Pigouvian Taxes and Equity

In the debate over global warming and what to do about it, we often hear arguments such as:

In particular, we could go to Greg Mankiw, founder of the Pigou Club. He would no doubt argue that the proper way to handle the negative externalities ... would be to tax them. Then, there's no need to stamp out industry... Rather, we simply give the market an incentive to reduce the bad effects.. The idea is that larger social goals are perfectly compatible with the preservation of individual choice...

But yet, despite the economic superiority of taxes over mandates in terms of the efficiency properties, there is substantial public support for mandates such as CAFE standards over taxes, and mandates continue to garner enough votes in the legislature to pass and be signed into law.

Why might that be? In thinking about efficiency as the primary reason for promoting one policy over the other, I think we might be missing something important: equity. More choice is best most of the time, but when it's a matter of being constrained, of not being able to do something you want or need to do, people want that constraint on behavior to be shared equally - especially when it involves something as essential to daily life as energy. If we impose an energy tax (carbon tax), the wealthy will pay more for their fuel, but the jets will still fly. We know that if the price of gas goes up a dollar or two due to a carbon tax, many people at the upper end of the income distribution will hardly notice, they won't be constrained in the same way the average or poor household will be. They can still drive their cars, heat their pools and houses, and so on. Their savings might not accumulate quite as fast, but to what extent are they really paying the same cost as a poor person?

Progressive carbon taxes anyone?

That might work, but even with a progressive carbon tax many people toward the upper end of the income distribution would not be very constrained in what they can do. With CAFE standards at least there's a chance that the cost of the policy action will be shared more equally. I realize that people have found a way to evade the CAFE standards (e.g. classify an SUV as a truck and make trucks subject to different standards), and evasion is always a problem, but that's largely a matter of will and closing loopholes. With mandates, at least the perception that we are trying to distribute the costs more equally is there.

I don't think policies that allow certain segment of the population to "buy out" of the constraint will find much popular support. If the poor are passed by roaring, gas guzzling, sports cars on the freeway as they drive their gas saving, small hybrid, they won't feel that is fair, not unless our transportation infrastructure changes dramatically. We can promise that with a carbon tax the proceeds will be redistributed to the poor so they are left harmless, but credibility over the long-run is a problem (what if the next administration cuts the government transfers to the poor?), people won't necessarily believe it will be fair to them individually, and there remains the problem of certain groups buying their way around the constraint and the public perception that comes along with that.

Maybe I'm wrong about this, but I do think we should spend more time thinking about the equity of these proposals and how fairly the (utility) cost is distributed across the population. A mandate, done properly, may have poor economic properties, but I think people support them because at least there's a chance that a mandate will force the luxury cars to abide by the same mpg restrictions as the lower price cars driven by the typical household. If we are going to go the carbon tax route, touting the efficiency properties won't be enough, I think we will need to find a way to convince people that everyone will share the costs (approximately) equally before it will find popular support.

Comments

[Alex Tolley]

I think you have a good point. In another case, Florida is short of fresh water. This is resulting in higher fees and some mandatory supply restrictions. But it turned out that the wealthy were using huge volumes of water for their estates. Worse, they were able to use a loophole in the law that allowed more water use for new gardens, so they continually replanted, evading the water use restrictions. This resulted in so popularizing of the situation and public outcry.

This seems to come back to the behavioral economics studies that show fairness is very important to humans. Equal suffering under constraints would seem to be required to make that comfortable for everyone.

[Mark N.]

Maybe the lack of support for gasoline taxes has nothing to do with equity and fairness. The costs associated with CAFE standards are less transparent, correct? If a gasoline tax was imposed, the cost to the individual would be much more clear. People love to talk about how they want to save the environment, but when they realize that it isn't a free lunch they may quickly change their minds. Thus people will support CAFE standards because it looks like they don't have to foot the bill, but at the same time they get a chance to feel good about themselves because they "care about the environment".
Also, economic ignorance may be another reason people don't support gas taxes. People may simply not understand the principle that if you increase the price of a commodity, the quantity consumed tends to fall. They may not associate an increase in the price of gas with a reduction in emissions and less pollution.

[Mark Thoma]

That's a good alternative hypothesis (the lack of transparency).

[Kurt]

My gut feel is that a tax is the way to go. However, I must go out of my way to commend you for a well thought out piece that doesn't resort to yelling and screaming. Too many people on all sides of all issues seem to think that's the only way others will listen.

Thank you.

[david]

yep. Marginal utility of the dollar answers a lot of questions. That, and regulations are more efficient in the doing than given credit for

[anon/portly]

"I don't think policies that allow certain segment of the population to 'buy out' of the constraint will find much popular support. If the poor are passed by roaring, gas guzzling, sports cars on the freeway as they drive their gas saving, small hybrid, they won't feel that is fair, not unless our transportation infrastructure changes dramatically."

Mightn't stricter CAFE standards lead to the same outcome? I thought they applied to the "fleet" as a whole. It seems like they would make low-mpg high-hp vehicles scarcer and more expensive, perhaps therefore as or even more exclusively a thing for the wealthy as the higher-priced gas.

[A student of economics]

Mark N. is right. The reason is lack of transparency and confusion, not equity consideration.

