Nobel Laureates and Other Climate Experts to Paris Negotiators: Tax Carbon

A letter composed by the Carbon Tax Center calling for a carbon tax as the basis for international climate negotiations boasts of an impressive list of signatories: three Nobel Laureates in Economics, three former Cabinet Secretaries (one of whom, Steven Chu, also received the Nobel Prize in Physics), two Vice-Chairs of the Federal Reserve Board, and some other people that have done a few things in their lives, like teach Economics at Harvard.

What is perhaps most important to note about using carbon taxes as a basis for negotiating a climate treaty is that while international negotiations will always be fraught, a carbon tax treaty would at least look more like what international treaties look like: countries promising to observe some code of conduct -- human rights for prisoners of war, reducing trade barriers, and harmonizing taxation for border straddlers like me. It is much more intuitive for countries to agree to do something -- phase out subsidies and tax carbon -- than it is for countries to divvy up responsibility, a divisive exercise that led to the ill-fated Kyoto Protocol, which allowed China to triple its emissions over the time period since. The strength of such an approach is also, admittedly, a weakness: unless something is specified about the collected carbon tax proceeds, a carbon-taxing signatory would be free to somehow channel proceeds to affected fossil fuel stakeholders. But if the approach is paired with a commitment to phase out fossil fuel subsidies, then at least carbon tax proceeds are likely to be distributed in such a way as to decouple emissions from proceeds. Above all, one thing would be important about a carbon tax-based treaty: countries raise revenues, keep them, and spend them in a way that they control. That intrudes upon sovereignty concerns less than other approaches, and avoids some of the finger-pointing exercises that have plagued previous Conferences of Parties.

Alberta's Carbon Disappointment

Alberta Premier Rachel Notley announced Sunday that the province will adopt a climate policy that will replace its existing Specified Gas Emitters Regulation. Unfortunately, the new policy really does not do much more than the SGER. It appears to be a cap-and-trade program that replaces the intensity-based SGER trading program. Whereas SGER would give more permits to specified emitters (large ones) as long as they got more efficient, the new policy allocates emissions permits on the basis of output, but seems to institute a cap for each sector. (I will frequently use the words "seems" and "appears" because the plan does not completely spell out some implementation details) So the possibility of indefinitely rising emissions allowances disappears, but the initial allocation (which appears to re-set each year) is still based on productive and/or value-based efficiency (which one and when is not clear). The cap on Alberta's oil sands sector is 100 Mt, which is not a binding cap at all because current emissions are about 70 Mt. The plan does expand carbon pricing into consumer sectors, so that distributors of gasoline and heating fuels will have to have permits, too, and pass them down to end-consumers. That is a sensible step, making the carbon price as economy-wide as possible.

What is mysterious about the plan is what exactly the role of pricing is. The report refers to a ceiling price of $30 per tonne, which is consistent with a cap-and-trade program, but it also refers to price increases of 2% above inflation, "as long as emissions prices in Alberta do not significantly exceed those in comparable/competitor jurisdictions and as long as they are not above current estimates of the social cost of carbon." (p. 32 of the report). How do you increase the price if the price is determined by market trading? The mechanism seems to be that the province will reduce allocations "1-2% per year to reflect expected energy efficiency improvements." (p. 31 of the report OK, but that still seems like the province still just adjusting the cap.

In sum, this plan is a disappointment for those like myself, who were hoping for a bolder policy, especially in light of the Premier's remarks earlier this year expressing unhappiness with the SGER, and rejecting the National NDP Party's call for cap-and-trade. The plan still grandfathers a certain amount of emissions, and that is disappointing because the income effects of those freely-allocated permits will reduce the incentives to innovate. Worse still, the sector-specific caps will eliminate any market signals to re-order Alberta's economy in less carbon-intensive ways. In particular, if the oil sands sector still has 30 Mt to grow, there is no bite at all to this climate policy in terms of curbing oil sands emissions. Some of the money raised from the plan (how the plan raises the claimed $3 billion in revenue is unclear) will go towards reducing coal-fired generation and increasing renewable energy generation, but how it does it is ... you guessed it: unclear.

Party Before Country: The Democratic Congressional Campaign Committee Kills Moderate Republicans ... Because It Can (or thinks it can)

If you're a Democrat, and you blame the Republican Party for hyperpartisanship, maybe you should look a little closer to home. The Democratic Congressional Campaign Committee is partly to blame -- probably exactly half. The DCCC has been targeting Florida Republican Congressman Carlos Curbelo (FL-26) for all kinds of fabricated charges. Why? Because the DCCC thinks Florida's 26th district is a swing district, and they think they can win it.

