The Trump administration promised to revive the declining coal industry, but has failed to do so:
Robert E. Murray, the U.S. coal baron who pressed the Trump administration to help save America’s struggling miners, placed his company into bankruptcy as demand for the fossil fuel continues to weaken.
Even a determined administration has difficulty going against powerful market forces. One tactic that Trump did not try would be to help coal by putting its competitors out of business. Perhaps the coal barons should take a look at Elizabeth Warren’s policy proposals:
Ms Warren sees environmental policy as an opportunity to play favourites and to protect American manufacturing. She wants an accelerated phase-out for carbon-free nuclear electricity and a ban on fracking, which has not only made America the world’s top oil producer but also provided it with a lot of cheap natural gas. This appeals to the Democrats’ base; but it would also make America’s transition to cleaner energy more expensive and less effective. Ask someone selling coal-fired electricity what they want for Christmas and an end to nuclear power and cheap gas will come high on the list.
As the Trump administration demands that China abandon its industrial policy, they are going in the opposite direction back at home:
The Trump administration wants to dictate how and where global auto companies make cars and parts to secure duty-free treatment under the new Nafta — in its most direct intervention yet to manage trade and production, according to people familiar with the effort. . . . The push comes amid Trump’s tariff-led assault on supply chains that run through China. It illustrates how much his administration has drifted from Republicans’ free-market ways and is willing to employ the sort of coercive tools used in command economies like China to force domestic production.
Some worry about giving the president so much power:
People familiar with the discussions say the language gives the White House a chance to abuse the transition-plan approval process to pressure companies into making politically expedient investments. To avoid an opaque process ripe for meddling by politicians, auto companies and Congress are asking USTR to commit to uniform rules so they can plan accordingly and don’t have to fear retribution for opening a plant in Mexico, for instance, instead of the U.S.
As long as America voters elect philosopher kings who are not vindictive and are not focused on the next election, then there is no reason to fear that these powers would be abused.
READER COMMENTS
sty.silver
Nov 2 2019 at 6:42pm
The popularity of anti-nuclear policies on the left seems like evidence for the “politics is not about policy but about signaling loyalty to your tribe” model. Certainly this is a good reason to want Warren to lose.
Thaomas
Nov 3 2019 at 8:40am
Yes there are many curious inconsistencies in the median positions of different groups, like favoring zero CO2-emission nuclear energy but not favoring a net tax on CO2 emissions that would make it more financially attractive.
Jon Murphy
Nov 3 2019 at 10:38am
It’s not inconsistent at all if you accept the public choice/institutionalism/neoclassical/cost-benefit/Pareto-relevant/welfare economic critiques of Pigouvian taxes. Indeed, you’ll notice there has been a metric ton of literature since the 1920s showing that Pigouvian taxes do not work as advertised (indeed, as Jim Buchanan discusses, Pigouvian taxes are almost, by definition, designed to fail. See Cost and Choice, Chapter 5).
Jon Murphy
Nov 3 2019 at 10:49am
Here’s the thing: Pigouvian taxes would only make nuclear power more financially attractive if we assume that is the only margin firms can adjust along. If there are other margins, then the Pigouvian tax may very well be ineffective.
Furthermore, a Pigouvian tax assumes no concern for other parties enter into the decision-making calculus of the actor. If this is not the case, then the Pigouvian tax ends up being harmful.
Pigouvian taxes only work under very specific conditions. It is not inconsistent at all to be concerned about CO2 emissions and also argue that the necessary conditions for a Pigouvian tax to be effective do not hold in real life.
Simple cost-benefit analysis.
Thaomas
Nov 4 2019 at 8:22am
Could you explain in a little more detail. I genuinely do not understand your objection to the tax on net CO2 emissions. It seems to me almost like supply curves slope up and to the right.
Jon Murphy
Nov 4 2019 at 10:11am
Yes, supply curves slope up and demand curves slope down. Those are necessary but not sufficient conditions for a Pigouvian tax (indeed, there are countless examples of situations where supply curves slope upward and demand curves slope downward and there are no Pigouvian issues. It’s the standard supply-demand diagram).
Now, the objections are manifold and old, dating back to the 1930’s (pretty much once Pigou released his book, he’s been facing criticism).
1) If transaction costs do not exist, there are no such things as Pigouvian externalities since the market would bargain them away. If there are transaction costs, then the market may not necessarily bargain them away (see The Problem of Social Cost by Ronald Coase. This won him a Nobel Prize).
2) However, just because there are transaction costs, it does not logically follow that a Pigouvian tax can be applied. There may be no Pareto-relevant gains to be had (where the costs of imposing the tax are less than the benefits gained from the reduction in the externality. See James Buchanan and Craig Stubblebine’s paper Externality.)
