Shadow carbon pricing is a bad idea
Matt, the part about deadweight loss is a bit off.
The point of Pigovian taxes (taxes on negative externalities) is to *eliminate* deadweight loss by internalizing the externalities of the transaction. As things stand, fossil fuel consumption *produces* deadweight loss because we overconsume relative to the socially optimal level. Buyers don't have to pay the full costs that their consumption induces, so they consume more, and we're all left worse-off.
A properly-tuned Pigovian tax has no deadweight loss. That's what makes them so appealing.
I think there are three groups related to climate change and that leads to difficulties in reaching good policy options:
Group 1 are the climate change deniers. These folks used to be dominant in the Republican party, and they still make up a too-large percentage of people. It would be nice to ignore them, but they vote. Actual (rather than forecasted) data is reducing their numbers, though slowly. I have no idea how to reach these people.
Group 2 consists of those who believe climate change is happening but the effects will be mixed. Some places better off, some not. Humans and the environment will adapt and we'll all learn to live with the change. Anyway, it happens over a long time period and people want to enjoy their lives now. This group thinks we should do things to reduce carbon, but not at very much expense to today's economic situation.
Group 3: Those who believe climate change is real and the effects will be catastrophically bad. I think this encompasses most climate change journalism, activists like Dave Roberts and most of the Democratic Party. For these folks, high oil prices are acceptable, production is to be discouraged by any means possible and there is no level of economic pain that is too great to forestall the species-ending outcomes of climate change.
A solution is to have group 3 and group 2 find common ground similar to what Matt Y suggests. But when "the future of the planet" is at stake, I don't see a path to compromise. Which is very discouraging. The downside risk is the group 1 and 2 folks find common ground.
I don’t think it is surprising that supply-side climate activists will take both sides of the argument on the impact of domestic oil production on price. Because, as Roberts explains, the activists are not incentivized towards increasing the price of oil to decrease carbon emissions. Instead, they’re primary focus is on fundraising and volunteer recruiting. At times their best marketing strategy is to sell the argument for increasing prices by strangeling out domestic supply. At other times that argument is less palatable. This is no different from car manufacturers highlighting their fuel efficiency when gasoline prices are high and shifting to marketing other features when consumers aren’t focused on prices of gasoline.
At the end of the day, we need to accept that activists of all stripes are first and foremost focused on fundraising. I actually think there is a productive line of attack against counterproductive lefits NGOs based around this truth. Rather than attacking supply-side climate activists for their poor approach to limiting emissions, we should instead praise them for their innovative and effective marketing campaign. We should compare and contrast their marketing strategies through a capitalistic lens no different than how McKinsey would critique Coke’s branding. We should offer advice on how they can create a better product to sell to their donors and suggest books on corporate marketing.
This take is rational- too rational. Opposing domestic oil production is not a rational proposal, it's an emotional one. (To be clear, I think there is value in both emotion and rationality, generally speaking.) Activist groups are not purposely advocating for something they know is ineffective in order to keep raking in dough. They simply think oil is bad, so we should leave more of it in the ground. Something like if someone is opposed to pornography, they think people should stop producing it, even if someone else will pop up and fill the demand anyway. Tweets like the one from Roberts are just a post-hoc rationalization of one's emotional opposition to oil, period.
I recognize this was primarily an economic and supply/demand argument, which I think is correct on the merits, but there is also a reasonable climate argument to be made for continued (and ever cleaner) US production.
Russian gas is among the dirtiest in the world when you add the vented/leaked methane from it's production and transportation. Not too mention the wasted flaring volumes that still produce CO2. Places like Iran and Venezuela are also quite bad purely in climate terms. Basically anyone who is not the Saudis/US/Canada is making a dirtier marginal barrel of oil/gas, often in systems with little regulatory interest in emissions.
Much like pricing, modeling precisely is hard, but it certainly makes sense that if you are going to burn carbon, you might want to do it as cleanly as possible - having the marginal barrel come from us, as opposed to Iran, actually has real climate consequences for the better (not to mention the geopolitical side).
many smart points here but a quibble: this is not as many EVs as "can" be made..it's as many as can be made now given the industry's previous investment decisions about capacity and previous failures to assure supply of components. And also "oversupply" is the same as back-up redundancy which is no sin except under the unfortunate regulatory paradigm for electricity.
