Why carrots and sticks are not interchangeable
David Roberts challenges carbon tax advocates. He says GHG policy should “penalize the emission of GHGs and reward the prevention of GHG emissions. Sticks and carrots.”
As someone who thinks neither a carbon tax nor cap-and-trade can be the primary means to solve global warming, I’ll take on Roberts’ challenge just because it offers an opportunity to illustrate what is wrong with a lot of thinking on the subject.
The key to this and many other greenhouse policy questions is that carrots and sticks are not symmetrical. When you are penalizing or charging for an emission, you don’t worry whether people who avoid the charge by not emitting would have avoided it anyway. You charge a tax high enough to keep emissions below the level you want, or auction few enough permits to accomplish the same goal, and let people sort for themselves who lowers emissions and who continues to pay taxes and buy permits.
But once you get into “carrots,” rewarding people for not polluting, you have to figure out what to pay them for not emitting. Suppose, for example, we handled littering the way Roberts wants to handle carbon emissions. Instead of just fining people when they littered, we rewarded them every time they did not litter. Right now I don’t litter because I was brought up not to. It wasn’t even a matter of ecological consciousness — it was just something you didn’t do. But if you to want to pay for every piece of litter I don’t drop, 24 hours a day, seven days a week, I’ll be glad to get some of those tasty, tasty carrots.
Of course all the carrot advocates will protest that of course they don’t mean to give unlimited carrots away. But that leads to new questions you don’t have to confront with an emissions tax. You either have to wrestle with additionality, a la CDM, or you need to rely on a regulatory standard — rewarding those who exceed the standard and requiring permits from those who fall under it. And in the latter case, why not simply reinforce pricing with rule-based regulation (usually slandered as command-and-control).
Also, if you are talking about “carrots,” a lot of the best “carrots” are not market incentives, but old fashioned public investment. No amount of market incentives will produce or improve railroads. You need straightforward public investment in track and rights-of-way and freight-yards and switches and stops. Market signals won’t produce smart grids, new long-distance transmission, or large-scale storage.
Take another case, home insulation and sealing. Existing homes can have ducts and shells sealed at a very low cost with very fast paybacks. Other types of efficiency improvements with slower rates of return still can offer far better paybacks than many far riskier speculative investments. Yet most homes in the U.S. are not properly sealed, let alone properly insulated or equipped with efficient appliances or with various types of window improvements.
OK, I suppose we could try and establish an elaborate market based incentive system, paying residents per BTU or kWh saved. But there are already very successful programs in Europe that establish standards for efficiency in existing homes, and that offer subsidies for meeting those standards. (Such programs have even tougher standards in new buildings, since the incremental cost of doing it right the first time is much lower than retrofitting to correct existing mistakes.) If you want energy used efficiently in buildings, combine efficiency standards plus efficiency subsidies plus an emissions price. If you can’t get them all through, the emissions price is the least important.
I’m sure at this point someone will point out a kind of carrot we do have that has had a lot of success: the 1.9 cents a kWh renewable tax credit. Of course it is implemented in a flawed way, short periods with occasional lapses, and always with tremendous uncertainty as to renewal. Even so, the U.S. wind industry has flourished and to a lesser extent the U.S. solar industry as well.
However it is worth noticing that many other nations have surpassed the U.S. in development of their renewable industries. A lot of this is due to feed-in tariffs where utilities must buy renewable energy and pay certain minimums for them. It is also due to renewable portfolio standards where a certain percentage of utility purchases must be low-carbon. It is also due to a strong regulatory approach to acid rain control in European nations, which wind, as a coal replacement, contributed to meeting.
The bottom line is that when we talk of carrots and sticks we are not speculating in a vacuum. Various means of controlling both greenhouse and other emissions have been tested throughout the world. Old fashioned so-called “command-and-control” regulation, public investment, and straightforward pricing have all proven more successful than what Roberts describes as a “market based democracy.”