The cost of avoiding the carbon tax with standards

March 31, 2020 Energy

The French’s Convention Citoyenne pour le Climat reveals hostility to the carbon tax and a craze for technological standards. Carbon tax and technological standards are two levers of technical progress. Each has pros and cons that are worth recalling.

Conventional ideas and statements

Global warming is forcing us to be innovative. This is what the French government has done by launching an original experiment in direct democracy: the Convention Citoyenne pour le Climat. One hundred and fifty people were randomly picked to propose "measures to achieve at least a 40% reduction in greenhouse gas emissions by 2030 (compared to 1990) in a spirit of social justice." The work began in October 2019 with a three-day weekend every month and was interrupted by the covid-19 epidemic. The Convention was due to deliver its conclusions in April.

One of the interests of this Convention lies in its pedagogical virtue. As the public hearings are broadcasted, everyone can improve knowledge about climate issues and the related public policies.  The first exchanges with the experts set the tone: hostility to the carbon tax. On the fourth day, one of the Commission's citizens complained about a questionnaire that had been given to them on the subject.  She declared, with applause, that there was "too much talk about the carbon tax".[1]  There was a suspicion of manipulation by the public authorities.

Without prejudging the conclusions of the Convention, it appeared from the debates that technological solutions were gaining acceptance over fiscal measures. Members want to promote cleaner technologies with subsidies (which will have to be financed through tax) or to impose more stringent standards for energy efficiency and pollutant emissions. Some technologies should be banned, as is already  the case in cities that limit heating of the terraces of bars and restaurants. Members of the Convention are talking about banning domestic airlines and introducing a quota of new clothes per year.[2]  Although these technological solutions are attractive - everyone wants the best of technology - they come at a cost. They also have flaws that can be avoided with a carbon tax.


The carbon tax as a lever for technological progress

Everyone agrees we need better technologies to deal with global warming. But opinions differ on how to achieve this. Imposing more stringent technological standards seems straightforward. For example, CO2 emissions can be capped per kilometer for vehicles, per living area for housing, per volume for refrigerators.  This type of regulation sends a clear message to manufacturers: you must innovate to ensure that your products meet these new requirements. But it needs to be accompanied by means of controls, and penalties in the event of non-compliance. Setting standards also opens the door to intense lobbying by manufacturers.

The carbon tax uses a roundabout means to encourage this innovation: the price signal. Charging CO2 emissions increases fuel price, which encourages the purchase of more fuel-efficient vehicles. It increases the cost of oil and gas heating, making investment in insulation or the purchase of a heat pump more attractive. Rising energy prices encourage households to consume less energy and businesses to design products to support this transition. We experienced this back in the seventies during the oil crisis, which transformed the European car fleet towards greater sobriety. 


Standard vs. tax

The technology standard and the carbon tax are both policy instruments that drive technical progress. The episode of the yellow jackets highlighted the drawbacks of the carbon tax not accompanied by social measures. Standards also have their flaws, some of which can be avoided with the tax. Here are some of them.

Standards can be manipulated by pressure groups to favor their products or technologies. In 2015, Volkswagen managed to fool the inspectors about the polluting emission levels of its diesel vehicles. Like metal barriers preventing cars from parking, the absence of a standard on a given technology is interpreted as an authorization. Therefore, they have to be multiplied, which opens the door to negotiations on an industry-by-industry or even company-by-company basis. The industrial policy of supporting national champions and the threat of job losses then clashes with the environmental objective of reducing polluting emissions at lower cost. Similarly, the technological standard may be diverted from its original mission of environmental protection to erect barriers to international trade to the benefit of influential producers who, protected from competition, can impose their price.

The standard regulates the product but does not control its use. Forcing a low-driving driver to pay the extra cost of advanced energy-efficient technology is economically inefficient.  With a carbon tax, he would keep his old car but reduce his trips, and the high traveler would have an incentive to buy a more fuel-efficient car. For the former, the impact on CO2 emissions would be roughly the same as with a more expensive car since he drives less; for the latter, the extra cost of purchase would be offset by reduced consumption. Similarly, it is inefficient to force the purchase of a sophisticated air conditioner if it is only used for two weeks a year. If technical specifications are to be used, air conditioners would have to be specified differently depending on the region and duration of use, which is impossible to put into practice.

Moreover, a car that stays in the garage does not pollute, while a car that consumes little will be used more. This is what economists call the rebound effect (or Jevons paradox) of environmental policies. The reduction in pollution due to the new standard is less than that estimated for a given use because use increases. The rebound effect was highlighted in a study on the car bonus-malus for CO2 emissions in France. This measure did achieve its objective of directing purchases towards more energy-efficient cars, but at the cost of an increase in the number of kilometers travelled per year. The authors of the study estimate that overall the bonus-malus has increased emissions from the automobile sector by around 9%. In contrast, taxing the carbon contained in fuel impacts not only the purchase of cars but also their use by encouraging drivers to drive less even if their car consumes less fuel.

The technological standard, by applying to new products, increases the value of more polluting products on the second-hand market. It is the Gruenspecht effect, named after the economist who popularized it. Consumers who are unwilling or unable to pay the extra cost of more advanced technology have no choice but to keep their vehicle or turn to the used market. Cars that should be scrapped instead continue to run. The standard enhances the lifespan of fuel-inefficient vehicles. A study has identified the Gruenspecht effect for the CAFE (Corporate Average Fuel Economy), the energy efficiency standard of the United States. The authors start from the premise that the heaviest and most powerful vehicles are those that last longer. As a result of CAFE's strengthening, buyers of SUVs and pickups are postponing their purchases or buying second-hand. The authors estimate that this effect undermines the reduction in CO2 emissions by around 15%. The carbon tax avoids the Gruenspecht effect. Owners of SUVs and pickups are immediately impacted by the increase in fuel prices when they fill up their gas tank. They have an incentive to drive less and to replace their vehicle with a new, more fuel-efficient one.

The technology standard is no fairer than the carbon tax. Certainly, the carbon tax hits hardest on the poorest, who spend a large part of their income on energy for heating and transportation. However, as we mentioned in a previous blog, unlike the standard, the tax generates revenues that can be used to offset this loss by targeting the poorest. The standard, on the other hand, is far from painless. It increases the cost of cars, boilers, air conditioners. The poorest households will find it difficult to finance these expenses, especially if they do not have access to credit. Like the carbon tax, a technological standard can hurt the poor more than the rich.  Economic analysis shows that an energy efficiency standard can be more regressive than a carbon tax, i.e. increase inequalities. This result has been empirically validated for CAFE in the United States


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The mandate of the Convention Citoyenne pour le Climat is to recommend public policy instruments to reduce greenhouse gas emissions in line with social justice. Several instruments are available, combining direct interventions on quantities and behavioral guidance through price controls. Some are already in use; others are to be imagined. The carbon tax, with its qualities and shortcomings, is one such instrument. It will not do everything, but it must be part of the solution in the same way as technological standards. Not talking about taxing carbon emissions is a choice that the members of the Commission will have to make vis-à-vis future generations, who are also concerned about social justice.




[1] See the postcast at 2 hours 52 minutes.


[2] Source : Le Canard Enchainé January 15 2020.