Lint Barrage on climate change and capital taxation

I show that decentralizing the optimal allocation requires not only high carbon prices but also fundamental changes to tax policy: If the government discounts the future less than households, implementing the optimal allocation requires an effective capital income subsidy (a negative intertemporal wedge), and, in a setting with distortionary taxation, an effective labor-consumption tax wedge that is decreasing over time. Second, if the government cannot subsidize capital income, the constrained-optimal carbon tax may be up to 50% below the present value of marginal damages (the social cost of carbon) due to the general equilibrium effects of climate policy on household savings. Third, given the choice to optimize either carbon, capital, or labor income taxes, the socially discounting planner’s welfare ranking is ambiguous over a standard range of parameters. Overall, in general equilibrium, a policy-maker’s choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy.

That is from her discount rate paper.  The broader lesson here is that all your intuitions about climate change, discount rates, and taxes might not hang together.  Do not follow mood affiliation, rather think the issues through carefully.

For the pointer I thank the excellent KL.  Here are other papers by Lint Barrage.

Comments

If the author doesn't fully model the strategic effects of the most rapidly growing parts of the world not cooperating and the most developed being more committed to implementing carbon policy the potential offsets could make the costs of the change prohibitive and the benefits for climate improvement relatively unimportant.

Tax, tax, tax, and spend, spend, spend. Anyone who really thinks this is about the climate just isn't paying attention. This is about money, your money, they want it to be their money. If the AGW scam collapsed tomorrow they would come up with a new scam to take your money and your rights. YOU are the target.

100% correct.

I would add, the future states of the climate system are unknowable. All of this fighting over global warming and public policy are possibly unnecessary and dangerous.

This is why it is foolish to invest in the stock market because future share prices are absolutely unknowable.

The optimum carbon policy is payouts to low consumers from high consumers. If the climate damage is small, we get fewer low carbon payouts. Low carbons consumers have a diminishing return as the planet gets freer from carbon. The equilibrium [point is easy, we get more accurate over time and eventually end up in the middle of the glacial cycles, a lot colder than current holocene.

So, we know we not going to do that, we are not going the optimum path. No one is suggesting it, no one is considering it, except me, ice age man.

Right there, go no further, you have the big unknown because we are choosing an unstable point in the glacial cycle, none of the calculations will work. The model will crunch along coalescing three variables, then come to a sharp inflection point and need another variable to curve through.

Here is the what if intuition fails to hang together.
We run the model and find a path to pre-industrial, a twenty year path, a miracle. The path includes the cause of the current holocene period, because back before CO2 pollution, the holocene was likely preparing for the next ice age. So the ne variable you need is the connection to the glacial cycle, and that is likely geologic.

The term Holocene means 'way to hot, the ice age is coming'. What happened to the ice age, really? Here is a scary though, it has been a very long time in geo-history since we had a kilometer of ice sitting on Yellowstone volcano. It would certainly be nice iuf we could get another kilometer of ice on that cauldron, it is the most dangerous geology we face. And that is what your models lead to, massive geoengineering as we learn that geology is massively destructive.

We can set a scale for geology change by looking at the change in magnetic field, moving, racing they call it, to Russia. That is not indicative of disaster, but is indicative of how fast core motion of the earth can change.

So, I am a NASA scientist just now figuring out magma flows from Yellowstone south to Mexico and pacific. I have to find the connection between the events, one way or the other, because Yellowstone is in a bit of a motion. So, Dr NASA is back at the pre-industrial, asking the same question, what is the relationship between magma flow and glacial cycle, and how fast can that change. And that is what is going on, behind the scenes, in climate studies.

'The broader lesson here is that all your intuitions about climate change, discount rates, and taxes might not hang together.'

Well, at least we can be thankful that your intuitions about climate change, discount rates, and taxes do hang together, right?

And 'you' is really starting to get a workout here, as if a vast range of opinions and beliefs can be simplistically reduced to whatever point it is that is being advanced.

