Fiscal and climate policy all in one

Is it possible to have a win-win?

 

http://www.nytimes.com/2013/01/09/opinion/friedman-the-market-and-mother-nature.html?nl=todaysheadlines&emc=edit_th_20130109&_r=1&

Comments

[Haley Miller]

This article presented the alarming argument that the United States is approaching a "tipping-point" on debt to GDP ratio and the world is approaching a "tipping-point" in carbon levels. The debt tipping-point will be reached when growth and stability decrease as debt to GDP ratio rises, making it nearly impossible to have a stable economy, let alone begin to repay the debt. The climate tipping point will occur when carbon levels reach 450 p.p.m. at which point the permafrost will rapidly melt and release methane into the atmosphere. Although it would be infeasible to take drastic measures on either situation, the author argues for action to be taken while it still has a chance of making a difference.

[Matthew Thomas Howell]

This article fits in with Thursday's class discussion perfectly. Friedman highlights the negative externalities associated with using carbon. He supports the Congressional Research Service's plan of a $20 per ton carbon tax, which would help curb the increasing levels of carbon in the atmosphere as well as generate tax revenue to decrease the debt. His views seem to be paralleled by many economists who also believe an increased tax on gasoline is needed. Politicians constantly shrink away from levying such a tax, since the public is vehemently against doing so.

He cites that the carbon level has raised 120 ppm in 200 years and that the 'tipping point' is around 450 ppm in the atmosphere. This would mean there are at least about 50 years left before such levels are reached, leaving sufficient time to try and reverse the process before this point is reached. However once the 'tipping point' is reached, I wonder exactly how rapidly the "out of control acceleration" would be, and what a time frame for such acceleration would look like?

[Chris Nault]

The article clearly states that both the United State's deficit and level of carbon emissions are serious issues that must be addressed soon in order to provide our country with a successful future. The proposed carbon tax featured in this article makes a lot of sense as a possible way to dramatically reduce the deficit, but a carbon tax, causing increases in the prices of gasoline and electricity, would have to be coupled with decreases in some other form of taxes so that the American people are not seriously burdened by an increase in the prices of gasoline and electricity. Not only would a carbon tax reduce the deficit, but it would also reduce the United State's level of carbon emissions, hopefully helping to slow the forces of climate change. However, in order to slow the rate of climate change, the United States cannot be alone in their actions. Although a decrease in our country's carbon emissions would be a significant first step, with the US being the world's second largest carbon emitter as of 2011, other countries must take steps to reduce their carbon emissions as well in order to significantly slow the rate of climate change around the globe. Although both the deficit and carbon emissions need to be addressed, Friedman noted the political reality of the situation as he said that liberals are focused on curbing emissions immediately and not desiring to urgently deal with the deficit, while conservatives are focused on finding immediate fixes to the nation's deficit problems, mainly through urgently pressing for spending cuts, and not focusing on the country's carbon emissions. As we have seen in debates on many issues in Washington, topics such as spending, taxes, the deficit, carbon emissions, and climate change are typically highly polarized issues with neither side willing to do much compromising. In order to cut the nation's deficit and reduce our carbon emissions simultaneously, a compromise over these issues must be reached. As we discussed in class, a proposed price hike in gasoline and electricity is not a politically advantageous stance, as these increases would affect all Americans in some way. Thus, if this were to occur through a carbon tax, a compromise would have to be made with spending cuts and a reduction in other taxes so that the burden of higher gasoline and electricity prices on Americans would decrease and so that Americans would buy into and support a carbon tax.

[David Fishman]

Thomas Friedman emphasizes the urgency in addressing two main issues facing America. Both the annual federal budget deficit and the amount of carbon dioxide in the atmosphere are increasing at unsustainable rates. Friedman illuminates a possible policy solution that would ameliorate both issues. A carbon tax.

