Do all serious economists favor a carbon tax?

Richard Thaler, Justin Wolfers, and Alex all consider that question on Twitter.  I say no.  While I personally favor such a policy, here are my reservations:

1. Other countries won’t follow suit and then we are doing something with almost zero effectiveness.

2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse.

3. There is Jim Manzi’s point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers.  Denmark remains far more dependent on fossil fuels than most people realize and for all their efforts they’ve done no better than stop the growth of carbon emissions; see Robert Bryce’s Power Hungry, which is in any case a useful contrarian book for considering this topic.

4. Especially for large segments of the transportation sector, there simply aren’t plausible substitutes for carbon on the horizon.

5. A tax on energy is a sectoral tax on the relatively productive sector of the economy — making stuff — and it will shift more talent into finance and other less productive sectors.

6. Oil in particular will become so expensive in any case that a politically plausible tax won’t add much value (careful readers will note that this argument is in tension with some of those listed above).

7. A carbon tax won’t work its magic until significant parts of the energy and alternative energy sector are deregulated.  No more NIMBY!  But in the meantime perhaps we can’t proceed with the tax and expect to get anywhere.  Had we had today’s level of regulation and litigation from the get-go, we never could have built today’s energy infrastructure, which I find a deeply troubling point.

8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax.

9. Jim Hamilton’s work suggests that oil price shocks have nastier economic consequences than many people realize.

9b. A more prosperous economy may, for political and budgetary reasons, lead to more subsidies for alternative energy, and those subsidies may do more good than would the tax.  Maybe we won’t adopt green energy until it’s really quite cheap, in which case let’s just focus on the subsidies.

10. The actual application of such a tax will involve lots of rent-seeking, privileges, exemptions, inefficiencies, and regulatory arbitrage.

It seems to me entirely possible that a serious economist would find those arguments hold the balance of power.  In my view those points stack up against a) the problem seems to be worse than we thought at first, b) the philosophic “we are truly obliged to do something,” and c) “some taxes need to go up anyway” arguments.

I am in any case not an optimist on the issue and I consider my pessimism a more fundamental description of my views on the issue than any policy recommendation.  If you study tech, you will see a bright present and also a bright future.  If you study K-12 education, you will see a mixed to dismal present and a possibly bright future.  If you study energy economics and the environment, you will see an OK present and a dismal future, no matter what policies we choose.


> 1. Other countries won’t follow suit and then we are doing something with almost zero effectiveness.

It will have more effectiveness if we also us a "carbon tariff" that tries to take into account the carbon emissions of countries from whom we import. This would, of course, be a morass of complexity and hurt feelings. Nevertheless, it would likely get Canada and Mexico to adopt carbon pricing, and it would shift more of our imports to carbon-pricing countries in the EU.

> 9. Jim Hamilton’s work suggests that oil price shocks have nastier economic consequences than many people realize.

I think the imposition of a carbon tax be very unlike an oil price shock, for two reasons. First, the "extra" money in the newly-high price would go toward something that helps the economy in the long run (deficit reduction, tax cuts, spending on investments) or short run (spending, tax cuts, spending on digging holes and filling them in again), rather than to the Saudi Royal family. Second, the market price of oil would go down as we reduce our demand for the stuff. That can't hurt, right?

On carbon tariffs, see I don't think their chance of working is so high.


Logic 101. Why would Mexico and Canada (and China) adopt domestic carbon taxes because we tax the carbon content of imports from them? America doesn't have a magic wand that we wave, and change the world with. Remember domestic energy consumption in Canada, China, and Mexico dwarfs the energy content of their exports to the United States.

"The craziest thing about conservatives is that they think America can rule the world. The craziest thing about liberals is that they think America can save the world."

I was thinking from the perspective of a country that exports a lot to the U.S. but doesn't price carbon: "If the carbon content of this stuff is going to be priced one way or another, we may as well have our government get the revenue for it."

> Remember domestic energy consumption in Canada, China, and Mexico dwarfs the energy content of their exports to the United States.

You make a good point. Perhaps they would find a way to ONLY tax the energy content of their exports to the USA. That wouldn't be as good from a global perspective, but it would improve the effectiveness of our own carbon price by reducing the leakage of energy-intensive production across borders.

I acknowledge that this is pretty speculative.

1 and 2 would be solved by a carbon tariff.

Who is the "we" in a)?

A better, because people will more readily accept it, is Hanson's tax + div proposal.

All carbon is taxed at the source. Imports receive a carbon tariff depending on the actual carbon policies of
the exporting country (a countries with the same tax policy would pay no tariff). All proceeds from the tax
and tariff are then electronically distributed equally to every adult citizen on a quarterly basis.

You left out:

11. If you're under 30, there hasn't been any global warming in your adult lifetime, so you might be a little bitter about having more money taken from you fraudulently.

That is patently false.

It's more like 15 years.

