In his classic book The Logic of Collective Action, the late great Mancur Olson explained that the hardest policies to implement are those with diffuse benefits and concentrated costs. Olson’s argument was straightforward: individuals bearing the costs will vigorously oppose the policy, while the beneficiaries will free ride – preferring that someone else take up the cudgels.
Olson’s insight applies to the single most pressing policy challenge facing humanity today: namely climate change. The starting point for addressing it, economists agree, is a tax on carbon. The resulting reduction in emissions would deliver benefits to virtually everyone on the planet. But specific segments of society – Olson’s concentrated interests – will bear a disproportionate share of the costs and mobilise in opposition.
A case in point are the French gilets jaunes (‘yellow vests’). Like any mass movement, the gilets jaunes had multiple grievances. But their most animating complaint was a fuel-tax increase imposed in the name of combatting climate change. Rural residents rely more on their cars, trucks and tractors than do urban dwellers, who can ride a bicycle or take the subway to work. The tax increase hit them where it hurts… in the pocketbook.
The diffuse interests represented in France’s National Assembly had agreed to increase gas taxes in 2014. But after farmers and their sympathisers closed down roads and took their fight to the cities, President Emmanuel Macron’s government backed down and rescinded the tax hike in 2018. Olson would not have been surprised.
Other countries can expect similar resistance, and not just from farmers. In the United States, President Joe Biden’s administration had to overcome the opposition of fishermen and whale-watchers to approve an offshore wind-farm near Martha’s Vineyard, cancelling a more ambitious project off the coast of Cape Cod. We can also expect opposition to a carbon tax to be regionally concentrated. In the US, that means states like Texas, North Dakota and others producing oil, gas and coal.
In addition, there is the danger that carbon taxes will worsen political polarisation and provoke a populist reaction similar to the response to the China shock. Workers displaced from the energy and transport sectors will blame the tax, even if the root-causes lie elsewhere. Parents struggling to feed their kids and fill their gas tanks will dismiss carbon taxation as an elite project championed by pointy-headed intellectuals. The China shock gave us Donald Trump. A carbon tax, imposed willy-nilly, could result in even worse.
But Olson also suggested how to overcome the problem of concentrated interests: namely by buying them off. In policy-wonk speak, revenues from a carbon tax could be redistributed to those who bear the costs. Besides enabling abatement of climate change, this would limit undesirable political consequences.
We know that carbon taxation imposes higher costs on residents of small municipalities and rural areas than on urbanites. Similarly, poorer households spend a larger share of their income on food and transport, which are carbon intensive, than do wealthier households, which spend more on more environmentally-friendly services. One US study estimates that the share of income absorbed by a carbon tax would be three times higher for the lowest income quintile than for the highest.
Thus, a more progressive income tax that compensates the less well-off for the burden of a regressive carbon tax could overcome concentrated opposition. (The scheme would have to include a negative income tax to compensate those who do not earn enough to pay income tax.) But making policy on this basis – determining how much more progressive a future income tax should be – will require more nuanced analysis of carbon taxes in practice. And it will be important to link introduction of carbon taxes explicitly and visibly to the change in income tax, so that the compensation is clear to the public.
Then there is the question of regions specialising in the production of carbon-intensive fuels. A more progressive income tax won’t solve Texas’s problems, because corporations based there – not to mention the state government, rely on revenues from oil and gas production.
Biden’s budget and the European Union’s recovery fund both feature measures to discourage production of carbon-based fuels and speed the transition to wind and solar. The opposition sure to come from Texas and its counterparts in other countries suggests that these policies should have a more prominent regional dimension. They need to avoid creating more Appalachias – Appalachia having been decimated by the decline of employment in coal mining.
Unfortunately, experience with ‘place-based’ policies is not good. Just ask Sicily. But this is not a counsel of despair; it is an argument for trying harder. Subsidies for bringing broadband to rural areas at risk of missing out on the rise of service-sector employment would be a start. More generally, regional policies – alongside progressive taxation – will be an indispensable aspect of any politically viable strategy to combat climate change.
Barry Eichengreen is Professor of Economics at the University of California, Berkeley. He is the author of many books, including The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era.
Copyright: Project Syndicate, 2021.