Carbon Tax Compensation – The Solution For Climate Change

Carbon Emmiting Companies Are Free-Riding At The Expense Of The Environment

The climate and our environment are a global public good.

Think about your actions along the lines of both positive and negative externalities.

Every time you jump into your car and drive to work the cost of your journey is priced by a whole range of things: The amount of fuel you consumed, the value depreciation of your car, the depreciation of the road driven, the opportunity cost, your CO2 offset and just about a thousand other things.

All these factors are accounted for through different pricing mechanisms along the way. Your fuel is priced according to a myriad of factors including transport, market conditions, extraction and so forth. The car deprecation is priced through its odometer at resale and condition. The depreciation of the road is covered by your road tax. Your time spent is priced according to your necessity to get to work. Your opportunity cost is priced according to the value of any other activity you could have been doing.

This is all a really roundabout way to say that although it may not seem it, prices are set according to thousands of moving parts and are supposed to account for the all the potential externalities any given activity may offset.

Near-Impossible To Measure

However, as you may have already guessed, this system is far from perfect and can be wildly inaccurate.

The pricing mechanism is not perfect and is most evidenced by an unaccounted for ‘damage to climate’ negative externality from CO2 emitting producers. Now, these producers are all ‘free-riding’ which simply means that they are assuming pricing benefits at the cost of the environment because their prices are artificially lower having not had the negative environmental (damage to the environment) priced in.

To calculate the true cost of any CO2 emitting activity the cost to the environment needs to be priced in. Simple as that. If prices remain steadfastly separate to their CO2 damage, the CO2 emitting producers will not have the price incentive to adjust their operations.

Elon Musk & Charlie Munger Have Said As Much Munger famously wrote – “show me the incentive and I will show you the outcome”.

Elon Musk has said on numerous occasions that the whole CO2 problem is in its pricing.

There is nothing evil about carbon, nothing evil about oil, and CERTAINLY nothing evil about big energy companies. They are simply ineffective to escape dominating incentives.

All it takes is the free market forcing function to adjust carbon-emitting prices equal to the negative externality then we are hunky dory.

Stop the free riding. Price the externality.

But is in this simple truth, complexity wins the day.

Hang In There

I hope that made some sense but in case it was more gibberish than economics, give this a go.

Fossil fuel-producing companies are not paying for their environmentally damaging fossil fuels.

This would not be a problem if they were the only ones experiencing the downside, but the crux of this issue is that their actions affect people outside of their ecosystem, they create downside for more than just themselves.

Beers Bad For The Environment?

Take, for example, a producer in Holland – say, Heineken – who may produce their product, have it transported and then consumed, and have all of this happen irrespective of the input from you or me.

In this case, the whole life cycle of that Heineken produced X amount of CO2. It is not important how much for the sake of this example, it is an arbitrary amount. But that CO2 affects the environment which in turn affects all of us – even if we had nothing to do with that Heineken.

And this is what it means to ‘free ride’, and as of now, essentially all producers out there are free-riding by not paying for the negative externality (CO2) that they produce.

What Is The Solution?

We need CO2 producing companies to have their environmental damage priced in.

Unfortunately, it seems that leaving it to the free market won’t enact the level of immediate change required. The consumer is not changing his buying behaviour significantly enough to make a difference. The solution for the immediate future is a carbon tax.

The answer to lowering our emissions lies with the incentive. As it stands the producer does not have an incentive to invest in green tech or different operations to reduce their CO2 emissions. Even if the company is environmentally conscious, their incentive for change is stifled by making themselves uncompetitive through raising their costs. Which, as it stands, would be the result for any company now who attempts to reduce their CO2.

What a Carbon Tax does is level the playing field. Now everybody’s costs are raised, and it is no longer a disincentive to explore more carbon efficient means of production. A Carbon Tax incentivises business to produce differently.

So, there you have it – a key solution to climate change is the carbon tax. But this is highly controversial and invasive.

How Is It Implemented?

Essentially, if we are any chance of experiencing the positive effects of this change, it requires action in unison across the board. This is certainly the hardest part of the implementation. Nordhaus – the Nobel prize-winning economist who has birthed the Carbon Tax into the mainstream – suggests the formation of a ‘Global Climate Club’. The club would be comprised of influential nations and work to set an international carbon price. Countries which refused to abide by the carbon price would be shunned and shamed through tariffs and sanctions to force (incentivise) them to get on board.

