Just bribe the country to do the right thing

[jducoeur]

One of the problems facing the climate-change debate has been the current political shibboleths, and specifically the anti-tax one. Every sensible economist is clear that the *right* way to deal with it is a flat carbon tax: it would address the problem head-on, would probably be least likely to distort markets in unfortunate ways, and would likely be pretty effective. But of course, anything called a "tax" gets peoples' backs up, so we instead wind up with the Democratic leadership creating a classic muddle, in the form of the wildly overcomplex cap-and-trade model. (Which is *probably* better than nothing, but I honestly can't say that with complete confidence.)

So I'm intrigued to read (in last week's Economist) about Maria Cantwell's "cap-and-dividend" proposal. From the description given there (and I need to learn more about the details), it sounds delightfully sensible. Basically, the notion is that any carbon cap will drive up prices: indeed, that's the point of any sensible proposal. So fine: auction off limited permits for all carbon-based fuels, and then bribe everybody with the proceeds. Seriously: take the money from the auctions, and distribute it to the populace. Their back-of-the-napkin kickback calculation is $1000 for a family of four.

It's not perfect, mind -- a carbon-tax system would still be simpler than a cap-based one -- but it's still far simpler than cap-and-trade. If the auction is mandatory and universal, it's likely to succeed in the goal of raising prices and thereby reducing carbon output. And the bribe (which is effectively a progressive redistributive tax, but a very well-disguised one) could be *very* popular if it was marketed properly.

I confess that I'm seesawing between being appalled at the concept, and admiring its elegance. The citizens'-responsibility puritan in me is vaguely unhappy at the notion of bribing the citizens to get them to agree to a system that will help everyone. But the economist in me just loves the way it aligns incentives, and the armchair political quarterback admires the simplicity of the message...

Comments

[umbran.livejournal.com]

Some might call it a bribe. However, the #1 way to drive acceptance of *anything* is to make it economically advantageous, right?

I'd have to read the proposal in more detail, however there is a certain amount of illogic - we'll make things more expensive, and then give people money... so they can now afford the expense? Waitaminute... :)

[jducoeur]

A fair point, but remember that this is still a cap-based system. It says that there is an absolute limit on carbon supply -- basically saying that we *will* pump X amount into the atmosphere. The question is simply how much, and who gets to "buy" that carbon now that there's no longer a nigh-infinite supply available.

In practical economic terms, if the cap is set to a meaningful level, it will cause prices to rise. (Rise dramatically if the cap is tight.) Carbon consumption will become more expensive, which doesn't affect the rich too much but will affect the poor quite a lot. (This is why carbon taxes are traditionally unpopular -- like most sales taxes, it's fundamentally regressive.) By redistributing the proceeds of the auctions, the poor get more of a shot at some of that carbon (as you point out), but due to the price they will have incentives to seek out lower-carbon options.

In theory, that should tend to drive a virtuous cycle: it's a good spur to innovation to reduce carbon usage. Granted, theory and practice don't always line up, but the economics seem basically sound. By putting a consistent price on carbon, this forces consumers to think about that cost more concretely. And it provides a straightforward regulatory framework for gradually reducing the supply (and therefore the atmospheric effects) over the next few decades...

[meiczyslaw.livejournal.com]

Granted, theory and practice don't always line up [...]

Yeah. Europe's version doesn't work (http://www.cphpost.dk/news/national/88-national/47643-denmark-rife-with-co2-fraud.html).

[...] but the economics seem basically sound.

Only for the first sale. Once the original owner of the allotment chooses to re-sell his allotment, the cost will still be passed onto the consumer. Since they no longer receive a kickback from the resale, they become a net loser in the process.

This also assumes that companies can't overbuy during the initial sale. I'll bet you dollars to donuts that companies will do everything they can to get spare allocations, as this will give them a cartel position in the new artificial market for pollution.

