The two worst talking points on carbon taxes/pricing

My little disquisition on carbon pricing earlier this week was actually just a warm-up for what I really wanted to write about, which is the two incredibly irritating talking points that have pretty much made up the entirety of the federal government’s communications strategy on this issue, for at least five years now. The first is the claim that a carbon tax would be a “tax on everything” or that it would increase the “price of everything.” The second is the claim that a carbon tax would be “job killing.”

What’s infuriating about these talking points is that they both sound vaguely correct, even though they are completely wrong. Thus they have all the hallmarks of our “post truth” political environment, where government no longer even tries to defend its actions or policies, it simply adopts a communications strategy that is calculated to be effective with a target segment of the electoral, then sticks to it through thick and thin.

I wrote an op-ed for the Ottawa Citizen a while back, complaining about our current Minister of the Environment’s robotic repetition of the “tax on everything” talking point. It’s of course hopeless trying to stop her from repeating it ad nauseum inside the country. The closest thing that the current federal government has to a “national vision” is the idea of Canada as a global “energy superpower,” and the way that this gets interpreted is that it requires advancing the interests of the Alberta oil patch over all over considerations.

Here are the facts that are actually guiding government policy: Right now, two thirds of the proven fossil fuel reserves in the world are unburnable – which means that, if the earth is to avoid dangerous climate change, this carbon will have to stay in the ground. If you look around the planet, trying to decide which fossil fuel reserves should probably stay unburnt, one is led inexorably to the conclusion that Canada’s bitumen should stay in the ground (because the process of producing synthetic oil is so energy-intensive). Thus the overriding objective, of both the Alberta oil patch and the Conservative government, is to get as much of it out of the ground as quickly as possible, before it becomes unburnable. It’s like a game of musical chairs. This obviously commits us to doing everything we can, not just to keeping the price of carbon at zero inside the country, but to ensuring that there is no effective international pricing or regulatory system put into place. And this is, more or less, what our government has been doing.

Unfortunately, you can’t really go on television and explain this to Canadians in these terms. While the current government policy advances a certain callow national interest, it is also shockingly immoral. So the only real solution is to dissemble, which is what every Minister of the Environment, from Baird to Kent to Aglukkaq, has done.

Still, it’s irritating. And I found it particularly shameful when Aglukkaq went to a United Nations Climate Change Conference in Warsaw and repeated the same stupid talking point, about how carbon pricing would “increase the price of everything.” I mean, Canadians at least have something to gain from believing this sort of thing. But to stand up in front of the victims of our policies and repeat the same claptrap struck me as being a bit much. This is what occasioned the op-ed. Unfortunately, space constraints prevented me from developing the point about prices as fully as I might have liked. Here is what I wrote:

Increasing the price of carbon emissions would not increase the price of all goods and services. It would increase the price of exactly one thing, namely, carbon emissions. Whether or not that would result in other prices being increased throughout the economy is a decision that would be made entirely by the free market.

That is precisely why carbon taxes were initially proposed by free market economists, and are favoured by the responsible right everywhere. They are the environmental equivalent of a surgical strike. They hit precisely the intended target, with none of the collateral damage associated with old-fashioned environmental regulation.

Now of course, there is a sense in which carbon taxes, by increasing the price of certain forms of energy, would undoubtedly lead to an increase in the price of other goods. But that’s just how market economies work – everything depends upon everything else. If you were to increase the price of shoes, that would undoubtedly increase the price of other goods as well. (UPS provides uniforms for its employees, including shoes. If the price of shoes rises, UPS will have to charge more for parcel delivery. This could increase the prices of all sorts of other things…) In this respect, the tax on alcohol is also a “tax on everything” – by raising the cost of living, it raises the price of labour, which raises the price of all other goods. The point is that these ripple effects are irrelevant to the basic policy question, which is whether the price of carbon, or the price of shoes, or the price of alcohol, is at the correct level.

This was a bit too hard to explain in an op-ed, so I simplified a bit:

Most importantly, carbon taxes leave it entirely up to market forces to determine whether the increased price of carbon emissions is going to raise the price of other goods. If entrepreneurs and consumers are able to substitute away from carbon-intensive power sources (such as coal), toward carbon-neutral power sources (such as hydro-electric or nuclear), there is no reason that prices have to rise.

The important point, however, is that these decisions are all made by the market, not by the government. The only question that the government needs to answer is what the correct price for carbon should be. The current answer in Canada is zero. Because of this, people who oppose carbon taxes (or cap-and-trade systems, which according to the current government are the same thing) need to explain why zero is the correct price.

