The fact that he was serving his constituents well doesn't redeem him.
A common conservative argument against government intervention against poverty is that the government can't solve the root problem, and any action is going to be too expensive and have unintended consequences worse than the original problem. The degrowth crowd is deploying the exact same argument against geoengineering and nuclear energy, and they might not be wrong.
I think Noah Smith nailed this a while back. The fact that fossil fuel consumption isn't taxed for climate externalities is actually the lesser distortion. The greater distortion is that we aren't using renewable energy sources that are even cheaper than •untaxed• coal and oil--because we haven't discovered/invented them yet, because there hasn't been enough government-funded research to discover and invent them. Obama was shrewd enough to let the first problem go and focus on the second one, and thanks to the fall in photovoltaic prices on his watch, the coal industry is dying without any new taxes. Spending on scientific research is the real ice cream party.
Without available substitutes that people can realistically turn to, coming out in favor of a carbon tax aka gas tax is about as political astute as running on a platform of higher taxes on bread and tea.
But times are rapidly changing. Just ten years ago, electric cars seemed mostly theoretical. Now you see them on the road all the time.
Yes, subsidization by Beijing was actually the key. And Obama's decision to apply anti-dumping measures against cheap Chinese solar panels (weirdly endorsed by Paul Krugman) didn't do anyone any favors.
It's worth noting that China isn't doing carbon taxes either; their approach is all about subsidies and regulation. I think they figured all this stiff out long before Noah and Matt did.
“Subsidize and regulate” will turn the ship eventually, but it won’t achieve the massive reductions necessary to stick to a 1.5 or even 2.0 degree target for mean temperature increase. There needs to be investment in mitigating the effects of climate change. Improved coastal defenses and air conditioning subsidies are important steps, others are doubtless needed. Effect mitigation is too often thought of as a sort of defeatism, but it is an essential part of any popularist climate agenda.
Yes, I agree with this. We have already seen substantial warming and we are going to see more. We should be trying to limit the extent of that warming, but we also need to fund adaptation.
Yes, 2 degrees, that horse has sailed. Most people don’t understand the kind of Hail Mary thinking that underlies the Paris agreement (basically negative carbon emissions from 2050 onwards). The reductions David Abbotts talking about for a 2 degree world is not about what we are putting in the atmosphere now or in the future, but more likely about what we already have put in the atmosphere. Realistically we are looking at a 3-4 degrees warmer world (and that might happen regardless even if we threw the whole kitchen at the problem). The sensible thing is to start to prepare for both radical and catastrophic change as we are unlikely to avoid either. From that perspective carbon taxes is a tool for problems we thought we had in the previous millennium. In this millennium, they would make very little difference for global warming - we need to ban the use of fossil fuels (I wonder how that polls), not to reduce the consumption of it by taxes. Matt is correct that there are easier ways to get funding.
Generally speaking, there is too much focus on how we can stop climate change from happening (we can’t, the bomb has already exploded) and too little on how we can slow it down and mitigate its effects. The idea that it might be defeatist to think about mitigation reveals how deluded popular opinion is on this matter.
I just love how often you go back to the well of "interest rates are incredibly low" as if that were a completely neutral fact independent of historical government policy. Like, yes r* is negative in the US right now. The channels contributing to that are not all instantaneous and include policy choices going back decades.
Even if inflation does arrive, everybody knows the Fed won't be able to raise rates more than 100-150 basis points over a few years, because if they did it would push the US into a sovereign debt crisis, cause waves of corporate bankruptcies, and basically collapse US politics as we know it. And that jeopardizes the Federal Reserve itself, so they just won't do it.
So just be careful with how much money you think we can dump into the economy, because if inflation does come, it will be low-growth stagflation, and consumers will be forced to eat that inflation for at least a few miserable years. And if that stagflation happens, we all know the Democratic Party will be stuck owning it.
Yeah I've always wondered about this. Matt and other "there's no downside to spending" types always cite low interest rates like we have simply found ourselves in a period of sunny weather, when it seems to me we *chose* those interest rates.
So if, as a matter of policy, we can choose low interest rates and then as a consequence choose to spend whatever we want without downsides, well, I don't understand economics well enough to know how long this can last but at a gut level it starts to feel pretty Ponzi scheme/perpetual motion.
At the very least we've shown we're vary capable of building really stupid shit with our free, unlimited money - for example, the very urban freeways that we apparently can't afford to fix but always have money to build, and which are huge contributors to climate change.
We did not choose low (real) interest rates. They are natural and part of a long-term trend. I would also expect the Fed to meet its average inflation target even if that required raising interest rates by more than 150 basis points. The political system might then be facing true austerity budgeting for the first time in a long time but I would expect the Fed to prevail.
It is unserious to suggest you can tease out "natural" "long-term" trends from a financial system which has been routinely bailed out by monetary authorities since 1987 to keep institutions from eating bad investments. You don't get to have activist monetary policy/a "Greenspan Put" and also claim to be following "natural" "long-term" trends.
I think you do. Even if you were right the direction of the trend would be salient if not the level. But in any case, the Fed funds rate cannot deviate by much or for long from the "natural" rate without causing hyperinflation or hyperdeflation, so that fact should give a ballpark estimate of where the natural rate is.
It's very enlightening for me to hear "this is why the Fed won't ever raise rates too quickly" because I never get exposed to the other side of the argument. The only people I ever read arguing for being concerned about this kind of problem are in the denialist camp regarding r* being negative right now (and for the past x years). The idea that there are finance-specific problems that aren't obvious on the surface is much more compelling. So thank you for commenting! Now I have something to dig deeper on.