(Also, it's worth mentioning that your zeroth assumption is not exactly sound. I stopped believing in AGW last year as I dove into Climategate. After following up on the issues that were contained in the e-mails and the software engineer's ReadMe file, I've come to the conclusion that the only data inputs that are actually trustworthy are the satellite data. If you're willing to grind through technical minutia, my journey through the data is haphazardly recorded in this tag (http://meiczyslaw.livejournal.com/tag/climaquiddick).)

[jducoeur]

Well, the European version of cap-and-trade is a known disaster, but pretty much any serious economist knew that it would be from the start. When you try to start a market by flooding it with free goods, you don't have much of a market. I don't think that necessarily dooms the Democrats' plan, but it certainly illustrates that it's an easy approach to screw up, especially if you don't manage the politics carefully.

Once the original owner of the allotment chooses to re-sell his allotment, the cost will still be passed onto the consumer. Since they no longer receive a kickback from the resale, they become a net loser in the process.

I'm not seeing it. This proposal is essentially a tax on the basic fuel input. That certainly raises the price all the way down the value chain, but it should have a relatively constant net effect on the end consumer, regardless of how many times it changes hands. Why do you see the end-consumer's cost changing due to allotment resale? Efficient-market theory would seem to argue otherwise, and while I don't actually believe in that theory very far, I do tend to find it a decent rule of thumb.

(Keep in mind that this proposal is *not* cap-and-trade, and has somewhat different dynamics. It'll have problems, but probably not the same ones.)

This also assumes that companies can't overbuy during the initial sale. I'll bet you dollars to donuts that companies will do everything they can to get spare allocations, as this will give them a cartel position in the new artificial market for pollution.

Yep -- that would definitely have to be dealt with. I don't see a good reason to believe it can't be, though -- cartels are an old fact of life, and there are reasonably well-established regulatory approaches for managing them.

I stopped believing in AGW last year as I dove into Climategate.

Not getting into that particular argument, because the reductio ad absurdam comes down to the simple fact that science requires interpretation. I've been following this one pretty closely for a long time, and while I'm willing to grant that there are no certainties about the end result, the *ridiculous* preponderance of evidence points to major climate change happening on a global scale, extremely rapidly by geologic standards. It's essentially a gigantic accidental science experiment being conducted mainly on the basis of wishful thinking, and I have little desire to be in the middle of it.

So seriously: you're going to interpret the data as you like. But by now there is essentially no chance that you're going to convince me that we're not seeing pretty wild change happening, albeit chaotic and hard-to-predict change...

[meiczyslaw.livejournal.com]

Yeah, my first thoughts are challenges, rather than show-stoppers. I think the thing that kills a lot of this, though, is the assumption of a closed system. Once you bring in international players, this becomes a domestic tax. Consumers will buy products from China, and factories will relocate to India.

[...] science requires interpretation.

Indeed. The problem is that, despite the supporters protestations to the contrary, the science is not settled. You have to choose who you're going to trust: Jim Hansen (http://en.wikipedia.org/wiki/James_E._Hansen), or Richard Lindzen (http://www-eaps.mit.edu/faculty/lindzen.htm)?

Based on the serious ethical lapses at HadCRUT and IPCC, I can no longer trust their conclusions. That leaves GISS (Hansen) as the only uncorrupted AGW-supporting climate model, and they don't look that good: at the very least, they don't apply their input adjustments consistently; at worst, they might be introducing selection bias through their choice of inputs. It's been very painful going -- having to learn a whole 'nother discipline in order to evaluate its biggest theory is as crunchy as it sounds.

The interesting thing is that my politics haven't changed much -- AGW isn't the linchpin for any of my environmental thinking. The things that are good ideas are still good ideas, because there was always more than one good reason to do them. The bad ideas are still bad ideas, because (like cap-and-trade) they didn't do anything positive in the first place.

Like not drilling for oil in the US: it's not like Americans don't cause oil to be drilled -- we just do it in places like Saudi Arabia, Nigeria, and Venezuela where they don't care about the environment anywhere near as much as we do. Domestic environmental taxes won't end our consumption -- it'll just move the production to someplace with a worse environmental record. How is that a positive thing?

