27 March 2010

The Politics of a Carbon Tax: Lessons from France

The French government's decision to withdraw its proposed carbon tax last week followed on the heels of a stinging electoral defeat of President Nicolas Sarkozy's UMP party in regional elections. A carbon tax, starting at a low level with proceeds invested in energy innovation, remains a good idea. You'll hear more about this in The Climate Fix. The experience in France confirms lessons already understood about efforts to put a price on carbon. Among them:

1. A carbon tax is politically difficult to pass unilaterally.

France saw concerns raised about its proposed tax from across the political spectrum due to concerns about its effects on French competitiveness within the EU. In fact, the main justification for its withdrawal at this time by President Sarkozy was to link it in the future to a broader European approach.

2 . An unpopular political party or leader (or both) won't do policy innovation very well.

The French ruling party was trounced in the regional elections, winning in only 1 region. In such a context any policy innovation that they propose will all but certainly be a victim of the political winds of the day. Policy innovation needs to come from a base of political strength -- but also and crucially -- in the context of policies focused on energy innovation need to be politically sustainable over many decades. Hence, they cannot simply be appealing in a particular political context, but must appeal to common interests.

3. Technological innovation that reduces costs must precede any tax viewed as increasing costs.

The proposed tax was -- $23 per ton of carbon dioxide -- was (with hindsight, obviously) way too high for the benefits that were perceived. This fact was made clear by Segolene Royal, leader of the Socialist Party:
This tax only makes sense if there is an alternative. In my region for example, I calculated that for people who have to drive their car to work every day this tax would have cost over 200 Euros per year. As long as we haven't developed the electric car or public transport a carbon tx is totally unfair and antisocial and its a very good thing it has been withdrawn.
A carbon tax won't succeed politically if it is imposed under a promised of distant and diffuse benefits. It needs to be built upon a platform of innovation which shows immediate benefits. This is another reason for starting small, as any benefits will not result immediately.

It is worth noting that on the left-right political spectrum, Royal -- Sarkozy's once and perhaps future political opponent for President -- is a Socialist and opposed the carbon tax while Sarkozy is center-right and supported it. This suggests that the issues here are less about left-right politics in general than about the policy specifics (and the present unpopularity of the President).

4. Short terms costs must be balanced by short term benefits

Ultimately, for a carbon tax to pass or any effort to put a price on carbon emissions, short term benefits must approximate the short term costs. France saw this calculus fall in the direction of opposing the tax, both politically and in terms of policy. This calculus is the result of failed policy design, not anything inherently wrong with the notion of a carbon tax. Expect to see it proposed again, in France and elsewhere.

A carbon tax remains a good idea. The policy and politics needs some work.

29 comments:

  1. Roger,

    You forget that a carbon tax had in fact been passed but was declared unconstitutional but the courts. The reason was that large businesses are subject to the EU Emissions Trading System, and get their permits for free. Small businesses would be subject to the carbon tax, without a tax rebate. This is unfair.

    The French government could not find a way around it that would be acceptable to the own party, and so they ditched it as a populist measure.

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  2. -1-Richard

    Yes, this is correct and underscores the importance of policy design. The original plan was flawed due to all of the carve-outs and inequities.

    A carbon tax will be best passed "upstream" (e.g., when coal, petroleum, nat gas are removed from the earth) as fossil fuel production tax, not as an emissions tax.

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  3. Why is it that the tax can be a victim of the political winds, and not a part of them? Elections don't merely influence policy Roger, policy influences elections.

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  4. "Small businesses would be subject to the carbon tax, without a tax rebate. This is unfair."
    That's not only limited to carbon tax. Tax rebates usually favors large businesses, especially with international contacts.

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  5. Roger,

    Carbon taxes may be good in theory (like many other economic theories). The trouble is the practice is invariably constrained by politics which, IMO, ensures they are useless for anything other than raising revenues - something that can be done more cheaply with a simple VAT.

    In Canada, carbon taxes have become a political no-go area because they were perceived to be an excuse to confiscate wealth from the fossil fuel producing regions (e.g. Alberta) of the country and hand it over to the regions with a lot of hydro power (e.g. Quebec). There is no way to square this circle without rendering the tax ineffective (i.e. providing exemptions and rebates to politically powerful industries and groups).

    I realize that many people want government to 'do something'. But when it comes reducing CO2 emission I think governments will only do more harm than good. Technology will solve the problem when it becomes economic. No amount of wishful thinking on the part of governments can change this before the technology is available.