Anyway, equity is entirely separable. Implement the optimal Pigovian system and the separately set up transfers. As you note in the earlier post, that's how most welfare states reduce the gini coefficient anyway. It's horribly inefficient to try to price every good (and bad) progressively. Just do it once, with transfers and let people buy what they want.

[Bupa]

America could try to offset the tax to some extent with other progressive policies. Europeans have much higher taxes on gasoline, drive more fuel efficient cars, and have less inequality.

They also have CAFE standards. So it doesn't have to be an either/or choice.

CAFE standards hit the supply side, while carbon tax hits the demand side. If you take Global Warming seriously perhaps America should attack it from both sides.

Another regulation that is seriously lacking in the US is standards on home construction. America's number one position in the world in CO2 emissions per capita comes not only from their gas guzzling cars but from their underinsulated houses. Here again you can attack the issue from both the regulatory side and from the higher price of fossil fuels.

[William Smith]

Prof Thoma,
Point of correction that is sort of a pet peeve of mine:
SUVs are not just trucks; they are classified as light trucks exempt from normal fuel effeciencies standards because poor, rural, small-time, family farmers might not be able to afford more expensive trucks. When viewed in that lens, the argument over the SUV exemption seems more ridiculous.

[Richard A.]

I found this on youtube. Kenneth Green of the AEI speaks on cap and trade vs. the carbon tax.
http://www.youtube.com/watch?v=5l43JHQ5cqY

Green's essay on caps vs. taxes --
http://www.aei.org/publications/filter.all,pubID.26286/pub_detail.asp

And of course http://www.carbontax.org/

[piglet]

I think you are missing the obvious: mandates like CAFE are popular with the citizenry because citizens are spared any responsibility. It's the car manufacturer's responsibility to design efficient cars, isn't it? Is it my fault that the Hummer I'm driving is such a gas guzzler? Let them invent more efficient Hummers! This thinking is not completely wrong - manufacturers do have some responsibility for not investing more in energy efficiency - but it is above all an easy excuse. It may also arise from a misguided belief in technological miracles. The solution is to drive less, even with more efficient cars, and the tragedy is that Americans used to have too little incentive for doing the obvious.

[bakho]

There is much lack of transparency in energy inefficiency. People know that water heater X costs $200 and Y costs $300. There is a funky tag about energy efficiency, but how does that translate into dollars saved? The same with fuel efficiency of vehicles. People really don't factor in how much it costs to operate them.

Plus energy efficiency is not as big of a seller as safety or affording the payments. Lack of standards allows sellers to race to the bottom and woo buyers with short term savings and opaque long term costs. Standards, such as CAFE take the guess work out of the process for the consumer and force the sellers to meet the standard.

This is why everything from toilets to refrigerators, air conditioners, furnaces, etc all come with efficiency standards.

[John V]

Stuff like this truly puzzles me, Dr. Thoma.

You say:

there is substantial public support for mandates such as CAFE standards over taxes, and mandates continue to garner enough votes in the legislature to pass and be signed into law.

My first inclination is to believe that any economist, regardless of non-economic ideological leanings, would be dispassionate and stand firm on the side of simple, straight forward carbon taxes.

Take Bryan Caplan's view for example. Granted, he's an ANTI-partisan libertarian (like me) and you are a more modern liberal Democrat. But still, you are both PhD economists and you both know better. Yet you seem willing to try and bend solid principle for the sake of those who don't know better and give credence to suggestions that you know are simply not the best and simplest and most effective policy. This kind of occurrence is hardly unique among economists. I simply don't think it should be this way. Color me naive or an idealist if you will.

If we impose an energy tax (carbon tax), the wealthy will pay more for their fuel, but the jets will still fly. We know that if the price of gas goes up a dollar or two due to a carbon tax, many people at the upper end of the income distribution will hardly notice, they won't be constrained in the same way the average or poor household will be. They can still drive their cars, heat their pools and houses, and so on. Their savings might not accumulate quite as fast, but to what extent are they really paying the same cost as a poor person?

As an economist, are you telling me that these are good, sound reasons to support or at least entertain the notion of a progressive carbon tax?

I see a plethora of implementation and transparency problems with this. Don't you? It strikes me as being as messy and as impractical as a progressive sales tax on purchases.

Besides, I always thought efficiency was the primary factor for economists if they venture into positivism. And I agree that it should be...not "equity" and subjective notions of "fairness". Why compromise? An architect would not compromise principles to placate a client on a structurally unsound idea for his home. And I don't see the point in economists doing the same with their trade.

Perhaps I sound stubborn or dogmatic and I don't mean to but I think these "spoon fulls of sugar" to help the medicine go down send the wrong signals. It's a doctor telling the patient what he wants even though the doctor knows better.

A mandate, done properly, may have poor economic properties, but... cut.

Yes. So why even entertain any motive for its appeal? Carbon taxes are user fees. Aren't you concerned about distorting market signals or incentives to economize and/or stunting continued R&D into fuel efficient models? I am.

I really wish economists would ALL just stand firm on these matters and stick to sound principle. All this bending and twisting does is empower politicians to pander with bad policies grounded in appeals to less than noble human emotions of passing the buck while alienating those politicians who choose not to. And the justification? "Even leading economists say it's a good idea!"

And so goes another needless controversy.