But what a pyrrhic victory would it be, to wipe out one of the last of the remaining members of that most endangered species, the moderate Republican. Congressman Carlos Curbelo is an environmental hero. Curbelo was one of the eleven co-sponsors of the Gibson Resolution, the nonbinding but meaningful statement by House Republicans that climate change is really a problem, and needs addressing. It is perhaps an unfortunate thing that it takes political courage for a Republican to "come out" on climate change, but that doesn't make it less courageous. Curbelo came out early, as this Scientific American article points out.

These are precisely the kind of craven, Machiavellian shenanigans that have corrupted Washington. This is why Republicans are drawn to ignorant knaves like Donald Trump and Ben Carson. I would personally give Bernie Sanders more credit, but he draws upon the same, angry, anti-Washington sentiment that is also gaining ground in the Democratic party. The Party comes before your country.

Support, and vote for Curbelo if you live in Florida 26th. And call the office of Steve Israel, the chair of the DCCC, at 631-777-7391 or in DC at 202-225-3335, and let him know he is a schmuck.

Carbon Tax Time in Canada

Holy Loonie Toonie! It was clear that incumbent Canadian Prime Minister Stephen Harper was very nervous heading into yesterday's election, going so far as to enlist the help of Doug Ford, the brother of famously inebriate Toronto Mayor Rob Ford, and not exactly a teetotaler himself. The smart money was that a plurality would emerge from yesterday's federal election and the best bet, far from a sure bet, was that the Liberal Party would wind up holding the most seats. But Canadian voters stunned everybody by handing Justin Trudeau and the Liberal Party 184 seats out of 338, for a majority. This is parliamentary democracy, where caucus members toe the party line reliably. As leader of a majority party, Trudeau does not have to negotiate with Harper and the Conservatives, nor Thomas Mulcair and the NDP. Justin Trudeau has control over Canadian government policy.

Trudeau has clearly signaled a concern with climate change. Here is the first order of business for the Prime Minster-elect: enact a carbon tax. Do it in a way that will outflank the NDP and permanently put to rest their cap-and-trade dalliance: by enacting a carbon fee-and-dividend, collecting all revenues into a dedicated trust fund, and distribute every single tax dollar collected to Canadian households, on a per-person basis. This is the proposal championed by Citizens Climate Lobby Canada, and its sister American organization Citizens Climate Lobby.

A carbon fee-and-dividend makes economic sense for the United States, but the political prospects for enactment in Canada are far brighter. Not that Americans should give up on  carbon fee-and-dividend, but this moment in history is perfect for Canadian adoption. Here is why:

Canadians are ready for a carbon tax. Canadians have tired of being an international laggard on the climate change, and have expressed a clear desire for something on climate policy. But what policy? Apart from a basic suspicion of the NDP leadership's maturity levels, Canadian voters have questions about the cap-and-trade that Mulcair championed, especially after Alberta Premier Rachel Notley rejected it. How about just regulating greenhouse gases as a toxic substance under the Canadian Environmental Protection Act? That is plausible, and was the predicate for two past federal initiatives: the failed rolling-cap-and-trade scheme proposed by the previous Prime Minister, Paul Martin, and Harper's 2011 plan to phase out coal-fired generation in Canada over the next forty years. But how does Environmental Canada (the weak Canadian version of the U.S. Environmental Protection Agency) set a standard for greenhouse gas emitters in Canada? It had to lean heavily on the U.S. Environmental Protection Agency just to help establish the coal-fired generation phaseout, so my guess is that Environment Canada simply does not have the institutional capacity to figure out how to set standards for cement plants, refineries, steel mills, and pulp and paper mills. So what's left? Well, the Canada Revenue Agency is pretty good at what it does, and collecting a carbon tax is comfortably within its wheelhouse. Add to that the political dynamic that oil sands executives past and present favor a carbon tax, and it is starting to look like a political no-brainer.

