The Case For A Carbon Tax (Book Review)

case for a carbon tax book cover photo© Island Press

Watch a live discussion with Shi-Ling Hsu right now.

Though climate change action seems politically off the table in the United States, if certainly not the rest of the world, setting a price on carbon remains the crucial solution to preventing dangerous global warming—as well as indirectly solving a number of other environmental and public health problems associated with fossil fuel usage.

How to do that remains a contentious subject, with cap-and-trade dominating the international discussion, even though some of the most prominent climate scientists and economists argue that some form of direct carbon tax would be both more economically efficient and environmentally effective.

Which is where University of British Columbia law professor Shi-Ling Hsu's The Case For A Carbon Tax, published by Island Press, comes in.

After a brief discussion of alternative methods of controlling pollution, cap-and-trade systems, command-and-control regulations on emissions (such as has been done mandating scrubbers on power plant smokestacks), and government subsidies for alternatives to polluting technologies, Hsu launches into a 10-point exploration of the superiority of carbon taxes.

There's not space to go into every part of the of Hsu's case—presented very thoroughly, with countless examples from real-world application—so I'll pick out some of the more interesting parts.

On the perils of backing of one technology or another:

The overlooked danger is that by supporting specific renewable energy technologies now, we run the risk of effectively locking them in for decades, and perhaps missing the change to find renewable technologies with even smaller carbon or environmental footprints. ... It is far less dangerous to spur growth by taxing that which is undesirable, than encouraging capital formation around that which we think, at this time, is desirable. [...] A carbon tax is capital-neutral: it does not encourage the formation of expensive physical capital that would inhibit future changes in production. [...] A carbon tax also avoids, at least as well as other instruments [to control pollution], the creation of political economies that would inhibit future policy changes. Today's political grease is tomorrow's obstacle to change and reform, as the powerful coal lobbies have taught us.

On government being generally better at reducing 'bads' than in increasing 'goods':

If the goal is to reduce greenhouse gas emissions, then a policy instrument should draw on what government does well -- tax -- rather than what it does poorly -- make strategic market decisions. With a worrying problem such as climate change, it is too easy and too dangerous to fall into the trap of thinking that governments can "fix" the problem directly, funding a potential "home run" or "gamechanger".

On price signals, versus cap-and-trade:

In general, a carbon tax will encourage innovation in ways that a cap-and-trade program does not... First, a carbon tax introduces a steadier price signal that would generally not be present in a cap-and-trade program... [Second], over time, innovation will reduce the price of [pollution] allowances, and if innovation is successful enough it will cheapen the price of allowances so that innovation will no longer be worthwhile... [Third, valid only when pollution allowances are given away and not auctioned off], the free allocation of allowances creates an asset in the hands of emitters, something that does not happen in a tax regime. The fact that innovation could reduce the value of that asset is a disincentive for cost-saving innovation.

On the comparative ease of administering a carbon tax, versus the needed additional administrative overhead required by other carbon pricing methods:

A carbon tax has some more subtle advantages over its cousin cap-and-trade program. While both draw on the advantage of working within a global fossil fuel regulatory system that is capable of determining carbon content and tracking the movement of fossil fuels all over the world, cap-and-trade programs will require the development of more regulatory infrastructure. In all developed countries and in many developing countries, a number of federal and subnational taxes are already levied at the gasoline pump, and incorporated into the price that is prominently posted at gas stations. A carbon tax can and has been added into prices as just another tax on gasoline. Enforcement thus draws from existing tax collection procedures and institutional arrangements. So, whereas the collection of taxes on fossil fuels is simple even in developing countries, the establishment and administration of cap-and-trade system is not.

And, three ways carbon tax beats cap-and-trade internationally:

China and India are likely to be more open to a carbon tax that does not smack of a mandate externally imposed by wealthy countries. Moreover, for a carbon tax, governments get to keep the proceeds. [...] Cap-and-trade programs that have been implemented thus far have included offsets, which have the perverse incentive of discouraging international participation in greenhouse gas reduction. Since offsets provide a means for capital flow from developed countries to developing countries, joining an international accord would carry with it the added disadvantage...of giving up this source of foreign capital." [...] Under international trade law, a carbon tax will provide a stronger basis for levying , import and export adjustments when a country that reduces carbon dioxide emissions trades with a country that doesn't.

Of course, regardless of the policy and economic superiority of a carbon tax versus the alternatives, there remains the ever-sticky problem of convincing people (particularly in the US, again) that they ought to set aside the collective knee-jerk aversion to the very word 'tax'.

Hsu goes into a briefer exploration of what's behind this visceral reaction, on three separate themes: The "Do No Harm" Effect, the Identifiability Effect, and the Endowment Effect. But Hsu is less persuasive here, in proposing how to overcome these hurdles, than in making the economic and environmental case for a carbon tax. Which isn't a mark against the book as a whole. Indeed, overcoming these sort of psychological barriers is crucial to solving pretty much every environmental problem we currently face.

Is the case for a carbon tax effectively made by Hsu?

Honestly, I have a hard time judging that, as going into reading the book I was already convinced for some time that a variation of a carbon tax would be more honest, more effective, more transparent, and less prone to financial shenanigans than cap-and-trade. That said, Hsu's case is thoroughly documented and eloquently made.

Read more about The Case For A Carbon Tax on Island Press' site. It's available now from your favorite bookseller, as well as directly from the publisher.

Watch a live discussion with Shi-Ling Hsu right now.

The Case For A Carbon Tax (Book Review)
Hsu's case for the superiority of a carbon tax over other methods of pricing carbon is throughly and eloquently made. But will it actually help us get past our collective aversion to the word 'tax'? That's frankly the bigger question.

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