As discussed in class, markets do not typically account for externalities, whether positive or negative. Thus, it is the responsibility of legislators to properly induce society to accurately internalize the costs of the given externality. In this case, as the carbon dioxide levels increasingly near the 450 p.p.m level that will foster a climate that is far more sporadic, legislators need to implement legislation that will mitigate this unnatural phenomenon. A carbon tax, as outlined by Friedman, is a viable solution. This directly raises the price of inputs producing carbon emission, so the MPC will shift out to become nearer to the MSC curve. Hence, the tax will more accurately internalize the costs of carbon emissions. Moreover, levying a tax will generate more revenue, reducing the budget deficit. Commodities, such as oil, have a very inelastic demand curve, especially in the short run; thus, this form of pigovian tax will generate a consistent source of revenue. While the tax will also serve as a deterrent to transactions that produce a negative societal externality.

[Hank Hill]

At times, I believe we can rant on and on about the problems plaguing our world, and our words are often not backed by any sort of resolution, practical or farfetched. I appreciated the straightforwardness of this article as it efficiently explained the two problems we're facing: one with Mother Nature and one with the market. The two problems are not necessarily intertwined; however, they bring a sort of impending doom. On the one hand, we see that the carbon level has raised 120 ppm in 200 years, while our "debt-to-G.D.P. ratio from 36.2 percent in 2007 to 72.8 percent today".

Though neither problem bodes well for our future, we cannot possibly solve either one of the problems overnight. That being said, we must start now in order to have any chance of alleviating the problems. Friedman suggests and supports a carbon tax of $20 per ton, which "could cut the projected 10-year deficit by roughly 50 percent (from $2.3 trillion down to $1.1 trillion)". There is a spillover effect as well. As the deficit steadily shrinks, the environment begins to improve as well, allowing us to hit two birds with one stone.

For instance, here's one benefit among many: an improvement in air quality and the environment will allow for children to play outside longer and more often. This sort of benefit will lead to less obesity and a healthier population overall.

Overall, as economists, we are seeking to maximize our social well-being while still paying close attention to the well-being of our environment. We must work inside the confines and capabilities of our environment. Without a doubt, extended abuse of the environment will negatively impact our social well-being. The carbon tax is a step in the right direction: a feasible and practical solution for us to start solving our problems over a long time.

[Emily Zankman]

Under the blog post link, Professor Casey asks the question: “Is it possible to have a win-win?” According to this article, the answer is absolutely.

However, if the rationale behind a carbon tax is as logical as Thomas Friedman presents it, then why is this proposal not on the table?

After considering this question, I looked into the objections to a carbon tax.
According to Tejvan Pettinger in “Carbon Tax- Pros and Cons”, the cons of a carbon tax are:

• Production may shift to countries with no or lower carbon taxes.
• Cost of administrating the tax.
• Difficult to know the level of external cost and how much the tax should be.
• Possibility of tax evasion. Higher taxes may encourage firms to hide carbon emissions.
• If demand is price inelastic, the tax may have to be very high to reduce demand significantly.
• Consumers dislike new taxes and often don’t believe that they will be ‘revenue neutral’. This is not an economic argument, but it is a political reality and explains why it is often difficult to implement (Pettinger)

Most of these objections have to do with the technicalities involved with setting up and enforcing such a tax. I believe that these concerns are valid; however, there are not any points that are impossible to solve or are strong enough to refute the entire tax proposal. Even if we cannot find ways to remedy all of the concerns, I do not find any of the points to be compelling in the face of upcoming financial and climate crises.

Therefore, I agree with Friedman in asking “How could a carbon tax not be on the table today?”

[Rachel Samuels]

While I understand the point of Friedman's article to be a proposal that would alleviate the current strain in both our monetary and environmental situation, I believe it is also a criticism of the myopia that exists in government regulations. I have often felt that the hesitation in implementing mitigating policies is due to, as Kahn said in the first paragraph, the preference for delaying decisions and responsibility into the future. Even the major deadline for the "fiscal cliff" was delayed by two months in recent discussion. As Hank said in an echo of both Kahn and Friedman, there is no "overnight cure" for either issue, and I believe that an immediate cure is precisely what politicians are waiting for: some sort of easy fix, because they do not want to hold the responsibility of the perceived failure of an action not having an immediate result. A tax would not be an easy fix, and there is the fear that it would initially hurt more than it would help, and the short terms of politicians mean that they would be held responsible for the initial dip in productivity and the lack of corresponding decrease in carbon emissions.

