This is a good short critique of the carbon tax (I still think pricing might help but maybe I’m wrong). Followed by a good critique on GDP.
From Vaclav Smil (Growth) and he knows way more than me on energy.
“...The largest externality that remains unaccounted for is the undoubtedly very large cost of relatively rapid global warming (that would increase average tropospheric temperature by more than 2 ° C) attributable to anthropogenic combustion of fossil fuels and land-use changes (IPCC 2014). But in this case there is, at least, a reasonable excuse, as the complexities, interactions, and feedbacks of change attributable to rising concentrations of greenhouse gases are extremely difficult to monetize, especially as some regions, some countries, and some economic sectors will also derive various benefits from rising temperatures and from an accelerated water cycle, and as many of these impacts will not be seen in force for decades to come (and hence will be steeply discounted by today’s valuations). As a result, the carbon tax favored by many environmentalists and by some economists would be nothing but a largely arbitrary (and also a very crude) form of internalizing an unknown fraction of the unfolding and future effects of global warming. …”
And Smil on GDP (including the carbon tax critique).
“... Given the complexity of modern economies, only a broad aggregate measure can capture their growth. This measure, now universally deployed, is gross domestic product. Its oft-repeated definition seems straightforward: GDP expresses the monetary value of all final goods and services that are produced or provided within the borders of a country during a specified period of time (monthly or quarterly in national reports, per year for international comparisons). But measuring GDP growth, and hence ascertaining its disappointing or satisfactory rates, is an inherently difficult matter and one whose systematic practice is quite recent. Its origins go back to the 1930s when Simon Kuznets was asked by the US Congress to estimate the country’s national income (Kuznets 1934). Its scope was defined by John Maynard Keynes, the measure became a key tool for the international financial institutions set up by the Bretton Woods agreement in 1944, and it was widely applied for the first time to the growing post-WWII economies (Coyle 2014).
Before too long it became obvious that, like every aggregate measure, GDP has many drawbacks—but despite suggested adjustments and proposals for alternative accounts, it has become only more entrenched as the dominant yardstick for appraising the achievements and assessing the growth of national economies.
Problems begin with the choice of currency. In order to derive comparable values required for calculating long-term growth rates it is necessary to express GDP in constant monies, that is in inflation-adjusted terms, but that requires continuous, reliable, and broadly based monitoring of price changes. Not doing so may make only a small difference when inflation remains low (as it has been, generally, in the West since the beginning of the 21st century) but comparing costs in current monies during periods of higher inflation rates (in the West they reached double digits during the 1980s) could lead to major distortions. Even in countries with capable statistical services, this results in often considerable uncertainties, as is best illustrated by the frequency and extent of GDP revisions. Zwijnenburg (2015) found that between 1994 and 2013 the mean absolute revision of year-on-year quarterly growth (the growth rate of a quarter compared to the same quarter of the previous year) for 18 countries in the Organisation for Economic Co-operation and Development (OECD) was 0.36% after one year, 0.5% after two years, and 0.61% after three years, with the average three-year value as high as 0.93% for Japan. As the originally assessed growth rates during that period were on the order of 1–3%, such revisions clearly matter.
On the most basic level, proper GDP accounting requires a definition of the economy, that is, putting the boundaries on what gets counted. Because GDP accounting was established at a time when manufacturing was a leading sector of the economy (with shares of 30–40% during the 1950s), its output continues to be monitored in a relatively more disaggregated manner than the contributions of the now-dominant service sector (in itself a highly heterogeneous group of activities) which make up 70–80% of GDP in affluent countries. Counting all final goods and services may seem to be a fairly comprehensive definition of economic activity—but it is not. Even if we knew with great certainty the size of a country’s economy defined by monetary transactions, it would be still difficult to make a proper adjustment for calculating real long-term growth unless we also knew the trend of nonmonetary exchanges or activities, whose share of the overall economy may remain fairly stable for decades but may rise or decline as economies advance or falter. As it is structured, the GDP concept cannot capture nonmonetary exchanges (the barter economy) and unpaid work (such as household chores or child care provided by members of a family or by relatives and friends) or those financial transactions that take place outside the monitored flows of modern economies, deliberately avoiding them or being hidden, a sector known as the informal, shadow, underground, or black economy.