A few years ago, I read Gene Sperling's The Pro-Growth Progressive.

One passage by Gene stuck out to me. It was when he complained about his frustration over Clinton's political operatives' willingness to twist and mangle his policy ideas with no defense from Clinton himself on the matter. They would say to him:

You worry about the policy, we'll worry about the politics.

He didn't like it. I wouldn't either. He recalls congress resisting YEAH votes on some bills Clinton wanted because his voters wouldn't like it and for the wrong reasons. Why? Because his voters thought mattered more than what he knew. But this opens up a whole can of worms about the bad incentives of the political process....something I just touched on, incidentally. But I won't rehash that here.

[Mark Thoma]

I am trying to explain behavior, not justify it or make a policy recommendation (though economists have to recognize political realities when they step outside academics). The "Why might that be?" was a big clue.

I'm sorry you failed to see the distinction, but I'm not surprised given your history here.

My position on these issues has been pretty clear. The point at the end was that we should make sure that equity issues are addressed in implementing a tax if we want it to be successful ("touting the efficiency properties isn't enough"). It wasn't - despite your wishes to portray it that way so you could make your Libertarian points yet again - a call for CAFE standards.

[John V]

Dr. Thoma,

It's actually not a libertarian point at all. It's simply a "stay true to sound principles" point.

I did see the distinction, BTW. My main issue was in engaging the very idea of making appeals to the wrong emotions because it is "political reality". And challenging the notion that it's a good route to take. I also thought that was clear.

But thanks for taking the time to respond, Dr. :)

[eclectic artist]

Mark Thoma is a teacher talking to his students on this weblog about how economists should advise Congress and the President. He is encouraging you to think through how they should behave in the urgent situation of global warming. He is telling you that the pro-carbon tax forces apparently need to compromise in order to accomplish the passage of a bill addressing global warming quickly. The environmental and economic fallout from the warming would be far more serious, he implies, than the effects from an attempt to use the one (weaker) strategy that Washington is likely to adopt.

It will be harder to craft a bill that severely punishes vehicle manufacturers who fail to abide by the mandate and to get the present presidential administration to enforce it. But it would be harder still to even pass a bill that taxes consumers for using gasoline, with the new gasoline prices shouted out on every corner gas station billboard.

May I add something about ideology here in the context of a discussion of macroeconomics? Ideologies are bents of minds, or prejudices, which the aim of science is to defeat. With more knowledge available and more organization of knowledge, ideologies are less and less relevant. Studies of ideologies are part of the science of political economics -- enabling implementation of an economic policy in a democracy where ideologies are one of the voting public's miseries.

Economists have got to find a policy here that is consistent with the major ideologies prevalent in this deomcracy. Time does not allow economists to rely only on the long, slow molding of public opinion through public debate and through education. Economists in government must act in the short-term, for now, as well.

[Mark Thoma]

If it's not a Libertarian point, why bring up that you are a "ANTI-partisan libertarian" just like Bryan Caplan! Anti in Caps and italics even.

Do you think being anti-partisan somehow makes you better or special in some way?

And, one more question, you do know that Gene Sperling is a lawyer, not an economist don't you? He's done a lot of work on econ policy, but he has a J.D., not a Ph.D. in econ.

And finally, since you can't seem to get this point (though you seem to think you do), I wasn't appealing to any emotions, wrong or right, I was explaining why the mandates seem to be more popular than taxes. Please stop distorting what I said.

[paine]

the best de facto carbon tax today
is $100 per b crude
only the rents don't get collected
by the various states
thru wind fall profit taxes
on resources

standards for sure
but they're too slow acting
standards are for production after all
and don't we have
a bad flow to stock ratio
imagine certain fuel standards
increasing in increments
over the next two decades

fine but ...
the lag in full effect
new vs existing cars etc

the higher price of fuel is necessary
why not a tax
plus
a virtual ie
card based ration book
for x gallons tax free per license per month
might be best

rations are loved when fair
and the ration price need not be fixed
but float with the non tax component
of the per gallon pump charge

[paine]

i think standards and taxes
plus full rebating in cash
of the average
household tax gets sold best
as a package deal

because
you can say about
the higher standards
we 'll require the auto makers
to build cars more fuel efficient
as a way to ease
the burden of the tax

[paine]

"Color me naive or an idealist if you will "
i'll color you
anal passive agressive petty ridiculous
unimaginative
and rightfully
subject to an internet
per word posted pigou tax
not ads valoreum
cause in use by you
they're worth near zero
but as a source of meme traffic bottle neck
and you love it so

like a road hog
in the fast lane

[pgl]

Just noted over at EconoSpeak an alternative hypothesis put forth by Kevin Drum who says taxes do gather public support but the Norquist anti-tax stranglehold over the GOP has gotten in the way. All is to add is to tell Greg Mankiw: GOOD LUCK with his Pigou Club efforts!

[John V]

Paine,

Real
nice
not

[guillaume]

Mark,
Thanks for this clever post. Equity does bring additional dimensions to the debate of tax vs. constraints.
I like your describing the issue as an issue of constraints. It is even more true when you think that small consumers (poor people) of the constrained good (gas) are likely to have contributed much less to the problem (greenhouse gas accumulation) in the past than big consumers (the rich). In short the rich get the reward (enjoy the high consumption) and the poor get the constraint.
Fairness anyone ?

