Plan for stopping the climate catastrophe – Is it magic realism or a serious possibility?

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from Jorge Buzaglo

Is it fake science? Is it magic realism? Or is it the launch of a serious, rational, open debate beyond establishment politicians, diplomats, and other amateurs? The following is (the internet translation of) an article published in the main Swedish morning newspaper by Mats Persson, economics professor and member of the Royal Academy of Sciences. According to him, it does not have to be painful and difficult to stop the climate catastrophe; on the contrary, it can be quite simple. In any case, my own choice is developed in http://www.paecon.net/PAEReview/issue44/Buzaglo44.pdf, or in a more detailed form by a number of reputed scientists including the late “economics Nobel prize” winner Elinor Ostrom (https://science.sciencemag.org/content/319/5864/724.2).

Let the UN climate conference introduce global carbon dioxide taxes

Do something!” Says Greta Thunberg. Her call raises three questions that must be answered: What should we do? Who will do it? And how should the measures be designed so that they become politically acceptable — even for populists and climate deniers?

With regard to the first question, we must reduce greenhouse gas emissions, and in particular carbon dioxide. All economists agree that this can be achieved through a global tax on carbon dioxide emissions of between $ 100 and $ 200 per metric ton. This will give consumers an incentive to demand climate-smart goods and services, and companies will be given incentives to meet this demand. Certainly, it is good if the automotive and aerospace industries are voluntarily trying to develop fuel-efficient engines — but there is nothing that speeds up the technological development such as sharp financial incentives.

The second issue is more complicated. Already today, several countries have introduced a carbon dioxide tax, including Sweden. But now we have to gather around a global tax that must be placed on top of existing taxes. Who will accomplish this?

Here in Europe, we probably think in the first place of the EU. But, unfortunately, the EU does not work in this case, for two reasons. First, the EU is far too small; it accounts for only 10 percent of the world’s carbon dioxide emissions. Secondly, not many people want to give the EU its own taxation rights.

Instead, the solution is in the form of the UN’s annual climate conferences. These, which have been organized in a number of cities (for example, Copenhagen, Paris, and most recently Katowice in Poland) cover virtually all the countries of the world and have been disappointing every year. They have issued beautiful declarations, but no obligatory compromises — and then nothing has happened. The latest meeting is a clear example; in Katowice, the idea was to give concrete form to the promises from the Paris meeting in 2015. But of that, nothing became, and the delegates went home disappointed again (except the delegates from the coal and oil producing countries, who were probably satisfied with the non-result). The reason for the impotence of UN conferences is simple: their agendas are poorly designed. They are supposed to agree on quantitative cuts in carbon dioxide emissions, of the form “Land A will reduce its emissions by x percent (or y tons) in the next few years, and country B will reduce its emissions by z percent”. But no country likes quantitative cuts. Each country therefore usually puts forward several arguments against why “our country” should cut down so much: “We are so poor” or “We have already cut so much down so much” or “Our government will lose power to a populist opposition.”

Therefore, climate conferences have not produced any results. We must now redo their agendas. Instead of general promises of quantitative cuts, conferences should gather countries around a carbon tax. Such a tax does not mean that the UN gets own taxation rights; the tax is to be administered by each individual country, and the individual governments thus get control of the tax revenue themselves.

In fact, this is one of the features of a carbon tax that can make it politically feasible. The UN conferences will thereby be transformed from an impotent discussion club into a forum for sharp decisions — decisions that lie in the interests of each individual country. Presumably, the oil-producing countries will vote against a carbon tax — but it does nothing because the oil producers are still quite few, and all oil-consuming countries actually have incentives to introduce the tax. We come here to the third question of those mentioned at the outset: How should the necessary action be designed to be politically acceptable to governments that must take into account (or themselves consist of) populists and climate deniers? Assume that an individual country introduces a tax of $ 100 per ton of carbon dioxide. This corresponds to approximately 2.50 SEK per liter of gasoline. Then the petrol price would rise by 2.50 SEK and attract protesting “yellow vests” on the streets.

But if, instead, all countries introduce a carbon tax, it will be different. Then the world market price of oil will fall. Exactly how much it falls depends on the long-term price sensitivity of supply and demand. For the sake of simplicity, suppose the world market price falls by half the tax amount, i.e. by SEK 1.25. The price increase for consumers is therefore only half of the tax: SEK 1.25. At the same time, the state gets SEK 2.50 per liter. How does that work?

The answer is that consumers account for half of the increase in the state’s tax revenue, while oil producers are forced to account for the other half in the form of a lower world market price. If we assume that an average person buys 1000 liters of gas per year, the state receives an average of SEK 2,500 per person on average. However, as the price for the consumer only increases by SEK 1.25, the annual additional cost for consumers is “only” SEK 1,250, if consumption is unchanged. (Corresponding calculations can easily be made with regard to the fact that the price increase after some time gets demanded quantity to decrease, and for other fossil fuels, for example coal).

What should the state do with these new incomes? This is where you can see that a global carbon dioxide tax is politically feasible.

One answer is that the state simply pays the money back in the form of a lump sum of SEK 2,500 per capita. The cost of the tax is thus SEK 1,250 on average, but the income is 2,500. It sounds almost too good to be true. And will the effect not be completely thwarted then, if the consumers get back the money by the way?

No not at all. The tax raises the relative price of gasoline for consumers, which attracts fuel savings and increased demand for more fuel-efficient vehicles. And this also applies if consumers receive a large income supplement in the form of a lump sum of SEK 2,500. If the state thus uses the increased tax revenue to compensate consumers, we still get a climate gain.

Then, of course, the state does not have to pay the money back. Some countries might rather use them to alleviate the budget deficit, or invest them in education and welfare. A third country might use the money for increasing military expenditures, a fourth to build a wall against Mexico. The examples show how a tax can be even more appealing than if it was only paid back to consumers as a lump sum. And that applies regardless of whether the countries in question are democracies or dictatorships, and whether they are governed by climate-conscious politicians or by climate denialists. The financial incentives are simply so strong that virtually all governments could be attracted.

It does not have to be painful and difficult to stop the climate catastrophe. On the contrary, it can be quite simple. But then a carbon dioxide tax must be put as the first issue of the agenda for UN climate conferences.

Dagens Nyheter, June 23, 2019.