So wrong, and so stupid.

Your patent is still pending.

This is false.

Your statement is false, so there!

I prefer "0. Taxing carbon is worse than useless."

2 and 7 are basically false as far as the power sector is concerned, which is responsible for half of US emissions. Power, obviously, cannot be imported from overseas, and the technology for cutting emissions massively certainly exists: gas combined-cycle plants, which emit roughly half as much carbon as an average coal unit per MWh. The low price of natural gas relative to coal the last few years already has limited carbon emissions growth significantly relative to history, and NG vs coal prices are so competitive today that a very small carbon tax would have massive implications for which plants are dispatched. And because of a combination of factors, in most regions we already have more CC capacity than we need, so no additional investment would be required for at least the first several years.

If all power sector production is for consumer consumption, then you're right. But any power-intensive industry would move.

Also, "replace coal with gas" isn't really a technology. If coal happens to become cheaper than gas in the future, nearly all the arguments in your second paragraph up-end themselves.

Had we had today’s level of regulation and litigation a century ago, the private automobile would never have become accessible to the average person. We would all be immensely poorer than we actually are. Since roughly the 70s, there has been a social and political war on energy and technological progress, with a few exceptions such as computers. The exceptions show, by contrast to the choked technologies, just how much progress has been lost and how much poorer we actually are than we would have been.

Technologically, our energy future is extremely bright. Fossil reserves have ballooned with shale-accessing technologies, and that's likely to continue for at least a few decades. Other modes of energy production are amazing numerous, ranging from thorium reactors to fuel cells to space-based solar. I do not presume to pick winners, but only to point out the enormous variety of promising options.

The notion that the political sausage factory that produced Solyndra has even the slightest chance of accelerating technological progress to any realistic green energy technology is pure fantasy. Carbon taxes are the societal equivalent of religious self-flagellation.

The notion that the political sausage factory that produced Solyndra has even the slightest chance of accelerating technological progress to any realistic green energy technology is pure fantasy.

Comment line of the month. . .

"Had we had today’s level of regulation and litigation a century ago, the private automobile would never have become accessible to the average person. We would all be immensely poorer than we actually are."

Counterfactual fallacy. And if for the past 50 years we had subsidized development of new energy technologies at the level we do oil and gas companies we would not have any manmade climate change.

Both of these arguments are correct. The worst possible environment for innovation is extensive regulation plus subsidies for incumbents, which describes the US energy sector to a T. The left yells about the subsidies, while the right yells about the regulations.

poppycock. Pure and simple. We learn from our mistakes. The refusal to learn - which is what you're proposing - is an evolutionary dead end.

"8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax."

What is an "economic argument?" This is a normative question and all of the arguments above make implicit value assumptions. Why single out the one where the value is equality as "non-economic." I do agree with you that, to a certain extent, economics warps people's values toward efficiency and away from say, a Rawlsian or utilitarian criteria, but I'm not proud of that.

Clarification: Efficiency is utilitarianism pure.

The degree of risk aversion conjured by Rawls is not descriptive of humans at levels of income earned in advanced countries. .

What I had in mind for the non-normative versions of efficiency, i.e. Paerto efficiency. Now that certainly has nothing to do with utilitarianism as the efficiency just concerns preferences while utilitarianism is about (loosely) hedonic benefits. They teach this in most micro theory classes nowadays in the GE section.

Where is the evidence for the claim about risk aversion? Did anyone show people distributions for hypothetical (or real) countries and ask them which one they'd like to live in?

Rawls' model implicitly assumes the risk coefficient is infinite. Different empirical measures of people's risk coefficients may give different results, but I don't think anyone has ever suggested that.

I don't see this dismal environmental future..

population will stabilise..biotech will eventually make food production orders of magnitude more productive. cities are more efficient and vibrant than rural areas generally.

expand on your pessimism

All of the reasons you listed for not having a carbon tax


the reasons for


Carbon Subsidies--Oil and Gas Tax Breaks, Free Coal Transportation Subsidies on Inner Waterways.

End Tax and Other Subsidies.

1-3 are arguments to push for a international agreement, not to push against the tax per se, as an economic arguments (and there are bypasses to the argument even if an international agreement wouldn't be feasible). 4 is wrong, all land transport can be carbon efficient, ships and planes still can't but the idea of a carbon tax is exactly to incentive carbon efficient technologies. About 5, I'd really like to know how much less productive is now a sector like software development with respect of car production, in the USA. Is a carbon free enterprise, like Google, less productive then Crysler for the total wellfare?
6 is irrelevant. I agree that it's important to complement the tax with more deregularization of the sector(7), but again isn't an argument against a tax. 8 is true, but again it's not a problem of the tax per se: income taxes can be redefined to cover for it's redistributional effect. 9 it's quite evanescent, it's already hard to see the carbon tax as an oil shock, the argument is still valid but quite stretchy... I'd like to see a proper model with the specific idea.