[reason]

John V.
What sort of animal is an economist supposed to be that he doesn't recognise equity as even being a criteria? Your position to me translates to:

"If some millionaire is prepared to pay more for fuel for his ferrari than a poverty stricken farmer in the third world, that is the most EFFICIENT use of that fuel."

This is only true if you have a peculiar (to economists) view of what EFFICIENT means.

Consider however mandates vs taxes more generally. We have seen already with oil prices, that poorer countries have virtually had to drop out of the market for oil. In other words, while prices have been raised in order to encourage substitution, there has been a substantial income effect. By concentrating only on the substitution effect, we are ignoring something very important. (This by the way is also the great fallacy in "supply side economics".)

Tell me how high would we have to taxes leaded petrol to have acchieved the same effect as we did from mandates? And what would have been the distributional effects (hint the rich would have bought new cars)?

[piglet]

I said above that CAFE mandates are an easy excuse for the citizenry, and I would also say a sedative because government and industry pretend that something is being done while in reality, those mandates are so weak that in the end we get Hummers and SUVs. I do not however subscribe to the black and white view exemplified by John V. There are many situations in which government mandates are perfectly legitimate and they don't have to "have poor economic properties". In most cases, a good policy will include both mandates and market-based incentives. I don't see what's wrong with that.

[Valuethinker]

I think there are quite a few opinion polls that Americans think global warming is a problem, and favour doing something about it but *not* if this will lead to an increase in household bills. Any economist can tell you that at the minimum, there has to be a shift in relative prices, raising the energy price, even if the income effect can be fully neutralised.

Politics in other countries seems to mirror that eg the British argument over nuclear power is founded on a government assertion that there will be no government subsidy for nuclear power (a bit like Eurotunnel, where the law was actually written that there would be no government subsidy, at Thatcher's insistence, but in practice there have been significant subsidies. Similarly, with nuclear (the Sizewell B plant, built in the 90s) it was paid for by a direct levy on electricity bills to avoid 'a government subsidy'.

That tends to support the transparency argument. Tradable quotas, emissions control standards etc. are less transparent than a carbon tax. I suspect even if the carbon tax were to be 100% rebated on a poll tax (per head) basis, that it would not incur support. Middle Americans who vote (and would be net losers) outnumber Americans as a whole.

But distribution is in there somewhere. CAFE and tradable carbon permits impose a cost, which the rich are better able to shoulder.

I think there is evidence (there was a piece in the New Yorker on that) that people know that cars are too heavy and large, for example, but they won't sacrifice their personal safety or performance (the average horsepower of the American car has grown 60% since 1980 for example) unless everyone else sacrifices.

There may well be a bit of the 'Israel' spirit in this. The exigencies of Israeli military service are (were?) born by Israelis, because everyone, from factory floor cleaner to CEO, bears them. And in fact those who aspire to the best jobs in Israeli society know they have to have worked in elite military units first. The guy who works on the warehouse floor may actually be your CO when you show up for reserve duty, even though you are CFO.

Humans are like this with sacrifices. I think there have been some experiments that show if you make people pay for a service (eg being late at an Israeli childcare service, to pick up your child) they are more likely to abuse the privilege than if you use moral suasion?

ie humans tend towards equity as a default state. Once you throw in the monetary incentive, they are reminded that 'some animals are more equal than others' and they behave accordingly.

[reason]

Valuethinker
I think there is evidence (there was a piece in the New Yorker on that) that people know that cars are too heavy and large, for example, but they won't sacrifice their personal safety or performance (the average horsepower of the American car has grown 60% since 1980 for example) unless everyone else sacrifices.

Yes and of course the effect on safety is proportional to relative size, so if everybody has a lighter car there is no (or little) safety cost. I'm sure other people, notably (James Kroeger) have pointed out this issue with positional goods. I would even go so far as to say the main effect of tax level changes (within moderate bounds) is to raise housing prices and alter the exchange rate (i.e. the effect is mostly distributional).

[Valuethinker]

On household energy conservation, studies have show again and again that individuals and companies look for, at most, 2-3 year payback, ie Internal Rates of Return of 30-40%.

In capital markets that equates to a high risk venture capital return. An equally safe return (your bank account) pays 4-5% at most.

This is irrational, but a commonly observed result. It's a clear argument for energy efficiency standards in appliances and buildings.

California has exploited this to a very great extent. Per capita use of electricity in CA hasn't risen since 1980, whereas it has in the rest of the country by 60%. The modern fridge (uses 1/4 of the electricity of its 1975 equivalent) is a creation of the Berkeley National Energy Lab. So too is the 'white roofs initiative' which cuts air conditioning use by 10% (the payback, even as far north as New York City, is 12:1 energy saved to winter heating lost).

There are also masses of 'split incentive problems'. Developers and commercial and residential landlords are aiming for lowest building cost, tenants have no incentive to invest in energy savings.

Lastly most US utilities make more money if they sell more water, gas or electricity. There is no incentive to encourage customers to save.

None of these situations are 'irrational' but they are 'suboptimal'. Most studies of greenhouse gas emissions savings show large numbers of improvements that are NPV-positive, ie they would actually grow the economy, if implemented.

