Externalities Who knows what an economist means by “externality?”
Pigouvian-tax game Nutritionists and medical doctors say that we consume too much salt. How can we fix that? Apply a tax A model of an economy reducing consumption of a good with externalities by taxing it
Pigouvian tax Arthur Pigou Externalities Impact of externalities on consumption A tax applied to a market activity that generates negative externalities (costs for somebody else).
Social Costs External Costs = Pigouvian tax Private Costs Salt Health effects Delivery Marketing Processing Transportation Mining Exploration Fossil Fuels Global warming Damage to environment Damage to property Health effects Delivery Marketing Processing Transportation Mining Exploration Social Costs
Components 3 goods - cherries, salted almonds & unsalted almonds 3 salt-tax levels - none, low and high 3 income levels - 20, 30 and 40 cents per round 3 rounds – Round 1 - pre-tax – Round 2 - low tax – Round 3 - hi tax
How to tax Game – Problem - Salt isn’t a separate good in our model economy. Can’t tax it directly. – Solution - Tax the good with added salt Carbon – More complicated
Taxing carbon - a misnomer,... CO2 is the real problem. Except that some other green-house gases are even more potent. Fossil fuels differ in the amount of CO2 they emit when burned. We don’t buy carbon or carbon dioxide by themselves very much. Carbon is converted to CO2 at many places in our economy.
CO2 equivalents From 2013 IPCC AR5 p714 Lifetime (years) Equivalent tons of CO2 Global-warming-potential time horizon 20 years100 years Methane12.48634 Nitrous oxide121.0268298 HFC-134a (hydrofluorocarbon) 13.437901550
Pounds of CO 2 emitted per million Btu of energy (From Energy Information Administration) Fossil fuel Pounds of CO2 / million Btu of energy Coal (bituminous)205.7 Coal (subbituminous)214.3 Diesel fuel & heating oil161.3 Gasoline157.2 Propane139.0 Natural gas117.0
Some answers What to tax? – Tons of CO2 equivalents emitted by each fossil fuel Where to impose the tax? – At the mine, well or border – Let the tax percolate thru the economy, affecting everybody in proportion to their CO2 emissions.
Low-tax round Choose tax level to achieve target reduction in salt consumption Adjustments to and impacts of tax - by income level – Conservation – Substitution Tax collected
High-tax round Dividend – Equal amounts – Progressive nature Adjustments to, & impacts of tax & dividend - by income level Reduction in salt consumption
End of game What answers has it provided? What questions has it prompted?
Economic models It’s time to let Bob tell you about some serious attempts to explore the impacts of a C tax.
Comparison of 2 legislative proposals Sanders-Boxer Bill Carbon Fee & dividend
Comparison of 2 legislative proposals Sanders-Boxer BillCarbon Fee & dividend Tax rate Initial Increase $20/ton CO2 and C02 equivalent of methane + 5.6%/year for 12 years $15/ton CO2 equivalent $10/year til IPCC target reached Use of funds 60% to households 40% to Pollution Reduction Trust Fund (PRTF) Mitigate impacts of fee Weatherization Job training Research Deficit reduction 100% distributed to households Trade impacts Mitigation of impacts on trade-exposed industries thru PRTF Carbon-fee-equivalent tariffs Rebates for exports
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