The barter economy, common in all preindustrial societies, has been largely eliminated in modern economies, while unpaid services are as important as ever and unreported transactions are thriving. Housework has been always excluded from GDP, and although it can be argued that most household chores became easier over time, care of the elderly will be taking more unpaid time in all affluent societies with aging populations and rising life expectancies. Interestingly, Britain’s Office for National Statistics estimated that in 2014, when the country’s GDP reached £ 1.8 trillion, the value of unpaid labor was £ 1 trillion (Athow 2016). And counting only what is sold and bought leaves out many important activities, particularly in modern economies with their rising shares of electronic information and digital production: Internet providers charge a monthly fee that includes virtually unlimited access to almost any conceivable category of information, with the marginal cost of searching for news or participating in social media being very close to nothing, and hence excluded from the standard GDP accounts. The size of the black economy can be only estimated but its share of total production was growing during the last decades of the 20th century (Lippert and Walker 1997), and at the beginning of the 21st century its size was put at about 15% of official GDP in affluent nations and at one-third in low-income countries, with shares as high as 40% or more in Mexico, the Philippines, and Nigeria (Schneider 2003). The best available studies show it to be far from negligible even in some of the world’s most affluent countries with generally good governance and with low levels of corruption.
A comprehensive study of the shadow economy in the European Union put the average for all member states at 18.3% in 2015, with the range from 8.3% in Luxembourg to 30.6% in Bulgaria, and with Germany and France nearly identical at, respectively, 12.2% and 12.3% (Schneider 2015). In an older study of 162 countries, Schneider et al. (2010) put the mean at 31% in 2007, with the extremes ranging between 8.2% for Switzerland to 62.6% for Bolivia. How uncertain these estimates are can be illustrated by many comparisons. In a closer study of Germany’s black economy, Schneider and Buehn (2016) compared the outcomes of eight studies using different methods (including discrepancies between expenditure and income and between official and actual employment, a currency demand approach, and surveys) and found that between 2000 and 2005 estimates of the country’s shadow economy were as small as 1% and as large as 15–16% of official GDP. And while Schneider et al. put India’s shadow economy at 21% of official GDP in 2006, a confidential report commissioned by the Indian government (and leaked to the press) put the size of the country’s black economy at nearly 75% of the official GDP (Mehra 2014). And Statistics Canada (2016) claimed that in 2013 the country’s shadow economy was just 2.4% of official GDP and that this share had remained unchanged since 2002, a remarkable fact (if true)—while Schneider (2015) put Canada’s 2015 share at 10.3%, identical to the Australian rate. And then there is GDP’s almost utter inability to capture qualitative improvements.
For decades Bell offered American consumers one model of its standard black rotary-dial phone, and then came push-button dialing, a variety of electronic phones, and eventually cellular phones and smartphones. Successive outlays spent on acquiring these items or paying rental fees tell us nothing about the fundamentally different qualities embodied by changing designs. The same is, of course, true about cars—a rising share of their value is now in electronic components and hence they are mechatronic devices, not simply mechanical machines—and, to different degrees, also about housing and long-distance travel, in terms of both speed and comfort: compare what the same price bought in 1955 with a seat in a propeller-driven Constellation and in 2015 in a Boeing 787. GDP is not a reliable measure of the total economic product, and it is an outright inferior measure as far as the quality of life and real prosperity are concerned. From a long-term perspective, the most fundamental failure of GDP accounts is to ignore diverse forms of environmental degradation caused by economic activities and treat the depletion of finite resources as current income that adds to wealth. These are, of course, utterly unsustainable premises as no society can exist without adequate support provided by natural capital stored in biodiversity and in photosynthesizing species and maintained by many indispensable environmental services ranging from soil renewal to water retention by forests and wetlands (Smil 1994, 2013a). Remarkably, economists call these critical omissions “environmental externalities”: the very choice of the noun is telling because historically they were not an integral part of the cost of doing business and their still far from adequate pricing has been making slow progress. Most major gains have come only since the 1950s, with most of the externalities far from getting internalized. Reducing air pollution is an excellent example of this