The objective of the carbon tax.

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I set readers of this blog a challenge – tell me the objective of the Gillard government’s carbon tax. From the many responses I think that there are seven broadly claimed objectives:

  1. The carbon tax is driven by the politics of minority government (the objective is political);
  2. We need to carbon tax because it is morally the right thing to do (the objective is moral);
  3. We need the carbon tax to reduce domestic carbon emissions (the objective is domestic emissions reduction);
  4. We need the carbon tax to prepare us for when the rest of the world acts on carbon emissions (the objective is to ease transition in the future);
  5. The carbon tax is a solution (or part of a solution) to global climate change and its terrible consequences (the objective is reducing global emissions);
  6. We need the carbon tax to be an example to other developed nations or to avoid claims of hypocrisy by developing countries when global solutions to carbon pollution are being mooted (the objective is reducing global emissions by setting a global example); and
  7. We need a carbon tax to help maintain a (Pareto superior) solution to the repeated n-player international prisoners’ dilemma of carbon pollution (the objective is reducing global emissions through strategic behaviour).

A number of readers each thought that specific but different objectives were obviously correct – which might help explain the government’s problems in ‘selling’ its policy. But let me examine each of these  claimed objectives in turn, asking in each case whether, from an economic perspective, the carbon tax is a ‘good policy’ to achieve the objective.

First, if the objective is political (i.e. an attempt to placate the Greens) or moral (i.e. an attempt to placate a higher being or meet a non-economic imperative) then fine. Time will tell whether or not the policy is successful politics. And future generations will judge the morality of our behaviour. But there is no economic basis for me to determine whether the carbon tax is good or bad policy as these objectives are not economic.

If the objective is the reduction of domestic carbon emissions, regardless of the rest of the world, then the policy is pretty bad from an economic perspective. It leaves out the transport and agricultural sectors that are two of our highest emitting areas. As it is not comprehensive, it will not lower domestic emissions at minimum cost.

If the objective is to ease our transition to a low carbon future (which will occur when the rest of the world acts), then the tax may be good or bad economic policy, but there is far too little evidence to justify a definitive conclusion. It is far from clear when the rest of the world will act and it is not obvious that the cost of transition is lower if we act today rather than wait until the future is ‘clearer’. So, at best, the policy gets a big question mark under this objective. If in hindsight it appears to be good economic policy, this will probably reflect luck more than anything else.

The final three objectives are all essentially variants of a theme – the objective is global emissions reduction. If this is the objective, then I think the carbon tax is bad economic policy.

If the policy is meant to achieve its objective by somehow influencing the rest of the world, then, at best, its mechanism is unclear. The idea that the world will somehow ‘follow our lead’ is Australian-centric egoism. Joshua has discussed this before. His key argument still stands. There is little if any evidence that a unilateral action, such as the carbon tax, by Australia will influence world decision making. While we actually managed to get a lead article in the Economist and mentions in other international media outlets, a quick look at the international media shows that our carbon tax ranks well below Murdoch, Greece and US debt in terms of coverage.

As to the n-player (repeated) prisoners’ dilemma, if someone can show that our playing a ‘dominated’ strategy today will uniquely lead to a Pareto superior equilibrium tomorrow, then they have a top publication ready to go. (Please note I want uniqueness – it is easy to show that this could be an outcome – but so could the rest of the world continuing to do nothing.) Again the problem is that the mechanism by which the policy will achieve its global objective is completely unclear.

But I don’t want to be negative. Let’s take the objective of reducing global emissions as reasonable and ask what Australia could do to achieve this objective. Given that we are small and internationally politically impotent, the best way to achieve a global solution is to join up with a large country (or group of countries) that may actually have an influence. But on this basis, there is only one working policy at a global level – the European emissions trading scheme. Yes – it has many flaws. But it is the only global grouping at present that is making a difference.

So, if you want to pursue the objective of globally reducing carbon emissions, here is my suggestion: lobby the government to change its policy from a carbon tax to one where it enters negotiations with the EU in order to join its emissions trading scheme. That might, at least, be a mechanism to achieve the objective.

