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> The authors are not kind to economists, who typically want to put a price on emissions and then let markets do the work. Economists have, the authors allege,

> The authors are not kind to economists, who typically want to put a price on emissions and then let markets do the work. Economists have, the authors allege, skipped a chapter in the textbooks. They have focused on externalities, the damage done to society when carbon is emitted. But they do not think about the elasticity of demand—the extent to which prices change behaviour. This completely misunderstands the point of setting a tax precisely at the rate of the externality. If a good is taxed at its true, global, long-term rate of externality, then the externality, the damage being done, is precisely being paid for. There is now no longer a net externality. If the tax means demand switches to a product without that externality, then good, problem solved, and if instead people still prefer that good to the alternatives, then they can just go ahead and pay for that good plus the tax that pays for the externality. If this isn't good enough for you then probably the problem is you think the price is being estimated wrong, in which case you shouldn't be complaining about there being a tax, you should complain that the rate it is set at is incorrect. I also think the inelasticity of demand claim is mostly bogus; it's inelastic on short timescales but there is plenty of momentum to switch to electric cars and renewable energy even at undiscounted price points. Electricity generation in particular is extremely price sensitive; it's just that with cost trends that cover literal orders of magnitude the crossover point was always going to seem like a sudden event.

usednet 5y ago
I agree, and I think that what you said about the rate being incorrect is right. Pigovian taxes are great in models but extraordinarily difficult to implement. Measuring externalities, especially of something like carbon production, is a monumental task that economists in my opinion have been failing at. Another commenter linked a great analysis on how economists are drastically underestimating the economic effect of climate change (assuming 90% of GDP won’t be affected because its indoors!). On the second point I somewhat disagree. The current inelasticity of demand is extremely important as climate change will become uncontrollable at longer timeframes. The current trend is not enough and not fast enough. I agree with the authors that Pigovian subsidies for renewables worldwide are necessary as soon as possible.
- LudwigNagasena 5y ago
  > economists are drastically underestimating the economic effect of climate change (assuming 90% of GDP won’t be affected because its indoors!) Please, take Steve Keen with skepticism. He is, so to say, an unreliable narrator.
  - usednet 5y ago
    I like Steve Keen. I find his work convincing and practical.
    - colinmhayes 5y ago
      That's fine. Just know that he's effectively a quack.
      - soVeryTired 5y ago
        It'd be nice to see a refutation of his arguments, or at least a recognition of them. As it stands I've just seen two ad hominems in a row and not much else.
        LudwigNagasena 5y ago
        https://economics.stackexchange.com/questions/43116/did-william-nordhaus-exclude-87-of-economic-industries-from-his-climate-change https://economics.stackexchange.com/questions/43116/did-will... https://economics.stackexchange.com/a/18992/1601 https://economics.stackexchange.com/a/18992/1601
  - orwin 5y ago
    On this, I've read a critic of Nordhaus (in French) that said basically the same thing. AKA: Nordhaus willfully ignore in his research two major facts: you cannot operate machines with famished workers, and people need to be able to move around to produce value. The impact on GDP will be much higher, especially if agriculture is hit by climate change.
robocat 5y ago
> If a good is taxed at its true, global, long-term rate of externality, then the externality, the damage being done, is precisely being paid for. There is now no longer a net externality. Why is there no longer an externality? Let’s pick a concrete example: taxation of petrol in the UK. The externality still exists (say people in Indonesia living on the coast[1]), and more than enough fuel duty is paid to the UK Exchequer to cover the externality (from article: “Britain has had one of the highest levels of fuel duty in the rich world in recent decades, note Mr Lonergan and Ms Sawers, but drivers’ take-up of electric vehicles has been unremarkable.”). You could make a colour of money[2] argument that there is no explicit externality tax. Or perhaps the victims of sea rise need to tax British petrol users? And I have a feeling your argument somehow ignores surpluses or market inefficiencies? [1] https://www.theguardian.com/environment/2021/jun/29/risk-from-sea-level-rises-unless-emissions-reduced https://www.theguardian.com/environment/2021/jun/29/risk-fro... [2] https://bam.kalzumeus.com/archive/accounting-for-saas-and-swords/ https://bam.kalzumeus.com/archive/accounting-for-saas-and-sw...
- convolvatron 5y ago
  sure. this only works if you spend that money to offset the consequence - i.e. direct carbon capture. then it really is no longer external.
- dagw 5y ago
  taxation of petrol in the UK. As a counter example look at Norway. To a first approximation no one in Norway is buying a new petrol car. The taxes are simply too high compared to electric cars. So obviously there exists a level where people will switch out of their own short term financial self interest, without having to make an environmental argument.
