Posted by Watching insiders – listening to Dr. Emmerson claim that opposing a carbon tax is like favouring tax hikes, as by ‘yanking out the carbon price, you are yanking out the tax cuts’.
Dr E doesn’t belive what he’s saying – no economist/ one could.
His argument cannot be true: the upper bound on the value of tax relief is the the revenue raised by the CPRS, LESS the cost of the mechanisms of government required to 1/ collect the carbon tax and 2/ distribute the tax cuts.
Tax – transfer systems generally make everyone poorer: due to
1/ the direct costs tax and transfer systems (wages and capital costs)
2/ the deadweight losses associated with taxation
In general, we spill a little of the economic milk each time we pour from cup-to-cup. That’s why we cannot tax ourselves rich.
ricardian ambivalence 
He’s back! Nice metaphor at end. Yet to watch today’s Insiders.
Deadweight loss… in a broken market which has no mechanism to price the impact of carbon emissions.
Decisions in firms are largely made by 40-/50-/60-something-year-old management, who are profit-maximising in the 10-/20-/30- years left of their careers and lives. This makes the market irrational.
If 50, or 100, or 200 years from now (and then through to infinity) the environmental impacts of today’s pollution impacts on habitability, there will be a direct impact on the firm’s profitability, meaning that there is a direct marginal cost associated with every (carbon-assisted) unit of production which ISN’T accounted for by today’s market.
If you append that cost onto supply/demand, and then superimpose today’s price/quantity “equilibrium” onto the new supply/demand, you will uncover a whole world of economic loss through inefficiency.
So:
“1/ the direct costs tax and transfer systems (wages and capital costs)”
…. is a necessary cost associated with correcting free market failure
“2/ the deadweight losses associated with taxation”
…. is actually gain because it is counteracting the inefficiencies associated with the unaccounted externality.
The upper bound of the value of tax relief is the the revenue raised by the CPRS, LESS the cost of the mechanisms of government required to 1/ collect the carbon tax and 2/ distribute the tax cuts, PLUS the positive outcomes associated with the market’s adjustment to intervention.
Your argument is that the market is infallible, market failure is impossible, and that the outcome of any intervention is necessarily less-than-or-equal-to free market equilibrium, meaning that we are always worse off by at least the cost of intervention.
This is ridiculous. The invisible hand is NOT magical, it is the aggregate of efficiency-seeking behaviour of actual people across the economy. It depends on a feedback mechanism between bad decisions and bad outcomes which is observable by decision-makers within firms, and in this case the feedback delay between pollution and its impact exceeds the forecasting and decision-making horizon of these individuals. Therefore the invisible hand has no way of making this decision.
If you really wanted to point out a politician’s hypocrisy you could make a point about how a party which claims to simultaneously believe:
(a) in small government
(b) in liberal markets
(c) in man-made climate change
can hold a policy position that a mix of green government programs will more efficiently deal with (c) than a market mechanism.
@ JohnC:
• Good argument, if you accept the premise. I particularly like you referencing the decision making behaviour of management in firms. I think you are being optimistic about the time horizons they are interested in. More likely that they care for next 5 yrs max.
• I dispute the premise though. In this instance, there is no catastrophic global warming due to CO2 (note: it is not carbon, which is a very different chemical structure). What is catastrophic? It is changes in the climate that are so rapid and far reaching that humanity’s ability to adapt cannot be done without some significant Pigovian intrusion. And unfortunately I would argue that this is not something compatible even with the IPCC. They are talking about change over a century that is relatively minuscule.
But even more than that:
1/ Basing temperature projections on GCMs that failed to predict somewhere in excess of 50% of the temperature variation over the last century is stupid public policy, and much worse over longer time horizons. Whilst it is very likely that CO2 contributes to warming, it doesn’t seem to have had the radiative forcing effect assumed by the models.
2/ The temperature variation we have observed over the last 150 yrs or so is not particularly noteworthy when considering the temperature variations observed over the last few millenia. The climate changes all the time. We are not in a particularly interesting period. The changes we are observing, if they aren’t already reversing (no warming over last decade), will be gradual. Humans will adapt instinctively, as they always have, without a Pigovian intrusion.
I think more research, thought and initiative should go into things that are:
1/ truly catastrophic
2/ happen very rapidly
This might for example include: Geomagnetic storms which are not predictable and can fry communications and electricity grids [2]. Perversely, we can’t deal with this because AGW obsession is making major electricity / power infrastructure investment unattractive. And yet, this is necessary. Perhaps even a Pigovian / regulatory approach is necessary here. Hundreds of thousands, if not millions of people could die from this from one intense, short lived event.
Notice that this is one that humans aren’t responsible for. I think our hang up with AGW is a result of our anthropological obsession: we are obsessed with ourselves and think we are more important than we are. Unfortunately nature (witness Sendai earthquake) wishes to demonstrate otherwise. (NB: I ain’t a Gaia wackjob; the last statement was a turn of phrase that came to mind)
[1] http://en.wikipedia.org/wiki/The_Myth_of_the_Rational_Voter:_Why_Democracies_Choose_Bad_Policies
[2] http://en.wikipedia.org/wiki/Geomagnetic_storm
Maybe I have missed something but I dont think you’ve mentioned that we are only going to get about half the revenue back in tax cuts.
The other half will be used to protect businesses from the tax (why are we doing it then?) and also on various green research and development projects.
How can any economist agree that a narrowly based tax which wont the cool the planet one iota deseres the moniker of reform?
@Matt C : “How can any economist agree that a narrowly based tax which wont the cool the planet one iota deseres the moniker of reform?”
It will…by something like 0.05 deg C. How they come up with such a spuriously non-zero value I don’t know. Believe the models!
“Economist concerned carbon tax won’t help the environment”
http://www.abc.net.au/pm/content/2011/s3161870.htm
“My support is with the process of adaptation. We should be waiting to see what, if any, impacts there are from climate change and then putting into place policies that would ensure that we adapt to those changes.”
Yes.