[jducoeur]

Once you bring in international players, this becomes a domestic tax. Consumers will buy products from China, and factories will relocate to India.

On the one hand, this is a good argument by classical trade theory. OTOH, the same argument applies to essentially *all* domestic regulations that increase the cost of goods -- which is most of them. World trade manages to stumble along successfully despite that.

That is, you're certainly correct that this would put domestic players at some sort of competitive disadvantage; however, I think you're overstating the end result. It would definitely make things messier, in ways not terribly unlike the way labor regulations do. Like labor regulations, it would become a long-standing bone of contention and argument, would serve as the excuse for periodic trade spats, and most likely would eventually result in some sort of compensatory tariffs if it turned out to make a major difference.

That's not an ideal situation by any means, but I don't see it as especially catastrophic in likely practice. Definitely an argument to make one pause and reflect a bit, and a *fine* argument for trying to craft a system that works at the global level, rather than hacking it at the local one. But waiting for global political change all at once is pretty much the surest recipe to make sure that nothing ever happens; in practice, these things have generally proceeded in fits and starts, beginning in the "first world" and extending slowly outwards from there. I don't see any particular reason to believe this case is likely to be different in the long run.

You have to choose who you're going to trust: Jim Hansen, or Richard Lindzen?

Tsk; strawman argument.

The true answer is that *mostly* I trust The Economist. It's a complex world, and I can't claim to have time to become sufficiently expert on most topics, so like everyone I need to choose my preferred data filter. On a wide variety of topics, I've found The Economist to be calmer, more honest, more balanced and harder to panic than any other source I am aware of. So if we're going to talk about primary influences, that almost certainly counts as my number-one.

On the specific topic of climate change, I've watched over the course of a couple of decades as the magazine has very slowly shifted from being broadly skeptical to broadly certain that *something* is going on here; again, that's based on a broad array of input data from a lot of sources, including the various refutations of the data. I'd summarize their general viewpoint as middle-ground: that the chicken-littles are generally overstating their case, but that it is nonetheless clear that things are broadly warming, and that this is already beginning to have a broad array of side-effects.

I find their presentation consistent with the rest of the information I've found, middle-ground and pragmatic as I generally expect from them, and generally convincing.

Domestic environmental taxes won't end our consumption -- it'll just move the production to someplace with a worse environmental record. How is that a positive thing?

Again, strawman. Nobody's talking about ending consumption. The point here is *reducing* fossil-fuel-based energy consumption, and I suspect the proposal at hand would be moderately successful at that. Yes, there would be side-effects that have to be mitigated (no plan ever survives contact with reality), and no, it's not a panacea. But it's extremely unlikely that *all* of that energy usage would be shifted offshore; indeed, I find it pretty unlikely that more than a modest minority would be, after all the social and political feedback loops play out. So again, I think you're overstating...

[meiczyslaw.livejournal.com]

The true answer is that *mostly* I trust The Economist.

Which is a long way to go to say, "James Hansen."

But why do you trust The Economist? What makes you think that they're the most reliable intermediary? What makes their writers less susceptible to the forces that befuddle the most well-intentioned journalists covering scientific issues?

To me, the anonymity of their writers is one The Economist's weaknesses. Because of this cloak, there's no way to evaluate their qualifications, biases, and histories. In contrast, I know that Ben Goldacre (of The Guardian) doesn't actually care to understand climate change (as he's said in not so many words), so he's not really a reliable intermediary on that subject. I also know his politics (and his religion!), so I know which articles of his to verify. But this also means that I know which issues I can trust him as an authority, because I know about his faults (and his background as a medical doctor).

Slightly off topic: In between his snark, Goldacre's site Bad Science (http://www.badscience.net/) is a good source for understanding the pressures that a science journalist faces. That education is one of the reasons I've started looking at the primary sources more, as it's excessively easy for a journalist to make an innocent mistake that changes the meaning of an article.

money talks

[lauradi7.livejournal.com]

There is also serious talk among several NATO nations about paying people not to affiliate with the Taliban. Seems like good sense to me.

