Posted by: Tobias | January 5, 2009

Win, Win, Win, Win, Win

Thomas Friedmann in the NYT making the case for a carbon tax (or at least a much higher tax on gasoline) yet again:

The two most important rules about energy innovation are: 1) Price matters — when prices go up people change their habits. 2) You need a systemic approach. It makes no sense for Congress to pump $13.4 billion into bailing out Detroit — and demand that the auto companies use this cash to make more fuel-efficient cars — and then do nothing to shape consumer behavior with a gas tax so more Americans will want to buy those cars. As long as gas is cheap, people will go out and buy used S.U.V.’s and Hummers.

There has to be a system that permanently changes consumer demand, which would permanently change what Detroit makes, which would attract more investment in battery technology to make electric cars, which would hugely help the expansion of the wind and solar industries — where the biggest drawback is the lack of batteries to store electrons when the wind isn’t blowing or the sun isn’t shining. A higher gas tax would drive all these systemic benefits.

[…]

Which one of these things wouldn’t we want? A gasoline tax “is not just win-win; it’s win, win, win, win, win,” says the Johns Hopkins author and foreign policy specialist Michael Mandelbaum. “A gasoline tax would do more for American prosperity and strength than any other measure Obama could propose.”

Now I’m pretty sure, there should be several ‘lose’s in there as well. After all, if this were a true Pareto improvement, I’m pretty sure it would have happened already somewhere in the world. But the overall benefits of a carbon tax are so overwhelming and the loses can probably be kept to a minimum if we structure it right (e.g. by cutting payroll taxes, upping the EITC and other things to replace the lost purchasing power) that there is really no good reason not to do it.

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Responses

  1. As far as my knowledge reaches there is little to disagree with, however, I was stroke by the sentence ‘There has to be a system that permanently changes customer demand,….’ The examples discussed afterwards indeed ‘only’ drive all these systemic benefits but doesn’t really influence demand and the whished for change, does it? (I agree it is better doing something than doing nothing, however,… )
    I think the problem is exactly this bit and won’t be solved therefore till people really change what they want. Those changes can at best be slightly influenced by increasing taxes etc. but won’t be sustainable. I believe that people won’t ‘accept’ those changes when imposed by their governments, and even when they do accept it, it doesn’t really change what they want. Therefore I think those changes in general are only sustainable for the short term and most likely are changed / compensated after elections. Furthermore people themselves will more likely look for ways to circumvent the imposed regulations, like flying from airports just across the border. I know that this problem could be circumvented when applied European or world wide but that unlikely to happen and it still, according to me, doesn’t really influence behavioural demand.
    It seems that the only way imposed changes are accepted and therefore influence behaviour is when there is a something at work they perceive for a considerable part outside control of their elected government (increase oil prices, financial crisis, etc.). Otherwise only when the consequences of certain behaviour are felt, people are (more) willing to change, which, I agree, might be too late. Education, information and / or a well thought-out ‘marketing’ campaign on the consequences of behaviour (not the plainly obvious / lecture like ones) might be the only way to really change demand, but even that I only give a small chance.

    (Sorry for a maybe somewhat pessimistic start of the New Year)

  2. I’m not completely sure what your point is to be quite honest.

    If it is that you think that only a general change in attitude and conscious decisions by the general population to change its consumption behavior will be sustainable and bring about the change we can believe in in demand we need and that a tax (or some other form of price signal) will not be able to do so, then I have to disagree with you. The economic analysis for corrective Pigouvian taxes is standard Econ 101 and perhaps one of the few areas that economists the world over can agree on. An increase in the price of carbon, brought about by a tax or a cap-and-trade system, will lead both to a negative income effect (which we might be able to counteract as hinted at in the post) and – what’s more important – a substitution effect away from fossil fuels. In essence, making carbon-based sources of energy more expensive will shift demand to alternative sources of energy and this increase in demand will – we hope – also drive increases in research and development and eventual cost reductions for these energy sources. This is the essence of the economists’ approach to merely set the correct incentives (by exactly pricing in the negative externality of carbon emissions) and let market price signals do the rest.

    If you do not think that any carbon tax that comes close to the correct size is politically sustainable unless people realize that it is probably the best and cheapest way to address this problem, even if it means much higher energy prices for the foreseeable future, then I must wholeheartedly agree with you. This is in fact something that I worry about quite a bit. Whether any “thought-out ‘marketing’ campaign” or other forms of education can make a difference in this respect I do not know. I should certainly hope so, but for now, color me skeptical. I think a vast majority of people would support statements like “something should be done about global warming” if asked, but I would not be at all surprised if that support turns out to be very soft indeed as soon as we start to seriously deal with the issue in a way that will affect people’s wallets.

  3. Clearly I wouldn’t dare to challenge something economists over the world agree on. The system of increasing the price therefore changing demand is too straight forward and proven to work. It is however the link between the two paragraphs of your reaction I am challenging, or at least wondering about. Because governments are elected they won’t impose too many rules people would object to and even when they would, in the next they’ll get punished for doing so with a big chance that the tax will be revoked. Furthermore people will look around to circumvent the tax and still have the bad behavior (keep on flying, just from an airport in another country). Therefore demand (people’s wish) hasn’t really changed; people still want the good the government has taxed and therefore somehow will get it. General change in consumption behavior can only be accomplished by a change in attitude; tax has only a limited and temporary influence if the attitude hasn’t changed. The economic rule is thus not challenged put just doesn’t seem to work in practice and won’t get the job done, will it?

    Hope my point is more clear this time.


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