Shop around the notion of climate change strategies, and you will quickly come across a lot of people who put a great deal of faith in carbon taxes. However, just as inflation has failed to quell the world's thirst for oil, carbon taxes won't either.
Carbon taxes, or taxes on fossil fuel, are a Pigovian tax (otherwise known as an effluent fee) meant to force producers and consumers to internalize the external costs that arise from the private transactions between these two parties.
Generally, when someone buys gas from a gas station, the surrounding society pays a third-party "price" associated with pollution and climate change. A Pigovian tax, however, would make the purchaser of the gas pay an added fee, which, ideally, would force the purchaser to internalize what would have otherwise been the external cost incurred by society. From the seller's point of view, such a tax will raise prices and hurt sales. Moreover, the tax itself must be passed on to the government, which essentially acts as an increased cost of production - further hurting the seller's bottom line. The idea here is that that both consumers and producers will make different consumption and production decisions if they have to bear what otherwise would have been the external costs arising from their private transactions. Consumers would buy less, and producers would sell less. Simple enough. Or is it?
In theory, a carbon tax should work. However, there are four critical reasons why carbon pricing does not tend to alter consumption or production patterns to any degree that would effectively combat climate change. These reasons can be summed up as herd behaviour, political backlash, climate change skepticism, and the Green Paradox.
One would certainly think that a carbon tax would dampen consumer thirst for oil. Sadly, the data just does not support such a conclusion. In actual fact, higher prices for oil and gas have not historically had much effect on the consumption of oil and gas (Gasoline prices, 2014). If we plot a correlation between the relative price of gas (for example, the price of gas compared to average incomes) then we find that consumption of oil and gas has actually increased with price. We must, of course, bear in mind a few variables while considering this trend, not the least of which is the increased demand associated with both greater populations and greater economic output. However, another variable occurring at the same time also includes greater energy efficiency. Thus, even though vehicles, furnaces, and energy-consuming electronics have all become more efficient over the years, the world is still consuming more oil and gas, even as the price goes up. (More on that issue under Green Paradox below.) Just a quick glance at the cars on the road today will confirm the fact that consumers have not responded in a typical fashion to higher gas prices. We have actually seen far more vans, SUVs, and trucks sold in the last decade than we have ever seen before (Why are SUVs so popular?, 2014), and yet, relative to household income, gas is at a percentage that we have not seen since the 1980s (U.S. household expenditures for gasoline, 2013).
When it comes to fuel prices - and climate change in general - the world's population has tended to behave much like the allegorical frog that has been placed in a pot of tepid water. As the allegory goes, if the temperature of the pot is turned up slowly, the frog will not jump out... it will just stay in the pot until the pot is eventually boiling. It's actually hard to say if people are truly acting like the frog in the pot. This is because gas prices have not tended to increase at a constant rate. Prices tend to go up a little, then down a little, then up a lot, then down a little, etc., etc... thus, memories of gas prices from yesteryear fade, and the long-term trend becomes obscured. If gas prices did tend to increase in a linear fashion, then perhaps more people may indeed have opted long ago to take public transit, car pool, or ditch their old gas car for a shiny new electric car. Sadly, whenever oil companies perceive a growing animosity amongst the oil-consuming public, they tend to open up supply and cut prices drastically. (More on that issue under Green Paradox below.) Thus, the public seems to be somewhat oblivious to the increased percentage of household income now directed toward fossil fuel, with that percentage doubling from 2% to 4% from 1999 to 2013 ("U.S. household expenditures for gasoline, 2013). Not so many years ago, we would have viewed $1.00 per litre of gas as being more than reason enough to kick our gas-burning cars to the curb. Today, we see it as a bargain.
The bottom line is this: humans, by nature, operate on two principles that are highly resistant to change: i) we tend to do what the herd is doing, and ii) we tend to do what we have always done. If people are given the option to do the wrong thing, then many of us are more than happy to do it... just as long as enough other people are doing it, too.
The fact is, a good deal of the price that we pay for gas in Canada is in fact tax. From the year 2000 to 2012, taxes on gasoline in the United States comprised between 30% to 12% of the price paid at the pump (What Makes Up the Cost, 2013). "In 2012, taxes in Canada represented on average 39.3 cents per litre, which is approximately 31% of the pump price" (Gasoline taxes Across Canada, 2013). However, if you take a good close look at the percentages over time, you can see two clear trends: i) gas taxes have not really altered consumption patterns, and ii) gas taxes have declined as market price of gas has increased.
The problem with taxes is that they are more than just a revenue tool: they are also a political tool. Governments will happily institute a tax halfway through a mandate, but come time for re-election, they either lose heart, or they lose an election to the party that promised to lower taxes.