In the end, it's the old nice 10: anything done by the government could be biased/lack of information (true).
Honestly, since in this case we know that anything done by the market WILL be biased (that's what externalities do, don't they?) I don't understand how an economist could prefer a market solution over a centralized/incentive based solution in those cases in which a market solution is the unbiased solution to the wrong problem.

Google is hardly a carbon-free enterprise. There are massive server farms behind the scenes that require power and air-conditioning.

But actually it is.

To be carbon neutral you don't have to avoid producing any CO2: that would be impossible, even breathing you do so. What you have to do is to consume/offset as many CO2 as you produce.

I achieve carbon neutrality in my breathing by offsetting it with consumption of food that has sucked (directly or indirectly) an equal amount of carbon dioxide from the atmosphere.

And I have it on good authority that everyone else does the same.

Assumes that food production results in net removal of CO2 from atmosphere. Not really true under mechanized farming with chemical fertilizer, transport, etc.

Thanks for articulating the best available economic case against a carbon tax. However, I didn't fine most of your arguments convincing. A surprising number seem outright backwards. See some specific comments below.

1. You are not thinking on the margin. If other countries don't follow suit, then almost surely the *marginal* benefit of carbon taxes is higher, because the climate costs, on the margin, are higher, when carbon levels are high. Would you refuse to help put out a fire in the house if your neighbors didn't help?

3. Europe has about 50% less gasoline consumption per capita, partly from more efficient cars and partly from different commuting arrangements, etc. Both can be traced to carbon (gas) taxes. Small "innovations" count, too. A lot.

4. Sounds like an argument that the tax would have close to zero deadweight loss. That's a lot better than most other taxes. Ergo, it's an argument that we should have relatively *more* carbon taxes. Remember optimal taxation theory.

5. So you support the premise Pigouvian taxes, but now we need to assess the relative social externalities of various industries. Sounds right to me.

6. The question is *on the margin* is the price optimal, not whether it's high or low.

7. The reason for much existing regulation (CAFE, lightbulb efficiency standards. etc.) is because we *don't* have a carbon tax in the first place. Regulation is a second best solution that dominates our policy because, well, economists haven't been clear enough about the first best solution.

8. The research I read is that a gas tax is NOT particularly regressive. The poor don't drive much. Besides, progressivity is a job for the overall tax system, not each and every component.

9. That's a good argument for reducing our dependence on oil over time, isn't it?

9b. And let's balance the budget while we're at it.

10. If the price of carbon does not currently reflect its true social cost, then there already is massive rent seeking going on. A carbon tax would likely reduce it, on net, when you take that into account.

"Europe has about 50% less gasoline consumption per capita, partly from more efficient cars and partly from different commuting arrangements, etc."

Unless you're lumping gasoline and diesel together, a good part is the emphasis on diesel in cars (just over half of passenger car sales in Europe are diesel). Refineries have some flexibility in how they crack petroleum; European refineries target increased diesel yield, US refineries increased gasoline. It's still not enough, as there is usually trade in finished products between Europe and the US, with us shipping excess diesel to them and them sending excess gasoline the other way.

Re optimal taxation, when you tax stuff people want to buy, you're automatically exacerbating the income tax's deadweight losses. Optimal tax theory in fact seems to say that you don't in general get this "double dividend" (the hypothesis that taxing externalities gets you less externality plus more efficient revenue) unless you were doing something very wrong in the first place. And even then you have to lean on the taxed good being a fairly strong leisure complement relative to everything else you buy. I'm not sure if such a broad good as carbon can differ terribly much from the average good.

I am in any case not an optimist on the issue and I consider my pessimism a more fundamental description of my views on the issue

The "on the issue" qualifier is somewhat superfluous I feel........

Reading Tyler's views on the great stagnation, American deficit, American politics, the Euro, Greece, Medicare, Social Security, climate issues etc. I hardly see a silver of optimism anywhere.

What things is Tyler really optimistic about?

Restaurants in NoVa?

I've made the argument before in my paper on The Pigou Problem that economists have not made a fully rigorous accounting of carbon taxes that takes into account all other taxes, regulations and subsidies. I am not convinced that we have strong evidence (other than gut feelings) that a carbon tax would move us in the right direction if we leave all existing regs in place like CAFE, etc. (Remember that the Public Finance lit says that the optimal Pigou tax is lower in a world of income taxes and other general taxes in addition to my objections re: substitution to other countries like China which won't abide by treaty and unaccounted for internal subsidies like restrictions on parking which work to mitigate the congestion externalities of driving).

Does Brynjolfsson really believe that a carbon tax would lead to a bargain where CAFE and the myriad of regulations would ALL be removed if a carbon tax were enacted? I think that is a greater fantasy.

