Why do we need a carbon tax ?
The price of energy resources that we consume does not include now the cost of damages to the environment and to our own populations. Consumption doesn't take into account in the price system the real costs, that can be numbered (if they can be) of the management of damages caused by that consumption. In an even more significant way, the price system doesn't take in to account qualitative damages that are worrying as well (how could we assess the cost of a climatic drift or the loss of ecosystems?. A carbon tax creates an incentive to curve our consumptions and is likely to influence the evolution of industry and economy in that direction. The tax has characteristics that are different from those of a quota system.
That measure is generally considered in the context of a constant tax level: it would be revenue-neutral.It is generally said that social contributions could be lowered, so as to give firms compensations. In the case of individuals and households, a system through which the money collected could be shared equally on a per capita basis is also feasible. It is the one solution favored by James Hansen. Both ways must be discussed; they can both be implemented.
This is not what it is meant to be. Where markets fail, public policies are necessary to make sure that prices reflect long-term social costs. The purpose is not to punish, but to make the costs we associate to environmental risks more explicit and to make production, innovation, consumption and location choices evolve consequently. Our current demand for goods depends on the range of equipments that are available today, the stock of these equipments being constituted according to signals received during the last decades by households as well as by firms and engineers who design new products and by the city planners who build on our territory : a car lasts 5 to 12 years, a heating system 2 decades, an apartment or a house over 40 years, an urban architectural concept more one century. We are now in 2008 being trapped by low energy prices up to 1973 and in the 1985-2000 period.
Studies dating back to the 90s show that the best use of the sums collected by that type of taxes would be to reduce deductions on work, allowing therefore a creation of wealth, unlike other types of use (reduction of other taxes, subsidies, reduction of public budget deficit) which could bring net costs. The explanation of that phenomenon is complicated. Two subtleties have to be considered before concluding that a carbon tax is globally positive.
- it affects eventually the revenue that permits consumption since it taxes a consumption. It could also affect production costs if wages are raised in order to offset the loss of purchasing power.
- it modifies the structure of prices by increasing pressure on a good that is already heavily taxed. this is likely to deteriorated the "well-being" that workers get from their income.
To that extent a carbon tax is not an absolutely satisfactory response at first sight.
But if we look at the mechanisms involved in the effect of a carbon tax, we can notice the following points:
A. The carbon tax does not only have a positive effect on work, it helps us to improve the country's balance of trade by penalizing imported energies, by reducing demand and cutting a part of the rents of oil-exporting countries. Besides, as it is paid by all consumers, it relies on all revenues and not only the revenues of work: real estate rents, ground rents,etc. We must nevertheless be cautious with the revenues of pensioners, for whom compensation and adaptation measures must be decided. But tax-cuts on work are a major positive fact.
B. An other positive aspect of such taxes on hydrocarbons is the advantage in adaptation in case of a reduction of activity and turnover: Unlike social deductions on wages that are globally constant for a given number of employees in a firm, spendings related to the use of fuel do follow the level of activity and decrease consequently in periods of underactivity, as energy consumption and spendings are strongly correlative to production. This permits to limit the increase of cost per unit of a good produced. The shift from social contributions on work to carbon consumption would thus enable to reduce a flaw of our social protection system's financing framework and to increase the firms' willingness to hire new employees.
Another benefit associated to it is that there would be a weaker incentive to moonlight work that is mostly caused by the gap between wage costs and net income received.
There is already a comparable tax in France, but it was not conceived as an ecotax: The Interior Tax on Oil Products. (TIPP). It represents about 7% of the State budget's tax revenues. Its application costs are ridiculously low in comparison with that.
The quota system even though it is justified, suffers from failures. Read the paragraph on the characteristics of both systems. here. The carbon tax and the system of negotiated emission permits have in common, however, that theoretically they both result in pricing carbon, by different mechanisms (direct or indirect).
If the tax is "only" offset by lowering social contributions. (mere tax-shift)
It is possible to create compensations for low incomes. As some studies show, (read contribution from J-Ch. Hourcade and Emmanuel Combet). Moreover, the increase of energy prices is unavoidable, for demand (strong economic growth of developing countries like China) and supply reasons (we may be reaching the limits of oil production capacities, and depletion will follow).
It is possible to take measures that would make the tax more favourable :
- tax credits for low incomes. "Basic needs" must be defined for fuels and would determine the level of consumption to be exonerated, financial and technical help for the improvement of energy efficiency in buildings.
- individual help and measures for the regulation of cost of housing.
- finally: the creation of jobs expected thanks to that measure is likely to be profitable.
It is also necessary to aknowledge the fact that creating a permanent context of energy savings, will undoubtedly influence households more strongly in their choices as regards transport and housing. Denying at any rate - "in the name of our purchasing power" - the impossibility to avoid it, is deeply dishonest towards working classes.
If the tax used is a tax and 100%dividend system, then there is no doubt it is fair to the poorest taxpayers.
