Carbon Death and Taxes

What is up with a Carbon Tax? Why does it get my goat, so to speak? It comes back to economic thinking blotting out messy reality and squashing alternatives that are deemed sub-optimal for a model that never represented our reality to begin with. That’s a dense line and it’ll take a bunch of work to unpack. Here are the main thrusts:

1) Carbon Tax levels are not set to stop fossil fuel extraction and consumption.

2) Carbon Taxes are hard to define well.

3) Carbon Taxes are regressive.

4) Carbon Taxes are politically vulnerable.

5) Carbon Tax advocates believe their optimality to the exclusion of anything else

#1 — Carbon Tax levels are not set up to stop fossil fuel extraction and consumption. This represents the economist’s simplification of time and space, if the carbon tax reduced in-jurisdiction consumption that must be good because we didn’t emit that carbon! The thing here is that your administrative boundary still exists inside the same carbon-atmosphere environment as everyone else. If your tax just pushed the emission from this jurisdiction to that one, or from this month to that month we’ve not actually gotten anywhere. This NBER working paper from 2019 discards the Pigovian presumption of a one-period model — e.g. there is no future consumption if you stop it here with a tax! That modelling assumption turns out to be pretty bad at describing the real world where time and location matter for consumption, production, and global impacts all together, leaving the externalities outside your model if they happen in the future. The long and short, a $200/ton tax on carbon is only going to push 4% of oil production out of the market across all time and markets (the requirement to modify the forward integral of atmospheric carbon content, e.g. nominally the point of a carbon tax). Stopping a larger share is upwards of $600/ton (2% reduction for the first $100, 28% for the step between $500 and $600/ton) and levels below that leave all fuels extracted and burned with the tax/rent seeking going to those doing the extracting over time — not a great equity or justice outcome. If you are talking about a carbon tax in practice you are in the $10–90/ton range, well short of that required for a measurable impact on total extraction over time.

Very smart people have been calling peak oil for the last 40 years because they assume current behavior instead of accept that the market responds to the disruptions it experiences. We have enough fossil fuels in the lithosphere for 750 more years of consumption and rising prices both provide incentive to extract increasing rents and the capital required to develop new extraction technologies to make further extraction more economical. This is why some very smart people were calling a peak in 2004 just as fracking (Tar Sands and Permian basin) was coming online and the US had already built the infrastructure to become the world’s greatest fossil fuel exporter — these authors and modellers missed the bit where future conditions weren’t bound by today’s trade-offs. This is a common thing, discount rates are notoriously made up to facilitate exchange between “now” and “the future” and they are just wild ass guesses.

Any effective carbon tax, where we measure effectiveness by keeping fossil fuels in the ground, needs to shock the system sufficient to foreclose the research and development that reduces future extraction costs. It needs to be big, it needs to stop the conversation, it needs to be everywhere, because there is no ongoing rate of extraction that leads us to a good ecological end. In short, we should just nationalize and end those industries rather than taxing their outputs; name our collective enemy and directly engage instead of making every citizen bear the cost separately. There is no market fairy that will keep climate change in check.

#2 — Carbon Taxes are hard to define well. This represents a mechanical challenge that we’ve historically failed at. This isn’t a new event, in the 18th century Ze Germans decided forests were too complicated and invented a system of normal forest management leading to Badenreinertrag for optimizing forestry for internal rates of return on capital and Waldreinertrag focused on maximizing annual returns. This optimization necessarily obliterated the natural state and created a constrained state aligned with a model of optimum yield. This was subsequently applied without regard to local conditions all over the world, often with disastrous consequences on the local ecosystems (sometimes it took generations to manifest those negative outcomes, unless you were a native person who’s lands were stolen and normalized). The history of silviculture (specifically A Critique of Silviculture) covers the old stuff, but there are concrete and contemporary examples of the difficulty in establishing bounds for policy: in California the carbon management assumptions have created favorable forestry offsets based on an artifact of the model rather than forest management practices (California Carbon Offsets) and in British Columbia the carbon tax included some operations at the landing but not others, causing forestry companies to stop burning their slash due to the particulars of the tax resulting in increased methane emissions, fire risk, and additional ecosystem degradation. The passage of a carbon tax here was noteworthy and early enough to become a course at the Harvard Kennedy School. Not great when the examples do the opposite of the intended policy, in fairly large segments. You can get parts to work well, but it is more a portfolio of specific responses rather than a silver bullet — which breaks much of the appeal of the one-true-market-intervention to fix all ills.