For reasons I articulated in the Pigou Problem, even the work on the optimal gas tax shows that the biggest problem of gas usage is congestion and that a straight gas tax does not address that problem effectively. Nor have I seen work updating Parry and Small's AER piece that fully takes into account all problems of properly pricing net externalities.

If we globally banned all future fossil fuel exploration, it would guarantee that we meet a reasonable "safe" target CO2 concentration at the year 2100 without the needs for any taxes, tariffs, or giant regulatory technocratic bureaucracies. The extreme IPCC scenarios require a high degree of additional discoveries and increased rate of production (past estimates of which have not been realized in the petroleum markets).

The market would efficiently spread production of existing economically extractable reserves over the time period and raise prices and lower emissions automatically. If you want more oil or gas instead of coal, you could have some kind of "exchange for permanent retirement" regime. No one is interested in pursuing this government-light policy, and everybody celebrates new large finds.

If and when warming gets bad enough, we'll use some kind of geo-engineering. At that point, all the hair-shirt green conservation will become meaningless.

Or, someone may come up with a new idea for power generation or battery technology. At that point, point, all the hair-shirt green conservation will become meaningless.

Or, powerful technologies like biotech, nanotech, robotics, AI, etc. may cause problems that make global warming look like a minor problem. At that point, point, all the hair-shirt green conservation will become meaningless.

The only scenario where these measures make sense is one where we massively cut our carbon output, manage to convince the third world to embrace an expensive, low-energy economy, there are no significant technological changes, and it's necessary in the first place. The least likely scenario, in my opinion.

exactly (what's amazing to me is that none of this is really disputable -- you're not getting the rest of the world on board, we're unlikely to change, it's unclear there's really much reason to change until we run out (house isn't obviously on fire yet) -- but the pragmatic position is considered foolishness by greens/lefty (who, IMHO, are fairly transparently looking for some sort of quasi-religious crusade (to fill the gap left by the fact that the communist religion didn't pan out so well))).

The "rest of the world" seems more interested in at least looking at the issue than we (the US) are. That may not be solid action yet. But let's not pretend that the US is some kind of global leader on climate change action.

It is a lot easier and less disruptive to change before we run out. Infrastructure takes time, I don't think the best plan is "we'll figure it out when the sky falls."

Anything firm to demonstrate that "greens/leftys" are not open to a pragmatic approach or in general approach this from a quasi-religious perspective? Or is it more that you don't agree with what they're saying, therefore they must be 'stubborn', 'ignorant', 'blindly faithful', etc, etc, etc...

What would that geoengineering consist of? How will it be tested? Will it be undertaken by governments, private entitites? At least one of the proposed geoengineering solutions to AGW (iron seeding of the ocean) has been tested, and didn't necessarily show the kind of results that would suggest it is going to be a useful solution.

So I'm surprised to see how sanguine people are about the prospect of geoengineering as an ace in the hole.

Most geo-engineering is aimed specifically at the higher tempurature issue in GCC. It doesn't address other serious issues like ocean acidification. There are also pretty significant concerns about unforseen side effects. None of that means we won't need/want to resort to geo-engineering, but it seems pretty risky to just assume it will save us all at no cost.

Furthermore, part of the argument for addressing emissions, even if this alone won't "solve" the problem is simply to slow the pace of change as much as possible. This gives more time for social, geographic, technological, etc. adaptation. An extra 10 or 20 years may be very important even if it doesn't change the equation in the long term.

11. It won't be (or long stay) revenue neutral. It is just a huge regressive tax increase.

What if, instead of a carbon tax, we instituted a "pollution tax," in which carbon emissions are just one type among many?

The "carbon tariff" frightens me. I can see the theoretical appeal, but it seems like it could just undo decades of reductions in trade barriers.

Why not a tax on the stuff coming out of the ground. I propose a Value Extraction Tax. Most importantly, the revenue has to go to the subsequent generation, and not in the bullshit way the government wastes all the money it gets today.

Sure, you can trust the government to keep that money safe for future generations. They have a great track record of that very thing.

Alaska seems to do a good job of collecting and distributing its royalties from extraction. The only difference between a royalty and a tax is the admission of the state government that the revenues rightfully belong to the people of Alaska directly, and not through some patriarchal rationalization for using them for general expenditures.

Why the people of Alaska alone? Why not the people of the United States?

States with extractive industries have costs associated with those industries, but beyond those costs, any additional tax really is a tax on the rest of the US and its citizens.

Alaska's oil royalties are a payment to its citizens for the value of the jointly owned resource. it is NOT compensation for the damages of extraction which are minimal.

Why not everywhere else? Because oil companies either own the land or lease the land on which they drill. If its privately owned, the owners get the benefits. If the fields are government owned, you ought to be asking you Congressman why you're not getting a check.


It's because the future generation doesn't have a chance to bid on the land.

Oh, and limited natural resources are special. That's why not everyone and everything else.