I mean if you land where I do, you get a set of opinions that are incompatible with either political party. Denialists do so because they want to stay consistent with a party, and they should pay attention to none other than Donald Trump who spent the middle years of his presidency insisting the Fed was raising rates too quickly.
My position is simple: we're a massively leveraged securitization-driven economy, mired in unproductive debt (both public and private), and it's been plain since GFC that we can't let too much of that debt go bad without a deflationary event that would disempower everybody who has let us get this far. Look at Japan for inspiration into our future - the Bank of Japan literally buys ETFs every time the stock market dips a few %.
I've wondered about this too. Low interest rates mean that interest payments are low. It says nothing about principle payments. I may be able to afford a $300,000 mortgage at low rates, but that doesn't mean I can afford a $10 million mortgage, even with zero percent rates.
So, ignoring the climate stuff, this is Matt's worst take and really demonstrates the limits of economic "popularism". The problem is that what is popular is always the same thing, giving people money. What's unpopular is paying for stuff. This whole dodge of, "Interest rates are low so we can just promise to print money at some undetermined point in the future instead of having to vote on a tax bill now." is a fucking disastrous way to do government. It's just a straight up political distortion. Just because people don't perceive it as a tax increase doesn't mean it's not exactly the same thing functionally. If you're doing what's "popular" it should be based on transparently debating the costs and benefits and not this bullshit monetary cup and ball game.
If you are “debating costs and benefits,” the fact that the cost is “borrowing money at roughly 0% real interest” is significant. The only reason the is possible is there is a lot of idle capital out there. If private investment were sucking up massive amounts of capital, interest rates would be higher. The fact that interest rates are zero is a signal that there is slack in the economy and that induced demand wkll increase total output rather than just create inflation.
All government spending is borrowed money. “borrowing money at roughly 0% real interest” is just saying "it's no more expensive than spending tax dollars". The only reason to deficit fund spending is to kick the spending down the road in a way that obfuscates the costs to taxpayers. It's about giving cover for politicians to tell their constituents, "Of course YOU won't have to pay for these things. I'd never ask YOU to pay." when the reality is they mostly have no fucking clue who it will end up costing and they don't care because the costs will be dispersed in some way that won't get traced back to them. (It's also a good way of disguising exactly who's throwing money at which cronies when the fed starts throwing a bunch of QE at the financial sector)
Now, none of this is to suggest that there aren't government investments that end up paying off for taxpayers, of course there are, but the ultimate value of a given piece of spending is no lesser or greater based on how it was financed. What changes is the political accountability of the people passing the legislation. I happen to think representatives should be as transparently accountable to their voters as possible.
Actually, cap and trade makes even more sense than a carbon tax. This is a proven strategy for harm reduction in a case of externality. The revisions of the Clean Air Act in the 90s established a trading system in Sulfur dioxide emissions. The result has been no more dead lakes in New England. As someone whose summer vacations are in Maine, I'm sure you appreciate that. Putting a price on carbon emissions would encourage efficient solutions to their reduction. Of course, some of the responses will be unforseen. The mandate resulted in the substitution of low Sulfur Western coal for higher Sulfur Midwestern coal with attendant job losses in mining areas like West Virginia, Ohio, Pennsylvania, and Illinois.
Taxing something at increasingly prohibitive rates is also a proven strategy for reducing its use and promoting substitutes. It's a simple way to make the price of a harmful product internalize externalities from it's use.
And it's easier to understand and administer than a complex, administratively burdensome carbon-trading scheme.
I think the bigger problem is that America is now a low-trust society with political and administrative institutions that are decaying and/or under siege, and so voters suspect of any government initiative that they're incurring an unfair portion of the cost for something that won't work anyway.
Climate change is a difficult problem that we're facing in an era when we can't solve easy problems.
Don't pretend like this is only an American thing. Europe has it easier because their whole continent is like the Northeast in terms of population density and public transit availability, and I don't see Asia doing a great job with emissions reductions.
But the big things we tax like that, alcohol and tobacco, a) have well-known direct human health impacts, b) have big chunks of the population that don't use them, and crucially, c) are avoidable. Most people are limited in how much less gasoline they can use, especially in the short term, so they feel the sting of a gas tax and also can't change their behavior. Gas usage is inelastic, in other words.
The benefit of cap and trade is that it gets the government's fingerprints off the increased prices people have to pay. People have a visceral hatred of tax increases. If you can hide what is effectively a tax increase, it has more of a chance of working.
In other words, in terms of political palatability, regulation>>tax increases. I suspect that the California mandate to only allow EVs to be sold after 2035 will both put more people in EVs and be more accepted by the population than imposing a punitive gas tax that would accomplish the same thing.
I must be one of the moderates Matt was referring to because a heavy-handed government intervention to determine what I can buy sounds absolutely awful compared to a tax that biases, but does not limit, my decision.
Economically, pollution externalities are caused by unpriced use of a resource, i.e. clean water and air. Making resource consumers pay the opportunity costs of their actions will result in increased economic efficiency. Taxation, in the mode of Pigou, can also result in internalization fo externalities but may not be politically feasible. That was the thrust of Matt's essay.
1. The unreflective masses (aka "voters") hate carbon taxes partly because they hate all taxes, and partly because they love cheap gasoline, which makes a carbon tax the worst possible tax.