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  6. -3-Andrew

    Undoubtedly true. But I've seen no evidence in this case to support such a claim, have you?

    -5-Raven

    We agree about the role of technology, but where does it come from? Who pays?

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  7. what technology? this is a social problem not a technological one

    if man can't learn to live within the means provided by the planet he lives on no technology will save anyone

    this is why politically it is basically impossible to curb emissions because it literally affects everything including things like population

    we got here because of leverage and energy, this is how we overpopulated the planet and over consume beyond what the planet can provide and sustain..........there is no going back, you lose leverage and curb energy and it has drastic consequences

    wanna seriously continue to think technology will save the day then you had better find a solution that provides the same or better leverage that fossil fuels provide and physics already tells us this isn't gonna happen

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  8. Roger,

    Energy costs money. This has driven innovation the past and will drive innnovation in the future.

    The cost of fossil fuels is going up (oil in particular). A $200/barrel oil price will do more to reduce emissions than any government policy.

    A high oil price also has the virtue of being 'fair' since politicians cannot undermine the market incentives by providing exemptions or rebates to political favorites.

    I also don't think that peak oil is a real fear. The price of oil will go through boom and bust cycles like it has in the past but after each boom the floor price will increase. This will ensure sustained innovation without a economic catastrophe.

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  9. -7-carl

    "physics already tells us this isn't gonna happen"

    WHay physics?

    -8-Raven

    I agree with much of what you say, except for the part about energy policy needing to be 100% market driven. Is this your view for all policies?

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  10. The problem with $23 per ton of CO2 is its too low to have any effect. That's $70 per ton of (CH2), or $0.05 per liter of gas.

    The socialist just made up (euro)200, it would be $50 for a small car. That's nothing compared to the existing taxes of $0.50 per liter.

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  11. Forgive me for pointing this out, but as the whole Carbon Tax thing is a scam,why debate it in any way.There isn't any notion of 'fairness',its a scam and should be removed. No tax on the air please. The environment should be protected by responsible use and regulation, not cap and trade.

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  12. Roger,

    Governments have a role when it comes to regulatory issues. i.e. government regulatory power is often used to block the development of energy sources and this can only be addressed by a sensible policy framework that is applied consistently.

    Governments also have a role funding the basic R&D but the commericalization of technology is best done by the private sector.

    Governments should not be trying to manipulate the markets because the market players will always find it cheaper to lobby politicians than to actually solve the problem that the government thinks needs solving.

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  13. Turns out it was a corporate scam, like carbon trading. What a shock.

    That is the problem with post normal realities. If Hamlet says it looks like a camel, then it's a camel. He's the Prince of Denmark and you aren't. Princes don't pay tax, peasants do.


    France turns to Europe for carbon tax plan

    President Nicolas Sarkozy last year hailed the new tax as a vital weapon in the fight against global warming when it was first approved by parliament. But it was struck down by France's highest court just 48 hours before it was due to come into force, on the basis that there were too many loopholes for the big industrial polluters.


    http://www.euractiv.com/en/climate-environment/france-turns-eu-carbon-tax-plan-news-375149

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  14. France already has one of the lowest GHG footprints per capita in Europe because 90% of their electricity comes nuclear and hydro. I suspect many Frenchmen feel they are already doing more than their fair share. The proper approach would be to spend more on battery R&D for electric cars, so they can leverage their current nuclear lead.

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  15. @ roger

    its all about energy density and ease of usage which yields leverage as in the ratio of energy used to obtain said energy source vs what that energy yields in return---net return on energy is literally everything

    Fossil fuels for all practical purposes are nothing more than centuries of sunlight compressed and stored by nature over very very long periods of time which drives its energy density way up compared to things like biofuels or ethanol which basically are nothing more than a single seasons storage of energy. This is nothing more than basic physics.

    Early on in US history and world history when it was fueled by wood,coal, and animal power population was far lower than it is today.....those sources have low energy densities compared to oil. The "green revolution" was literally an oil revolution using directly petroleum to make food. Now if you go backwards back towards energy sources with far less leverage which is the case with ALL the alternatives then the consequences become pretty easy to see coming. Economically and food wise it is devastating. Petroleum is the major source of everything in our daily lives because it has enough density and volume to pull it off and allow it to happen, there are no existing substitutes nor are there any replacements. There are plenty of other ways but they all have far far less leverage and energy density. Oil back in late 1800's US had a ROI of up around 100:1, its now down to around 20-30:1 depending on where it comes from, this too is already very apparent economically. Solar, biofuel, nuclear, wind power etc etc are all low density sources....in comparison to oil or natural gas very very low density sources.