  - nicoburns 5y ago
    Yep, this is basically my view: taxing the externality would absolutely work. But the taxation rate needs to be pretty high!
- derriz 5y ago
mr_toad 5y ago
It also overlooks the fact that elasticity is not constant, it changes as the price changes. Tax high enough, and demand will become elastic, if for no other reason than the tax becomes unaffordable. If you believe that human society cannot afford to continue relying on fossil fuels, because they are an existential threat to civilisation, then it follows that the tax on those fuels also needs to become unaffordable. Taxing fuels and other carbon emissions at a high enough rate to actually stop people using them is politically never going to happen.
- throwaway6532 5y ago
  >If you believe that human society cannot afford to continue relying on fossil fuels, because they are an existential threat to civilisation, then it follows that the tax on those fuels also needs to become unaffordable. I think if you cut out all fossil fuels society would just not work. At least not at the scale it currently does. Even so called "renewables" are really only possible because of the complex society that fossil fuels allow. The more I dig into reneweables the more I feel like once fossil fuels go away, we largely go back to the stone age.
  - joebob42 5y ago
    I think the hope is that we bootstrap the renewable capable complex society on top of fossil fuels and then it can continue to function with the renewables it builds.
    - thoughtstheseus 5y ago
      Every society does this. We grow, change, and evolve… or perish. Our generation has an opportunity to build a sustainable and robust society. If we do succeed, that’ll be up to us.
    - throwaway6532 5y ago
      I know that that's the hope, but there are some very questionable assumptions it's based on. The more I dig into it the more I get the sense that while there are solutions being investigated across a wide variety of domains for how to replace fossil fuels, there isn't an integrated picture of what such an endgame looks like and what size society it will actually support. Then there's things like sand, water tables, synthetic fertilizers, and demographics to take into account too. You're essentially in a race against time to retool the entirety of society before the effects of fossil fuels either through climate change or human conflict destabilize the society past the point of being capable of doing so. I would almost certainly bet against us.
deleted 5y ago
[deleted]
joe_the_user 5y ago
If a good is taxed at its true, global, long-term rate of externality, then the externality, the damage being done, is precisely being paid for. If a little bit of CO2 pollution causes fairly quantifiable harm we can live with but a lot of CO2 pollution causes runaway global warming ending life on earth, what is it's "true, global, long-term rate of externality"? Me, with an actual degree in economics, would say there is none. Many damage effects simply can't be easily put into a simple cost function. But even if there somehow is such a rate, it seems quite likely that bureaucracies and markets "working together" can't be counted on adjust fast to be certain that price is paid.
- geysersam 5y ago
  Also, one product having a higher price does not mean it's more valuable in a global context. Two carbon equivalent products can be vastly different in terms of how essential they are (for the life or well-being of people). Prices may not reflect that difference because of global differences in purchasing power.
- ephbit 5y ago
  Climate scientists have long been calculating a remaining CO2 budget (that would prevent the worst from happening if humanity didn't go over). This gives rate of CO2 emissions as kg/s. Economists surely can come up with some number of USD to be paid for the emission of 1 kg CO2 (by looking at some economic reference numbers) that will effectively render 10,20,...,90%,99% of all different uses of CO2 emitting processes unprofitable or economically infeasible.
  - joe_the_user 5y ago
    Sure, you could raise prices so much that nearly every of use CO2-emitting processes wouldn't be possible. But that might result in, say, people not being able to afford to heat their houses in the winter in cold areas of the US. I am all for alternative energy but I don't think this is an approach that would work.
    - ephbit 5y ago
dkarl 5y ago
> the problem is you think the price is being estimated wrong, in which case you shouldn't be complaining about there being a tax, you should complain that the rate it is set at is incorrect If there is no way of setting an appropriate price and fairly deploying the money gathered, then the policy is unworkable to begin with. From what process could an appropriate price for the externalities of global warming emerge? And by what process would climate refugees receive their share of compensatory value from the tax? In short, even if the theory checks out, it's no use unless we have a political process capable of implementing it. Otherwise it's about as useful as a policy of us all concentrating on breathing in CO2 and shitting diamonds -- a brilliant idea if we could do it.
- w-j-w 5y ago
- DennisP 5y ago
