BC’s carbon tax was supposed to be “revenue neutral”, meaning all carbon tax revenue would be “recycled” to British Columbians through personal income tax cuts, corporate income tax cuts and a low-income credit. When the 2008 budget launched the carbon tax, we were provided with a forecast that had revenues precisely match recycling through tax cuts and credits, with about one-third of revenues going to each of PIT cuts, CIT cuts and the low-income credit.
But recent budgets have shown a carbon tax deficit: tax cuts have completely swamped carbon tax revenues. While some were concerned that the carbon tax would be a “tax grab”, instead we are a carbon tax is that is revenue negative not revenue neutral.
Corporate tax cuts are now absorbing the lion’s share of carbon tax revenues. In 2010/11, they will be equivalent to 57% of carbon tax revenues, compared to one-third in 2008/09. Cutting corporate taxes is the worst possible way of using carbon tax revenues. This is because of the intense concentration of ownership of capital at the top of the income distribution (when you hear corporate tax cuts think upper-income tax cuts), and also because shareholders outside BC, who pay no carbon tax, benefit from corporate tax cuts.
A lot of the draft agreements floating around reference a principle of equity in cumulative emissions budgets. For example, the latest AWG-LCA draft,
A long-term aspirational and ambitious global goal for emission reductions, as part of the shared vision for long-term cooperative action, should be based on the best available scientific knowledge and supported by medium-term goals for emission reductions, taking into account historical responsibilities and an equitable share in the atmospheric space;
That’s a nice sentiment, but the goals expressed here are not compatible. If you take “aspirational and ambitious” to mean 55oppm – much less stringent then a 1.5 or 2C target – we’re already halfway or more through civilization’s cumulative emissions budget. Most of the historic emissions occurred in the 20th century. The rest will happen this century. The problem is, there are a lot more people around this century than last. Therefore, this century’s remaining emissions budget just isn’t big enough to make up for historic inequity in emissions, even if you allocate it all to the developing world.
For example, here’s a scenario in which the developed world stops emitting almost immediately – essentially abandoning its GHG-intensive capital stock – while the developing world pursues a trajectory consistent with a global 50% cut by 2050. Per capita emissions convergence and reversal happens right away:
I recently wondered whether developing countries were asking for the wrong thing in Bonn. Now Bolivia is barking up the right tree with a proposed “climate debt” concept. The idea’s actually quite old; it’s already well developed in the Greenhouse Development Rights framework.
The trick is, how to achieve an equitable outcome that’s consistent with the physics of climate? Consider this reaction to ideas like climate debt:
Obama’s Global Tax
By INVESTOR’S BUSINESS DAILY | Posted Tuesday, July 29, 2008 4:20 PM PT
Election ’08: A plan by Barack Obama to redistribute American wealth on a global level is moving forward in the Senate. It follows Marxist theology – from each according to his ability, to each according to his need.
Obama would give them all a fish without teaching them how to fish. Pledging to cut global poverty in half on the backs of U.S. taxpayers is a ridiculous and impossible goal.
We already transfer too much national wealth to the United Nations and its busybody agencies. …
If you’re worried abut gasoline and heating oil prices now, think what they’ll be like when the U.S. is subjected in an Obama administration to global energy consumption and production taxes. Obama’s Global Poverty Act is the “international community’s” foot in the door.
Obama has called on the U.S. to “lead by example” on global warming and probably would submit to a Kyoto-like agreement that would sock Americans with literally trillions of dollars in costs over the next half century for little or no benefit.
“We can’t drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all times . . . and then just expect that other countries are going to say OK,” Obama has said. “That’s not leadership. That’s not going to happen.”
Oh, really? Who’s to say we can’t load up our SUV and head out in search of bacon double cheeseburgers at the mall? China? India? Bangladesh? The U.N.?
I suspect that these sentiments are quite prevalent, at least in the US. I’m even sympathetic in at least one respect: transfers from the global rich to poor are beneficial in principle, but difficult to execute. Transfers from country to country are susceptible to capture by elites. Direct transfers among individuals could be facilitated by a global carbon market with allowances allocated to individuals (one of the few good arguments for emissions trading in my mind), but would undemocratic regimes permit their citizens to participate?
I don’t see agreement on this front any time soon. I could see things going a different way: the US, EU and a few other developed nations move to reduce, then goad developing nations along with a mixture of carrot (offset projects and other transfers) and stick (border carbon adjustments).
BONN, Germany (Reuters) – China, India and other developing nations joined forces on Wednesday to urge rich countries to make far deeper cuts in greenhouse gas emissions than planned by 2020 to slow global warming.
I’m sure that the mental model behind this runs something like, “the developed world created most of the problem up to this point, and they’re rich, so they should get busy making deep cuts, while we grow a little more to catch up.” Regardless of fairness considerations, that approach ignores the physics of the situation. If developing countries continue to increase emissions, it hardly matters how deep cuts are in the rich world. Either everyone plays along, or mitigation doesn’t work.