    Even oil and gas gets left in the ground trapped by physics. Most of it never is pumped out and extracted. Simple reason being if it takes more energy to get it out than you get in return then you don't do it, you can't economically. Only a fraction of these resources can be exploited and all the tech gains and tricks over a century haven't changed this all that much. Physics imposes some pretty hard and harsh limits that can't be negotiated with.

    how all these things are tied together is profound and crosses multiple disciplines:physics, economics, science, psychology, human nature, politics....all of it

    can we get by on far less energy usage? yes we can by a huge margin

    can we implement and substitute that negates the need to use less? nope and it isn't even close....that throws multiple problems into the game immediately

    can we support 6 billion plus people on the planet and get off fossil fuels? nope

    these are a few of the immediate conclusions which you have to deal with in this kind of discussion

    does this mean we should give up and abandon trying, of course not but if it is going to be done then it must be done knowing what we are getting into and what the consequences are otherwise we end up with more bad policies which make things worse

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  16. Hilarious. Europe - and the French in particular - hammered Bush for his crimes against humanity. That would be, refusing to subject the United States to restrictions that China, India and others would not be a party to. Now, we hear - from a leading French socialist, of all people - that a French carbon tax would not be fair because it would give other European countries a competitive advantage?

    Pot, meet kettle.

    These clowns are being hoist on their own petards. To work, market-based carbon restrictions - including taxes - have to bite and bite hard. That bite, by definition - comes by way of increased cost. What did they expect when they signed up for this foolishness? Now, all of a sudden, we have to wait for electric cars before we "save the planet?"

    In coming years, they'll look back at this time as the Age of Climate Madness.

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  17. @ Mark B

    this is a good example of why it is so difficult, it means sacrifice and everyone will naturally say "you go first"

    getting the entire world to cooperate is has a pretty dismal odds of happening

    we humans simply aren't wired to go backwards or use less of anything, it isn't our nature......like all other animals we over consume into die off or catastrophe despite our knowing better. Our own very nature also makes us reactive creatures rather than sensitive to small changes and planning long term. We tend to wait till an emergency happens rather than planning for it possibly coming and just avoiding altogether with proper planning and some foresight.

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  18. Forgot to add: a carbon tax ESPECIALLY makes no sense when we can't even establish whether there is a "climate problem!"

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  19. "A carbon tax remains a good idea. The policy and politics needs some work. "

    We don't need no more stinkin taxes and government, Roger! We are already taxed too much, and most of the money collected from taxes is just wasted on building up the extremely inefficient, wasteful government sector. As Carl explains so well, there ain't no magic to be found by more R&D. You may as well spend the money trying to repeal the laws of physics and the basic tenets of economics. If R&D is the example please show me just what gains NREL has given us for the hundreds of millions (billions?) spent over the last 35 years.

    Please listen to carl!

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  20. I have no idea how popular the tax was in France, I'm not saying I know it affected the election results. But before we conclude which way the causality goes, I think it should be looked at.

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  21. Roger Pielke, Jr. said...
    " A carbon tax will be best passed "upstream" (e.g., when coal, petroleum, nat gas are removed from the earth) as fossil fuel production tax, not as an emissions tax."

    Good point, Roger. And such a tax will be best accepted if it replaces existing taxes (ie is revenue-neutral). Most European countries would have a VAT equivalent that could be scrapped to make way for a very substantial carbon tax.

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  22. -19-jae

    We have "income taxes" but no "income problem"

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  23. #22 heyworth,

    The US will have trouble imposing carbon taxes on oil extracted in Russia or Saudi Arabia.

    If it is tax on imports then it will be no different from a consumer tax.

    Revenue neutral taxes are also wonderful playground for politicians because they have to decide which taxes get cut. The Canadian carbon tax proposal that was shot down was revenue neutral but it provided the largest rebate to low income earners which tend to be concentrated in specific regions. This meant the tax further exacerbated regional tensions within Canada.

    If there is a carbon tax 100% of its revenue should go to R&D for alternate energy sources.

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  24. Roger, 23:

    "We have "income taxes" but no "income problem""

    Yeah, and they are so high they are destroying the economy. And set to go even higher, due to a disgusting bunch of morons in DC.

    You ignore most of my comment. Can you cite some studies that offer even a little bit of hope that more research on "alternative energy" will lead to energy sources that are anywhere near as economical as carbon-based ones?