Canadians are ready for at least a small wealth redistribution. No study of carbon fee-and-dividend has been done for Canada, but the results would be similar to that of the United States: that a carbon fee-and-dividend would effectuate a modest wealth redistribution from rich to poor. Not that we are talking about fleecing the rich. If the $30 per ton CO2 tax in effect in British Columbia were to apply nationally, emissions (576 Mt in 2013) would likely decrease by about 7% in response to what would be an 7% increase in fossil fuel price (a -1 elasticity), resulting in emissions of about 535 Mt of CO2, producing revenues of about $16 billion Cdn. Spread out over the 35.8 million Canadians, that would be about $450 for every man, woman, and child, or an average of $1,800 for a household of four. We know that wealthy Canadians consume more, poor Canadians less, so a lump-sum rebate, or "dividend," would wind up giving the poor back a little more than they pay out, the wealthy not so much. But the difference is small, a transfer payment from a rich family to a poor family on the order of a couple of hundred dollars. Still, in a political reality in which the poor are globally clamoring for greater equality, this is in the right direction, and really not much to complain about if you're a wealthy Canadian. Certainly wealthy British Columbians have moved on to more important things, like hockey.

Canadians will want some simple, clean, and straightforward. There is something small, simple and straightforward about a carbon fee-and-dividend. Dollars go into a trust fund, not unlike sovereign wealth funds like Alberta's Heritage Savings Trust Fund or Alaska's Permanent Fund, only the incoming dollars would go right back out, instead of invested. The amount of money for some industries would be large -- cement and coal-fired power plants -- but for most Canadian households, it would be a mostly manageable adjustment. Unlike the British Columbia carbon tax, the dividend would make net winners out of the poorest Canadians. Could political shenanigans hijack some of those carbon tax proceeds? Of course, that is always possible. But Justin Trudeau has a majority, and he doesn't have to deal with the opposition, the way that Democrats would have to work with Republicans in the U.S. Justin's in control. The only question is whether Canadians would punish the young Prime Minister for this. If he proceeds deliberately and with notice -- something Gordon Campbell did not do in British Columbia -- he will not be politically punished, but rewarded.

A carbon fee-and-dividend is small, self-contained, costs rich Canadian households a couple of hundred dollars a year, benefits poor Canadian households by a few hundred dollars a year, and reduces emissions. You want to mess with that? Step right up and announce your opposition to a small wealth redistribution or to climate policy.

Is Alberta Inching Toward a Provincial Carbon Tax?

The third significant climate change-newsworthy event of last Thursday (in addition to the Pope's address to Congress and President Xi Jinping's announcement that China would institute a cap-and-trade program) was an address by Alberta Premier Rachel Notley to the Montreal Chamber of Commerce, in which she clearly balked at toeing the federal party line on climate change: Thomas Mulcair's call for a national cap-and-trade system. "A national cap-and-trade program may not be our best road forward." Canadians are polite; that was was a rejection. Give 'em hell, Rachel!

I may turn out to be a fool, but I find myself wondering what Alberta, as a province could do, other than a real, British Columbia-style, old fashioned carbon tax. Former Canadian oil executive Dennis McConaghy blogged a month ago that Canadian oil producers should embrace a carbon tax. Privately, Alberta oil executives have long been open to a carbon tax. The late Rick Hyndman, the widely respected senior economist for the Canadian Association of Petroleum Producers, espoused a carbon tax. Rick even quietly worked for Liberal Prime Minister Paul Martin, designing an ultimately ill-fated convoluted cap-and-trade scheme with a price floor and a price ceiling. Hmm, a cap-and-trade with a price floor and a price ceiling ... is that a carbon tax? Rick only smiled when I asked him that question.

We know that a carbon tax would win political points from economists. We know from the British Columbia experience that a carbon tax would win political points from environmentalists. If the Alberta oil industry is aboard (it is), who's left? It is ironic that people have always thought a carbon tax was a political non-starter. In Alberta, it really seems as if there is no place left to go.

President Xi: Maybe a Carbon Tax Would be Better

Who would have thought that the first-ever Papal address of a joint session of Congress, calling for Congress to take action on climate change, would be the second most important news item of the day on climate change? That was the case for Thursday, September 14, when Chinese President Xi Jinping announced that China will commit to establishing a cap-and-trade program to reduce greenhouse gas emissions. The details of the program are still apparently under development, but the Chinese plan is hardly an impulse; regional pilot trading programs have been operative for years. The announcement was still considered a surprise; the New York Times reported just Monday that "There is little expectation that Mr. Xi will promise anything as drastic as he did last year."

The plan is meant to be an operationalization of a commitment by China back in November to peak its emissions in 2030, but it may have to wind up being a good bit better. The way that the Chinese Central Committee moves on policy, incrementally and cautiously (except maybe when rescuing stock markets), suggests that the Chinese are not nearly done with climate policy. The greater significance of the announcement is that it renders incredible the claims of climate skeptics inveighing against President Obama's cooperation with China on the grounds that China is simply sitting on its hands and waiting for the world to end.

