Monday, July 15, 2013

Why Progressives Should Love a Carbon Tax—Although Not All of Them Do

Progressives should love a carbon tax. Most progressives love the environment and believe that carbon emissions cause environmental harm. Unlike conservatives, whose attitudes toward carbon taxes were the subject of my last post, progressives have no generalized aversion to taxes. Carbon taxes should be a natural for progressives, then, if they can accept the power of economic incentives to slow the destruction of the planet.

To be sure, many progressives do express strong support for carbon taxes. Here are just three of many examples:
  • The Center for American Progress has put out a position paper titled “A Progressive Carbon Tax Will Fight Climate Change and Stimulate the Economy.” It argues that climate change, economic growth, and fiscal responsibility are intimately linked, and that a price on carbon should be part of a policy to deal with each of these issues.
  • Gernot Wagner, an economist at the Environmental Defense Fund, argues that it makes eminent sense to tax what you want less of in his excellent book, But Will the Planet Notice: How Smart Economics Can Save the World.
  • In Green Illusions: The Limits of Alternative Energy Ozzie Zehner argues against the wishful thinking that solar, wind, or other technological fixes will bring a future of cheap, clean, and abundant energy. Insisting that a strong push for energy conservation has to be part of the mix, he advocates carbon taxes to counteract what he calls “the boomerang effect”—the tendency for subsidies for clean energy to make energy in general cheaper, therefore discouraging conservation.
Yet, not all progressives are convinced. Many are skeptical on principle of our capitalist economic system and instinctively distrust market-based environmental policy. Others fear that a carbon tax would disproportionately harm the poor. Still others have ethical objections to the whole idea of bribing people to do things they ought to choose voluntarily, out of love and respect for the planet. Let’s look at each of these objections in turn.

Doubt that people really respond to market incentives

One reason that some progressives are skeptical of a carbon tax is a simple doubt that people really respond to prices. If you want to get people to stop doing something, they think, you need a government regulation that commands them not to do it in no uncertain terms.

For example, here is how Earthjustice President Trip Van Noppen puts it in an interview published on the organization’s website:
The problem with a carbon tax, as a nice and tidy solution for climate change, is that some things we tax we still use. We've got really, really high cigarette taxes, and people still smoke. It doesn't necessarily guarantee the reductions that you'd need to have to prevent climate change. So in other words, we wouldn't know whether the tax would be at a sufficient level to change behavior at the pace we'd need to change behavior . . . we don't really know how much the market would respond.
The economic term for the responsiveness of demand to a change in price is elasticity. A large negative value for elasticity of demand means that people make a large reduction in the quantity they buy when the price rises. For example, an elasticity of -0.8 would mean that a 10 percent rise in the price of a product would lead to an 8 percent decrease in the quantity purchased. So what is the price elasticity of demand for carbon-based energy?

The fuel for which economists have most extensively studied elasticity is gasoline. One widely cited source is a 1996 meta-analysis by Molly Espey. She concluded that the best estimate for the price elasticity of gasoline demand was -0.26 in the short run and -0.58 in the long run. A 2011 study by Todd Litman of the Victoria Transport Policy Institute provides a comprehensive review of the literature since Espey’s paper. Litman finds long-run fuel price elasticities in the range of -0.4 to -0.8. Those numbers suggest that a tax that added $1 per gallon to the cost of gasoline—still leaving it well below European levels—would cut use by 10 to 20 percent. (For a more detailed discussion of the evidence on elasticity, see this earlier post.)
If elasticity numbers are too abstract, here is a chart from the Litman study, which shows a convincingly tight relationship between fuel prices and fuel use across OECD countries. Can it really be just coincidence that the United States, with the lowest fuel prices, also has the highest fuel consumption?

Prices are having an effect on fuel choice in other industries, as well. One of the strongest trends is increased replacement of coal by natural gas in the generation of electricity.  Duke Energy is one of several big utilities that are rapidly moving from coal to natural gas, in large part because of lower gas prices. According to a report in Forbes, Duke Energy’s chief executive, Jim Rogers, is calling for the government to put a price on carbon with either a tax or a cap-and-trade system. According to Rogers, who should know, doing so would accelerate a trend away from coal, not only toward gas but also toward solar and wind power.

In short, the preponderance of evidence is that prices work, both to promote energy conservation in general and to motivate the choice of cleaner over dirtier sources of energy.

A carbon tax would hurt the poor

Critics of a carbon tax frequently object that any policy that raises the cost of energy would disproportionately hurt the poor. They base the claim on data that indicate that lower income families spend a higher percentage of their budget on transportation, home heating, and electric utilities than do the more affluent. However, even if we accept the truth of that claim, it does not constitute a valid objection to a carbon tax.

The main reason is that policies to keep energy prices low are a poorly targeted way to help the poor. Just do the math. Start with data indicating that families in the bottom half of the income distribution spend an average of about 20 percent of their budgets on energy, compared with less than 10 percent for those in the top half. Combine that with the fact that households in the lower half of the income distribution receive only about 20 percent of all income. Comparing 10 percent of 80 percent to 20 percent of 20 percent makes it clear that lower-income families, despite their greater relative expenditures, consume only about a third of all energy. The much smaller number of households that fall below the federal poverty line probably consume only about 15 percent of all energy. That would mean that for every dollar by which national consumer energy costs decrease, the poor gain only 15 cents.