  > From what process could an appropriate price for the externalities of global warming emerge? I can think of one process: charge a fee per ton of CO2 emissions that equals the cost of taking that CO2 back out of the atmosphere and sequestering it. Then give the money to whoever is able to do that and prove it. That's probably too expensive right now and definitely not feasible politically, but it's something to work towards. The closer we get to that, the more incentive there will be to develop technological methods of accomplishing it. In the meantime, we're probably best off just setting the price as high as we can get away with, and equally distributing the revenue among residents as partial compensation for the damage being done. In a functioning democracy, wide distribution helps build political support for a higher price. It also keeps the burden from falling heavily on the poor.
  - dTal 5y ago
    >That's probably too expensive right now Understatement of the decade. This is functionally the same as hefty, punitive fines for burning any fossil fuel at all. The simple math is that closing the carbon cycle will always take as much energy as you got from burning it plus some extra, so it's never going to be economical to put the CO2 in the atmosphere and then take it out again.
s1artibartfast 5y ago
In the economic model, cost of the externality should go to reverse the damage, or compensate those harmed. This breaks down if the government taxes a good due to externality, but spends the proceeds on something else. Raising government revenues is arguably a social good, but does not benefit or compensate those harmed. Without targeted mitigation or compensation, such policies are simply sin taxes. I don't think this is a problem with economists, who understand this well. you can not "set a tax precisely at the rate of the externality" without finding the cost of the externality to those impacted.
- hackerfromthefu 5y ago
  Yes this is an important point that is usually overlooked in arguments about taxing externalities. e.g. GS makes off with bank from introducing carbon tax
fallingfrog 5y ago
I get what you’re saying, but I’m almost 100% sure that all you would achieve is spurring the development of new and inventive forms of tax evasion. Not to mention, the companies you intend to tax have a huge amount of political sway, and would likely try to put loopholes and exceptions for themselves and special penalties for others in order to weaponize the tax code to attack their competitors. I’m fairly certain that the end result would be no reduction in emissions whatsoever, but the formation of a number of new monopolies along with the price gouging and stagnation that comes with them. Now of course, none of that implies that I have a better idea, currently. Except for maybe the replacement of winner-take-all capitalism with something better.
anothernewdude 5y ago
And? That doesn't fix the problem. People can pay for the damage all they want, it won't fix the damage they cause.
pmichaud 5y ago
I think the place where this model breaks down, and perhaps the source of most of the apparently ideological conflict around it, is that the abstraction of the externality tax doesn’t cash out to reality well enough. Modeling an externality in dollar terms seems like a fine and good thing to do, but the system in practice only works if those dollars are actually allocated to mitigating the literal, physical externalities. Eg. a good situation would be like Acme corp is poisoning the water supply, they are taxed for the actual, continuous cost of cleaning that water supply such that the water supply is no longer dirty or some other actual solution that addresses the concrete problem with the water. This can be a literal tax or it can be a de facto “tax” in the sense they have to switch to a more expensive process that doesn’t poison the water supply. In any case, the externality has been addressed and we can talk about it in dollar terms since dollars are moving, but we can also talk about in concrete outcome and activity terms because that is also happening. In practice it seems to me that the scenario is almost never like this. The externality tax, precisely correct or not, approximately never actually later gets allocated to mitigating the externality. Acme pays its pollution tax, and then… nothing. The military gets an extra tank or the tax is allocated to local teachers and police or a stadium project, but the water supply is still polluted. It’s a super difficult problem because in reality it’s never just one concrete externality that can be legibly solved, it’s a morass of factors that resist measurement and has a very long tail, but it seems basically like we’re not even trying, and regardless of how hard the problem is this misallocation is a serious issue, according to me. My favorite world is one where we, by and large, substantially address the concrete externalities using the taxes that are ostensibly for that purpose. I think we do that more than zero, but not nearly enough. I think this fact causes numerous irresolvable conflicts on the local level, because when someone’s family is drinking cancer water what they want is to not be drinking cancer water anymore. And when some smartass retorts that the pollution externality has been efficiently priced in so it’s fine, it not only doesn’t seem fine to the family, it feels like a callous and disingenuous runaround ignoring the fact that they are still drinking cancer water and will be for the foreseeable future. If this disconnect were somehow addressed correctly on a systemic level, I think there would be a lot less frustration all around.

