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Am I correct to say that carbon taxes are not a solution to global warming? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Michael Barnard, low-carbon innovation analyst, on Quora:
There is a belief that taxes (such as carbon taxes) are punitive or punishing, hence the misconception that carbon taxes aren’t part of the solution set useful for climate change.
This is a common misconception, especially in the USA where taxes have been demonized and cut for decades, and politicians bend themselves into all sorts of silly shapes to avoid putting a tax on something. However, it’s a false assertion.
Taxes are a necessary mechanism for governments to raise money for their actions. They are also a key lever for changing consumer and corporate behavior, along with regulations. In behavioral economics, there’s something referred to as induced demand. This is a directly observable behavioral trait of groups. If something is cheap, people will figure out how to use it and more of it will be used. You can see this with building new roads which become congested almost immediately and you can see it with dumping sewage into rivers instead of treating it where that is allowed by lack of regulation and penalty.
Taxes raised on cigarettes and alcohol have a long history of seeking the right balance of dis-incentivizing overconsumption of these health risk products while not overly incentivizing illegal creation of alternatives via smuggling and the like. It’s been challenging, but taxes on those substances have worked along with many other mechanisms to reduce the worst aspects.
Similarly, carbon taxes are not punitive, but shapers of behavior. Corporations tend to be more rational than individual humans, but over time behavior shifts to more rational choices in aggregate. Let’s look at a couple of examples.
- A couple are considering the purchase of a car, the second largest single expense most people have after their home. They want the most car for the money, they need to balance status with practicality, they need to balance her desire for an insanely fast corner carving beast with his relative timidity behind the wheel and the like. The price of gasoline and projected future price of gasoline is part of the conversation. A 20 mile per gallon car might cost a couple close to $1,600 in annual gas bills at $2.40 a gallon. A carbon tax might raise that to $3.00 a gallon which would increase their annual gas costs to perhaps $2,000, about $400 more. Meanwhile, a 50 mpg PHEV or a full electric car could drop their annual gas expenditure substantially. Filling up with electricity is half as expensive as filling up with gas at $2.40 a gallon on average in the USA, and closer to a third as expensive at $3.00. That means that buying an electric car might save them $800 without a carbon tax or up to $1,200 with a carbon tax. $1,200 is $100 a month. For most couples that’s material. They’re more likely to make a decision to buy a Chevy Bolt or a Nissan Leaf or a Tesla Model 3 instead of a gas car. They have a choice and are incentivized to make one choice over the other. This doesn’t penalize them, but it does shift behaviors to preferential ones.
- A company is establishing a factory in a region. Without a carbon price, the basic electricity from the grid is cheaper than the local green option by 1 cent per KWH. The company in that model will get the cheaper electricity even though it’s much more carbon intensive and even though the company might want to go green. With a carbon price, the negative externalities of the fossil fuel generation are loaded into the cost of electricity and the prices are equal or the carbon-neutral option is actually cheaper. The company makes the decision to buy the cheaper or same priced electricity that’s carbon neutral instead. And the company selling the carbon intensive electricity is incentivized to shift its generation mix away from coal to more renewables and some gas to stay competitive.
- Let’s say I’m planning a trip from Vancouver to San Francisco. I have a Tesla Model 3 and I’m debating driving vs flying with my wife. We have Autopilot for the boring bits, but twenty hours in a car even on the lovely roads along the coast is still twenty hours in a car over two or three days. The cost of flying is pretty reasonable without a carbon tax because of massive competition and efficiencies built into air travel. The cost of driving the Model 3 down the coast is pretty cheap because of Superchargers and electricity being cheap, but extra accommodations and the like have to be factored in. Let’s say it’s a bit of a wash without a carbon tax, but with a carbon tax the price of the flights goes up $100 for each of us. The teeter totter tips, we drive and I get to thrash the Model 3 through the awesome twisty windy’s from 101 to coastal Hwy 1. Life is good. We’re incentivized to pick a cleaner travel option and I get to have some fun while my wife clings to the door handle and begs me to slow down.
Taxes change behavior. They aren’t punitive.
And don’t forget the reason why carbon taxes appeal to some libertarians and conservatives despite their aversion to government in general: revenue neutrality. In this model, when government revenues increase through a carbon tax, they decrease via tax cuts elsewhere. The typical model is to reduce income taxes.
In this model, the tax expenditure for the couple stays exactly the same if they don’t do anything, but they can save money by buying an electric car and electric appliances to replace their gas appliances. That’s actually a win for them, not a wash.
That all said, getting taxes on carbon to the price where they actually do the job that they are required to do hasn’t occurred anywhere in the world yet. British Columbia’s revenue neutral carbon tax was stopped at $30 per tonne, which is at least $60 below the minimum necessary for the scale of the problem. Australia shut down their carbon tax foolishly, even though it was reducing emissions at its low price of $23, and didn’t get anywhere near high enough to make a significant different.
Carbon taxes aren’t the entire solution. But they are part of the tool kit.
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