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Paul Matzko: Welcome to Unintended Consequences, a podcast about what can go wrong with government regulation. I’m your host, Paul Matzko, and with me as always is Peter Van Doren, the editor of Regulation Magazine. We have an interesting paper to discuss today about carbon taxes and subsidies in Norway that’s titled “Green Waste” by Ingvil Gaarder and his co-authors.

Now, Norway is a funny country. It is simultaneously the beneficiary of vast offshore oil fields with which it has created a massive sovereign wealth fund, which is then partly invested in propelling it to the forefront of the global green energy revolution. So it’s worth paying attention to when it comes to their policy experiments with green energy to see what works and what doesn’t, given that so many other countries are following suit.

So, Peter, before we get to the contents of this particular paper, what’s the debate that they’re speaking into?

Peter Van Doren: In a normal microeconomics class, one learns about externalities. “Externalities” is just a word for a behavior, a thing, an act, something, that is not priced. It is external to the price system. The usual category of thing that students are taught as the most obvious example of an externality is pollution. So emissions into the air are not priced, and therefore they are external to the price system.

Paul Matzko: So the coal that goes into the plant is priced.

Peter Van Doren: But the good that comes out of the stack, they do not have to pay a price for using the air as their dump.

Paul Matzko: Yeah.

Peter Van Doren: And that’s different than solid waste, right? I think solid waste, you pay your municipality or a private entity for use of the dump. Then the dump has to be regulated so that it doesn’t cause externalities by letting stuff leak out of the dump, and in the old days they did, and now we have dumps that don’t do that.

Paul Matzko: But it’s easier to price the dump than it is the air.

Peter Van Doren: Correct. So there’s a famous English economist named Pigou, 1920s, wrote a book, and so we talk about Pigouvian pricing of externalities, putting a price on the emissions. So for conventional pollution, i.e. soot and things like that, you can think of pricing that. But this is about global warming, right? So the thing emitted would be carbon dioxide. Of course the status of whether one thinks of that as a pollutant or not is itself contentious in a way that conventional pollution is not. There are people on the right who think of CO2 not as something negative put in the air that has cost, but as something positive, right, that encourages plant growth, etc., etc., etc. Anyway, in a conventional economic context, you talk about an appropriate Pigouvian tax on CO2 emissions as the first best economic answer to the “problem” of climate change.

Paul Matzko: Yeah, it is a problem. I’ve subscribed to anthropogenic climate change. So I do think it is a problem that should be priced in order to mitigate the problem, and that’s Pigouvian.

Peter Van Doren: And in a normal, typical economics educational context, we talk about the beauty of the price system as opposed to anything else, because if you price emissions, it will reduce the thing emitted just through the effects of the price. And the price itself will cause other things to happen that are unknown to the regulator, because the price system works in magic ways that we can’t predict. It will encourage invention, it will encourage innovation, etc., etc. And a lawyer might say, we need to regulate CO2 emissions, and an economist will say, no, you need to price it, because you can never regulate it enough to ensure all avenues of optimization, whereas the price system does that on its own.

Paul Matzko: We had a good example of that in the previous episode, where there was this proposal, I think it was in Los Angeles, to mandate ventilation hoods that scrubbed the emissions from restaurants, right? Very expensive intervention. So the lawyers come in and say—

Peter Van Doren: Put this thing on your smokestack.

Paul Matzko: Cap it. And, well, some economists pointed out and noted that actually, for less money, you could instead pave roads in, like, the western mountains in Idaho, and the amount of air pollution generated by driving along—the dust that gets kicked up, the microparticulates, are actually really bad for the lungs and so on. You could actually have a far greater effect on reducing pollution by doing that. But that wasn’t easy to… So a pricing scheme that’s about…

Peter Van Doren: It’ll happen even though you don’t, or the regulator does not, think about it.

Paul Matzko: Yes. The lawyers in Los Angeles aren’t thinking about the roads in Idaho, and so they do the suboptimal, very expensive intervention that doesn’t help as much as this other cheaper intervention that helps more. But the price would, if there was a way of trading and pricing that externality, right?

Peter Van Doren: Over the decades, people at Cato have asked me, Peter, if you think this is real, then all we need is a carbon tax, right? We don’t need green subsidy. We don’t need to do things other than just have a carbon tax of some non-zero level, and then let the market work its wonder, both on the demand and the supply side. And my answer was always yes. Well, the literature has evolved from that viewpoint. Daron Acemoglu, the Nobel Prize–winning economist…

Paul Matzko: I know his stuff on the economics of AI, so it’s interesting hearing him in another context here.

Peter Van Doren: He wrote an article in 2012 that said—and here’s the intuition. He said, if you just have a carbon tax—because all the innovations that need to be invented haven’t been invented yet—having just a carbon tax will not be the least-cost path to a less-carbon or carbon-free future.

