Attentive observers will have noticed several people on the extra-parliamentary ‘left’ proposing a carbon tax (also advanced by the Australian Greens and many on the right) as their preferred short-term measure to limit greenhouse gas emissions.
This has involved some or all of the following claims:
- tradeable emissions permits are a sneaky way to commodify the atmosphere, granting private property rights over a common resource;
- a secondary market in permits, and the inevitable permit-backed derivatives, will only enrich traders and idle rentiers;
- granting free permits to large emitters, or even conducting auctions, doesn’t provide enough revenue for the state to mitigate the effects of global warming, invest in solar and windpower, or compensate households;
- price instruments are usually the best way to correct market externalities like pollution.
Some of these are reasonable and helpful points.
But there are problems with a carbon tax, especially from what purports to be a left-wing perspective.
First, we don’t know the price elasticity of fossil-fuel usage (i.e. the precise responsiveness of carbon emissions to the tax-induced price rise). So at what level should the tax be set, if we want a given level of emissions? We could start with an estimate (say, $23 per tonne), then adjust the tax rate every year until we reach the desired level of emissions. But it’s likely to require several iterations to reach the emissions target; meanwhile international obligations (under any new protocol) aren’t met.
It may be objected that annual deviations from the target don’t matter; global warming depends on atmospheric concentrations built up over decades. But politics works on a different timescale, and no government is likely to embark on a year-by-year sequence of tax-rate adjustments.
A government serious about reaching targets must therefore set a physical limit to the volume of emissions.
Second, the tax is regressive, just like any fuel tax, VAT or poll tax. Even with some redistribution to households, it enriches the state bureaucracy at the disproportionate expense of lower-income groups. Carbon-tax advocates seem to consider this necessary to finance state investment in renewables, but that issue is separate from short-term abatement of CO2 emissions. (At any rate, income and asset taxes would appear better candidates.)
If one must (why?) choose a market-based policy, compatible with existing institutions, the best option seems to involve setting a physical cap on emissions, then dividing permits equally among the adult population, rather than issuing them (either through auctions or “grandfathering”) to existing coal and oil companies.
These rations would then be tradeable on a secondary market, allowing companies to purchase emission rights by paying ordinary citizens. This would allow a precise emissions cap to function, while producing progressive income effects. It would also make obvious the only fair basis for international agreement: equal per-capita emissions rights for every country.
These are, of course, short-term policy objectives. In what way might they serve as instruments for pursuing larger goals?
The Greens pay due respect in their climate-change pronouncements to the importance of ‘price signals’. But the problem of emissions reduction makes plain the desirability of economic planning in physical terms rather than market prices. Prices encode less information than the set of technical coefficients that make up an input-output model of the economy; the latter provides all the information necessary to form prices. So any calculation that can be done with prices can, in principle, be done in kind (i.e. with physical units).
An emissions target (so many tonnes of CO2) is easily incorporated as an additional constraint within a linear programming model, allowing planners to optimize final consumption and resource usage while ensuring the cap isn’t breached.