The logic of collective action

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By BARRY EICHENGREN*

The most difficult public policies to implement are those with diffused benefits and concentrated costs.

In his classic book, The Logic of Collective Action [The logic of collective action], the great Mancur Olson, now deceased, explained that the most difficult policies to implement are those with diffused benefits and concentrated costs. Olson's argument was easy to understand: the individuals who bear the costs will vigorously oppose the policy, while the beneficiaries will enjoy freely, preferring that someone else do the fighting.

Olson's perspective applies to the most pressing political challenge facing humanity today, namely climate change. The starting point for tackling this challenge, economists agree, is a carbon tax. The resulting reduction in emissions would benefit virtually everyone on the planet. But specific segments of society – the vested interests Olson talks about – will bear a disproportionate share of the costs and will mobilize in opposition.

An example of this are the yellow vests ("yellow vests") French. Like any mass movement, the yellow vests carry many resentments. But the complaint that emboldened them the most was a fuel tax hike, instituted in the name of combating climate change. Rural residents depend more on their cars, trucks and tractors than urban dwellers, who may cycle or take the metro to work. The tax hike hits them where it hurts, in the wallet.

The diffuse interests represented in France's National Assembly agreed to raise fuel taxes in 2014. But after farmers and their supporters closed roads and took their fight to the cities, President Emmanuel Macron's government backed down and canceled the tax increase in 2018. Olson would not have been surprised.

Other countries can expect similar resistance, and not just from farmers. In the United States, the administration of President Joe Biden had to overcome opposition from fishermen and whale watchers to to approve an offshore wind farm near Martha's Vineyard, cancelI have a more ambitious project on the coast of Cape Cod. We can also expect opposition to a carbon tax to focus regionally. In the US, that means states like Texas, North Dakota and others that produce oil, gas and coal.

Furthermore, there is a danger that carbon taxes will exacerbate political polarization and provoke a populist backlash similar to the response to the China-related shock. Displaced workers in the energy and transport sectors will blame the tax, even if the root causes lie elsewhere. Parents struggling to feed their children and fill their fuel tanks will dismiss the carbon tax as an elite project championed by pesky intellectuals. The China-related shock gave us Donald Trump. A carbon tax, instituted by hook or by crook, could do even worse.

But Olson also suggested how to overcome the problem of concentration of interests, that is, “bribing them”. In the language of policy experts, the revenues from a carbon tax could be redistributed to those who bear the costs. In addition to allowing the reduction of climate change, this would limit the undesirable political consequences.

We know that carbon taxation imposes higher costs on residents of small towns and rural areas than on urban residents. Likewise, poorer households spend a larger share of their income on food and transport, which are carbon intensive, than richer households, who spend more on greener services. One US study estimates that the share of income absorbed by a carbon tax would be three times as great for the lowest income quintile as for the highest.

Thus, a more progressive income tax that compensates the less affluent for the burden of a regressive carbon tax could overcome concentrated opposition. (The plan would have to include a negative income tax to compensate those who do not earn enough to pay income tax). But making policy around this – determining how much more progressive a tax on future income should be – in practice will require a closer look at carbon taxes. And it will be important to link the introduction of carbon taxes explicitly and visibly to the change in income tax, so that the payoff is clear to the public.

Then there is the issue of regions specializing in the production of carbon-intensive fuels. A more progressive income tax will not solve Texas's problems, because Texas-based companies, not to mention the state government, depend on revenues from oil and gas production.

Biden's budget and the European Union's recovery fund lay out measures to discourage production of carbon-based fuels and accelerate the transition to wind and solar power. The opposition that will certainly 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 examples like Appalachia, which has been decimated due to the decline in employment in the coal industry.

Unfortunately, experience with “location-based” policies is not good. Just ask Sicily. But this is not despair advice; it's an argument to try harder. Allocating subsidies to bring broadband to rural areas at the risk of losing service sector job growth would be a start. More generally, regional policies, along with progressive taxation, will be an indispensable aspect of any politically viable strategy to combat climate change.

*Barry Eichengreen is a professor of economics at the University of California-Berkeley, and a former senior policy adviser to the International Monetary Fund. He is the author, among other books, of exorbitant privilege (Campus ed.).

*Originally published on Project syndicate.

 

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