Thursday, July 26, 2007

Paying Out from an Externalities Tax

As your pseudo-candidate for the House of Representatives, I am more than happy to respond to the concerns of my constituents, particularly those living outside of the United States.

For example, Psychols has asked how I plan to get the money raised through a pigovian tax on fossil fuel consumption to the victims of fossil fuel consumption – those who will suffer the loss of life, health, and property as a result of American actions.

If I understand you correctly, the pigovian tax on emissions will increase the price of the energy and products we consume.

Yes, but it does not increase the cost of energy or the products we consume. Instead, it helps to ensure that those who consume the products pay those costs, rather than force those costs onto others.

How can those pigovian tax funds realistically be directed to everyone who was and will be impoverished by the emissions generated in the production and use of the energy and products?

I want to start by making the point that we are not going to create a perfect system. While we strive to eliminate unfairness, there comes a point at which one might be forded to say, “This is the limits of our ability to be fair. We can’t do any more.” A system that precisely matches compensation to harms done is beyond the realm of possibility. However, this is not an argument against going as far as we realistically can go to addressing some of these wrongs.

Income Effects and Market Failure

There is also no moral crime in addressing two different concerns at the same time, if it can be conveniently done. One of the examples of true free-market failure – a case where free markets themselves fail to provide for the social good – has to do with the income effect on consumption. One way that free markets fail is that the wealthy are able to bid resources away from poor people who would have put them to a more highly valued use, but who could not participate in the bidding due to a lack of funds.

In an earlier discussion I used the example of a rich person wishing to shampoo her dog bidding a bottle of water away from a woman who wanted to give it to her sick and dehydrated child.

I applied this to ethanol, where we have the case of rich people bidding corn that they will then use to fuel their vehicles away from poor people who would have used the corn for food. There has already been a measurable affect on corn prices due to ethanol production, and it is expected to get worse.

So, in light of these facts, I have no qualms for using the revenue from the pigovian tax not only to compensate the poor for harms done through fossil fuel production, but to correct for the income effects on welfare. I would use the money to fund an organization that will use it to purchase food for distribution to third-world nations, particularly those that will be hit the hardest by the effects of fossil fuel consumption.

I want to stress that this is not charity. This is compensation for harms done (or risk of harms done). Any protests against ‘foreign aid’ to third-world countries do not apply.

Energy Assistance

This section is a slight aside. Of course, an increase in energy prices is going to harm the poor people in this country, and steps should be taken to alleviate that suffering. Technically, this money should not come from proceeds of the pigovian tax – that money should go to the victims of consumption itself. Money to help the poor should come from a general tax on the wealthy – something that respects the fact that the wealthy can bid resources away from the poor, who have a more valuable use for it.

As your pseudo-legislator, I do not see much wisdom in making this support take the form of subsidies for the use of fossil fuels. The types of assistance that I would support include increasing available public transportation and lowering prices, particularly for the poor. They also include providing renewable energy options such as solar and wind power to augment traditional fuel sources in rural climates.

Efficient Mitigation

Another principle that I would apply to answering this question is to look for programs that will provide the greatest benefit to the greatest number of victims of fossil fuel consumption at the least cost. As I see it, one of the greatest concentrations of people who will need some sort of mitigation or compensation of harms done are those who live in the delta regions of major rivers and island nations threatened with sea-level rise.

As a part of my energy package, I would include funding for studies on how best to help people of these regions – whether this involves creating barriers against sea-level rise, relocating these people to higher land, rebuilding the towns themselves so that its people can literally live on a shallow ocean, making cash contributions for property destroyed, or providing for education benefits so that their children will have options that do not require living on the same plot of land.

Specifically, I would use the revenue to fund studies into how best to help the people who live in the deltas for the Nile River. I will leave it up to these experts to make specific policy recommendations and study carefully their suggestions.


I would argue for using the revenue from the pigovian tax to fund an international program that would fight malaria around the globe.

First, many of the people adversely affected by malaria are also those who would be adversely affected by global warming. Reducing the malaria problem may well be an important compensation to forcing people to live with other greenhouse-gas induced problems.

It is also the case that one of the externalities of fossil fuel consumption is to expose people to a risk of diseases that they had little or no risk of being exposed to before. Warmer temperatures will allow the mosquitoes that carry malaria to live in parts of the world that they are now currently incapable of living in. Mitigating against the effects of this and other tropical diseases would be an important form of compensation for the harms done by global warming.

One of the potential threats due to global warming are those who will suffer the added risk of diseases that they have not had to deal with before.


These illustrate some of the policies that I would support in terms of using the pigovian tax to compensate and mitigate the harm. They do not do a perfect job of getting the assistance to those who deserve it. However, the question to be asking is not, “Are these options perfect?” The question we need to be asking is, “Are these options better than the alternative. The alternative, in this case, is the injustice of robbing the poor of trillions of dollars worth of life, health, well-being, and property from the poor, and transforming it into a few tens of billions of dollars in profits for the rich. On this measure, I would suggests that these options would make an improvement

Improvement is a good thing.

1 comment:

ADHR said...


I'm curious as to why you would want to redistribute income in this way, through what look like aid schemes, rather than direct investment. Take the issue of food. Instead of funding some redistributive food bank, why not invest in local farms, in order to help them purchase new equipment, modernize production and distribution, and so on? That way, eventually, the investment will be paid off and the local industry will be left to grow on its own, at a level that (if the investment is done correctly) will be competitive against other (international) players?

There's obvious concerns about the administrative costs associated with large agencies, such as would be needed to distribute food to the global needy. But there's also, I think, a problem with the temporary "stop-gap" nature of such solutions. Teaching a man to fish seems to be a better solution than funding an agency that gives him fish daily.