Nice article Matt! 👏 This is an example of why after 4 months of free riding I finally stepped up to an annual membership last week.
I may not agree with you very often, but you try to address topics honestly as they are without infusing unicorn dust to make everyone feel better. And when you advocate for a dream or vision you usually label it as such. Thank you for trying to address issues from the left of center honestly.
I am all for addressing the carbon issue in a responsible way and I agree that we will eventually come to see that some type of carbon tax will need to be involved to wean us off of the oil/coal pipelines. Now for the disagreement. Where we probably disagree is how that tax is implemented and trusting government to use the revenue responsibly (ex: what happened to all of the smoking settlement money??). I have no confidence that the revenue generated will be used to address climate change.
You could say money is fungible and that specific tax revenue doesn’t need to be tied to carbon reducing environmental actions. I would counter, looking at our $30T debt with yearly $1T budget deficits, what makes you think government can spend money effectively? Any new revenue would cause the health care, childcare, college, UBI, advocates to step out of the shadows farther.
My specific grumbles with your article are toward the end. You mention the greenhouse gas reductions that started under Obama by listing his wind and solar initiatives first then segueing into the NG boom. Even with the massive subsidies wind and solar have received, our total generation percentage from them is only around 10%. In raw numbers, the increase in BKw hours generated from the NG boom (mostly driven by market forces, not government) is about double what the wind and solar added (based on numbers from 2006 – 2021). BTW, that NG increase is largely due to fracking which is the devil incarnate to the environmental movement.
I have nothing against wind and solar and no love for oil. I think all government subsides should be eliminated for all energy production, including oil. But pretending that we are anywhere close to eliminating fossil fuels in the next 50 years is a dream. Especially while ignoring the only true always on, zero carbon energy source – Nuclear. Over that same 2006-21 time span the raw BKw hours from nuclear has stayed steady and is now on the decline due to plant shutdowns and lack of new sites.
I’m not a nuclear freak either, I just want to encourage discussion of reality. Speaking of reality – electric cars – their cost and performance still cannot compete with gasoline. Even if they were equivalent, we are nowhere near ready to produce the number of batteries required to make a dent in the demand for oil anytime soon (and the electric push assumes we have converted electricity generation away from oil).
I would prefer the government spend it’s time and our tax dollars on targeted carbon projects that are hard to justify in the market (ex: solar powered carbon capture farms??) instead of subsidizing the upper classes’ virtue signaling with $7,000 rebates on Teslas. If carbon tax dollars could be credibly promised to be spent on actual carbon addressing projects, it would be easier to get conservatives like myself to support more government revenue (taxes).
Again, great article and if I was in the Denver area, I would definitely stop by tonight!
The supply-side climate activists' biggest success hasn't been defeating any single project. It has been convincing Wall Street not to finance hydrocarbon exploration and extraction. US oil companies aren't doing much exploration for new oil currently. They don't want to have any new, expensive projects on their books, because when the price of oil drops they won't have anyone to finance them during the downturn. The oil industry has been told they are a dying industry, and dying industries don't invest money in new projects, they return it to their shareholders. If the Democrats were seriously concerned about how gas prices will affect them electorally, Biden, Schumer, and all the regulatory appointees would signal to Wall Street that it is okay to finance oil companies. Or, they would pass legislation that provides *a lot* of funding to CO2 capture and sequestration research, and would start directly funding the burial and sequestration of CO2. This would tell oil companies (and Wall Street) that they will still exist in 20 years, and it is okay to begin new projects right now.
Honestly, any time someone says "cabal" these days its a huge red flag that you're about to read a terrible take.
Regardless of climate activist actions, I think it will be incredibly difficult to encourage substantially more private investment in domestic oil production and refining projects. I just think that there is too much uncertainty and downside risk as we transition to green energy.
Afterall, how many of us would be willing to invest a non-trivial portion of our networth into a new domestic fossil fuel project that doesn’t plan to start generating cash for 2 to 10 years? Putting aside the morality concerns around investing in fossil fuels (a la ESG investing), does it look like a lucrative bet? What is the risk we end up in another oil boom and best similar to the 2015 shale financial implosion? Could OPEC+ choose to increase production to again strangle out the US oil industry? What does the regulatory future look like? To what extent will green energy get increasingly cheaper and crowd out fossil fuels even without government action?.