Re: money talks

[jducoeur]

Interesting. I wonder what the cost winds up being, and how it compares to the usual military options? Wouldn't surprise me if it's a good deal, at least in the short term.

Mind, I do think there are some clear problems with the idea, at least in a naive implementation. In particular, the obvious outcome is that this amounts to an ongoing subsidy from rich countries to poorer ones, and there's no obvious way to *stop* that subsidy -- if you try to stop it, people will logically claim that they suddenly have a Taliban problem. Moreover, once you do that, other poor countries now have a powerful incentive to join in: indeed, the most rational response is to deliberately *foster* a similar terrorist group, simply so that you can get in on the bribe.

It's possible that a subtler implementation could get around these problems -- the idea isn't obviously crazy on its face. But I think that there's a real chance of it backfiring unless they get the economic equation right. It's basically a variation of the classic terrorist-hostage problem, and has the same problems. (There are very sound practical reasons for policies requiring no negotiations with terrorists, and this shares some common features...)

[ulfhirtha.livejournal.com]

An interesting idea. As described, such a system would at least ease the pain of those of us least able to absorb the increased prices, which seems to me an issue with proposals like the carbon tax.

[jducoeur]

Just so -- as I mention in a comment above, the problem with a carbon tax is that it is inevitably quite regressive. By compensating the populace with a directly-related progressive-ish redistribution scheme, it might get over that particular bump. Very clever, both economically and politically...

[rickthefightguy.livejournal.com]

But... a cap with purchasable permits IS a tax. The tax is the cost of the permit - the govt charging you to pollute, right? How is that any different than a tax (you know, where the government charges you for polluting?)?

[jducoeur]

Yes, that's correct. But put like this, I suspect people are at least a bit less likely to *perceive* it as a tax, due to its indirect nature. I mean, there are lots of implicit taxes in modern society -- but people tend not to notice the ones that aren't coming directly out of their own pockets quite as much. Also, this one is delightfully squishy: due to the auction approach, there is no clear "The government is charging us $3/gallon, which we're passing on to you" to point at -- the price is effectively set *by* the companies in the auction, and the blame gets spread around in messy ways.

But more importantly, the redistribution of the proceeds goes a fair ways towards helping with the negative impact of that tax, and *that* part is terribly clear and obvious. Even if people get pissed off at having to pay extra at the pump, the fact that most people will get back *more* than that extra goes a long ways towards neutralizing the anti-tax messaging.

(In practice, of course, they may not get back more than the extra: they'll get back more than the actual tax, but prices will have risen more than that due to scarcity. But that's getting into real economic subtlety, and shouldn't be a huge issue if the cap is set correctly and ratcheted down gradually...)

[doubleplus.livejournal.com]

Heck, I've often said that if I were president and we needed more revenue, I'd raise taxes and raise withholding more, and when the refund checks came out, 90% of people would think they'd gotten a tax cut. While I wish we could have a rational discussion that would lead to people wanting to do the right thing, even if it causes them some pain in the short run, the past year has convinced me even more that ain't gonna happen. In the absence of that, I'm all in favor of anything that will make people want to do the right thing, no matter how underhanded it may seem on the surface.

Think of it as psychological economics. If the purpose of applied economics is to align financial incentives, the purpose of psychological economics is to align psychological incentives. Especially with long-term problems that our brains aren't evolved to respond to, "tricking" people into overcoming our natural mental tendencies and doing the right thing is probably the only way it's going to happen.

[corwyn-ap.livejournal.com]

During the recent Copenhagen summit, I was explaining to someone how the entire issue was political. That a FEASIBLE solution was easy, getting politicians to do it was the hard part. When doubted, I gave basically this idea. Though the recipients were everybody (and some to remediation and sequestering). And in addition to the current year, you also had to pay off last year's CO2 production. (so every year you pay off the current year and 1 previous year).

Getting it to fly is the hard part.

If you don't like bribing people, just use the proceeds to reduce the current tax burden. Nothing immoral about that... wait. oh, nevermind you know what I mean.