Connect to share and comment

Carbon emissions: What if a carbon tax doesn't work?

This morning's panel at IPI Helsinki has UC Santa Barbara environmental economist Charles Kolstad, Royal Dutch Shell chairman Jorma Ollila, and Ali Sayigh of the World Renewable Energy Network talking about climate change. In response to a question about how to tax carbon to reduce emissions, Kolstad brought up something I hadn't heard of before. He attributed an insight to a German economist named Hans Sinn, who apparently just wrote a book called "The Green Paradox." (For a short version of Sinn's idea, see his recent article on Project Syndicate.) "The idea is that a tax on oil may lead OPEC to just reduce price in order to maintain consumption levels," Kolstad said. "That is a difference between cap-and-trade and a tax system. In cap and trade, you have more assurance of the quantity of carbon reduction you will get."

This seems like a very interesting point — clearly, with the price of oil running substantially higher than production costs, producers will respond to taxes in large measure by lowering prices. That may negate a large portion of the savings in carbon emissions one might expect to see. Most of the time, in the cap-and-trade vs. carbon tax debate, it's the carbon tax that people claim will be simple and will definitely reduce consumption. Cap-and-trade, many argue, can be completely negated by poor implementation. But Sinn's point seems to complicate that claim.

However, I don't understand how this meshes with the fact that European gasoline prices are vastly higher than those in the U.S., due to high European gasoline taxes. Why haven't gasoline producers adjusted by lowering prices?

I asked Kolstad this after the discussion, and he explained he can't really answer because he hasn't yet read Sinn's book — it's only available in German. I suppose the answer might simply be that oil producers can't price discriminate by charging European refiners and distributors less in order to bump up consumption in Europe. They have to sell their oil at a single worldwide price. And European refiners and distributors probably have only a limited ability to drop their profit margins to compensate for higher tax levels. Maybe Sinn is saying that if tax levels rose globally, all over the world, then oil producers would respond by lowering prices. So the reason why taxing gasoline works to raise prices and reduce consumption right now in Europe is that the U.S. and China aren't doing it.

Interesting idea, anyway. I hope Sinn's book is available in English soon.