 

21 Responses to "The objective of the carbon tax."
  1. ‘There is little if any evidence that a unilateral action, such as the carbon tax, by Australia will influence world decision making’ – This depends on the definition of ‘influence’. Australia doesn’t have to directly and independently ‘influence’ the US/China to have a positive impact (in the sense that countries are more inclined towards taking action ex-ante) on the global climate change debate. Take for instance our neighbours next door. Since our credible gestures towards taking action a debate is being generated across the Tasman on whether NZ should raise their carbon price to match ours. Of course even if NZ matched our carbon price, this will do little to change the status quo on the quantity of carbon emitted to avert climate change (at least directly anyway) but this is an example of ‘influence’ that a credible political commitment can generate. This ‘influence’ isn’t quantifiable but it exists and is observable. I don’t have any journal articles to back my assertions but I think symbolic credible political commitments to taking action will generate positive feedback (in the mathematical sense) so that over time it can lead to an ‘equilibrium’ where all the countries that matter credibly commit and then the real horse trading can begin. Stephen you’re quite correct that the mechanism of ‘influence’ is unclear but politics isn’t an (nearly) exact science like physics (nor is economics for that matter). 

    Secondly, I don’t believe how much emissions we commit to cut right now is all that important so long as it isn’t absurd. You need to get all the parties to the table in the first place before you can start any horse trading and that is what political acts like legislating carbon tax are intended to signal, that we are actually serious about negotiating the share of emission cuts. The ‘how much’ can be worked out once everyone is at the table.

    On the economic merits of the climate change policies proposed by the respective parties? Well, economists are better positioned to answer that than anyone else but if you believe in climate science and doing something about it then you have to realise the political battle has to be won otherwise the economic merits of various policies will be moot.

  2. The tax is a short-term precursor to operating an ETS. Under this ETS international trade in permits will be allowed. How does this differ from your proposal to join the European ETS? If we joined Europe there would remain the substantive issue of the size of emission quotas and consequent carbon charges.

    And why introduce this wrinkle at this stage of the debate? Isn’t it hair-splitting?

    The claims that we leave out the transport sector is dubious because we currently impose a 38 cent excise on fuels per litre that can be regarded as an environmental proxy. A $25 carbon tax would add about 7 cents to that. The agricultural sector is a tough one because of the high costs of measuring methane and nitrous oxide emissions and because of difficulties of computing net emission impacts. Agricultural offsets of carbon emissions are possible and will contribute something. Concentrating on carbon emissions generally makes transaction cost sense given the concentration of such emissions in the power sector.

    Ken Henry’s remarks on the proclivity of economists to nitpick come to mind. It’s important to take action to address the most serious environmental issue the world has faced. Australia should do it’s share of the adjusting.

  3. I’m loathe to leave a comment as I am not nearly as articulate as the commentators and the original poster, but I have been spending some time overseas and I just thought I would lend weight to the argument that Australia’s carbon tax policy is not having much influence overseas.

    Articles on the carbon tax are buried in the middle and back pages of papers periodically. If anything, the news I am seeing is talking about the political toll that the carbon tax plan is having. It’s more a warning to other governments than a rallying call. Interestingly as well, Canada’s finance minister Jim Flaghtery (sp) denounced any carbon tax as disasterous.

    Everyone likes to say that Abbott’s alternative is worse than Gillard’s but I think its clear that its only posturing so an alternative can be presented, and not an honest policy proposal. And didn’t this debate start as a carbon price and Abbott turned it into a carbon tax? 

  4. HC
    You miss the key point. Of course we can have our own ETS. But if the aim is to influence global emissions then there has to be a causal link between our behaviour and the actions of other countries. A domestic scheme provides no link.
    I believe that we have a better chance of international influence if we join a larger coalition. 
    So the choice seems clear. If the objective is global emissions reduction, designing our own ETS is unlikely to have any effect. Joining the European ETS slightly increases the chance that this becomes a global solution – so at least has a chance of achieving the objective.

  5. Another way we can influence world opinion is by showing that carbon pricing works.
    Most of the anti-tax arguments are scare stories predicting an economist disaster. By demonstrating that carbon pricing is no big deal we can undermine the anti-pricing arguments in other countries.
    Down the track I like the idea of linking our ETS with the Europeans. Together we could start imposing punitive carbon tariffs on high-emitting trading partners, which would be a pretty strong incentive.