3) Determining what is a Pareto-relevant externality poses its own problems, too. Each of the actors faces uncertainty and thus have expected costs and benefits to the negotiation (this is a function of the fact that all costs happen in the future, not the past). Thus, a Pareto-relevant outcome can only occur if both actors improperly estimate the benefits and costs to negotiating and they should have known better (see The Problem of Externality by Carl Dahlman)
4) Objectively measurable costs are not easily spotted by an outsider. Furthermore, if there are non-economic factors at play, the observable metrics do not accurately reflect the costs the actors face. This means any corrective action will likely do more harm than good (see Cost and Choice by James Buchanan).
5) Additionally, if the person extruding the externality actually takes into account the harm that he imposes on the other party, then a corrective tax, while to the outside observer looks “correct,” actually reduces market efficiency (see Cost and Choice again, by James Buchanan).
6) Along those same lines, if there are already various Coasian bargains taking place that address the externality (like, for example, parking surcharges in cities or gasoline taxes), then that needs to be taken into account when setting the Pigouvian tax. Treating the market as though it has no other bargains in place 9ie “carbon is not currently priced’) would lead to too-high a tax (see The Pigou Problem by John VC Nye. Also related is Governing the Commons by Elinor Ostrom. She won a Nobel Prize for this).
7) Further, Pigouvian analysis assumes the market is competitive and the only margin the person causing the externality can adjust along is by reducing the externality-causing activity. If “quasi-rents” exist, or if there are other margins the producer can adjust along other than reducing production, then the tax would be ineffective at curing the externality (see Cost and Choice, chapter 5).
8) If the market is monopolistic, then the Pigouvian tax would lead to deadweight loss exceeding any supposed gain from the tax (see External Diseconomies, Corrective Taxes, and Market Structure by James Buchanan).
9) All of the above underlines the fact that “cost” for a collectivity is not the same as “cost” for an individual, so for “social cost” we cannot merely sum up individual cost evaluations.
10) All of the above assumes that the costs and benefits can be even known ex ante but this is simply not the case (see The Use of Knowledge in Society by FA Hayek, another Nobel Prize winner. This paper also highlights the aforementioned cost-collectivity problem).
11) Furthermore, any tax necessarily needs to go through some sort of a political process. This means all sorts of public choice issues, like logrolling, rent-seeking, self-interest, political concerns, etc come into play. All of these would weigh on the effectiveness of the tax and also explains why it will not be “revenue-neutral” (see The Calculus of Consent by Buchanan and Gordon Tullock, The Rent-Seeking Society by Gordon Tullock, The Transitional Gains Trap by Gordon Tullock, and The Logic of Collective Action by Mancur Olson. Buchanan won the Nobel Prize for his work in this area).
12) Actually identifying and classifying an externality is itself problematic: what may be a negative externality for one person may be a positive externality for another. Even something like pollution may not be a “bad” for everyone. (See my article What Theory Won’t Tell You About Public Goods).
13) I’ve not even touched on the issues of jurisprudence and the presumption of liberty, that is the unintended consequences a Pigouvian tax could have on the liberty of a people. But that is a long discussion for another time (another 10+ points).
14) Let me conclude by quoting Ronald Coase: “This approach [the Pigouvian approach] has serious weaknesses. It fails to disclose the factors which determine whether governmental intervention is desirable, and of what kind, and it ignores other possible courses of action. It has consequently misled economists in formulating their recommendations for economic policy. In particular, the existence of “externalities” does not imply there is a prima facie case for governmental intervention (taxation or regulation) is called for rather than the other courses of action which could be taken (including inaction, the abandonment of earlier governmental action, or the facilitating of market transactions).” (From The Firm, The Market, and The Law, pg. 24).
I have skimmed over almost a century of literature on externalities that have come out since Pigou, all of which are critical of him. You yourself have levied some of these criticisms on other “central planning” schemes, like optimal tariffs. I have left out a lot of things (issues of causality, issues of morality, issues of jurisprudence, issues of probability and estimating probability, etc).
So, in the face of all this work, I think the question is not why do I not think a carbon tax is viable or desirable, but rather why you do.
Thaomas
Nov 4 2019 at 10:46pm
@ Jon
I’m definitely learning something from this, but I think we might do better discussing our points of view without feeling that we have an audience. I’m going to suggest, though you are centrality free not to follow the suggestion that if you have a further response to this (and I hope you will) to do so at my email which is easy enough to figure out from my posts in Cafe Hayek.
