The Liberal Democrats of the UK have taken their first concrete step towards doing it. Al Gore has wanted to do it for a while. What is it? Taxing carbon - taxing the black.

In a world where Exxon lies about climate change - it is an increasingly attractive possibility, since people don't really know how much they will pay under the new system, and they know they are paying a great deal under the old one.

Taxing Black

Economists have wanted to find ways of "taxing bads" for some time - sin taxes being one catagorey of trying to tax bads, because people know they are bad. However, the taxes on cigarettes and alcohol aren't directly related to how much they cost society, but on "what the market will bear", trying to find the optimum recapture point for states that don't want to raise general taxes of some kind.

"Taxing Bads" is the term created by Arthur Pigou in 1920 in his book The Economics of Welfare. Emissions controls are one way of taxing bads - the cost of removing the pollution being passed on to the consumer or absorbed out of profits. However, it is widely recognized that simply placing a fee on pollution does not seem to work is that it is hard to collect the information needed. There has been some work on trying to tax output of pollution and tax inputs - such as levying a tax on petroleum, on the presumption that when burned it will produce a certain amount of carbon dioxide, with the buyer able to get a refund if they can show that they used it in a less carbon intensive manner.

The ulitmate problem of course, is that carbon is a rock, and sooner or later we are going to realize that we should leave it in the ground. But that requires developing options, and right now we are involved in an intensive campaign to avoid doing this. Which means that global warming is going to accelerate for the forseeable future. As Al Gore quipped in his speech - "We need a national oil change, and you can tell by looking at the national dipstick" - George W. Bush in this case.

And with the he costs of global warming are becoming visible, and they are becoming visible faster than was previously thought, this means that significant global warming costs are going occur.

Carbon dioxide is a normal producted of burning coal, which is, after all, carbon, and burning fuels made from petroleum, which is hydrogen and carbon, and from natural gas, which is hydrogen and carbon as a gas rather than as a liquid. Carbon dioxide is a very stable gas of its own accord, but it is absorbed by plants in their ordinary course of photo-synthesis, and dissolved by liquid water. In these forms carbon dioxide is broken up, and the carbon is often made part of living organisms. This cycle "sinks" carbon that is in the atmosphere. Under normal conditions there is a long term balancing of carbon dioxide - if carbon dioxide is released into the atmosphere, the global temperature rises slightly, which over time increases plant activity, which absorbs more carbon, and restoring a running equilibrium. In the short term there are large spikes and valleys of temperature, as other factors - such as volcanic activity and the cycles of the sun - outweigh the effect of the ebb and flow of the carbon cycle.

What makes this important is that it isn't the carbon cycle which does most of the work. Water vapor holds more of the energy in the atmosphere than does carbon dioxide. Water moves that heat energy - a tropical storm is a giant heat pump, so are winds that blow off of hot regions into cooler ones. It is water that people care about for their own activities - cities, agriculture and manufacturing all locate near sources of water, or have water pumped in from distant locations if need be.

This means that we worry about global warming largely through the lens of what it does to the hydrologic cycle, it is the hydrologic cycle's shifts that are the most visible. For example disappearing arctic ice or the disappearance of a quarter of Peru's Andes glacier. Billions of people live where they live, because of the rain fall patterns and flooding patterns from ice melt. Changing these patterns will mean that hundreds of millions of people will want to move from where they are, to other places. Since this will be irrespective of national boundaries, it has the potential to be the most disruptive migratory period since the late 19th and early 20th century - when the introduction of better transport and the rise of the coal economy turned areas which had previously been marginal into major centers of production.

This is why taxing pollution, particularly pollution that causes global warming, is such an appealing idea: the distruption that major changes in where water falls, even if net neutral over the whole globe, would be huge. Since the world does not live under one government with completely free movement of people, such disruption will entail war, violence and genocide, as those without water try and take the lands of those with water, or those with water begin killing those without water who try and migrate. If you think that our current immigration scare in the US is a big deal, imagine what it would be like if agriculture collapsed in Mexico for want of water and was ablaze with wild fires.

However, until recently, the idea of taxing in the black was thwarted by the realizations by most consumers, that pollution taxes are consumption taxes. If you think about it, the present regime of taxing capital gains at a very low rate has the same net effect as carbon taxation - GDP generated by flipping bits on NASDAQ computers, which generates very little carbon per dollar of GDP, is taxed at a low rate. Wages - which tend to become consumption - are taxed at a high rate. The "financialization" of the American economy has helped reduce the energy density of GDP as much as technology has. If you want to see what a world with only consumption carbon taxes looks like, well, you are living in it more or less. There would be some changes on the margins - somewhat fewer poor people driving gas guzzlers, fewer people flying jet airplanes - but no real change in the direction of the economy - make the poor people pay.

This is why the step that both Gore and the LDP want to take is constructive - it replaces one set of regressive consumption taxes with another. At least, they can argue, you are no worse off, and you can make yourself better off by not polluting as much. However, this, alone, is not going to make the difference, for the simple reason that it does not change the incentives among elites to bet on continued carbon emissions.

