From our economists: The cost of climate change 100 years from now

As an environmental economist, I work on issues that may be very important –like the fate of the entire planet — but are also inherently technical and hard to explain. Take the Social Cost of Carbon (SCC) and the Social Discount Rate (SDR). Neither would make a great ice-breaker at a cocktail party, but they are critical for how the world deals with climate change.

One of the first things you do when faced with a new problem is to try to judge how big or serious it is. The SCC is one way of expressing this – as the estimated cost to society of each ton of carbon emitted. This cost, in the abstract world of textbook economics, would be the price that everyone paid when emitting a ton of carbon dioxide into the atmosphere. The trouble, of course, is that the world doesn’t work this way. Everyone doesn’t pay the SCC price, or any price, when they, say, switch on a lamp or drive to work.

There are two ways to bring reality into line with economic theory: either a cap and trade system for carbon (and other greenhouse gases) or a carbon tax. Both make the world pay for carbon emissions, which will drive those emissions downward. But even without those tools in place, it still makes sense for policymakers to make large, long run decisions in a sustainable manner that correctly takes into account the real costs of climate damage. That is why a number of countries, and even some large companies, use a SCC in the cost benefit analyses that inform public policy. In the U.S., the official government value for the SCC is just over $40, in today’s dollars, per metric ton of carbon dioxide emitted.

Recently the social cost of carbon has even become a topic of dispute in the U.S. Congress. The House last week passed an amendment that is intended to prevent the Environmental Protection Agency from using the SCC in its rulemakings. (The measure has little chance of being adopted by the Senate.)

What is the social cost of carbon?

The SCC is a valuable tool for policymakers in evaluating the benefits and costs of regulations. It improves decision making which would otherwise assume that the price is zero. But of course there are many layers of uncertainty in determining the size of the SCC. First comes the uncertainty concerning how much the planet’s temperature will increase as a result of carbon emissions. This is a complex problem that includes variables from the effects of thawing tundra to the reflectivity of changing cloud patterns and the amount of heat reflected by Earth as it changes “color” due to the Albedo effect. Next, there is the uncertainty of what the effects of changing temperature will be. How fast will glaciers melt? What will happen to the flow of major rivers? How fast and far will sea levels rise? What will happen to plant ecosystems and what, ultimately will all this cost humanity in lost crops, increased costs of transport, economic disruption and social unrest.

Then you have to analyze the feedback effects of our socioeconomic system – that is, how well will humanity handle the changes and costs imposed by global warming. Will we be able to deal with them efficiently or not – or will the world fall into widespread dispute and conflict – dramatically raising the social cost of carbon, not to mention the amount of human suffering in the world.

Finally, even if we were able to correctly estimate all these costs, we would see that they would hit different people in different countries and at different points in time.

How is the poor economist, faced with all these variables, to aggregate them into one single number that accurately expresses the Social Cost of Carbon? To begin to answer that question, we have to bring in the Social Discount Rate (SDR), mentioned above.

The real value of money is variable. The cost of $100 to a poor person in a low income country is not the same as it is to a middle class person in the U.S. Similarly, a dollar in 50 years is not the same as a dollar today.

In many large scale studies like the Stern Review, the latter issue – the changing value of money, or discounting — has actually been the biggest uncertainty of all! Discounting is a way of establishing equivalency over time. For example, suppose you have a debt of $100 to a bank with a 5% interest rate. The debt will grow to $105 in a year’s time and with compound interest it will grow to $208 in 15 years’ time. In this sense we say that a cost of $208 in 15 years’ time is equivalent to a cost of $100 today or the discounted value of $208 in 15 years is $100.

In the long run, discounting has very large effects. For example, a cost of $1 million in 200 years would be valued at not much more than $50 with a discount rate of 5%, and around than $1 with a discount rate of 7%. This example shows that being affected by a cost of $1 million in 200 years (in the year 2213) is “equivalent” to a cost of $50 – or just $1 – today. Both numbers are very small – and furthermore, a small difference in the discount rate makes a big difference to the value. Discounting with a constant and high discount rate is equivalent to saying that we do not value costs two centuries away at all. But this runs contrary to what many people feel is reasonable – which is why we need to think through this carefully and – in our opinion - revise it.

