Climate policies bite poor consumers and frustrate politicians without much wider impact
I just purchased “free airmiles” tickets to the UK for my wife, our two children, and myself. These free tickets actually cost over $2,000. The vast majority of this money is for European climate levies.
The cost made me think about climate energy and tax policies (due to Brexit, the pound is near its 20-year low against the dollar, so these costs are lower than normal). Unfortunately, I have no positive conclusions, just reflections.
Twenty-six years ago I co-wrote “Global Warming: Apocalypse or Hot Air?, a pamphlet for the UK’s Institute of Economic Affairs. I took to heart the following HL Mencken quote: “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.”
While the basic science was obvious and I didn’t think the greenhouse effect was a hobgoblin, I didn’t believe the forecasts of rapid warming. And, more importantly, I believed — and still do — that all sorts of odious actors wanted to use climate change to drive their own dangerous policies. Warming, and harm from it, seems more likely now, but the political economy surrounding the issue has, if anything, become more difficult, especially in US.
Carbon taxes are an option: they lower demand for energy-intensive activity without harming the economy, as long as they are largely matched by reductions in other taxes (such as on employment). But by and large such levies are not offset with lower taxes elsewhere because government officials always want more revenue to spend. After all, perhaps the most important part of increasing the cost of carbon is assisting the innovation that will resolve climate change’s worst problems.
Nevertheless, this course of action imposes costs on voters, and that’s what makes the politics of this issue so difficult. As such, policy centrists are unlikely to favor massive carbon tax rates. And when such policies are proposed, a tipping point is sometimes reached where politicians have to back down.
In the US, carbon taxes are so disliked that most of the policies that climate-driven politicians push — including many Democratic presidential candidates — are targeted on businesses, as though consumers can be protected from them. Al Gore certainly had it right in 1992 when he talked about requiring society to accept a “wrenching transformation” if we really wanted to combat carbon use. The tax rates required to actually limit carbon use would be very high: filling up your car could cost $600 to $1,000, and heating or cooling your modest home could require $2000 or $3000 every month.
Even then, the middle class would adapt to such costs by limiting growth in energy use as Europeans have done for years. In many EU countries, it costs upwards of $140 to fill up a large car (in the UK taxes on gas are over 80% of the total price), but Europeans have shorter distances to travel, live in more densely populated areas and are more likely to be able to use public transport systems, some of which are more energy efficient. Nevertheless, energy use and carbon emissions are rising in EU.
With 2.5 billion aspiring Indians and Chinese currently using perhaps 10 percent of the energy we use, emissions in Asia are likely to grow rapidly. Maybe we’ll reach a tipping point when it will be hard to reverse damage from climate change, but ironically, only after a major catastrophe related to climate change will the politics change and significant hikes in carbon cost made politically viable. And probably only then will China and India agree to limit their carbon use.
Until then, modest changes in carbon tax rates have little impact on richer consumers (most Brits have adapted to higher gas prices). But there is little doubt that EU tax rates, including on energy, have slowed its economies and hit the poor most. As such we are probably close to current limits of carbon taxes.
