Pigouvian Taxes

Sovereign debt , as a potentially crippling fiscal problem world wide, has risen to the forefront over the past few months. Whether it is the US, Europe, Japan or many other developed and developing countries the sovereign debt watch is on.

The major metrics of a pending sovereign debt crisis that have been in vogue for decades used to be applied only to developing countries. Unfortunately this is no longer the case. The Herculian efforts by governments all over the world; the developed in particular; to avoid a repeat of the debilitating depression of the 1930's has forced these countries to increase substantially their fiscal stimulus programs. In a sense the monetary and fiscal policies adopted by the officials of all of these countries have been very successful. A worst case scenario has been avoided.

But as economics has always taught us, There Ain't No Such Thing AS A Free Lunch; TANSTAAFL. Yes we avoided a deep recession and the top officials can pat themselves on the back for this. But maybe not. Is the cure at least as expensive or maybe even more so than the ailment that it saved us from? That is , currently, the $64,000 question or maybe I should say the $64 billion question?:-)

Often, our efforts at prescribing remedies are counter productive because of what is inherent in problem solving. We always seem to target the symptom rather than the disease. As a result we inevitably move from one crisis to the next as a result of the law of unintended consequences.

In our efforts to save the system and to prevent a major economic depression we proceeded to throw money at the problem in order to generate more final demand and thus put more people to work. What we did not stop to consider is the major question of how are we going to pay back all of these funds that we have borrowed? It seems that we did what we always do, shift the burden onto the future generations. The debt will not come due for some decades ,right? Wrong.Well informed individuals know that more debt implies more taxes in the future and so they take corrective by refusing to own the highly risky debt. Once we find out that the debt service is too large and that we cannot keep on rolling the debt unto the future then we will have no choice but to become deadbeats. That is where we are at the moment. The question is which country is going to go under first? Would it be Greece or would it be one of the other PIIGS? How about the UK, or evn Japan or the US? If any of these countries default would they set up a contagion that will devastate all the current international financial sytem as we know it?

Believe it or not there is a potential mechanism that if adopted could go a long way towards addressing the real cause of this issue and not only the surface phenomenon. The solution that I am about to propose is not new, actually,N.G Mankiw wrote about it in 2007.

"The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. ...

The idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them “Pigovian taxes.”...some taxes align private incentives with social costs and move us toward better outcomes."


I would love to see a carbon tax levied not only in the major industrial countries but all over the globe with all the proceeds dedicated to lowering the sovereign debt. Such a tax could be a first step towards internalizing the negative externalities of all the production inthe world economy. If that leads to less and more efficient production then all of us will be winners.

Copenhagen, One More Time

Who Cares?

The peace Nobel laureate Desmond Tutu sent a letter to the EU parliament in which he berated them for not acting to slow down climate change. Mr. Tutu said in his letter " The rich world is historically responsible for the emissions causing climate change and they have a moral obligation to provide the means for the countries on the front line to survive and prosper."

Mr. Tutu was in effect urging the countries of the North to overcome their differences and to live up to their moral responsibility by agreeing; during the Barcelona negotiations; to find a way out of the current impasse before Copenhagen . The developing countries have made it clear that they expect financial transfers from the developed countries of around $148 billion a year by 2020 if they are to do their part of reducing their expected carbon footprint.

But since climate change is a global issue then it does require a global solution. Again it seems obvious that we cannot have a global solution if the largest, well second largest , emitter is not ready to participate in the game. Copenhagen is exactly one month away and the US climate change bill is still languishing in the Senate sub-committee. Senator Boxer , the chair of the Environmental Committee, remains hopeful that a bill will leave her committee before Copenhagen. That is not assured because a number of the Republican senators promise not to attend the committee mark up sessions. If they do not attend then no bill can be presented to the senate at large. Even if a bill is to emerge some very powerful Democratic senators such as Max Baucus promise to hold up the measure in his powerful Finance Committee by delaying funding for the measure.

