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Changing places

March 5th, 2011

As long-term readers here will know, I argued for quite a few years that, of the possible ways of putting a price on carbon, an emissions trading scheme was preferable to a tax (I set out my position here). But following the collapse of the Rudd government’s ETS deal with Malcolm Turnbull, and Rudd’s ultimately disastrous failure to call a double dissolution on the issue, I changed my mind.

This was partly because of changed circumstances, and partly because of a reconsideration of the politics surrounding compensation. In both cases, the driving force was the massively complicated set of free permits, exemptions and cash handouts with which the final ETS was saddled, nearly all of these going to large-scale emitters. I had seen the possibility of a limited issue of free permits as an advantage of an ETS, but now I think it was actually a weakness. And in political terms, the inordinate complexity of the CPRS made a strong case for something simple and comprehensible, where everyone understood that consumers would ultimately pay the price of carbon. Unlike with emissions permits, everyone understands that a tax on producers will be passed on (partially in the short run, and totally in the long run) to consumers, and therefore that any offsets or compensation should be directed primarily at consumers.

So, I now think a carbon tax is the best short-run option. There’s even a case, which a plan to discuss later, for leaving the tax in place when we come to introduce an emissions trading scheme, which is still the desirable outcome in the long run.

While I’ve come to support a carbon tax, John Humphreys, who formerly thought it the best (or perhaps least bad) option, is now vigorously opposing it. His change in position coincides with a change in political alignment, from the libertarian LDP to the Liberal Party, for which he was briefly an endorsed candidate last year. A few observations over the fold

First up, I don’t think being a member of a political party is a great idea for an economist who wants to comment on public policy. The shifts and turns by both parties on global warming policy illustrate the problem. In the last year, Labor has successively supported an ETS, a ‘wait-and-see’ policy, direct action like ‘cash for clunkers’ and now a carbon tax. The Libs have cycled through the same set of positions. For a party-aligned economist, the options include:
(a) loyally push the ever-changing party line, and explain away the inconsistency
(b) take a stand against the party line when you disagree
(c) interpret the party line in such a way that you can agree with it
(d) keep quiet when you disagree, and support the policy strongly when you agree
As regards carbon pricing, Andrew Leigh seems to have taken some combination of (c) and (d). John Humphrey’s early support of a carbon tax was an example of (b) since most libertarians oppose this measure (most, because they reject physical reality). But the Libs are tougher than the LDP and he has now shifted to (a).

Explaining his shift of position, Humphreys says that his support was conditional on the revenue being returned to households and businesses through cuts in other taxes. By contrast, while the current proposal does not specify a mechanism, but it’s been announced that all revenue will either be (a) returned to households (b) used to offset costs on business (c) used to reduce the costs of moving to low-emissions technology

Humphries says the crucial difference is between returning revenue as tax cuts and returning it as higher expenditure, and criticises me and Tim Lambert for saying that the change is marginal. He concludes “I think the difference between government spending and tax cuts is pretty obvious and very important. ”

As an economist rather than a politician, Humphreys is surely aware that it doesn’t matter much which side of the budget (revenue or expenditure) a given policy initiative affects – what matters are the effects on relative prices, incentives and the distribution of income. That’s why economists worry about things like tax expenditures and effective marginal tax rates, and why we analyse the tax-welfare system rather than treating the two separate.

Taking this approach to the carbon tax, let’s begin with households. As far as taxpayers are concerned, it makes no difference whether compensation for the effects of a carbon tax comes in the form of a lump-sum cash payment or an increase in the tax-free threshold, to take the two simplest possibilities. But one is classed as expenditure and the other as a reduction in revenue.

UpdatedThat accounts for income taxpayers, but what about those who don’t pay income tax. The answer, first put forward by Milton Friedman (someone I assume Humphries would not regard as a lefty economist) is that a combination of tax and transfer payments may be treated (analytically and for policy purposes) as being equivalent to a negative income tax for those below some threshold. In such a system, a universal cash payment is exactly equivalent to a reduction in the net tax payment. Humphries seems to have completely missed this point, both in his original post and in comments here. He persists in writing as if there is an unproblematic distinction between taxation and expenditure. This may be good politics, at least for a Liberal party member, but it’s bad economics. End update

Similarly, as regards business, the policy relevant concerns are the price of carbon and the distribution of the net tax burden. Whether compensation to business is undertaken through some form of cash allowance to firms with a large investment in carbon-intensive capital or by making some part of historic emissions tax-free makes no economic difference, it just changes the account.

