Ben: Okay, you ready?

Both: Rock, paper, scissors.

Ben: Ow ow you broke my scissors.

Liz: Hey, I'm Liz Landau.

Ben: And I'm Ben Klemens.

Liz: And this is

Both: Pod, Paper, Scissors.

[Theme song: You've gotta make decisions.]

Liz: Hey Ben, remember what we were talking about right before we got started on the tragedy of the commons.

Ben: Oh, right. That was about how regression analysis was first developed by a eugenecist—

Liz: No, we're not talking anymore about regressions. Today, we were actually talking about Pigouvian taxes,

Ben: right. Pigouvian taxes, which are intended to entice people to do less of something that has negative externalities, so negative effects on others.

Liz: Right. And the core problem of these taxes designed to reduce the negative effect on others is what price do we set those taxes at?

Ben: Yeah, so this is a subfield of game theory, or part of a subfield of game theory called mechanism design.

Liz: Oh, is that robots?

Ben: No, no, it's social mechanisms. So it's the problem of the social planner. And the short version of my personal impression of mechanism design, is that the problem of the social planner [suspenseful music] is impossible.

Liz: Tell me about it. I love organizing parties in non-COVID times. But a lot of people's schedules are so tight, that it's like, "Okay, this person can only meet on Wednesdays or Saturdays, this person can only meet between the hours of 6pm and 8pm..."

Ben: So that's not quite the type of social planner that we're talking about. But it's pretty close. The goal of a typical mechanism design paper is to find some optimum, in this case, I guess, would be getting as many people as possible to dinner at the same time. And then the rest of the paper typically goes into all of the ways in which the goal is impossible.


Liz: So what we're talking about the environment, and specifically, the greatest problem of our time was is climate change, we're really trying to reduce fossil fuel emissions. And we're looking for ways to make the biggest culprits stop or reduce their behavior. But what will people pay for the right to emit pollutants? I mean, you can't just ask them. Here, I'll be the government and you'll be the oil burning company.

Ben: OK.

Liz: Hey, oil company, what should I tax you for a tonne of co2?

Ben [Oil company voice]: Why, nothing at all!

Liz: That doesn't seem right.

Ben [Oil company voice]: Okay. Here you go. Here's this shiny penny.

Liz: And of course, if you ask environmentalist—

Ben: Infinity! It should be infinity!

Ben: Yeah, so they'll say infinity. And that's not a system, that's gonna work. But there are a lot of different ways that we could get people to reveal their secret prices. You could run auctions, you could rely on the free market, you could just make up a number and see who bites.

Ben: Yeah, so taxes, including Pigouvian taxes are often disfavored. Because the price isn't revealed. It's more what you said, where you just make up a number, and see who bites. Or more likely that number is politically jostled for, which is probably the worst mechanism possible. But as they say in the movies, [suspenseful music] there has to be a better way.

Liz: So one approach that a lot of economists have thought about is the cap and trade system. That's where the government would put out some number of credits that give companies the right to pollute, and then whoever emits less pollution can sell their credits to companies that aren't there yet.

Ben: Yeah, and that's the favorite of the neoclassical kids who believe that the only right way to get people to reveal the price they're willing to pay is the market mechanism.


Liz: So while cap and trade has been studied, a lot talks about a lot and actually implemented in some places, there are a lot of scholars who think that just having a carbon tax would be a more appealing way to go. People hate taxes—

Ben: Burn them!

Liz: —but they do love the status quo, and imposing a cap and trade system would be a big change. We don't have a whole architecture within the federal government right now that would implement a cap and trade system. Taxes, on the other hand, are already part of the routines of businesses and corporations. Everybody's already used to paying taxes. And when you consider how we already have a federal agency that sets and collects taxes, just taxing companies for their fossil fuel emissions shouldn't be that hard.

Ben: It's true, every cap and trade system that's been implemented so far feels like kind of an experiment for the first time. But with taxes, the government still has to guess at what the right tax level is. So there still might be, it still might be worth trying things out of the status quo and seeing if we can do better.

Liz: Let's role play!

Ben: Is this gonna be the role playing episode?

Liz: Oh, yeah. [video game music in background.] So let's say I'm the owner of ten credits, each credit is for the emission of one tonne of co2. Do you want to buy my credit?

Ben: I'd love to I love emitting co2. Would you like this shiny penny?

Liz: You know, there's a company right over there who will pay me $20 per credit. You're gonna have to do better than that. I'm gonna charge you infinity.

Ben: But there's another company over there that will sell me credits for $22. So that's my max.

Liz: Okay, why don't we call it 21?

Unknown: I can accept that.


Liz: I'll accept that, too. [angelic resolution music]

Ben: Yeah, so we've done a lot better than just asking people. We're not getting zeros and infinities anymore because of competitive pressure. But did you notice the part at the end where any price between 20 and 22 was? Okay. So Liz, do you know how we arrived at a final price there?

