I came across a post by Joseph Heath, called why are carbon taxes so low (H/T Willard). I found it very interesting, because it clarified (for me, at least) why some people probably hold the views that they do. I may not have it completely right, but the basic argument is that if you can estimate the future damage due to climate change, then the way you address it is by introducing a carbon tax that essentially pays now for the damage that will happen in the future (discounted, of course, to today). As I understand it, most estimates suggest a carbon tax that is, initially at least, quite low.
I asked a couple of questions at the end of the post, but didn’t get an answer. I’ve worked one of them out myself, I think. Rather than paying the estimated carbon tax now (which would be to cover the cost of damages that will actually happen) we could choose to pay more so as to actually reduce the future impact of climate change. The problem with this is that it would imply that people today would be paying in order to help people in the future who will likely be richer than we are now. The argument against doing this is that we would essentially be asking poorer people today, to help richer people in the future.
The other question I asked related to future economic growth. A basis of much of the argument is that continued economic growth means that “even though climate change gets worse over time, the economic situation gets better at a much faster rate (under the most probable set of scenarios), and so it is rational to delay some action.” My understanding, though, is that most estimates of a carbon tax are based on models in which continued economic growth is assumed. Even for modest growth rates, the size of the world economy would double in a few decades. Hence, damages due to climate change would need to be substantial in order for people in the future to be poorer than they are today. If economic growth does continue, then this does indeed seem very unlikely.
What I was wanting to understand is whether or not anyone had attempted a self-consistent calculation in which one tries to incorporate the impact of climate change on economic growth itself. I have a feeling that some have and seem to remember Stoat having a post about this, but can’t find it. If anyone can find it, maybe you could point it out.
There was one other aspect of a carbon tax that I have been trying to understand. In principle the idea is that you’re paying today for damages that will happen in the future (internalising externalities). If the estimates are correct, then every MtCO2 emitted, will actually produce the damage that is estimated. In other words, a properly determined carbon tax does not prevent this damage from happening, it simply ensures that we’re paying the full cost of emitting this carbon. However, climate change is a global issue. Taxation is typically local. It would seem, therefore, that this would imply that a rich part of the world could be paying today, for damages that will occur in a poor part of the world in the future.
Maybe I’m wrong about the above (if so, feel free to explain why) and it may not really make a difference from a market perspective. The goal of a carbon tax is really – I think – to simply ensure that the market is fair; to ensure that everything is properly priced so that the market can operate in the most efficient way possible. However, it does seem as though there is the possibility of rich parts of the world paying today for damages that will accrue in poor parts of the world in future. If I’m wrong a about this, maybe someone who understands this better than I do could explain in the comments.
I’m also aware that even if I am roughly right about this, it doesn’t mean that a carbon tax isn’t the way to go, because the alternatives may well be far less effective. Even though a carbon tax is intended to simply pay the future damages due to emissions today, a goal is obviously to ultimately reduce emissions by ensuring that fossil fuels don’t have some kind unfair advantage over alternatives (and vice versa, of course). I should make clear, however, that I am just a lowly physicist, so may well be confused about some of this complicated economics 🙂