I fired up C-ROADS and ran a few scenarios to illustrate:
The top blue line is the AIFI business-as-usual, with rapid emissions growth. If rich nations stabilize emissions as of today, you get the red line – still much more than 2x CO2 at the end of the century. Whether the rich start cutting emissions a little (1%/yr, green) or a lot (5%/yr, green) after that makes relatively little difference, because emissions from the rich world quickly become a small share of the total. Getting everyone to merely stabilize emissions (at 2009 levels for the rich, 2020 for developing countries, black) makes a substantially bigger difference than deep cuts by the rich alone. Stabilizing CO2 in the atmosphere at a low level requires deep cuts by everyone (here 4%/year, brown).
If we’re serious about stabilization, it doesn’t make sense for the rich to decarbonize faster, so that the developing world can construct more carbon-dependent capital that will ultimately have to be deconstructed. It may sound “fair” in carbon-per-capita terms, but I don’t think that’s a very good measure of human welfare, and it’s unlikely to end up with a fair distribution of damages.
If the developing countries are really concerned about climate impacts (as they should be), they should be looking to the rich world for help getting onto a low-carbon path today, not in 20 years. They should also be willing to impose a carbon price on themselves. It won’t collapse their economies any more than it will ours. Without a price on carbon, rebound effects and leakage will eat up most gains, as the private sector responds to the real signal: “go green (but the price of carbon is zero, wink wink nudge nudge).” Their request to the rich should be about the transfers, property rights, and other changes it takes to get the job done with some measure of distributional fairness (a topic that won’t be popular in some circles).
In Four Legs and a Tail I pondered what we need to get some action on climate. Over the holidays I heard Seamus Heaney on NPR. A story from his Nobel lecture came up, which I think rather poignantly illustrates the nature of the needed paradigm shift, in a different context:
One of the most harrowing moments in the whole history of the harrowing of the heart in Northern Ireland came when a minibus full of workers being driven home one January evening in 1976 was held up by armed and masked men and the occupants of the van ordered at gunpoint to line up at the side of the road. Then one of the masked executioners said to them, “Any Catholics among you, step out here”. As it happened, this particular group, with one exception, were all Protestants, so the presumption must have been that the masked men were Protestant paramilitaries about to carry out a tit-for-tat sectarian killing of the Catholic as the odd man out, the one who would have been presumed to be in sympathy with the IRA and all its actions. It was a terrible moment for him, caught between dread and witness, but he did make a motion to step forward. Then, the story goes, in that split second of decision, and in the relative cover of the winter evening darkness, he felt the hand of the Protestant worker next to him take his hand and squeeze it in a signal that said no, don’t move, we’ll not betray you, nobody need know what faith or party you belong to. All in vain, however, for the man stepped out of the line; but instead of finding a gun at his temple, he was thrown backward and away as the gunmen opened fire on those remaining in the line, for these were not Protestant terrorists, but members, presumably, of the Provisional IRA.
It is difficult at times to repress the thought that history is about as instructive as an abattoir; that Tacitus was right and that peace is merely the desolation left behind after the decisive operations of merciless power. I remember, for example, shocking myself with a thought I had about that friend who was imprisoned in the seventies upon suspicion of having been involved with a political murder: I shocked myself by thinking that even if he were guilty, he might still perhaps be helping the future to be born, breaking the repressive forms and liberating new potential in the only way that worked, that is to say the violent way – which therefore became, by extension, the right way. It was like a moment of exposure to interstellar cold, a reminder of the scary element, both inner and outer, in which human beings must envisage and conduct their lives. But it was only a moment. The birth of the future we desire is surely in the contraction which that terrified Catholic felt on the roadside when another hand gripped his hand, not in the gunfire that followed, so absolute and so desolate, if also so much a part of the music of what happens.
The bottom line:
In this study, we model the distribution of BC’s carbon tax and recycling measures. Our results conirm that BC’s carbon tax, in and of itself, is regressive. However, the overall carbon tax and recycling framework is modestly progressive in 2008/09 ’” that is, low-income families get back more in credits, on average, than they pay in carbon taxes. If the low-income credit is not expanded, however, the regime will shift to become regressive by 2010/11. It is important for policy makers to rectify this situation in the 2009 and future budgets by minimally ensuring that the credit grows in line with the carbon tax.
A related problem:
A second concern with the carbon tax regime is that tax cuts undermine a progressive outcome at the top of the income scale. In 2008/09, personal and corporate income tax cuts lead to an average net gain for the top 20% of households that is larger in dollar terms than for the bottom 40%.