What is even worse are the proposed targets. Kyoto which was initially agreed to by the US was to cut carbon emissions by 5 % from the 1990 level by 2012. The US is estimated to have released around 5 Billion tons of carbon in 1990 and thus the implicit target by 2012 would have been 4.75 billion tons.The new bill is aiming for a 20% reduction from the 2005 levels by 2020. Since the 2005 emissions are estimated to be 6 billion tons then the 20% reduction will take the US back to 4.8 billion tons by 2020. That is irresponsible behviour besides being a cruel joke on the aspirations of those that take these existential matters seriously. The US is targeting to potentially reach by 2020 a level of carbon emissions that it was supposed to have hit by 2012 and yet they want the world to call such measures responsible action. Go figure.

Mr. Yao de Bar, the UN Climate Change Secretariat said it best when he stated the need to "Step back from self interest and let common interest prevail" Nothing else will work.

TANSTAAFL

Who Pays For Lunch?

“There ain’t no such thing as a free lunch” has been traced to the late nineteenth century when saloons in the US offered free lunch for their paying customers. Obviously the idea has since become a corner stone of economics by emphasizing that whenever we make a choice then we have to sacrifice something else in exchange. The same principle governs all activities in the scientific world that is governed by the entropic nature of the universe. We can never produce something out of nothing.

It is unfortunate, in light of the above, that so many thinkers, institutions and organizations have chosen to remedy what is arguably the greatest challenge to civilization; environmental degradation; by advocating policies that are not guided by that most basic of ideas.

Sustainability, an inevitable phenomenon of an increasingly complex systems, is being promoted by each and every government in the world, by the United Nations and all its agencies and many think tanks and educational institutions of higher learning through arguments and models that seek more economic growth when it is very clear that sustainability came to the forefront; as an existential issue; as a result of the destructive activities of economic growth. Major concerns about sustainability, the ability to continue the current scale of operations into the future demands that we adopt a radically different methodology rather than the current paradigm that glorifies economic growth and unfettered markets. As the proverb says "If you always do what you've always done, then you'll always get what you always got." Business as usual will only result in severe shortages and unthinkable environmental degradation.

Kenneth Boulding, the preeminent economist is reputed to have said: “Only mad men and economists believe that infinite growth is possible in a finite world”. He actually went further as to characterize that kind of irresponsible behavior as a “cowboy economy” when he suggested that we need to think of the delicate balance of a “spaceship” earth. A society without limits is a fiction.

This idea of the absolute need for limits to growth has been adopted by many thinkers in all sorts of fields, physics, anthropology, biology, ecology, philosophy and economics just to name a few. But the most effective proposition has been the one made by Herman Daly who revived the old idea of the classical economists in general and that of J. S. Mill in particular, namely steady state economics. This notion has become the foundation for all environmental visions that seek to steer human activity in such a way as to avoid the imminent collapse that we are heading towards. How far are we from the abyss is debatable but many of the models such as the Club of Rome, global ecological footprint, Pimentel estimates of the limits to the size of global population or the Energy Return on Investment (EROI) speak in terms of decades and not centuries.

Add to the above the bleak Environmental assessment of the group of 1300 scientists assembled by the UN, the dreadful outlook of James Hansen of NASA about the severity of the upcoming climate change in addition to the dire predictions of James Lovelock who has been described as “one of the environmental movement’s most influential figures” and one cannot help but be bewildered when we hear the politicians suggest more growth when it was growth that created the problem in the first place. When would we understand that more of the same is a recipe for disaster and that sustainability is not compatible with economic growth. It is simply one or the other.

Under the best of circumstances growth can be justified as a means to an end but it is pure madness when growth becomes an end in itself as it has become in the developed world. Why is it so difficult to connect the dots and conclude that since pollution is a by product of economic activity and since economic growth demands a greater scale of human activity then economic growth is the cause of environmental degradation. Maybe when all is said and done Homo sapiens (wise humans) we are not.

