Wednesday, June 25, 2008

Why I can't support the "Green Shift"

I like the premise, I really do - make polluters and C02 emitters internalize the cost of their actions, rather than externalize that cost for the rest of us.

Prima facie, it seems like a sound idea. Stephane Dion and the Liberals are proposing using the tax system to push those external costs onto polluters while trying to remove the public cost. It is costed, planned and well thought out.

The problem is, of course, it won't work. It runs counter not only to sound economics, but counter to human economic behaviour. The plan, as with most attempts by the government to regulate and engineer the economy and society, holds within it the seeds of "unintended consequences" which will have absolutely paradoxical effects - it may cause more pollution and Co2 emissions than it stops.

The problem is the regulation and taxation may destroy the normal "moral sentiment" and give polluters the ability to merely pay for permission to pollute.

As Ronald Bailey points out at Reason in a review of the work of Samuel Bowles, it comes down to both insentive AND our inate sense of what is right. The example given is the Israeli Daycare fines case. In that case, 6 daycare centres in Haifa implemented fines for parents who picked up their kids late. But rather than encouraging parents to be more prompt, it had the exact opposite effect:

Instead, parents reacted to the fine by coming even later. Why? According to Bowles: "The fine seems to have undermined the parents' sense of ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as just another commodity they could purchase."


That is, parents felt they could just purchase the ability to be late as a comodity. Extrapolate this to the directors of heavy polluters and C02 emmiters - they can merely purchase, through taxes and fines, the ability to pollute with out having to justify or explain it in the more moral sense - to the public anxious to see something done.

The Green Shift can be seen as allowing polluters to buy the ability to pollute with impunity. Given that Bowles research is based on 41 behaviour economics experiments around the world and he comes to this conclusion:

"[I]ndividuals from the more market-oriented societies were also more fair-minded in that they made more generous offers to their experimental partners and more often chose to receive nothing rather than accept an unfair offer. A plausible explanation is that this kind of fair-mindedness is essential to the exchange process and that in market-oriented societies individuals engaging in mutually beneficial exchanges with strangers represent models of successful behavior who are then copied by others."


Or as Bailey puts it "as people gain more experience with markets, morals and material incentives pull together."

Given this research, and the research in behavioural economics previously cited in my post on Michael Shermer's "Mind of the Market", I believe that the entire scheme runs contrary to human behaviour in the market. It will not work.

There is another problem as well. I could not find where the Liberals would end the years of subsidies to the oil and gas industry, the most polluting and C02 emitting industry in Canada. As I stated nearly 18 months ago, the federal government provides about $1.4 billion in subsidies, totalling over 8 billion between 1990 and 2003. Add 5 more years to that and its up over $10 billion. Under Dion and the Liberals when they were in government, that is $2 for subsidies to pollution industries for every $1 in environmental funds.

I don't see in the Green Shift where this is fixed or addressed. Rather, we have one market distorting factor being used to try to offset another market distorting factor. That's like taking Quaaludes to counteract all the Amphetamines you just took - it would be better to lay off the pills altogether.

A better solution would be one that followed not just the climate science, but the science of economics and human behaviour. One where the public as well as the industries are forced, as CD Howe Institute President Bill Robson said, by incentive to change :

"If you seriously want to reduce greenhouse gas emissions the consumer has to feel pain,"

A plan that would have worked, in my opinion, would have been one that meant less government, not more:

  • Get rid of all Federal subsidies to the oil and gas industry
  • Get rid of all subsidies to the auto industry
  • Force the industries to negotiate with the local people, rather than distant governments, over land use and dumping (rather than quietly telling them its ok to dump pollution into 16 lakes and streams)
  • Allow individuals and groups to sue polluters for damages.
  • Get rid of regulations that prevent alternatives from entering the market - if I could buy a Zenn car for zipping around the city, I would. Imagine how many out of work CAW members would get a new job if this car took off and needed an Ontario manufacturing plant.
  • End monopolies on power generation and subsidies for the industry. The biggest polluters are provincial government owned electricity utilities. How about lowering the barrier to entry so that power needs can be satisfied by multiple means and sources - wind, solar, nuclear, hydro etc, where reasonable - and decentralized.
All of this, and more, working in concert with normal, human economic behaviour, would work to reduce greenhouse gases and pollution without distorting government interference, allowing our "morals and material incentives [to] pull together."

