Evidence That Bill Nordhaus Was Right About The Carbon Tax

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Or at least, evidence consistent with Bill Nordhaus having been right about the carbon tax. That is, that the effect happens over the capital replacement cycle, not immediately as a change in behaviour. For we’ve the results so far of that carbon tax in British Columbia:

Using difference-in-differences and a novel break-detection approach I show that the introduction of a carbon tax has not ‘yet’ led to a significant reduction in aggregate CO2 emissions in British Columbia, Canada. Despite the lack of detectable aggregate effect, there are heterogeneous emission reductions across sectors: the tax led to a reduction in emissions from transportation incl. personal vehicles (-5%), buildings (-5%), waste processing (-3%), and light manufacturing, construction and forestry (-11%). Introducing a new method to assess policy based on breaks in difference-in-differences fixed effect panel models, I demonstrate that neither the carbon tax, nor the carbon price and emissions trading schemes introduced in other Canadian provinces are detected as significant interventions in aggregate emissions. The absence of significant aggregate reductions in emissions is consistent with existing evidence that current carbon taxes (and prices) are too low to be effective.

As Tyler Cowen comments:

Since current carbon taxes are already not so popular, I don’t take this as especially good news.

Well, that rather depends. There are two main views about the carbon tax. Nick Stern proposed that it should be at the current social cost of carbon right now. So, maybe $80 a tonne. For people will change their behaviour in the light of the new tax. This doesn’t seem to be particularly true.

Bill Nordhaus instead thought more like an economist. We’ve got an awful lot of stuff already built out there that was created on the assumption of no carbon tax. Much of the cost of which is a sunk cost – it has no bearing on decisions about future use of that infrastructure. Therefore a carbon tax is going to be a very weak instrument to change current and immediately future behaviour. For people will still use that $1 billion old coal plant as long as the marginal costs, not average costs, make sense.

OK.

So, what we need from a carbon tax is something that doesn’t tax current emissions very much. Why impose such pain for no very great gain? But we absolutely want to insist that as that extant infrastructure comes up for renewal that it is replaced with not more of the same emitting technology but with non- or at least less- emitting such. Thus a low carbon tax to start, say $10 a tonne, moving to a much higher than social cost of – in his example at least – $240 some decades in the future.

That is, the Nordhaus view is that the carbon tax should be attempting to influence replacement decisions, not current consumption ones. On the grounds that current consumption decisions have too much baked into them from the technological choices made when we built everything. The change desired – and the lowest cost method of doing it – is to change the decisions about what we build in the future in that future when we come to rebuild it anyway.

OK, sure, this paper doesn’t prove Nordhaus right but it it is consistent with his recommendations. And it’s getting close to a disproof of Stern’s as well.