The root theoretical reason for this is that input taxes on rent, or consumption taxes on rent, are not efficient. They may change marginal behavior, but for every person who stops using the rented good, it lowers the price, and encourages someone else to use a bit more. While the taxing entity gets income, at the cost of some production, the best that can really happen is neutrality. Most of the "gains" from not using the rented good will come from reductions in production, not from improvements in efficiency. We've seen this with the "back door" carbon tax of higher payroll taxes, lower capital gains taxes and a strong dollar. Most of the productivity wins of the 1990s came from increases in equity trading efficiency and lower wages from the Wal-Mart/Southwest effect. When you look at the actual improvements to productivity from increased efficiency, they are dwarfed by the bull market, and the pink collaring of Wal*merica.

This is why more sophisticated tax systems are needed to tax bads. One example is London's congestion tax. Congestion is pure bad - no one likes being stuck in congestion. While radio talk show hosts who scream right wing propoganda like congestion, since it creates a larger audience of rage fueled bored people - the only other people who like it are people who build highways, since congestion is a good argument for creating more lanes to be congested.

Congestion generates more pollution for less happiness than simply driving a car. Employers who want people to be at work at the same time, simply because it eases management problems, should also be charged for the privilege. Stop taxing per employee, and start taxing based on the waste profile. In otherwords target the areas where a great deal of carbon dioxide is generated for a very small amount of utility.

This means that the complementary idea to replacing payroll taxes with pollution taxes, or more generally taxes on bads, such as fat taxes and so on, is to replace much of the corporate tax structure - or rather, when we start taxing corporations again to pay off the huge debts that the Reagan-Bush-squared era racked up - we tax the costs being loaded on to society by the activity. Only by persuading investors to invest green will one get more technology that is green. Taxing the black, if only applied to consumption will create a perverse incentive to invest in technology that extends the life of current capital, rather than in replacing current capital with new systems entirely.

Let me explain that, because it is simple once you look at it. Imagine that some activity generated 10 dollars a year of black tax. Imagine for 2 dollars you can create a gizmo that will reduce that to 5 dollars of black tax. You sell it for 3 dollars, and the result is that people buy the gizmo, pay 3 dollars, and have their taxes reduced by 5 dollars. You are one dollar a head per person, each person is 2 dollars a head. The government is 5 dollars minus the black taxes on the gizmo behind. However, better would be to find a new activity that replaces the 10 dollars entirely, particularly because that 10 dollars includes some amount of "exempt" carbon production. Doing this would probably require replacing whatever capital people are using, and that will be more than a 2 dollar gizmo. Let us say it is 100 dollars to replace the original capital. This means that it will be 10 years before the consumer even breaks even against the current 10 dollar tax. Taking into account the time value of money the three options open are:

1. Do nothing, pay the tax.
2. Buy gizmo, pay less tax, and use the gizmo.
3. Replace capital, pay no tax.

Of these the second is easily the win, you get an immediate cost savings, even if you have to buy the gizmo every year because it wears out. Where as investing the 100 dollars doesn't break even until 12 years out with interest costs - you could have been investing that 100 dollars in making carbon tax reduction gizmos and making more money.

In short, only by building in pollution taxes into capital gains taxation, will there be a net change in investor psychology. The tobacco and asbestos law suits did exactly this - the fear of judgements cratered the value of these stocks. Given that petroleum companies lied, repeatedly, about global warming to consumers, it is only a matter of time before some bright team of lawyers realizes that there is a multi-trillion dollar lawsuit out there.

And even if they take only 10%, mere peanuts compared to the customary fees, on trillions of dollars, that is, as Prof Solow of MIT is wont to say, an awful lot of peanuts. For example, even if only 10% of the destruction of Katrina can be attributed to higher Sea Surface Temperatures brought about by global warming, that is a huge amount of money that people can sue for, particularly since much of the loses of individual people is not covered by insurance. Such events are only going to go up, and governments of drought stricken areas will have every reason to use courts to sue first world companies to collect something, anything, on their losses.

Since global warming is demonstrable, and at some point the linkage between global warming and its economic effects will be calculable, and nations and companies that have profitted from global warming have lied about it, you have all the elements you need for a law suit - harm, damages and intentional acts.

In The Long Run, not quite all of us are dead

The logical thing to do is for the government to get there first - there is going to be long term dislocation because of global warming. The effects are going to be catastrophic, even if only partially attributable to global warming. The costs of avoidance and amelioration - and we are going to have to admit that since we are not going to avoid further global warming under even the most aggressive scenarios - are going to be staggering. Either governments can get actuarial on the problem, and start building the costs into the structure now, or they can wait for catastrophe and hope that it costs less to fix the effects. The record of long building problems is not encouraging, in fact, the history of Europe is one of periodic violent convulsions that kill millions of people when there is a dislocating economic or environmental disaster.