Liz: Well, it seemed like we just made it up.

Ben: Yes. And so does every economist. So how surplus like that is split, it's a mystery we'll have to save for another episode.

Liz: Well, it seems like that money from emissions credits, that $21 that I would have made from you, that would never go back to the government.

Ben: Yeah, it's only if companies initially buy allowances from the government, that the government made any money at all. The trade part of it comes in after allowances have been put out from the government by some amount, the exciting part of the cap and trade is after that exists out in the free market, how that gets traded around between individual parties. It's kind of like when stock gets sold on the market. There's an initial public offering where the company actually gets paid by the public. And after that, when trades are happening on the stock market, it's between traders. The original company is not really involved.

Liz: It's kind of funny to think about it like trading, though, because this isn't muffins or stocks of corn or whatever people sell. So it's some amount of a right to emit fossil fuels that we're inventing on the spot.

Ben: Yeah, and so that's, that's challenging of itself. We're not looking for the right price now, we're looking for the right quantity. And there are cases where governments have gotten it right and where they... haven't. So the EPA got it right in 1982, with leaded gas production.

Liz: Oh, right. When I had a car and I would go to the gas pump, it would say, unleaded gasoline. And that's because lead poisoning is bad.


Ben: Yeah, I have a friend who worked on lawsuits for lead poisoning of kids who live in old apartments where the owners still hadn't recovered the lead. She said meeting the kids was heartbreaking.

Liz: Lead causes birth defects and children, actually demonstrable drop in IQ and kids. If you listen to one of my other favorite podcasts, Radiolab, you'll learn that there were actually standardized tests that showed that kids with higher lead exposure from paint and gas did significantly worse than those with less exposure. And that testing disparity was what helped convince lawmakers to reduce the amount of lead in gas and paint.

Ben: So for all these very good reasons, the EPA wanted to eliminate load entirely. So the EPA set up the market and gave every producer as many credits as they need to produce leaded gas as they were doing it then and there. And then every year they ratcheted down how many credits every refinery got. So there were three or four hundred refineries and the bigger refineries had an easier time finding ways to reduce and the smaller ones who couldn't adapt as quickly. So the smaller ones would either buy credits or they'd have to get creative about forming coalitions or what have you to stay within the credits allotted. So you'd have a few hundred trades per quarter and all these creative tricks. So it's like the EPA saying, okay, here's your limit. And now you all go sort out between yourselves how you're going to meet it.

Liz: Well, it looks like it worked.

Ben: Yeah, it did, you can't buy leaded gas anymore. By 1987, the program was phased out. It's generally praised as a working model. Oh, and Liz, as an aside, did you notice how initially the credits were handed out by, well if you're a bigger polluter, then we're gonna give you more credits? So given that you can sell these credits, you're basically handing money to the worst polluters.


Liz: Alright, well, we'll add it to the list. [spooky transition music] The European Union, actually with the first international Emissions Trading System, they set that up in 2005. According to their website, emission from sectors that participate in the system will be 21% lower this year, that is 2020, than in 2005. That system, though, has come a long way. When it was first implemented 15 years ago, it wasn't that there was one cap on emissions, it was that individual EU countries had their own caps. And most of the allowances were just given out for free.

Ben: Sooo, how'd that work out?

Liz: Well, initially not super well, because when the first emissions data came out, after they implemented the system, everyone realized that too many allowances had been given out, and the price fell to zero. In the next phase, a few years later, the EU reduced the number of allowances, raised penalties for non compliance, and included more industries.

Ben: Yeah. So even though the word market makes a lot of a lot of wants happy cap and trade is not necessarily the ideal solution.

[bloopy transition music]

Liz: Well, the EU really came a long way, since they were able to have several years of experience and the ability to tweak how it worked. Now, there's just one EU wide cap on emissions. And the majority of allowances are auctioned, even though some are still freely allocated.

Ben: So an auction?

Liz: Yeah. And the money from that auction goes to the government instead of being traded among the polluting producers. California does something like that now too.

Ben: Yeah, and how's that going?

Liz: It's going so well, that Quebec or [bad French accent] Quebec, just joined in. And now it's a model for China's pollution credits auction to

Ben: Wow, that is literally and figuratively huge.


Liz: Yeah.