The social discount rate

The correct value of the social discount rate (SDR) is the subject of a whole literature – it is almost a mini-field of its own. It’s a critically important area because it asks the fundamental question of what we are willing to pay – today – toward the welfare of our children and grandchildren. The SDR is as close as you can get to a “price on the future.” It tries to estimate how much society should pay now for its carbon emissions in order to limit the damage (and cost) of those emissions to future generations.

Last Friday a number of coauthors and I published an article in the journal Science that is a contribution to this debate. The article entitled ”Determining Benefits and Costs for Future Generations,” shows that the SDR should fall over time – and that the United States should use a declining discount rate like the ones already used by the governments of Britain and France.

The discount rate is tied to the growth rate of the economy. One of the main reasons for discounting is that we expect to be so much richer in the future and for rich people money is relatively speaking less important. The SDR might fall for several reasons. One of the conceptually simplest is if we believe in “limits to growth.” If the economy cannot grow forever then, by definition, the growth rate will slow down and the SDR will fall over time. Our article in Science focuses on another reason discount rates should fall: uncertainty over future growth rates.

The article illustrates this with a simple numerical example. The discounted value of $1000 at 4% in 100 years is $18.32. But suppose we do not know the discount rate and it might be either 1% or 7%. The discounted value with 1% is $368 and with 7% it is just 91 cents. If it could be either 1% or 7% with 50% probability each, then the expected value (the average of the results discounted at 1% and 7%) would be $184, which is much more than the discounted value with a certain discount rate of 4%. So uncertainty actually gives you a result that is equivalent to using a much lower discount rate.

Our Science article shows that this effect increases over time. So costs far into the future should be assigned a lower discount rate than costs in the more immediate future. What all this economic theory means in terms of caring about our children is that we should care particularly about our grandchildren and even more about our great grandchildren!

We know that the worst effects of climate change will come in the distant future, so with a discount rate that falls over time, the SCC should be higher now. This will make fossil fuels less profitable and renewables more profitable, and future generations will reap the benefits of having to deal with less global warming.

The world of the future, the place where our grandkids and great grandkids will be grappling with the climate change issues we leave behind us, is the reason figuring out the correct SCC and SDR is so important.

krives August 5, 2013 - 03:02

From our economists: The cost of climate change 100 years from now

As an environmental economist, I work on issues that may be very important –like the fate of the entire planet — but are also inherently technical and hard to explain. Take the Social Cost of Carbon (SCC) and the Social Discount Rate (SDR). Neither would make a great ice-breaker at a cocktail party, but they are critical for how the world deals with climate change.

One of the first things you do when faced with a new problem is to try to judge how big or serious it is. The SCC is one way of expressing this – as the estimated cost to society of each ton of carbon emitted. This cost, in the abstract world of textbook economics, would be the price that everyone paid when emitting a ton of carbon dioxide into the atmosphere. The trouble, of course, is that the world doesn’t work this way. Everyone doesn’t pay the SCC price, or any price, when they, say, switch on a lamp or drive to work.

There are two ways to bring reality into line with economic theory: either a cap and trade system for carbon (and other greenhouse gases) or a carbon tax. Both make the world pay for carbon emissions, which will drive those emissions downward. But even without those tools in place, it still makes sense for policymakers to make large, long run decisions in a sustainable manner that correctly takes into account the real costs of climate damage. That is why a number of countries, and even some large companies, use a SCC in the cost benefit analyses that inform public policy. In the U.S., the official government value for the SCC is just over $40, in today’s dollars, per metric ton of carbon dioxide emitted.

Recently the social cost of carbon has even become a topic of dispute in the U.S. Congress. The House last week passed an amendment that is intended to prevent the Environmental Protection Agency from using the SCC in its rulemakings. (The measure has little chance of being adopted by the Senate.)

What is the social cost of carbon?

The SCC is a valuable tool for policymakers in evaluating the benefits and costs of regulations. It improves decision making which would otherwise assume that the price is zero. But of course there are many layers of uncertainty in determining the size of the SCC. First comes the uncertainty concerning how much the planet’s temperature will increase as a result of carbon emissions. This is a complex problem that includes variables from the effects of thawing tundra to the reflectivity of changing cloud patterns and the amount of heat reflected by Earth as it changes “color” due to the Albedo effect. Next, there is the uncertainty of what the effects of changing temperature will be. How fast will glaciers melt? What will happen to the flow of major rivers? How fast and far will sea levels rise? What will happen to plant ecosystems and what, ultimately will all this cost humanity in lost crops, increased costs of transport, economic disruption and social unrest.