(McKinsey and Vattenfall, the Swedish power utility, have some nice curves on this, I'll try to find them)

[reason]

In order to avoid confusion, in my previous post, I should have said "residential land prices" not "housing prices". By the way - Valuethinker - great post.

[piglet]

reason: "Tell me how high would we have to taxes leaded petrol to have acchieved the same effect as we did from mandates?"

The answer is simple. Europe didn't used to have efficiency mandates (they are only now introducing some, and getting big resistance from Germany) but they have high gas taxes, and it worked. Their transportation system is way more efficient than the US. Would it have worked better with mandates? Possibly. But certainly not without taxes. The question of the equity of energy taxes has been debated over there too. Schroeder, in Germany, touted what he called an "ecological tax reform" (raising energy taxes in order to lower payroll taxes). Critics, on both the left and right, pointed out that this tax affected most those among the poor who were not in employment. This argument has been overrated, in my view. For one thing, the poor don't own cars, they enjoy subsidized public transport (in Europe, that is). They are still affected by energy prices, of course, but there are ways to address this issue without making energy cheap. From the point of view of equity and social justice, improving energy efficiency is the best policy.

[reason]

Valuethinker
I think there is evidence (there was a piece in the New Yorker on that) that people know that cars are too heavy and large, for example, but they won't sacrifice their personal safety or performance (the average horsepower of the American car has grown 60% since 1980 for example) unless everyone else sacrifices.

Yes and of course the effect on safety is proportional to relative size, so if everybody has a lighter car there is no (or little) safety cost. I'm sure other people, notably (James Kroeger) have pointed out this issue with positional goods. I would even go so far as to say the main effect of tax level changes (within moderate bounds) is to change residential land prices and alter the exchange rate (i.e. the effect is mostly distributional).

[reason]

piglet...
I'm talking about unleaded petrol. The issue with unleaded petrol is that lead in petrol is a health hazard for children. We wanted to reduce the lead in air virtually to zero. Two possible paths, phase in increased prices for leaded petrol or mandate new cars having unleaded petrol. (Europe actually went for both). Just increasing the taxes would hit mostly the poor (who buy new cars less often). In general I think equity, compliance enforcement issues and information economics issues often make mandates an efficient strategy.

[Worker]

Think your giving the pols too much credit. Rather than equity, their desire is for proposals that appear, at least to the ill-informed swing voter, to be cost-free to that voter. More efficient mechanisms that directly allocate the costs are transparent to the voter and directly link the pols to a voters costs.

Why impose a tax on energy consumption when you can impose a mandate on the utility company AND then blame the utility company for passing on the costs? In the absence of a concerted media campaign by the targeted industry (not generally likely) ill-informed voters will believe the politician.

So proposals with transparent costs will fail to acheive support. Proposals that allow opt-outs, by their nature, have to be somewhat transparent in their direct cost to voters (ie. the opt-out price). That is why they are favored by pols.

I will stand corrected when the US pols raises its absurdly low gas tax to fund anything other than building more highways.

[Valuethinker]

Exhibit 1 page 4

http://www.epa.gov/air/caaac/coaltech/2007_05_mckinsey.pdf

below the line has a negative economic cost (positive NPV).

http://www.mckinsey.com/clientservice/ccsi/pdf/Cost_Curve_for_Greenhouse_Gas_Reduction.pdf

same article, different URL.

[paine]

value
nice summary
of part to whole market failures
and shared sacrifice

but as to
transparentcy vs sanctum sanctorum
produced
hocus pocus policy
as in
the elite must do some things
behind our backs ...for our own good

hmmm

maybe gutless corporation pruned pols
unwilling to lay it out
are the problem

fdr sold many things
to the un-degreed un-wise majority
because they trusted him
and he'd earned that trust

[Valuethinker]

Some interesting hypotheses emerge from our discussions:

- in cases where visible behaviour is important, equity is a big issue

examples: Al Gore's mansion and its energy bill, water rationing (rich people trucking in water to fill their swimming pools), military conscription in a country with present and local threats

President Carter was derided for wearing sweaters. By contrast in Japan (more collectivist country, greater emphasis on conformity to group norm) energy conservation is a fetish and leading corporate execs etc. make a point of demonstrating their commitment to it.

Government types driving SUVS sends wrong signals.

Purely price/ income based solutions may just not work here, or not at levels of, for example, gasoline taxation which do not have large welfare costs.

- it may be governments tax gasoline heavily for the same reason they tax cigarettes heavily. Not because they want it to stop, but because of low price elasticities of demand ie low welfare loss and high net government revenues.

UK government raises £20bn from gasoline taxes (just under 2% of GDP, about 1.6% I think).

- Achilles Heel of carbon taxation schemes may be that the required price is just too high-- carbon emission is an income superior good. See Dieter Helm analysis. Can the world live with the $300/tonne of carbon ($84/ tonne CO2) that Stern Review estimates is the marginal harm of CO2 emission?

Even paying that price, will we really stop flying?

Carbon permit trading schemes will therefore fall down for the same reason NOX and SOX permits failed in California during the 2001 Energy Crisis. The marginal price could be hundreds of dollars per permit (MWHR) without dissuading emission. On a hot summer's day, or during a deep freeze, this is very likely to be so.