The nature of climate commitments would seem to call for an emissions limit, and therefore a quantity instrument – like cap-and-trade, with an emissions cap – rather than a price instrument, like a carbon tax. But cap-and-trade brings problems with administration. The U.S., with its experience with sulfur dioxide trading, could probably set it up and run it competently, for about a billion dollars as a start-up cost. But other countries might not start up so smoothly. It has been pointed out that China has even more experience with corruption than Chicago. If emissions permit fraud can happen in the European Union Emissions Trading System, it seems pretty likely that we will see some permitting fraud and corruption cropping up with a Chinese cap-and-trade system.

A better alternative would be a Chinese carbon tax. Who would complain if China had announced a plan to introduce a carbon tax, instead of a cap-and-trade program? There could be Sino-skeptical climate skeptics out there that would argue that a carbon tax would not necessarily constrain the quantity of emissions, but those people are not open to persuasion anyway. There could be environmentalists out there that worry that emissions reporting fraud could be a problem, but such an enforcement problem would be no worse, and significantly better, than they would be under a cap-and-trade program. Under cap-and-trade, it would be easy for a permit buyer to avoid asking questions about the validity of permits bought, especially if she could simply flip the permit to someone else in a robust-traded market. Under a carbon tax, there could be an angry Central Committee to face if emissions under-reporting were found. It is true that under both systems there is a danger of local government and emitter fraud. But if guaranteeing the absence of fraud in China is the condition for an international agreement on climate change, then we might as well just give up.

A Chinese carbon tax would also be a better base model on which to negotiate a climate treaty. The failure of the Kyoto Protocol itself is testament to the fraught politics created by divvying up emissions among signatory nations. What do international treaties look like? Unfortunately, American and European negotiators were overly taken with the Montreal Protocol, the cap-and-trade-like agreement to phase out the use of ozone-depleting substances. In the wake of the success of the Montreal Protocol to dramatically reduce the use of ozone-depleting substances worldwide, every international environmental problem started to look like a pollution problem nail that needed to be addressed with a cap-and-trade hammer. Result: Kyoto.

What do treaties really look like? Most are agreements in which every signatory party agrees to do something affirmative, and the signatories get to bicker over whether certain behaviors are or are not consistent with the treaty. They do not generally look like Kyoto or Montreal. Not only that, tax treaties are really quite common. The harmonization of tax collection throughout the world is imperfect, but a familiar task for trade and tax people. And with a carbon tax, there is at least there is the fact that carbon tax proceeds can be retained by each signatory taxing country.

If Tea Party extremists can force out a House Speaker, then a carbon tax treaty may not seem very plausible. But if opposition from the Tea Party is a really a deal-breaker for international climate negotiations, then we might as well give up.

Actually, What the Pope Thinks Matters

The Papal Encyclical Laudato Si of this past summer, and the address to Congress by Pope Francis yesterday (the first Pope to ever address a joint meeting of the U.S. Congress), prominently featured calls for action on immigration reform (calling himself a "son of immigrants"), poverty, and also climate change. Climate change is often talked about as problem to be solved by policy and economics, but a growing number of people have raised it as a moral imperative. Niskanen Center's Jerry Taylor wrote cogently about it yesterday. I think the world of Jerry, and am privileged to call him my friend, but when it comes to moral authority, the Pope has a higher perch.

The question has remained, however, whether the Pope will move people. On the Niskanen Center blog, David Bailey has argued persuasively that he will not. I disagree. I agree that the Pope inveighs quite heavily against what we have to believe is capitalism, and loses some of his moral authority in doing so. Note that at this point in history, with lingering public anger over the role of the finance industry over the Financial Crisis, wagging a finger at exuberant capitalists seems more credible than it has been in decades (see Republican Senator David Vitter's opposition to the deregulation of derivatives in the last spending bill). I do agree that with a few exceptions in Congress – John Boehner, who wept during his address, one of them – it does indeed seem as if the Pope will fail to move the needle, at least directly and immediately. Former Senator and Presidential candidate Rick Santorum remarked on the Papal Encyclical, "The Church has gotten it wrong a few times on science, and I think we're probably better off leaving science to the scientists…" We might elide the fact that Santorum has waded into climate science himself as a lawyer ("the idea that man, through the production of CO2 … is somehow responsible for climate change is, I think, just patently absurd."), lacking the training that Pope Francis had as a chemist, but the point is that politicians seem to believe they have their own moral authority.