Standards have hidden costs, that are often much higher then those of a quota system or a tax, because less flexible. On the top of that, the criteria used to create standards of fuel savings in different activity sectors are very likely to cause hard fights and lobbying, with every corporation trying to get the upper hand (firms and households as well). Each category tends to refuse its own obligations and its true involvement. In the industrial sector, regulations that would not have been well thought and discussed would probably be a cause of unfair competition between different economic protagonists or firms and to generate an intense lobbying.
such as building renovation programs, railway infrastructure programs, consumer information programs. Such disposals make investments safer and further innovation on technical objectives. But presenting these programs as alternatives avoiding the constraints of a carbon tax and claiming that we could solve everything by such instruments is dissimulating the risks of generalizing rather arbitrary standards: technical standards have no major negative effect in cases where pollution is diffused by a limited number of firms and where replacing technologies are known. But on the short-run, there is no mass substitute for fossil fuels. Trying to give a regulatory frame to decisions made by households, firms, administrations and laboratories is giving way to uncontrollable lobbying: standards for processes and products can be adjusted in order to disadvantage any group of competitors; environmental quality standards can help hindering any alternative to fossil energies (windmills might affect landscapes, there may be risks with biofuels for biodiversity). As far as allocation of research budgets is concerned, it often depends on persuasion about future potential of different competing technological projects, that cannot by the present time be proven.
Allocating more funds to R&D in low-carbon techniques is a major precondition to any climate policy, especially after a twenty-year decline of investments in R&D in the energy sector. But there is no innovation without a strong link between research, development and diffusion, and without bets made by industry leaders on low-carbon techniques to make their price lower. A price on carbon simply encourages such bets. Moreover, technical progress alone is not enough to reduce greenhouse gas emissions. At constant fuel price, the improvement of engines in a more fuel-sparing way favours the competitiveness of road freight compared to railway freight. It lowers the cost of car and truck use and incites households to more road-mobility. This rebound-effect exists in other sectors but not with the same strength as in the transport sector. A price-signal would prevent it.
It is often said that a carbon tax is useless because we all keep driving as much even though fuel prices rise. But this only stresses the fact that at a given time, we are all trapped by past choices that we have made. But a carbon tax has the quality of guiding us in our future equipment and location choices and helping us to anticipate such traps. That is why economists say that long-term price-elasticity is greater than short term price-elasticity. By the way, there are good reasons to think that elasticities measured by now (between -0,2 and -0,5) don’t enable to assess correctly the long-term impact of a carbon tax. They are drawn from historical records of highly fluctuating energy prices, the growth of which has been slow, as we have shown it. Why investing in energy savings or worry about transport costs related to outlying lodging if energy prices decrease? On the contrary, with a steady and predictable signal, households and industries would make their choices in a more persevering way.
It is estimated that for a country such as France, the number of jobs created would be between 200 000 and 400 000. (see details in the full text of J-Ch. Hourcade's contribution). These results date from the end of the nineties, and research on these topics has been more than neglected since then because of the lack of interest from decisionmakers. These data have two main limits.
Firstly they overestimate the overall gain by taking it for granted that the revenues of the tax are only used to lower social contributions, but a part of it will be used to give compensation to those affected by the operation.
Secondly they also under-estimate the gain because the model used doesn’t include any potential impact of reduction of the hiring risk on employers’ behaviour. This stresses the fact that analysis must go further, but whatever the effect of these new elements may be, we already now that the final result depends, as we will see, on the whole context this reform will be integrated in. We take as evidence of this dependence the fact that, supposing permanent full-employment (with total flexibility on salaries), the small environment-economy “double dividend” that we find turns into a small cost (but lower than strictly regulatory measures).
Shifting a part of deductions on work revenues on energy consumption reduces the total fiscal burden (direct or indirect) on the productive system. It enables to offset the effects of the tax, but that compensation is very variable, depending on the sectors: sectors with high labour intensity will take advantage of a reduction of social contributions that is larger than the increase of energy consumption costs, whereas industries with high energy intensity and low labour intensity will see their tax load grow, the reduction of labour costs being insufficient to offset the carbon tax. These industries represent about 4% of industrial value added, compared to 70% for « winning » industries.
Some of these industries are protected by very high transportation costs and will simply pass it on the price for post-production activities. The industrial sector actually affected therefore represents only 1 to 2% of total value added. This must not lead us to minimize the effect of relocation of these activities on some regions’ industrial network can be important and the loss of mastership on some links in the industrial chain can have a strategic cost. But let us keep some sense of proportions and not make carbon-pricing responsible for difficulties in these industries. They have suffered in the last 40 years from strong variations of €/$ currency exchange rate, a lot more than what we now imagine for a price on carbon. These variations had an impact on every element of production costs and not only energy: - 53% from 1980 to1985, + 79% from 1985 to 1996, - 30% from 1996 to 2000, + 53% from 2000 to 2007. In the same way, overcapacities of steel production in China (between 10% and 20% in 10 or 15 years for example) would have a depressive effect on prices much more threatening for the survival of european steel industry than any significant level of a carbon tax.
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