2. People who make money selling fossil fuels hate doing anything about climate change and pretend to love carbon taxes because that will sabotage the chances of effective climate policy in general.
3. The left hates carbon taxes partly because they they don't believe in markets and therefore don't think carbon taxes would work, and partly because they agree with Matt and with the unreflectives and with the oil barons that carbon taxes are politically toxic. (For some reason Matt doesn't dwell on this, but see "Carbon Pricing and its Green Critics" http://tiny.cc/rmu9uz )
4. Carbon taxes might be a good way to raise revenue if we needed more government revenue, but right now we don't.
5. Therefore policy wonks who think carbon taxes are an essential part of an effective climate policy (and who could very well be right about that) should just shut up, at least for the time being, because they are doing more harm than good.
#1 is wrong in that it assumes people "love" cheap gasoline when really people "budget around and thus need" cheap gasoline, at least in the near term (before the next car purchase or job switch, at a minimum).
Yeah, "love" is with a grain of salt, as in "People love things that don't bust their budget." But I have always thought the special sensitivity to gas prices was not really so much budgeting as the extreme salience of gasoline prices. Salience is a function of how often you buy, how volatile the price is, and how plainly it is stated by the seller. So people budget around their monthly electric bill, too, but the price per kWh of electricity is not salient in any of those three senses.
#2 is true but probably mostly irrelevant. If the fossil fuel companies did zero lobbying and advertising, people would still love their cars and loathe gas price increases. We weren't bamboozled into our current lifestyle.
Perhaps oversimplifying but interest rates are low because we are printing money to compensate for massive government borrowing. “Follow the science” but economics is rightly called the “dismal science” so I don’t buy into the “nothing to see here, move along” view of the growing national debt.
Public, rather than incentivized private investment in alternative energy will inevitably suffer from the same cronyism and other political baggage that plagues infrastructure and defense projects.
Nobody really knows why interest rates are low. The most likely explanation is a combination of super high savings rates in China (because no welfare state), demographics skewing old in rich countries and more efficient capital allocation. The demographic driver is probably the most important one, at least judging from the Japanese experience.
The fundamental error in this piece is the declaration that people don't like taxes. They love taxes. As long as it isn't on them. The big problem with a Carbon Tax is that it is hugely regressive and afflicts the poorest the most. And if you try to draw the sting by subsidization of those people who will be most afflicted by rising home heating costs or travel or whatever you are going to find nearly everybody thinks that should include them. And the whole point of a carbon tax becomes moot.
I don't see how this regressiveness is necessarily true at all.
"People making <$250k/year now get a subsidy of $x for vehicle fuel and energy consumption. Also, we are taxing those things in terms of their carbon footprint, such that the 95th percentile of consumers will wind up paying $x for use. So if you don't change your behavior, nothing changes even if you're the worst carbon consumer. But guess what! if you have an electric car and are hooked up to a solar plant instead of a coal one, you get the subsidy with no offset!" - this doesn't defeat the purpose at all? And it's not regressive.
I think this is true. A gas tax that is paid every time you’re at the pump and then offset even at 3x or 5x on a huge novelty check with “Courtesy of the Gas Tax” written on it would still be unpopular.
People who come up with stuff like tax-and-dividend fail to consider examples like how people whose taxes were lowered by TCJA were nonetheless upset upon filing because their withholdings were also lowered and their refund was thus smaller than they had expected. It doesn’t matter how the numbers add up, all that counts is how it feeeeeeeels.
Yeah, in a low-trust environment it's pretty easy to attack a carbon tax as "just a tax grab."
Getting carbon pricing onto solid footing in Canada has been a series of epic political and legal battles: the federal election in 2008 (the carbon-tax proponent lost); the BC election in 2009; the Alberta and federal elections in 2015; Ottawa negotiating a national climate policy framework with the provinces (except Saskatchewan) in 2016; lawsuits by Saskatchewan, Ontario (after the 2018 provincial election), and Alberta (after the 2019 provincial election); the 2019 federal election; the Supreme Court decision that the federal carbon tax was constitutional. Now the Conservative opposition leader is trying to get his party to accept carbon pricing, which is not easy. https://twitter.com/russilwvong/status/1383520928475144195?s=20
The most recent bipartisan ice cream party happened because Trump was desperate to avoid a depression which would have reduced his chances of re-election to near zero.
What Republicans want an ice cream party these days? Isn’t it mainly a question of giving pork to one or two small state moderates (Tomney, Murkowski, Collins possibly Capito) who can feather their nest with say $10 billion? Why is it necessary to offer tax cuts that would be much more expensive than building lots of roads in Alaska?
Second, don't call it a carbon tax, call it a carbon dividend.
Third, a carbon tax is probably moderately regressive, but a carbon dividend can be as regressive or progressive as the distribution rules make it.
Fourth, popularism is a fine principle, but every principle can be misapplied. Whether a carbon dividend is "popular" depends on the under-explored details. Unlike gas taxes, where we have decades of legislative and political experience, I don't think we know with certainty whether a well-framed carbon dividend would be a political winner.
A carbon tax may seem like a great idea in the abstract, but in practice it is a regressive tax, as we should have learned from the Yellow Shirt Movement in France.