Gasoline is roughly 2.5 times as expensive in the UK as the US. Brits don't drive 40% as much but rather more than that, especially not adjusting for being a much smaller country.

Note price of carbon fuels for transport has probably tripled in 7 years. Limited signs of fall in consumption? Price inelastic?

Note Long Term v. Short Term price inelasticity issues.

- home heating, being a necessity, like driving is seen to be a necessity now, probably also suffers from the political issues about fairness. Water consumption is same.

- in cases where transparency is not clear (electric power generation, transport of goods for distribution) and there are substitutes (gas for coal, wind or nuclear for either) then carbon taxes/tradable permits may provide an answer.

European experience on tradable carbon permits (peaking euros 30/MWHR) is not hopeful on reducing emissions. US SO2 picture is much better, but the European solution was simply to regulate best use technology for abating SO2.

- political system will almost inevitably gravitate towards producer-led, 'low pain' solutions like bio-ethanol, even if the scientific case for them is highly negative.

On a good day, that means more windfarms. On a bad day more US corn ethanol, with some plants being fueled by coal.

Producer-led, heavy industry requirements also a big factor in European Emissions Trading Scheme (ETS)

[notsneaky]

The thing is, raising CAFE standards isn't all that equitable either. This is because, other things equal, more fuel efficient cars are more expensive. As a result the rich folks to a large extent ALREADY drive cars with above-CAFE standards. Sure, some of them might have a Hummer or some other gas guzzler but I'm willing to bet (and yes, I'm speculating here without any research to back it up) that if you divide folks into income groups, the ownership of fuel efficient cars goes up with the income group.

So if you increased CAFE standards, this wouldn't affect rich people much - they already drive cars which by and large meet those standards. Instead what you'd be doing is forcing a lot of lower income people who would otherwise purchase less fuel efficient cars to buy more expansive fuel efficient cars.

Also a gasoline tax isn't as inequitable as you think - for a proper definition of equity. In fact it's a mixed bag - both the poor and the rich consume a smaller share of their overall budget on gas than the folks in the middle. Which is probably the real reason it's unpopular.

[piglet]

reason: "I'm talking about unleaded petrol." That was indeed a clear-cut case for a government mandate.

[Arne (not anne)]

When I read this I end up wondering why my view is contrary to what is politically realistic. I would happliy vote for a gas tax. Is it because I make enough that I can easily afford it, or is it that I have been convinced that it is fair because it captures externalities, or is it that I that I have been convinced (by reading in economics) that it will be effective.

While I do believe that a gas tax will be more effective, I also believe in CAFE mandates for reasons others have already mentioned. I just bought a Civic hybrid - I was disappointed I did not have more choice in a somewhat lighter, lower powered vehicle. Putting a vehicle weight tax could help the market find a place for lighter vehicles, but there is still a problem when light and heavy vehicles share the road. I don't care whether I get hit by a cheap old heavy car or an expensive new heavy car.

In the mandate column I would consider putting a fuel milage indicator in all new cars. There is nothing like it for bringing home how much extra it costs to drive 70 mph than 55 mph.

[reason]

By the way, I find the argument that size of country has something to do with the average journey length unconvincing. This is basically saying that there are big barriers to international trade. (How many trucks drive from Holland to Italy!) Now the average population density is another thing entirely, but even in that case, most journeys are local.

[reason]

To make it even clearer for John V, if it came down to it and it was a choice between golf courses for the rich and survival for the poor (water or grain take your pick), I'd be for plowing the golf courses up. By defining economics as purely searching pareto optimal production given the distribution of wealth I think you are defining it too narrowly. I was taught that it was an examination of the process of trying to meet infinite wants given limited resources. That is a pretty open question. I tried to get Mark Thoma into a discussion of this some time ago. My contention was that the implicit definition of the subject was different between social democrat and libertarian economists and he disagreed. Your contribution tends to support my conjecture I think.

[Valuethinker]

notsneaky

No. Other way.

Or rather:

- SUVS and the old gas guzzlers have high depreciation rates, reflecting the much higher cost of fuel than when they were manufactured. A lot of poor people drive them because they are cheap to buy, and as we say in economics, poor people face real capital market liquidity constraints. If we made it harder or impossible to buy low mpg cars, then when poor people get round to buying them (used), the lowest mpg cars won't exist.

This is more or less what CAFE did, and to the benefit of the poorest American car drivers.

- generally on fuel usage, people with more money drive nicer cars (Lexus, BMW etc.) and SUVs (think Land Rover, Porsche Cayenne). And they have more cars and so burn more fuel. And fuel costs matter less to them, so they may drive more (on the other hand, they tend to live in more expensive areas, closer to work).

- distorting factor Red v. Blue America etc. 'Red' America aka flyover country drives a lot more domestic makes (lower fuel economy) and pickup trucks, SUVs etc. Red America is less affluent than Blue America.

Again improving fuel economy generally would force people to consume less gasoline. It's the WalMart customer bracket who are getting killed by higher gas prices, as WMT tells us at each quarterly results presentation.

- cars would cost more. This would, generally, be bad for the poorest car buyers.

[Valuethinker]

reason

Loads of trucks go from Netherlands to Italy, and back, despite the Alps being in the way. Not sure your point there?

Trucks are the major way Europe moves freight, our railways are more oriented towards passengers than yours.