I will give Stephane Dion credit though. He has, at least, presented a policy and a plan of action to do something rather than nothing, or actively undermining environmental efforts, as the Conservative government is doing. The Green Shift should be argued on its merits, and on its merits, I do not think it will work.

Rather than taxes and top down enforcement, bottom up, self-organizing, voluntary behaviour will be what works in the long term.

"[P]aying taxes does produce a neural reward. But we're showing that the neural reward is even higher when you have voluntary giving."


Let's base an effort to reduce C02 and pollution on that assumption, rather than running contrary to human nature.

Edit: fixed link and added power generation to the less government list.

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17 Comments:

At 4:27 PM, Blogger Steve V said...

Mike

You present a logical case, something which is largely missing from most detractors. Just one quibble:

"The problem is, of course, it won't work. It runs counter not only to sound economics, but counter to human economic behaviour."

Does it run counter to sound economics, and if so, then why are so many intelligent economists endorsing the concept?

 
At 4:50 PM, Anonymous Anshu said...

to do something rather than nothing, or actively undermining environmental efforts, as the Conservative government is doing

I think your anti-Conservative bias gets the better of you here.

The Conservatives are using a variety of mechanisms, based primarily on regulation, with specific targets.

You may argue that they are wrong, ineffective, not enough, whatever. But to ignore or distort basic facts doesn't help your case.

 
At 5:26 PM, Anonymous Anonymous said...

I agree with alot of what you had to say on this topic, Mike.

My contentions:

(A) Your link to 'oil and gas subsidies' is broken. What exactly are you referring to? Can you provide a government document or are you taking second hand information from an obviously biased source (sierra)?

(B) Clearly, the major carbon emitters in Canada is power generation, not 'oil and gas'. At least from the government of Canada's website. Where do you come up with your data? The Pembina Institute (another hugely biased entity) article you link to in the other post only speculates upon future numbers.

(C) What alternatives do you see are available as opposed to using some of our remote northern lakes as tailing ponds? Those decisions were reached after consultation with industry, government, and local groups. They will provide much needed employment to many native peoples, would you prefer they remain unemployed?

 
At 11:11 PM, Blogger Mike said...

Steve,

Well by sound economics, I mean supply and demand without distortions and interference through actions that weigh in on one side or the other. Actual 'free market' versus the corporatist, mercantilism state capitalist planned economy we have.

Anshu,

Intensity targets that actually allow polluter to pollute more, versus less, but make it sound like more. Follow the link to my old STFU article - by the Conservative intensity target standings, the Liberals improved by 24% during their "13 years in power" rather than being behind, like they say. If their regulatory approach is so much better, why are they resorting to smear tactics like "The Dion Tax Trick" nonsense?

Sorry Anshu, my anti-Conservative bias in this case is well founded. They deserve every nasty word written about them.

Anon,

A) Thanks, I'll try to find a new link to the article. If my memory serves, they got their numbers from Stats Can and Finance.

B) Agreed. When I do the update for the article link, I'll add that perhaps the government ought to stop enforcing monopoly on power generation and on generation methods. Of course, this is mostly a provincial jurisdiction, not federal, but another example of a state subsidy that has an unintended detrimental effect.

C) Funny, I don't remember there being any consultation with the locals mentioned anywhere. But fixing unemployment isn't a reason to allow a company to despoil a lake and, once again, externalize the cost of dealing with the waste they create. It is the company that should pay the cost, not us or the communities around those areas.

I think you ought to read Frederic Bastiat's parable of the broken window and then re-examine your "but it will provide employment to poor natives" excuse.

 
At 11:32 PM, Blogger Mark Francis said...

"6 daycare centres in Haifa implemented fines for parents who picked up their kids late. But rather than encouraging parents to be more prompt..."

