Thursday, 5 September 2013

This Carbon Tax thing

I came across the 50 to 1 project today. The premise of the video seems fair enough. Using Australia as an example, enacting a carbon tax to mitigate climate change, if applied to the world, would stop climate change only while consuming 80% of global GDP, while adapting to climate change, such as it´s projected by the IPCC, would cost only around between 0,something to 3% (I assume that´s on the future GDP). Ok, so I have not gone to any lengths to calculate whether this is right or wrong, but these thoughts occur to me:
1. The video is dead wrong about the Australian carbon tax being the most expensive yet, carbon taxes in Sweden are up to 106 USD per tonne, I found it strange that they omitted that.
2. Yes, a carbon tax at current levels where they are applied, will probaby have neglible effects with regards to stopping climate change, but:
2.1: Isn´t it fair enough that the adaptation costs are "paid" by carbon taxes? (No I´m not suggesting a hypothecated fund MW). A couple of percent of GDP isn´t nothing, but it´s still a level of GDP that can plausibly be brought in with carbon taxes.
2.2 One person interviewed said something along the lines of "the best way to adapt to climate change is to increase wealth". Which is an excellent point. So my question is then: if carbon taxes, which is a narrow excise tax on a good that has a notoriously inelastic demand, replace other sources of revenue that are more harmful, say VAT or income tax (Australia did increase the treshold for income tax significantly with the introduction of the CT), isn´t that actually a small, but still worthwile change in the tax-system to increase wealth? Working against my theory, is the fact that increased use of "carbon" also raises GDP, and reducing fossil fuel use, would work in the other direction again. Which is the strongest effect?

Weigh in please.


Mark Wadsworth said...

"Isn´t it fair enough that the adaptation costs are "paid" by carbon taxes?"

Intuitively, yes.

But actually it doesn't make any difference.

We all benefit from the use of fossil fuels; we will all suffer from "global warming" (assuming there is such a thing, which there isn't); and we will all benefit if "global warming" is prevented; so we might as well split the costs between all of us.

Or we could finance the costs from a tax on that factor which will benefit most from preventing "global warming" (or which stands to lose most if "global warming" makes the UK uninhabitable), i.e. land values.

Kj said...

MW: That point was more political, ignore that. The main point was the economic outcomes of exchanging one tax for another, which incidentally has some political thrust (or at least adding the one tax has). Stern report figures are around 50 quid per tonne of carbon or external costs. UK carbon emissions are what, around 600 mn tonnes? Ignoring LVT for one moment, what is better, 30 bn pounds in revenue from a carbon tax or the same from VAT/income tax?

Derek said...

The climate change argument is irrelevant as far as I am concerned. Natural resources such as minerals and hydrocarbons are similar to land in that nobody actually made them, they are in fixed supply, and ownership is dependent on government title. So the justification for taxing them is the same as the justification for taxing land.

However there is an interaction between resource extraction and land value which bears a little examination.

Suppose that we rent a field and use it to grow cabbages. At the beginning of the year the field is worth say £5,000; we rent it for a year; we pay a labourer £300 to grow cabbages on it; we sell the cabbages for £800. At the end of the year the field is still worth £5,000. What rent does the landowner charge? Well, the maximum is probably about £450. Any more than that and we'd probably look to invest our money somewhere else. But he could also charge the minimum of £0 if he was a kind-hearted philanthropist. Unlikely but possible.

Now suppose that surveys show that there is oil under the field. We now want to rent it and drill. The oil means that the field is now worth £20,000 at the beginning of the year; we rent it for a year and pay our labourer £10,000 to drill, install pumps and pump it dry; we sell the oil for £30,000. At the end of the year the field is now worth £5,000 because it no longer has any oil under it. What rent does the landowner charge. Well, the maximum might be about £19,000 but the minimum would now be £15,000 since otherwise the landowner would be losing money.

Even when the landowner charges us the £19,000 maximum, we can look on £15,000 of that as compensation for the reduction in his land value caused by our oil extraction.

So resource royalties don't have to be connected to climate change. They can be looked on as payments for disimprovements to land.

Mark Wadsworth said...

Kj, D, yes of course, we covered all this recently. The government ought to charge for the value of minerals etc extracted because it is "common wealth". Plus it's a handy source of revenue.

And as D says, this has nothing to do with "climate change" and doesn't actually reduce the amount of oil etc being consumed.

Kj said...

D: yes agreed, but resource rents are one thing. A hypothetical carbon tax would certainly affect resource rents, but that´s a side-issue for now.

