Nature and Carbon Pricing.

(source)

Almost a year ago to the date, two large Menindee mass fish kills shocked Australia and the world. Water no longer flowing through the Darling River caused those deaths.

Last week another mass fish kill (said to be in the hundreds of thousands) on the Macleay River went all but unnoticed. Ironically, this time the cause was the rain, adding water to the river bed.

Rain falling over Queensland, New South Wales, and Victoria these last few days (justifiably welcome by firefighters and farmers alike) carried bushfire ash to the river. The fish suffocated in the thick sludge. According to witnesses, between 60 and 100 kilometers of river dead.

Nature is not a trivial thing. That’s why there are tertiary and post-graduate courses covering biology, ecology, Earth Science, meteorology, oceanography and many, many others. It takes time, smarts, and hard work to study those subjects, let alone to master them.

With all due respect, I am not sure economists are equipped for that.

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Last week carbon pricing as a means to reduce GHGs emissions was the object of comment in Australian media.

I think I’ve identified a pattern in such discussions. Whatever else is said, someone mentions the label “carbon pricing”; comments about its superior economic efficiency usually follow; one hears “incentives” and “markets”. Carbon pricing, it is said, is hands down the best alternative to reduce GHGs emissions.

Well, maybe it is. But I think that’s not the whole story. So, let’s begin with “carbon pricing”. What is it?

There are, to be sure, authoritative explainers. Sometimes journalists go as far as explaining that carbon pricing is a Pigouvian tax, that it comes in different flavours (emissions trading systems and carbon taxes, theoretically equivalent) and other technicalities.

Valuable as those efforts are, they rarely spell out what is probably more vital to the wider public. That’s our focus in this post.

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Carbon pricing is based on the undeniable fact that the use of fossil fuels to produce energy has unintended negative effects. That needs no further substantiation: we are seeing, smelling, feeling those effects.

Such effects, economists add, are not covered by the market price of fossil-fuel generated (FFG) energy: they are a “negative externality”, in economic terminology.

Carbon pricing aims to correct that by adding the cost FFG-energy use inflicts on others to its sale price.

Two things happen now. Firstly, economists say, higher prices provide an “incentive” to reduce demand for FFG-energy (and therefore, GHGs emissions). In its carbon tax flavour, carbon pricing is a tax. In that flavour, carbon pricing has fiscal effects, but it’s not justified on the need to raise fiscal revenues. Its rationale, instead, is to reduce something undesirable. It is, in other words, a “tax on a bad”.

(We’ll come back to the second effect later.)

Now, a question seldom mentioned in those discussions is key: who’ll pay that higher price?

In strictly literal terms: anyone using FFG-energy will. Business and consumers (that is, you and I). Business, however, can pass that additional cost on … to us. Sales reductions aside, most businesses shouldn’t be affected. Consumers will be affected with all certainty: we’ll pay directly the higher prices of the FFG-energy we ourselves use and indirectly for that energy businesses use to produce the goods and services we buy from them.

(I’m not going into quantitative considerations: how much prices should increase? Nor am I going into the fact that not all consumers were created equal: those on lower incomes shall suffer most).

In more general terms, in addition to those price hikes, workers losing their jobs will also face income loss. That’s an additional cost we’ll pay (this is a problem that sometimes makes it into those discussions, without eliciting a solution universally accepted).

Unlike other business owners, fossil fuel mining magnates will pay a hefty price, too: their assets will plunge in value. Coal, oil and gas will have to remain buried. That explains why them, but not other capitalists, are dead set against carbon pricing in particular, and climate change action, in general.

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Now, given that we live under a capitalist system and the choice we are offered is, at one hand, carbon pricing, and at the other hand is at best catastrophe and at worst mass extinction and civilisation collapse and even human extinction (all of which seem increasingly likely if not inevitable consequences of rampant anthropogenic climate change), I as a low-income worker, am personally willing to try and pay that price.

But, let’s be clear, as a low-income worker, I may be willing to try, but I’m not enthusiastic about carbon pricing. I’m only reluctantly willing to accept it because we are forced to remain in a capitalist system. I resent that.

Put in those terms, I am not sure all other workers will be as willing as I am (witness the gilets jaunes protests in France).

To put things differently, workers’ rejection of carbon pricing may well be self-destructive, but in the light of those considerations, it’s not as unexplainable as middle class critics like to claim.

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Before readers get too negative a picture (justified if they only followed the Australian discussion of carbon pricing), let me add that compensation payments could be made to those most negatively affected by FFG-energy price increases. In a nutshell, that, under the brand name “carbon dividend”, is what prominent American economists (including 27 “Nobel” laureates) proposed a year ago, almost to a day, apparently to counter Alexandria Ocasio-Cortez’s Green New Deal. Under their proposal, all fiscal revenues raised through the carbon tax would be redistributed equally among tax payers.

That no doubt would sweeten an otherwise bitter medicine. But, wouldn’t it also reduce its effectiveness? You cut down your coal-generated electricity use fearing an unaffordable bill, then you get some money in compensation … What would you do with that money?

Unemployment could be addressed through MMTers’ Job Guarantee (provided, of course, decision-makers could be persuaded to accept it).

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The second effect of a carbon pricing (left hanging above) could also make carbon pricing less painful. Negative-externality-ridden FFG-energy is not the only form of energy. There is presumably negative-externality-free renewables-generated energy. If relative prices shift in the latter’s favour consumers and businesses could likewise shift consumption (and production) from one to the other. That’s another goal of carbon pricing: to make FFG-energy more expensive (which is justifiable), in order to promote renewables-generated energy. Say, add an additional cost to coal-generated electricity, to favour renewables-generated electricity.

The question is whether renewables can step up to the challenge. Can enough of the rare earth and other elements be extracted to produce gigantic batteries and electric cars and wind turbines now, not in thirty, twenty, or even ten years? As importantly: is renewable energy really free of negative externalities?

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Scientists and climate change activists often acknowledge the need for an unspecified radical transformation of society, if our species is to have a fighting chance at survival.

From where I stand, carbon pricing hardly qualifies as radical.

Moreover, readers may have noticed many questions left hanging in the text above. They are not rhetorical. I left them unanswered because I don’t know the answers nor is my job to answer them.

It’s carbon pricing proponents who need to find answers.