We need a knowledgeable nudge

Here Michael Levi of the Council on Foreign Relations argues that the SCOTUS ruling on the Affordable Care Act bodes well for the constitutionality of environmental policies that use taxes to influence our behavior. Of particular interest to me here is the idea that policies, like taxes, can nudge us to act ethically. Pigouvian taxes, for instance, aim to internalize the negative externalities of economic activity. A pollution tax, e.g., influences behavior by giving emitters a choice: “pay or don’t emit.” If regulators set the tax at the right level, where it’s cheaper for businesses to reduce their emissions rather than pay the tax, then we get economically efficient pollution reductions.

But setting a tax at the “right” level can be difficult. Policymakers must be sure not to over or under shoot the mark. If the tax is too low then there’s no incentive for polluters to reduce their emissions. If it’s too high then we end up using our already limited resources in an inefficient way. Neither is desirable. Why, then, don’t they just get it right?

The challenge policymakers face is informational. Making good pollution reduction policy takes “on the ground” knowledge, but this information is frequently wrong, unavailable, or non-existent. Estimations of the societal costs from pollution are often uncertain and the corporate costs of polluting tend to fall under the scope of “proprietary knowledge.” The result is that policymakers don’t know what the real damages to society from pollution are, nor do they know how much pollution abatement would cost businesses. So how can policymakers hit a target that they can’t see?

Some argue that the invisible hand should guide the shot using a market-based cap and trade system to reduce pollution. But, again, this assumes that policymakers know more than they often do. Cap and trade policies only work if policymakers know the marginal costs of pollution abatement for businesses and the marginal benefits of abatement for society. The former, however, is proprietary knowledge and the latter varies in estimation. Without that knowledge they risk setting an inefficient target, so we run into the same informational problem that we do with a tax policy.

Policymakers are in a tough spot here – they face a moral imperative to do something, but every option is risky (even and especially non-action). Hybrid policies that combine free market principles with taxation, like the one McKibbin and Wilcoxen suggest, help to hedge the risks of uncertainty by drawing from the virtues of both kinds of pollution abatement systems. But ultimately there is no substitute for knowing.

Moreover, policies like a pollution tax or a cap and trade system are fundamentally utilitarian. Perhaps a pragmatic tendency, policymakers like to look at the costs and benefits (today’s “utles”) of pollution abatement so to maximize efficiency in our use of resources. But it’s not clear that what is counted is everything that counts. Often cost-benefit analyses will altogether exclude any measure of nature’s intrinsic value rather than risk using an over or under estimation.

Even valuations of ecosystem services are inherently instrumental in their thinking. Despite sometimes including recreational enjoyment or aesthetics in ecosystem services accounting, each aspect is merely quantified and then considered only in terms of its utility. Regulatory decision-making processes tend to omit the entire dimension of intrinsicity in moral reasoning, and so, again, we encounter another informational deficiency that policymakers must confront.

In turn, there are several moral questions at work. How far should policymakers nudge our behavior when they themselves don’t have the information needed to understand the reality on the ground? What role should intrinsic value play in policymaking? How should we weigh the risks of acting without knowing against the risks of doing nothing? And how much information should businesses be allowed to withhold from policymakers in the name of proprietary knowledge?

Without complete information (or as complete as possible) to guide the policymaking process, moral nudges such as pollution taxes are like regulatory swings in the dark – we may miss the target entirely, and we may do more damage than good. But that’s not to say we should resign ourselves to inaction. On the contrary, doing nothing might prove more harmful than landing off the mark. We must simply keep in mind that we live in a world of imperfect information and knowledge, and that these are the conditions we must make decisions within. In the meantime we can take solace in Levi’s assessment that a carbon tax, should we go that route, will have constitutional precedent.

JM Kincaid

See this post also on the CSID blog.

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2 thoughts on “We need a knowledgeable nudge

  1. Pingback: I agree with almost everything, but… | tothesungod

  2. Pingback: Listen up utilitarians! Friedman’s “win-win-win-win-win | tothesungod

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