The following is a blog post written by CCAN volunteer Andrew Crane-Droesch. In this satirical piece, he illustrates the benefits of a tax on carbon by telling the story of loud, obnoxious neighbor that needs to turn the volume way down. Take a look!
This is a blog post about carbon taxes. But before I go there, let me tell you a story about a guy named Ernie.
Ernie lives in a small condo in a big city. He has many neighbors, and the walls of his unit are thin. Ernie can hear the muffled voices of his neighbors in the hallway when he comes home from work.
When Ernie is home, his likes to listen to music. His favorite bands include Gorgoroth and Vanilla Ice. Ernie has a powerful stereo. He likes to listen to his favorite songs with the volume turned all the way up. He doesn’t like headphones because they aren’t comfortable. And they make it difficult to copy Armi ja Danny’s sweet moves.
Ernie’s neighbors don’t like this. They have politely asked Ernie to turn down his music. Ernie resists, saying that his music makes him happy. He argues that sometimes his neighbors are loud too, and he doesn’t like their music either. He argues that this is a free country, dammit, and he can do what he wants.
So the neighbors start playing their own music louder to counteract the NKOTB marathon coming out of Ernie’s apartment. Nobody can sleep. People are starting to lose their hearing. The cats have all run away. What can be done?
Externalities
Ernie’s loud music is an example of an externality. An externality is the cost born by others of anything done for oneself. Ernie experiences pleasure listening to Color Me Badd really loudly on his stereo. But his fun comes at a cost to everyone around him. His neighbors don’t get any pleasure from his music, but they’re the ones losing sleep. And they can’t get the Electric Slide out of their heads.
Does this sound familiar? Externalities are an annoying part of everyday life. One person’s cool motorcycle is someone else’s interrupted conversation. Someone’s relaxing cigarette break is another person’s asthma attack. That sinking feeling that you get when you realize that you’ve stepped in dog doo? An externality.
How can we deal with externalities? It is usually a good idea to start simple. Ernie’s neighbors can try harder to talk to him. Regulations governing motorcycle mufflers, designated smoking areas, and dog waste can be adopted.
Pigovian Taxes
But some situations call for a Pigovian tax. Named after the British economist Arthur Pigou, a Pigovian tax increases the price of a public nuisance until the costs (to society) equal the benefits (to individuals). When a nuisance is more costly, less of it is produced.
Back to Ernie. The neighbors could decide to get together and implement a Pigovian tax in the form of a volume fee. Everyone in the building gets a sound monitor just inside of their front door. Any time the music goes above some volume, a surcharge is levied on the person making the noise. So if Ernie wants to really get down to the Archies, he’ll have to pay a little extra.
Pigovian taxes have a bunch of nice features.
First: they change behavior. Ernie will probably turn his music down if the price is high enough.
Second: they spur technological innovation. Ernie might decide that it is finally worthwhile to invest in soundproofing insulation, or get some Bluetooth headphones.
Third: they are flexible. Ernie can decide whether he wants to lower the volume, invest in insulation/headphones, or just pay the fee sometimes.
Finally: they raise revenue. The neighbors can spend the money on soundproofing, fix the leaky roof, or just divide up the money and put it into their pockets.*
Carbon fees
What does carbon pollution have in common with Ernie’s Tom Jones marathon? The benefits go to the few and the costs are charged to the many.
Unless we do something, here in DC we’ll get worse heat waves, stronger storm surges, and, in a few centuries, sea-level rise that will turn Capitol Hill into an island and the national mall into a swamp. Globally, food production will plummet, species will go extinct, storms will get worse, some countries will cease to exist, and others will be sources of climate refugees. If we let these things happen, it won’t be because anyone wants them. It will because people want to burn fossil fuels, and aren’t bothered by the fact that others – including their children – will bear the consequences.
Scientists and economists on the left and right agree that a tax is probably our best policy option for fighting climate change. The idea is simple: if it costs money to burn carbon, (1) you’ll burn less of it, and (2) you’ll figure out other ways to accomplish your goal without burning carbon.
So, businesses in DC might decide to stop air conditioning the sidewalk during summer if their electricity bills go up. Builders and homeowners can demand better insulation and more efficient appliances. Individuals and businesses can switch to renewable electricity providers, and those providers will get more customers because their energy will be cheaper in relative terms.**
What do we do with all of the carbon tax money we collect? Different people have different ideas. CCAN is pushing for a rebate system, in which the money would go directly to DC residents. This would help fight inequality here in the district – rich people usually pollute more (and thus will pay more), but everyone will get the same check. This proposal is actually very similar to the approach advocated by Bernie Sanders in his recent presidential bid. And it is nearly identical to a recent proposal by a group of republican elder statesmen.
Ultimately, the choice of how we respond to a carbon fee is up to each of us. Nobody is going to tell you how to live your life or run your business. But we’re going to be asked to pay the cost of the messes we make. And if we all have to do this, hopefully, there will be a smaller mess.
Andrew Crane-Droesch has a PhD from UC Berkeley’s Energy and Resources Group, and works as an economist for the federal government. He has written this blog post in his capacity as a private citizen. His views expressed here are his own, and do not reflect those of the federal government (obviously). He actually *likes* Gorgoroth.
*If the money just goes back to the residents — including Ernie — why would Ernie’s behavior be affected? Because he is taxed according to his own noise, but he is paid according to the average noise of everyone in the building. So if he makes more noise than average, he’ll lose money. Likewise, good neighbors would stand to benefit.
**This is because the price of dirty electricity will go up while the price of carbon-free electricity stays the same. However, if enough people sign up for renewable energy through the energy choice program, the cost of carbon-free electricity may actually go up in the short term. This is basic supply and demand. But the market will adjust over the longer term. Seeing all of the demand, more renewable energy producers will enter the market, and the competition will drive prices down. And as there is more renewable energy production, economies of scale will begin to emerge. For example, there will be more companies around that specialize in servicing wind turbines. That will lower the cost of wind turbine service, lower the cost of generation, and ultimately lower the absolute cost of renewable energy compared to what it was at the start.