There are many proposals for combining a carbon tax with targeted mechanisms for offsetting its impact on the poor. One way to do so would be to refund part of the tax directly to low-income households, either through a special rebate or by expanding some existing program like the Low Income Home Energy Assistance Program. As long as the rebate came in a lump sum, rather than in proportion to energy use, it would offset the distributional effect of the tax without reducing its incentive to conserve.

Another approach—one that is consistent with revenue neutrality—would be to use some of the money from a carbon tax to lower the marginal rate of the payroll tax. Because the payroll tax is inherently regressive, reducing it would disproportionately help lower-income households. With either of these approaches, just a fraction of the revenue from a carbon tax would be enough to compensate low-income households. The rest would be available for other purposes—reducing the deficit, lowering the rates on other tax rates, or expanding other federal programs.

There is also another way to think about the effect of a carbon tax on the poor. Keep in mind that the reason for such a tax in the first place is the belief that carbon dioxide emissions are harmful to the environment. If so, it is just as true for the CO2 emitted by the poor as by the rich.

We do not, as a rule, exempt poor people from restrictions on socially harmful behavior. We do not suspend rules against littering in public parks on the basis of income. We do not allow poor people to shoplift their food from supermarkets; we give them food stamps, instead. By the same token, it is reasonable to require poor people to behave responsibly toward the environment. If we are concerned that a carbon tax pinches the budgets of poor households, we should provide relief through other channels, not give them a pass on the need to conserve energy and reduce pollution.

We should protect the planet because we love it

A third objection voiced by some progressives is that we should protect the planet because we love it, not for purely economic motives. Ethical objections to economic incentives are not limited to carbon taxes; they apply to all efforts to put a price on pollution, whether through taxes, marketable pollution permits, carbon offsets, or other mechanisms.

Harvard philosopher Michael Sandel, author of What Money Can’t Buy: The Moral Limits of Markets, has expressed this view with particular force. All policies that rely on economic incentives, he says, pose the danger that those who pay a pollution tax, buy a carbon offset, or trade pollution permits are likely to consider themselves absolved of any further responsibility for climate change. Such incentives become “a painless mechanism to buy our way out of the more fundamental changes in habits, attitudes, and ways of life that may be required to address the climate problem.”

He applies his moral reasoning not just to individuals, but also to nations. Suppose that some wealthy county imposes a carbon tax or cap-and-trade mechanism. “Letting rich countries buy their way out of meaningful changes in their own wasteful behavior,” he says, “reinforces a bad attitude—that nature is a dumping ground for those who can afford it.” Whatever the efficiency of market-based mechanisms for combatting pollution, they “make it harder to cultivate the habits of self-restraint and shared sacrifice that a responsible environmental ethic requires.”

The best response to this ethical argument, in my view, is one made by Gernot Wagner in his book But Will the Planet Notice, cited at the beginning of this post. Here is what he writes in response to Sandel:
By all means, make the moral case. Teach it in philosophy classes and preach it from the pulpits, but let’s not wait for it to have an impact while the planet burns.
By all means, declutter your life. . . Downsize your apartment. Carry around a canvas bag. Bike. . . But everyone else won’t catch up to your good deeds voluntarily—not in time, and not with sufficiently strong action.
That’s where economics enters the room There’s simply no way to go about tackling this problem other than taking seriously the incentives all of us face. Getting several billion of us to behave differently—to behave morally—means guiding market forces in the right direction, making it in our interest to do the right thing. It’s the only way to make the planet notice.
The bottom line

The good news is that, despite initial skepticism, progressives are increasingly supportive of carbon taxes and other market-based environmental policies. Ironically, it is now conservatives who are more likely to reject them.

That is not to say that progressives have come around all the way. One sign of the sometimes half-hearted acceptance of market-based policies is an insistence on a belt-and-suspenders approach: Carbon taxes, marketable permits, or carbon offsets are acceptable as a supplement to existing command-and-control regulations, but not as a replacement for them. For example, a position statement from the Sierra Club reads as follows:
The Sierra Club advocates the establishment of pollution taxes which would make it less expensive for a polluter to adopt alternative processes or invest in additional equipment to curtail releases to the environment than it would be for him to continue as before. Such taxes would supplement, and not replace, standards on maximum permissible emissions.
That attitude poses a significant barrier to the kind of coalition-building that will be necessary if progressive and conservative advocates of carbon taxes are ever to agree on mutually acceptable legislation. Conservative advocates of market-based environmental policy like it, in large part, because it would replace the mish-mash of grossly inefficient taxes and regulations that they see as shackles to business. To many of them, adding a carbon tax on top of CAFE standards, clean energy mandates, ethanol subsidies, and the rest would make matters worse—not only worse for the business environment, but worse for the physical environment.

In a rational world, there would be room for a win-win compromise. Conservatives could make concessions to progressives on the need to protect the poor, for example, by using part of the revenue from carbon taxes to lower payroll taxes. Progressives, in turn, could offer conservatives some relief from the red tape of overlapping mandates, subsidies, and performance standards. In exchange they would get market-based policies that have lower compliance costs, but are equally or more effective in cutting pollution. Whether such a rational compromise is possible in today’s politically polarized America is, of course, another question.

This is the second part of a series. Follow these links for the first part, “Why Conservatives Should Love a Carbon Tax—and Why Some Do,” and the  third part, “Why Libertarians Should Support a Carbon Tax—Even if they Can’t Love It.”  

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