We know oil is also uniquely special. In 100 years we will have some other energy technology, but for some time between now and then, oil is life.

Tyler, what do you mean "a) the problem seems to be worse than we thought at first,"
What problem exactly?

"If you study K-12 education, you will see a mixed to dismal present and a possibly bright future. If you study energy economics and the environment, you will see an OK present and a dismal future, no matter what policies we choose."

The most interesting sentence I've read in some days.

i respect tyler immensely, but the bit about energy and the environment is just silly. recentish history is basically the story of humans abusing their environment less and less, while finding new and better forms of energy. e.g., yergin just wrote in the WSJ that peak oil is a bogeyman, rather than reality. are you really going to dispute yergin on oil?

if you don't want a carbon tax .. what is your method to get your economy to transition to new carbon-free energy use? Is there any alternative? Why would it be impossible not to compensate a carbon tax by lowering other taxes, putting cash into pockets of people that can then decide how to live a less carbon-intensive life?

Europe is doing it. Maybe not quite effective yet, but its transition is starting to move. The USA would not be going this alone.

Most developing countries have no grid power, or it is very unreliable. Solar PV is sufficient for first needs, like lighting, water pumps, computers, etc. The basic development needs.

China has jumped onto the bandwagons, using its command-and-control economy. It will produce the wind and solar power to develop the world. The developing world has very little reliable grid-power, so jumping directly to (chinese) solar power is great for them.

The USA will come out of this economic crisis ready for the 80-ies. But it is 2011, now.

Interesting that neither the post nor a single comment so far has dealt with several real world issues, much less what is the serious alternative to a carbon tax, supported by both quite a few serious economists as well as many policymakers. That would be much-maligned cap and trade, a flawed version of which passed the House awhile ago (no chance now), but could not get through the Senate. Nevertherless, one real world consideration is that it still has a better chance of getting passed in the US than a tax increase of any sort. As long as Grover Norquist continues to run a stranglehold dictatorship of the GOP, there will be no tax increases of any sort whatsoever in the US, except maybe undoing the fica tax cut put in by Obama.

The other real world consideration is that many think it would be a good thing to attempt some sort of global coordination on policy regarding this matter, despite the abject failure at Copenhagen. The hard reality is that the rest of the world, particularly Europe, has a form of cap and trade in place thanks to Kyoto, which we failed to ratify. They put it in place to appease the US, which demanded it over taxes back when Kyoto was negotiated, and now their attitude is very negative on the new push by some US economists to go for taxes. Most of these people compare some idealized textbook example of taxes vs messy real world cap and trade systems, such as the one in Europe. But the Scandinavian countries attempted to introduce a cross-border harmonization of carbon taxes and utterly failed. If the Scandinavians cannot pull it off, the rest of the world cannot. Forget it.

As a theoretical matter, cap and trade and taxes are essentially equal. Each can in theory bring one to that amount of pollution reduction where MSC= MSB, one from the quantity side (optimized for expenses) and one from the price side. Not much difference, although cap and trade has worked pretty well in the US for SO2, a main reason we pushed in the original Rio and Kyoto negotiations, even if the US Senate refused to ratify Kyoto thanks to not wanting to let India and China off the hook for that round (Byrd-Hagel passed 95-0).

As it is, states should raise gas taxes to pay for their crumbling highway infrastructure, although that is really an entirely different matter.

Oh, and the goofballs claiming no global warming recently have obviously not been paying any attention to recent years' data.

It is the "recent years" data that casts the most doubt on global warming.

It is the method of data collection, who collects it, who and how it is processed, and how it has been packaged into propaganda that casts doubt on it.

The biggest failure of Copenhagen was the severe shortage of limousines for the delegates.

I've been hearing these stories of "crumbling infrastructure my entire life. It's amazing how little has been accomplished despite massive expenditures, frenetic activity, and bi-partisan lofty rhetoric. Never before have we achieved so little at such a high cost with nearly unanimous political agreement. It has all been bridges to nowhere, but the end product looks more like the Winchester Mystery House.

While I can name a couple recent Nobel winners who are goofballs, I don't think this guy is one:

Nobel Prize winner resigns–global temperatures "amazingly stable"
"In the APS, it is okay to discuss whether the mass of the proton changes over time and how a multi-universe behaves, but the evidence of global warming is incontrovertible?"
"The claim (how can you measure the average temperature of the whole earth for a whole year?) is that the temperature has changed from ~288.0 to ~288.8 degree Kelvin in about 150 years, which (if true) means to me is that the temperature has been amazingly stable, and both human health and happiness have definitely improved in this 'warming' period."


His complaint was about the use of the word "incontrovertible" and we have seen warmer temps in the far distant past, with his precise claim about temp 150 years ago slightly absurd.

As for recently, 2010 set a new record high for more recent observations, and this year the Arctic ice sheet was even smaller than last year's record setting. Those claiming no warming recently really need to pay attention to facts rather than rantings by certain people.