+1

Exactly what I was going to write.

Note that this result follows from the assumption that the social planner has a different time discount rate than households. It seems a bit strange to disagree with household time preferences but keep everything else neoclassical revealed preferences implies, but hey theory papers going to do their thing.

It does not follow from carbon taxes as a Pigouvian tax to address negative externalities in general. It would also be interesting to use this framework to analyze, say, a subsidy for green energy as a more focused intervention than just a negative capital income tax as higher energy prices is the distortion to savings.

Also, if we are undervaluing the future, there are other solutions than cutting capital gains taxes (basic research grants, infrastructure, human capital subsidies, etc.) Seems intentionally libertarian mood affiliated to create ideological dissonance to discredit the idea of a planner discounting the future. I mean, look at the title. It's a typical playing silly games with theory to show that you can't take it too seriously paper.

It is true that policymakers have other levers to pull. After all, it is because an effective carbon tax rate has been difficult that efficiency standards have been used so broadly.

It wasn't a carbon tax that killed the incandescent light bulb, it was a regulation, opposed by libertarians.

(The fact that good LED light bulbs arrived in the nick of time might be an argument for techno optimism, and for greater public spending on energy-saving technologies.)

You're reversing cause and effect. The incandescent light bulb ban came about because LEDs existed (and were more profitable), but the public wasn't buying them.

The way I remember it, momentum got going for the ban in the fluorescent days. And then we of course had to wait for a window when deniers were not in charge of the US government.

FTFY: "And then we of course had to wait for a window when authoritarians were in charge of the US government." I just put a bulb in a fixture this morning. Not often used but had one fluorescent and one regular. The fluorescent died. I put in 2 LEDs because they are cheaper now, and I don't want to burn the 60 watts for the regular bulb.

What is also not taken into account is the risk that the Government is wrong when looking at the threat of global warming. This is not a trivial issue - we can see this many times in history - some examples include the Iraq war, the threat of communism, the benefits of a high carb diet and so on. These wrong views have cost the country a lot of money. And every time there were objections the objectors were marginalised by the mainstream very serious people (worse there was no apology afterwards by the serious people and no seeming effect on their position in society). I am not saying that this is necessarily true with AGW but it should be seriously considered. If you take this into account, perhaps the best policy is to wait until you have clear indication of harm occurring, and a very clear plan as to what to do about it. Useless plans that cost money but don't have an impact are great for signalling but are at best a waste of money. Just working on developed nations emissions won't be enough for instance - the UK for instance has reduced its emissions to the 1860's level, but there is almost no impact on global emissions as the use of coal has exploded in other places like India and China. This has cost the UK a lot of money in energy subsidies but with no global benefit. How can this be a good thing? Currently there is absolutely no price signal that uncontroversially shows harm from global warming. World food prices remain on a downward trend, coastal properties are in demand, people are not fleeing hot cities to go to cooler ones and so on. And the hottest area's of the world, India and Africa, are experiencing booms both in population and economies. My message to all these wannabe social engineers is to learn the lesson of history, be humble about what you know and what you can do, and wait and watch until you have clarity.

Rare is the source of atmospheric carbon that does not have other documentable environmental impacts. This is especially true for the dirty dogs of energy production, coal plants.

About 70% of China’s energy production is coal.

Over 80% of Indian energy production is coal.

Europe of course is moving back to coal as they shut their nuclear plants.

CO2 tariffs? Have yet to hear a realistic policy here.

Germany increased coal burning because of their "energy weenie" program.

German coal capacity is down by about 22% since 2010 with coal consumption down by a roughly similar amount. German coal use is down by about one-third from 1990. No doubt closures of inefficient East German power stations are involved with that.

Coal is over 40% of German energy production (compared to 30% NA). Of course they play the California game, Germany imports over 50% of energy. That 50% can be anything since it “doesn’t count”

Of course, quite a bit of the imported energy is nuclear from France after Germany began to shut down its own nuclear power plants after Fukushima in 2011.