Being late at my kid's daycare is $60/hour, charged at $1/minute. Works great. I certainly can't afford to be late and hurry like heck to avoid it. When I arrive almost late, the place is empty. Perhaps those Haifa daycare centres weren't charging enough? Perhaps there's a social/cultural difference in play?

Tax shifting, in practice, works. At worst it slows CO2 emission growth. At best, it reduces it (Sweden/Demark for starters <- very successful examples of tax shifting). Most of Europe is now using it.

Whatever reduction of "moral sentiment" is caused by this policy, if any (I severely doubt any reduction in moral sentiment will affect us here given that the tax is geared to consumption), will be countered by other human economic behaviours. Companies directly subject to the tax will strive to avoid it in order to maximize profits. There are incentives built into the plan to encourage adoption of emission reduction technologies.

Clients faced with higher prices will rethink what they are buying. Coal plants are looking to become less economical.

"as people gain more experience with markets, morals and material incentives pull together."

Despite widespread knowledge of the problems of global warming, Canada's emissions have increased drastically over the years.

I think that the carbon tax will encourage the people who see it to think more about their actions and of the actions of whatever corporate master they serve.

 
At 7:22 AM, Blogger Mike said...

Mark,

I understand you position, but I think Samuel Bowles research is pretty solid.

Not that I think the tax shift will be bad...I suspect it will just rearrange the status quo and simply will not work to achieve its stated ends - reduce GHG and pollution - because it give companies the ability to purchase the ability to emit, rather than face the wrath of consumers.

The study shows that people are more likely to do the right thing if left to themselves, rather than being forced in one direction by an external authority.

 
At 8:34 AM, Blogger JimBobby said...

Whooee! Good post, Mike. I think Mark's example of the high fees at daycare is telling. The Liberals' $10/tonne tax is one-fifth of the Greens' $50 proposal. I higher penalty will have a greater effect. I know when those signs for speeding fines are posted, drivers check it back.

You're correct that the tax shift doesn't do everything. It merely shifts the source of revenue and mildly encourages individuals and businesses to conserve and to become more efficient.

For the green plan to be really effective, there needs to be a massive spending shift, too. Simply bringing the same amount of money and giving away the same obscene corporate handouts to the oil industry is not the way to get it done.

To give the Grits some slack, I'll say that the tax shift concept is a tough sell, regardless of the motivation. The carbon tax component is another tough sell. The Grits were slow off the mark with details and fumbled the presentation of their green plan. To couple the tax shift with an equally complex spending shift would be asking too much from the MSM and public.

As a Green, my problems with Dion's plan are very similar to yours. The solutions you've suggested are mostly solutions that have been proposed in Vision Green.

If there is backroom business collusion (price fixing) or a complete lack of competition in the marketplace, companies will be able to do as you say and simply pass along the carbon tax to customers. However, if Company A works to lower its carbon taxes and thereby cut its costs, it gains a marketplace advantage over Company B, with its pass-along-the-tax policy. Couple that lower cost with an ad campaign that touts Company A's greenness and ecological responsibility (not to mention lower prices) and Company A will be the clear winner -- along with the environment. Companies do strive to be competitive, even if they are not philosophically on board with green initiatives.

As far as people doing the right thing on their own, all of the single passenger SUV's commuting to Toronto paint a different picture. People have shown they are not willing to make changes until things like $1.40/litre gas force them to do so. People are starting to do the right things but most of them are only doing so because they feel pressured by economic forces.

JB

 
At 11:52 AM, Anonymous Anonymous said...

Mike,

The article you linked to clearly outlines the public consultation process:

Vale Inco's proposal was the subject of a public meeting on June 10 in Long Harbour, N.L. Billed as a "public consultation" on the proposal, the meeting was attended by government officials, mining executives, environmentalists and fishermen.

Lakes are often the best way for mine tailings to be contained, said Elizabeth Gardiner, vice-president for technical affairs for the Mining Association of Canada.