But in the longer term, the Pope's calls will have a political effect. Politicians' beliefs are ultimately derived from, in addition to the beliefs of the Koch Brothers, the beliefs of their constituents. I believe that for the 1.2 billion Catholic voters in the world, the Pope's call for action on climate change will have substantial weight. Humans are evolved to take all kinds of action and belief cues from prestigious, high-ranking people within their most important social groups, and the Catholic Church remains an extremely important source of identification for many of the 1.2 billion. Climate change is an economic issue, a policy issue, but it also is a compelling moral issue. Harm imposed on others is both an externality and a moral wrong. Ultimately, the divergence between the Pope and the economists of the world rolling their eyes at his moral call may just be a matter of degree. No credible economist believes that the appropriate price of greenhouse gas emissions is zero. That is inefficient and immoral.

The Pope is not actually the first to invoke faith in support of action on climate change. The Evangelical Environmental Network has long advocated for action on climate change. That organization has recognized the need to pass on a clean environment to future generations. There is no reason for economic and moral compulsions to be rival motivators for action on climate change. On climate change, there really is no tension between economic efficiency and moral imperative.

Pope 1, Economics 1.

A Capital-Driven Oil Glut?

Russell Gold of the Wall Street Journal reports today that even as oil prices sulk at $40 per barrel, oil producers just keep on pumping, even at what analysts believe to be losses. He doesn't mention it, but it is even worse in the oil sands (notice I did not say "tar sands") of Alberta, where their discounted price (because of the difficulty of transporting crude to market from Northern Alberta, and the reason for their desire to build Keystone XL) is more like $24 per barrel. Ouch, that hurts, eh?

A common explanation for the persistence in production, even at losses, is competition for market share. Saudi Arabia has actually increased production. Russell Gold, taking the same line as oil pundits, explains that this is Saudi Arabia trying to avoid losing Asian customers to competitors.

But there is another explanation. Saudi Arabia has always had low production costs -- somewhere in the neighborhood of $8-$10 per barrel. See the graphic below, from Agora Financial and Total S.A. It is true that most producers are now operating at a budget loss, but not a production loss.  The difference between the budget breakeven and the production breakeven is the difference between the orange blocks and the blue blocks below. As one can see, most producers are still selling their oil for more than the variable costs to produce it. The capital, most of the difference between orange and blue, is sunk. If you are a producer, you stop producing when your marginal price drops below your variable costs, not your total costs. Your capital is sunk; what are you going to do about it anyway?


This is the problem with a capital-intensive oil industry: that production continues even at loss levels. A heavy loading of capital makes the industry sluggish to change, and less responsive to price fluctuations. I guess that's a consequence of the capital-intensive oil industry. But that ignores the role that law and policy have played in contributing to this overcapitalization.

We have seen this before, actually. Fisheries have in the past been plagued by overcapitalization. Chronically poor fishers have gone out to fish out a depressed and overfished species just because they have a boat, and no other plausible use for it. It does not cost too much to pay the variable costs of fishing (gas, crew), so why not? What else are you going to do with that boat? That, in sum, as most ably researched by Jim Wilen, is an important cause of overfishing worldwide.

In the United States and Canada, we feed this overcapitalization, just as we fed, through fisheries policy, the overcapitalization of the fishing industry. The overcapitalization of oil and gas goes beyond the approximately $4 billion per year bestowed upon the oil and gas industry by the American taxpayer for over 100 years. All oil and gas exploration and drilling subsidies have to do is change the decision environment enough to convert an unprofitable situation to a profitable one. How inefficiently overcapitalized the oil and gas industries are, we do not know. Oil and gas subsidies are so old, there is no baseline.

So, oil continues to flow. And that's in significant part thanks to the American taxpayer.

Koch Brothers, Socialists

The Koch Brothers and their putatively conservative friends, like Americans for Prosperity, have reached new heights of Orwellian messaging. Charles Koch has complained in the past that politics "tends to be a nasty, corrupting business," preferring instead to "advancing libertarian ideas." Above such nastiness himself, Charles opines that "[c]ompanies should earn profits by creating value for customers and acting with integrity, the opposite of today's rampant cronyism."

This must surely be the reason that the Koch Brothers are opposing a Florida ballot initiative to allow homeowners to finance rooftop solar panels with third parties that are not necessarily their local utility. The ballot initiative has the support of Georgia Tea Party activist Debbie Dooley, as well as the Republican Liberty Caucus of Florida and the Libertarian Party of Florida. Americans for Prosperity Florida opposes the ballot initiative "because they are not free market." 