And yet : "The latest sea level numbers are out, and Envisat shows that the two year long decline is continuing, at a rate of 5mm per year."
Also, does your claim about water temps in the far distant past suggest that there may not be a human component to this?

I don't actually disagree that there is warming. I do not believe it is severe as claimed though, as often as those making the claims have been shown massaging their data.
I also don't agree any human cause is greater than 9.7%. That is an awfully precise number I pulled out of my ass. I wonder if that qualifies me as a climate scientist.

2010 was only a record according to GISS, which is a giant convoluted mess of adjustments. The satellite record disagrees. Compare that to the Hansen 1988 predictions.

The Arctic sea ice record minimum was 2007, not this year or 2010. In any case, Arctic sea ice is fairly irrelevant. We have a small sample size to compare to (newspaper reports suggest similar area in the 1930s, but we have no direct pre-satellite measurements) and it makes no difference in sea levels.

I disagree:
Apart from (personally) favouring cap-and-trade:
1) Doing it nationally is ok. You can always estimate the CO2 in imported products and add a tariff. Which solves 2) as well.
3) You're right but the market here doesn't really work because there are way too many CO2 certificates around.
4) That doesn't make CO2 any cleaner. So it will be incremental steps towards mor eefficiency. That's ok.
5) Maybe more bright people go into physics and do the next generation solar cells?
6) Greetings from Germany, the country where a gallon of gasoline costs $8 and the economy still hasn't reverted to horse-pulled carts!
7) You're right. But cap-and trade yould provide a solution here too.
8)-10) Can't help you there, except that cap-and-trade offers more tradeoffs.

Re point 2 - there's been some work on carbon leakage (eg Aldy + Pizer: This work suggests that leakage would be relatively modest overall and confined to a small number of sectors with high emissions intensity and trade exposure.

Re point 3 and others - it seems like you're envisioning reductions coming from very visible emitters, chiefly automobiles. Most of the modeling work suggests that emissions reductions from private cars would be modest for quite some time. (See slide 11 of EPA's Waxman-Markey analysis, Initial emissions reductions would instead come from electricity fuel switching (coal to natural gas), offsets, etc. Early ransportation reductions are relatively small. The European experience is generally consistent with this. This is also consistent with your point 6 - see EPA slide 19 noting that carbon pricing would only modestly raise gasoline prices.

Not sure that "other countries won't follow suit" really holds water; it was us that decided not to ratify Kyoto, not that the other countries, and the China has had a grab bag of policies over the years that are far more onerous than anything we've even contemplated -- one child per family, and various large cities have banned motorcycles (but not electric scooters) for various reasons. They're also selling a ton of automobiles, so it's not all roses.

It seems to me, also, that regressive (or not) tax does have some bearing on the economy, in practice, if not in theory. For a given level of revenue, in a bust like the one we are currently experiencing (I know, formally we are not in recession, but this is not a great economic climate), a regressive tax is a thumb on the wrong side of the stimulus scales, since the poor are more likely to spend than to save. But we have more knobs to turn that just a carbon tax.

There are some other economic-efficiency improvements that might discourage driving (and hence, carbon consumption); if automobile liability insurance were priced either by the gallon, or by a GPS/black-box odometer, the marginal rate of driving a mile would go up (from my experience with low-mileage cars, auto insurance is priced as large-yearly-fixed-plus-small-mileage-variable -- consistent with not-entirely-honest self-report of miles driven per year).

I am not sure what to make of claims about NIMBY regs -- oddly enough, I am a member of a group that is attempting to get a stretch of abandoned rail (next to remaining active rail) converted to bike path, and we've got NIMBY out the ears. Cape Wind, more NIMBY. On the other hand, there's people getting methane in their water from fracking, and the methane is isotopically old (i.e., from down deep) and correlated with nearby fracking. That would strongly suggest that (a) fracking is a good thing to keep away from your drinking water (at least in practice, if not in theory) and (b) if that methane is also leaking into the air (it made it from 5000+ feet to 500 feet; what is stopping it from traveling the last 500 feet to the atmosphere?) that undercuts the GHG-goodness of natural gas. Since the industry is not (to my knowledge) compensating the owners of the polluted wells, NIMBY is a rather sensible reaction here.

A grab bag of BS. China's environment is filthy from pollution such that people are literally dying from breathing their air and drinking their water. They have no more concern about the environment than you do. They apply a little window dressing, a lot of smug elitism, and proclaim to be making monumental strides toward Ecotopia while raping Mother Earth.

The US Senate unanimously voted against Kyoto PRECISELY because it contained exemptions for countries like China, and PRECISELY because the cost to our economy of compliance was unacceptable. Why don't you actually read the text of the Byrd-Hagel Resolution:

China's one child policy isn't the social and environmental boon it was proclaimed to be. China's birth rate declined DESPITE "one child", not because of it. The policy is easily avoided or ignored.

