A collage of images, featuring most prominently a person holding a sign reading "no justice no peace"

Author: Peter Dietsch

Climate / Distribution / Economics / Environment / General / Governance

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Quo vadis carbon tax?

Carbon taxes represent a key part of humanity’s current strategy to avoid global warming above 2 degrees Celsius. They work by making carbon-intensive activities more expensive, thus encouraging individuals to reduce these activities. Given the existential threat climate change poses to our societies, one would hope that such a key policy tool was both effective and enjoyed broad public support. Neither of these things are true today. Why is that and what needs to change?

The carbon tax is a so-called steering tax. Its goal is to change people’s behaviour, not to raise revenue for the government. The current version of the carbon tax in place in most countries does not change people’s behaviour as effectively as it could and should. To see why, consider two frequently ignored facts.

First, rich people emit considerably more than the average person. Studies on socioenvironmental inequality estimate that the top 10% of emitters are responsible for about 50% of individual carbon emissions. Think of private jets, which emit up to 4.5 tons of CO2 equivalent (tCO2e) per hour, that is three times as much as the average human on the planet can emit per year if we want to meet our climate targets. Second, someone who falls in this category will usually not even bat an eye at a carbon price of, say, 100 Euros per tCO2e, let alone change their consumption habits. For context, the price of carbon in the European Union Emissions Trading System has oscillated around 80 Euros per tCO2e over the last three years.

Progressive carbon taxes are more effective

In light of these facts, a carbon tax that ignores socioenvironmental inequality and charges everyone the same will leave the low-hanging fruit in terms of carbon emission reduction on the tree. Those who emit the most, often by spending on luxury items, will contribute hardly anything to emission reduction.

A progressive carbon tax would change that. The basic idea is to have different carbon tax brackets based on individual emissions: everyone would pay a low carbon price for reasonable carbon use; for instance, on your first 1.5 tCO2e of emissions, you would pay 50 Euros per tCO2e. Beyond that, the tax rate goes up. For people whose emissions are above a certain threshold, e.g. more than 35 tCO2e or more than three times the emissions of the average European citizen, the price per ton in the top bracket might reach prohibitive levels in the tens or hundreds of thousands of Euros per ton. The precise thresholds and tax rates are up for discussion, but the general idea is clear enough.

Some countries successfully use this approach in other policy areas. For example, in Finland and Switzerland, traffic fines are based on income. To make rich people reduce their speed, speeding tickets can rise to six- or seven-figure sums. To make them reduce their carbon footprint, a similar logic applies.

You might think a progressive carbon tax is difficult to implement. After all, do we know how much a person emits? Fortunately, fairly reliable proxies for the two main categories of greenhouse gas emissions, transport and housing, are already available. Data exists on who owns or uses what aircraft, cars or boats, and we also have good proxies for the carbon-intensity of building and heating homes.

Current, flat carbon tax: by elites, for elites

Many countries are currently experiencing political pushback against standard, flat carbon taxes. For example, Canada has just abolished consumer carbon taxes at the federal level and in most provinces. At first sight, the political frustration might seem surprising, given that many low-income Canadians in fact came out ahead under the former policy thanks to a generous rebate structure. In British Columbia, for instance, individuals with an annual income below $41,071 automatically received a rebate of $504 per year.

So why the popular discontent with the tax? Misinformation about rebates as well as a poorly justified general sentiment against any form of taxation certainly play a role. However, here is another explanation whose importance is underestimated. When communities have a common goal, it matters for members of the community to feel that everyone is pulling their weight to achieve that goal. Today’s carbon tax fails this test. The burden of adjustment in terms of reducing emissions falls squarely on low-income individuals, whereas the wealthy just shrug it off and pay the tax. Moreover, the fact that some portion of today’s income and wealth inequalities are perceived as unjust to begin with adds insult to injury.

Against this background, resentment against the current, flat carbon taxes in most countries is not only surprising, it is also legitimate. Even when taking rebates into account, the policy is rightly perceived as a policy by elites, for elites. A progressive carbon tax remedies this shortcoming.

This article is a modified version of a post in the Conversation Canada and informed by a paper published in Nature Sustainability in 2024.

Climate / Economics / Environment / General / Health

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Redefining limited liability

Different phases of economic development call for different institutional arrangements. When an institution outlives the economic circumstances for which it was designed, it can lead to unintended negative consequences. The limited liability of corporations, at least under certain conditions, represents an example for such an institution.