Then you have to analyze the feedback effects of our socioeconomic system – that is, how well will humanity handle the changes and costs imposed by global warming. Will we be able to deal with them efficiently or not – or will the world fall into widespread dispute and conflict – dramatically raising the social cost of carbon, not to mention the amount of human suffering in the world.

Finally, even if we were able to correctly estimate all these costs, we would see that they would hit different people in different countries and at different points in time.

How is the poor economist, faced with all these variables, to aggregate them into one single number that accurately expresses the Social Cost of Carbon? To begin to answer that question, we have to bring in the Social Discount Rate (SDR), mentioned above.

The real value of money is variable. The cost of $100 to a poor person in a low income country is not the same as it is to a middle class person in the U.S. Similarly, a dollar in 50 years is not the same as a dollar today.

In many large scale studies like the Stern Review, the latter issue – the changing value of money, or discounting — has actually been the biggest uncertainty of all! Discounting is a way of establishing equivalency over time. For example, suppose you have a debt of $100 to a bank with a 5% interest rate. The debt will grow to $105 in a year’s time and with compound interest it will grow to $208 in 15 years’ time. In this sense we say that a cost of $208 in 15 years’ time is equivalent to a cost of $100 today or the discounted value of $208 in 15 years is $100.

In the long run, discounting has very large effects. For example, a cost of $1 million in 200 years would be valued at not much more than $50 with a discount rate of 5%, and around than $1 with a discount rate of 7%. This example shows that being affected by a cost of $1 million in 200 years (in the year 2213) is “equivalent” to a cost of $50 – or just $1 – today. Both numbers are very small – and furthermore, a small difference in the discount rate makes a big difference to the value. Discounting with a constant and high discount rate is equivalent to saying that we do not value costs two centuries away at all. But this runs contrary to what many people feel is reasonable – which is why we need to think through this carefully and – in our opinion - revise it.

The social discount rate

The correct value of the social discount rate (SDR) is the subject of a whole literature – it is almost a mini-field of its own. It’s a critically important area because it asks the fundamental question of what we are willing to pay – today – toward the welfare of our children and grandchildren. The SDR is as close as you can get to a “price on the future.” It tries to estimate how much society should pay now for its carbon emissions in order to limit the damage (and cost) of those emissions to future generations.

Last Friday a number of coauthors and I published an article in the journal Science that is a contribution to this debate. The article entitled ”Determining Benefits and Costs for Future Generations,” shows that the SDR should fall over time – and that the United States should use a declining discount rate like the ones already used by the governments of Britain and France.

The discount rate is tied to the growth rate of the economy. One of the main reasons for discounting is that we expect to be so much richer in the future and for rich people money is relatively speaking less important. The SDR might fall for several reasons. One of the conceptually simplest is if we believe in “limits to growth.” If the economy cannot grow forever then, by definition, the growth rate will slow down and the SDR will fall over time. Our article in Science focuses on another reason discount rates should fall: uncertainty over future growth rates.

The article illustrates this with a simple numerical example. The discounted value of $1000 at 4% in 100 years is $18.32. But suppose we do not know the discount rate and it might be either 1% or 7%. The discounted value with 1% is $368 and with 7% it is just 91 cents. If it could be either 1% or 7% with 50% probability each, then the expected value (the average of the results discounted at 1% and 7%) would be $184, which is much more than the discounted value with a certain discount rate of 4%. So uncertainty actually gives you a result that is equivalent to using a much lower discount rate.

Our Science article shows that this effect increases over time. So costs far into the future should be assigned a lower discount rate than costs in the more immediate future. What all this economic theory means in terms of caring about our children is that we should care particularly about our grandchildren and even more about our great grandchildren!

We know that the worst effects of climate change will come in the distant future, so with a discount rate that falls over time, the SCC should be higher now. This will make fossil fuels less profitable and renewables more profitable, and future generations will reap the benefits of having to deal with less global warming.

The world of the future, the place where our grandkids and great grandkids will be grappling with the climate change issues we leave behind us, is the reason figuring out the correct SCC and SDR is so important.

krives August 5, 2013 - 03:02

Uncovering the Real Cost of Carbon

World Bank/flickr

(This post was co-authored by Gernot Wagner.)