Both of these issues are steadily inching towards catastrophe, and long term planning is needed for the both of them. This tax, despite initial harm, would be a good step towards correcting these situations away from their respective cliffs. I feel as though, as Emily outlined, it is precisely the initial harm that it is so hard for people to overlook. As always, there is never quite a clear cut answer, and I am not agreeing that a single carbon emissions tax would be the end-all, be-all, but I feel as though such a thing might be useful in the long term. I might be too quick to place the blame of the lack of such a tax on the shoulders of near-sightedness, and the law of unintended consequences seems to reign supreme, particularly in the environmental and economic worlds, but even a smaller tax in the same vein would level out the negative externalities.

[Holley Beasley]

Reading Friedman's article reminded me of an article I read last May in the Washington Post about the impending doom of the country's financial deficits. In the article, by Montgomery and Helderman, which can be found at http://www.washingtonpost.com/business/economy/taxmageddon-sparks-rising-anxiety/2012/05/14/gIQAUxAAQU_story.html , the real issue was condensed into a short phrase: "there's so much at stake. And there's nothing that inspires confidence that this will get done" (Montgomery and Helderman). The authors later continue that "political leaders are focused less on finding solutions than on drawing lines in the sand". This article was written before the 2012 elections, while Friendman wrote his article after. However, the issue is the still the same. Our country is approaching an aggressively downward-spiraling future, and no one seems to be doing anything about it.

I appreciate how Friedman lays out the information in a straightforward, unbiased manner. It seems like our country could use more Friedmans these days. But even with more people like him, we still can't make any progress with politicians who spend their time just drawing lines in the sand. In the Washington Post article, Ajay Rajadhyaksha of Barclays Captial describes the approaching deadline as a "slow-motion train wreck".

If Friedman's article weren't enough to make me slightly nervous about the future of this country, the striking similarities between these two separate articles by two unrelated authors are more than enough. One article was written eight months ago, before the presidential election. And now, eight months later, post-election, another author is pointing out the same issue. This country is crashing and something needs to be done before it's too late. How many Montgomerys and Heldermans and Friedmans will it take to actually make a change?

[Nick Cianciolo]

I agree with Chris’ point that if a carbon tax is instituted, then we need to see at least temporary cut backs on other taxes until we see economic improvement. Friedman brings up in the article something that we touched briefly during class… the idea that we are going to see higher taxes in some form in order to reign in the deficit; so we must choose whether it is in the form of consumption taxes on things with negative externalities like carbon, or taking away tax breaks for mortgages and children. I like the idea of taxing things with negative externalities instead of positive externalities. This gives the market incentive to invest in things without negative externalities, i.e. green energy, and could lead to relatively quick results in reducing carbon emissions. Another benefit of the market having more incentive is that it will lead to more innovation and new technology. The problem with this is the complexity of our tax code to begin with. If we had halfway competent policy makers we would see a scrapping of the current code and starting fresh with a tax system that is simpler and taxing more negatives instead of positives like working (via the income tax).

[Ellen Gleason]

This article was not the first time I'd been introduced to the concepts of carbon taxes or the dangers presented by global warming, but I'd never thought of the connection and similarities between the two issues. After reading, the most prominent issue Friedman discussed was the very true possibility of reaching a "point of no return" in both our debt to GDP ratio and carbon emissions rate. This was the first time I'd ever heard of the large portion of permafrost made up of CO2 and menthol, and the enormous effect those emissions would have on our global atmosphere if warming conditions continue as they are currently. It seems to me that the potential to reach an atmospheric state where cutting emissions would no longer have any positive effect would be enough to pass legislation in order to deal with this problem now. But, as Emily said, there are problems with instituting a carbon tax that would need to be seriously examined. The ideal solution would be politicians working together with environmental experts to come up with emission-reducing policies while we still have the potential to return our atmosphere to a sustainable state.