Agree urban sprawl/ density has a big influence, as most trips are intra-urban (commuting and shopping) rather than interurban.

Nonetheless I think the amount Americans fly and drive is correlated with the size of their country. You are probably more likely to go to Los Angeles, Las Vegas or San Francisco, if you live in New York, than I am to go to Moscow from London (which is only the equivalent of flying to Chicago I believe, in any case).

[notsneaky]

Valuethinker,

I'm willing to be convinced on this.

[John V]

Reason,

Your choices are non sequitirs (all of them). That's not the choice and that's not how to view these matters.

[reason]

John V.
Really? Yes it is reductio ad absurdum, but reductio ad absurdum is a good way to decide if something is a question of principal or a pragmatic issue. You are trying to make a matter of principle something that is a pragmatic political decision, and it seems you don't like being called on it.

[reason]

Value Thinker...
I live in Europe also.
Re trucks (between Italy and Holland) - I was just questioning that size of country has much to do with average fuel consumption. And yes, Los Angeles is a long way from New York, but Bangkok is also a long way from Frankfurt and Germans take more international holidays than Americans do. I think that the size of the country is largely irrelevant to the issue.

[reason]

John V.
Please reread your own posts. Do you realise how arrogant your position is. First you tell Mark Thoma what his job is. And then you tell me what the correct way to "view these matters" is. Just who do you think you are?

says...

By the way in case people get the wrong impression here, I'm agnostic on the central question here. I actually think there are good arguments for using taxes (with appropriate rebates) for global warming, mainly because TOTAL energy input is almost impossible to measure without using the price mechanism to do it. However, it really makes me angry people who pretend to know with certainty that there is a correct answer to such question without any ifs and buts. If we want to be arrogant prigs we can all go over to ECONLOG where we will fit in perfectly.

says...

I was so angry I forgot to proof read...
... However, it really makes me angry, reading people who pretend to know with certainty that there is a correct answer to such questions without any ifs and buts. If we want to be arrogant prigs we can all go over to ECONLOG where we will fit in perfectly.

[reason]

Typepad lost my id. The last two are mine.
Reason

[John V]

Reason,

I'm not being an arrogant at all. First, that's a pretty lousy characterization of my post to Dr. Thoma. That's not what I did at all. I find it ironic that a post the following day was made that showed disagreement with the premise of this thread here.

Secondly, yes, your choices are non sequitirs. It's hardly arrogant to point that out.

[Matt Lappé]

Mark is right that equity issues will be central to the debate on climate policy. If the solution is not effective and equitable, it stands little chance of lasting the forty plus years necessary to make a difference.

One policy option that would achieve necessary emission reductions without resulting in a regressive tax is the cap and dividend approach outlined in a recent paper from the University of Massachusetts. The policy creates an economy-wide cap that auctions permits to upstream emitters. As long as dubious offset programs are kept out of the policy, the cap is effectively a tax on CO2, with the advantage of placing the uncertainty on carbon price rather than emission level.

To deal with regressive energy price increases, auction revenue is returned equally to all citizens, regardless of income level. This approach has two advantages to a welfare-type program that just gives to the poor. First, equal dividends would create a clear incentive to conserve; those families that guzzle fossil fuels will get back less than they pay, while efficient households will come out ahead. Second, the policy gives back to every citizen in the country, so it has a strong chance of building and maintaining the political and popular support to last.

[piglet]

"Gasoline is roughly 2.5 times as expensive in the UK as the US. Brits don't drive 40% as much but rather more than that"

Is that so? I would like to see a comparison chart with gas consumption per capita versus retail price of gas. I would be surprised if there wasn't a strong relationship.

[reason]

John V.
Your brain obviously functions in such a different fashion to mine that it is pointless to try and communicate with you.

[reason]

Just so everyone knows why I am so pissed off with John V. I quote from him.
Besides, I always thought efficiency was the primary factor for economists if they venture into positivism. And I agree that it should be...not "equity" and subjective notions of "fairness". Why compromise? An architect would not compromise principles to placate a client on a structurally unsound idea for his home. And I don't see the point in economists doing the same with their trade.

Simplified version - if you are not a propertarian Libertarian you are not a proper economist. I cannot see how that can possibly NOT be reguarded as arrogant. Nor can I see how a discussion of what economics is about (including notions of "efficiency" as if that was well defined) is not relevant to this passage.

P.S. This is not addressed to John V. I don't regard further discussion with him as having any point.

[reason]

And just in case John V. is wondering where I am coming from, he should realise that another economist on another thread characterised my position as "utilitarian", so my notion of efficiency might just be somewhat different from his.

[John V]

Reason,

If you see arrogance in that passage you cite, then I guess you do. BTW, in case you hadn't noticed, Dr. Thoma DOES support efficient carbon taxes and not mandates...unlike you.

Like I said, A post the following day eerily echoed the idea when other disagreed with this very same general premise.

As for the more important part, the non sequitirs, perhaps you should go back reread your choices that you gave me and reconsider whether they are, in fact, non sequitirs. They are also false choices. They don't speak to the issue. They miss the point.

[John V]

Here they are:

"If some millionaire is prepared to pay more for fuel for his ferrari than a poverty stricken farmer in the third world, that is the most EFFICIENT use of that fuel."