Finally, there are expenditures on funding for direct action to reduce emissions. Here Humphreys has a point, except that
(a) Gillard has already cut a number of these programs on the basis that a carbon price is coming
(b) His own party is committed to achieve Labor’s emissions targets entirely through direct action. Obviously, this will require much more public expenditure than an approach based on a carbon price

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  1. Ken Fabos
    March 7th, 2011 at 17:57 | #1

    John Humphreys, given your association with groups such as Menzies House that appear to consider climate science to be Bad Science – not simply wrong but as some kind of weapon of the Green Left that’s intended to do harm – and that consistently opposes every serious proposed policy measure to reduce emissions whilst failing to offer credible alternatives, you need to do a lot more to convince me that your arguments are something more than more of the same.

    I think it’s safe to assume that, in the case of emissions, we will not see an overall willingness for everyone to take personal responsibility and go on to freely engage in more responsible behaviour especially when groups like Menzies House are intent on promoting doubt and denial in order to induce delay. It’s clear the Right absolutely do not want business, government, or the community at large to take responsibility; on the contrary they oppose the existence of the problem in order to justify an absence of responsibility.

    The Right needs to accept the existence of the problem and start coming up with credible alternative policies that are aimed at the problem rather than preventing action.

    The artificial Left/Right divide on this, and most of all on the existence and seriousness of the problem, has to end.

  2. TerjeP
    March 8th, 2011 at 15:25 | #2

    Ken – the right has offered a solution. It’s called nuclear power. It was invented by scientists. John Quiggin has banned discussions of nuclear power so I won’t bother trying to discuss it here.

    All the behavioral evidence suggests to me that in the hands of the green left climate science is being used as a destructive weapon. I have mixed feeling about whether this is intentional but either way it is destructive and they need to be stopped. It would be nice if we could do this politely over a cup of tea but I no longer have much faith in that strategy. I think it will come down to irrational fear wars which is regretable. I’m predicting not advocating.

  3. Michael
    March 8th, 2011 at 16:06 | #3

    TerjeP :
    Ken – the right has offered a solution. It’s called nuclear power. It was invented by scientists.

    Nuclear power stations are rightwing?

    All the behavioral evidence suggests to me that in the hands of the green left climate science is being used as a destructive weapon.

    Are you implying that climate science is “green left”, climate scientists are part of the “green left” or that when the “green left” proposes action to takle climate science it’s destructive?

  4. March 8th, 2011 at 16:45 | #4

    @John Humphreys
    That’s Orwellian nonsense comment. I wont stoop to that level. If you’ve kept the same position, you support a Carbon Tax only. End of story. You need to make yourself clear.

    I am very disappointed that you went from a Liberal party to a Conservative Party (which I could expound much upon but this isn’t the place. Coincidentally that is very Orwellian.

  5. Ken Fabos
    March 8th, 2011 at 21:44 | #5

    Terje, the Right in Australia has not seriously proposed nuclear as a solution. It has not proposed any sincere policy response. Nuclear has primarily been used as a wedge, to exacerbate divisions amongst those most concerned and committed about emissions and climate and to try and damage The Greens’ credibility amongst such people. If the Coalition has sufficient acceptance of the seriousness of the problem to propose serious policies, nuclear or otherwise, it’s news to me.

    The Coalition – the Right of Australian politics – is not betting it’s electoral chances on promoting a low emissions nuclear future for Australia, it’s betting it’s electoral chances on Australian’s being so apathetic – or antithetic – to the climate change issue that simply opposing climate policies of others will get them over the line. They actively choose to encouraged their constituents to be ill informed and antithetic and I think that’s dangerously irresponsible.

    Menzies House, which Humphrey’s is part of, is complicit in encouraging ignorance and misunderstandings about the nature and seriousness of the issue. They are devoted to undermining efforts on this issue, not to putting forward solutions that they are prepared to fight for.

  6. Fran Barlow
    March 8th, 2011 at 21:51 | #6

    @TerjeP

    John Quiggin has banned discussions of nuclear power so I won’t bother trying to discuss it here.

    That’s not so Terje. There is a sandpit for that.

    All the behavioral evidence suggests to me that in the hands of the green left climate science is being used as a destructive weapon.

    This is simply perverse. What are we trying to destroy, in your opinion?

