image_30474053.jpgBefore I get into the main subject of this posting, I just wanted to recap the French debate. The New York Times put it best, it was the kind of “vivid confrontation that has disappeared from the American scene, where the candidates avoid each other as much as possible.” The post-debate polls ended up split, and even the political analysts couldn’t make heads or tales on who actually “won” the debate. Both actually played off their opponents’ strengths, so for that matter, they each had pros as to who might have won. From a neutral standpoint, I’m also of the mind that it was a draw, however it is obviously the votes that count. On a personal level, it was nice to see Ms. Royal finally shed some of her charm and fight with some intensity against the usually hard-headed Sarkozy. She might not have had all of her facts right (those who aren’t privy usually find it more difficult to be right), but at least she shows that she could possibly have the cojones to run the country.

On a different subject, there was an interesting column by Jonathan Guthrie in the Financial Times today about carbon footprints. After reading it, I came away with a sharp check on my thoughts about Pigovian taxes. For those who don’t know, Pigovian taxes is an economic term that describes taxes that are levied as a way of reducing economic externalities (the effect a person/company has on another person/company, either directly or indirectly). In some instances, these taxes are called sin (or more formally, sumptuary) taxes.

Here’s the thing with Pigovian taxes. Taxes are a financial charge that are raised by the state. In the case of Pigovian taxes, the money raised would be used to offset the negative externality (in this case, carbon emissions). But what happens if we take a cynical look at Pigovian taxes?

Let’s pretend that Company X was emitting 200 tons of carbon a year. Let’s say there was no tax. That means that the company is taking normal income at face cost. The government derives no tax benefits of Company X’s pollution and no finances to actually offset the problem and the Company has no incentive to stop polluting.

Now, let’s say that there was a tax of $2m per ton of carbon. The company takes in normal income at face cost. Thus, the government now derives $400m in tax benefits off Company X’s pollution and has some finances to offset the problem, while the Company has some incentive to stop polluting: If it cuts its emissions by 50 tons, it only pays $300m in taxes.

This method of cutting carbon emissions seems like a great way to save the environment. And in fact, its one of the most feasible (and common) options that government can step in to reduce externalities. However, there are two reasons to be cynical here. The first is that we must assume that the taxes levied on the externalities are actually being put to use for carbon emissions. Here in America, we can’t even actually be sure that taxes aren’t being pooled together to fund the Iraq War instead of subsidising businesses that are researching environmental issues.

President Bush actually recently met with Angela Merkel and Jose Manuel Barroso and shrugged off the suggestion that the US get involved with the Kyoto treaty as to entice China and India to reduce their carbon emissions. His stance was to invest in new technologies and pass them off. This is a great suggestion, but it only works when the government’s budget and financing actually plows the Pigovian tax proceeds back into research.

The second problem I’m finding with Pigovian taxes is, as Mr Guthrie writes, the means by which they become nothing more than the indulgences the Catholic Church used to sell in the Middle Ages. Sure, this is why Pigovian taxes are often called ‘sin taxes,’ but now that the wealth in the world is massively disproportionate and the reach of the problems are truly global, the actual viability of these indulgences is actually unrealistic to me. And I’ll tell you why.

I have a friend who is very much the type of person who subscribes to this “pay to make it go away” mentality.  If Mayor Mike Bloomberg’s Congestion Tax ever makes its way to New York, I could see her being the type to pay $8 to bring her car into lower Manhattan.  There are companies that have the same approach: if they can afford to pay the $400m and it means they don’t have to spend any money on researching how to reduce carbon emissions, why not pay the $400m and call it a day?  Throwing money at problems solves them, doesn’t it?

Well that comes back to the previous premise.  In economics, there is an assumption that firms are profit-maximizers and that they will act rationally in order to achieve this goal.  The fact of the matter is, this is farther from the case.  Firms are actually more inclined to behave as people, with the same behavioural patterns (and one might even suggest, psychoses) that individual persons have.  Governments are the same way.  So while the Pigovian tax proposed by Mr Bloomberg might fund the planting of 1 million trees in New York City, Mr Bush may never put the money to R&D of these technologies (this coming from the man whose 2003 State of the Union suggested that hydrogen cars we’re not that far off but lost all ground to the Japanese in carmaking).

Throwing money at problems doesn’t solve anything unless you use money for problems.  Just as paying to rid oneself of sin is a ridiculous idea, so is paying to use tons of carbon just because the money is available.   So it is with low gas mileage SUVs where people say “If I can afford to pay for the gas, why shouldn’t I get one,” it is with carbon emissions.  “Affording it” doesn’t solve problems, reducing it does.