#3 — Carbon Taxes Are Regressive. This has to do with money and policy choices that seem reasonable from a perspective of privilege. There are at least two paths to inequity in outcomes. First, wealthy citizens have more options for dealing with a pay-at-the-pump style carbon tax. Fuels are a popular target, but they feed into every good or service that depends on transportation logistics — if your plumber is paying more for gas you also need to pay more to have your leaky faucet fixed because of the carbon tax. Rebates are often distributed per capita rather than per consumption, for a variety of reasonable assumptions (e.g. you don’t want to subsize super consumers with larger rebates — the policy goal is less consumption!). But if you are wealthy your out of pocket travel is more likely to be leisure (or entirely optional) rather than work. Wealthy citizens can also more easily shift to an electric vehicle and avoid the tax entirely, while still receiving the rebate. That rebate is the other side, the second regressive challenge here. A little more than 10% of the population doesn’t file their taxes because they don’t make enough to pay taxes, but this also deprives them of a tax-based rebate program. This leaves these low earners to pay for the tax at every transaction throughout the year but not to receive the compensating rebate at the end of the year. It is hardly better when tied to one’s utility bill, for similar reasons (renters, folks who live off grid). Those most in need of the rebate are least well situated to reliably receive it, those in least need are most likely to entirely avoid the downside costs and receive pure subsidy through the rebate. It is bad policy for equity and justice — that’s why folks introduce the rebate to put enough lipstick on that pig to sell it to others. General background on zero-tax filers starts here looking back from 1980–2004. I don’t know where to go for demographics, there is a lot of bluster and noise (the 47% political polarization fight got linked to tax filing; reality is in the 5–10% of employed Americans not filing) — the US tax system is intentionally opaque thanks to tax filing services regulatory capture. Canada sees 10–12% with no returns, leaving the government holding all those rebate checks instead of the people who need them.

4 — Carbon Taxes are Politically Vulnerable. The opposition fights just as hard against small things as large things, so go big. This point deals with the politics of the situation. A carbon tax is paid on every transaction throughout the year and even when compensating rebates are offered, they can go unnoticed by the recipient. If no one knows they got money back, because on net they still owed tax or money on their utility bill, did you really compensate for the regular reminders of high prices at every cash register you see throughout the year? Quite clearly the answer to that is no. High pump prices are a universal rallying cry for the political actions aligned against drawdown and green initiatives. Even if the recipients know the rebates exist and believe they are approximately balanced out, you are getting much more cost reinforcement than compensation reinforcement and might be left to wonder why the tax is landing on you at all if the state is just going to rebate it back to you anyway? It fails many explainability and reinforcement tests, normal people hate this and the carbon tax recall initiative in Washington was polling +15% in May. Citizen initiatives are clumsy, often invoking a double negative to undo a recently passed law, so voter education is a real issue (as is wider knowledge of who the main funder of the initiatives is), it is currently polling -10% with 28% undecided — the wording on the ballot is going to be a big deal. I understand the public outcry with a year of public complaining about high gas prices and really can’t fault anyone (though my gripes are mainly that the tax is insufficiently large to be worth the social cost of imposing that regulation on everyone; it pisses everyone off to no end). I only see my rebate because I swapped my furnace and water heater from natural gas to a heat-pump and the rebate regularly makes my natural gas bill negative. If I didn’t care that much about my natural gas portion of my bill it would disappear into all the non-actionable fees of my broader utility bill.

5 — Carbon Tax Advocates Believe Their Policy Preferences Are Optimal And All Else Is A Mistake. This deals with the human psychology of carbon tax fanatics as they appear to folks just trying to do their thing in the real world. This is just my opinion here, but I can dislike the rigid, zealous, defense of dogma if I want to. Like Nuclear Bros (or Hydrogen Bros, I guess), who see their preferred policy position as the silver bullet balm that salves all, anything that isn’t a carbon tax is wrong, in the way, and wasting everyone’s time/opportunity to do something real for the climate (e.g. pay more for gas). This causes year after year of infighting in climate focused advocacy as those bitten by the optimal economic policy bug demand their universal carbon tax at the expense of all other action. This manifests as torpedoing other initiatives, laws, policies, and action and repeatedly taking up space with unpopular carbon tax initiatives (e.g. a kind of green initiative vote splitting). Yes, I live in Washington State where this played out very publicly over several years (2016, 2018, 2021 — with the eventual passage going through the Senate instead of the ballot initiative process); this year there is an effort to repeal the local carbon tax and rebate system. The policy loses votes and feeds the opposition a steady drumbeat of high gas prices and food costs, from both the opposition party and the carbon tax advocates who would rather see nothing than an economically sub-optimal policy go into effect. Not all economists or policy people, sure, but really? If it keeps happening perhaps it isn’t the kids who are wrong.

Anyway, a Carbon Tax is a fine response to manage carbon consumption in a world we don’t happen to be living in (if, for instance, the environment was within the administrative unit of the taxing regime, or all future decisions were bound to the economic calculus of today). One can support a lot of positive work on the revenue these systems generate, but the impacts tend to reinforce rather than upend the current power and privilege structures and support maximizing fossil fuel extraction profits. Economics as practiced isn’t about maximizing ecological outcomes, after all, but shareholder outcomes.

Or, Carbon Tax advocates come back and rally broad civil support once you’ve shown as much impact as Bill McKibben’s divestment efforts. Show there is something more than theory at work before you demand policy obedience. I get that economists have a way of making policy and extant carbon taxes have generated loads of revenue, I’m not doubting any of that. I’m doubting the efficacy of the policy tool for the stated policy objective of burning fewer fossil fuels across space and time. It has shown it is great at increasing profits for fossil fuel companies, extracting subsidy for the wealthy, and loading cost onto the most vulnerable. Basically it shows itself as pro-system and ill suited to tearing down the existing fossil fuel extractive economic organization we’ve built up over the last 250 years.