Instead, we ought to subsidize green R&D initially, and then once things are invented, then put a carbon tax in place and have it predictably increase over time. Because then, instead of just taking money from people and giving it to the government… Or we could refund it, right? You could just price carbon and not have government revenues go up. But for a long period of time, that’s all that would happen. There would just be a reduction in demand for carbon, but you wouldn’t have enough innovation in the short run.

So Acemoglu and a co-author wrote a paper that said, let’s have green subsidies to start, and then a carbon tax, say, in year 10 after we start the subsidies. And then they claim—and I could go through the evidence, but—they claim that would be lower cost in a strictly economic sense over decades than a carbon tax with no subsidies for green alternatives.

Paul Matzko: Let’s make this look concrete, perhaps. Today, it’s a little bit different, because now we have green energy production that’s market-driven in a way we didn’t see…

Peter Van Doren: Remember, this article was 2012.

Paul Matzko: 2012. So that’s still pretty early. The big gains in solar efficiency and wind power efficiency weren’t quite there yet. Late 2010s is when solar power… At this point, it’s actually cheaper per kilowatt hour in certain contexts than fossil fuels. That was not true in 2012.

Peter Van Doren: Correct.

Paul Matzko: And if you go back even earlier, that becomes less obvious. In the 1970s, at the height of the oil embargo, we kind of got a… It wasn’t exactly a carbon tax.

Peter Van Doren: We got a price shock.

Paul Matzko: We got a price shock. And it decreased demand.

Peter Van Doren: Yep.

Paul Matzko: Definitely. People were lining up for gas stations. It did not, in an immediate time frame, generate green energy alternatives. And people actually did start to become interested in it, because they’re like, oh, my goodness, this is… But we had to wait a while, 40 years, before we got consumer-grade level energy sources. So it’s not crazy. I mean, the intuition is not crazy. Even if it does make my skin crawl, because we’re getting into what amounts to… We’re adjacent to industrial policy in a way.

Peter Van Doren: Yes. You have government deciding about appropriating monies to various things.

Paul Matzko: So the intuition isn’t nuts. But. Intuition, you know, the best laid plans of mice and men “gang aft a‑gley.” So did anyone try this plan, the Acemoglu plan, and how did it go?

Peter Van Doren: Well, the paper that’s written up in my Working Papers column in Regulation is about Norway. And what a great case study, right? Norway has, what, the highest percentage of new cars that are electric vehicles in the world, right? Norway is… They’re just wonderful. They’re wonderful people. They’re 8 million. They’re all green.

So this paper is: let’s look at all the green appropriation subsidies in Norway from 2012 to 2023. And because the Norwegians, as we’ve said in previous podcasts, they gather data about themselves and don’t worry about government intrusion of this and that and the other thing. So they have data, data, data about all their behavior, including the government’s.

So they have data on all the green subsidy projects and they can rank—the authors were able to rank order—them in terms of the cost effectiveness of the carbon emission reduction that would take place. And presumably in a rational econ world, you would set a budget constraint and you’d rank order the projects and you’d fund the projects in order of carbon reduction cost effectiveness. And then when you ran out of money, you’d stop funding projects.

Paul Matzko: So you want: per million dollars, this reduces a thousand tons of carbon. You can fund that before the million dollars that reduces by ten tons of carbon.

Peter Van Doren: Correct. It’s that simple. And you’d have a list and you’d have rank order. And they’re Norway and they would do this. Well, this paper is about: they didn’t do that.

Paul Matzko: So even the place with high state capacity, really great data and economic thinking, it didn’t work out that way.

Peter Van Doren: No. And the notion of “no politics” wasn’t true even in Norway. What this paper found is that there were lots of other things other than carbon reduction cost effectiveness that intruded into the bureaucratic decisions about what projects to fund, i.e. what you and I would call “politics.”

One of the concerns was, oh, maybe the analysts weren’t very good at predicting cost effectiveness ex ante, and then in the real world, the emission reduction of a particular technology actually wasn’t very good, even though we thought it was on paper. And that was the problem.

But no, that was not the problem.

Paul Matzko: No. They were very consistent.

Peter Van Doren: They were very good at predicting what would and wouldn’t reduce carbon emissions. Instead, other considerations intruded. Now, the paper. You may ask in my column, why don’t I have examples? Why don’t we talk about an example in the podcast?

The answer is, this is an econ paper, and there are no examples. So I can’t state, either in writing or in words, an example of how other considerations intruded into the decision-making process. But the bottom line was, Norway could have achieved the same level of carbon reduction that they did at less than half the cost that they expended.

Paul Matzko: So that strikes a blow to the idea [of] the Acemoglu subsidies, and then you wait for carbon taxes. Like, maybe they should have just gone to the carbon tax approach instead.