The first clear example we have of this was the Minoan civilization, which grew up in the islands of the aegean, in no small part fed by the rich volcanic soil that allowed them to grow cash crops such as olives and trade with others. A series of volcanic eruptions laid waste to their key cities, and the climatic changes of that period, which may or many not have been directly related to the vulcanism, brought down hellenic invaders that proceded to burn their cities and end their period of dominance. The new invaders adopted the architecture, writing system, trading patterns and territory of the Minoans.

In short, by not investing when environmental factors were good, the Minoans were destroyed with very same long term factors that they had used to reach dominance turned against them, namely, good volcanic soil, a central trading location, and easy access to raw materials to make bronze. The invaders used that same bronze to make spear points.

One can look forward to the collapse of Rome in the same way, when large scale changes caused waves of tribes to pour down on to the Roman Empire in the West. As Victor Hanson summarizes the emerging scholarship:

To Heather, we have missed the significance of two unprecedented events. The invasions of 376 and 405–406 are not to be attributed to periodic incursions by tribal Tervingi and Greuthungi, Vandals, Alans, and Suevi. Those inroads were merely epiphenomena of a much larger and far more serious thirty-five-year-long mass migration caused by the advance of the Huns westward and southward, a gigantic demographic shift that drove other barbarians scurrying ahead into Roman territory—putting enormous pressures on tenuous Roman defenses along the Rhine and Danube.

These initial incursions led to subsequent decades of unrest where frontier territory was insidiously lost, taxes disrupted, populations scattered, and, perhaps worse from the Roman perspective, accommodation and appeasement—rather than genuine efforts of assimilation—became the standard mechanism for provincial elites to deal with Hunnic inroads. So after this initial haymaker, Rome never quite recovered and was laid low by the final Visigothic knock-out punch in the late fifth century.

The inability of Rome to integrate the barbarians knocking at the gates, in sharp contrast to their previous policy of absorbing cultural influences and peoples, is though to have played a large part of this collapse. This, in turn, is rooted in the failure of the Romans to realize that the same climatic circumstances which made their empire possible, were producing favorable circumstances for asiatic invaders, the ancestors of today's European peoples, to multiply in number.

We can move forward from there, the argument, nakedly advanced by right wing economists, including a couple who have won the Nobel memorial prize, is that the future will be richer, so let them deal with it. This presumes that the have nots of the future are as willing to simply riot and die in place as the have nots of the present. History teaches us that when it becomes a matter of mass, rather than statistical, life or death, the have nots synchronize, and begin to try and take the wealth from the haves, even if they cannot run the means of production on which that wealth rests. The barbarian invaders of the Roman period didn't merely take wealth, they left the factories and the mines to decay. Coins became fewer in number and cruder, fewer people could read and write, population in cities plummetted, life spans decreased, mass produced home goods, such as pottery, reduced in amount and quality. The future isn't always richer than the present, particularly at the moment when the catastrophic manifests itself.

This is, in short, an example of "the Death Bet". The Death Bet is when an actor rationally bets that while there will be negative consequences for current actions, that since that actor will be dead by the time that the consequences occur, or more broadly the actor and any one the actor cares about will be dead by the time the consequences occur, there is no reason to take any precaution against the negative outcome. "It's the long run, and I am dead." Since the actors most likely to be injured by the long run are infants and those not even conceived - they are in no position to fight for their interests.

Investing in the Green and Taxing in the Black

Green investment is an essential part of surviving the changes that are coming in the world economic system. However, as long as it is possible to make billions by drilling $7/barrel crude and selling it for $60, there is almost no Green investment other than porn and gambling on computers that will compete. These being green because they use very little carbon for a great deal of trade. This means that balancing green investing with capital taxes on polluting is an essential step. The examples of Tobacco and Asbestos show that taxing black investing does have its benefits - both activities are substantially reduced, and less and less money is being invested in them.

Since the effects of the petroleum economy are visible, the drive to shift taxes from general income taxes, to taxing direct results of the petroleum economy will work, so long as it is packaged as what it is - unpalatable, but necessary. The other important frame change that must occur is to put before people the alternatives that actually exist, rather than those that don't. People were furious at the idea of 50 cent a gallon gasoline taxes. Back when gasoline was $1. Right now people could really go for some $1.50/gallon gasoline. The way to change this frame is by having pollution taxes directed that the problems that they are intended to solve. Social Security taxes are not challenged, in no small part because there is a direct connection between the tax, and the benefit. One way to do this would be to attach a gasoline tax to pay for the war in Iraq, which is, after all, a war over petroleum, even if you don't believe that it was a war for petroleum. Call it "the national defense tax", and attach it to every Iraq and Afghanistan appropriation.

It will take time to get these ideas in a form that the public is willing to accept. It will also take time for the problems to materialize that will argue for them. It is important to be in front of the problem, as Al Gore and Sir Menzies Campbell are, because when the series of problems arrives, people choose from available solutions that have already had time to marinate the public consciousness.