This month we’ll cover three things: my own piece with Bryan Cheang of Singapore’s Adam Smith Center on the city-state’s newly expanded carbon tax, Edwin Dolan’s carbon pricing essay from late March over at the Niskanen Center, and Scott Sumner’s carbon tax musings via EconLib.
Business Times — April 27, 2022
In February, the Singapore government announced a new carbon tax schedule as the centrepiece of its net-zero emissions plan. The carbon tax, now set at S$5 a tonne of carbon dioxide equivalent (tCO2e), will be raised to S$25/tCO2e in 2024 and 2025, and S$45/tCO2e in 2026 and 2027, with a view to reaching S$50 to S$80/tCO2e by 2030. In March, the Energy Market Authority further articulated Singapore’s plan to achieving net zero by 2050.
IER’s Take
Singapore’s carbon tax venture provides an interesting case. The country is tiny and trade-dependent, so a lot of the standard pro-carbon tax arguments can be thrown right out the window. As I wrote for the Business Times, it’s too small to possibly drive changes from other countries (as proponents think stringent U.S. or Chinese policies would). Instead, the Singapore plan quite clearly is an attempt to get out ahead of the global policy curve and capitalize in some way from developing emissions credit trading markets, or something similar.
National University of Singapore Professor Vinod Thomas, writing for Channel News Asia, doesn’t seem to take seriously the possibility that the tax runs the risk of spurring carbon leakage—whereby emissions are not lowered, but rather are displaced to other jurisdictions. As I wrote in the op-ed, “With a multitude of nearby options for businesses to relocate, a carbon tax might nominally lower Singapore’s emissions without securing any cumulative global emissions decrease.” On the other hand, Singapore has the enduring argument that it has better governance than its neighbors, and that’s a huge factor in businesses’ decisions.
Here’s how I concluded the piece: “Though Singapore famously “punches above its weight” in international affairs, its cumulative emissions are lower than those of any large Chinese or American city. China and America today emit nearly 40 percent of global greenhouse gases. China, though it has instituted a nominal form of carbon pricing, intends to increase its greenhouse gas emissions until at least 2029. The United States, though it has a multitude of sub-national carbon strategies, has no unified policy and faces political headwinds against forming one. In the background looms India, a country whose development depends on energy deployment in all forms.
What benefits, then, will this policy deliver to Singapore? Environmentally, the only measurable upgrade could be the ‘co-benefit’ of lowered local air pollution that could accompany a reduction in climate-altering greenhouse gas emissions. Reducing local air pollution is a worthy goal, but should not be confused with the climate agenda.
More plausibly, the real benefit of the carbon tax plan would be to get ahead of global political trends and position Singapore as a carbon market hub. If the government is reading global political signals with clairvoyance, the Singapore carbon tax could position the country for competitive success amid global policy cooperation.
But much stands in the way of such a future, as recent developments illuminate.
The competition underway between China and the United States is one such example. Despite the 2021 joint statement issued from the Glasgow climate conference, neither country appears willing to conform with international guidance if it means the other might surge ahead economically. The global commodities challenge spurred by Russia’s war in Ukraine is another example. After becoming dependent on Russian natural gas, Germany now finds itself returning to a higher-emitting fuel source. ‘If we want to be more independent,” a state energy minister explained in March, ‘we will have to operate with coal.’ Geopolitical shocks upend the best-laid plans and there is little reason to believe they will abate over time.
Singapore’s use of a carbon tax as a means to its net-zero end must be understood not as a genuine pursuit of environmental quality—remember, local air pollution is a distinct issue from climate—but rather as a political calculation. The policy is a gambit that entails significant risk. Instead of leading the way to a global carbon pricing system, Singapore could leave itself on a political island, warding away key enterprises while reaping no gains.”
Niskanen Center — March 24, 2022
The Pigovian model assumes not just a knowledge of the economic and technological determinants of abatement costs, but also of the social cost of carbon. In practice, however, estimating the value of the SCC remains remarkably difficult, despite the best efforts of many talented economists. This section explains why and the next section introduces an alternative approach to the implementation of carbon pricing that is less dependent on the SCC.