I plotted the results in the report’s tables to show some of these effects. In 2009, the lowest income groups (quintiles 1-3) come out a little ahead, but the 4th quintile faces a net loss, while the top income group is overcompensated by the corporate tax cut:
Nature has a review, by economist Dieter Helm, of William Nordhaus’ new book, A Question of Balance. I don’t have the book yet, but I’ll certainly check it out. I like the conclusion of the review:
But it may be naive to assume that substituting for environmental systems is so easy. Feedbacks in the system may be such that as climate change unfolds, the return on capital and hence the discount rate falls. Environmental damage may slow or stop economic growth; if that were the case, we would not be much better off in the future. And if we are not so well off in growth terms, Nordhaus’s slower and more measured policy approach may not be so favourable over taking rapid action now. In other words, Stern’s conclusion might be correct, but not his derivation of it ’” right answer, wrong analysis.
This is a crucial point. Richard Tol pointed out the substitutability problem back in 1994 but it hasn’t really found its way into formalization in mainstream IAMs. The issue of slowing or stopping growth isn’t limited to climate feedback; oil and gas depletion, the ever-present possibility of conflict, and degradation of other resources also impose constraints.
I have to take issue with one part of the review:
Where A Question of Balance has most power is where it is most controversial. Nordhaus tackles Stern head on. Stern’s case for urgent action, which the DICE model shows would be excessively expensive in the short term, rests upon his radical assumption that the time discount rate should be close to zero. This means that we should value people’s consumption equally regardless of whether they live now or in the future. Nordhaus has little time for this moral philosophy: he takes a much more positivistic position, grounded in market evidence and what people actually do, as reflected in market interest rates. The difference between Nordhaus’s optimal climate change policy and Stern’s policy based on a zero discount rate translates into a tenfold difference in the price of carbon. Stern’s discounting approach, Nordhaus argues, gives too low a rate of return and too big a savings rate on climate-stabilizing investments compared with actual macroeconomic data. Not surprisingly, then, his verdict is damning. [emphasis added]
The Stern discounting critique has been done to death. I recently discussed some of the issues here (in particular, see the presentation on discounting and welfare in integrated assessment modeling, based on the primer I wrote for last year’s Balaton meeting). In a nutshell, the discount rate can be decomposed into two terms: pure time preference and inequality aversion. Ramsey showed that, along an optimal growth path,
- interest rate = pure time preference + inequality aversion x growth rate
Stern has been criticized for choosing discounting parameters that aren’t consistent with observed interest and growth rates. That’s true, but let’s not confuse the map with the territory. Stern’s choice is inconsistent with the optimal growth framework, but is the optimal growth framework consistent with reality? Clearly, market interest rates reflect what people actually do in some sense, but they do it in a rather complex institutional setting, rife with opportunities for biases and misperceptions of feedback. Do market interest rates reflect what people actually want? Unfortunately, the micro foundation of macroeconomics is too wobbly to say.
Notice also that the equation above is underdetermined. That is, for realistic growth and interest rates, a variety of pure time preference and inequality aversion assumptions yield equality. Nordhaus, in his original DICE work, preferred 3%/yr pure time preference (no interest in the grandkids) and unit inequality aversion (doubling my income yields the same increment in happiness as doubling a poor African farmer’s income). Dasgupta prefers zero time preference on ethical grounds (as did Ramsey) and higher inequality aversion. The trouble with Nordhaus’ approach is that, unless the new book cites new research, there is no empirical basis for rates of time preference that heavily discount the future. It is difficult to create a realistic simulated context for such long term decisions, but the experimental evidence I’ve seen suggests quite the opposite, that people express some concern for even the distant future.
Thus it’s a mistake to call Nordhaus’ approach “positivistic.” That lends undue authority to what should be recognized as an ethical choice. (Again, this is subject to the caveat that Nordhaus might have new evidence. I await the book.)
I’m at the 2008 Balaton Group meeting, where a unique confluence of modeling talent, philosophy, history, activist know-how, compassion and thirst for sustainability makes it hard to go 5 minutes without having a Big Idea.
Our premeeting tackled Ethics, Values, and the Next Generation of Energy and Climate Modeling. I presented a primer on discounting and welfare in integrated assessment modeling, based on a document I wrote for last year’s meeting, translating some of the issues raised by the Stern Review and critiques into plainer language. Along the way, I kept a running list of assumptions in models and modeling processes that have ethical/equity implications.
There are three broad insights:
- Technical choices in models have ethical implications. For example, choices about the representation of technology and resource constraints determine whether a model explores a parameter space where “growing to help the poor” is a good idea or not.
- Modelers’ prescriptive and descriptive uses of discounting and other explicit choices with ethical implications are often not clearly distinguished.
- Decision makers have no clue how the items above influence model outcomes, and do not in any case operate at that level of description.
My list of ethical issues is long and somewhat overlapping. Perhaps in part that is due to the fact that I compiled it with no clear definition of ‘ethics’ in mind. However, I think it’s also due to the fact that there are inevitably large gray areas in practice, accentuated by the fact that the issue doesn’t receive much formal attention. Here goes: Continue reading “Ethics, Equity & Models”