Ben: And, by the way, let's I looked at the auction rules themselves, and they're pretty interesting. So it's not a typical auction, right. And so if you're trying to complete your collection of commemorative or Star Trek plates, you only need one Leonard Nimoy plate, right. But a producer, they need credits to produce, I don't know how many tons of co2. Okay, right. So producers, instead, they put in a full demand curve. So if the price is $100, they'll say, we'll buy 40 credits. If the price is 80, We'll buy 100 credits. If it's 60, we're gonna bid for 150. And—

Liz: All right, well, we'll add it to the list. So the question remains whether a carbon tax or a cap and trade system would be better. One survey of economists suggested that most of them favor the tax system. Again, because it would be relatively simple to implement, compared to a cap and trade system that would need a whole new structure in place to make it happen. In fact, British Columbia and Norway, both have carbon taxes. Nonetheless, even though a carbon tax has supporters among liberals, conservatives and centrist in the US, and it just keeps coming up and proposals again, and again, from different Congresspeople in different political parties, no one has ever been able to pass federal legislation to institute a carbon tax in the US. Even President Obama shied away from it. There are some who believe that taxes would not do enough to reduce emissions. But the bottom line is that politically and among voters in the US, tax is just a dirty word.

Ben: Maybe they should call it a carbon disincentive. Or you know, we both love the word Pigou. So it should be a pigouvian carbon disincentive. Do you like that?


Liz: That sounds just obscure enough to work. There's still the issue of what do we spend the money on?

Ben: Burn iiiiit.

Liz: Okay, Ben, so I know that you just burned all of your 2019 tax paperwork since you submitted your taxes on time. But there are better things to do with resources.

Ben: Sometimes we have to celebrate,

Liz: but we shouldn't celebrate by burning money.

Ben: And you remember a few episodes, I'm sort of calling back to a few episodes back when we talked about an admissions fee to get into something that would be overcrowded. We're talking about the Cherry Blossom Festival.

Liz: Oh, yeah. So if you charged admission to the DC Cherry Blossom Festival, by having an admissions fee, you would limit the crowds, even if you just burn the money.

Ben: Yeah. What you do with the money is really a separate question from the price paid to, the price paid initially. That disincentive happens whether that money just gets burned right in front of you, or handed to schools or you know, used for upkeep of the streets and so on.

Liz: While that may be true, I like to look at things as opportunities for good. So you could imagine that the revenues from a carbon tax could be given back to the American people in the form of a payroll tax credit. That was actually something that Al Gore suggested.

Ben: And you know, Al Gore suggested it, but Alaska actually does this. So to give people... To give companies the right to drill on Alaskan land, they charge enough that living in Alaska, you pay a negative income tax. They pay you to live there, because basically, it's a redistribution of those oil drilling fees.


Liz: Wow, that sounds pretty sweet. Maybe I should just go and hang with the polar bears.

Ben: Sounds great.

Liz: But, of course, their environment is in grave danger because of climate change. So another thing we could do with the revenues from a carbon tax would be to reinvest it into energy solutions that don't involve fossil fuel emissions, like solar power, and wind power, things like that, or even public transit, so that people do have sustainable ways to get to work that don't involve driving.

Ben: I will admit that burning money does release carbon into the atmosphere, so it's counterproductive. Liz, it sounds like you have a lot of feelings about this. And, and it's a bigger problem than just post consumer recycling, huh.

Liz: I do believe that climate change is the most important issue not only of our generation, but of future generations. It is putting the whole planet at risk. And it is the only planet that we know of where we can live. In fact, I feel so strongly about this, I wrote a song about it.

Ben: Okay, Liz, hit it.

Liz [singing, with piano]:
Last summer I went down to Queensland to swim the Great Barrier Reef.
I found the coral bleached and bare `cause the temperatures give it so much grief.
So go ahead, point your finger at every one you see—and yourself—because there's no denying climate change is the product of you and me.

Don't wrap yourself too tightly in a blanket of greenhouse gas.
The oceans are rising, and it's not surprising that you're acting like it's gonna pass.
It doesn't matter what car you drive, if you fly coach or first class.
Look at your emissions, by your own admission, it's bad.
But not too late.

Have you seen the recycling bin,
The one for cans like glass?
Okay, how about for paper or cardboard?
This is such a pain in the ass.
Global temperatures are warming,
and the ice is liquefying. There are fires tornadoes, floods and droughts, and it's like we're not even tryin'

Don't wrap yourself too tightly and a blanket of greenhouse gas.
The oceans are rising, and it's not surprising that you're acting like it's gonna pass.
It doesn't matter what car you drive, if you fly coach or first class.
Look at your emissions, by your own admission, it's bad.
But not too late.

Because Miami's gonna sink.
Atlantic city's gonna sink.
Oh, yeah, Jakarta is gonna sink.
[spoken:] You know that part of New Jersey that's like across from New York? Yeah, that's probably gonna sink.

I look at that other planets, and they're all too cold or hot.
This earth is our only spaceship, So please be a good astronaut.

Don't wrap yourself too tightly in a blanket of greenhouse gas.
The oceans are rising and it's not surprising that you're acting like it's gonna pass.
It doesn't matter which shrimp you fry, if your beef was fed on grass,
Look at your emissions, and by your own admission it's bad,
yeah it's is pretty bad,
but not too late.