6: Taxes and Subsidies Flashcards
Preference vs incentive
Inside of us is a set of preferences for everything
When incentives are provided, preferences have not changed but the package has. Might lead to a different choice being made
How do economists identify preferences? Where do they think they come from?
Through observation – what choices someone actually makes
They do not know where they come from, just assume everyone has them
What is tax/subsidy shifting?
There is an existing ‘status quo’ of taxes, subsidies and markets. A shift makes changes to that.
What is environmental tax shifting?
Any approach which increases taxes on actions that are environmentally harmful
What is environmental subsidy shifting
Increases subsidies on actions that are environmentally beneficial OR decreases subsidies on actions that are environmentally harmful
Two ways the value of the tax or subsidy is decided
- Full cost accounting
- Goal oriented approach
What is full cost accounting
Identifying the exact cost of negative and positive externalities and correct for them then using taxes and subsidies to ‘internalize’ those externalities
Returns decision making to market forces. Individuals can make free choices about production and consumption but WITH the externalities included.
Example of full cost accounting
Social cost of carbon
Tax on carbon includes public health impact, species extinction, property, ag productivity loss, etc
Weaknesses of full cost accounting
getting prices right means you need to determine the value of ‘everything’ (many things are difficult to quantify e.g. cost of climate change on future generations)
What is the goal oriented approach?
Desired outcomes are determined by policy makers (informed by environmental scientists, economists)
Taxes or subsidies are enacted to whatever level is required to achieve the desired outcome
Does not try to ‘get the price right’
Goal oriented approach example
BC’s carbon tax
- wanted to reduce its GHG emissions by 33% by 2020 (value arrived at thru consultation with scientists, industries, etc)
- economists calculated that to achieve 33%, it would take a carbon tax of about $140 per tonne
- ^^ not economically feasible, so $30/tonne tax was established
Example of people responding to prices and price changes
Canadian metered vs non-metered water use (people who pay for water use in form of water bill and those who don’t)
People who pay more or less depending on water use tend to use less
What is ‘at the margins’? e.g.
Economists don’t presume that everyone responds exactly the same to price changes. Instead they consider situations ‘at the margins’ (near decision thresholds)
e.g. renting an apartment closer to work is more expensive, so might not take it. Price of fuels go up, financial incentives have shifted
e.g. 2 turning down thermostat and putting on a sweater to save money on heating (smaller threshold)
Price elasticity of a good? How does this determine the efficacy of a tax
Elastic = when the sale of goods or services are very affected by price
Inelastic = when the sale of goods or services are not very affected by price
Elasticity of a good/service determines how effective a tax can be in changing behaviour
Why might elasticity change over a longer period of time? E.g.
People need longer to make big changes/change behaviours
e.g. per capita consumption of petroleum decreased by higher % each year following BC’s carbon tax
What is Canada’s carbon tax? What is it going up to?
$40 per tonne of CO2 ($0.09/L of gasoline) going up to $170 per tonne by 2030
How is Canada’s carbon tax revenue neutral? What does this mean
Average cost to a family of 4 is $950, and each family gets a rebated of $980
Revenue neutral to the government (gov does not make money by having carbon tax in place)
If the carbon tax is revenue neutral, won’t we produce the same amount of CO2
The rebate is not tied to consumption/emissions of carbon
If you reduce your carbon impacts and spend less on carbon, you still get the rebate
If you stop consuming all carbon and pay no carbon tax, you would end up with an extra $1000 per year.
slide 44
What is Canada’s Vehicle Efficiency Incentive
Subsidy for highly fuel efficient vehicles
Neutral treatment for average fuel efficiency
A tax on fuel inefficient vehicles
What is different about the carbon tax and auto tax/subsidy for fuel consumption reduction?
Auto tax/subsidy focused on auto industry
Carbon tax affects everybody and industry, auto tax targets certain individuals
Auto tax is a one time cost, carbon tax affects every decision
What are payments for ecosystem services?
- owners of environmental assets (forests, wetlands, etc) often only get benefits from their asset if they exploit it
- most benefits of these assets (CO2 sequestration, providing habitats) are felt at a societal level (positive externalities)
- by paying owners of environmental assets not to exploit them (deforest, farm) society gets the benefits those areas provide
What are conservation easements?
Cases where those who want to protect natural or agricultural land from being developed purchase the right to develop the land from a land owner
Land owner retains ownership of the land, but no longer has the right to develop it
Slides 53-56
Catskills watershed
what is the goal of the catskill watershed program
Influence the behaviour of those who live in the Catskill watershed so that NYC has access to high quality water.
In essence paying them (directly and indirectly) to protect the natural functions and quality of the water
Multiple subsidy based policies to achieve goals
What kind of subsidies/incentives does the Catskills program provide
- subsidize cost of public sewage and private septic system improvements
- pay farmers not to farm all or part of their land
- subsized school educational campaigns on environmental management
- subsidize private forestry plans to allow selective logging
- subsidize the economic development of the area including new business subsidies
Example of who should pay for environmental degradation
User (consumer)/polluter (environmental tax) e.g. carbon tax
vs
The beneficiary (environmental subsidy) e.g. catskills
Why did NYC choose to go the subsidy route to protect the catskills
Politics: they did not have the right to impose regulations upon the catskills
What are perverse subsidies
- subsidies that promote environmental degradation
- ‘created negative externalities’
- environmental tax shifting aims to remove perverse subsidies
Examples of perverse subsidies
- tax breaks to oilsands companies
- ‘discounted’ water for industry and/or households
- agricultural subsidies
- energy subsidies
- east coast cod fisheries
What are deposit and bond schemes
Used where there is risk of environmental harm; involves the application of a deposit or bond at the start of an activity
If proper actions are taken to avoid environmental harm then deposit or bond is returned
Examples of deposit and bond schemes
- bottle deposits
- mine reclamation bonds