usednet 5y ago

I agree, and I think that what you said about the rate being incorrect is right. Pigovian taxes are great in models but extraordinarily difficult to implement. Measuring externalities, especially of something like carbon production, is a monumental task that economists in my opinion have been failing at. Another commenter linked a great analysis on how economists are drastically underestimating the economic effect of climate change (assuming 90% of GDP won’t be affected because its indoors!). On the second point I somewhat disagree. The current inelasticity of demand is extremely important as climate change will become uncontrollable at longer timeframes. The current trend is not enough and not fast enough. I agree with the authors that Pigovian subsidies for renewables worldwide are necessary as soon as possible.

LudwigNagasena 5y ago
> economists are drastically underestimating the economic effect of climate change (assuming 90% of GDP won’t be affected because its indoors!) Please, take Steve Keen with skepticism. He is, so to say, an unreliable narrator.
- usednet 5y ago
  I like Steve Keen. I find his work convincing and practical.
  - colinmhayes 5y ago
    That's fine. Just know that he's effectively a quack.
    - soVeryTired 5y ago
      It'd be nice to see a refutation of his arguments, or at least a recognition of them. As it stands I've just seen two ad hominems in a row and not much else.
      - LudwigNagasena 5y ago
        https://economics.stackexchange.com/questions/43116/did-william-nordhaus-exclude-87-of-economic-industries-from-his-climate-change https://economics.stackexchange.com/questions/43116/did-will... https://economics.stackexchange.com/a/18992/1601 https://economics.stackexchange.com/a/18992/1601
- orwin 5y ago
  On this, I've read a critic of Nordhaus (in French) that said basically the same thing. AKA: Nordhaus willfully ignore in his research two major facts: you cannot operate machines with famished workers, and people need to be able to move around to produce value. The impact on GDP will be much higher, especially if agriculture is hit by climate change.

robocat 5y ago

> If a good is taxed at its true, global, long-term rate of externality, then the externality, the damage being done, is precisely being paid for. There is now no longer a net externality. Why is there no longer an externality? Let’s pick a concrete example: taxation of petrol in the UK. The externality still exists (say people in Indonesia living on the coast[1]), and more than enough fuel duty is paid to the UK Exchequer to cover the externality (from article: “Britain has had one of the highest levels of fuel duty in the rich world in recent decades, note Mr Lonergan and Ms Sawers, but drivers’ take-up of electric vehicles has been unremarkable.”). You could make a colour of money[2] argument that there is no explicit externality tax. Or perhaps the victims of sea rise need to tax British petrol users? And I have a feeling your argument somehow ignores surpluses or market inefficiencies? [1] https://www.theguardian.com/environment/2021/jun/29/risk-from-sea-level-rises-unless-emissions-reduced https://www.theguardian.com/environment/2021/jun/29/risk-fro... [2] https://bam.kalzumeus.com/archive/accounting-for-saas-and-swords/ https://bam.kalzumeus.com/archive/accounting-for-saas-and-sw...

convolvatron 5y ago
sure. this only works if you spend that money to offset the consequence - i.e. direct carbon capture. then it really is no longer external.
dagw 5y ago
taxation of petrol in the UK. As a counter example look at Norway. To a first approximation no one in Norway is buying a new petrol car. The taxes are simply too high compared to electric cars. So obviously there exists a level where people will switch out of their own short term financial self interest, without having to make an environmental argument.
- nicoburns 5y ago
  Yep, this is basically my view: taxing the externality would absolutely work. But the taxation rate needs to be pretty high!
derriz 5y ago

mr_toad 5y ago

It also overlooks the fact that elasticity is not constant, it changes as the price changes. Tax high enough, and demand will become elastic, if for no other reason than the tax becomes unaffordable. If you believe that human society cannot afford to continue relying on fossil fuels, because they are an existential threat to civilisation, then it follows that the tax on those fuels also needs to become unaffordable. Taxing fuels and other carbon emissions at a high enough rate to actually stop people using them is politically never going to happen.