  6. Hi Stephen,

    Thanks for reengaging the debate. I remain unconvinced. You have identified 7 overlapping objectives, and putting a price on carbon will likely contribute (to various degrees, I grant you) to all of them!

    I suspect that you are adopting a very different premise to many of the commentators. The omission of important sectors is certainly unfortunate. Your argument then is that the carbon tax, so constructed, is bad economic policy. If this is your premise, then fine. I suspect many of your readers are taking on board the political climate and using as a basis for comparison the absence of a carbon price in Australia for the foreseeable future. This is certainly the way I think about it.

    Relating to the repeated prisoners’ dilemma, I think you are harassing a straw man by insisting on uniqueness. If we required uniqueness when thinking about the repeated prisoners’ dilemma, we could do away with many of our anti-trust laws! OK, that is a little glib, but I think you are being a little tough in requiring certain global influence as a benchmark for success. A carbon price is cheap, it will help us meet our emissions targets, and it *may* have some influence in future international discussions.

  7. Stephen, have you actually read the Clean Energy Future policy document?
    International linking, including with the EU ETS, is explicitly part of the policy, once the fixed price period has ended.
    Read Table 8 (pages 127 and 128 of the PDF).
    If I understand your argument about the prisoner’s dilemma, you are asking for a guarantee that Australia’s actions will lead to a better global outcome.  If that is your basis for decision-making, you’d never get out of bed in the morning – there’s always the possibility that you’ll trip, fall, and break your leg on the way to the bathroom.

  8. Really Stephen. You are a great economist but it shows when you stray outside of your area of expertise. There are very good reasons for both transport and agriculture to be excluded in the short term. First, through existing excise, the fuel already carries a very high implicit carbon price. Indeed, that is why, in the original CPRS proposal, transport’s inclusion was to be matched by offsetting reductions in fuel excise. The most important first step is ensuring that the stationary energy sector (the largest emitter), which currently faces no carbon price, does so. As for the agricultural sector, you should read the documentation in Rudd’s green and white paper documents (as well as other associated inquiries) about how the complexity and administrative cost of including agricultural emissions means that it makes sense to exclude it from schemes until the sector can be included more cheaply. When embarking on a pricing mechanism there are a host of tradeoffs to consider, but just because every sector is not included in the short-term does not make it bad policy from an economic perspective.

    As for your comment about the EU ETS. As other commenters have noted, we will link in the future. But as for joining formally, that would be crazy given that we have no say in the governance and construction of their scheme. So why on earth would we want to join a scheme that we cannot influence? And how would that go over in the domestic political debate? 

  9. Those objectives all look pretty complementary. But I think the big problem I have with your stance is that it implies the choice is between the government’s scheme and some ideal scheme (the exact nature of which will probably depend on which of the 7 objectives is chosen). A more realistic stance is that the choice is between this scheme and no scheme (or the Abbott scheme, which is more or less the same thing as no scheme). Is the status quo really superior to the government’s scheme if the goal is to reduce Australia’s emissions? 

  10. Hi Stephen – thanks for your articles on this matter.
     
    There is one dilemma with all 7 objectives, and that is that, the ultimate ‘pay-off’ is justified.
     
    The scenario I would pose against the ‘pay-off’, is that a natural disaster takes place, regardless of a moral, political or economic imperative.
     
    If this said ‘disaster’ takes place – what is the human ‘price’?
     
    I pose 3 options: 1) All or most die, 2) All or most live, 3) Nothing
     
    1) becomes the Revelation incarnate.  But, we won’t know it did.
    2) becomes the Darwin approach, in that natural selection kicked in and the human species adapted somewhat uniformly
    3) becomes the control. But, we continue on.
     
    Considering these options, and factoring out our ego of wanting to ‘live forever’, where does a carbon tax, an ETS etc., reside?
     
    Outside of the 2 certainties of ‘life’ (‘We live’ and ‘We die’) we are left with the only other ‘certainty’ – taxes.
     
    What is evident, is that we have a foreseeable rise in welfare demand.  People are living longer. With ‘baby boomers’ transitioning out of work participation and onto forms of our social justice agenda, the Government is looking down the barrel of lower tax receipts and higher welfare payments. Is it any wonder that we have this continuous chatter of MRRT or ETS (or even Death Duties)?
     