A recent paper by Kevin Rennert of Resources for the Future and 10 distinguished colleagues gives an overview of the state of the art in SCC estimation. It lays out the challenges of compiling the data needed as inputs for an integrated assessment model, including rates of population growth, economic growth, and technological change; models to estimate the impact of those variables on emissions; more models to assess the impact of emissions on climate variables such as rainfall, storms, and ocean levels; and still more models to estimate the value of the economic harms caused by changes in those climate variables, including falling crop yields, storm damage, droughts, and extinctions. Few if any of the data needed as inputs are known with any degree of certainty.
IER’s Take
I’ve written a full blog post discussing this essay by the Niskanen Center’s Edwin Dolan, the crux of which is this: how can we set a carbon price without using the very SCC methodology that Dolan eviscerates?
Here’s a loose excerpt from my blog post: Dolan says that economists who are enamored of the Pigovian approach need to recognize its limitations and its lack of political appeal, and open themselves to the possibility that a pure Pigovian climate policy should be abandoned in favor of the modish “target-consistent” approach to climate policy (see: my 2021 article in National Review on this) in which political bodies select a temperature target and technical specialists supply the pathway to achieve it.
I don’t see how his recommendations escape the fundamental problem he describes with the SCC: we have deep and abiding question marks surrounding how much harm we can credibly attribute to each ton of greenhouse gas emissions. How do we even ballpark a temperature target if we’re jettisoning the SCC exercise?
EconLib — April 5, 2022:
When I first moved to southern Orange County I was shocked at the number of Teslas I saw on the road, especially in affluent areas. Five years later there are predictions that electric cars are the wave of the future, and even the traditional car companies are planning to dramatically ramp up production of electric vehicles. Many experts predict that in a few decades most new cars will be electric. Indeed many areas are planning to ban the sale of gasoline cars in another decade or two. The price of car batteries has been falling rapidly.
Let’s say these plans for an electric car future come to fruition, and that in 2040 or 2050 only relatively poor people who cannot afford new cars are still driving old clunkers using gasoline. How will society regard those people still driving cars with gasoline engines?
You might not think there’s anything disgusting about a car driving by you belching exhaust out its tailpipe. Fair enough, but in 1965 I didn’t think there was anything disgusting about someone sitting next to me at a bar smoking a cigarette, it seemed normal. What we find disgusting is almost purely subjective.
In my view, by 2040 or 2050 the politics of a carbon tax will begin to look a lot like the politics of a heavy tax on cigarettes looked in the late 20th century–increasingly feasible.
IER’s Take
This is a thought-provoking argument from Scott Sumner that obviously chimes with Dolan’s pessimistic view on the propects for a pure Pigovian carbon tax.
What Sumner is saying is that a carbon tax is likely to become more palatable to the American public over time as our taste shifts. The shift he’s describing is of a piece with the notion of an environmental Kuznets curve, which suggests that as we get richer environmental concerns take up more of our mindshare, since we generally have less to worry about. The feel that Sumner brings to this is a good reminder that we might have a carbon tax someday in the U.S., but that (like all carbon taxes in existence today) it is not going to reflect the blackboard version that carefully attempts to match the tax to a social cost of carbon estimate. If and when we have a carbon tax across the U.S., it’s going to be watered down, but it’s also going to come on top of a lot of other thrusts against fossil energy. The promised grand bargain in which regulations are scrapped in favor of a Pigovian tax just isn’t happening.
Moreover, as one EconLib commenter wrote, we should consider another aspect of the dynamic: “Doesn’t this basically mean a carbon tax will become politically feasible only once it’s become nearly redundant, because few enough people will still drive gasoline cars anyway for it to induce political backlash?” I think that could be correct, though that doesn’t mean the justification for a carbon tax would be any stronger.
Final thing: to offer some pushback against Sumner’s description of a scenario that could elicit a different response in future, I do find cars driving by me belching exhaust to be disgusting, but that’s not exactly what a carbon tax targets. Carbon dioxide is not a local air pollutant and it’s entirely possible that we can improve local air quality while actually increasing the cumulative global emission of greenhouse gases.