    Oh, well, since the Hope 'N Change thing isn't selling well, anymore, this is probably just an academic discussion, anyway.

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  25. -25-jae

    This is an interesting question:

    "Can you cite some studies that offer even a little bit of hope that more research on "alternative energy" will lead to energy sources that are anywhere near as economical as carbon-based ones?"

    I'm happy to discuss, but first, let me ask you, what, other than the existence of such energy sources (which would make the debate rather pointless) would constitute evidence that you would find to be a convincing answer?

    Would you accept evidence of technological progress in other contexts?

    Would you accept technological progress to date in nuclear, wind, solar etc.?

    What would you accept?

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  26. Raven,

    "If it is tax on imports then it will be no different from a consumer tax."

    - except that it will fall most heavily on those items with the highest fossil fuel content, thus discouraging their purchase and encouraging the purchase of lower fossil fuel content alternatives.

    "Revenue neutral taxes are also wonderful playground for politicians because they have to decide which taxes get cut. The Canadian carbon tax proposal that was shot down was revenue neutral but it provided the largest rebate to low income earners which tend to be concentrated in specific regions. This meant the tax further exacerbated regional tensions within Canada."

    - yes, there is no accounting for the endless stupidity of politicians. We can only keep voting them out until they get it right.

    "If there is a carbon tax 100% of its revenue should go to R&D for alternate energy sources."

    - governments have a pretty poor record when it comes to picking winners. The US could be run entirely on thorium power by now if it wasn't for the stupidity of government. What have they actually spent money on in energy research in recent times? Tokomacs? My brother in law worked in tokomac research twenty years ago. I sent him a recent paper on the state of current research, he said he could have written the same paper twenty years ago. Fits in with the well known joke, "fusion is the energy of the future. And it always will be." His other comment about fusion power "People worry about a bit of radioactive waste, but they want to put the sun in a box?"

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  27. heyworth,

    Your brother-in-law's comments are on point. We already know how difficult and expensive it was to obtain a permit to construct a fission power plant. We still can't recycle used fuel rods because that would supposedly encourage proliferation of nuclear weapons. So now let's try running a D-T tokomak reactor that requires the breeding of tritium (a vital component of thermonuclear warheads) as part of the fuel cycle through the permitting process. Good luck with that. No fusion reaction that produces neutrons at a high rate will ever fly past the greens. Maybe 11B + p yielding three 4He ions will pass, if it can be made to work. But that research is receiving only a tiny fraction of the money spent on tokomaks, so I'm not expecting much.

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  28. 26, Roger:

    “What would you accept?"

    First, some of my previous comments might suggest that I don’t support R&D. If so, that is incorrect; I am a very strong supporter of R&D. Especially better nuclear solutions. We probably will need alternative forms of energy at some point, unless the abiogenic theories of hydrocarbon formation are true. I might even support a SMALL tax on energy to support it, if it could be kept small. But that scares me greatly, because the irresponsible Congressmen that we keep electing would smell blood and would very soon increase any such tax—and it would very likely begin supporting WAY more than R&D for energy. Probably even health care for those of us peons who aren’t eligible for Congress’ Cadillac Health Care Plan.

    Many engineering studies have already assessed the true costs for various forms of “alternative energy,” studies that include the necessary life-cycle analyses that include ALL the inputs. The problem is that the costs of these types of energy are way higher than the cost of traditional energy forms, and the energy is often not very “useful,” because it can’t be stored. Some types of “alternative sources,” like biofuels, also result in the release of MORE GHGs and more expensive food. Clearly stupid!

    So the next steps are to continue to try to find feasible ways to store energy and determine what can be done to decrease the costs—material substitutions, more efficiency, etc. NREL and other research institutions have been doing this type of R&D for many years. Still, the bottom line at this point is that alternative energy will not “pencil out” until conventional energy costs much more. Hence the silly and economy-destroying drive for Cap and Trade and other forms of carbon taxation—IMHO simply deceitful tricks to make alternative energy look less expensive.

    So, what to do? I say keep doing R&D that focuses on decreasing the costs of alternative energy, but don’t necessarily expect any big breakthroughs soon. The low-hanging fruit has been plucked. But, whatever is done, LET THE FREE MARKET WORK. Don’t FORCE more expensive energy on people in the name of some ill-defined climate change “threat” that is at worst minor and at best a boon to mankind. When the costs of fossil fuels get high enough, which will happen in time, we will have to switch to higher cost “alternative energy.” Let that happen “naturally.”

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