Last week, the Obama administration released new energy efficiency standards for microwaves, along with an update to the government’s official Social Cost of Carbon (SCC) figure. What do those two things have to do with each other? Well, the efficiency standards will help the planet by cutting the energy needs of microwaves, which will in turn save consumers money. And the new SCC numbers show just how expensive our addiction to fossil fuels has become.

The SCC is used to estimate the damages from carbon emissions (and the benefits from reducing those emissions) for the purposes of regulatory benefit-cost analyses. The central estimate for the SCC is now around $35 per ton of carbon dioxide pollution emitted today.

That’s the administration’s estimate of the damage—to human health, ecosystems, and the economy—caused by every ton of carbon dioxide emitted into the atmosphere. The average American emits about 20 tons each year.

The new cost of carbon figure is a welcome step forward, reflecting the latest versions of the underlying models. The bad news is that the increased number also shows that our lack of a comprehensive climate policy is becoming ever more costly.

Moreover, this updated SCC number underestimates the true costs of carbon emissions. For example, the current SCC quickly rises to $55 per ton under a lower discount rate (that is, an estimate that doesn’t “discount” harms to the wealth and health of future generations by quite as much as the administration did in reaching its $35 per ton figure).

The value of one ton of carbon dioxide would rise higher still with a declining discount rate, something that, in line with the general consensus among economists, would more closely reflect the true costs of climate change. And none of that includes the cost of extreme climate events.

Basing Policy on Science

The good news: the administration’s latest numbers show exactly how policy analysis should be done— rigorously and consistent with the latest advances in science and economics. For example, instead of using older versions of three main SCC models to calculate its official number, the administration now uses the most recent peer-reviewed versions of each. That simple but important step helps to bring the new official SCC more in line with the latest academic literature.

In short, the administration’s economics are slowly and carefully catching up with what we all can see outside our windows. While atmospheric carbon dioxide levels have just passed the 400 parts per million threshold for the first time in over 3 million years, the real costs of climate change keep piling on.

What the country really needs, of course, is for Congress to pass a comprehensive climate policy. Only then will Americans stop living in a world where their personal behavior leads to socialized costs of at least $35 for each of the 20 tons of carbon dioxide we emit every year. Until then, the Obama administration is right to at least include these costs in its own regulatory impact assessments.

krives June 3, 2013 - 04:26

See comments

Of course we need Congress to pass a full and effective climate policy.

Much of the planet can be run using solar power but who is spending the time and money on this.

____________________
Location Ile Maurice

Julie Watson June 4, 2013 at 3:20 am

Fine waу of describing, and nice post to obtaіn іnfoгmatiοn regаrԁing my prеsentation
subject, ωhich i am going to deliνer іn аcademy.

internet marke… June 4, 2013 at 11:49 pm

In reply to Of course we need Congress to by Julie Watson

Thanks a lot for this notice

Matteo June 4, 2013 at 5:45 am

Great post for all time definitely going to read your other posts. Thank you.

________________
Logo Design

Beth Rogers June 4, 2013 at 7:26 am

Thanks for sharing such information. Sometimes, these things are not open to the public or rather confusing.

nchhoda June 5, 2013 at 1:38 am

thanks for share this notice
-------------------------------------
qua tang sinh nhat, banh trung thu rau cau, thu nhoi bong gia re, qua tang sinh nhat gia re

winwinshop88 June 5, 2013 at 4:16 am

Thank you for this useful article, you give a great new idea that i wan use in my country

bangchuck June 5, 2013 at 5:53 am

This article is a devastating answer to those who complain that the cost of renewable energy is subsidized, in that it shows the extent to which we subsidize fossil fuels.

___________
Nail Design Ideas

Teddy Hudso June 5, 2013 at 7:44 am

The Social Cost of Carbon is used to estimate the damages from carbon emissions (and the benefits from reducing those emissions) for the purposes of regulatory benefit-cost analyses.

____________
Acne Cyst

Ati Kinson June 6, 2013 at 8:29 am

Congress need to take responsibility and pass the bill the for climate change policy. Otherwise we all will suffer.

Logo Designer April 17, 2018 at 3:51 am

Uncovering the Real Cost of Carbon

World Bank/flickr

(This post was co-authored by Gernot Wagner.)