Really?? This is not free market, to facilitate new entry into the electricity supply business? To allow outsiders other than utilities to provide an alternative to regulated monopoly electricity service mode? It sounds like flat-out socialism, to me, protecting incumbent industries regardless of their economic merit. Sounds like the cronyism that Charles says he finds so offensive, protecting incumbent industries because they share an ideology. There really are few industries in the modern world that have been as allergic to innovation and efficiency as the electricity generation industry. In 1920, a kilowatt-hour delivered to the grid by a coal-fired power plant was about twenty percent of the energy contained in the raw coal. By 1999, that figure was thirty-three percent. That stands in pretty stark contrast to Moore's Law, that semiconductor processing speeds double every two years or so. Rooftop solar threatens to upend this dinosaur of an industry. Actually, with the restrictions on entry, as the Kochs would have it, it is more of a guild than an industry.

Florida does provide for net metering, the requirement that utilities buy back, under reasonable terms, excess electricity generated by residential owners of solar rooftop. The rub is that most homeowners cannot afford to buy and install solar rooftop panels without some financing. Under the Floridians for Solar Choice ballot initiative, homeowners can receive financing from some outside funder. The utility itself is not, under Florida law, permitted to finance solar rooftop panels to its customers. It is only allowed to sell electricity to its customers, not help them generate their own. The Arizona Public Service Company, the state's largest utility, received funding from the Koch Brothers to fight net metering in Arizona, attempting to keep rooftop solar out of the state. The Arizona Public Utilities Commission ruled that utilities had to allow net metering for rooftop solar owners, provided they paid a $5 monthly fee for access to the grid. 

That is the crux of the problem, and why the Koch Brothers are acting like such socialists, protecting their anachronistic utility friends under the guise of "freedom." Solar rooftop is disruptive, and it does in fact threaten the traditional hub-and-spokes, regulated utility model for electricity generation. Rooftop solar, cheap as it has become, threatens to make obsolete the large, expensive baseload power plants, many of them coal-fired and looking at a bleak future anyway.

The socialist dinosaurs in Florida have countered with their own ballot amendment, which contains this following language:

This amendment establishes a right under Florida’s constitution for consumers to own or lease solar equipment installed on their property to generate electricity for their own use. State and local governments shall retain the ability to protect consumer rights and public health and safety, and to ensure that consumers who do not choose to install solar are not required to subsidize the costs of backup power and electric grid access to those who do.

This sounds uncontroversial, attempting to conceal its real opposition to solar, and it skirts the tough issue -- what exactly would be a reasonable grid access fee for residential rooftop solar homeowners? Is the Arizona $5 fee too much? Too little for utilities to recoup their fixed costs of providing grid support?

This would be a good debate to have, one that is ongoing in Arizona, what residential rooftop homeowners should have to pay their utility to essentially have them back up their electricity generation. But is obscured by the sophomoric demagoguery that has, with the Koch's blessing, taken over the discussion in Florida. If you are sympathetic to the Koch Brothers, you would have to be disappointed that they do not seem interested in this discussion, but merely wish to entrench the incumbent utility industry, to protect their regulated profits at the expense of technological progress in electricity generation. This is not the first time that the Koch Brothers have allowed their high-minded principles to trump the discomfort of telling their friends they're wrong, they should do things the Koch way. Three years ago the Koch Brothers, funders of the libertarian think tank Cato Institute, tried to capitalize on the death of William Niskanen by claiming the right to buy his shares, trumping claims by Niskanen's widow, Kathryn Washburn. Their goal? To knock out the leader, Ed Crane, in favor of someone that the Koch Brothers wanted. What do you expect from a couple of good old-fashioned socialists but a coup at Cato?

Alberta Increases Its Carbon "Price"

I put the word price in the title in quotations because the province of Alberta has announced plans to tighten its emissions standards under its Specified Gas Emitters Regulation, the first-ever policy in Canada to impose some sort of a pricing mechanism on greenhouse gas emissions. You read that correctly: Alberta, home to the "tar sands" (I prefer the older term "oil sands"), not climate-taxing British Columbia, was the first to impose a price on carbon emissions. In fact, other than Boulder, Colorado's carbon-tax-like electricity surcharge, this was the first in North America. The catch is that the SGER is not a carbon tax unless one of the specified emitters exceeds a particular emissions "intensity," a measure of emissions per unit of production. The requirement was a twelve percent reduction from baseline levels. The bottom line was that emitters were only required to become more efficient with their greenhouse gas emissions, rather than actually reduce them. The price for being unable to sufficiently reduce emissions was $15 per ton of emissions over the required levels (12% below baseline), working out to a pretty low average cost of under $2 per ton. So this is not a carbon tax, but still, Alberta, which passed the legislation in 2003 and implemented the regulation in 2007, was first. Now, Alberta has announced that they will ratchet up both the price – from $15 per tonne (that's "ton" in Canadian) to $30 per tonne – and the reduction from baseline – from 12% to 20% -- by 2017. That is a welcome first step.

