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It's Supposed to be Painful

May 1, 2009, 11:51 am

Megan McArdle points out the real problem that carbon taxes and other CO2-abatement approaches have -- they only really work if it they are painful.  I mean, the whole point is not supposed to be to raise government revenue or just arbitrarily raise prices.  The whole point is to change behaviors, and the most powerful tool for behavior change is price changes.

Global warming activists are talking about 80% CO2 reductions.  This is an enormous number, especially since the relative cut has to be even higher to account for future growth, as reductions are generally pegged to current (or as in Kyoto, past) CO2 emissions levels.

A 40-cent gas tax is not going to do it.  Or, looking at how much behaviors changed when gas prices recently went up to $4, a $2.00 gas tax is not going to do it.  The Europeans have $6+ gas taxes and that is not enough to reach the levels activists want for this country.   It is likely going to take $10+ gas to even start to get the reductions in use and the shifts to much more expensive carbon-less technologies that would be required to hit 80% type goals.

All this means that we are NEVER going to have a carbon tax that really reflects the necessary rates to hit the emissions targets Obama and the alarmists claim to be committed to.  That is why we will get backdoor taxes that try to hide the tax and shift the blame away from Congress.    But none of these schemes, including cap and trade, will have any meaningful impact unless they lead to consumer price increases that change behaviors of the end users**.  But these approaches are preferable to lawmakers, as they somewhat disguise the relationship between legislation and prices, and give them some ability to blame private companies for the price increase, even where these increases are the inevitable result of carbon caps.

Postscript: This is further complicated because the major technologies the government is attempting to subsidize as part of meeting these goals are virtually useless.  Two in the transportation sector - ethanol and electric vehicles - are of questionable merit.  Ethanol has about zero efficacy in reducing Co2, and may actually increase it (but it is essential if one wants to win the Iowa caucuses).  Electric vehicles have some potential, but their impact is dependent on how electricity is generated.  Based on the current mix, shifts to electric vehicles just shift emissions from one place to another without much net reduction.  If someone were to propose a massive nuclear and electric vehicle program, they might convince me they were on to something.

**PS#2: I suppose you could reach these goals without fuel price increases.   Two alternatives:

  • Mandate certain transportation and other technology solutions, as well as certain limits (e.g. maximum house size, maximum number of TV's, etc).  This still has cost, though, in terms of enormous losses in personal liberty as well as likely enforced higher costs of major purchases, like cars.  So this is still likely a price increase, it just shows up in a different place.  Also, this may well not work -- there is very good evidence that without price changes in fuel, consumers react to higher MPG in their cars by driving more, thus sibstantially dilluting the carbon effect.
  • Enforce carbon limits combined with price caps on fuel and electricity.  This would be effective, probably, but of course would result in massive shortages of gas and electricity.  The rationing challenge would be enormous.
Tags: , ,
Category: Climate, Economics, Energy
  • Rolo Tomasi

    Master Resource has posted an excellent speech given by Questar's CEO. It rather succinctly summarizes much of the energy issues.

    http://masterresource.org/?p=2214

    Money quotes:
    "It’s not about will. It’s not about who’s in the White House. It’s about thermodynamics and economics."

    "Question: when was the last time Utah’s carbon footprint was as low as 2.2 tons per person per year? Answer: probably not since Brigham Young and the Mormon pioneers first entered the Salt Lake Valley (1847). "

  • Brian

    Don't forget the third option: "Buy" one of the big three auto makers with tax dollars, write legislation to put the remaining competition out of business, then offer a national light rail boondoggle as a solution to the limited choices in the auto market.

  • Eugene Kirkman

    Fred Smith, the patriarch of Fedex, stated recently that he believes high gas prices precipitated, or helped precipitate, the current crisis. People, says he, were forced to choose between getting to work in the morning or paying, say, the mortgage. It's not that folks were paying an extra $1000 a month in gas, but with funds tight, the extra hundred or so they WERE paying put them behind on other things. Thus his theory that $4/gallon gas brought the whole economy down. True or not, high fuel prices hit long-distance commuters hard and forced them to make difficult sacrifices.

    BYW: I LOVE this blog. What great postings and comments. Just outstanding.

  • Fred from Canuckistan . . .

    One of my favorites is if the political greenie crew were REALLY interested in reducing CO2 they would be insisting on a 55 mph hard cap speed limit and huge tax increases on devices like clothes dryers - machines that use huge amounts of electricity that is often made for CO2 spewing coal.

    But they know that in addition to pain, voters don't like inconvenience, so they don't touch this third rail of eco-politics.

  • Dr. T

    Our politicians don't give two shits about reducing CO2 production. They care only a little for the tax dollars that will be generated by cap-and-trade. What they do care about is the extra political power cap-and-trade gives them (which correlates strongly with increased lobbying efforts and all kinds of bribes).

    So, while consumer costs skyrocket and we feel much pain, our politicians will be collecting tens of millions in bribes and gifts and will feel no pain. Ain't our democracy great?

  • Scott Wiggins

    Not mentioned enough is the fact that China, India, Russia, Africa and the rest of the developing world have absolutely no intention of joining in our intitiatives. In fact, they will be happy to gain more competitive advantage over US companies as we insist on tilting against the global warming windmill. This is an unforced error that Obama and his legions of cretinous counterculturalists intend to inflict on Americans.

  • Bob Smith

    You don't need price changes if you implement direct rationing, as was done in WW2.

  • LJB

    Article by David Booth in yesterday's National Post (Canada) pointing out that there may be a problem with the supply of lithium. Lithium of course is the main ingredient in the production of batteries for the planned electrical car. No lithium, no electric cars.

  • Bryan

    Direct rationing certainly would cause prices to go up, unless you're willing to enact price controls along with them. Both actions would be a pretty direct intrusion on American's daily lives. Direct rationing has all sorts of nasty side effects and complications. Even with price controls, rationing will increase the cost to consumers.

    Question: How do people with longer commutes get the gas they need? Answer: They buy ration stamps from someone who doesn't need them. Price goes up.

    To say that you can reduce supply (rationing) without having an impact on price shows some incredible hubris, or at the least a lack of basic understanding about economics.

    Polititions are unwilling to enact a direct carbon tax because it is visible to the average voter. They prefer Cap and Trade schemes because their effects are not easy for the average person to trace back to the government, and because Cap and Trade is more complicated and allows them to pander to interest groups. Rationing would be far more visible to the the average voter than even a direct carbon tax.

  • Sam L.

    And then there's the fact that many of us distrust Congress--how will they spend those extra billions coming in? And they will spend it. It won't be used to reduce debt.

  • Phil

    Coyote, I do not think a Carbon Tax would work. To get the 80% reductions greenies want, the tax would have to be incredibly high (>400%). These high prices would create an enormous black-market in cheap gasoline; it could likely dwarf the market for drugs. However, I don't know that much about the oil business, so I don't know if oil can be extracted and refined both clandestinely and cheaply enough to be worth the risks.