One of the drums that MY has been beating on repeatedly is that "...moderate members who see the value of bipartisanship spent most of the Bush and Obama years paralyzed by a misguided fear of budget deficits." As best I can tell, he thinks this is because they were coming from a paradigm in the 90s where "the perception (and I think the reality too) was that objectively the government needed to raise taxes and cut spending."
Essentially - moderates believed that the economics of the 2000s and 2010s were the same as the 90s that required spending restraint when in reality they needed excess spending.
I'm concerned that this lingering lesson will go the other direction. That the economics will change and government spending restraint be needed, but most of congress will continue to believe that excess is acceptable and this will lead to economic problems.
This is even more concerning given I think future spending capacity will be needed to address climate change. There are likely to be major impacts that will need government intervention. Deficit spending for investments that will have a long term payoff return make sense. Outside of that though, the more debt we create now, the more we constrain our future capacity.
This post, and most american commentary on carbon taxes, largely misses the point of why they are needed. There is too much focus on renewables vs. fossil fuels. There are many sources of emissions that don't compete in any way shape or form with renewables. One good example is production of cement, which counts for more than 6 percent of global emissions. That's more than the total emissions of Japan or Russia. Any technology to remove those emissions will come at a cost, and without a prices on carbon, it will never make sense to invest in and implement those technologies. Regulations won't work either, since you need to have the technology in order to mandate it.
The same thing applies to other industries such as steel (8 % of world emissions), aluminium production (roughly 3 % of world emissions), and many essential chemicals. Emissions from the energy sources of these industries are only a small part of the total emissions, and the easiest part. The difficult stuff is to decarbonise the actual production process. There are many promissing technologies, from hydrogen as a reduction agent in steel, to non-carbon based anodes in aluminiumproduction, to carbon capture from cementproduction. All of these are costly however, and require a carbon price to be economically viable.
Progressives in the US are still fixated on whether a moderate price on carbon helps decarbonise the power sector. Nevermind that the UK has shown that it is extremly effective at removing coal from the grid (combined of course with support for renewables). Nevermind also that a climate policy structured purely around support for renewables risks increasing energy usage, such that part of the renewable energy comes in addition to, instead of replacing fossil fuel use. More importantly it completly misses the point that decarbonising power production is the eazy part. The world needs to get to net zero ASAP, and the hard parts can't wait.
Thankfully Europe takes climate change seriously in a way that US progressives simply do not. Case in point, the price of carbon in the ETS is currently at 57 € and rising, with more ambitious EU legislation just around the corner. That's at a level where some of the "difficult" low-carbon technologies for heavy industry start to become profitable.
With respect, I think it’s you who is missing the point, which is that no matter how superior a carbon tax is as a technocratic policy, it’s just doomed in the current American political context, so people should stop pretending that it’s possible until a future when fiscal constraints force us to look for revenue sources. Ideas like tax-and-dividend founder on the reality that a carbon tax would hit in highly salient areas (like the gas pump) and American are irrationally averse to taxes.
To make progress on carbon policy we need to think about things like the car fuel efficiency standards, which are certainly not the most sensible way to implement their goal but have been extremely successful precisely because they are so opaque. So something like a “clean concrete” standard where x% of concrete must be made using cleaner processes is going to be more successful that a straight tax, and even that is probably too straightforward to survive industry and consumer pressure.
In short, to fight climate change Americans need to embrace janky policies that hide the ball as much as possible. It’s frustrating to a technocrat but it’s political reality.
Your point is only valid if you assume that a carbon tax has to be comprehensive and economy-wide and therefore hit the gas pump. That would certainly be the preferable outcome from a technocratic point of view, but a targeted carbon tax on highly polluting industries that don't affect consumers and voters directly, and a combination of mandates and subsidies for consumer-facing sectors, could be politically feasible. I don't know about you, but I rarely buy cement, steel or large quantities of industrial chemicals. Their price isn't very salient, and even a high carbon price would only have a limited (and hidden) effect on most finished products.
There is too much focus on the scope of carbon prices and too little focus on the level amongst carbon prices advocates in my opinion. Better a narrow scope and high prices, than a wide scope and prices that simply aren't economically meaningfull (or a price of zero like now).
Your answer also presupposes, as Matt Yglesias does, that the main arguments for carbon prices are its attractive fiscal properties and efficiency. My point is that while that's all very good, the more important argument is that there are no realistic alternative policies for many emissions. Taking climate change seriously means fighting for some form of carbon pricing IMO.
To be sure, it would be a heavy political lift, even with a narrow scope.
Maybe it needs to start at the state level, maybe it needs to be combined with carbon tariffs to protect industry from carbon leakage, maybe it needs to be paired with regressive tax cuts to sweeten the deal for "moderate". An economy-wide cap and trade nearly passed under Obama, so I don't see why a narrow one should be considered completly unrealistic now. The problem currently is that no one is trying, or even thinking seriously about the legislative trade-offs.
I don't understand why "there are no realistic alternative policies" to a carbon tax. The mechanism of the tax is that it makes lower-carbon alternatives relatively cheaper. You could instead subsidize the alternatives, mandate the alternatives, or cap use of the high-carbon technology. Why does it have to be a tax?
Sure, you could conceivably mandate a bunch of specific technologies (many of which are currently only at an experimental stage) across a multitude of industrial sectors, and hope that they catch on, despite having no advantage other than lower emissions. Its just much more complicated than promoting renewables, and unlikely to work very well. I don't think its a coincidence that most of the effort to develop low carbon steel and cement is taking place where there is a high carbon price.
