The tax simply isn't high enough

From Environmental Capital:

If Norway can’t slash emissions almost two decades after slapping a hefty pricetag on carbon, what does that say about the belief that “making polluters pay” will automatically transform America’s economy?

Comments

[Scott]

A couple of thoughts. First I agree that it implies the tax is too low, or perhaps it may be that Norway is too small of an economy to feasibly come up with an alternative to fossil fuels. The USA being slightly bigger may not have the same scale issues that Norway has and so it might work just fine here.

[Soren]

A couple thoughts.

First, we can not evaluate whether the tax was successful simply by looking at the trend in absolute emissions. The question is: How high would carbon emissions have been in the absence of the tax? For all we know, emissions might have been much higher. As one example, take the commercial CO2 sequestration project at Sleipner---the world's first---whose sole purpose is to avoid the Norwegian carbon tax.

Second, it's possible that we could set the CO2 tax equal to marginal damages and still see an increase in total emissions! That's not to say Norwegian's tax equals marginal damages, or even that our best estimates of marginal damages are correct, but with population growth and higher incomes and strong preferences for private transportation, it's possible.

[Charles Sifers]

Once it becomes clear to the majority of us that your hysterical political campaign is a lie, we will hunt you down like the dogs you are and make you pay for the damage you have done to us.

[CG]

A couple thoughts:

1. I think Charles Sifers needs professional help.

2. In my mind, this is another reason to favor cap-and-trade over a carbon tax. With a high enough penalty for non-compliance and a properly chosen cap, you can ensure that you meet the emissions goal.

[Gernot Wagner]

John,

Sometimes you make it too easy for me... Looks like a cap on emissions is the way to go after all, if we want to ensure the environmental results.

Gernot

[John Thacker]

Looks like a cap on emissions is the way to go after all, if we want to ensure the environmental results.

Gernot-- a cap on emissions is the way to go if you believe that we can most easily answer the question "what is the optimal level of CO2 to emit?" A tax is superior if you believe the easiest question to answer is "what is the cost of CO2 emissions?" (so that we can balance it against benefits.)

However, Gernot, remember that the two methods are functionally equivalent when they achieve the same results, just a different way of getting there. A tax sets the price, and then you get a certain amount of reductions. A cap sets the level of emissions, and then you get the price necessary to achieve that level. So e.g. if a tax bringing gas to $6/gallon would not be sufficient to achieve the reductions that you want, then a cap on emissions at the level you want must needs effectively raise the price to over $6/gallon in order to work.

[Gernot Wagner]

Thanks for your note, John. You might be interested in a current Roundtable discussion over at thebulletin.org on this very issue. In short, the two approaches are equivalent in a world of perfect certainty and no political roadblocks. Either of these points towards a cap as a preferred solution.

[Gernot Wagner]

For good measure, here's my letter to the WSJ:

Dear Editor,

You argue that "Norway's efforts to contain greenhouse gases move forward -- and backfire" ("An Exhausting War on Emissions," September 30, 2008) by saying that emissions have risen 15% since 1990 despite its tax on emissions. That's not a bad outcome for an economy that has grown 70% over the same period. It implies a massive decoupling of carbon emissions and economic growth. But you rightly say that it is not enough. To limit emissions, cap them. It's simple, affordable, guarantees the environmental results, and helps free us from our dependence on oil. No wonder both presidential candidates support it.

Sincerely,
Gernot Wagner

[John Thacker]

In short, the two approaches are equivalent in a world of perfect certainty and no political roadblocks. Either of these points towards a cap as a preferred solution.

I respectfully disagree that either of those points towards a cap as a preferred solution. I do agree that, politically, support for a cap seems to be easier to achieve than a tax. However, I argue that that's largely because of the view that a cap is a free lunch, and would not impose costs like a tax would. Since that view is untrue, it seem to me that a cap would eventually run into political problems. While it is more difficult to raise a tax, it is also in the world's experience more difficult to cut a gas tax than to raise a cap that has proven more expensive than anticipated. Even in the case of the US, dependence on the gas tax for road funding prevented it from being cut, even if not raised. The European experience has shown that the political roadblocks of a cap are subtle but manifold. Many industries seek and get exemptions, and it is my expectation that political considerations will cause a cap to be relaxed exactly at the moment that it would do any good-- when it would impose any sort of meaningful cost.

The popular and political support for a cap rests upon the assumption that it will not actually raise prices; in other words, that it will not actually work. This will either be proven false, and massively reduce support for the cap, or be proven true, as the cap is tweaked, evaded, filled with loopholes, and raised so as to have no real effect.

As regards certainty, remember that a cap set too high will have no salutary effect whatsoever on emissions, whereas a tax will always have a positive effect. Both measures require certainty in different ways-- a cap is strongly preferable where one has great certainty about what level of emissions is a tipping point beyond which catastrophe becomes dramatically more likely. A cap also requires some certainty about what levels of emissions are reachable-- set the cap too high and it does nothing, set it too low and the costs are far greater than anticipated.

A tax, by contrast, is far more predictable in the other costs one will pay for the benefits of emissions reduction. It does require its own form of certainty, that about the marginal costs imposed by emissions, and it is certainly less likely to guarantee a particular level of emissions. However, if reaching a particular level of emissions ends up costing far more than predicted, it's reasonable to want room for reconsideration. (Though in fairness, in that case politicians would likely alter the cap.)

Unfortunately, I find your letter to the editor to be quite disingenuous. A cap is not simpler than a tax. It cannot be more "affordable" than a tax that achieves the same results, and it could easily cost far more than predicted. It does guarantee the emissions results promised, so long as the cap is not lifted in response to events.