Experts in Economics and Climate Policy

Some comments in the Chris Hatch, Zero Carbon newsletter for November 5 2023, highlight the struggle to have political pronouncements refer to expert analysis of policy like the carbon tax in Canada.

Economist's take on the Tax

“The carbon tax is dead,” laments Trevor Tombe, a professor of economics and a carbon tax supporter. “It all unravels from here” is the widespread view among economists who have been championing carbon pricing as the most “efficient” way to cut greenhouse gas emissions. (Zero Carbon Newsletter | Canada's National Observer: News & Analysis, n.d.)

Angela Köppl and Margit Schratzenstaller have published  Carbon taxation: A review of the empirical literature in the Journal of Economic Surveys. The conclusion of their study includes attention to the big picture of climate change. Public acceptance of carbon taxes can be increased by providing public information, avoiding negative distributional effects, and channeling part of the revenues into "environmental projects."

Environmental taxes in general and carbon taxes in particular need to be considered in a broader perspective in the context of climate change, and it is important to keep in mind that the transition to climate neutrality requires a profound structural change that cannot be achieved through incremental (political) steps. The focus therefore needs to be on a broader policy mix that integrates a wide range of policy interventions such as price-based instruments, subsidies, standards, and public infrastructure investments, and not to forget the greening of finance. (Köppl & Schratzenstaller, 2019)

The researchers have made several recommendations that can be derived based on the results presented in their report.

✔️		Eight Characteristics of Effective Carbon Tax Policy
	1	Carbon tax at a sufficiently high level to trigger emissions reduction and innovation.
	2	Two contradicting objectives need to be balanced carefully. Exemptions will undermine environmental effectiveness of carbon taxes and will improve acceptance and public support.
	3	Revenue recycling is important to increase public support and acceptance and to mitigate undesirable distributional effects. Recycling schemes should be created in a way to support innovation and employment.
	4	Revenue recycling schemes cutting the labor tax burden seem to be more favorable regarding macroeconomic effects compared to lump-sum revenue recycling, whereas the latter is more supportive regarding public acceptance. Policymakers therefore should consider both mechanisms when designing carbon taxes and recycling schemes.
	5	Compensation measures to cushion off regressive effects should also account for socio-demographic household characteristics.
	6	Information and communication are important to secure public support for carbon taxes. On the positive impact of the carbon tax on emissions reduction and on the future costs of inaction in a business-as-usual scenario.
	7	Present the broad theoretical and empirical consensus on the usefulness of environmental taxes in general and carbon taxes in particular. Take into account both the system boundaries and the specific political context as well as general socioeconomic conditions and policy styles in the country concerned.
	8	More evidence is needed to enable the diffusion of experience and knowledge gained on the effectiveness of climate policy instruments across countries.

First of all, carbon tax rates should be implemented at a sufficiently high level in order to trigger emissions reduction and innovation.

Second, exemptions which on the one hand very likely will undermine environmental effectiveness of carbon taxes, will on the other hand improve acceptance and public support; therefore, these two contradicting objectives need to be balanced carefully.

 

Third, revenue recycling is important: to increase public support and acceptance, but also to mitigate undesirable distributional effects. If possible, recycling schemes should be created in a way to support innovation and employment. 

Fourth, revenue recycling schemes cutting the labor tax burden seem to be more favorable regarding macroeconomic effects compared to lump-sum revenue recycling, whereas the latter is more supportive regarding public acceptance. Policymakers therefore should consider both mechanisms when designing carbon taxes and recycling schemes.

 

Fifth, compensation measures to cushion off regressive effects should not only consider vertical distributional effects, but should also account for horizontal aspects, that is, socio-demographic household characteristics. 

Sixth, information and communication are important to secure public support for carbon taxes: not only with regard to the positive impact of the carbon tax on emissions reduction and further co-benefits, but also the future costs of inaction in a business-as-usual scenario.

Finally, apart from the broad theoretical and empirical consensus on the usefulness of environmental taxes in general and carbon taxes in particular, any specific policy reform must take into account both the system boundaries and the specific political context as well as general socioeconomic conditions and policy styles in the country concerned.

Last but not least, more ex-post evidence is urgently needed to enable the diffusion of experience and knowledge gained on the effectiveness of climate policy instruments across countries (Carraro et al., 2015), as informed policymaking requires sufficient empirical evidence (Green, 2021). (Köppl & Schratzenstaller, 2019)

Chris Hatch, in the Zero Carbon newsletter, regrets that the debate has become fixated on carbon taxes instead of carbon emissions. 

You’ll often hear that carbon pricing is the cheapest way to drive cuts in climate pollution. And that there’s evidence it works. That evidence exists but, frankly, it’s not overwhelming. Pricing does seem to work but the effects are modest and usually accompanied by bigger carbon cuts from regulations.

There seems to be no way forward that won’t be a messy combination where regulation does the heavy lifting supplemented by pricing and incentives. Industry always fights regulations but there’s a long history of successful ones that industries claimed they could never survive.

How did Ontario phase out coal? Regulations.

How is Alberta phasing out coal? A combination of regulations and pricing.

How did we get lead out of gasoline? Regulations. 

Acid rain? Regulations that allowed pricing and trading. 

The ozone hole? A regulated phaseout of the chemicals causing the problem. (Zero Carbon Newsletter | Canada's National Observer: News & Analysis, n.d.)

The rejuvenation of carbon pricing in Canada should be based on the research and expertise of economists who have a track record of research in the subject. The “feeling” of disgruntled provincial premiers and the populist dog whistle of “Axe the Tax” are political slogans that do nothing to advance our need for programs that are based in the research of experts and our experience with past regulatory regimes to effect the changes necessary to reduce the extremely expensive damage from future wildfires, floods, and hurricanes.

References

Köppl, A., & Schratzenstaller, M. (2019, March 9). Carbon taxation: A review of the empirical literature. Wiley OnLine Library. Retrieved November 8, 2023, from https://onlinelibrary.wiley.com/doi/full/10.1111/ 

Zero Carbon newsletter | Canada's National Observer: News & Analysis. (n.d.). National Observer. Retrieved November 8, 2023, from https://www.nationalobserver.com/newsletters/zero-carbon