Lefty Liberal Tomfoolery

I am driving a stunt. No, not a Stunt (as in Chevy Stunt or Ford Stunt); a "stunt." More on that in a bit.

I commented on a recent Paul Krugman column where Krugman explained that when it's not possible to do the best (that is, the most economically efficient) thing, we have to be content with doing the second-best thing. His point was that while a carbon tax may be the "best" action we can take to reduce greenhouse gas emissions, it is unfortunately infeasible in the current political climate. We therefore need to take other actions that may not be as efficient but are nonetheless helpful.

My comment acknowledged his point, but expressed some dismay:

Ah, the frustrations. A carbon tax would be so simple, so elegant, so effective. And we could make it revenue neutral. Too bad about our broken politics.

There are lots of maddening imperfections. I've been driving a Toyota Prius, but guess what? When I reduce my use of gasoline, my reduced demand lowers the cost of fuel for everybody else, meaning less incentive for gas guzzlers to conserve. Arrgh! I suppose the only net "good" I'm doing is supporting a technology that will be needed when we get serious.

A reader named "Concerned Citizen" commented on my comment:

There are so few Priuses, they don't really make a dent in the cost of fuel for anyone.

And carbon taxes are NOT simple nor elegant and certainly won't be effective -- they are the modern version of "buying religious indulgences" (popular in the Medieval Catholic Church). Companies and hedge funds will speculate in them and distort them beyond all meaning.

Even worse: carbon taxes won't affect you or Dr. Krugman, because you two are (relatively speaking) rich. Well -- he's VERY rich and you are at least rich enough to own a Prius (most folks can't afford to pay $32K for a tiny, uncomfortable car and Toyota LOSES $3000 on each one, because they are a stunt and not a product).

The rest of us would really suffer, because our needs -- not just physical comfort, but practical stuff -- require bigger vehicles to get to work or do our work or carry our kids to school. We are the middle class, and ALWAYS the tax burden falls on US -- not the 1% or the 0.1%. Us, average folks, who cannot afford your lefty liberal tomfoolery.

I must admit I can't find anything here that's actually correct. Let's start by dispensing with the trivia. My Prius cost $24K, not $32K. And after I bought mine Toyota came out with a new generation of Priuses that included an entry level model priced in the very low 20s.

My Prius is surprisingly roomy, comfortable, and fun to drive—although my expectations may be more spartan than yours. It will easily haul four kids to school—six if you stuff two under the hatch, and eight if you strap a couple on the roof. Because it combines both a gasoline engine and an electric motor, it has far better acceleration than any car I've ever owned, including my '74 Plymouth with a 318 cid V8. I still get startled whenever I "punch it" while passing on the highway and find myself exceeding 90 mph before I realize it.

It's widely believed that Toyota sold each Prius at a substantial loss back in the late 1990s and early 2000s when it was trying to bootstrap the hybrid market and mainstream the technology, something that was necessary and desirable. Claims that Toyota still loses money on Priuses seem to have no basis in fact. In regurgitating this canard, Mr. Citizen (I'll assume this commenter is a male) may have it exactly backward: as far back as 2009, some experts believed Toyota was making, not losing, $3,000 per vehicle on its hybrids. For its part, Toyota claims the Prius is profitable. Mr. Citizen may be one of those who just knows it ain't so, but let's not take it on his say-so.

And to be clear, I didn't imply that my driving a Prius makes a "dent" in the cost of fuel for anyone—except, I might add, for me! The simple point—and this is the most trivial of economic principles—is that any effort by drivers of hybrids to conserve gasoline will necessarily (to the extent they are successful at conservation) have the effect of placing downward pressure on gasoline prices due to incrementally reduced demand, thereby creating less price incentive for others to conserve. This is true even if the effect is small or negligible because of the low proportion of hybrids on the road. The point I was making is that absent other incentives which are not currently present, driving a hybrid is an inherently self-defeating proposition if your goal is to reduce carbon emissions in the broader society.

Now, to the important stuff.  Mr. Citizen asserts that not only wouldn't a carbon tax be simple, elegant, or effective, but also that "companies and hedge funds will speculate in them [taxes] and distort them beyond all meaning."

I have no idea what he's talking about, and neither does he. He seems to be saying the "tax" is some kind of manipulable commodity or security. Maybe he's confusing taxes with credits (in a cap-and-trade system, which is not what I'm talking about) or "offsets"—which, by the way, I abhor. Whatever he's thinking, he's wrong. A carbon tax would be imposed far upstream, near the point of production (or import), on the amount of carbon embodied in each unit of oil, gas, or coal. How a company or hedge fund could "speculate" on such a tax is beyond me. In fact, a carbon tax would be simple, elegant, and effective precisely because it is relatively immune to market shenanigans and complexity. It would be elegant and effective because it would be imposed at a point in the economy where it has maximum reach; where it efficiently and equitably allocates the costs of carbon downstream throughout the entire economy. No other approach would be so powerfully simple.

As Paul Krugman points out, a carbon tax would be the most economically efficient action we could take. That's because it would set an across-the-board price on the thing we want less of—carbon—and it would do so uniformly, in a way that would minimize market distortions. It would harness market incentives to find the most economical alternatives to carbon based fuels. All economic actors, be they businesses or consumers, would have a strong incentive to emit (directly and indirectly) less carbon.

