EnviroEconomics.ca

Now for those of you who have spent anytime at a University know, the best definition for the institution is a group of anarchists who share a common parking lot. Generally, these are the folks who eviscerate first and argue points of fact later. This is why an open letter supporting a carbon tax and revenue recycling from 230 of these intellectual knife wielders matters – they all agree on the basic points. They buried their respective hatchets as it were and sent a message to the electorate (see coverage here). Indeed, as they themselves recognize:

That’s an astonishing number for academics not typically inclined to act collectively and quickly on policy issues.

The open letter can be found here:

But here are the main points:

1. Canada needs to act on climate change now.
2. Any substantive action will involve economic costs.
3. These economic impacts cannot be an excuse for inaction.
4. Pricing carbon is the best approach from an economic perspective.
1. Pricing allows each business and family to choose the response that is best and most efficient for them.
2. Pricing induces innovation.
3. Carbon is almost certainly under-priced right now.
5. Regulation is the most expensive way to meet a given climate change goal.
6. A carbon tax has the advantage of providing certainty in the price of carbon.
7. A cap and trade system provides certainty on the quantity of carbon emitted, but not on the price of carbon and can be a highly complex policy to implement.
8. Although carbon taxes have the most obvious effects on consumers, all carbon reduction policies increase the prices individuals face.
9. Price mechanisms can be regressive and our policy should address this.
10. A pricing mechanism can allow other taxes to be reduced and provide an opportunity to improve the tax system.

I particularly like point seven that follows point six – it basically reads: yes cap and trade can send a carbon price, but it is administratively ugly to implement, so why go there when a simple tax is available. And point five is directed at the Conservative Plan.

While the economists don’t fully support the Liberal plan:

“You can say that the Liberals have a carbon tax. Is it a good carbon tax? That’s a whole other question…This is not about influencing the election, it’s about clarifying debate.”

Make so mistake, by “clarifying the debate”, these 230 academics stealthily eviscerate the Conservative Plan.

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.

As word of the all night negotiating binge was broadcast far and wide, there was cause for celebration. It turns out that the developed world was not so far apart and that language in Bali could be agreed upon. So, instead of binding reductions of say 20% to 40% by 2020, they settled for “deep”. The US grooved, the Europeans waltzed and voila, a road map for more talks. But can we afford to dance?

The developing world says no:

“We need to grow, and we need to grow rapidly,” said Munir Akram, a Pakistani diplomat who heads the G77, the major bloc of developing countries at the Bali conference.
“It’s a question of justice and humanity,” he said. “We cannot afford to allow our development to be stalled or reversed.”

But in Canada does this affordability refrain make sense? For some, like the manufacturing sector or low income households, climate policy needs to be concerned with income effects. Practically, this means that climate policy needs to separate the emission signal from compensating due to income concerns. For example, a broad-based emission signal, like a carbon tax, could be complemented by measures to compensate on the income side. This could be done through recycling revenue from a carbon tax or auctioned permits (from cap and trade) to those most adversely affected, like trade exposed sectors or low income households. This does not mean that we exempt some sectors from the price signal all together, and shift the cost burden to the rest of us.

But what about the rest of us, can we afford “deep” reductions? Nic Rivers and I have been doing some modeling using a macroeconomic model of the Canadian economy and find that deep reductions will cost, but will not ruin. We find that at emission prices of say $100, national GDP impacts are small and in the order of 1% to 1.5%% below a “no climate policy” level, which is less than forecast growth. With some creative tax shifting and revenue recycling (reducing labour taxes for example), this can be more or less halved. For this cost, we get emission reductions of about 20% below current levels, which is the federal government’s Turning the Corner target.

So, even with deep reductions, we will continue grow and have the national income to compensate those most adversely affected. But, just like the Bali-two step, I suspect that climate policy will continue to be one step forward and two steps back.