Peter Van Doren: Exactly, exactly. That’s why when I read this paper, I said, oh my, you know, wow, I got to put this in Regulation because this, to me, seems like damning empirical evidence about the workability of the Acemoglu article, which we both agree makes sense in theory. And again, in a politics-free decision-making [context], which I thought was Norway, that’ll work out. And in the US, right, there’d be, this would be…haha.

Paul Matzko: Which, to be fair, it’s possible they would come back and say, okay, this was half as efficient as expected. But even so, the half-as-efficient process is still, it might, you know… Again, we’re into the world of tradeoffs and values and so on.

Peter Van Doren: It’s still possible that subsequent articles will say, even though this didn’t look very pretty, it still was cost-effective relative to a carbon tax–only regime. But again, you’d have to then question the assumptions that got to that.

Paul Matzko: So we should use the podcast. Here’s the open invitation to Nobel Prize–winning Daron Acemoglu to write a response for Regulation Magazine about whether or not the model still is worth it.

Peter Van Doren: Well, he’s pretty smart. My guess is there probably will be some sort of response, because the people who wrote this are pretty prominent. So there’ll be an intellectual back and forth, I suspect.

Paul Matzko: It was funny to me. I mean, I’m a historian, so I want stories. So I always, these papers that have no stories—

Peter Van Doren: I knew you’d say—You know, yesterday preparing, I reread the paper and I said, a listener—and Paul—are going to [go], oh, come on, this isn’t just a quote, put some glue on this. And I got none.

Paul Matzko: So my brain started inserting stories. When I heard, that it’s politics, I immediately thought, well, in the American context, we have that—We’re both old enough to remember the 2011 Solyndra scandal, which was our version of that. The Obama administration decided to put out subsidies for green energy, and they gave half a billion dollars to this.

Peter Van Doren: But again, see, here’s what’s different. That failed. All of these projects in Norway succeeded.

Paul Matzko: Some failed, right?

Peter Van Doren: No.

Paul Matzko: They all succeeded?

Peter Van Doren: Yeah. They reduced carbon emissions!

Paul Matzko: Okay, yeah.

Peter Van Doren: But not at least cost.

Paul Matzko: Right, right. So this is qualitatively different.

Peter Van Doren: Norway is better than us. They just didn’t maximize efficiency. All of these things reduced carbon. So no, Solyndra is—

Paul Matzko: So even with a country with arguably some of the highest state capacity in the world, still—

Peter Van Doren: And only eight million people, all of whom agree with each—no. It’s not the US.

Paul Matzko: It’s not the US. So even there, even in the best case scenario—which is telling—the best case scenario still fell short by half. Let alone the place with much lower public trust and state capacity.

Peter Van Doren: I.e. us.

Paul Matzko: And more corruption. Yes. I did think it was funny. In a footnote in the paper, they just dismissed the possibility of corruption. Just—

Peter Van Doren: Well that’s not Nordic!

Paul Matzko: I guess, yeah. Maybe it depends on what you mean by corruption. Like I would say someone’s steering money to, you know, number seventeen on the list instead of number seven on the list, because they’re personal friends or whatever. That to me counts as corruption, as opposed to just overt bribing.

Peter Van Doren: There was no hint of that in the paper, but again, the paper didn’t have many hints about anything, right?

Paul Matzko: I don’t know what that is, yeah. Is there anything we can cross-apply from the Canadian experience? So Canada experimented with some carbon taxes, I think 2019.

Peter Van Doren: Well, British Columbia had a refundable provincial carbon tax, i.e. the government did not keep revenue. It was a Pigouvian externality price instrument. It was a tax, but did not raise revenue. It just, it was recycled back to the people. And I always used it in lectures in class as an example to my colleagues of: the carbon tax doesn’t necessarily mean more government revenue. It doesn’t have to be in class, and even in practice in British Columbia, it did not increase government revenues. It changed prices and it reduced emissions. And then they got rid of it.

Paul Matzko: But it was politically unpopular.

Peter Van Doren: Right. Prices are wonderful and people don’t like prices. I mean, it’s—

Paul Matzko: People want a free lunch.

Peter Van Doren: Well, they want a hidden lunch. They want something—again in the US—that we can appropriate our way to a green energy future, which we’re trying to do—well, under Biden, and now we’re less so. But, the dems after… When did Obama…? We tried the carbon tax sort of, 2010, ’11, ’9? We had a vote.

Paul Matzko: That sounds about right. It was going to be cap and trade.

Peter Van Doren: Something. Yeah. And, oh my goodness, right? That just, so. It’s never going to be mentioned again, but we’re going to spend money every which way in the name of green energy, even if… Well, now it’s carbon capture, right? Spend a gazillion dollars per ton and put it in the ground and then help produce more oil. It’s a classic American, right? Only in America can you do that.

Paul Matzko: And that’s our show. Thank you for listening, and please leave a review on your podcast platform of choice. It helps more people find us. Thank you to Sedona LaMarre for producing. Until next time, be well.