  7. Donald Oats
    March 8th, 2011 at 23:01 | #7

    This meme that climate science is being wielded by the green left as some kind of “holy hand grenade” is simply perverse indeed, @Fran Barlow

    I wouldn’t characterise myself as green left (I know nothing of Marx, and, I do like nature so very much I couldn’t live without it :-P ), although some others would incorrectly see me that way. Nevertheless, I cannot imagine very many people even from the green left (whatever that is, I’m guessing that Terje is using it broadly, not narrowly) wanting to destroy civilisation as the opposition to some kind of global action would have it portrayed.

    Sure, some people may wish to see population to peak and reduce somewhat over time, or at the very least to have a smaller impact upon the natural environment over time. Only an anarchist would be not unhappy with the destruction of civilisation. Anyway, even the expression “destruction of civilisation” greatly exaggerates what can be expected from the most extreme outcomes from either business-as-usual for GHG emissions, or from the most extreme reductions in GHG emissions possible across the human world. It might get ugly for awhile but there will be civilisation for the remaining humans because that’s what humans do. If civilisation shifts to take a slightly different path to the future from the one that denialists demand, what is the big deal; why do they lie and create bizarre fictitious realities in which eco-fascists + commies bring down the democratic world via the Trojan Horse of Anthropogenic Global Warming (aka AGW)? Afterall, the asymmetry in the issue is substantial, in that the consequences of choosing to act like there is no AGW and then copping the average case or worse if it turns out to be true, are far more severe than the converse case of assuming AGW is true and making changes to our energy production that turn out to be not required if AGW is actually false. Some of the changes to energy systems are probably desirable on other environmental and even economic grounds, anyway. We’ll eventually see.

    Goodnight all.

  8. Ken Fabos
    March 9th, 2011 at 08:12 | #8

    Terje, the failures of mainstream politics to address this and other sustainability and environmental issues is the reason for the growing popularity of The Greens. Those concerns have a strong foundation in science and mainstream politics has not responded decisively. That the Greens and green left come with baggage and blind spots is hardly unique in Australian politics. That they will be politically opportunistic and try and link the issues that they are trying to advance is also not unique, but they are a minority in representative terms and ultimately mainstream politics makes or breaks these policies.

    The response of mainstream politics – mostly, but not only from the Right – to portray the Greens as destructive is a popular meme that has some resonance amongst those who see little value in ecological protection and don’t want their short term activities limited for the sake of long term environmental protection. But it’s being used divisively and destructively by the Right, in order to prevent action on these issues as well as to avoid facing those issues squarely themselves.

    The Right could have chosen to take the threat of climate change to our future seriously and fight for policies like nuclear to reduce it’s impact but chose instead to protect the fossil fuel interests and to vilify the loudest voices for it being on the political agenda at all.

  9. Jeepers Creepers
    March 9th, 2011 at 08:53 | #9

    Terje,

    Almost any ‘rightwing’ person who advocates nuclear power does so whilst saying taxing carbon emissions shouldn’t happen.

    This is quite crazy

  10. may
    March 9th, 2011 at 16:20 | #10

    may :a good while ago(i’ll hunt it out and post the date early in the coming week.)New Scientist did an article on the cost of amelioration of climate effects broken down by item.how much more for petrol, electricity ,food,etc in the UK.the cost was risible.
    any chance of seeing something like that for here?

    took a while but here it is

    page 8-10 ,New Scientist,5 December 2009.

    food- – - – - – - 1%
    cars- – - – - – - 1%
    electronics – - – 2%
    clothing – - – - – 1%
    alcohol – - – - – -2%
    electricity – - – - 15%

    and wait for it.

    air travel – - – - – 140% (i wonder why)

    these numbers are,because of the nature of public information dissemination,subject to change.

    in the fin,mon 7 mar,page 8 .

    a property developer seems to have lost $3.8 million to a company in bahrain,partly because
    a series of newspaper articles reinforced an”aura of credibility”.

    “auras of credibility” are worth money.

  11. Alice
    March 9th, 2011 at 22:15 | #11

    @TerjeP
    What an absolute porker Terje P and you know it – you were in here not so long ago accusing JQ of banning discussion of climate change (after having your probably close to 100 posts) and now you are doing the same thing – accusing JQ of shutting down disscussion on nuclear power. Spare me. Go back to ALS and stay there – you are a nuisance.

    The Profs discussion pages on pro vs anto nuclear including comments ran to in excess of 500 posts. See much else that reaches those numbers Terje?

    Go complain you are being shut down when they throw you in Guantamo or some other incxarcertion facility of ill repute. Youwouldnt know freedom of speech if you fell over it obviously.