Is this really the paradigm? Is this really lies at the heart this carbon tax issue? No. A straight carbon tax is the most EFFICIENT way to have the desired effect in question, which is what this is all about.

if it came down to it and it was a choice between golf courses for the rich and survival for the poor (water or grain take your pick), I'd be for plowing the golf courses up.

Once again, is this what is at stake when discussing carbon taxes, mandates or some bending thereof? No. I don't see these all or nothing extreme choices have anything to do with the matter at hand.

[reason]

John V.
You clearly don't understand. If at one point you use the word principle and another you refer to only a specific issue (and I don't necessarily disagree with you, I'm agnostic on the particular issue, and so should you be if you are a scientist and not an ideologue). I was arguing against the principle that equity can be ignored - at the limit it is critical as I tried to show. (And with what is happening to grain stocks as a result of mistaken policies on ethanol it may not be as far fetched as you think.) And you seem to think you know what efficiency means. I think it is a very wishy-washy concept. Efficient in what sense exactly?

[reason]

John V.
I am almost coming to the conclusion that you are what in German is known as a "Fachidiot". Somebody, who knows a particularly subject very well, but has no relation to the real world. But as in every, I'll wait for the evidence to roll in.

[reason]

You see John V. I understand the theoretical economic arguments very well, I'm just not sure they cover all the angles that are relevant to making democratic political decisions (and regulate and tax decisions are as political as any decision can be).

Sure you can argue that people who value a resource more will pay more for it. But you see that world "value" is also ambiguous. Most people will apply a different meaning to it, than your technical economic definition. People may well "value" things that they "can't" pay for, and also things they currenty don't pay for. You only count preferences that people can pay for. Well you can stick to that, and I can say that could mean (at the limit), either building golf courses or growing grain in a starving world. There will come a point where social need will trump hedonistic individual preferences. In fact in happens all the time. It is just hidden. If that means mandates, i'll put up with a little less "efficiency".

[reason]

Maybe John V. I should have simply put it this way, Mark Thoma understands nuance, you only see black and white.

[Valuethinker]

reason

Germans travel to see other Germans: like most big countries much of the travel is intra-country (it's even intra-country in a place as famously globetrotting as Netherlands).

But a business trip to Frankfurt (or even Paris) from Munich is not the same as one from NY to LA.

Note the relative CO2 emissions between the US and Germany per capita.

More international travel is a factor (and AFAIK the official figures exclude air travel) but, fundamentally, the size of the US does influence total CO2 emission.

(there's an underlying factor: the US has more land, and its cities sprawl, so intra-urban usage is higher, too, and of course public transport isn't economic at low housing densities: you need c. 10,000 people per square mile for light rail, and 20,000 psqm for subways.)

[John V]

Reason,

Let it go. I can see very clearly where you're coming from now. I kinda figured as much before but wasn't sure how far you would go in making it abundantly clear. This is cluttered with far too many assumptions about me that you can't seem to take my points with the calm spirit I have taken here.

It's kind of hard to explain but I think the facelessness of the computer screen and preconceived notions you may hold are letting your imagination assume far too much about me.

This quote encapsulates a lot of illuminating irony about your posture:

Mark Thoma understands nuance, you only see black and white.

My original points are kind of lost here. It's OK. I guess it's not really that important.

Another thread, another day.... :)

[agricanto]

Economist's View
Previewing your Comment
Just a postscript on Al Gore's alleged huge carbon footprint mansion. Actually it is live-work space that also houses his security detail. 3 in 1. Taken as a whole with all reductions in journey to work and facilities for staff its combined carbon footprint is very small by comparison to average in his line of work, his social class and their consumption level. I know many would love to see Al Gore live in a grass hut, but I am happy he got the Nobel and that he continues to work on climate issues. Maybe a UN ambassador job for Al would help coordinate the global effort needed to define goals.

When E.F Schumacher wrote Small is Beautiful, I never thought it would become an aesthetic for a mass consumption society like ours, but as I read mags like Dwell and see trends in housing, autos and consumption, I think economists should take a serious look at movements such as the Simplicity Mvt that started in Seattle and the zip cars in Boston and the <1,000 sq ft homes and see that "behaviour" is as malleable as clay when social consensus moves quickly and is lead by little considered factors in popular culture, religion, and good old desire.

[reason]

John V.
This is cluttered with far too many assumptions about me that you can't seem to take my points with the calm spirit I have taken here.
No I'm just responding to what you wrote. Maybe you should think about how you express yourself. It comes across as arrogant and dogmatic (just like your apparent hero Caplan). You aren't winning many friends. I'm not the only one who has taken offence.

[Martin Menner]

That's the problem with inequality: the rich are always "better off" and can do more things than the poor, e.g buy sports cars and "afford" higher green taxes. But they can also more easily "buy themselves out" of legal constraints like traffic fines or judicial punishment etc.. Not to say that they have more economic means to do nasty things like bribing politicians or, say, paying for a killer ...
Thus, the receipts of green taxes should be at least redistributed to the poorer (and probably the ongoing increase in income and wealth dispersion should be counteracted by other means, too?). Moreover, the most ugly "ecological" sins should be addressed via mandates - similar to the most ugly "legal" sins that are (or should be) addressed by jail instead of pecuniary punishment.