The answer to cutting carbon emissions is to wallop shoppers in the wallet.
Listener: 24 April, 2014
Keywords: Environment & Resources; Regulation & Taxation;
Who pays beer tax? Technically, it is paid to the Government by the brewers. But they pass it on, so ultimately the tax is paid by beer drinkers.
Were we to tax one brewer but not the others, things would be different. Competition would prevent the taxed brewer from passing it on to consumers, so the producer would pay. This is obvious, maybe, yet such elementary analysis has not been applied to our carbon emissions policy.
A few preliminaries first. Although I am a trained scientist, anthropogenic global warming – rising temperatures caused by human activity – is outside my expertise. I accept the analysis of climate experts on this issue and disregard that of people with minimal expertise whose conclusions suit their ideologies and self-interests. There was global warming and cooling before humans, but this is faster. Sea levels are rising at about 100 times the rate of the past. If levels rose only at the historical pace, human society could easily cope.
Second, New Zealand’s contribution to the world’s global warming is tiny. So, yes, we could coast along, telling the rest of the world to fix it. We address the issue for reasons of international solidarity and in line with the precept “do unto others as you would have them do to you”.
In any case, an economist’s task, along with that of other scientists, is to give the best technical advice. If New Zealand decides it wants to cut its carbon emissions, what is the best way to do it?
Third, to simplify, I assume here we control emissions with a tax. There are other ways, such as permits, but their analysis is clumsier, although the policy conclusions are similar.
Suppose that to reduce our carbon emissions we impose a tax at point of origin. The emitters pass the tax on to consumers, who ultimately pay it.
That encourages consumers to seek goods produced with fewer carbon emissions and pushes producers to switch to cleaner technologies. The tax thereby makes a contribution to reducing global warming.
However, this applies only if the producers can pass the tax on to consumers. Astonishingly, our regime “taxes” producers who can’t. The largest potential group is the farm sector, because it competes for overseas consumers against offshore producers who are not always subject to the same discipline.
There is a ready solution – rebate the carbon emissions tax on exports. If other countries want to tax all their agricultural consumption by the carbon its production emits, that’s their business; our farmers would not be competitively worse off. At the same time we would impose a tax on imports according to the carbon emitted in their production, so our domestic producers would not be disadvantaged.
And if other countries want to rebate their carbon taxes on exports, so be it. We get the tax revenue instead. A properly designed system would not infringe international trading agreements. After all, we excise imported beer and rebate excises on the beer we export.
Such a regime would shift the penalty from producers who emit carbon to the buyers of their goods and services, encouraging consumers to shun carbon-intensive products and production methods.
We willingly blame the ills of the world on producers, failing to recognise that they take their signals from us – consumers. We would rather fault someone else than admit it is our appetites that are stoking global warming. This extends beyond alcohol and carbon emissions to other “bads” for which consumers should be targeted, albeit indirectly.
Because the world has not understood this, it has mucked around for a couple of decades with ineffective carbon-emission regimes. Global temperatures are rising and, of particular concern for us, sea levels are, too. We seem to be moving into a new phase: what to do as the sea begins to inundate our living spaces. If only the world had tried harder to slow that rise down.