Last week, the Obama administration released new energy efficiency standards for microwaves, along with an update to the government’s official Social Cost of Carbon (SCC) figure. What do those two things have to do with each other? Well, the efficiency standards will help the planet by cutting the energy needs of microwaves, which will in turn save consumers money. And the new SCC numbers show just how expensive our addiction to fossil fuels has become.

The SCC is used to estimate the damages from carbon emissions (and the benefits from reducing those emissions) for the purposes of regulatory benefit-cost analyses. The central estimate for the SCC is now around $35 per ton of carbon dioxide pollution emitted today.

That’s the administration’s estimate of the damage—to human health, ecosystems, and the economy—caused by every ton of carbon dioxide emitted into the atmosphere. The average American emits about 20 tons each year.

The new cost of carbon figure is a welcome step forward, reflecting the latest versions of the underlying models. The bad news is that the increased number also shows that our lack of a comprehensive climate policy is becoming ever more costly.

Moreover, this updated SCC number underestimates the true costs of carbon emissions. For example, the current SCC quickly rises to $55 per ton under a lower discount rate (that is, an estimate that doesn’t “discount” harms to the wealth and health of future generations by quite as much as the administration did in reaching its $35 per ton figure).

The value of one ton of carbon dioxide would rise higher still with a declining discount rate, something that, in line with the general consensus among economists, would more closely reflect the true costs of climate change. And none of that includes the cost of extreme climate events.

Basing Policy on Science

The good news: the administration’s latest numbers show exactly how policy analysis should be done— rigorously and consistent with the latest advances in science and economics. For example, instead of using older versions of three main SCC models to calculate its official number, the administration now uses the most recent peer-reviewed versions of each. That simple but important step helps to bring the new official SCC more in line with the latest academic literature.

In short, the administration’s economics are slowly and carefully catching up with what we all can see outside our windows. While atmospheric carbon dioxide levels have just passed the 400 parts per million threshold for the first time in over 3 million years, the real costs of climate change keep piling on.

What the country really needs, of course, is for Congress to pass a comprehensive climate policy. Only then will Americans stop living in a world where their personal behavior leads to socialized costs of at least $35 for each of the 20 tons of carbon dioxide we emit every year. Until then, the Obama administration is right to at least include these costs in its own regulatory impact assessments.

krives June 3, 2013 - 04:26

See comments

Of course we need Congress to pass a full and effective climate policy.

Much of the planet can be run using solar power but who is spending the time and money on this.

____________________
Location Ile Maurice

Julie Watson June 4, 2013 at 3:20 am

Fine waу of describing, and nice post to obtaіn іnfoгmatiοn regаrԁing my prеsentation
subject, ωhich i am going to deliνer іn аcademy.

internet marke… June 4, 2013 at 11:49 pm

In reply to Of course we need Congress to by Julie Watson

Thanks a lot for this notice

Matteo June 4, 2013 at 5:45 am

Great post for all time definitely going to read your other posts. Thank you.

________________
Logo Design

Beth Rogers June 4, 2013 at 7:26 am

Thanks for sharing such information. Sometimes, these things are not open to the public or rather confusing.

nchhoda June 5, 2013 at 1:38 am

thanks for share this notice
-------------------------------------
qua tang sinh nhat, banh trung thu rau cau, thu nhoi bong gia re, qua tang sinh nhat gia re

winwinshop88 June 5, 2013 at 4:16 am

Thank you for this useful article, you give a great new idea that i wan use in my country

bangchuck June 5, 2013 at 5:53 am

This article is a devastating answer to those who complain that the cost of renewable energy is subsidized, in that it shows the extent to which we subsidize fossil fuels.

___________
Nail Design Ideas

Teddy Hudso June 5, 2013 at 7:44 am

The Social Cost of Carbon is used to estimate the damages from carbon emissions (and the benefits from reducing those emissions) for the purposes of regulatory benefit-cost analyses.

____________
Acne Cyst

Ati Kinson June 6, 2013 at 8:29 am

Congress need to take responsibility and pass the bill the for climate change policy. Otherwise we all will suffer.

Logo Designer April 17, 2018 at 3:51 am

Carbon Taxes, Simplicity and Happiness

Ekaterina Didkovskaya/flickr

The Sunday Review section of The New York Times has the provocative title “Happy Taxes” and devotes three pages to death and taxes, which have been twinned in the American mind ever since Benjamin Franklin wrote that they are life’s only certainties. 

