Well Done – Entirely, And Totally, Misunderstanding Canada’s Carbon Tax

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There are things not to like about Canada’s new federal carbon tax. For example, any concept of federalism or provincial power rather dies when the Feds insist that they’ll do what the locals have decided not to. We might also want to insist that climate change isn’t a problem, carbon emissions don’t cause it and it’s not us humans anyway. However, within the constraints of what people believe, that it is, they do, we are, it’s a great solution.

People are doing something which has benefits to them and costs to third parties, great, slap on a Pigou Tax – preferably revenue neutral – at the social costs to those third parties. Thus only those actions which have benefits greater than the costs will happen, those that have costs greater than benefits will not. We’ve just maximised human utility and as long as we’ve got our discount rate correct we’ve done so over time as well. Sure, we’d all prefer that we all lived without imposing any costs on anyone at all but welcome to the real world of trade offs.

No government action is ever perfect but this is pretty good.

Greenhouse Gas Pollution Pricing Act

Some people don’t understand the basics here though. This is a generally excellent piece by Tristin Hopper.

It’s overwhelmingly reasonable to assume it will cut emissions
Everyone hates taxes. We write off our cats as dependents to avoid taxes. Entire Caribbean economies are kept afloat because people hate paying taxes. Some hotheads even start revolutions against the British to avoid taxes. One of the key principles of a carbon tax is that by slapping a premium on fossil fuels, you spur people to avoid those fossil fuels in order to dodge the tax. It’s the exact same principle by which raising the minimum wage is known to spur job losses: When labour becomes more expensive, businesses use less of it. Granted, gasoline isn’t like strawberries: You can’t just cut it out of your household budget if it gets pricey. But in the long term there is plenty of precedent to show that when gas is expensive, people find ways to buy less gas. Just take a look at a European highway. The average U.K. gas price is $2.20 CDN per litre and the country is filled with tiny, fuel-efficient cars. The most popular vehicle in Canada right now is the 6,000 pound Ford F-150. The most popular vehicle in Britain? The 2,500 pound Ford Fiesta.

Nicely done. There is a small lean toward error that creeps in here though:

Yes, it won’t meet the Paris targets
If a carbon tax was the only climate change policy Canada ever implemented (and it’s not), $20 a tonne wouldn’t come close to meeting its Paris agreement target of reducing emissions by 30 per cent below 2005 levels by 2030.

The answer being it’s not supposed to. The Guardian of course makes the error itself rather than just mentioning it:

This is a somewhat modest carbon tax – after all, the social cost of carbon is many times higher – but it’s a higher carbon price than has been implemented in most countries. Moreover, a carbon tax doesn’t necessarily have to reflect the social cost of carbon. The question is whether it will be sufficiently high to meet the country’s climate targets.

It’s not supposed to meet climate targets. What the target should be is emergent from the application of the carbon tax.

Conceptually we could have two methods of dealing with this. Set a temperature target, work back to an emissions plan and pledge to do that at whatever cost. This is what Paris does and it’s the wrong approach.

We could also work out what the costs are, be willing to spend up to that to avoid those costs, and see what the temperature comes out as. This is the correct approach.

For note what we’re trying to do – maximise human welfare over time. That means we do not want to pay any price to avoid any level of warming. There really are people out there insisting that we should ban all use of fossil fuels yesterday. At which point 6 billion people die and everyone left and their descendants gets to live as medieval peasants until the end of time. This is too high a price to pay to avoid a bit of coral bleaching. Note also what the assumption of a temperature target insists upon – we’ve weighed the costs and benefits of a temp rise and decided that they balance at this temperature point. But if the costs of reaching that target change then obviously, logically, the temperature we aim for changes. This is why the concentration upon the costs is the right way to go in the first place.

That’s exactly what the tax does – imposes upon emitters the costs of their emissions. Yes, entirely true, we don’t know what the temperature rise that results will be. But that’s the point. The correct temperature is emergent from the system of everyone balancing the costs and the benefits.

That is, we simply do not know what the correct temperature should be in order to maximise human welfare. Thus we’ve got to use the only tool we have – markets and the entire economy – to do the calculation for us. We don’t know what the societal utility function is – that aggregate of all personal utility functions – and so have to use a different method. The only one we’ve got is markets plus a Pigou Tax. The temperature is an outcome of this process. We’ll find out what the right amount of climate change is once we’ve priced emissions properly.

Thus the complaint that a carbon tax doesn’t meet a temperature target is nonsense. For it’s not supposed to, not designed to. We shouldn’t even have a temperature target in the first place. Stick on a carbon tax, wait, and we’re done.