Published on August 28th, 2019 | by Steve Hanley0
It’s The Economics, Stupid! The Case For Carbon Fees
August 28th, 2019 by Steve Hanley
Researchers at the Carnegie Institute For Science and the University of Waterloo were curious how placing a price on carbon emissions would impact the effort to keep average global temperatures from rising more than 2º C above pre-Industrial Revolution levels. Surprise, surprise! They found putting a price on carbon would lead to greater innovation and energy efficiency. The results of their research have now been published in the scientific journal Joule.
“It has long been theorized that raising carbon prices would provide an incentive to reduce emissions through energy efficiency improvements,” explained lead author Rong Wang. “So, we looked to history to determine how cost increases have affected energy use efficiency in the past.”
The researchers developed their own version of the productivity model created by Nobel Prize-winning economist Robert Solow. According to Science Daily, they found that when the cost of energy comprised a larger fraction of the cost of production, new ways were found to reduce energy use or to use it more efficiently. Rong and his colleagues asked what would happen if these historical relationships between energy costs and efficiency improvements continued into the future. When this dynamic was continuously in play, according to their model, by 2100 energy usage would be reduced by up to 30 percent relative to simulations where this dynamic was not considered.
“Other studies have examined how taxing carbon emission would drive innovation in renewables,” explained co-author Ken Caldeira. “But we show that it would also lead to more efficient consumption of energy — not just by getting people to use better existing technology, but also by motivating people to innovate better ways to use energy. This means that solving the climate problem, while still hard, is a little easier than previously believed.”
Don’t Call It A Carbon Tax!
The researchers have made one glaring mistake, however. They refer to any price on carbon as a tax. Poof! Any support for the idea just evaporated into thin air. Who wants to pay taxes? Anybody? Did anyone notice in 2017 the US Congress went into a paroxysm of tax reduction mania to pass a trillion dollar tax cut for America’s wealthiest people? What did you get out of it? Chances are 9,999,999 to 1 that you got bupkes, a Yiddish word politely translated as “nothing” but which may be derived from the Polish word for “goat dung.”
The word “tax” means different things to different people. To you and me, it means sending money to the government, but to an economist, it means something completely different. Economists use it as a term of art — part of the jargon they have developed to convince ordinary people they need to hire economists to explain what other economists are saying. To an economist, “tax” and “cost” are synonymous.
Let’s take an example. Your neighbor backs up truck loaded with goat dung and dumps it on your land. His action lowers his costs because he doesn’t have to pay someone to accept the dung but it imposes a cost on you because now you have to hire someone to clean it up. Fossil fuel companies have been pulling this con for more than a century by dumping the dung created by extracting and burning fossil fuels — carbon dioxide, methane, nitrogen oxide, and fine particulate matter — into the environment we all share. Now we have to pay the cost of cleaning up their mess.
Is that fair? Of course not. Apologists for the industry point out that we have all benefited from their nefarious scheme by using electricity, buying cars, and consuming the products of the global economy like there is no tomorrow. It’s our fault, don’t you see? They only did what they did because we demanded it!
But what it really amounts to is privatizing the profits and socializing the costs. Conservatives today scream long and loud about socialism, but they have no problem with it when it benefits them. How about that? Can you say “two-faced,” boys and girls? Yeah, we knew you could.
A Modest Example
The proof of what the researchers are telling us is an examination of how taxation affected the development of the automobile industry. From the beginning of the internal combustion engine, European countries put high taxes on gasoline and diesel fuel. In the US, the taxes were much lower. In response, the auto industry in Europe relied on innovation to produce highly efficient engines.
Overhead camshafts, fuel injection, and multi-valve cylinder heads all originated in Europe because fuel was expensive and making it go as far as possible lead to higher sales of automobiles. Smaller, lighter cars with highly efficient engines and manual transmissions became the norm.
In the US, efficiency was less important because gas was cheap and so larger, heavier cars with slow turning, gas guzzling V-8 engines and automatic transmissions dominated the marketplace. Cheap gasoline came to be considered a basic human right. When OPEC turned off the oil spigot in the 70s, cars got smaller and lighter but no one ever suggested raising fuel taxes to the level considered normal in Europe. If they had, city dwellers and suburbanites in America today would not be using Stupid Duty pickup trucks to commute to work and drop the kiddies off at school.
Elon Musk Explains It All
One of the best explanations of all this economic mumbo jumbo was made to an audience at the Sorbonne in Paris just prior to the COP 21 conference in 2015. Watch the video of that presentation to see Musk lay it all out, chapter and verse, why placing a fee on carbon pollution not only makes sense but may be a prerequisite for preventing the Earth from becoming a lifeless cinder. The video begins at the point where Musk describes the economics of the renewable energy transition. Feel free to jump to the beginning if you want to see the entire presentation.
Given a choice between two equal products, most people will chose the less expensive option most of the time. We’re humans. That’s what we do. Economics may seem like a highly complex, super complicated field but it’s not. It’s about how people make choices and why.
The pollution created by extracting and burning fossil fuels causes economic harm. It makes people sick and shortens their lives. It will make it harder for all the species alive today to survive in the future. Yet the fossil fuel companies have conspired to buy enough political influence to rig the system so they don’t have to pay the costs associated with their activities.
They are the ones who call carbon fees “taxes,” knowing the predictable response will be, “NO! No taxes! Not now. Not ever!” A carbon fee is a no-brainer. It makes so much sense there shouldn’t be any room for argument. In short, the wisdom of using carbon fees should be intuitively obvious to the most casual observers.
Use the money generated to accelerate the transition to renewable energy and a carbon free future. Use it to provide financial assistance to those affected by higher gasoline costs. Use it to build more solar and wind and hydro and geothermal facilities. Use it to build a smart grid with lots of microgrids and battery storage. Use it to fix America’s crumbling infrastructure.
The researchers are correct. Placing a fee on carbon emissions would spur a frenzy of innovation. Who knows what wondrous new technologies might emerge as a result? According to legend, near the end of the year 1899, the head of the US Patent office remarked to a colleague, “Everything that can be invented has now been invented.”
The only people who oppose carbon fees are fossil fuel executives. That’s OK. It’s their job to worry about stranded assets and such. But the essence of capitalism is creative destruction. A carbon fee is a natural concomitant to that notion and would benefit all of humanity. The only reason not to do it is to protect the status quo.
For too long, the oil industry has benefited from a playing field tipped heavily in their favor. Isn’t it time to even things up so that everyone benefits and not just a select few? We don’t need science to tell us something so obvious. Make polluters pay today and watch the zero carbon future begin tomorrow.
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