Earlier, in June, newly-elected Alberta Premier Rachel Notley announced that she would seek help on environmental policy from the national and Ontario offices of her New Democratic Party, a party that occupies a very liberal political left in Canada. I groaned, because I have historically found the NDP's climate policy positions a bit facile. The national NDP leader, Thomas Mulcair, has called for cap-and-trade because "polluters [should] pay for the pollution they create instead of leaving those costs to the next generation." There has always been a for-the-little-guy-against-the-big-guy populism in the NDP, and unfortunately climate policy has been similarly hostage to this party principle. The NDP, historically a very green party, even opposed British Columbia's carbon tax on the grounds that it hurt individuals. (Oy) I am heartened to see that the Premier has asked University of Alberta economist Andrew Leach to chair a climate advisory panel to help devise a new provincial climate policy.

Expect some change. The new Premier has said she's not a big fan of the current regulatory scheme, so this recent announcement is likely just a stopgap. She is also reported to be skeptical that a cap-and-trade plan is right for Alberta, so that leaves …. hmm, a carbon tax? Chair-designate Leach has written quite sensibly in the past that carbon pricing is not a "panacea," but depends on the stringency and the context. But at this point, it is hard to imagine any kind of scheme that is not a plain old carbon tax. Alberta will probably not try to one-up its neighbor, but seems likely to eventually accept a provincial carbon tax like British Columbia's. Trying to imagine some regulatory scheme to regulate Alberta's specified gas emitters just seems too anachronistic to me. What could you possibly tell Alberta's eight coal-fired power plants besides simply, "shut down"? What kind of a standard would be applied, above and beyond the already existing federal plan to phase them out? What about gas plants? What would their standard be, and why? I am hard-pressed to imagine a climate policy for Alberta other than a carbon tax.

Canada's Climate Will Change, and So Will the World's

Apologies to my readers whom have somehow managed to do without me for several months while I battled with teaching a new course.

Wow. Holy Bob and Doug Mackenzie. I would guess that the vast majority of Americans would not have had the slightest idea that the earth moved underneath the second-largest country in the world, and the United States's largest and most reliable trading partner. The most conservative of Canada's ten provinces, and the one that is most reliant on oil and gas production for economic growth, Alberta, tossed out a Progressive Conservative Party Premier (that's "Governor" in Canadian) and elected ... the leader of the New Democratic Party (NDP), Rachel Notley as its new Premier. Fox News calls the NDP "left of center." Huh? No, sorry -- the NDP is left of George McGovern. The center (such as it were in Canada) has historically been occupied by the "Liberal" party. This election is the equivalent of Wyoming electing Elizabeth Warren as its Governor.

Why is this so significant for Canada? Canada's palpably creepy Prime Minister Stephen Harper hails from Alberta (although originally from Ontario), has led the Progressive Conservative Party that housed every single Alberta premier since the Party's founding in the 1990s, and has devoted enormous federal resources and political capital to helping the oil sands industry in Alberta.
The spurned incumbent, Jim Prentice, was very closely allied with the Prime Minister, and in fact was the Environment Minister when Canada announced its sensibly Canadian plan to phase out coal-fired power plants over the ensuing forty-five years. The oil sands are not going away, but they will have to deal with a very different government. To think about the NDP, just imagine Elizabeth Warren, only not as reasonable. Stephen Harper must be sitting in his Centre Block office wondering, "what am I going to spend my time doing now?"

Why is the world going to change just because of a provincial election for a province of 4.1 million people? It's what Alberta represents to Canada, and what Canada represents to the world. Alberta has always been the most conservative of the provinces, the most energy-focused, and the most socially conservative. That Alberta voters have turned against its economic engine in favor of a liberal populism and more concern for the environment is extremely important. Imagine what American politics would look like if all of a sudden Texas elected an environmentally conscious and liberal Democrat like, oh, how about Elizabeth Warren? And what would that do to a President Ted Cruz (who was born in Alberta, by the way)?