    This is why I tend to lean towards the view that this tax isn’t at all about reducing carbon dioxide equivalents, but about a more broad-based social or taxation agenda.
     
    Let’s not forget A.Birk’s conclusion in “Evolution of Continuous Degrees of Cooperation in a N-Player Iterated Prisoner’s Dilemma” that ‘Justified Snobism’, a form of altruism where an actor would do just a little more than average (to sate his self-preservation desire with the moral community objective) was evolutionary stable, meaning that no one will do less than average, but may do just a little more (for that superiority complex!). The takeaway of this, is that we will tend to the average on the positive-outcome side. Though in the iterative process, average will tend to be sought & found.  This moral imperative is why the Government is running this message.  It hopes it catches on, as part of the cover for the real ‘objective’
     
    The moral hazard with all this, as always, is that Pigs will be Pigs!  Now, where is Squealer when I need him??

  11. Hi Stephen. I have a Machiavellian inclination. My take on the carbon tax is that, once in place, application will be made to the WTO for an additional trade barrier based on carbon abatement. That should give Australia a 5 year gap on imports, with all that that entails. Best Regards   Richard.

  12. Several people have suggested that transport is include because of the 38c fuel levy. Yes, this means our private motor vehicle travel is taxed, but this levy is not paid by heavy vehicles over 4.5 tonnes.
    Heavy vehicles used on the road have part of the levy rebated to them, the rest is a notional road user charge based on allocatable costs. Heavy vehicles that don’t use the road (such as those in mines and on farms) have the full excise rebated to them.
    Trains do not pay the excise either.
    The CPRS would have included this part of the transport sector (essentially all freight transport). The CPM does not.
     

  13. I was going to add my bit, but three impressive comments from hc, LO and Roger Wilkins have done far better than I could.

    On my reading your line has been politely but comprehensively refuted, Stephen.  My humble suggestion is you think again.

  14. I think Stephen’s post is a good illustration of how the perfect becomes the enemy of the good. Public policy is messy and getting any sort of pricing mechanism at all has been hard work. If we wait for the perfect scheme, then we will be waiting a long time. This scheme is not perfect. Neither was the CPRS. Their main value will be to start to price the externality and demonstrate to the public that pricing is not the disaster the coalition make it out to be. The scheme will be amended and improved over time (assuming it is not repealed). I suspect the main thrust of Stephen’s critique is really just a variant of the dominant one in parts of the conservative press. That it doesn’t make sense for Australia to begin abatement until more competitor countries do the same. The problem with that is that every country can make similar arguments and it ultimately gets us nowhere in confronting climate change. Perhaps think of what Australia is doing as making a small step down the road of abatement (far deeper cuts will be required in the future) that will have the benefit of being able to be ramped up much more quickly if and when more other large emitters take more steps of their own.

  15. The Economist seems to be far better at selling this policy than the Government, and that’s not even their objective.  For example, the Government should really have been using this potent line already:
    It is better to tax pollution than work or saving.

  16. On objective 3, could we see it as a form of constrained optimisation: in this case the constraints are political.

    As another poster alluded to, is this better than doing nothing (or other alternative options) – is this a good way of reducing domestic emissions subject to the political constraints (if we accept that including transportation, agriculture were not viable options politically in the short term)?

  17. Sam: On page 29 of the govt. Climate Change Plan document it explicitly states that ‘the govt. intends to apply a carbon price to heavy on-road transport from 1 July 2014’. It also says rail transport and ‘off-road transport use of liquid and gaseous fuels’ excluding use by fishery, agriculture, and forestry is also covered by a carbon tax indirectly so presumably that would include mining industry as well.

  18. The real question is ‘why do we need a carbon tax’. Everybody says to ‘save the environment’ but personally I think people are grossly overestimating our influence on the world. When I was in primary school, I would hear about how dangerous global warming is and that in 20 years the sea level would have risen a couple of feet and be a couple of degrees hotter. Guess what? It hasn’t, not even by a measurable amount. Most importantly even if these things had occurred the earth goes through these fluctuations on a continuous cycle and would occur anyway even if we do contribute to them.

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