'Tiny Tax': The Best Worst Climate Fix You’ll Read About All Day

Photographer: Charles Bowman

A power plant in Madrid, Spain. Close

A power plant in Madrid, Spain.

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Photographer: Charles Bowman

A power plant in Madrid, Spain.

Bill Gates assumes we’ll have one. Thomas Friedman made his case for one on Sunday. And the Sunday before that. Four Democratic legislators want to know what you think theirs should look like

What they're all talking about is a tax on carbon pollution, and there are a zillion ways to design it: Cheap or expensive? For energy producers or consumers? Who gets all the money collected? 

These are the economic questions that policymakers, lobbyists and NGOs typically struggle with. So here's a modest proposal: 

Let's try a tiny tax.

Since 2010, Washington has required by law that clerks at stores selling food or alcohol ask customers at checkout if they want disposable bags, paper or plastic, for five cents each. The city’s Anacostia River had become choked with plastic debris, much of it from bags, and officials hoped a law imposing a nickel fee on every plastic bag would unclog the system. It's working.

The question for the behavioral economists who think up these little deterrents is, What if, as with the plastic-bag tax, policy could change behavior by increasing social pressure on consumers or companies, while turning down inflicted economic pain? I asked a few behavioral researchers to imagine how a five-cent carbon tax might work. 

First, the tax must be a separate item in the transaction, which ensures that the nickel doesn’t get lost in the overall price, according to Dan Ariely, the James B. Duke Professor of Behavioral Economics at Duke University's Fuqua School of Business, and the author of the bestselling books Predictably Irrational and The Upside of Irrationality

Second, a human interaction should be involved, "the social humiliation part," as Ariely put it. That helps people understand personally why the tax is there. He said that maybe a nickel levy should be collected at the gas pump, where “an attendant ask[s] people as they drive in if they want to drive to the part of the gas station for 'good people' or to the pumps for the people who don't care about the future and their kids."

If the tax were placed on industrial emissions, instead of individuals, companies might initially embrace the nickel-a-ton penalty, given that Democratic foursome just proposed more conventional $15, $25 and $35 scenarios [pdf]. The U.S. Treasury wouldn't like it as much. A $25 carbon tax might raise $125 billion annually, according to the environmental economics think tank Resources for the Future. A tiny tax would shrink that to $250 million.

The real incentive to reduce emissions, however, wouldn’t be the money as much as whatever public, humiliating, brand-tarring ritual executives might have to go through when paying for or reporting their annual emissions. Think dunk tanks and chicken suits. They’ll be covering facilities with solar panels in no time.

Third, having any price in this case might be as important as having the right price. The simple addition of a monetary value to something that hasn’t had it before might also be a part of the tax strategy, Ariely said. After all, a nickel tax changed the way people thought about plastic bags in Washington. 

Tatiana Homonoff is a Princeton University doctoral student who recently conducted field research in Montgomery County, Maryland, which in 2011 passed a law similar to Washington’s. She wrote up her results in a working paper, “Can Small Incentives Have Large Effects?" that she said she plans to submit for publication in a peer-reviewed journal. 

Homonoff said she couldn’t speak to the overall effectiveness of a five-cent carbon policy. "Just because a 5 cent tax had a large impact on plastic bag use does not mean that a 5 cent tax will change all types of behaviors," she said in an email. Homonoff did specify that it’s likelier to work as a tax than as a bonus for avoiding emissions. Behavioral researchers call this "loss aversion." Consumers tend to notice pain more than pleasure. 

Fourth, and most critically, the tax would be more likely to succeed if it simultaneously, and perhaps magically, created alternatives to fossil fuel use. Plastic bags have a high demand elasticity, Homonoff points out. That’s economist speak for consumers having other options. Despite the emergence of electric cars and cheaper solar power, fossil fuels still have extremely low elasticity. 

The carbon tiny tax is, of course, a profoundly bad idea. It’s destined to anger consumers or businesses without giving them good alternatives. The only thing it would do is annoy everyone into awareness of their fossil fuel use and its consequences. 

Which is exactly the point. 

Analyses and commentary on The Grid are the views of the author and do not necessarily reflect the views of Bloomberg News.

Visit www.bloomberg.com/sustainability for the latest from Bloomberg News about energy, natural resources and global business. 

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