throwaway6532 5y ago
>If you believe that human society cannot afford to continue relying on fossil fuels, because they are an existential threat to civilisation, then it follows that the tax on those fuels also needs to become unaffordable. I think if you cut out all fossil fuels society would just not work. At least not at the scale it currently does. Even so called "renewables" are really only possible because of the complex society that fossil fuels allow. The more I dig into reneweables the more I feel like once fossil fuels go away, we largely go back to the stone age.
- joebob42 5y ago
  I think the hope is that we bootstrap the renewable capable complex society on top of fossil fuels and then it can continue to function with the renewables it builds.
  - thoughtstheseus 5y ago
    Every society does this. We grow, change, and evolve… or perish. Our generation has an opportunity to build a sustainable and robust society. If we do succeed, that’ll be up to us.
  - throwaway6532 5y ago
    I know that that's the hope, but there are some very questionable assumptions it's based on. The more I dig into it the more I get the sense that while there are solutions being investigated across a wide variety of domains for how to replace fossil fuels, there isn't an integrated picture of what such an endgame looks like and what size society it will actually support. Then there's things like sand, water tables, synthetic fertilizers, and demographics to take into account too. You're essentially in a race against time to retool the entirety of society before the effects of fossil fuels either through climate change or human conflict destabilize the society past the point of being capable of doing so. I would almost certainly bet against us.

deleted 5y ago

[deleted]

joe_the_user 5y ago

If a good is taxed at its true, global, long-term rate of externality, then the externality, the damage being done, is precisely being paid for. If a little bit of CO2 pollution causes fairly quantifiable harm we can live with but a lot of CO2 pollution causes runaway global warming ending life on earth, what is it's "true, global, long-term rate of externality"? Me, with an actual degree in economics, would say there is none. Many damage effects simply can't be easily put into a simple cost function. But even if there somehow is such a rate, it seems quite likely that bureaucracies and markets "working together" can't be counted on adjust fast to be certain that price is paid.

geysersam 5y ago
Also, one product having a higher price does not mean it's more valuable in a global context. Two carbon equivalent products can be vastly different in terms of how essential they are (for the life or well-being of people). Prices may not reflect that difference because of global differences in purchasing power.
ephbit 5y ago
Climate scientists have long been calculating a remaining CO2 budget (that would prevent the worst from happening if humanity didn't go over). This gives rate of CO2 emissions as kg/s. Economists surely can come up with some number of USD to be paid for the emission of 1 kg CO2 (by looking at some economic reference numbers) that will effectively render 10,20,...,90%,99% of all different uses of CO2 emitting processes unprofitable or economically infeasible.
- joe_the_user 5y ago
  Sure, you could raise prices so much that nearly every of use CO2-emitting processes wouldn't be possible. But that might result in, say, people not being able to afford to heat their houses in the winter in cold areas of the US. I am all for alternative energy but I don't think this is an approach that would work.
  - ephbit 5y ago

dkarl 5y ago

> the problem is you think the price is being estimated wrong, in which case you shouldn't be complaining about there being a tax, you should complain that the rate it is set at is incorrect If there is no way of setting an appropriate price and fairly deploying the money gathered, then the policy is unworkable to begin with. From what process could an appropriate price for the externalities of global warming emerge? And by what process would climate refugees receive their share of compensatory value from the tax? In short, even if the theory checks out, it's no use unless we have a political process capable of implementing it. Otherwise it's about as useful as a policy of us all concentrating on breathing in CO2 and shitting diamonds -- a brilliant idea if we could do it.