Climate Change Skepticism
The other issue that impacts the effectiveness of carbon taxing is skepticism. Despite the overwhelming evidence, many people are still skeptical about the existence of global warming and the influence that human activity has on it (One in Four, 2014). In fact, a 2015 report from the National Surveys on Energy and Environment found that, currently, there are barely a majority of Republicans - just 56% - who now "believe that there is solid evidence of global warming" (Energy and Environmental Policy, 2015). Even more interesting to note from this report is the fact that people's alleged "scientific" beliefs seem to be highly influenced by their "political" ideology.
Thus, there are still many people in the world who can both afford gas and who are not the least bit afraid of using it. From a policy-making standpoint, it would seem altogether unacceptable to allow individuals to carry out harmful behaviour just because they do not believe their actions will cause harm. To be sure, we would certainly not allow a person to jump off a building just because he believed he could fly. In the case of climate change, however, we are dealing with actions that are poised to have a catastrophic impact on the entire planet - not just the individuals who are carrying out the harmful actions. Climate change is, after all, the most profound and destructive example of a negative externality the world has ever known.
The Green Paradox
The "Green Paradox" refers to a number of unintended, somewhat paradoxical effects wherein efforts to reduce the consumption of a .given resource will actually encourage greater consumption of that very resource. In economic terms, the Green Paradox is comprised mostly of Jevons Paradox, otherwise known as the "Rebound Effect."
Jevons Paradox gets its name from English economist William Stanley Jevons, who, in 1865 wrote a book entitled The Coal Question. Jevons studied England's consumption of coal in the 1800s, and he observed that the country's consumption of coal actually soared after James Watt introduced the Watt steam engine. The Watt engine greatly improved the efficiency of the traditional coal-fired steam engine that had been used up to that point in time. Watt's innovation, however, made coal far more cost effective, which, naturally, lead to the increased use of steam engines. As one might expect, this increased the overall market demand for coal.
Therefore, efficiency improvements (generally prompted from either a naturally occurring innovation in the private sector or a government imposed policy - such as carbon taxes and other types of Pigovian taxes) do not tend to actually reduce consumption of a given resource because higher efficiencies inspired by these phenomenon will lead to gains in affordability, and those gains will in turn increase both demand and consumption.
Beyond the primary impact of Jevons Paradox, there is a secondary impact of something we might call the "Growth Effect," wherein cheaper energy will lead to faster economic growth. Thus, "improvements in energy efficiency eventually lead to higher energy depletion rates and usage" (Efficiency, 2011). Sadly, we can see blatant evidence of the Green Paradox in the world's energy consumption patterns since the signing of the Kyoto Protocol, wherein CO2 emissions "accelerated from 1.3% per year in the 1990s to a staggering 3.3% per year from 2000 to 2006" (Fölster et al., 2010).
Beyond the rather predictable impact of effects such as Jevon's Paradox, there is the complex issue of how the fossil fuel sector will respond when governments and private industry attempt to nudge fossil fuels out of the market. The fossil fuel industry is probably the world's largest and oldest multi-billion dollar industry, and it will not go quietly. Evidence of this can be seen in 2014, when electric and hybrid cars started to pose a genuine and affordable alternative to gas-powered automobiles. What did the oil producing countries do in response? "In late 2014, OPEC started a price war, and prices have fallen drastically since then, putting short-term prices very near 1972 lows and below 1947 and 1931 lows" (Inflation Adjusted Gasoline Prices). The resulting lower prices not only dampened sales in electric vehicles, but actually enticed EV buyers back into the gas engine market. In fact, Edmunds observed that "about 22 percent of people who traded in their hybrids and EVs in 2015 bought a new SUV" (Hybrid and Electric Vehicles Struggle).
Sadly, Jevons Paradox (aka the Rebound Effect) and the Growth Effect show us that efforts made by governments, or even some individuals, to decrease consumption of a given resource will often encourage the majority to increase their consumption of that very resource. The net effect leaves us absolutely nowhere.
At this critical juncture, there are absolutely no technical barriers preventing us from driving electric vehicles or relying on 100% renewable energy in our homes. The only barriers to this reality are psychological, attitudinal, and economic. Once the world makes a commitment to go electric, it will not likely be going back to oil, and the oil companies know this very well. That is why the world can expect stiff competition from an existing fossil fuel industry that now finds itself backed into a corner. This is precisely why the world needs true leadership from our governments on climate change, and that means instituting an outright ban on the production, sale, transportation, and refinement of oil. Once this is done, the green energy sector - which already employs more people than oil in countries such as the US and China (Renewable Energy and Jobs, 2016) - will take off... virtually overnight.
However, until oil and gas become banned substances, then any potential headway that might be made from carbon taxes will simply be undermined by basic human lethargy, climate change skepticism, a number of paradoxical economic effects, and stiff competition from an oil industry that has absolutely nothing left to lose.
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