Furthermore even for the relatively easy task of replacing fossil fuels in power generation with renewables, the current US strategy of mandates and subsidies has achieved remarkably little.
If you want carbon taxes to reduce GHG emissions, you have to tax the biggest producers of it. Going after cement and steel is nice, but you're going after tiny pieces of the pie. If you're not taxing gas, home heating and cooling, and food, you're basically wasting your time.
Not to mention the question of emissions from transportation, and if you think carbon taxes are unpopular wait until they start polling "no free parking ever", a good policy that is the only guaranteed way to get people to drive less.
What about direct spending on/subsidization of R&D? Not as efficient for sure, but couldn't you at least approximate the R&D that industry would be incentivized to do with a carbon tax?
I think you need both. Direct spending on R&D is important to get nascent technologies of the ground, but carbon prices are still needed to give private industry an incentive to contribute to the development and more importantly implement them at scale. The lesson from wind and solar is that it is large scale implementation that really gets the cost down, not early stage R&D.
I think there's a pyramid of carbon reduction, from the "easiest" (electrifying the grid) to the much harder (e.g., aviation fuel). Cement and the like are toward the harder end. So maybe it will be harder and take us longer to address these (relatively low %) sources of carbon. But let's not undermine efforts at easier parts of the problem by promoting solutions, like carbon taxes, that are needed to address the hardest parts.
What about a carbon tax that *ignores* emissions from combustion of fuels, and *only* taxes carbon from sources like cement setting, steel refining, etc.? I don't think this would disproportionately fall on rural people.
Opposition to carbon taxes extends far beyond poor people in rural areas. It's probably closer to a consensus. I mean, it was Jay Inslee's state of Washington that rejected not one but two carbon tax-centered voter initiatives in 2016 and 2018. That's a pretty climate friendly state! (In the meantime, though, the state legislature has been passing some pretty ambitious climate bills. We'll see how well they go down with a population that is on record as not being that supportive.)
No, but I can morally condemn them, and I can expect you to do likewise. White supremacy was good for the electorate that elected Theodore Bilbo, just as cheap fossil fuels are good for the electorate that elects Jon Tester; but Bilbo was a shitty human being, and we recognize him as such. The fact that he was serving his constituents well doesn't redeem him.
Morally condemn them for what exactly? Are you really equating Tester and Manchin to Theodore Bilbo?
A common conservative argument against government intervention against poverty is that the government can't solve the root problem, and any action is going to be too expensive and have unintended consequences worse than the original problem. The degrowth crowd is deploying the exact same argument against geoengineering and nuclear energy, and they might not be wrong.
I think Noah Smith nailed this a while back. The fact that fossil fuel consumption isn't taxed for climate externalities is actually the lesser distortion. The greater distortion is that we aren't using renewable energy sources that are even cheaper than •untaxed• coal and oil--because we haven't discovered/invented them yet, because there hasn't been enough government-funded research to discover and invent them. Obama was shrewd enough to let the first problem go and focus on the second one, and thanks to the fall in photovoltaic prices on his watch, the coal industry is dying without any new taxes. Spending on scientific research is the real ice cream party.
Without available substitutes that people can realistically turn to, coming out in favor of a carbon tax aka gas tax is about as political astute as running on a platform of higher taxes on bread and tea.
But times are rapidly changing. Just ten years ago, electric cars seemed mostly theoretical. Now you see them on the road all the time.
Yes, subsidization by Beijing was actually the key. And Obama's decision to apply anti-dumping measures against cheap Chinese solar panels (weirdly endorsed by Paul Krugman) didn't do anyone any favors.
It's worth noting that China isn't doing carbon taxes either; their approach is all about subsidies and regulation. I think they figured all this stiff out long before Noah and Matt did.
stuff fml
“Subsidize and regulate” will turn the ship eventually, but it won’t achieve the massive reductions necessary to stick to a 1.5 or even 2.0 degree target for mean temperature increase. There needs to be investment in mitigating the effects of climate change. Improved coastal defenses and air conditioning subsidies are important steps, others are doubtless needed. Effect mitigation is too often thought of as a sort of defeatism, but it is an essential part of any popularist climate agenda.
Yes, I agree with this. We have already seen substantial warming and we are going to see more. We should be trying to limit the extent of that warming, but we also need to fund adaptation.
Yes, 2 degrees, that horse has sailed. Most people don’t understand the kind of Hail Mary thinking that underlies the Paris agreement (basically negative carbon emissions from 2050 onwards). The reductions David Abbotts talking about for a 2 degree world is not about what we are putting in the atmosphere now or in the future, but more likely about what we already have put in the atmosphere. Realistically we are looking at a 3-4 degrees warmer world (and that might happen regardless even if we threw the whole kitchen at the problem). The sensible thing is to start to prepare for both radical and catastrophic change as we are unlikely to avoid either. From that perspective carbon taxes is a tool for problems we thought we had in the previous millennium. In this millennium, they would make very little difference for global warming - we need to ban the use of fossil fuels (I wonder how that polls), not to reduce the consumption of it by taxes. Matt is correct that there are easier ways to get funding.
Generally speaking, there is too much focus on how we can stop climate change from happening (we can’t, the bomb has already exploded) and too little on how we can slow it down and mitigate its effects. The idea that it might be defeatist to think about mitigation reveals how deluded popular opinion is on this matter.
