…environmental economics and the implications of environmental policy

“The price gap will close,”…which is the whole point of carbon taxes

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The climate science skeptics are turning into climate policy skeptics with each new climate policy announced. The basic argument is that the policy will be ineffective at reducing emissions and so is a waste of effort and money. There is a particular focus on the ineffectiveness of carbon taxes to reduce emissions (here),

At the same time, the mill’s managers have thumbed their noses at the global warming theme, replacing natural gas as a supplementary energy source with dirtier, but cheaper, coal…. It’s opposite from the behaviour that Mr. Campbell’s new carbon tax is supposed to produce.

While many policy skeptics decry that carbon taxes do not work, they are ignoring some simple policy truths. First, not all taxes are designed to create an incentive function, where changing behaviour is the objective of the policy. The Quebec carbon tax is a clear case of a tax designed for fiscal reasons, to raise money for other purposes, and in this case for investments in low emitting technologies.

Second, transition costs can be expensive and inefficient. Page one of that first year environmental economics textbook says that the tax should be phased in time to minimize dislocations and transition costs. One wants to go slow to get the cheap reductions first and then work up in time to the more expensive reductions. In cap and trade the same principle holds, where the initial cap is set low and ratcheted down in time.

So the quote in the above mentioned Globe article is a good one,

“The price gap will close,” the official said.

It may be cost-minimizing for that pulp mill to burn coal for the next five years given the level of the tax, but in time this will change. And that, my friends is why policy certainty matters – you know those folks burning coal are looking to the future and trying to figure out when that lump of coal ends up in their stocking. Expectations matter and good climate policy makes clear that the price gap will close. It is just a matter of when, and not if.

Written by Dave Sawyer

March 7th, 2008 at 1:58 pm

Posted in carbon tax

Tagged with , ,

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    27 Jul 14 at 9:15 am

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