Forcing consumers to do the right thing

The following blog post was kindly sent to me by fellow peakoiler, MrBill (Cheers!). The discussion is my own.

From The Globe and Mail’s Jeremy Cato:

But if we are really and truly serious about slashing fuel consumption, dramatically reducing emissions, developing clean, high-tech vehicles and shattering the power of petro-tyrants around the world, we’d all agree to raise fuel taxes.

But carefully. A planned, phased-in, steady, completely predictable increase designed to change behaviour.

Again, pricing mechanisms as the most efficient way to do it. Why? Good old “price elasticity of demand”:

Ah, behaviour. In a market economy, behaviour is very, very easy to manipulate. Just manage pricing.

When prices go up, buyers look for an alternative. When prices go down, they head for a lower-priced alternative.

How can it be done while achieving the least possible impact on people’s welfare? It’s not simple, and a bit fiddly, but here’s an idea:

Governments, if they were being honest and courageous, would propose a fuel tax floor with a sliding tax rate. If done properly, this would slowly, steadily, and predictably move new vehicle buyers away from higher-emitting, fuel-consuming vehicles, into vehicles that use less fuel and emit less pollution.

Possibly, yes. There are exceptions, though: gas prices in Portugal are one of the government’s main sources of revenue, because they are not this kind of progressive, sliding tax; they are excise taxes, blind to price movements. Since the price elasticity of demand for petrol or diesel is relatively low, last year’s hike in gas prices produced a larger-than-expected income for the government – and generalised fuel theft in some cities. But I digress.

One of the other advantages is that it brings much-needed stability to fuel prices, allowing consumers (individuals and companies) and carmakers to plan in the long-run – even if, admittedly, it detracts from the government’s capability of predicting income for any fiscal year:

… it comes with the added benefit of steadying wildly gyrating gas prices.

 

So, will we come to it? Well, there’s the usual Political Economy caveat:

The bureaucrats and the lawyers won’t like this idea and that alone suggests it might be a good one.

Neither will the environmental specialists, the advisers, the consultants, politicians and all the rest who have turned fuel economy and emissions rules into their own cozy little cottage industry.

None of the above will advocate for this idea; it’s too simple. It will also raise the ire of a lot of voters.

Alternatives? Probably the old, inneficient (and dumb, if I’m allowed to say so) comand-and-control mechanism of imposing economy standards, like CAFE.

CAFE, and efficiency standards in general, are a way to remove the responsibility from consumers and place it on producers, hoping in the process that there will be some sort of positive consquence – preferably, one we can’t quite measure. It wins ellection but doesn’t save the day.

As long as consumers keep on believing it is their self-interest to increase their utility (consumption) indefinitely, and governments respond by trying to come up with ways to allow people to keep on increasing their consumption, there’s no way out of this. There are no win-win strategies; that’s why we need to allocate scarce resources efficiently. The resources and the carrying capacity are finite; the only way we can increase our consumption ad-eternun is to borrow: discount from the future to consume today.

Long have we been discussing that, “at the current rate of consumption and activity, we’ll need 1.something Earths to carry us through in a sustainable fashion”. Of course, we only have 1. What we’re doing to our environment is the same we’ve done to our finance: borrowing excessively (if a lousy microeconomist in training, like me, can speculate so). The tab will inevitably come, there’s no way out of it.

The economic consequences of misguided environmental policies are already knocking at the door, and will further increase. Every day without a reversal in the impact, in the consumption, in the way things are right now, increases a price in the future. We need policies that put responsibility in every consumer, that push consumers to reduce consumption and make the best choices. Price is, by definition, the best possible mechanism of moderation of consumption. Just don’t say it aloud in the campaign trail, OK?