Limited liability is one of the key features that distinguishes a partnership from a business corporation. When a partnership goes bankrupt, it is not just the capital of the partnership that is liable but also the private wealth of each of the partners. When a corporation goes bankrupt, by contrast, the reach of the creditors is limited to the capital that shareholders have invested in the corporation. They are off the hook as far as their private wealth is concerned.

It is easy to see why this arrangement leads to a significant increase in the capital that corporations are able to raise compared to partnerships. Which investor would turn down a setup with significant potential upside in terms of capital gain but limited downside? The justification for limited liability from a social perspective is equally obvious. Separating individual property from corporate property in this way hugely enhances financing capacity and thus output across the economy.

Limited liability under climate change

Limited liability worked well under conditions where any growth was good growth. However, independently of whether that was ever true, it is certainly not true in the 21st century. Some economic growth generates negative externalities in the form of social and environmental costs. Corporations only pay for the private costs of their production, whereas the social and environmental costs are borne by society as a whole.

The classic example in this category are greenhouse gas emissions. Corporations in the fossil fuel sector only pay for the private costs of getting the stuff out of the ground. Beyond the insufficient forms of carbon pricing in place today, corporations do not pay for the human and environmental costs measured in human deaths, respiratory disease from pollution, extreme weather events such as heat domes or atmospheric rivers, food shortages due to droughts, and loss in biodiversity. The results are overproduction and overconsumption of carbon-intensive products at inefficiently low prices.

Investor liability as a complement to carbon pricing

The conventional wisdom in the discipline of economics tells us that the most efficient way to reduce fossil fuel production and use to efficient levels is a form of carbon pricing, for example by charging a carbon tax. It is true that carbon taxes could be effective if they were both high enough and progressive. However, they clearly fall short on both counts today.

The above considerations point to a complementary regulatory lever. Under conditions of climate change, the justification for limited liability breaks down. Letting shareholders off the hook is not a good idea when doing so amplifies irresponsible corporate behaviour in the form of overproduction. Instead, in order to convince corporations to meet the challenge of producing sustainably, we have an interest to ensure that both the corporations and their investors have some skin in the game.

Note that this does necessarily imply that investors would have to be liable with all of their wealth, but a limited liability rather than zero liability would encourage corporations to price in negative externalities right away rather than wait for adequate levels of carbon pricing. One might also envisage a progressive form of liability where wealthier investors have more skin in the game than their less well-off counterparts. Indeed, if they did not, their incentives to invest responsibly would be reduced.

Extending the corporate time horizon

Corporations, their managers, and their shareholders are often criticized for maximising profit in the short-term. The current forms of carbon pricing have not succeeded in changing that. Redefining limited liability in the way sketched above promises to have an immediate impact in this regard. After all, under this arrangement, and in contrast to carbon pricing, it is not primarily up to the government to ensure that negative externalities are priced in, but it is up to the corporation and its investors. If the corporation and its shareholders get the numbers wrong, they will have to pay for it.

Some people will no doubt object that liability of this sort would represent a form of red tape restricting private business activity. They have things the wrong way round. Limited liability for shareholders is an enormous privilege bestowed on the corporate sector and its investors. As shown above, this privilege is no longer warranted, at least not for sectors with significant negative externalities. Today, corporations in the fossil fuel sector are able to privatise gains while they socialise losses. This is untenable. Reforming liability arrangements for these kinds of corporations offers one promising path of reform.

Climate / Distribution / Economics / Environment / General

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The climate justice debate has a baseline problem

Humanity faces a number of daunting challenges in the 21st century. Climate change and socioeconomic injustice figure prominently on this list. When it comes to tackling these challenges, two possible strategies divide policy makers.

On the one hand, there are those who point out that addressing either of these problems on their own is a mammoth task, and that taking them on simultaneously is simply utopian. This view sometimes comes with a dose of optimism about technological solutions to climate change. On the other hand, an increasing number of voices argue that climate action can’t be separated from social justice. In particular, advocates of the latter position highlight the “triple inequality of climate change”: The global rich tend to pollute disproportionately and thus bear a heightened responsibility for climate change, the global poor are more vulnerable to its effects, and poor countries have fewer resources available for mitigation and adaptation. In political philosophy, we find a parallel divide between “isolationists” and “integrationists” respectively.

