Carbon Tax December 2018 • 6 minutes

I’ve written up my thoughts on occasion to various levels of politicians on carbon taxes but I wanted to put them in a single place in order to clarify my own thinking and get ideas from others on how to solve this issue. My assertion is that a revenue neutral, universally applied carbon tax will be necessary to price in climate change externalities and prevent them in future.

It seems like climate change is having legitimate and negative impacts on some people in some areas, but that certain indirect implications like more expensive produce or energy actually affects pretty much everyone. The challenge is that because climate change is a negative externality and that doing things that lead to it tend to provide an advantage to the person, company or country that engages in those things, we have to solve it through incentives. Incentives are pretty much the only way to get a large body of people to do what you want.

I don’t think I agree with the line of reasoning that we are past some point of no return, ultimately the negative economic effects of climate change would just keep growing until either 1. Everyone ran out of resources to spend combating it (unlikely) or 2. We can preempt that from happening through incentives. The challenge with a lot of what’s been proposed so far in practice is that it basically hurts the economy (it makes things more expensive for people). That is very hard to pull off politically, and so far the arguments have only won over people with certain politics and less so others. We have to figure out a way to win over everyone, without doing harm to anyone in the process, else it remain a political issue rather than a practice one. We can’t just keep beating people over the head with guilt and pretending that will work.

There are various ways of approaching it, but the basics of it are to take all the harmful externalities (pollution, unsustainable business practice, unsustainable energy) and price in those externalities to the best of our ability. Tax gas, clear cutting trees, pesticides, plastic and other things that lead to these externalities more heavily. In order to pull that off, you should probably make sure it doesn’t create a giant economic burden for the payer of the tax, so you should reduce taxes in order areas in order to fund it. My proposal would be personal income tax: it seems like the most productive people pay the most which doesn’t really make sense. If you have the same amount of money to spread around thanks to carbon tax, return that money to people in the form of lower income tax. That way people’s expenses total the same thing, but the incentive makes them shift their spending away from things with negative externalities.

For an individual, this might mean they take home more of their gross. Buying an electric car would be cheaper than buying a gas car, because the price of gas would be very high and the price of an electric car would be the actual economic price. At that point, the individual buys the electric car at the real price, which is really the only sane model. Very few people are willing to pay way more in order to do the sustainable thing, but that’s more easily solved by 1. Unlocking additional wealth so they can choose the sustainable thing by reducing income tax capture and 2. Drastically increasing the price of the bad stuff so that no one wants to buy it anymore.

As the price of gas comes down, it turns out people buy bigger cars rather than electric ones. The reason being they have a very fixed amount of wealth to spend on a car, and big cars are these days both cheap to operate and practical. So you really have to increase the tax on gas to the point that barring the most exceptionally important uses, it isn’t practical to use it for vehicles. This brings us to the second point: you probably have to phase something like this in. Doubling gas tax would be a metaphorical dick move if you did it overnight. The reason being, everyone with a gas car would probably hate you politically as they can’t change overnight.

So in order to be successful, you don’t just need a revenue neutral carbon tax, you need to phase it in. Fast enough to fix the problem before it actually blows up, but slow enough you don’t just end up with angry populists getting voted into office to reverse all your policies. Some places have pushed the guilt politics too far and ended up with a defiant populist in office, which simply sets back progress towards the world everyone knows we need to end up with.

The nice thing about going slow is that the politics work, and the nice thing about revenue neutral is that they work on both sides. Tell the Republican/conservative/status quo cohort that you found a way to drastically reduce personal income tax, and tell the Democrat/liberal/progressive cohort you found a way to make the other side take climate change seriously, plus you’re pricing in the cost of carbon externalities and unsustainability. It’s almost too good to be true but I can’t see a path to it failing politically, unless damage has been done trust wise in overusing the guilt card. And that is what I fear in Canada and elsewhere.

It’s unfortunate that politicians aren’t more rationally long-term selfish. If they were, they would see that they are missing an opportunity to both solve one of the biggest problems of our age and do so in a way that impresses their base. If we can’t solve problems like this, it may be more of a systemic issue, because this is exactly why government policy exists in the first place. The only way to make this kind of thing come to fruition though is to continue to pressure whoever represents you in government. The nice thing being you can focus on the selfish benefits, depending on their politics, of implementing something like it. And try to get it out of their head that we should raise taxes across the board to price it in, and/or ignore it until it goes away. They know who they are. Few civic issues seem to actually require action, but this does.

So on the basis of these points, I’ll just say that we should really pressure whoever we call the government into implementing a revenue neutral carbon tax, and implementing it over the course of the next few years. Every other approach will probably fail, and the Lindy/evolution process will probably just bring us back to this one. If you have a better idea, comment and let me know. I would love to hear it, but the options at this point seem both limited and obvious.