What may have surprised many Times readers was that, according to a piece by Elizabeth Dunn and Michael Norton, countries like Sweden and the Netherlands with the highest tax progressivity also are the happiest. The authors do not necessarily claim a causal relationship but at least the data suggest that progressivity does not necessarily lead to unhappiness.

There was also a piece by Cass R. Sunstein, which looks at the considerable burden imposed by the state on the individual of filling in a complex tax return system. In the United States, an estimated 9.14 billion hours is spent every year by Americans on government paperwork, most of it for the Department of Treasury – which includes the I.R.S. 

What has this got to do with carbon taxes? Quite a lot! Carbon taxes are one of two possible instruments urgently needed to deal with climate change. (Climate change will not be good at all for happiness and the best way to stop it is with a price on carbon – either through a tax or a cap-and-trade system.) Few countries have succeeded in implementing either so far.

France tried a carbon tax but, according to an analysis in a recent French Ph. D. thesis, by the time the lobbyists had finished with it, it was so watered down by exceptions and loopholes that, although passed by parliament, it was struck down by the constitutional court as being neither fair nor efficient in meeting its goal.

Cap and trade bills have suffered similar fates. Fossil fuel and other interests demand concessions that ultimately make the laws very complex. By the time legislators get to a vote, the length and complexity of the bill itself may become a reason for some to oppose it. This is of course deeply unfair to those trying to pass such legislation, but serves to illustrate the problems of policymaking in this area and the advantages of simplicity – if it can be achieved.

One of the countries that has succeeded in passing a carbon tax is Sweden and it is a very high one (over $150 per ton, compared with the $10 to $25 per ton discussed in the United States). Perhaps the most surprising thing is that most Swedes never think about it! It was passed and has been accepted politically in part because it was part of a general reform of the whole tax code.

Even Sweden’s carbon tax has a number of exceptions, but the overall package was popular: It lowered total taxes, lowered the top marginal tax rates and simplified the tax scheme by removing all the exemptions and deductions it used to have. Today most Swedes do their income returns quickly (many with a few clicks on their cell phones) and pay a much lower income tax than before.

The tax system is simpler because you do not have to keep track of all the deductions. And yes, gasoline and heating fuel are expensive, but then again property taxes are simplified, inheritance tax and wealth taxes abolished and the burden of paperwork heavily reduced.

The end result? Swedes are on average happy. They are currently thinking more about the free time they have to enjoy the spring than the price of petrol.

superuser April 16, 2013 - 12:40

See comments

My life has been mostly centered for the last 40 years on LAX. When LAX came to our community we were very innocent and we believed in all the wonderful things they promised. We lost the innocence very fast when the North Complex stop being used for emergencies only and became a full operational complex, many times with much higher traffic than the South Complex. The homeowners complained and with a simple law-suit and the help of morally twisted politicians 50,000+ families were evicted.

Every time I hear about communities fighting against mining in their area I cannot help but feel sorry for them. It is not only coal but any type of ore that can be mined with profit by a group of investors regardless of the amount of ecological damage their activity generates.

They must pay taxes and even higher ones for the enviromental disaster that they create with consequences that will need - in most cases-very long time to remedy and with a very high cost for all of us, the tax payers.

They do not deserve any deductions (loop holes) because of the damage to the soil, the water, the health , the ecosystem in general not only of their immediate neighbors but of far removed communities.

We should punish the politicians that fight in favor of these corporations making them directly participants on the costs to correct the damages. As long as we do not implement a system to make them feel the pain we will not be able to correct the root of the problem.

The world is over populated and extreme measures must be used. Why?
Because shame is not anymore a tool. Get them where it hurts, the pocket.

Our strength is in the numbers. Our society is being handle by a small group that uses puppets to do their dirty job. Make the position of these puppets public and demand them to pay for their decisions.

We do not need coal. We are in 2013. Let us work on other sources of energy.

Maybe I sound like a fool but if we know what is really going on behind close doors and we do nothing, we do not have the right to complain.

Get the coal mining to pay for their faults with high taxes and heavy EPA enforcement. Thank you.

