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Carbon Taxes, Cow Farts, And Central Planning

In a centrally planned economy decisions on what to produce, how to produce and for whom are taken primarily by the government.

The term is usually associated with communist economies. However, since US President Franklin D. Roosevelt implemented a robust range of government policies in the 1930s to counter the effects of the Great Depression, using principles that would be popularized by UK economist John Maynard Keynes, Western governments (along with their central bank consorts) have also taken on very interventionist roles in economic affairs.

But not even Stalin or Roosevelt could come up with a rather exotic tool that can take central planning to a whole new level: carbon taxes.

The reason why it is so powerful is that virtually all market activities produce some type of greenhouse gas, meaning carbon and other equivalents that contribute to warming our planet. Here’s the emissions breakdown by sector in the US according to the Environmental Protection Agency (as of 2014):

Virtually all economic activities (as well as most daily personal affairs in any modern society) produce some type of emissions. So by putting a cost on carbon any of them, from the most mundane to the most complex, would be impacted. Entire industries could be impaired with the stroke of a pen. Powerful stuff indeed.

Furthermore, the tax base could be greatly expanded as a result, at a time when governments are desperate for new sources of revenue.

Climate change skeptics, pointing to alleged gaps in the theory of manmade climate change (where carbon emissions resulting from human activity are primarily responsible for the rise in global temperatures since the 19th century) and the heavily politicized nature of the process have long argued that having such a powerful interventionist tool is really the ultimate goal of the politicians pushing for it.

Stated differently, it may not be just about saving polar bears but rather central planning – on steroids.

With the election of Donald Trump to the White House those skeptics thought they had gained a key ally and that the whole concept would now be consigned to the most liberal corners of Western societies. Indeed, one of his fist actions was to delete climate change references in official web pages, vindicating some of those early expectations.

But they might have to put the cork back in the bottle.

According to a recent Bloomberg article, a group of prominent Republicans are proposing the creation of a carbon-tax plan to top Trump aides, including Vice President Pence. And they are listening.

The idea is to tax a dollar amount for each ton of carbon emissions resulting from fossil fuel usage, with rebates for lower income families to offset escalating costs. There would also be a border adjustment tax to increase the cost of imports from countries that do not put a price on carbon.

Sounds rather complicated – and putting it into practice really is – but why would the Climate Skeptic-in-Chief go for it?

After all Trump publicly bashed the whole idea on multiple occasions. Getting all those coal miners into the Republican side undoubtedly helped him win the election. House Republicans also strongly oppose the concept.

So why would he ever change tracks on all that?

The reason is that it could significantly help push other critical points of his agenda. Let’s take a look at a few.

1. Reduce Regulations

It should be abundantly clear by now that Democrats, for better or worse, will vigorously oppose virtually every item on Trump’s agenda. That includes his recent executive order on reducing regulations, which now seems to be also heading to the courts (often run by liberal judges).

 

So he could garner some critical Democrat support for the concept by offering to implement a far-reaching carbon tax program in return for reducing a slew of environmental regulations. It would also appeal to their voters.

 

From what we can tell, the implementation of such a scheme would be adopted unilaterally and thus not subject to complex international agreements that could end up ceding US sovereignty to supranational institutions like the United Nations. This and a market mechanism to trade around (and help mitigate) the tax may help sway other Republicans too, but this is by no means certain.

 

2. Erect Technical Trade Barriers

If Trump wants to significantly reduce the US’s massive trade deficit, China needs to be part of the equation since in 2016 it accounted for over 40% of the total (excluding services), or about $350 billion.

 

China is also the world’s largest carbon emitter and with no pricing mechanism in sight, certainly not over the near term.

 

So here’s a rather elegant way to “stick it” to China: tax their imports under that border adjustment portion of the carbon tax proposal, with the pretext of helping to save the world from a climate catastrophe.

 

Who could ever protest that? Major US companies that depend on Chinese imports, already up in arms with the prospect of any restrictions, would have a much harder time publicly opposing such an environmental trade barrier.

 

The Chinese would likely contest it regardless. This will happen no matter what trade impediments Trump decides to enact and some level of retaliation is to be expected.

 

In all fairness though, the Chinese are no saints when it comes to free trade. In theory anyone can export there but in practice it’s a real challenge. American companies have a much greater difficult exporting to China than Chinese companies to the US. Often a local partner is required, which can reduce the economics and create other sorts of other issues. And China prefers to buy only what it can’t produce, going back centuries.

 

Moreover, given that the Chinese are not so keen on copyright and patent protection many companies prefer not to run the risk of shipping their products there, at the risk of seeing them displayed by someone else at half the price in the next trade fair.

 

So something will have to give at some point. This could be one way of doing it.

 

3. Counter the Coming Wave of Automation

Even if Trump manages to bring all the factories back their makeup is likely to be very different from the ones that originally left because of a massive disruption that is about to hit labor markets globally: automation.

 

Better put, the robots are already here, replacing many jobs and prompting calls for guaranteed income schemes for the displaced humans (funded by the offending robots).

 

Ah, but robots use electricity, and that one can be taxed under a carbon scheme. This would increase the cost of using them and reduce the incentive for companies to automate. While not as immediate of a concern, at some point over-indebted governments will have to find creative ways to keep more people employed.

That being said, it can also create big distortions. Robots can be used in a great number of activities beyond pure labor replacement. That is clearly good for society and should be incentivized, not discouraged.

All great and worthy goals. And a rather expedient way for Trump to fulfill his agenda in terms of jobs and trade deficit reductions, at least on the surface. But at what cost?

Governments should indeed intervene in the economy, but principally to correct market failures, where pollution (of any kind) is a hugely important one. And if a carbon scheme helps push developing countries to improve their own environmental standards, as opposed to export at the lowest cost no matter the dire consequences to their air quality, all for it. Ditto for encouraging the development of large-scale alternative energy sources, a goal that remains elusive at this point.

However, a big problem is that such far reaching tools often produce serious unintended consequences. Then governments will have to find ways to offset them somehow, in turn requiring even more intervention.

Furthermore, once such a tool is in place central planners will always find ways to expand it more and more, to the point where key elements of our lives could be severely conditioned.

As a reminder, California is now regulating cow farts. At some point in the not too distant future the scheme could be extended to people for whatever reason. Then what?

No more spicy beans for you, that’s what. Hypothetical of course, but one should never underestimate the imagination of a committed central planner.

What makes America great is not how well its government intervenes in the economy, but rather how it lets companies and entrepreneurs freely do what they do best with some sensible rules and regulations.

Indeed, that should be the guiding principle of any modern government.

Californian cows will likely agree with that.

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