“In some cases, particularly in Canada, with this kind of topography and this number of natural lakes and depressions and ponds … in the end it's really the safest option for human health and for the environment," she said.


As far as the parable, I find it hard to apply the thinking to the mining case.

You cannot argue the destruction of a window is the same as development of a natural resource.

" the total investment over the 25-year life of the mine would be about half a billion dollars and that the risk to the environment will be carefully managed. "

If we can only endear to develop our resources without any impact whatsoever, then what value is there in labor at all?

 
At 12:18 PM, Blogger SmartlikeStreetcar said...

Sorry, time is really tight today... But I'll be coming back to read your article in detail. But a carbon tax can work, and I can provide more than a dozen examples in which a carbon tax has reduced emissions dramatically. (I edit a carbon emissions newsletter that gets sent out to industry).

For eaxmple, Monica Prasad, a Northwestern University sociology professor, believes that carbon taxes are the best way to reduce CO2 emissions if governments follow Denmark's lead and reinvest those taxes into transforming heavy-emitting industries. Prasad suggests that carbon taxes aren't a new idea, as Denmark, Finland, Sweden and Norway all created carbon taxes in the 1990s, but only Denmark has managed to significantly reduce emissions by almost 20 percent over 1990 levels - without needing nuclear reactors and without harming their economy.

What's even more impressive is that in 1990, Denmark relied more on coal-fired energy generation than its neighbors, and that fact suggests Denmark's insight would work in North America. "If we want lower emissions," she suggests, "the goal of a carbon tax is to prompt producers to change their behavior, not to allow them to continue polluting while handing over cash to the government." Carbon taxes in Denmark are used to push industry away from fossil fuels while pulling companies toward renewables, and the money is invested to make it easy - and affordable - for industry to switch to low-carbon technologies.

Dion's tax isn't perfect, but it's a first step, and it certainly has people talking!

 
At 12:19 PM, Blogger Jamie said...

Mike,

I disagree with your argument but you certainly use some rational thinking to come to your conclusion.

Here's a few points i'd throw in on your argument. You in principal state that a carbon tax will simply encourage or enable people to pay for the pollution they create. In principal that is right...but you use an example from daycares in Haifa to explain how this type of initiative actually encourages people to continue the negative behaviour only with an associated cost. Here's where your example pokes a few holes in your methodology.

What if the fine for picking your kids up late was $10 the first time, $20 the second, $30 the third.....and so on so on. I would imagine that by the third, fourth, fifth time you'd begin to see some real significant changes in parents behaviour. Albeit more likely from the large majority who certainly couldn't afford that.

Point in case here, while i agree that the carbon shift is certainly not perfect and doesn't lay out GHG emission reduction timelines it does afford an alternative and begin to put a price on carbon. These are drastically needed steps. As the price of carbon begins to increase it will change the premise of your example. Now instead of only being fined for being late to pick up the kids, you'd be fined for being late to work, your tardiness actually becomes seriously detrimental to your wallet. It reinforces the need to change and alter behaviour, not maintain the status quo.

You state that this proposal, while well thought out, actually goes against basic economic principles. As someone with an educated understanding of economics...unfortunately, you couldn't be more wrong. Pricing (not necessarily regulation) is always the most effective way to stabilize and conform a market. However, that principal applies well when you are talking about optional items that can be subject to outside influences. When you talk about soemthing as broad as energy taxation you can't deny that it will impact everyone and almost every part of daily living. That is why the need to protect the most vulnerable is to me so important to any green proposal.

Again while imperfect i believe the carbon shift has struck an appropriate balance and the most important aspect to me is that rather than being rigid it is actually qutie flexibile and the amn proposing it is the right man to lead the charge.

Jamie in Manitoba

 
At 12:37 PM, Blogger Mike said...

Anon,

yes I read that, but in the end a little dog-and pony show of "consultation" means little when the contract or deal is made between Ottawa and Inco, rather than the people who live there or actually own the land and Inco. And by dumping Inco gets to externalize the costs.

Hope you enjoyed Bastiat...

Streetcar and Jamie,

Thanks for reading. I appreciate your points, but the 41 other studies Bowles refers to back up my contention.