The world is at a critical proverbial fork in the road. We can either change direction and hope that we can avoid the abyss or we can pretend that there is a free lunch and we can have it all, economic growth and sustainability in a finite world. The choice is very clear, either follow the principles and the models that show unmistakably he absolute need for a radical change in the whole architecture or continue the pretense that we can have our cake and eat it too. Lipstick on a pig just won’t cut it.

Is COP15 at Copenhagen Flawed?

Will the World End in Fire?
We are already witnessing the beginnings of a barrage of saturated media coverage about climate change and the upcoming Copenhagen conference. By the time the COP15 Conference at Copenhagen arrives, it might be the only item in the news all over the world and that is good. We need to take some meaningful measures that could get us to move in the right direction. Who knows, we might even avoid the apocalypse.

The failure to reach an agreement to adopt an effective and clear plan of action to reduce greenhouse gas emissions would be a major setback to the environmental efforts to avert a catastrophic climate change, an increase in temperature greater than 2 degrees Celsius. Sea level will rise, major ocean currents would be disrupted, monsoons and hurricanes will increase both in their frequency and intensity, crop failures will become more common, desertification will increase; life as we know it will become disrupted. What is at stake is surely the greatest challenge that civilization has ever faced and a successful Copenhagen meeting is a must.

Yet if we are to act as dispassionate observers of this process we will have no choice but to note the major logical fallacy upon which Copenhagen is built. The issue is not whether the world can afford not to decrease its GHG emissions; it can not. The real issue though is whether Copenhagen can deliver us out of this self inflicted quagmire? How can it possibly do that when we even refuse to look into the root cause of this problem?

Anthropogenic emissions are simply the product of human economic activity and no one is proposing that we limit economic growth. The position at Copenhagen is nothing else but an exercise in a combination of major logical fallacies such as “argumentum ad populum” combined with “argumentum ad baculum”; a false argument based on the appeal to the majority and to fear.

Let me explain. One of the major efforts that the nations, represented at Copenhagen, will confront is that of reducing car emissions. It is widely believed that the move to hybrid engines and electric plug-in vehicles, in addition to more efficient engines, will turn out to be a major contribution in achieving the sought reduction in carbon emissions. But would it? The world produced over 70 million new vehicles during 2007 but under the best estimates all the hybrids and electric plug-in will not amount to more than 2 million units a year by 2015. If these numbers hold then that is a miserly 2% of the new cars, not to mention that China and India alone are slated to replace the United States as the number one producers of vehicles in the world. Emissions from China and India, both of whom are neighbours of Bangladesh, will not be regulated. Climate change is the largest infringement on the sovereignty of Bangladesh and yet it goes on each day of the year without firing a bullet or creating a political standoff. Even if we are to assume, as unlikely as it might be, that by 2020 one fifth of the newly manufactured in the world each year would be powered by either a hybrid or an electric engine, what about all the raw materials that has to be mined and processed in order to build all of these cars not to mention all the tires, spare parts, accidents and highways that they will generate and require? Would supplying all of these resources by “developing” countries be without a carbon footprint?

A more efficient car is a welcome development but a more efficient car will be useless in reducing the human impact on the ecosystem unless we are to simultaneously build fewer cars and consequently fewer garages, less highways, less spare parts use less resources and conserve our natural capital.

It is not sufficient to set up a goal. We must set up a goal accompanied by a workable plan otherwise the goal would best be classified as a wish. Imagine ,if you will, that all the water bottling facilities in Fiji ; whose products are shipped to North America and the rest of the world; are to become totally powered by energy acquired through either thermal solar , photovoltaic or wind turbines, would that then make the consumption of such water environmentally friendly? You decide.

As you can see from the above the need to cut down on GHG’s and carbon emissions is not questioned. What is at stake is our ability, or rather inability, to accept that climate change is nothing more than a manifestation of a systemic failure and such failures demand a total redesign of the system. If we cannot understand this most basic of all facts then all our efforts, as well intentioned as they might be will be for naught.


A Podcast of the above text can be found at: www.ramblings11.mypodcast.com