My point here will be to suggest that the case for integrationism is even stronger that even most of its ardent supporters acknowledge. To see why, consider the first of the inequalities mentioned in the previous paragraph. Studies suggest that, across countries, the top decile of polluters are responsible for about 50% of emissions, while the bottom 50% of polluters are only responsible for about 10% of emissions. Wealth strongly correlates with carbon-intensive activities – think everything from private jets and yachts, via mansion-size homes, to multiple trips by airplane per year or multiple cars in a single household.

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Distribution / Economics / General / Work

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Why the economic whole is more than the sum of its parts

Contemporary Western societies are often criticized for being excessively individualistic. One interpretation of this claim is that their citizens mainly care about their own well-being and not so much about that of others or about communal bonds. Another, complementary interpretation that I develop here argues that our ideas in economics and about justice overestimate the contributions individuals make to economic production. Recognising the extent to which our productivity and thus our standard of living depends on the cooperation of others has a humbling effect on what income we can legitimately think we are entitled to.

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Academia / Distribution / Economics / General / Work

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Attribution fallacy, incentives, and income inequality

It is difficult to read anything on the justification of high salaries these days without running into catch phrases such as “the hunt for talent”, “attracting the best people to this job”, or “retaining human capital.” The core idea underlying this kind of discourse is one that has got a lot of traction in political philosophy in recent decades, too: It is justified to pay certain individuals – be they neurosurgeons, lawyers, or CEOs – financial incentives, because the productive contribution they will make in response benefits us all.

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Climate / Duties / Economics / General / Governance / Public Philosophy

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Fiduciary duties of pension fund managers in the anthropocene

The latest report by the International Panel on Climate Change (IPCC) estimates that hundreds of billions of dollars will be required for climate mitigation and adaptation investments per year to avoid catastrophic global warming. Yet, some of our financial practices are not only slow to adapt to this requirement, but actually represent an obstacle in achieving the goal.

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Climate / Duties / General / Governance

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Allowing fossil-fuel advertising is harmful and irresponsible

John Kenneth Galbraith, in his classic The Affluent Society (1952) formulated a powerful argument he called the “dependence effect.” In a nutshell, the idea is that capitalist societies create wants in individuals in order to then satisfy them. Perhaps the central tool in this process is advertising. Galbraith suggested that the additional wants generated through advertising might not even lead to additional welfare. People’s level of preference satisfaction before being exposed to advertising can be just as high as after the exposure. Viewed from his angle, advertising is wasteful from a societal perspective, because the costs involved do not generate any tangible benefits. The reason firms engage in it is solely to secure more market share than their competitors. (more…)

Distribution / Economics / General / Governance / International

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Is the OECD/G20 international corporate tax reform fair?

On October 8th, the Organisation for Economic Co-operation and Development (OECD) announced that 136 countries have adopted its two-pillar proposal to reform the taxation of multinational enterprises (MNEs).

Pillar One applies to MNEs with sales in excess of $20bn and profits over 10%. It shifts the taxing rights of the next 25% of profits above the 10% threshold to market jurisdictions, that is, to the country where the goods and services of the MNE in question are sold. The measure is thought to apply only to about 100 MNEs, many of them in the highly profitable digital services sector. Pillar Two introduces a minimum tax of 15% for all MNEs with revenues of more than $750m. (more…)

Democracy / Distribution / Economics / General

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More equal compared to what? How central banks are fudging the issue on inequality

Since the financial crisis of 2007, central banks have become the central tool of macroeconomic management, being described as the “only game in town.” To avert financial meltdown and, subsequently, to stimulate the economy, they have launched unconventional monetary policies such as quantitative easing (QE). The latter injects huge amounts of liquidity into the economy through large-scale purchases of financial assets by central banks. Central banks have doubled down on QE in reaction to the Covid-crisis.

QE has unintended side-effects. By pushing up the prices of the financial assets purchased, it favours already well-to-do asset holders. Given these consequences, central banks found themselves in the spotlight and pressured to justify their policies.

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Climate / Democracy / Distribution / General

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The case for an independent environmental agency

In recent decades, Western democracies have seen a trend towards the use of independent agencies (IAs) to insulate certain policy issues from direct political influence. Of course, such delegations can be revoked, but they do put the decisions in question at arm’s length from elected representatives for the time being.

Given the emphasis on the accountability of elected representatives in a democracy, how can one justify such instances of delegation? Advocates of IAs claim that they will do a better job at attaining the policy objectives in question. In particular, this will be the case in policy areas where governments face commitments problems that will prevent them from adopting optimal policies. (more…)