There was a bit of the philosopher’s “sneaky modal” here, since when I wrote that “there is no reason that prices have to rise,” I did not mean to say that prices would be unlikely to rise, only that they would not have to rise. Unfortunately, that was lost on many readers, several of whom wrote to me expressing their outrage over my unfathomable stupidity, wondering how I could have become a university professor, and so on. I didn’t have the heart to tell them that the problem was not really that I was being stupid, but that I was being excessively clever.

In any case, the essential point stands. The beauty of the market economy is that, when the government contemplates increasing the price of carbon, the only thing that it needs to worry about is whether it should increase the price of carbon, which is to say, whether the private cost to individuals fully reflects the social cost of their consumption. All other adjustments are made automatically by the market. If this means that other prices go up, then they probably should have been higher all along. In any case, the point of it all is to change people’s behaviour, so that they substitute less carbon-intensive activities, consumptions patterns, etc. for more carbon-intensive ones. If people respond appropriately to the price signals, there is no reason that the price increases need reduce their quality of life.

This brings us around to the second talking-point, which is the claim that a carbon tax would be “job killing.” Now this is either trivially true or else perniciously false, depending upon how you interpret the concept of “killing” a job. If it means that somewhere, someone will lose a job – even if somewhere else, someone will gain a job – then yes, a carbon tax would “kill” jobs. But then so would a change in the price of pretty much anything. In this respect, all international trade is “job killing.” Increasing the price of shoes is “job killing.” If, however, “killing” jobs means generating a net loss of employment, or generating unemployment, then the claim is completely false.

Indeed, it is absolutely elementary economics that it will not. In fact, this would make a great final exam question for an Economics 100 course: “Please explain why carbon pricing will not lead to any reduction in employment levels. Hint: it has nothing to do with the ‘green jobs’ that will be created.”

Now one might claim that carbon taxes, despite generating no unemployment, would reduce national income as a whole (or depress the rate of growth). At first glance one can see the argument: Fossil fuel allows us to generate a lot of energy with very little effort. If we burn less fossil fuel, and instead use energy that requires more effort to produce, we are reducing the productive capacity of the economy as a while. As a result, society as a whole will be less wealthy.

There are two things to point out about this argument. First, it lacks any empirical support. OECD countries with more significant “green taxes” than Canada are also, in general, more productive. But there is also a conceptual confusion underlying the argument. The carbon pricing proposals are backed up by cost-benefit analyses, which show that the net benefit of intervention would be positive. With environmental regulation, however, the costs typically have a market price, whereas the benefits do not. So even in a carbon pricing scheme depressed the rate of GDP growth, it would still be generating benefits greater than the costs over the long term, it’s just that the benefits would not be showing up in the GDP numbers. (Compare: the ban on leaded gasoline generated significant costs, by increasing the price of gas by 2-3 cents per litre. It also generated enormous benefits, such an 80% reduction in blood lead levels and a several point gain in average IQ. These benefits, however, have no market price, even though individuals value them quite highly.)

In other words, the idea that a carbon tax would cost us anything, as a society, is entirely an illusion. On the contrary, the reason for wanting to impose a price on carbon is precisely to make us all better off. (As I put it a while back, if government were a business, environmental regulation would be a profit centre.)

In conclusion, I think it is important to emphasize that the Harper government has yet to articulate any rational basis for its opposition to carbon pricing. All we have heard are the two talking points, and as we have seen, both of them fall apart under even elementary scrutiny.



The two worst talking points on carbon taxes/pricing — 3 Comments

  1. My economics 100 class is a while back (and I didn’t do so great on the final); so could you tell us what the answer to your exam question is, please?

    (related to that: I think that you are right that these talking points don’t hold up, but if an op-ed did not give you enough room to take them down as thoroughly as you’d have liked, maybe it takes a little more than ‘elementary scrutiny’ to debunk them after all.)

  2. I don’t think I have ever seen any free market types really admit externalities exist and that government may need to price them. You’ll get a lot of talk of carbon being good for plants and such in response here. It’s a hermetically sealed set of self-reinforcing lies and sophistry that keeps this scam going.

  3. Hasko: the problem is that the whole “everything depends upon everything else” aspect of the market is hard to explain concisely. Once you get that idea, then it’s elementary that changing one price changes other prices, and that certain things net out — but the underlying idea is not something you can squeeze into an op-ed. Anyhow, the answer to the question is that if you increase the price of one thing, leading to a reduction in consumption of that thing, the demand just gets shifted to some other commodity. So if jobs are lost, because of the decline in demand for the thing that is now more expensive, jobs will be gained, because of the increase in demand for the things that are now (relatively) less expensive. Also there is the important point that an increase in all prices is not actually a decrease in real wealth, it is just inflation.

    Dan: my own experience is that free market types admit externalities, but then argue that private contracting (a la Coase) is the more efficient way of addressing them. (In other words, they wish away transaction costs, rather than wishing away externalities.)