…environmental economics and the implications of environmental policy

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Anybody for stimulus from carbon taxes? Yes, please, and reduce my income tax while you are at it.

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The argument that carbon taxes are nothing but a tax grab is disingenuous (see here). No government seriously considering carbon pricing can afford, politically, to say anything but a carbon pricing package will be revenue neutral, at least mostly anyway. Reductions in other taxes, notably income, and subsidies to the “little” guy, like building retrofits are the political reality with carbon taxes. And free allocations of permits will be the order of the day, at least that is until the utilities start making windfall profits as they pass on the theoretical cost of the permits and their regulated 9% ROI to you and me. So, it is disheartening to see such irresponsible reporting at a time when markets are in chaos:

With all the talk about the need to stimulate growth and keep the economy humming, how many policy leaders are going to be keen on new green and carbon taxes? Despite all the talk…no politicians I’ve heard are raising the idea. And what will Prime Minister Stephen Harper do with his various carbon initiatives now that the economy is teetering on the brink of diffucult (sic) times and growth forecasts are falling by the minute? We’re in a new economic ball game, and the short-term rules are changing around economic and political policy. The first to go, I predict, will be talk of carbon taxes.

And this focus on the short-term will end up costing more in the future. Inaction results in higher costs later on, assuming one will eventually take action on carbon mitigation. Get going now and you avoid technology lock-in, that is, more stock of higher emitting technology that is long lived, and you stimulate, somewhat, technology development through both R&D but also learning by doing (cause we have more stock installed and learn as we go). Plus lower operating costs will eventually make some, but not all, more productive and thus competitive.

For those with real impacts, carbon policy can address the income hit though, for example, output-based recycling recycling which basically subsidizes output while maintaining the carbon price signal. This lessens the economic hit by returning revenue to industry assuming they have taken action to reduce emissions (i.e. they “see” the mitigation cost and reduce emissions and then are returned the tax on the remaining emissions since abatement occurred). Simply, policy design matters and preordained outcomes are therefore not certain.

So, myopia may sell ink, but it is no way to make rationale, economic decisions. And oh yes, markets tend to go up after they go down.

Written by Dave Sawyer

January 24th, 2008 at 2:09 pm