MW: I suspect it would reduce it, not enough to even slow what the IPCC claims will happen ofcourse, but some uses of fuels that are currently taxed relatively low would change, mainly in electricity production, compare the double CO2 emissions from coal to gas. While petrol prices would hardly move if we were to have flat CO2-taxes instead of VAT, even if fuel duties stayed the same.
The point, again, was not to argue about climate change, but to look at whether a flat tax on CO2 were to fare better for economic growth if substituting other taxes, especially VAT.

Mark Wadsworth said...

Kj, ah but would it make much difference?

Ignoring imports and exports, a coal power station is prepared to pay £100 per tonne.

In the absence of any taxes, the coal mine can charge £100 per tonne. Let's assume it costs the coal mine £20 per tonne to dig it up.

If we have a carbon tax of £80 per tonne, then the coal mine can only sell it for £20 per tonne. So the price to the power station is still £100 per tonne and the coal mine is still breaking even.

If we tax the coal mine at £80 per tonne, then he will sell it for £100 per tonne.

The end price is always the same.

(yes of course it would be better than VAT and so on, different topic).

Derek said...

Kj, I would say that there is no question that a flat tax on CO2 would be better for economic growth than VAT. It would probably be better than Income tax, Corporation tax, etc. too. It would not be quite so good as LVT because it would be slightly easier to evade by under-reporting hydrocarbon extraction.

There would be side-effects too. In particular, it would tend to promote low carbon energy production. Not just nuclear, hydro, solar and wind. I would also expect that it would boost natural gas extraction and extraction of methane hydrates since they are relatively low-carbon hydrocarbons.

Kj said...

MW: that´s a good point. Assuming most coal is domestic that is, you can get the same revenue. But if the tax pushes the cost of extraction + tax over the cost of alternatives, for some uses, that would reduce use, and possibly push up rent for other resources slightly. But energy importing countries can catch some of the ground rent with excises can´t they?

D: I think so too. It all depends on to what degree it´s done, whether it´s so high as to just export production to China etc..
I just thought this one video portrayed only one side of the coin, that Australia enacted a carbon tax. Most jurisdiction who´ve enacted a CO2 tax has also made other tax reductions (BC did a sort of dividend return if I remember correctly).
For whatever reasons´s it´s introduced, it doesn´t need to be all bad.
And to the degree that coal is affected; coal isn´t just about CO2, it´s pretty nasty stuff with regards to other non-CO2 pollutants that actually matter.

Bayard said...

"There would be side-effects too. In particular, it would tend to promote low carbon energy production."

This is where a carbon tax wins out over LVT in the long run. There is only a finite amount of minerals in the ground and when they're gone, they're gone. Land, however, is not consumed, so there is a need to use minerals more frugally, but not land, thus a tax that reduces mineral consumption is better than one that does not, all other things being equal.
This is why the whole global warming claptrap is not entirely evil - it's doing the right thing for the wrong reason and in the wrong way, but it's still doing the right thing.

The Stigler said...

We already tax CO2 at a higher rate than the damage caused. Therefore we certainly don't need any more taxes on it.

Fuel use is not inelastic. I'd like to take my kids to the United States, but the government has deterred me from doing so by sticking £500 of airline passenger duty on my family's travel. So, it affects how much value that represents, and instead, I think we'll be going to Italy. I know people who work from home and a large part of that is that they aren't spending £10/day on petrol going to work.

Mark Wadsworth said...

B: "This is where a carbon tax wins out over LVT in the long run. There is only a finite amount of minerals in the ground and when they're gone, they're gone"

Well, exactly not.

a) Physical land is not consumed, it is RENTS which are consumed.

b) Land rents will always arise and as you say, oil will probably run out one day. So what are you going to tax then?

c) The total value of land rents is much higher than the value of oil extracted or use, so it would be silly to tax the latter and not the former (and ideally both).

TS, also exactly not. Airline slots are a monopoly and so the tax comes off the ticket price. Observable fact.

The Stigler said...


Perhaps on higher price flights, but at the lower end, £134 is not going to be deductable from the ticket price.

Bayard said...

"We already tax CO2 at a higher rate than the damage caused. Therefore we certainly don't need any more taxes on it."

Where did I say this was anything about damage caused? A call to change the tax base is not necessarily a call to increase overall taxation, though the pols will always try and make it one. Governments have to tax something and the side-effects of a carbon tax are more beneficial than the side-effects of many other things. As Mark has been at pains to point out in many posts, if you tax something, you get less of it, so, if you tax carbon, that is fossil fuel consumption, then you will consume less fossil fuel and the limited amount that there is in the ground will last longer.