I'd also point out that we are in the state we are in now at least party because of government subsidies and "intensives" - Dion and the Liberals themselves presided over 8 years of giving twice as much to polluting industries than to environmental concerns. Subsidizing auto plants to get jobs. Subsidizing electricity to make it cheap in order to attract auto plants, which use power and pollute to create polluting cars and cause us to use more power and to pollute....

Well I think you get the idea. I would suggest putting a little faith in the millions of people out there that do the right thing all the time and will in this instance. Without the kinds of distorting insentives placed on them by a tax and regulatory system that encourages bad behaviour and bars entry into the market of better alternatives, I am confident the public will willingly choose cleaner cars, cleaner power and good old fashioned conservation.

And those industries and companies that cannot keep up will die. And, as the saying goes, "nothing focuses the mind like a hanging in the morning", it will only take one big company going under before some smart person or group finds a way to make money off of the desire for environmentally friendly goods and services.

Right now those are, under the guise of various regulations barred from entry or the technology intensives are such that only the incumbents will be able to explore them.

A thought experiment: if we had no government, how would we deal with this? How could this be done without the use of force?

Think about it.

 
At 5:52 PM, Anonymous Anonymous said...

yes I read that, but in the end a little dog-and pony show of "consultation" means little when the contract or deal is made between Ottawa and Inco, rather than the people who live there or actually own the land and Inco. And by dumping Inco gets to externalize the costs.

You are missing the point....the land is owned by the federal government.

Involving local fisherman was a step to get them involved in the process, even though they have no legal property rights.

As per 'externalizing' the costs, what do you mean? They likely will have had to pay for the right to use the lake as a tailing pond, and any environmental damages. Is that not internalizing and accounting for such?

Again, how else do you propose we solve these problems? Shutting down our economy doesn't seem to help anyone.

 
At 1:06 PM, Anonymous Occam's Carbuncle said...

Could someone please explain to me how it does not impact individuals when businesses must pay significantly more simply to keep conducting business as they do today? If Company A finds that it it's operating cost has jumped by 20%, will it (a) eat the loss and allow shareholders to take the hit; (b) reduce expenditures by cutting work force or scaling back investment and expansion; (c)charge the consumer more for its product to make up the shortfall in revenue (d) move its entire operation to a less punitive tax jurisdiction; or (e) anything under the sun but (a)?

The whole notion that you can punish producers without grinding consumers seems absurd to me. I wish Dion well in his ongoing attempts at testicular regeneration, however, I would suggest he address the problem medically, rather than meddling in something he knows nothing about, like taxation and the economy.

OC

 
At 1:15 PM, Blogger Mike said...

"They likely will have had to pay for the right to use the lake as a tailing pond, and any environmental damages."

Likely?

If they had to actually purchase the land and own it themselves, you might have a point. but they are merely being allowed to by the "owner" (I won't even start the debate about the Feds automatically being the owners of unowned land). Do you seriously expect that in the event of a spill the government - federal, provincial or territorial - won't be on the hook? Ask the fine people of Sydney NS who is paying there...

If there were no government, they would have had to purchase that land and it would have been part of their operating expense to keep it up. That they haven't means that economically its not worth it to them. That they are doing it now means they don;t have some expenses. meaning they have externalized that cost to make it worth it to mine.

That's a big fancy way of saying government subsidy.

 
At 1:17 PM, Blogger Mike said...

OC,

Yeah, that's pretty much what I meant with "running counter to sound economics" as well.

Always a pleasure...

 
At 12:22 PM, Anonymous Anonymous said...

It'll only grind the consumer if the consumer refuses to change to a company producing environmentally friendly products. That's kind of the point of the thing, after all.

If the government weren't about to make us do these things, I don't think anything would, to be honest. Let's face it, there is no rational reason for an individual in Canada to worry about climate change in the short term (ie, the span of a lifetime or so). Hell, we stand to benefit from such changes -- at least until the point where the nations that didn't benefit and aren't afraid to use force to ensure their own survival show up, but that's unlikely to happen for a generation or so at worst. You could just as easily say that the rational decision would be for people to stop having kids -- addresses all kinds of long term problems. Problem is, folks aren't rational -- especially for long term problems.