internalization of former externalities, that is paying higher prices in exchange for a cleaner environment. One of the first large-scale instances of this effort was the elimination of visible particulate air pollution from the combustion of coal in large electricity-generating plants, due to the post-1950 installation of electrostatic precipitators that remove more than 99% of all particles (USEPA 2016a). The next step, starting during the 1970s, was a large-scale adoption of flue gas desulfurization that greatly reduced the risk of acid precipitation, first in Europe and North America, later also in China. Removal of particulates and sulfur raises the cost of electricity generation by about 10%. But most externalities remain entirely unaccounted for. Among the most widespread negative impacts whose costs are completely ignored in product pricing are the declining yields caused by the universally increased rates of soil erosion in intensive row-crop cultivation (of corn or soybeans, two leading grain and legume species); the formation of dead zones in coastal waters caused by excessive runoff of nitrogenous fertilizers causing eutrophication of aquatic environments; the health effects and material damage caused by the photochemical smog that is now common in all megacities; and the rapid loss of biodiversity caused by such diverse actions as mass-scale monocropping and tropical deforestation. The largest externality that remains unaccounted for is the undoubtedly very large cost of relatively rapid global warming (that would increase average tropospheric temperature by more than 2 ° C) attributable to anthropogenic combustion of fossil fuels and land-use changes (IPCC 2014). But in this case there is, at least, a reasonable excuse, as the complexities, interactions, and feedbacks of change attributable to rising concentrations of greenhouse gases are extremely difficult to monetize, especially as some regions, some countries, and some economic sectors will also derive various benefits from rising temperatures and from an accelerated water cycle, and as many of these impacts will not be seen in force for decades to come (and hence will be steeply discounted by today’s valuations). As a result, the carbon tax favored by many environmentalists and by some economists would be nothing but a largely arbitrary (and also a very crude) form of internalizing an unknown fraction of the unfolding and future effects of global warming.
These are not new concerns. Kuznets was fully aware of these deficiencies (obviously not of the effects of global warming but of environmental externalities in general and of other ignored inputs). He asked who could place a value on the country’s rivers or on the skills and capacities of housewives and his suggested subtraction of dis-services from national income estimates was far more radical than most of the recent calls for GDP redefinition. His preference is worth quoting at length.
This writer, for one, would like to see work begun on national income estimates that would not be based upon the acceptance, prevailing heretofore, of the market place as the basis of social productivity judgments. It would be of great value to have national income estimates that would remove from the total the elements which, from the standpoint of a more enlightened social philosophy than that of an acquisitive society, represent dis-service rather than service. Such estimates would subtract from the present national income totals all expenses on armament, most of the outlays on advertising, a great many of the expenses involved in financial and speculative activities, and what is perhaps most important, the outlays that have been made necessary in order to overcome difficulties that are, properly speaking, costs implicit in our economic civilization. All the gigantic outlays on our urban civilization, subways, expensive housing, etc., which in our usual estimates we include at the value of the net product they yield on the market, do not really represent net services to the individuals comprising the nation but are, from their viewpoint, an evil necessary in order to be able to make a living (i.e., they are largely business expenses rather than living expenses). Obviously the removal of such items from national income estimates, difficult as it would be, would make national income totals much better gauges of the volume of services produced, for comparison among years and among nations. (Kuznets 1937, 37)
Economists have suggested fixing many inadequacies of GDP with suggestions ranging from using comparable market rates to value household chores (or shadow pricing measured by time devoted to a task) to quantifying environmental deterioration, and many critics have called for more radical redesigns or for abandoning the measure and adopting an entirely new valuation (Nordhaus and Tobin 1972; Zolotas 1981; Daly and Cobb 1989; Costanza et al. 2009; World Economic Forum 2017). In all cases, the goal is to quantify the extent to which economic development meets society’s needs (for adequate nutrition, shelter, personal freedoms, environmental quality) rather than measuring the magnitude of market transactions….”
Read Smil on Growth, Amazon link here.