Thus, the cost of carbon would be reflected proportionally in practically everything in the economy. Consumers would see higher prices for a lot of things, particularly—but not just—gasoline, electricity, heating fuels, and so on. Other goods and services would cost more because their producers would pass the cost of the tax on to consumers. That's a feature, not a bug! We want carbon intensive goods and services to be noticeably more expensive than they are today. We want to use price signals in the market to create the necessary incentives to use less of the thing we are trying to eliminate.

If you're shrieking in horror at the prospect of higher prices for everything, fear not. As I said, the tax can be made to be revenue neutral. That is, instead of keeping the revenue generated by the tax, the government instead would return it to the economy, preferably by some sort of refund to citizens. (And this could be structured to make the tax less regressive, and thus less harmful to poor people who may be least able to adapt.) Thus, the drag the tax would otherwise impose on the economy is eliminated. And—yes—a revenue neutral carbon tax would still preserve strong incentives to migrate away from carbon based energy.

If you believe with Mr. Citizen that making a thing more expensive won't reduce its use, then you are denying not just a basic tenet of economics, but also of history: Americans literally conserved their way out of the oil shocks of the 1970s. The effect was dramatic.

To be sure, there will be winners and losers. In general, the losers will be those least willing or able to adapt. Winners will be companies and consumers that adopt behaviors and technologies that cut their "carbon footprint." To be sure, an appropriately sized carbon tax would make gasoline significantly more expensive. But drivers of Priuses (for example) consume less gasoline than drivers of conventional vehicles, so they're less impacted by the higher price. At the same time, Prius drivers get the same carbon tax refund as everybody else, which to them becomes a kind of profit. Thus, drivers of fuel efficient vehicles are winners in the new energy economy, and drivers of gas guzzlers are losers. In such an energy economy, driving a hybrid is now not an exercise in futility, because there are personal and societal benefits. Suddenly, lots of everyday choices you make (such as where you set the thermostat) become an opportunity, not just a burden. And the calculus of fundamentally important long term choices, such as how well you insulate a new building, changes dramatically.

It's important to realize that the assumption of a properly structured refund mechanism means that Mr. Citizen misapprehends the tax's impact on the middle class, of which I'm a card-carrying member. As with all his other unsubstantiated prejudices, Mr. Citizen apparently just knows that "they" always screw "us," and that a carbon tax would be more of the same. Those of us who contemplate actual problems and solutions approach things a bit more thoughtfully, and hopefully a little less cynically. In any case, I have it on good authority that global warming isn't likely to work out so well for the middle class.

The same kinds of incentives directly impacting consumers at the pump and at the thermostat will cascade through the entire economy. Businesses that use energy less efficiently will have higher costs than their more efficient competitors. Ultimately, they will either adapt or fail.

Not only would a carbon tax promote energy conservation, it would also promote a transition to low carbon or zero carbon fuels. Natural gas will be a big winner over coal and oil, especially in the early going, but we can't stop there. Even better, sustainable energy sources such as solar and wind will become more price competitive with fossil fuels, so their use will increase over the longer term. And energy efficiency, which is always a beneficial strategy, becomes increasingly profitable.

A carbon tax would thus have remarkable economic heft, even as the mechanisms for implementing it would be astonishingly simple compared to almost any other conceivable action we could take to reduce greenhouse gas emissions. Any real complexity would actually be on the back end, in structuring the refund mechanism. But that's where we want complexity, if any, to be.

Coming around to where we started, Toyota passed the 1 million Prius mark way back in 2008. Mr. Citizen says the Prius is a "stunt," not a product. Some stunt. Every major vehicle manufacturer is ramping up production of hybrid or all electric cars. It's a start, but a tiny one. Rethinking and remaking our energy economy will require a lot more, and we have hardly any time at all to achieve it. A carbon tax would be the most powerful move we could make in that direction.

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Update April 30, 2016 - I recently purchased a new 2016 Prius Two Eco for around $23.3K net price  (it can be done if you work at it), not including sales tax. I normally keep a car until it dies, but somebody who will remain unnamed totaled my '08 Prius with a mere 120,000 miles on it. I guess "until it dies" includes explicitly killing it. It's my first time being associated with the killing of a car, and I don't like it. My '92 Civic passed peacefully with almost 500,000 miles on its odometer and its dignity and original piston rings intact, using hardly any oil all the way to the end.

Still, some things do get better with time. I paid a thousand dollars less for the new Prius than I paid for my 2008 model eight years ago, and it's a substantially better car in almost every respect. It's larger and has more passenger and cargo volume, although apparently it has less rear seat leg room—something I don't expect to verify anytime soon. Germane to this post, the rated fuel economy is 58 MPG city, and 53 MPG highway. My old Prius was rated 48/45 and averaged in the mid-forties over its tragically shortened life. I expect to easily average in the 50s with the new car.

Prius lovers should note that there will also be a next generation "plug-in" Prius coming out later this year (2017 model year) that will go 22 miles on a charge before switching to hybrid mode. Persons with short commutes could end up not consuming any gasoline at all getting to and from work, while having a real gas-powered engine always at the ready. Alas, I didn't have the option of waiting for the plug-in version.

Some stunt!

Copyright (C) 2014 James Michael Brennan, All Rights Reserved

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