These environmental findings, combined with Friedman's emphasis on the not-so-distant possibility of our debt burden reaching the point where taxes and spending cuts would go solely to interest payments, reinforce the need to address these issues immediately. By connecting our federal debt problem with that of global warming, Friedman offers a new perspective and way to address both issues at the same time. However, no matter how effective economists predict a carbon tax would be to alleviate both problems, we do need to recognize the complications that would ensue. There would be a far greater need for increased regulation of energy producers to ensure they're fair in monitoring, reporting, and paying for carbon emissions. Although opponents of a carbon tax will cite complications associated with such a tax, any method adopted to decrease emissions and reduce our federal debt will have problems. There is no perfect solution, and Friedman's proposition of carbon taxes should be carefully considered because unlike many other potential solutions, this tax would work to alleviate both issues with one method.

[Nathan Plein]

In this article Friedman draws a parallel between what he believes to be the two most important issues facing Americans today, the annual federal budget deficit and the emission of carbon into the atmosphere. He argues that the rates at which we are building up financial debt and emitting carbon in to the atmosphere are unsustainable and we are approaching the point to where there is no turning back. He proposes that a carbon tax is a solution to both of these issues.

While I do agree with the author that we should have a carbon tax, I also like many of the points that Chris and others in the class have brought up. As discussed in class, being in favor of a carbon tax is not a politicly advantageous stance to take because it would effect almost every American in the form of higher gas and electricity prices. I like Chris's and Nick's point about pairing a carbon tax with tax decreases in other areas to lessen the burden on the American people and get them on board. However while I think this would be an ideal solution, I don't see it happening in the near future. With all the problems that are facing our country today I don't believe the majority of Americans would be willing to pay more for something that may have no effect during their lifetime. I also don't think that with all of the pressures Congress is facing today that they would be able to come to a compromise and couple a carbon tax, with breaks in other areas.

[Cort Hammond]

I agree; the debt crisis and climate change can be solved together; however, it may have to be more indirect that a straight CO2 tax. Congress' failure to reduce CO2 emissions is, as many of peers have mentioned a case of delaying a difficult decision in hopes that the solution will become clearer (and politicization). The inaction on CO2 emissions stems, at least in part, from the free-rider problem (fear that other countries with ride on the US's emission reductions). Since climate change is by definition global, I find it hard to believe that the US will ever take strong action on CO2 emissions. When numerous countries banded together to solve the problem with the Kyoto Protocol, the US failed to ratify. At the same time, there remains a strong contingent of climate denialists. It seems to me that the way around this is to focus on rounding up all immediate and physical externalities from fossil fuel use and tax these.

I liked what Hank had to say about "one benefit among many." Clearly, there are wide reaching benefits that occur when fossil fuel use is reduced. Aren't the clear impacts on asthmatic conditions, fish and wildlife resources, and ecosystem health reason enough to tax fossil fuels? In addition, Thomas Friedman mentions the detrimental effects (what I would argue are externalities) of petropolitics/petrodictators in his last paragraph. These are all examples of externalities that could provide a reason (on top of impending climate change) for Congress to unite across ideological lines.

I acknowledge that it is preferable to tax the externality not the product; however, in this case, it seems that after extraction, refining, shipping, and burning, petrochemicals are themselves an externality.
Perhaps a direct tax on petrochemicals is a more realistic solution?

Unfortunately, the US has been slow to act and I fear that the issue of global warming has been so politicized that the ideal solution (a carbon tax) would be difficult to establish. But perhaps if CO2 isn’t the target (other externalities are) Americans might be more willing to accept a tax, especially if it meant the lessening of the deficit.