Dr. John Hollins, past chair, CACOR Board of Directors writes:
Market failure
In orthodox economics, climate change is a big, but straightforward example of a market failure, with a correspondingly simple solution. Economists think that people take environmentally harmful decisions because the private benefits of doing so (using a car to get to work, for example) outweigh the private costs (the price of the gasoline to run the car). But emission-producing activities also impose social costs that do not influence an individual’s decision to drive rather than walk or take public transport. Examples are health impacts from air pollution and the effects of global warming: changing climate and weather, rising sea level, and acidification of seawater.
Social cost
To solve the climate problem, economists advise that governments need only include the social cost of carbon in the prices people pay. The simplest approach is a levy on emissions corresponding to that social cost. Carbon-intensive activities become more expensive, and people are assumed to reduce their emissions by responding to price.
Price carbon
Schemes exist that put a price on carbon, some via a tax and others through a functionally similar system of tradable carbon emission permits. In January, a panel of distinguished economists signed a letter in the Wall Street Journal arguing in favour of a version that would refund carbon-tax revenue in the form of a flat, universal dividend. British Columbia has essentially been doing that since 2008.
This appears to be an elegantly simple approach. But the rub is twofold:
- The social cost is essentially impossible to calculate;
- Oil — and motor fuels in particular — are wickedly useful commodities:
- A carbon price high enough to affect the behaviour of consumers in rich countries has yet to be tried; so no one knows what might actually work;
- It would not be part of a recipe for re-election.
- Most consumers adapt somewhere else in their budget;
- The United States Energy Information Administration reports that the price elasticity of motor gasoline is between -0.02 and -0.04;
- In other words, the price does not matter [3].
- A carbon price high enough to affect the behaviour of consumers in rich countries has yet to be tried; so no one knows what might actually work;
BC Carbon Tax
The price in BC started at $10/T CO2 (2.2¢/L gasoline), stalled at $30/T CO2, and rose in 2018 to $35/T CO2. It has not constrained the consumption of gasoline in BC.
Conclusion
Robust carbon taxation will remain politically elusive in any parliamentary democracy governed by politicians who seek re-election.
- Citizens — including politicians — who seek effective action to reduce emissions should:
- Put simplistic economic solutions aside, and
- Pay attention to the raft of other tools in a government’s policy box.
- The first task is to determine whether or not there is any practically feasible pathway to reach whatever targets are adopted.
- In fact, targets should be set knowing what can in practice be achieved! (À la acid rain and stratospheric ozone depletion)
- Only then can informed choice of tools be made.
[1] This note is inspired by a column in The Economist, 2019 February 5
https://www.economist.com/finance-and-economics/2019/02/07/a-bold-new-plan-to-tackle-climate-change-ignores-economic-orthodoxy.
[2] Dr. Hollins is Past Chair of the Canadian Association for the Club of Rome; this text is his personal opinion.
[3] This should not be a surprise. The market price of motor fuels oscillates more than the carbon tax applied in BC. The C tax is but a modest addition to earlier taxes The Canadian Automobile Association reports that fuel represents between 10 and 20% of the total cost of operating a car. Insurance and depreciation are both substantially more expensive.
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