That aside, most of your recommendations I agree with as good sense both short term and long term, however there are two I have a quibble with.

How local is local? Do you just mean the people who own the lakes (assuming they were privately owned)? Or do you include the people whose crops rely on the ground-water from the lakes? Who are those people exactly -- have we mapped them all out sufficiently? What about those who rely on the farmers whose crops come from the lake water. Do they get any notification or a say as well? Basically, how many people do the oil companies have to pay off, and what happens to those who relied on those who got paid off -- where is their say? Hence -- government. It ain't perfect, but presumably it means more people get a say through the electoral process and representation.

And the other quibble is "sue who"? CO2 is pretty general. How do you link the output of company A in Mexico to the hurricane that took out your house in Spain? How do you show that the nuclear waste company X buried on their own land 60 years ago is responsible for your deformed grandchildren -- especially when the land has gone through 6 owners, the original company is long gone, and even its owners are now deceased?

Sueing is attempting to address a problem after it happens. If that problem happens to be a resource allocation problem, then it can address it. Not every problem is a resource allocation one, however. That's why we need government -- to enforce prevention, rather than just a legal system, to enforce fair allocation after the fact.

 
At 10:41 PM, Blogger Josh G said...

That is, parents felt they could just purchase the ability to be late as a comodity. Extrapolate this to the directors of heavy polluters and C02 emmiters - they can merely purchase, through taxes and fines, the ability to pollute with out having to justify or explain it in the more moral sense - to the public anxious to see something done.

That's a rather questionable extrapolation, to say the least - parents may be willing to pay a certain additional late fee on top of what they're paying for daycare, but that does not imply that they would be willing to pay fees that increase with each subsequent lateness. Or the daycare could simply refuse to continue providing services altogether to chronically late parente.

The same can be said for the Colombian example - paying fines is all well and good when the cost/benefit is assessed and they are worth paying, but the only conclusion you can reach from that is that said fines were insufficient to prompt a certain behaviour - rather different from Bowles' conclusion.

When it comes to fossil fuel use, a carbon tax would simply increase the cost of an existing expenditure - unless microeconomics is fundamentally flawed, a sufficiently large increase will prompt individuals and organizations to cut back on fossil fuel use. If some individuals are currently motivated by a "moral sentiment" to reduce their consumption, they'd already be doing it. Why wouldn't they? Are you arguing that they'd consume more if the price increased?

Not that I think the tax shift will be bad...I suspect it will just rearrange the status quo and simply will not work to achieve its stated ends - reduce GHG and pollution - because it give companies the ability to purchase the ability to emit, rather than face the wrath of consumers.

And these additional costs would not be passed onto consumers how, exactly? Since when do companies have unlimited funds to pay more for energy?

The study shows that people are more likely to do the right thing if left to themselves, rather than being forced in one direction by an external authority.

It does nothing of the sort - all the study shows is that a change in behaviour will not occur given the application of token sanctions. For that matter, the daycare is not an "external authority" but rather a service provider that is getting screwed over and likely taking on extra costs thanks to these tardy parents. If the fines cover those extra costs, then it may not really matter to them anymore, and if some parents cause more problems than they're worth, then they can be told to take their kids elsewhere.

So, if the conclusion is that "small fines" don't work to prompt behaviour changes, then that's fair enough and seems fairly obvious. That's not to say that other sanctions won't work or that people will view a carbon tax as fulfilling some sort of "moral obligation" - if something costs more, would you respond by buying more, less, or the same amount of it? How would you respond Mike?

Oh, and about this:
"In (the government regulation) case, players apparently believed that they had satisfied their moral obligations by paying the fine."

Is that what they actually believed, or is that just the author's interpretation? It's no less valid to interpret the result as, having internalised the additional cost via a fine, it was simply factor in as an "investment" on the road to maximizing long-term gains.

 

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