I personally can’t see domestic fossil fuels being a good investment without some massive changes in market factors. We could implement Yglesias’s idea for decreasing oil volatility by massively expanding the strategic petroleum reserve to soak up domestic oil when it’s cheap and sell it into the market when it gets expensive.  But I just don’t think the political calculus will work out.
Climate activists will be outraged by this plan to encourage more domestic fossil fuel production through what is essentially an industrial subsidy. Voters may like the idea in theory, but right wing populists will criticize the plan to artificially raise the price of oil when supply is abundant. They’ll call it a backdoor carbon tax, which is not inaccurate. Worse of all, if the US government introduces a mechanism to control the price of oil then there will be political pressure to keep the price low. Now that the president actually has a lever to control the price of gasoline they’ll always be compelled to shift the prices lower.
I used to think "a carbon tax can't really be that unpopular, can it?"
Then the American people were like "we will send an army of wife-beaters to the Senate if that's what it takes to lower gas prices" and it all made sense to me...
I am more and more convinced any (at least center-left or more right) climate change policy that does not include a carbon tax is just a fig leaf to not have a real policy. (A cap and trade is a carbon tax in disguise, with the side benefit of being a better vehicle for corruption and a worse carbon price, further left and they would do it all by regulation but actually mean it).
A slow, stable but slowely rising but known well in advance carbon tax is the best method of influencing investment decisions where they are not easily prescribed through regulation.
Should we look into ending sanctions on Venezuela and Iran? Maybe we should focus on the most dangerous geopolitical foe save the second tier players for later?
This may be a dumb comment, but I don't get the idea behind a carbon tax. If gas prices or heating costs go up because of a carbon tax (putting aside the complicated idea of redistribution for now), I as a consumer am supposed to do . . . what? Go out and buy a Ford F-150 Lightning that doesn't exist because it takes years for production capability to go up? Switch my electricity sourcing from fossil fuels to renewables (assuming I have that tool at hand) where the renewables are dependent on new wind/solar/etc capacity being built, with all the attendant transmission and grid issues that need to be worked out?
Sure, price signals work over time, at least to some degree. But what's the logic of imposing large costs now on consumers that won't yield benefits for years and years? Unless it's only to reduce consumption -- don't go on that family trip and move your thermostat down in the winter. In other words, vote Republican.
Maybe I'm missing something here, but I just don't get it.
Dave is wrong. And he got very angry and blocked me because he did not like me explaining in detail why he was wrong. That didn't change the facts of course. He remains wrong. Probably one of the dumbest things any environmental activist proposes is the whole idea of "keeping it in the ground". Apparently they are under the impression that all extracted oil and gas is burnt. It is not. A huge and increasing percentage is used to make pretty much everything. And if you keep it in the ground you are not simply eliminating CO2 you are also eliminating synthetic fibers (most of our clothes), plastics, rubber and every other thing made with petrochemicals. Almost nothing that is made today does not include those very petrochemicals.
Mind you Matthew was also wrong to assert that domestic production would make the US independent of Middle East or any other kind of oil. What's in a barrel of oil you ask? Depends on grade of course but primary distillation dictates what you can extract or make downstream from those fractions. It does not matter whether or not the US produces more barrels of oil than it uses in aggregate. When it comes to gasoline it matters that the extracted fraction that the US needs to make gasoline matches supply to demand. And it hasn't done that for a long time. The last major refinery built in the US with full downstream processing capabilities was built in 1977. Now the industry has labored to increase the throughput of existing facilities with amazing success. But they are at their limit. When you see a utilization graph that says they're consistently above 95 percent utilization that should tell you something. Barring imports you are one or two unanticipated shutdowns away from a severe gas shortage. And those imports come from the international markets. There is no way to insulate yourself from the world.
I'd encourage you to read about the "off the balance sheet" climate impacts of natural gas. TLDR: there's so much leakage in the system, and methane is such a potent greenhouse gas, that's its not clear to me that methane is superior to coal on any dimension except non-CO2 pollutants.