Why aren't we seeing carbon taxes in practice?

Question

(See also a version of this question under politics, https://politics.stackexchange.com/questions/48764/why-arent-we-seeing-carbon-taxes-in-practice)

It seems that there are many advantages to carbon taxes, including pricing in the environmental cost and generating revenue (that could offset other taxes). So why are we not seeing them in practice, at least not very much of them? I can think of some reasons below, but I don't know which of these if any actually play a significant role in practice and/or are actually well motivated. Am I missing anything? Is there any good study of this?

1. Too difficult to implement / will generate an underground carbon economy. This would be a concern with many taxes, but it seems we should be able to have a pretty good handle on where carbon enters the economy given the necessary physical volumes and processing.

2. Will hurt economic activity. But it seems that this can be addressed by using the revenue to stimulate economic activity / reduce distortionary taxes.

3. Will create too big of a shock to the economy with unpredictable consequences. But the tax could be gradually introduced according to a schedule.

4. Unfair to industries that will suffer from this tax. But we generally don't seem inherently very concerned about disruption of industries (e.g., taxi industry) and it is hard to argue that such action would come as a surprise at this point. Also, again, the tax could be gradually introduced according to a schedule.

5. Will economically hurt people who can't afford it. But this could be addressed by using the revenue intelligently (or by targeting only certain types of carbon, e.g., airline tickets).

6. Politically hard to sell. Even if it is in their interest, too many citizens will reflexively complain about, for example, high gasoline prices. But would they really feel this way when combined with, for example, a check made out from the government distributing the revenue in a basic-income sort of way? Or is there some other effective way to clearly present it as not just an additional tax from a greedy government?

7. Industry is politically too powerful. It will attack/reward politicians based on their actions and launch massive public relations campaigns. But is it really that powerful or is that exaggerated in people's imagination?

8. Even though many of the above aren't actually true, citizens and/or politicians are unduly worried that they are true (or simply not well educated about the option), are risk averse, and therefore they don't pursue this route.

Answer 1

I think it’s mainly politics. For example, when France tried to implement increases in tax on oil (indirect way of taxing carbon) it led to yellow jacket protest.

1. As you pointed out it’s easy to track who produces the carbon in the economy. Especially on industrial level in developed countries. The reason 1 could be problem in some developing countries though.

2. As you pointed out the revenue can offset any negative effect as with Pigovian taxes there is no deadweight loss - if set properly

3. Again you answered yourself plus I would add in a long run it’s better to undergo temporary shock to avoid higher cost down hill.

4. I don’t think you can say it’s unfair. In fact I would say the fact that the industries create externality in the first place due to lack of property right is unfair (at least if we agree that creating externality is not fair to society which I think most moral thinkers would - although that’s question for philosophy SE).

5. You again answered yourself.

If you look at the attempts to introduce carbon taxes then you will see 6-8 are the main culprits. In France you get yellow jacket protests in Netherlands farmers protests, in Washington voters refused carbon taxes in referendum last year (see here)etc. - all responses to trying to introduce Pigovian taxes of one kind or another. People of any political affiliations generally don’t like taxes when they are taxes on them as well. I suppose many people also are skeptical the government will make it revenue neutral later by lets say sending check to all people so their income stays the same. In case of redistribution some might not like that and others also don’t believe social spending will increase.

Answer 2

It seems that there are many advantages to carbon taxes, including pricing in the environmental cost and generating revenue (that could offset other taxes). So why are we not seeing them in practice, at least not very much of them?

We do, but not in an optimal way.

I'm a forest owner. My forest sequesters about 40 tonnes of carbon dioxide every year. If I let my forest grow to a higher density before chopping the trees, I should:

• Get a carbon payment from the sequestered carbon caused by growth to a higher density
• Have to pay carbon taxes if some of the trees are burned to energy or converted to short-lived products such as pulp or paper that will very quickly be burned to energy

However, no such payment scheme is in place. Thus, it isn't economical to let the forest to grow to a very high density (lots of sawlogs used to construct buildings that retain the carbon for 100 years), but rather chop it down earlier (lots of pulpwood that retains the carbon for 1 year or so).

On the other hand, I calculated that a Finnish car owner effectively pays 500 EUR of taxes for every tonne of carbon dioxide produced. This is caused by three taxes:

• Tax when buying a vehicle
• Yearly tax when owning a vehicle
• Tax on fuel when refueling a vehicle (this is by far the largest of the three)

Also, there is European emission trading scheme. The carbon price today is 25 EUR / tonne of carbon dioxide. For some strange reason, it doesn't apply everywhere, so there are still sectors that don't have to participate in emission trading.

So, to wrap it up:

• Owners of carbon sinks such as growing forest are not compensated in any manner for the sequestered carbon dioxide
• Energy sector pays 25 EUR / tonne of carbon dioxide
• Finnish car owners pay 500 EUR / tonne of carbon dioxide

As a fun fact, if the price of carbon dioxide was 500 EUR / tonne everywhere, including carbon sinks, my forest would have a 78% annual yield before income taxes.