Graciela Huth April 17, 2013 at 4:23 pm

Carbon Taxes, Simplicity and Happiness

Ekaterina Didkovskaya/flickr

The Sunday Review section of The New York Times has the provocative title “Happy Taxes” and devotes three pages to death and taxes, which have been twinned in the American mind ever since Benjamin Franklin wrote that they are life’s only certainties. 

What may have surprised many Times readers was that, according to a piece by Elizabeth Dunn and Michael Norton, countries like Sweden and the Netherlands with the highest tax progressivity also are the happiest. The authors do not necessarily claim a causal relationship but at least the data suggest that progressivity does not necessarily lead to unhappiness.

There was also a piece by Cass R. Sunstein, which looks at the considerable burden imposed by the state on the individual of filling in a complex tax return system. In the United States, an estimated 9.14 billion hours is spent every year by Americans on government paperwork, most of it for the Department of Treasury – which includes the I.R.S. 

What has this got to do with carbon taxes? Quite a lot! Carbon taxes are one of two possible instruments urgently needed to deal with climate change. (Climate change will not be good at all for happiness and the best way to stop it is with a price on carbon – either through a tax or a cap-and-trade system.) Few countries have succeeded in implementing either so far.

France tried a carbon tax but, according to an analysis in a recent French Ph. D. thesis, by the time the lobbyists had finished with it, it was so watered down by exceptions and loopholes that, although passed by parliament, it was struck down by the constitutional court as being neither fair nor efficient in meeting its goal.

Cap and trade bills have suffered similar fates. Fossil fuel and other interests demand concessions that ultimately make the laws very complex. By the time legislators get to a vote, the length and complexity of the bill itself may become a reason for some to oppose it. This is of course deeply unfair to those trying to pass such legislation, but serves to illustrate the problems of policymaking in this area and the advantages of simplicity – if it can be achieved.

One of the countries that has succeeded in passing a carbon tax is Sweden and it is a very high one (over $150 per ton, compared with the $10 to $25 per ton discussed in the United States). Perhaps the most surprising thing is that most Swedes never think about it! It was passed and has been accepted politically in part because it was part of a general reform of the whole tax code.

Even Sweden’s carbon tax has a number of exceptions, but the overall package was popular: It lowered total taxes, lowered the top marginal tax rates and simplified the tax scheme by removing all the exemptions and deductions it used to have. Today most Swedes do their income returns quickly (many with a few clicks on their cell phones) and pay a much lower income tax than before.

The tax system is simpler because you do not have to keep track of all the deductions. And yes, gasoline and heating fuel are expensive, but then again property taxes are simplified, inheritance tax and wealth taxes abolished and the burden of paperwork heavily reduced.

The end result? Swedes are on average happy. They are currently thinking more about the free time they have to enjoy the spring than the price of petrol.

superuser April 16, 2013 - 12:40

See comments

My life has been mostly centered for the last 40 years on LAX. When LAX came to our community we were very innocent and we believed in all the wonderful things they promised. We lost the innocence very fast when the North Complex stop being used for emergencies only and became a full operational complex, many times with much higher traffic than the South Complex. The homeowners complained and with a simple law-suit and the help of morally twisted politicians 50,000+ families were evicted.

Every time I hear about communities fighting against mining in their area I cannot help but feel sorry for them. It is not only coal but any type of ore that can be mined with profit by a group of investors regardless of the amount of ecological damage their activity generates.

They must pay taxes and even higher ones for the enviromental disaster that they create with consequences that will need - in most cases-very long time to remedy and with a very high cost for all of us, the tax payers.

They do not deserve any deductions (loop holes) because of the damage to the soil, the water, the health , the ecosystem in general not only of their immediate neighbors but of far removed communities.

We should punish the politicians that fight in favor of these corporations making them directly participants on the costs to correct the damages. As long as we do not implement a system to make them feel the pain we will not be able to correct the root of the problem.

The world is over populated and extreme measures must be used. Why?
Because shame is not anymore a tool. Get them where it hurts, the pocket.

Our strength is in the numbers. Our society is being handle by a small group that uses puppets to do their dirty job. Make the position of these puppets public and demand them to pay for their decisions.

We do not need coal. We are in 2013. Let us work on other sources of energy.

Maybe I sound like a fool but if we know what is really going on behind close doors and we do nothing, we do not have the right to complain.

Get the coal mining to pay for their faults with high taxes and heavy EPA enforcement. Thank you.

Graciela Huth April 17, 2013 at 4:23 pm