2012-09-11

Woolley On Carbon Taxes

Over at Worthwhile Canadian Initiatives, Frances Woolley suggests that carbon taxes would be more politically palatable if they were re-branded as "atmospheric user fees." She writes:
When faced with political opposition and image problems, there are three possible courses of action. The first is to argue ones point logically, hoping to change people's minds through reason and evidence.

A second is to admit defeat.

The third is to rebrand, and change the image. For example, Canada's bitumen deposits were once called the tar sands, a name that conjures up a (fairly accurate) image of a thick, sticky, black tar-like substance. They have been successfully rebranded as the oil sands, which sounds like clean sparkling oil, with just a bit of sand mixed in. 

Given how well economists have been doing with the first strategy, and that the second strategy gets us no where, I think it's time carbon taxes got a rebranding.
In contrast, my position is that even the re-branding of carbon taxes fail to address the reason such taxes are unpalatable, namely, people have other things to worry about, too.

Set aside all issues of climate science and instead focus on the fact that nations consist of individuals with limited resources.

First, I take it for granted that it is possible to tax a population to the point that they experience diminished economic welfare. That is, there exists some tax rate x at which (x + y) results in inferior economic growth nationwide for all positive y and superior economic growth nationwide for all negative y. (Note that we need not invoke the Laffer Curve here, even though I have essentially described a point at the apex of that curve.)

Second, I take it for granted that every tax increase or new tax makes every individual who pays it worse off, at least with respect to personal income. That is, while we can argue about whether a new government tax or policy improves our lives, we cannot argue about whether new costs restrict our incomes. In all cases, ceteris paribus, higher costs impede our personal wealth, regardless of what non-wealth benefits we may obtain from a new policy or tax.

From these two very defensible assumptions, it is obvious that the economic cost-benefit analysis of any new carbon tax must address the actual economic utility experienced by real people.

In other words, although we can assume that cleaner air increases our utility, we cannot assume that this increase in utility must automatically be sufficiently large an increase to offset the disutility of having to pay a new tax.

For some, the new carbon tax will certainly be "worth it." For others, the new tax will certainly not be "worth it." The difference between these two groups is how urgent "carbon reduction" is in their personal set of values and desires.

So, to sum up: If Prof. Woolley's objective is to promote a carbon tax, she must address the economic issues that actually matter to people. She must promote the tax as something that produces such a large utility increase for individuals that each of them believes he/she will be better off despite the disutility of a tax increase. Failing that, she must describe air pollution in such a way that people begin to believe that a marginal increase in CO2 emissions makes each individual worse off than the disutility of a corrective tax increase. Clearly, climate scientists have taken the second approach. I am unaware of anyone who has taken the first approach. Therefore, I suggest Prof. Woolley start there.

Instead, Woolley merely assumes that everyone who opposes a carbon tax is a global warming denier. Indeed, she follows up with a comment:
The case for an atmospheric user fee is based on three assumptions: (a) carbon emissions contribute to climate change (b) Canadian carbon emissions contribute, on the margin, to the amount of climate change (c) there are some low-benefit activities for which the cost of emissions exceeds the benefits (e.g. using heaters in the summer because the air conditioning is turned on so high). If one rejects these assumptions, there is no case for an atmospheric user fee, and no point in taking the argument further. End of discussion.
If one simply assumes that one's objective is a noble and worthy cause, then there is little to convince anyone of. It is tantamount to saying, "Assume I am correct. Then, re-branding a tax to be more palatable to people who don't believe me is a good idea."

But what if people who don't want to pay additional carbon taxes have no beef with global warming? What if, for these individuals, the disutility of a tax increase is greater than the perceived benefits of marginally cleaner air and higher prices for carbon-related goods and services? In that case, Woolley would be completely mistaken. Rebranding won't work, because people have already made the correct assessment of their personal values and preferences.

Is it possible to convince people that carbon taxes come with a non-income utility increase that offsets the income utility decrease associated with the tax? That is the real question.