Answer 3

Just to build up on @1muflon1's (+1) answer:

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I'd also add the "axe the tax" campaign in British Columbia back in 2008. The carbon tax there is (or at least was) considered a model example of how to implement revenue neutral carbon tax. Despite catchy slogans, the ruling party survived the election and so did the carbon tax. However, it brings us to the political disadvantages of policies like that – even though the tax was revenue neutral, the opposing parties were ready to abolish it (if only it meant that they win the elections), therefore the policy like carbon tax, in its core, is not “politics-proof”.

Answer 4

Germany is introducing a carbon tax. It will start at €25/ton in 2021 and increase to €55/ton in 2025. Although many argue that this is too little, too late, others are saying that it will start to have an effect on consumption from around €30/ton (I read this figure in an offline newspaper). In an earlier iteration, the proposal was a carbon tax starting at just €10/ton.

The Swedish carbon tax at more than €100/ton has correlated with, and possibly caused, the phase-out of the use of fossil fuels for (district) heating.

Answer 5

One reason is that in a globalized economy, there is an intractable co-ordination problem to imposing a carbon tax regime. If you've worked with the iterated prisoner's dilemma, you'll have seen that depending on the payoff structure, co-operation is unsustainable in the absence of a credible punishment strategy - even if co-operation results in higher total welfare.

Multilateral actions like the Kyoto Accord and the Paris Agreement are attempts at addressing the co-ordination problem around climate change, but neither the UN nor any other body has the unilateral ability to present a credible threat to defectors. As such, a great deal of conversation on pricing carbon centers around industry's concerns on competitiveness, the economic impact on households, etc. Even though the standard Pigouvian tax would be revenue-neutral (and indeed, revenue-generating for agents who emit carbon at below-average rates), almost by definition the most significantly-impacted industries will be those who, through avoidance of paying the true cost of their inputs, have become economically significant in jurisdictions worldwide. Thus, you have this concept of an "Emissions-intensive Trade Exposed" sector, driving policy that is hobbled from the outset by awarding "output-based allocations".

This might be workable if the carbon price being contemplated were actually sufficient to move the needle. However, the 30-units-per-ton price that is frequently tabled in discussions around the world is just an arbitrary political jumping-off point, based on an emissions-reduction cost-curve that is over a decade old. It is the nature of this problem that costs should be expected to increase with delay - and not linearly, but exponentially. True social costs of carbon are currently estimated in the hundreds of currency units per ton.

Answer 6

Sir Nicolas Stern, a British economist and a professor at the College de France, has called climate change:

The greatest market failure that the world has ever seen.

Of course now we're also faced with the evidence of the massive market failure of health care in the USA which has 4.25% of the world's population but accounts for a massive one quarter of the total global deaths from the corona-virus pandemic, not to mention the historical market failure of the transatlantic slave trade brought to the world's attention through the #BlackLivesMatter movement.

Thus, contrary to the OP's posit, it's not surprising that market mechanisms for mitigating climate change such as carbon taxes and emissions trading have proved failures.  A more radical solution is called for such as the global nationalisation of fossil fuels with the aim of winding down the entire industry and investing heavily in renewable green energy on the scale that actually befits the problem to be faced. The basic science has been long understood -  it's not rocket science - and one can charge the fossil fuel companies with a dereliction of duty in merely continuing business as usual: For example,  Exxon-Mobil plans to pump around 25% more oil and gas than it did in 2017,  the industry spends more than 100 million dollars in lobbying in the US. 

Moreover,  according to a working paper of the IMF, the cost of climate change externalities considered as subsidies to the industry amount to 4.7 trillion dollars in 2015 (6.3% global GDP), and in 2017, they are projected to amount to 5.2 trillion dollars (6.5% of global GDP).

Interestingly, there are roughly 1,500 fossil fuel companies listed on the world's stock exchanges with a total valuation roughly around 4.65 trillion dollars. Thus taking subsidies into account, we see that the net worth - financially speaking - of the fossil fuel industry is more or less zero. Given that the subsidies are ongoing, we see that in fact the fossil fuel industry is rapidly heading into negative equity prompting one leading research group to project a massive carbon bubble in the near future upto 16 times larger than the one causing the financial crisis in 2008.

According to the IMF, simply eliminating these subsidies would bring down global carbon emissions by 28% in 2015.

Given the complicity of the fossil fuel industry in defending their turf to the detriment to the greater good once man-made climate change was understood as a fact,  and not re-envisioning themselves more widely as energy companies with a duty to take into account this externality, a punitive legal framework is also called for, similar to that levelled at the tobacco industry for knowingly poisoning people's lungs,  whereas of course here,  they are knowingly poisoning our planets lungs. The only one we have.

Why aren't we seeing carbon taxes in practise?

Given everything I have said above, it's simply because they are the wrong solution to an ongoing chronic crisis.