"Land rents will always arise and as you say, oil will probably run out one day. So what are you going to tax then?"

Well, land, of course.

"The total value of land rents is much higher than the value of oil extracted or use, so it would be silly to tax the latter and not the former (and ideally both)."

Yes, that was what I was proposing, taxing both, but carbon more heavily in the short term, in order to make the oil and gas we have last longer.

Mark Wadsworth said...

B, when taxing rents and resources, the ideal rate is 100%.

So it's not a question of taxing one more heavily, but taxing both at the same rate.

And as it happens, total UK land rents are £200 billion - £250 billion a year, and total taxes on petrol etc are about £40 billion.

How much higher you could screw taxes before you hit the top of the Laffer Curve I do not know, but perhaps your intention would be to deliberately go past the top of the Laffer Curve, i.e. to reduce consumption (fuel duty is not actually a tax on petrol, it is primitive road use pricing - which is why farmers get cheaper diesel for their tractors and heating diesel is also cheaper).

Derek said...

There are two kinds of "damage" caused when oil, minerals, etc. are extracted from the ground. The first is that the extractor has ensured that other people can no longer extract that particular raw material from that particular location and hence lower its land value. The second is that the material extracted may lower other people's land values either immediately or at some point in the future. So for instance, asbestos, once extracted, may eventually reduce the value of land on which it has been used; uranium may reduce the land value of countries which have suffered major reactor malfunctions; and so forth.

The first case can be handled by 100% resource royalties which compensate for the reduction in land value of the location from which they are extracted. And, in principle, the second case can be handled by a Pigovian tax, such as the carbon tax, which compensates for the reduction in other land values caused by the presence of the unwanted material.

The problem is that the first tax (resource royalties) is fairly easy to calculate. The second (Pigou tax) is extremely difficult since
(a) there may be disagreement about whether a material actually causes drops in land value;
(b) land value may not be affected until long after extraction;
(c) the material extracted may be harmless until processed, ie cobalt which is harmless when extracted for use as a steel additive but becomes a potential problem when converted to cobalt-60.

So taking this all into account, I think that all mining and quarrying should certainly be subject to 100% taxation based on reduction of land value at the location of extraction. This can be done without affecting economic growth. However going beyond that is more problematical because it is impractical to calculate the correct level for a Pigovian tax in many cases. The best we can generally do (if we want to avoid lowering growth) is to calculate the minimum tax level (which may well be 0%) with the proviso that hindsight may well show that we set the level too low).

Kj said...

B: I think a carbon tax only rations use as far as it eats up all the rents, and makes other less carbon-intensive fuels more profitable. That slightly slants the favour to easily extracted stuff, meaning less oil sands or coal until the easy stuff is extracted. IMO that would be good, as far as time will, or should, give us lots of new technologies to play with until we have to squeeze out stuff rock.

MW: We tax some uses of fossil fuels, and quite a bit of the rents on the producer side. But a CO2-tax would primarily affect those uses that are currently lightly taxed, namely energy and industrial production. Fuel for motoring is just a portion of what´s being used.

D: that´s complicated stuff. Long term values of mineral/fuel deposits are very difficult to predict, changing market prices and all that. First of all, any existing uses that is being displaced have to be compensated for, as you say. And how much that is done, is most often a political question. For example those mordor-like tar sands tailings up in Alberta; I´m pretty sure those are not being properly compensated for. Then, any superprofits over return of extraction activities should be taxed as good as we can. If the first item can´t be compensated for without extinguishing rents, that pretty much means the extraction shouldn´t be done.

neil craig said...

The cheapest geo-engineering solution - putting sulphur crystals in the stratosphere has been costed at $100 mn a year. roughly 0.0001% of gdp. This is how Krakatoa produced the "year without a summer" so it would work.

It is, of course, opposed by those who say CAGW is so important we have to destroy western civilisation.

Pablo said...

nc: Wouldn't putting sulphur into the atmosphere produce acid rainfall; and what would be the cost of dealing with that? This sounds to me to be as good an idea as introducing the cane toad to Oz.

Morgan Charles said...

NC, that presupposes that 1) we still have global warming (which appears to have stopped in 1999) and 2) said global warming is a problem (which, given that things were a lot warmer in Roman times, it probably isn't). However, as a solution, it has the advantage that it doesn't involve anything to do with carbon dioxide (which, given that Mars has been warming along with the Earth, is probably not causing global warming (or should that be caused?)).

P, I think you need sulphur dioxide for acid rain, not elemental sulphur.

Pablo said...

MC: S would be oxidised to SO2.

Pablo said...

MC: S would be oxidised to SO2.