    JQ closed it (nuclear winter discussions) after 500 plus posts because – it had got boring.
    That simple. Over it. No one shut down at all – just plain exhausted ie heard it all before… and bored.

  12. Michael
    March 10th, 2011 at 07:29 | #12

    @Alice
    Fair go Alice, if the scorched earth right couldn’t keep parroting discredited ideas they wouldn’t have anything else to talk about.

  13. jakerman
    March 10th, 2011 at 12:10 | #13

    (Cross post from Deltoid)

    Abbott (the leader of John Humphreys’ party) is proposing the same targets for emissions cuts as the ALP (5% below 2000 levels by 2020). Tony Abbott and John Humphreys need to answer these questions:

    1) How much will Abbott’s direct action plan cost the tax payer (per tonne of CO2)?

    2) How will his direct action plan lead to development of low carbon energy, as opposed to simply offsetting emissions from dirty energy?

    3) If his plan does little to promote development of low carbon energy, how will this affect Australia when fossil fuel becomes more expensive?

  14. Ken Fabos
    March 11th, 2011 at 06:54 | #14

    I didn’t mean to take Terje’s lure and help divert this thread but I would like to just add that I agree with Jeepers Creepers even without his link that doesn’t work.

  15. BilB
    March 11th, 2011 at 08:18 | #15

    John Humphries @1/33,

    To assert that all taxes are a “dead weight” on the economy is quite incorrect. It depends entirely on how the money is used. The taxes that built the Sydney Harbour Bridge, for instance, can hardly have been called a dead weight. Taxes that fought wars certainly were, but taxes that built NSW power stations were not. Taxes that build are not dead weights because they multiply economic performance , and usually at a time and in a manner that private industry is not capable of performing or achieving.

    Global Warming Abatement is just such an instance and need. The damage is entirely created and exacerbated by private enterprise which has not found a need or manner to self regulate excesses. Only a concerted government response can turn this situation around. John Hunmphries should know this if he is anything of an economist worthy of contribution.

    Carbon Pricing is an instrument intended to apply, finally, a brake on environmental degradation. Its cost is only a small contribution to repaying the cost of this environmental degradation which is caused by our combined economic activity, a cost externalised from our economic balance sheets up till now. We have been living a lie. We have shut our eyes to the damage to the environment that our community causes. But now that damage has started to undo our achievements and could very well destroy most of what we take for granted as being “permanent”. It is time for our economies to pay up.

    So the question becomes “is the cost of stabalising our Climate and protecting our resources a dead weight on the economy?”

    I think that this about timing and perception.

  16. Ken Fabos
    March 12th, 2011 at 12:24 | #16

    I’m still not that confident the Carbon Tax will get up and not entirely convinced that Labor would be upset if it fails. Especially if they can point the finger of blame elsewhere than their own failings. To my mind they aren’t selling it very well – but that could be the result of seeing things through the murky coloured lens of mainstream media. Interesting to see how PM Gillard plays it after her meetings with the US President and that even more powerful and influential personage, Rupert Murdoch.

  17. Donald Oats
    March 12th, 2011 at 14:01 | #17

    @Ken Fabos
    Broadly agree with you, that Labor may not be that upset if the CT dies. However, Gillard will be taking the CT to a different senate after June 30th this year, one that doesn’t provide the Liberal/National Party coalition with control of the senate. She (obviously, of course) knows this.

    Personally, I hope to live long enough to find out why Rudd pulled the plug on the ETS after the Turnbull overthrow by Senator Nick Minchin and his band of merry Munchkins. The Labor government had held their ground well – bribes to industry and PR firms aside – and could have certainly have blamed the Liberal/Nationals coalition for not passing the ETS during the composition of the senate at the time. The Labor party could have argued for demonstrating patience and taking the ETS to the next election, the one that Gillard won – but nearly lost – without an ETS or Carbon Tax. The Labor support in that recent election simply moved to those who still supported action on CO2 emissions – the Greens; the irony is that that gave Labor a a final coalition with which to form government, something they may have been able to do in their own right, if they had kept the ETS legislation as a commitment to take to election. Anyway, it will be interesting to hear the views of the major players in the change of PM during the quite successful term by the original PM. Once upon a time the ABC could have been trusted to make an accurate and fair account (whether Labor or Liberal/Nationals were the subject matter); now, it is much harder to see who could do a reasonable account of Labor’s power players during that period.

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