Every now and then I come across arguments I have not heard before, and then I pass them along:
…relying on carbon taxes is also a terrible way to finance the government. We are talking about half a trillion dollars or so in revenue, so the percentage of financing would be quite large. Income fluctuates, and that is a problem, but the spending on a particular set of items, like fossil fuels, has the potential to fluctuate even more. Example: suppose we really are facing an oil production peak, and scarcity causes the price to spike? Every 10% rise in oil prices will tend to cause something like a 5% reduction in long run demand (I’m rounding here – and thanks to Gar Lipow for his valuable work in collating the evidence), but this also means less carbon tax revenue, potentially a lot less. This is a serious problem, one that the green taxers have not really confronted.
The wise guy answer is that we could buy U.S. government revenue insurance from the Chinese, or barring that, from Dubai.
Addendum: Here are some useful numbers.
Is this necessarily more volatile than a highly progressive income tax? See CA during the last recession.
Isn’t the entire point of a carbon tax to cut down on the use of carbon? The long term goal is to drive the usage of carbon as fuel as low as possible, so it seems a bit daft to think of the tax as a new source of general revenue for the government. I’ve always thought it would be nice to apply all the carbon tax revenue to working on the pollution / global warming problem.
I would rather see carbon taxes go to providing rebates on hybrid/fuel efficient cars, rather than payroll taxes.
This would have a several effects.
1. People would use their carbon heavy machines less.
2. They would switch to cheaper, more efficient alternatives sooner because (a) they’re cheaper because of the rebates (b) the cost of operating them is less because they use less carbon based fuels or none at all.
3. Manufacturers would have an incentive to offer more hybrids, electric vehicles etc… because the demand for them would sky rocket.
As Mankiw aptly mentioned, the main stumbling block to carbon taxes is that:
Republican consultants don’t advise using the word “tax” unless followed by “break” and Democratic consultants don’t advise the word “tax” unless followed by the phrase “on the rich”.
Excellent point by Jody above. Indeed both these revenues would be highly dependent on economic growth and do make long-term planning difficult. Furhtermore, a tax that seeks to drive down usage is extremely time-inconsistent. When the short-term pain is high it only takes one election to reverse the tax on some pretext or the other esp. when it falls on the middle class.
The author is talking about long-run demand, but there is also some short-term volatility in fuel use (and hence emissions) from inter-annual weather variability. The DOE estimates that US CO2 emissions fell 1.3% from 2005 to 2006, due partially to milder winter and summer weather. Any idea how this compares to fluctuations in income (and income tax revenues)?
DK makes a good point — so what if it fluctuates? the only reason to care is if we become dependent upon it as a source of revenue. But we shouldn’t. Instead, it should be some sort of rebate.
the biggest complaint about gasoline taxes, and thus about carbon taxes, is that it hits the poor hardest. Whether a straight rebate or a reduction in social security taxes (e.g., the first 10k of income each year is not subject to FICA) would be a way to avoid the problem posited. Let the amount fluctuate if necessary, based on prior year actual revenues.
Properly applied, a carbon tax should be completely rebated on an equal per capita basis. It applies the incentive to not use fossil fuels at the consumption points, keeps the revenue out of the government’s hands, and ameliorates the worst regressive effects of such a tax.
Without the above, I will never support a carbon tax. Any other use of the revenue will bring a veritable host of rats to the table.
8: don’t abolish payroll taxes, because that’s paid to seniors … Abolish individual income taxes and let the states, government agencies and Defense Department sweat it out.
To clarify, national defense is not an essential public good, but wealth transfers to seniors is?
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