“Making the perfect the enemy of the better” for a carbon tax

In an opinion article published on Utility Dive, Kenneth Costello argues that adopting a carbon tax would be a mistake. As he says, “(i)nstead of a carbon tax, why not give more consideration to adaptive strategies, which can evolve over time in response to new information?” His arguments make several key errors and underestimate the political will required to deliver his preferred option.

We need not rely on the social cost of carbon (SCC) to set a tax. Instead of using a benefit-cost approach implied by the SCC, we can use a cost-effectiveness approach by setting the tax to achieve an expected amount of greenhouse gases reduction. This is really no different than how we conduct most of our private transactions–we don’t directly weigh the monetary benefits of buying a new car against its costs–we decide what type of car that we want and then spend the money to buy that car. We may not achieve the mythical “positive net benefits” using such a strategy, but the the truth is that benefit-cost analysis is problematic in the context of climate change, as Martin Weitzmann among others pointed out.

We have a good idea of how increased prices that would result from a carbon tax impact demand, contrary to Costello’s assertion. We have seen that over and over with changes in gasoline and electricity prices in the last half century. (One paper found that the early CAFE standards did not affect automobile fleet fuel economy until gas prices fell in 1984.) We can adaptively manage a carbon tax (which also can be implemented as a global trade tariff framework) to steer toward our emissions reduction target.

Costello instead proposes that we focus solely on climate adaptation by hardening our infrastructure and other measures. This illustrates a lack of understanding of the breadth of the expected impacts and the inability of a large segment of the world’s population to undertake such mitigation without a large wealth transfer. Further, such adaptation focuses largely on the direct impacts to humans and ignores the farther ranging ones on our global environment. Those latter effects, such as ocean acidification and melting of the tundra, can lead to catastrophic outcomes that cannot be readily adapted to, no matter what is spent. And there other effects that that we may not even know about. Focusing so narrowly on what might be adaptive strategies will lead to a gross underestimation of the costs to adapt.

Finally, Costello overestimates the political barriers to implementing and managing a carbon tax and overestimates the political will to implement adaptation strategies. Contrary to his assertion, environmental groups such as EDF and NRDC have been at the forefront of using prices and taxes to regulate environmental pollutants. (I have worked for several of them on such proposals.) Yes, politicians want to avoid taxes, but that reflects the more general problem of wanting to avoid any hard choices. And we only need to look at the state of the U.S. infrastructure to see how difficult it is to persuade the political system to make the investments that Costello recommends. This will be a tough road either way, but the carbon tax option cannot be simply dismissed based on Costello’s analysis.

 

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