The tax would reflect a cap and trade system which in very simple terms means that CO2 emitters would have a ceiling level – cap – of CO2 emissions in a year. If a company is to exceed their cap, then way would pay a fine per CO2 ton set according to the Global Climate Club. The trading aspect comes into play when companies produce below their quota – cap. In these cases, the carbon efficient company can sell their unused carbon credits to inefficient producers at a cost. Rather than those inefficient producers – who exceeded their cap – pay a fine to the government. So, if you did exceed your CO2 producing limit, rather than paying a fine, you would be buying credits off your cleaner, greener competitor, therefore further incentivising cleaner, greener methods of producing.

This is quite clean because the incentives are clear. Being a carbon efficient producer will not only render you free from heavy taxation, but your carbon efficiency can also become another revenue stream as excess carbon credits have market value. Therefore, the competition would swing in favour of carbon efficient producers – which ultimately is the whole point of this Carbon Tax!

Finally – a little cherry on top of this policy is the intended use of the tax collected dollar. Tax revenue generated from this carbon tax would not just join the stale pool of government funds alongside everything else. The tax generated from the carbon tax would go into a separate fund that X for Y will take the money collected from inefficient producers and then be passed on to non-carbon intensive goods – such as health, internet, and so on.

Arguments Against The Carbon Tax – Of Which There Are Many…

I will admit I am very sceptical about this policy – and not because I don’t believe in it, I am sceptical over just how well it can be implemented.

This policy – in my eyes – produces a net good. We need more drastic intervention to combat climate change. The general attitude towards climate change now all feels very nihilistic and there is a sense of nothingness, a sense that nothing can be done. For that reason, I am stoked to see this policy get some legs and attention, but can it be implemented as intended?

Let us start by addressing the argument against this policy assuming it could be implemented flawlessly.

A sanctimonious free-market believer will adamantly argue against this level of government intervention in all cases. They will say a carbon tax will do nothing but artificially distort prices and the intended good of this policy will be eradicated by the stifling of those very businesses we rely on for our everyday goods and services. Because it is true that the businesses most directly affected by this policy are those very businesses we use every single day without knowing it. Normally I would be arguing this point as well but given the special nature and severity of climate change, I think the market will be too slow in administering the response required that a carbon tax will force through its ugliness with more haste.

All other arguments are implementation based. Is sanctioning nations that refuse to join the climate club ethical? How can we accurately measure the price of our carbon tax since it is always measured through a guesstimate’s lens? Will the tax revenue really be returned in equal measure to a non-carbon based good? Who is to say that the price of extra carbon credits is not less than the price of taxation, ultimately making the policy redundant?

There are many arguments that should be addressed whenever this policy is discussed. Any government policy this invasive should be questioned and dug into with fine scepticism. But like I said earlier – the carbon tax is addressing an issue abnormal in scope. Climate change is an abnormal problem and effectively worse than any downside this tax would cause.

The last argument against – and dishearteningly the most vocal – I will not give any credence too. For those who make this argument have excused themselves from the conversation. And that is the fundamental argument against the reality of climate change. For those who are ‘unbelievers’, this policy is a non sequitur because there is no issue that needs to be addressed. And it is this cohort of people that pronounce the conspiracy of climate change who do the most damage to the life of the potential policy.

We Reached The point Of Absolute Necessity Long Ago…

This is, of course, all a part of a much wider context. A context which exposes the global economic reality that per capita we are producing less and less carbon with each generation. The economic reality that despite all the negative press and doomsday rhetoric the planet is already steered in the right direction and at the end of the day things are going to be just fine. This policy is best explained and presented amongst all other contexts which are so brilliantly examined in Bill McAfee’s book, ‘More From Less‘.

For me – the issue of climate always comes down to a simple cost/benefit analysis. Even if the carbon tax produces more harm than good, and even if it is a complete fail. I am prepared to take that risk. I feel its potential downsides because at this stage it is evidently clear that the cost of inaction exceeds the cost of action. And that ultimately needs to be the attitude we take whenever addressing climate issues.

When you are speaking of climate change the potential downside is so severe than even if your proposed policy is a 100-1 cost-inefficient. It is still a cheaper alternative to inaction and still worth. our. while.

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