Those sneaky Germans....

Dear Mr Hmmm

You wrote, "Europe of course is moving back to coal as they shut their nuclear plants."

Europe, including Turkey but not Russia, used 637 million tonnes of all grades of coal in 2017. That's a 17% decrease from the 772 million tonnes used in 2012. So either you were mistaken or for some strange reason you have decided to lie about the very dry and boring topic of coal tonnages.

True. This is something most sceptics (or 'denier' if your the religious sort) agrees on. I'll be happy enough when coal is dead.

Totally agree on phasing out of coal in developed nations. It will be much more tricky to do in places like India though where they have lots of cheap coal locally. Their alternative is either expensive imported energy like LNG or very capitally intensive things like nuclear power. But I am told by Crikey that solar power is the cheapest source of energy now so no need to worry, they will be simply using solar from now on.

+1
The truth is no one knows what is going to happen:
https://www.pnas.org/content/104/21/8709

Don't forget the Paul Ehrlich bet ( he lost):

https://en.m.wikipedia.org/wiki/Simon–Ehrlich_wager

Actually, we do know what will happen. Technology in many energy related areas will be far more powerful in the 2040s and 2050s than today so that the long term threat to the climate is essentially nothing as has been the case since the Kyoto Accord in 1997.

Right. In the 19C they were very worried about when coal would run out. Reserves were limited and the economy ran on coal. Imagine if at that time the Victorians has been as far sighted as to implement a coal saving program for the benefit of future generations (per Tyler's suggestion of a zero discount factor for such programs). All they would have achieved would have been slower economic growth.

Isn't the point of subsidizing capital (whether directly or with tax preferences) to increase investment relative to consumption. In the context of carbon emissions, the point of subsidizing capital is to encourage investment in alternatives with lower carbon emissions. Encouraging investment alone won't do it: owners of capital may choose mansions or yachts or art or whatever assets that have the promise of appreciation. China devotes half its income to investment in order to produce more goods consumed elsewhere, emitting enormous amounts of carbon in the process. It's not consumption in China that produces all those carbon emissions, it's consumption elsewhere; thus, it's necessary to reduce consumption elsewhere (meaning in the U.S.). If elsewhere reduces consumption of goods made in China, that reduces the income in China unless China increases consumption in China (and reduces investment to offset the consumption). The Chinese may believe increasing consumption in China is a fine idea, but the people elsewhere not so much. Attention Walmart shoppers: With inducements from our government, Walmart has decided to change its business: we are discontinuing the sale of all those cheap products made in China in order to reduce carbon emissions in China but you may deposit the money you won't spend on those cheap products (that you don't really need anyway) with the cashier so that Walmart may invest it for you in alternative energy sources with lower carbon emissions. Walmart, your friendly investment bank.

The World likely ends (I can't see how it won't) in 12 years.

The apocalypse isn't global warming (anthropomorphic or otherwise), it's disastrous, misbegotten central planning.

AOC will end the world for the Dems in 12 years. It's gonna be fun to watch.

I'll make the popcorn.

The cost of removing CO2 from the atmosphere and sequestering it puts a lid on carbon prices. By estimating the cost of doing this agriculturally I expect the lid will be around $70 a tonne or less.

What some people get caught up on is that it is not at all practical to capture current emission levels agriculturally. However, as a carbon price approaches $70 a tonne emissions will be greatly reduced. It is also possible some other methods of CO2 sequestering will be cost effective at around that price.

Now, blondes are telling liberal jokes.

I just suffered a lint barrage from my dryer after doing a load of towels.

I wondered how long that would take; I didn't want to be the first.

This analysis contains an implicit false assumption of zero technology change. A relatively higher carbon tax will increase the relevant rate of technology and social change.

The carbon emission issue is created by billions of individual decisions every day.

I think I properly unpacked the argument and understand the points, but then I know that our existing tax policy is totally non-optimal which makes me question the above arguments are even relevant.

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