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Carbon Pricing

Published on January 16th, 2018 | by Steve Hanley


Carbon Fees & The Mystery Of The Untaxed Negative Externality

January 16th, 2018 by  

Unless you went to college to study economics, you have probably never heard the phrase “untaxed negative externality.” Elon Musk was the first person to use it in ordinary conversation during a presentation at the Sorbonne in Paris just prior to the COP 21 conference in 2015. Basically, the concept involves getting someone else to pay a portion of your costs of doing business. Musk referred to it rather dramatically as “the turd in the punchbowl” when discussing the wisdom of making fossil fuels the basis of the global economy.

Untaxed Negative Externality Explained

untaxed negative externality and climate changeQuora contributor Antong Liu tackled the untaxed externality concept in a way that was open and honest. Anyone who is interested in reducing carbon emissions could learn a valuable lesson by reading it. Here it is in its entirety.

Fossil fuel companies are making profits by taking something that isn’t theirs (the well-being of the planet) without having to pay for it. A carbon tax puts a dollar amount on how much they have to pay if they’re harming the environment. The “untaxed negative externality” that Elon Musk is talking about refers to the fact that there are no consequences for the continued use of fossil fuels, even though they are known to cause harm to the environment.

Let’s examine the phrase word by word, starting with “externality.” An externality is a cost or benefit that affects somebody other than the decision maker. In a very simplified view of economics, people will only make choices that result in a benefit to themselves that is greater than the cost to themselves. Therefore, externalities are costs and benefits that are not factored into whether a decision is profitable.

The “negative” part means that the externality is one that is harmful rather than beneficial to those affected. The carbon emissions and the resulting global warming are negative externalities because their costs to the environment are detrimental, but indirect and gradual. Somebody trying to raise the bottom line today can gloss over what might happen thirty years later.

Here we come to the last word: “untaxed.” Note that this is referring not only to taxes, but any form of financial deterrent such as fines and penalties. When an externality has no tax nor associated damages, they remain externalities that do not discourage an action. Carbon emissions are considered untaxed because there is no additional cost to creating them. This is exactly why people continue to use fossil fuels at an unsustainable rate – there is no economic reason for them to move away. When they use fossil fuels, their gains exceed what they consider their costs.

Now consider the alternative: taxing this negative externality via a carbon tax. Since the free market is too slow (or perhaps downright unsuitable) to create the appropriate economic pressure, governmental regulations must be imposed to realize the cost of using carbon. In effect, the government needs to put a numerical value on just how bad it is to continue using fossil fuels.

A carbon tax – an actualized penalty for releasing carbon into the atmosphere – will make the continued usage of fossil fuels less profitable relative to renewable energy. Only this sort of economic pressure will be strong enough to move us away from fossil fuels fast enough to avert disaster.”

Framing The Argument

Language is critically important when discussing ideas. See the fascinating book Don’t Think Of An Elephant by George Lakoff for more on this subject. It reveals in exquisite detail how Republicans win support for their anti-human ideas by wrapping them in terms that evoke a strong emotional response. The term “climate change” itself is a Republican repackaging of “global warming,” a concept they think sounds too scary and might actually motivate more people to get involved in the fight for earth justice.

How one defines the terms of the debate can often play a large role in how the debate gets resolved. The word “tax” has strongly negative connotations for virtually every human being. Nobody wants to pay a tax. Not now. Not ever. Yet progressives insist on calling any plan to make fossil fuel companies pay for the damage they do as a “carbon tax.” That’s a non-starter right out of the gate.

Anyone who puts forth a way to confront the untaxed negative externality conundrum is committing political suicide by labeling the idea a “carbon tax.” Why not call it a “carbon abatement program” or an “environmental enhancement opportunity”? An untaxed negative externality is when your neighbor pipes the outflow of his septic tank onto your property and expects you to pay to clean up the mess. If you do and send him the bill, is that a “tax” or a means of putting the financial burden where it belongs?

Carbon Policy Initiatives In Washington And Massachusetts

Politicians in the states of Washington and Massachusetts are starting off the new year by making carbon tax proposals. Washington’s governor Jay Inslee used his annual State of the State address to call for a carbon fee on fossil fuels. The fee would begin at $20 a ton and be adjusted from time to time to keep pace with inflation. The plan would align Washington with California and British Columbia, both of which have a plan in place to reduce carbon emissions within their borders.

The carbon fee is expected to bring in about $750 million a year in revenue, money that would be earmarked for carbon emissions reduction programs throughout the state. Provisions would be made to lessen the impact the fee would have on certain industries such as agriculture and on low income residents of the state. “We don’t have to invent the rocket ship here,” Inslee told the press. “This is not the first time this has been done.”

Republican leaders in Washington are outraged. House Minority Leader Dan Kristiansen told the Spokane Spokesman-Review that the governor’s plan is “extremely tax heavy and policy short.” He said Republicans want to institute policies to reduce carbon pollution without a tax increase. Speaking of policy short, Kristiansen offered no clue as to what those policies might be, but you can rest assured they involve adding no financial burdens to the shoulders of fossil fuel companies.

In Massachusetts, State Representative Jennifer Benson has introduced legislation that would impose a fee on fossil fuels, according to The Drive. “My carbon pricing bill establishes an initial fee of $20 per ton on carbon dioxide that increases to $40 per ton over four years,” she says. “The fee would be paid at the point of purchase of fossil fuels. This means it would be paid when you fill up your car at the gas station, when home heating oil is delivered, and when you get your monthly gas bill.”

“When it comes to cars, burning a gallon of gasoline produces 20 pounds of greenhouse gas, because the carbon combines with oxygen in the air to form carbon dioxide. This translates into approximately 16-18¢ per gallon of gas. For perspective, the current federal gas tax is 18.4¢, and the current state gas tax is 24.3¢.” In other words, Massachusetts residents would pay about 20 cents a gallon more for gasoline.

Similar legislation has been introduced in the Massachusetts Senate and is supported by local organizations such as ClimateXChange, which raffles off Tesla automobiles and other green energy products to support its lobbying efforts.

The Cost Of De-Carbonizing

De-carbonizing the environment is going to be expensive. Mitigating the harm that has already occurred and reducing the damage fossil fuels will do in the future will cost trillions and trillions of dollars. Everybody wants to do something about carbon emissions (except Scott Pruitt, of course) but nobody wants to pay for it. Asking people if they want to pay a tax to help out is like asking if they would like a colonoscopy.

Addressing climate change is vitally important as the world approaches its existential moment. Environmentalists must stop shooting themselves in the foot by calling their plans “taxes.” It’s not always about what you say. More often than not, it’s about how you say it. The city of New York is now asking the courts to make ExxonMobil pay for the damage it has caused and will continue to cause. That could be a very effective way of taxing the negative externalities the fossil fuel industry has enjoyed for almost a hundred years.

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About the Author

Steve writes about the interface between technology and sustainability from his home in Rhode Island. You can follow him on Google + and on Twitter.

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