Ed. Note: The late Steven Horwitz addressed the climate-change debate and related policy issues in ways that remain highly pertinent to today’s debate. Yesterday, he argued that social science, not only physical science, was crucial for public policy. Today, Horwitz’s views on the carbon dioxide (CO2) tax are revisited.
“First, finding the right tax/fee/price is not a simple thing…. Bureaucratically set prices or fees do not have the same powerful incentives for careful behavior, nor will they ever capture as much knowledge, as do real market prices. Given that, political battles over those taxes and fees are inevitable, and with such battles out goes any semblance of economic rationality.”
To say that he was a quick study was an understatement. The late Steve Horwitz imparted a lot of common sense to a lot of areas, including the climate change and carbon tax debates.
Below, Horwitz unmasks the simplistic argument that a tax on carbon dioxide (‘carbon tax’) is an efficient way to address climate change. Even libertarians and classical liberals use this argument as a way of being politically correct or dismissive of an issue they don’t want to really debate. (I believe this is the scholarly version of ‘greenwashing’ by those who want or need to be ‘politically correct’ to gain greater acceptance on other issues of interest.)
Here is Stephen Horwitz’s Why Environmentalists Need to Understand Economics , May 16, 2017), subtitled “When it comes to the environment, activists would do well to take advice from market economists.”
The most sophisticated environmentalists get this at some level, which is why the best proposals for dealing with climate change are those that try, to some degree, to enlist the price system in the process.
Government Fines Won’t Solve the Problem
Carbon taxes/fees, for example, try to include the external costs of carbon-based energy in the decisions made by energy producers. Those proposals then often try to return to consumers the revenue collected so as to help them afford the higher prices of energy caused by the tax.
These proposals are better than the old command-and-control regulatory approach, but they suffer from two problems that economists are uniquely positioned to note.
First, finding the right tax/fee/price is not a simple thing. We know that market prices are the emergent outcome of what Mises called the “higgling of the market.” Mises also noted that the changes in prices we observe are the visible end of a chain of causation that begins deep in the human mind. What makes market prices work is that they are the outcome of the decision-making processes of the people in those markets, risking their own resources and deploying their own knowledge.
Bureaucratically set prices or fees do not have the same powerful incentives for careful behavior, nor will they ever capture as much knowledge, as do real market prices. Given that, political battles over those taxes and fees are inevitable, and with such battles out goes any semblance of economic rationality.
And that brings the second point economists can make to environmentalists: market failure is not a sufficient condition for government intervention. Carbon tax proposals, like any other policy, can look great on paper but we must always ask whether politicians can do and will do what those proposing the policy have designed.
For example, suppose a carbon tax collected billions in revenue that was to be set aside for redistribution to US households. Given the history of Social Security, would we really expect politicians to not try to use that revenue to satisfy powerful special interests or for other purposes that would deliver more votes per dollar than a dividend check to US households?
Economists can remind environmentalists that as messy as markets are (much like nature is), government intervention is often worse. We have to compare the reality of two imperfect processes and the fact that markets are less than perfect is not, by itself, a justification for government intervention.
Comment
Another argument not mentioned by Horwitz is that any economist who defaults to a carbon tax as the least worst solution to address a ‘negative externality’ must also accept the companion intervention of CO2 tariffs to prevent ‘leakage.’
CO2 emissions and atmospheric concentrations, being a global issue, must be simultaneously and effectively addressed by multiple political jurisdictions. The U.S., for example, can reduce its emissions greatly only to be offset by a new coal plants in China or India or Africa. Same for Great Britain and Germany.
Therefore, short of global government, imports of goods from unpriced political jurisdictions must be taxed (tariffed) or otherwise restricted at the border. And with 190 or so sovereign political jurisdictions, can you imagine the knowledge problem and the political problem required for harmonization?
Game, set, and match for dense, reliable (carbon-based) mineral energies.