I just love how often you go back to the well of "interest rates are incredibly low" as if that were a completely neutral fact independent of historical government policy. Like, yes r* is negative in the US right now. The channels contributing to that are not all instantaneous and include policy choices going back decades.
Even if inflation does arrive, everybody knows the Fed won't be able to raise rates more than 100-150 basis points over a few years, because if they did it would push the US into a sovereign debt crisis, cause waves of corporate bankruptcies, and basically collapse US politics as we know it. And that jeopardizes the Federal Reserve itself, so they just won't do it.
So just be careful with how much money you think we can dump into the economy, because if inflation does come, it will be low-growth stagflation, and consumers will be forced to eat that inflation for at least a few miserable years. And if that stagflation happens, we all know the Democratic Party will be stuck owning it.
Yeah I've always wondered about this. Matt and other "there's no downside to spending" types always cite low interest rates like we have simply found ourselves in a period of sunny weather, when it seems to me we *chose* those interest rates.
So if, as a matter of policy, we can choose low interest rates and then as a consequence choose to spend whatever we want without downsides, well, I don't understand economics well enough to know how long this can last but at a gut level it starts to feel pretty Ponzi scheme/perpetual motion.
At the very least we've shown we're vary capable of building really stupid shit with our free, unlimited money - for example, the very urban freeways that we apparently can't afford to fix but always have money to build, and which are huge contributors to climate change.
We did not choose low (real) interest rates. They are natural and part of a long-term trend. I would also expect the Fed to meet its average inflation target even if that required raising interest rates by more than 150 basis points. The political system might then be facing true austerity budgeting for the first time in a long time but I would expect the Fed to prevail.
It is unserious to suggest you can tease out "natural" "long-term" trends from a financial system which has been routinely bailed out by monetary authorities since 1987 to keep institutions from eating bad investments. You don't get to have activist monetary policy/a "Greenspan Put" and also claim to be following "natural" "long-term" trends.
I think you do. Even if you were right the direction of the trend would be salient if not the level. But in any case, the Fed funds rate cannot deviate by much or for long from the "natural" rate without causing hyperinflation or hyperdeflation, so that fact should give a ballpark estimate of where the natural rate is.
It's very enlightening for me to hear "this is why the Fed won't ever raise rates too quickly" because I never get exposed to the other side of the argument. The only people I ever read arguing for being concerned about this kind of problem are in the denialist camp regarding r* being negative right now (and for the past x years). The idea that there are finance-specific problems that aren't obvious on the surface is much more compelling. So thank you for commenting! Now I have something to dig deeper on.
I mean if you land where I do, you get a set of opinions that are incompatible with either political party. Denialists do so because they want to stay consistent with a party, and they should pay attention to none other than Donald Trump who spent the middle years of his presidency insisting the Fed was raising rates too quickly.
My position is simple: we're a massively leveraged securitization-driven economy, mired in unproductive debt (both public and private), and it's been plain since GFC that we can't let too much of that debt go bad without a deflationary event that would disempower everybody who has let us get this far. Look at Japan for inspiration into our future - the Bank of Japan literally buys ETFs every time the stock market dips a few %.
I've wondered about this too. Low interest rates mean that interest payments are low. It says nothing about principle payments. I may be able to afford a $300,000 mortgage at low rates, but that doesn't mean I can afford a $10 million mortgage, even with zero percent rates.
Now, if we offered you a mortgage at -5%, maybe you could swing a $1M home. You'd only have to pay ~$250K by my rough (probably wrong) calculations.
So, ignoring the climate stuff, this is Matt's worst take and really demonstrates the limits of economic "popularism". The problem is that what is popular is always the same thing, giving people money. What's unpopular is paying for stuff. This whole dodge of, "Interest rates are low so we can just promise to print money at some undetermined point in the future instead of having to vote on a tax bill now." is a fucking disastrous way to do government. It's just a straight up political distortion. Just because people don't perceive it as a tax increase doesn't mean it's not exactly the same thing functionally. If you're doing what's "popular" it should be based on transparently debating the costs and benefits and not this bullshit monetary cup and ball game.
TLDR: If government spending isn't popular when it has to be paid for, it isn't popular.
I don't know. It seems pretty popular when it has yet to be paid for.
Obfuscating diffuse costs through monetary gimmicks isn't the same as not being paid for.
Which is fine, I just think you lose the high ground of "it's popular". And I think more broadly it's a bad way to do government.
If you are “debating costs and benefits,” the fact that the cost is “borrowing money at roughly 0% real interest” is significant. The only reason the is possible is there is a lot of idle capital out there. If private investment were sucking up massive amounts of capital, interest rates would be higher. The fact that interest rates are zero is a signal that there is slack in the economy and that induced demand wkll increase total output rather than just create inflation.
All government spending is borrowed money. “borrowing money at roughly 0% real interest” is just saying "it's no more expensive than spending tax dollars". The only reason to deficit fund spending is to kick the spending down the road in a way that obfuscates the costs to taxpayers. It's about giving cover for politicians to tell their constituents, "Of course YOU won't have to pay for these things. I'd never ask YOU to pay." when the reality is they mostly have no fucking clue who it will end up costing and they don't care because the costs will be dispersed in some way that won't get traced back to them. (It's also a good way of disguising exactly who's throwing money at which cronies when the fed starts throwing a bunch of QE at the financial sector)
Now, none of this is to suggest that there aren't government investments that end up paying off for taxpayers, of course there are, but the ultimate value of a given piece of spending is no lesser or greater based on how it was financed. What changes is the political accountability of the people passing the legislation. I happen to think representatives should be as transparently accountable to their voters as possible.
