/Terence Corcoran: We get ‘Carbon Tax for Dummies’ because they think we’re… dummies

Terence Corcoran: We get ‘Carbon Tax for Dummies’ because they think we’re… dummies

The national debate over the merits of carbon taxation keeps flitting across the surface of an ocean of complexity. The science of climate change, which estimates relatively small degrees of warming over a century, is tricky enough. The associated economic modelling is equally mysterious and theoretical. But that’s not deterring surface skimmers from cranking out commentaries on the merits of carbon taxes.

The Toronto Star’s David Olive recently offered a glib summary: “Carbon pricing is a capitalistic, free-market practice.” Jim Farney of the University of Regina wrote recently in the Calgary Herald that conservatives should embrace carbon taxes as a matter of principle. “Free market conservatives, almost by definition, hold true to a central gospel: setting prices through the marketplace is an extraordinarily efficient way to allocate scarce resources.”

When it comes to surface skimming, however, the folks at Simon Fraser University’s Clean Energy Canada aren’t even getting their feet wet. In an op-ed, they offered the following quick and easy explanation of market-based carbon taxation.

“Any economist can tell you the federal government’s approach (to carbon taxation) does work and in fact, the Nobel Prize in economics was just awarded for research demonstrating this point. Here’s an example: Let’s say I go to my local pub only to find they’ve raised the price of an Alexander Keith’s by a dollar. That’s an incentive to order a Canadian instead. Let’s say the pub is also offering customers a dollar off their bill. The incentive still exists to order a Canadian and keep the extra dollar, but I’m no worse off if I decide to order a Keith’s. That’s how price signals work.”

Before this bit of ideological twaddle becomes conventional carbon-tax-for-dummies wisdom, a few correctives are in order.

There’s the flaw in the beer analogy. The objective of the carbon-tax model is to reduce carbon emissions by imposing a tax to offset carbon’s “social costs.” In the beer case, the equivalent would be a tax on alcohol to offset the social costs of drinking.

Tobacco and alcohol are the failed demonstrations of carbon pricing models

A more accurate scenario would go something like this: A man walks into a bar and orders Alexander Keith’s. “With the new social-cost-of-beer tax,” says the bartender, “that’ll be 15 bucks.” Then give me a Canadian instead. “That’ll still be 15 bucks.” Some wine? “Twenty bucks.”

The head of Clean Energy Canada is green activist Merran Smith, one of the environmental architects, along with Tzeporah Berman, behind the Great Bear Rainforest conservation scam. But her beer analogy is flat out of logic.

The social cost of an alcohol tax, as with a social cost of carbon tax, would apply to all beers — Keith’s, Canadian, craft, imports — and all other alcohol. The U.S. Centers for Disease Control in 2010 estimated the social cost of alcohol — health care, productivity losses, accidents, etc. — at US$249 billion, or an implied tax of US$2.05 per drink.

In Canada, sin taxes on beer happen to run to around $20 a case, or about $1.60 per drink with increases added annually by greedy politicians. But no one has stopped buying beer. And if every Canadian got an annual tax rebate of $100, meant to encourage spending on alternatives to alcohol, people would still buy beer. Maybe more beer.

Another product with built in social costs is tobacco. A carton of 200 cigarettes that cost $31 in 1995 today sells for $120. Smoking has fallen, but the decline is not the product of a market-mimicking price mechanism. The major impacts have come from scores of regulations — including total bans on smoking in almost all public and private space — along with aggressive social stigmatization. Still, millions of middle- and lower-income Canadian still smoke, and continue to endure their punishment by paying high taxes and forgoing spending on other products.

Tobacco and alcohol tax regimes are the failed demonstration models for carbon pricing. Some want similar taxes extended to sugar, plastics, fat and salt. But such taxes are anything but capitalist. Harvard economist Greg Mankiw, in his best-selling Principles of Economics textbook, talks about how “the invisible hand will ensure that this new market efficiently allocates the right to pollute.” But the hand is not quite invisible, guided as it is by what Mankiw refers to as the “benevolent social planner” who will set the production level of a product at the point where “the demand curve crosses the social cost curve.”

Looks great in a textbook, not so great in the real world, and even worse in the unreal world of carbon science and economics. A new commentary this week from Texas economist Robert P. Murphy describes how the work of Nobel Prize winner William Nordhaus (the economist cited by Clean Energy Canada) actually fails to support a carbon tax in the context of the latest report from the UN’s Intergovernmental Panel on Climate Change.

According to Murphy, the work that won Nordhaus the Nobel demonstrates “quite plainly that the UN’s special report on climate change is full of proposals that are ludicrously expensive.” After Nordhaus accepted his prize, he diplomatically stated that the UN’s 1.5-degree-Celsius maximum warming target is impossible to achieve at this point. Murphy takes it further: “Nordhaus’s work shows that such an aggressive goal would make humanity much worse off than if we simply adapted to climate change with no government measures.”

Murphy’s analysis is not as easy to digest as the carbon-tax-for-dummies beer analogy or the fake appeals to capitalist markets. That’s the point. Those who skim past the complexity of carbon taxes are counting on us to be dummies.