Friday, June 6, 2014

Creating an Efficient Carbon Tax

The basic idea behind a carbon tax is that you tax companies for the amount of carbon they release into the atmosphere in their operations, which will tend to make less carbon efficient items more expensive for consumers, who will respond by using less of those things and/or switching to more efficient alternatives.

This sounds great except for one key problem: you screw over poorer people in the process. Many of the things that cause carbon emissions are quite basic and needed by everyone, such as electricity and fuel. For people who already struggle to make ends meet, you may end up quite significantly affecting their quality of life. Making a person buy a hybrid car not because it has become cheaper, but because a regular car is now too expensive to run is great unless the person can now no longer afford either. Making someone switch to cycling or walking rather than driving is great if they want the exercise anyway and can afford to take 4 times as long to get anywhere; not so good if they already work long hours and have children to look after and can't afford that loss of time.

The problem here is that you're trying to force change by excessively punishing poorer people and barely affecting rich people. When there is low wealth inequality this has less impact, but wealth inequality has increased by staggering amounts in the last few decades, so a policy aimed at inconveniencing consumers is so much more unfair to the lower class than it would otherwise be.

In the end, what we're actually trying to do is allow people to keep their same quality of life as much as possible, but with lower carbon footprint. Changing peoples' behaviour is generally not a good solution here because it might be done out of desperation, it gives them something extra to have to worry about, and it will probably reduce how much they contribute to other causes besides climate change due to an effect known as moral license. But if you give them alternatives that cost the same and work the same but are less carbon intensive, then you don't add any further burden on them or reduce their quality of life, while still achieving your result.

So, to achieve this, we need two things:
  1. More efficient options need to exist
  2. Encourage people to switch to those more efficient options
The first point is the most important one. If you make petrol more expensive but don't have equivalently priced non-petrol vehicles on the market, and you're in a country like Australia where many people need to travel large distances and good public transport is often not an option, well, you've basically just fucked over poor people. Rich people will continue driving their Bentleys and Hummers and not give a shit, while the poor people just ran out of options, or other aspects of their quality of life take a hit because they don't have a choice with the car.

So punishing consumers is of no use if companies aren't researching and marketing viable alternatives. So how can we use a carbon tax to incentivise companies directly without letting rich people off the hook and screwing over poor people as a side effect?

What if you design a carbon tax with the simple additional requirement that companies aren't allowed to raise their prices to compensate? This means that the tax eats directly into the company's profits, forcing it to innovate or find alternatives, which is what we need to accomplish in the first place. If something becomes now fundamentally unprofitable under this model, that of course sucks for that company, but maybe that's the result we actually need. And under this model, rich people don't get a free ride. They can't keep on buying high carbon footprint items without caring about a bit of a price hike because you're now hitting the company instead, and this forces them to make better products no matter how rich and thoughtless their customers are.

Actually administering this in practice may or may not be easy, but at least in the case when Australia introduced the 10% GST they made it illegal for companies to raise their prices by more than the GST amount and that worked, so it might not be crazy to do a similar thing here.

As more and more of the world is developing economically and there are billions of people seeking a taste of the good life that developed countries have been enjoying, it's clear that solutions that force people to change their behaviour are never going to be good ones, and that innovating to provide better technological options is the way forward. So we need to structure carbon taxes in a way that focuses on this goal rather than forcing behaviour changes from people. And of course, any ways you can find to stimulate R&D or reward people for getting rid of their inefficient stuff and switching to more efficient stuff is going to help too. But punishing poor people while not really affecting rich people is just kind of a dick move.

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