w-j-w 5y ago
DennisP 5y ago
> From what process could an appropriate price for the externalities of global warming emerge? I can think of one process: charge a fee per ton of CO2 emissions that equals the cost of taking that CO2 back out of the atmosphere and sequestering it. Then give the money to whoever is able to do that and prove it. That's probably too expensive right now and definitely not feasible politically, but it's something to work towards. The closer we get to that, the more incentive there will be to develop technological methods of accomplishing it. In the meantime, we're probably best off just setting the price as high as we can get away with, and equally distributing the revenue among residents as partial compensation for the damage being done. In a functioning democracy, wide distribution helps build political support for a higher price. It also keeps the burden from falling heavily on the poor.
- dTal 5y ago
  >That's probably too expensive right now Understatement of the decade. This is functionally the same as hefty, punitive fines for burning any fossil fuel at all. The simple math is that closing the carbon cycle will always take as much energy as you got from burning it plus some extra, so it's never going to be economical to put the CO2 in the atmosphere and then take it out again.

s1artibartfast 5y ago

In the economic model, cost of the externality should go to reverse the damage, or compensate those harmed. This breaks down if the government taxes a good due to externality, but spends the proceeds on something else. Raising government revenues is arguably a social good, but does not benefit or compensate those harmed. Without targeted mitigation or compensation, such policies are simply sin taxes. I don't think this is a problem with economists, who understand this well. you can not "set a tax precisely at the rate of the externality" without finding the cost of the externality to those impacted.

hackerfromthefu 5y ago
Yes this is an important point that is usually overlooked in arguments about taxing externalities. e.g. GS makes off with bank from introducing carbon tax

fallingfrog 5y ago

I get what you’re saying, but I’m almost 100% sure that all you would achieve is spurring the development of new and inventive forms of tax evasion. Not to mention, the companies you intend to tax have a huge amount of political sway, and would likely try to put loopholes and exceptions for themselves and special penalties for others in order to weaponize the tax code to attack their competitors. I’m fairly certain that the end result would be no reduction in emissions whatsoever, but the formation of a number of new monopolies along with the price gouging and stagnation that comes with them. Now of course, none of that implies that I have a better idea, currently. Except for maybe the replacement of winner-take-all capitalism with something better.

anothernewdude 5y ago

And? That doesn't fix the problem. People can pay for the damage all they want, it won't fix the damage they cause.

pmichaud 5y ago

I think the place where this model breaks down, and perhaps the source of most of the apparently ideological conflict around it, is that the abstraction of the externality tax doesn’t cash out to reality well enough. Modeling an externality in dollar terms seems like a fine and good thing to do, but the system in practice only works if those dollars are actually allocated to mitigating the literal, physical externalities. Eg. a good situation would be like Acme corp is poisoning the water supply, they are taxed for the actual, continuous cost of cleaning that water supply such that the water supply is no longer dirty or some other actual solution that addresses the concrete problem with the water. This can be a literal tax or it can be a de facto “tax” in the sense they have to switch to a more expensive process that doesn’t poison the water supply. In any case, the externality has been addressed and we can talk about it in dollar terms since dollars are moving, but we can also talk about in concrete outcome and activity terms because that is also happening. In practice it seems to me that the scenario is almost never like this. The externality tax, precisely correct or not, approximately never actually later gets allocated to mitigating the externality. Acme pays its pollution tax, and then… nothing. The military gets an extra tank or the tax is allocated to local teachers and police or a stadium project, but the water supply is still polluted. It’s a super difficult problem because in reality it’s never just one concrete externality that can be legibly solved, it’s a morass of factors that resist measurement and has a very long tail, but it seems basically like we’re not even trying, and regardless of how hard the problem is this misallocation is a serious issue, according to me. My favorite world is one where we, by and large, substantially address the concrete externalities using the taxes that are ostensibly for that purpose. I think we do that more than zero, but not nearly enough. I think this fact causes numerous irresolvable conflicts on the local level, because when someone’s family is drinking cancer water what they want is to not be drinking cancer water anymore. And when some smartass retorts that the pollution externality has been efficiently priced in so it’s fine, it not only doesn’t seem fine to the family, it feels like a callous and disingenuous runaround ignoring the fact that they are still drinking cancer water and will be for the foreseeable future. If this disconnect were somehow addressed correctly on a systemic level, I think there would be a lot less frustration all around.