So who cares about Canada? Why does a shift in Canada mean anything significant on the world stage? Well, first, Canada is the sixth-largest oil producer in the world, accounting for about 4% of world crude. But Canada and Norway are the two oil giants that viewed as socially and globally responsible. If Canada become discernibly more concerned about climate change, that would remove one of the major stumbling blocks to an international climate treaty. Even with the ascendance of Prime Minister Voldemort, Canada punches well above its weight in terms of serving as a moral conscience. Its New York City diplomats, like those from Scandinavian countries, avoid illegal parking. If Canada, a country heavily dependent upon oil production and export for its economic health, can turn the corner, then it will be harder for other countries, like the United States, to plead helplessness.

My 5-year-old Son's Rosa Parks Question

In advance of Martin Luther King's birthday, my wife and I have been checking books out of the public library on Dr. King's life, and the civil rights movement in general. Our local elementary school has certainly dedicated a significant part of its teaching year to the civil rights struggle.

My wife is Caucasian, so our children are half-Asian, but we have always taught our children, Katharine and Allen, that they are persons of color, even though they are only half. Their half-Asian status came up last night because my wife was reading to our 5-year-old son Allen about Rosa Parks. He learned the rule in those days that black people were supposed to sit in the back of the bus, and white people sat in the front. Aware of his half-Asian status, Al thus asked, "does that mean that Katharine and I would have had to sit in the middle of the bus?"

Thomas Piketty and Mancur Olson

Thomas Piketty's Capital in the Twenty-first Century has garnered a lot of attention this past year, as I've noted. One of the many striking things about Piketty's account is the idea that wealth inequality is a process, and a one-way ratchet at that: wealth inevitably concentrates in the hands of a few, gradually and over time. By "gradually," he means a long time: we are headed back to the vast differences in wealth in place at the beginning of the twentieth century, but that process has been slowed by two world wars and the Great Depression, which knocked everybody back, so that the world became more equal. Wealth inequality has not yet, by Piketty's account, recovered from those economic catastrophes.

A slightly different version of Piketty's story has been told before. In The Rise and Decline of Nations, the late economist Mancur Olson described a one-way ratchet of increasing unemployment, stagflation, and the ultimate economic decline of nations. Over time, Olson argues, a country with a stable political environment allows special interest groups to develop. Special interest groups exist only to engage in rent-seeking – the achievement of favorable government policy that secures above-normal rents for members of the special interest group. Why else would members of special interest group pay dues, unless they expect the group to obtain benefits they could not obtain themselves as individuals? Drawing upon Olson's earlier magnum opus, The Logic of Collective Action, how else can one even explain the existence of special interest groups, given the potential for within-group free-riding?

The provocative result of Olson's work is that this decline is almost inevitable. Over time, special interest groups form, they secure enough above-normal wealth, and what is left over is below-normal wealth for everybody else. Once special interest groups gain a foothold, their influence over policy grows, and their gains at the expense of society accumulate. Exceptions to inexorable decline exist, but are uncommon. A large and sudden shock from a trade liberalization might scramble the economic order faster than special interest groups can form or mobilize. Or, disruptive technologies might lead to a creative destruction. But absent such serendipitous shocks, the die is cast. 

While Olson is primarily concerned with allocative inefficiency and Piketty with distributive effects, it is striking to notice the parallels of their theses. Both see a one-way ratchet, not a cycle. Both see their stories as mostly inevitable, checked only by random, infrequent, exogenous shocks. But why, save for the few exceptions, should spirals be inevitable? Why can't developed countries stave off the tyranny of special interest groups and periodically re-invent their economic identities? In Piketty-world, why can't the ninety-nine percent rise up in electoral anger and smite down the one percent?

There is one answer for both Olson's and Piketty's puzzles. In both cases, a narrow segment of society – Piketty's one percent and Olson's special interest groups (though there is clearly overlap) – garner above-normal rents, use them to invest in capital, and then use legal rules and institutions to protect that capital. This has the effect of both widening wealth inequality and blocking reform. For Piketty, the missing piece was the use of law to secure outsized rents for the one percent, while for Olson, the missing piece was the use of law to protect capital, developing an elaborate legal super-structure around it to protect it from changes in its legal or economic environment. The legal system is used in Piketty's world to obtain capital and in Olson's world, to protect capital from regulatory interference and reform. Governments at all levels have demonstrated an inclination to use "carrots" instead of "sticks" to achieve policy goals, and the carrots frequently take the form of some capital promotion or protection. Scattered throughout the Internal Revenue Code are carrot-like provisions that lower the cost of private capital or increase the returns to private capital. This two-staged exploitation of the legal system has the dual effects of exacerbating wealth inequalities and grinding legal and economic reform to a halt.