I did not mean to suggest that upward sloping supply curve created externalities, which are the starting point for Pigou taxation
I think we should be able to agree that there are quite substantial transactions costs in negotiating between all the beneficiaries and victims of net CO2 accumulation.
I stipulate that a tax on net emissions of CO2 should not be levied if its deadweight loss is greater than the benefit from CO2. I take it that estimates of the deadweight loss of the tax are part of calculation its level and of course given the right parameter values the optimal rate could be zero.
I do not see why is necessary for the emitter to have mis-estimated the benefits from CO2 emission. I certainly agree that estimates of the harm from CO2 accumulation are uncertain but a priori I do not see why that uncertainty would mean that the estimated tax would be higher or lower
Who is the outsider here? Everyone is both a beneficiary and a victim of CO2 accumulation. Well I suppose no one would claim there are no non-economic factors involved in CO2 accumulation. Off hand I cannot think of any non-economic benefits, maybe you can. But how does the mere existence of non-economic costs and benefits imply that any corrective action will do more harm than good.
Yes, it is a possible that the tax could be set incorrectly if the emitter is not maximizing profits. It that very likely that a significant amount of the CO2 being emitted from millions f points of fuel combustion and industrial processes like cement making is already being under emitted from a profit maximizing perspective? [I confess that this sound so queer to me as to make me wonder if I understood your point correctly]. Now if you mean that it would be inefficient to have both a net CO2 emissions tax AND other taxes and subsidies aimed at CO2 net emissions reduction, then yes of course. That would be to incur excess cost to achieve the optimum amount of harm or too much harm reduction.
Yes this is the same point. One would need either to estimate the carbon tax assuming that all the other sub-optimal policies remain or be reasonably sure that they would be eliminated. Hopefully this is “just” a matter of transition. Over decades the sub-optimal polices would be replaced with adjustments in the carbon tax. (which will vary with developing estimates of cost and benefits of the emissions)
Please explain this in the case of CO2 emissions.
Of course some of the emitters of CO2 are monopolists (and will remain so over the decades that it will take to get the atmosphere back to an equilibrium?). But even for those firms why would the deadweight loss necessarily be greater? But whatever, as we agreed in point 2 above, Show me the model, incorrigible monopolies and all, and we’ll run the numbers and see what the rate come out as.
Does this mean more than that the model for calculation the tax on net emissions has to be a general equilibrium model?
Please explain this in terms of the CO2 emissions externality. As stated it sounds to me like an article of faith.
This is certainly true, but will these same political imperfections not result in other kinds of CO2 harm mitigating policies? Is it likely that they will be better in practice? [This gets to my point of suggesting that even someone who did not even believe that CO2 emissions did produce a negative externality, should cynically support a revenue neutral carbon tax.]
Please explain this in the context of CO2 emissions.
Please explain this in the context of CO2 emissions.
Please translate this from the original Coasain into an insight about CO2 emissions, particularly the “other courses of action” that he would have had in mind if analyzing our issue.
I hope at the very least I have show you why I remain skeptical about the objections to advocacy of a revenue neutral tax on CO2 emissions in not the best policy for a person who values individual liberty and continued growth in material well-being for our world.
Jon Murphy
Nov 5 2019 at 9:38am
That’s fine. I don’t have time to go digging through CH posts looking for an email. Just send me one. My email is on my website. Just click my name
Mark Z
Nov 3 2019 at 1:14pm
Actually, that’s not an inconsistent position in any case. Keeping nuclear energy legal is less costly than a carbon tax, and in fact would be the right policy even there were no global warming, so regardless of how high one estimates the cost of climate Co2 emissions (and therefore regardless of whether one finds it reasonable to have a carbon tax), not banning nuclear is a reasonable position.
Stephen
Nov 3 2019 at 12:05am
“As long as America voters elect philosopher kings who are not vindictive and are not focused on the next election, then there is no reason to fear that these powers would be abused.”
To quote Anna Kendrick’s character in The Accountant, ”Sarcasm, is that SARCASM!?!”
Gordon
Nov 3 2019 at 4:44pm
If Warren were to impose a wealth tax before banning fracking, I could see a potential scenario where some landowners (such as farmers in some Midwest states) could owe wealth taxes because of the assessed value of their land due to the presence of oil and natural gas. But then before they could sell off the mineral rights in order to pay the wealth tax, Warren destroys that wealth by banning fracking.
A somewhat similar situation came about for some tech workers during the dot com days. These people had been given stock options at their start up companies. When they exercised these options their taxable income was based on the cost of exercising the option versus the price of the stock at the time. But when it came time for them to pay their tax bills, the value of their stocks had plummeted and they didn’t have the means to pay. Some sold off most of their possessions and had to declare bankruptcy. Others fled the country.
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