Stifle the ad hominem, okay? You're quite wrong about what I think.

I think the sources you cite are not being entirely honest; China's fertility rate dipped sooner, and deeper, than other countries of comparable wealth, and population growth compounds. Furthermore, they enacted this policy in 1980, without benefit of the 30 years of experience since then with successful fertility reduction in other nations (hindsight is a wonderful thing). I'm not sure that I can call their intentions "best", but they had a plan, and it was a tough plan requiring a lot of sacrifice, and it had an effect, and they did it.

Byrd, he does represent a coal-producing state, so his constituents have quite a lot to lose in any carbon-reduction treaty. I would be surprised if he did not promote their interests. That resolution also merely asserted a high cost to our economy, with no estimates or justification whatsoever. Given that US industries have a long history of crying regulatory "Wolf!", why should this be any different?

I do agree with you on the nukes -- and I am sure that the nuclear industry will call for a repeal of the Price-Anderson act, to demonstrate their sincere belief that in fact their technology is safe. Because otherwise, that's not a level playing field, right?

First, learn what an ad hominem is:

I didnt use a personal attack as my argument. I made a statement that China and you are disingenuous about reduction of emissions. But i shall retreat from my assertion about you in the absence of more evidence. Mea culpa. My statement with respect to China remains - their "grab bag" as you put it are merely token gestures and part of a broad-based propaganda campaign. And it's difficult to disentangle their stated intend from their ulterior motives. China's central government is awash with hidden interests and agendas. The "various reasons" for banning motorcycles are more interesting than the environmental impact. To say China's policies are "not all roses" is the understatement of the millenium.

I agree that One Child had an immediate effect, but maybe you didnt notice in the Brookings article that over subsequent decades, demographic and economic factors played an increasing role. I personally know of families which ignored the policy at little to no consequence. I wasnt going to deluge you with links, so I chose the source that I thought would meet most with your approval. I invite you to explore other unbiased opinions on their One Child policy and its effects. But I submit that the environment was no part of their original intent.

China's grip over its people is like grasping fine sand. Much of the environmental damage is done by "illegal" mining which, of course, the government knows about. Then there's the legal production about which it doesn't care.

You stated explicitly that the argument "other countries wont follow suit" doesnt hold water. The text of Byrd-Hagel states SPECIFICALLY that the exclusion of China, et al, was one of their primary reasons for opposing it. Regardless of that, since the so-called "problem" is GLOBAL production of emissions, it simply does not do to lead by example and to hope others will follow, especially when the costs are observably high.

The Senate adopted Byrd-Hagel in a vote of 95-0, so your "he represents a coal producing state" doesn't hold water. I guess you think the entire US Senate - every liberal and every conservative - is disingenuous and ignorant about global warming and the costs of both action and inaction? Entrenched interests and political pragmatism typical holds sway over the majority, but unanimity on such a contentious issue is rare.

The resolution asserted the high cost based on EXPERT TESTIMONY. I don't believe Congress can pass a resolution declaring "night is day", but the facts regarding the costs are obvious to all except the most starry-eyed environmental optimists. If we had the technology to produce more efficiently, we would already be using it. With current technology, we can't go back to decades-past emissions without a substantial reduction in production and employment. And the prospects for better technology in the immediate future to meet the Kyoto goals are dim - except with nuclear power.

I actually agree with you on more levels than you know. I think the oil and coal lobby have consorted with radical environmentalists to oppose nuclear energy. Some have even suggested the nuclear energy industry has stifled its own development, relying on outdated (but relatively cheap) boiling water reactors instead of developing better pebble bed and Integral fast reactors.

Price-Anderson is a different story. On the one hand I agree it has contributed to unsafe cost cutting and lack of innovation. On the other hand, research, development, and implementation are very costly and highly risky. These barriers to entry are a substantial market failure, and we all agree that government is one solution to market failure - the topic of the current discussion. The subsidy to nuclear power would effectively be a form of picking winners and losers, but that's what we've been talking about here all along.

While it seems to be a giveaway, the tradeoff is substantial costly regulation. With safer technology, one would expect the potential damages to be far lower, but P-A was intended for medium level catastrophes, such as Fukushima. For enormous catastrophes, the government is always going to consider any disaster as "too big to ignore."

If we're going to repeal P-A, let's also ban federal government expenditures to mitigate the impact of fire, flood, earthquake. Why do we keep paying to rebuild cities in flood plains and on unstable fault lines?

The difficulty with our rejection of Kyoto, and the inference of the treaty that we would sign, is that our actions give China an incentive to increase their emissions. If our position is that everyone cuts equally, that puts China in an impossible position w.r.t. economic growth, and it also gives them an incentive to boost their emissions (and growth) now so if they ARE ever constrained to cut emissions in this one-size-fits-all-way, they will be starting from an easier place.