I thought the purpose of a carbon tax was to make carbon consumption go down not to raise revenue for green projects?
Green energy makes more sense to deficit finance, but to get old tech to be abandoned you’d need a stick so to speak.
Actually, cap and trade makes even more sense than a carbon tax. This is a proven strategy for harm reduction in a case of externality. The revisions of the Clean Air Act in the 90s established a trading system in Sulfur dioxide emissions. The result has been no more dead lakes in New England. As someone whose summer vacations are in Maine, I'm sure you appreciate that. Putting a price on carbon emissions would encourage efficient solutions to their reduction. Of course, some of the responses will be unforseen. The mandate resulted in the substitution of low Sulfur Western coal for higher Sulfur Midwestern coal with attendant job losses in mining areas like West Virginia, Ohio, Pennsylvania, and Illinois.
Taxing something at increasingly prohibitive rates is also a proven strategy for reducing its use and promoting substitutes. It's a simple way to make the price of a harmful product internalize externalities from it's use.
And it's easier to understand and administer than a complex, administratively burdensome carbon-trading scheme.
That’s the point, though. Easy to understand means easy to demonize.
Exactly. Making a carbon tax simple and easy to understand is not necessarily a good thing. On second thought, drop the word "necessarily."
I think the bigger problem is that America is now a low-trust society with political and administrative institutions that are decaying and/or under siege, and so voters suspect of any government initiative that they're incurring an unfair portion of the cost for something that won't work anyway.
Climate change is a difficult problem that we're facing in an era when we can't solve easy problems.
Don't pretend like this is only an American thing. Europe has it easier because their whole continent is like the Northeast in terms of population density and public transit availability, and I don't see Asia doing a great job with emissions reductions.
Is there any part of the world that you would say is taking this seriously?
But the big things we tax like that, alcohol and tobacco, a) have well-known direct human health impacts, b) have big chunks of the population that don't use them, and crucially, c) are avoidable. Most people are limited in how much less gasoline they can use, especially in the short term, so they feel the sting of a gas tax and also can't change their behavior. Gas usage is inelastic, in other words.
The benefit of cap and trade is that it gets the government's fingerprints off the increased prices people have to pay. People have a visceral hatred of tax increases. If you can hide what is effectively a tax increase, it has more of a chance of working.
In other words, in terms of political palatability, regulation>>tax increases. I suspect that the California mandate to only allow EVs to be sold after 2035 will both put more people in EVs and be more accepted by the population than imposing a punitive gas tax that would accomplish the same thing.
I must be one of the moderates Matt was referring to because a heavy-handed government intervention to determine what I can buy sounds absolutely awful compared to a tax that biases, but does not limit, my decision.
Economically, pollution externalities are caused by unpriced use of a resource, i.e. clean water and air. Making resource consumers pay the opportunity costs of their actions will result in increased economic efficiency. Taxation, in the mode of Pigou, can also result in internalization fo externalities but may not be politically feasible. That was the thrust of Matt's essay.
Exactly. Pigouvian taxes are not politically feasible. That's why you have to hide them in regulation. Even then, not a sure thing.
Food for thought. Here is what I get out of it.
1. The unreflective masses (aka "voters") hate carbon taxes partly because they hate all taxes, and partly because they love cheap gasoline, which makes a carbon tax the worst possible tax.
2. People who make money selling fossil fuels hate doing anything about climate change and pretend to love carbon taxes because that will sabotage the chances of effective climate policy in general.
3. The left hates carbon taxes partly because they they don't believe in markets and therefore don't think carbon taxes would work, and partly because they agree with Matt and with the unreflectives and with the oil barons that carbon taxes are politically toxic. (For some reason Matt doesn't dwell on this, but see "Carbon Pricing and its Green Critics" http://tiny.cc/rmu9uz )
4. Carbon taxes might be a good way to raise revenue if we needed more government revenue, but right now we don't.
5. Therefore policy wonks who think carbon taxes are an essential part of an effective climate policy (and who could very well be right about that) should just shut up, at least for the time being, because they are doing more harm than good.
Do I have anything wrong here?
#1 is wrong in that it assumes people "love" cheap gasoline when really people "budget around and thus need" cheap gasoline, at least in the near term (before the next car purchase or job switch, at a minimum).
Yeah, "love" is with a grain of salt, as in "People love things that don't bust their budget." But I have always thought the special sensitivity to gas prices was not really so much budgeting as the extreme salience of gasoline prices. Salience is a function of how often you buy, how volatile the price is, and how plainly it is stated by the seller. So people budget around their monthly electric bill, too, but the price per kWh of electricity is not salient in any of those three senses.
#2 is true but probably mostly irrelevant. If the fossil fuel companies did zero lobbying and advertising, people would still love their cars and loathe gas price increases. We weren't bamboozled into our current lifestyle.
#4.
What polling are you relying on? I'd never seen polling but a carbon tax strikes me as (1) common sense and (2) the sort of thing that is too wonky for most voters to care about. I googled around and I didn't see the "less popular than defund the police" polls. I did find this, though: https://www.carbontax.org/blog/2021/01/19/still-they-persist-2-3-of-voters-in-poll-want-carbon-tax/
Perhaps oversimplifying but interest rates are low because we are printing money to compensate for massive government borrowing. “Follow the science” but economics is rightly called the “dismal science” so I don’t buy into the “nothing to see here, move along” view of the growing national debt.
Public, rather than incentivized private investment in alternative energy will inevitably suffer from the same cronyism and other political baggage that plagues infrastructure and defense projects.
Nobody really knows why interest rates are low. The most likely explanation is a combination of super high savings rates in China (because no welfare state), demographics skewing old in rich countries and more efficient capital allocation. The demographic driver is probably the most important one, at least judging from the Japanese experience.
If that's true, shouldn't we expect a spike in interest rates as the boomers finish retiring?
The fundamental error in this piece is the declaration that people don't like taxes. They love taxes. As long as it isn't on them. The big problem with a Carbon Tax is that it is hugely regressive and afflicts the poorest the most. And if you try to draw the sting by subsidization of those people who will be most afflicted by rising home heating costs or travel or whatever you are going to find nearly everybody thinks that should include them. And the whole point of a carbon tax becomes moot.
I don't see how this regressiveness is necessarily true at all.
"People making <$250k/year now get a subsidy of $x for vehicle fuel and energy consumption. Also, we are taxing those things in terms of their carbon footprint, such that the 95th percentile of consumers will wind up paying $x for use. So if you don't change your behavior, nothing changes even if you're the worst carbon consumer. But guess what! if you have an electric car and are hooked up to a solar plant instead of a coal one, you get the subsidy with no offset!" - this doesn't defeat the purpose at all? And it's not regressive.
I'm surprised you didn't mention rebates to consumers as a way to reduce resistance to carbon taxes. That's the path Canada is taking.
I think he did, here:
"And others will say that a “tax and dividend” strategy minimizes public backlash and builds legitimacy"
The implication is that it is still too unpopular.
I think this is true. A gas tax that is paid every time you’re at the pump and then offset even at 3x or 5x on a huge novelty check with “Courtesy of the Gas Tax” written on it would still be unpopular.
People who come up with stuff like tax-and-dividend fail to consider examples like how people whose taxes were lowered by TCJA were nonetheless upset upon filing because their withholdings were also lowered and their refund was thus smaller than they had expected. It doesn’t matter how the numbers add up, all that counts is how it feeeeeeeels.
Ah, sorry, you're right. I wonder if there are any polls backing that up?
Mark Jaccard, a veteran of the battles over the carbon tax in British Columbia, has data showing that strong opposition to "flexible regulations" (which are still pretty cost-effective) is much lower. See Figure 6.4. https://www.cambridge.org/core/books/citizens-guide-to-climate-success/we-must-price-carbon-emissions/66AEBB8BE9A7F7760DC1BCE3A9C50748/core-reader
I just started reading this, but it's really interesting. I guess I shouldn't be surprised, but I had no idea how much resistance there would be.
Yeah, in a low-trust environment it's pretty easy to attack a carbon tax as "just a tax grab."
Getting carbon pricing onto solid footing in Canada has been a series of epic political and legal battles: the federal election in 2008 (the carbon-tax proponent lost); the BC election in 2009; the Alberta and federal elections in 2015; Ottawa negotiating a national climate policy framework with the provinces (except Saskatchewan) in 2016; lawsuits by Saskatchewan, Ontario (after the 2018 provincial election), and Alberta (after the 2019 provincial election); the 2019 federal election; the Supreme Court decision that the federal carbon tax was constitutional. Now the Conservative opposition leader is trying to get his party to accept carbon pricing, which is not easy. https://twitter.com/russilwvong/status/1383520928475144195?s=20
The most recent bipartisan ice cream party happened because Trump was desperate to avoid a depression which would have reduced his chances of re-election to near zero.
What Republicans want an ice cream party these days? Isn’t it mainly a question of giving pork to one or two small state moderates (Tomney, Murkowski, Collins possibly Capito) who can feather their nest with say $10 billion? Why is it necessary to offer tax cuts that would be much more expensive than building lots of roads in Alaska?
First, vegetables are good.
Second, don't call it a carbon tax, call it a carbon dividend.
Third, a carbon tax is probably moderately regressive, but a carbon dividend can be as regressive or progressive as the distribution rules make it.
Fourth, popularism is a fine principle, but every principle can be misapplied. Whether a carbon dividend is "popular" depends on the under-explored details. Unlike gas taxes, where we have decades of legislative and political experience, I don't think we know with certainty whether a well-framed carbon dividend would be a political winner.
A carbon tax may seem like a great idea in the abstract, but in practice it is a regressive tax, as we should have learned from the Yellow Shirt Movement in France.
One of the drums that MY has been beating on repeatedly is that "...moderate members who see the value of bipartisanship spent most of the Bush and Obama years paralyzed by a misguided fear of budget deficits." As best I can tell, he thinks this is because they were coming from a paradigm in the 90s where "the perception (and I think the reality too) was that objectively the government needed to raise taxes and cut spending."
Essentially - moderates believed that the economics of the 2000s and 2010s were the same as the 90s that required spending restraint when in reality they needed excess spending.
I'm concerned that this lingering lesson will go the other direction. That the economics will change and government spending restraint be needed, but most of congress will continue to believe that excess is acceptable and this will lead to economic problems.
This is even more concerning given I think future spending capacity will be needed to address climate change. There are likely to be major impacts that will need government intervention. Deficit spending for investments that will have a long term payoff return make sense. Outside of that though, the more debt we create now, the more we constrain our future capacity.