I don't think that the waste problem is solved for uranium reactors, and I don't know that it has been properly accounted for in the cost of nuclear energy. Long-term, we have entire plants that need to be decommisioned (neutron-embrittled steel shells, that sort of thing. A friend's husband who works in the business said that the Russians annealed one "in place", but I didn't get the feeling that this was either cheap or proven.) I would like to see how experiments with the thorium cycle pan out; if nothing else, we can use it more efficiently, and produce a much smaller volume of shorter-lived waste, with little or no risk of running out in the next thousand years.

The hypothetical transition to an all-electric-world has its own potential constraints; that many electric cars is an awful lot of large motors, meaning a lot of magnets, and a lot of copper wire, and a lot of batteries.

Byrd-Hagel has to be one of the most irresponsible actions ever taken by the US Senate. We have been responsible for massive amounts of past CO2 pollution, but we were not going to do what we did with the Montreal Accord on ozone and give the developing countries a break on adopting. Try talking to anybody out of India or China about that one.

So, at Copenhagen there was an effort to get China and India on board, although Byrd-Hagel completely polluted the discussion. The game did come down to the US and China, with much of the rest of the world disgusted with both of us, with neither country suffering much from global warming in the near term, in contrast to such powerhouse countries as Bangladesh.

As it is, your rhetoric on China is way overstated and inflated. While they have suffered badly from pollution, they are also making serious efforts to combat it, much more serious than anything recently being done in the US. It is little wonder that they are taking control of the global solar power industry while we sit around in the US with our thumbs stuck up our asses looking like idiots while global warming skeptics take over the debate in one of our leading political parties. We are rapidly becoming a pathetic joke to the rest of the world on this matter.

You do understand that lack of environment regulation is one of the things that makes China attractive for mfg?

The whole point is moot if we develop nuclear energy with any of the advanced techniques developed over the past few decades.

The risk of radiation leaks and the problem of nuclear waste have been essentially solved, relegating nuclear fears to the category of alien invasions, hobgoblins, and the end of the Mayan calendar.

In any event, even if we continued to build inefficient and fragile reactors using older technology, the risks and waste are infinitesimal compared to burning oil, coal, and natural gas. Do we have to build a mountain of carbon refuse and put it next to a few spent fuel rods to help people visualize the relative environmental impacts?

Even rabid environmentalists should be pushing for nuclear energy, but because of the unfortunate circumstance of nuclear energy being used as a weapon, people have created irrational fears of the most efficient, reliable, and clean power source imaginable.

With nuclear energy, we needed say another word about global warming, OPEC, funding of terrorism, oil spills, peak oil. All cars, trains and buses on the planet could become electric. We would need oil only for plastics and certain petrochemicals.

The avoidance of the most OBVIOUS and NATURAL solution makes me wonder if people really prefer states of argument, unrest, uncertainty, and warfare. I'm convinced people really aren't concerned about the environment, but rather it's an excuse to consolidate more government power and to hobble capitalist economies.

Let's adopt nuclear energy and focus on fighting about truly important unresolvable issues like who killed JFK, who won the 2000 election, and whether childhood immunization causes autism.


I happen to agree that we should be developing such things as thorium reactors, but you are as politically out of it as those advocating a carbon tax: ain't gonna pass the Congress, not after Fukushima, even if it should.

Hamilton is wrong.

Oil price "shocks" don't cause or exacerbate recessions. Rather, both oil prices and recessions are related to the money/credit cyclical booms that preceded the recession and accompanied the oil spike.

The UCLA/Ceridian diesel fuel (volume) index tracks industrial production very well. This measure, which can be calculated instantaneously, shows how diesel fuel consumption is linked closely to production. Even though the index does not include gasoline consumption or rail, ship, or air transportation, the sample is broad enough to remain useful.

Fuel consumption (irrespective of price) is a good predictor of how production is turning.

Oil prices are not the output and price bugaboos they are made out to be.

Serious economists favor a second term for Obama.

This garbage is more threat than promise. Governmments don't need more power too disrupt and distort capital flows and hinder economic growth.

More reason to buy gold.

Hi Tyler. I think you are wrong in your pessimism about what can be done about the climate crisis, though right that a carbon tax (at least in isolation) won't do as much as proponents think. I actually think there is reason to be pessimistic on the subject, but not because we lack either policy or technological tools to solve the problem, but because the politics are against us implementing those policies and deploying those technologies.

I put a link to my full post on this in the "website" field on this comment form in case anyone wants to read my full take on this and on Kevin Drum's reply.

There is ***NO*** global warming to begin with.

And your source for this claim is what, Martin? You should understand that capitalizing words in a blog comment is prima facie evidence that you do not know what you are talking about and are wrong, and adding lots of asterisks just adds to those prima facie conclusions.

Wow, almost a psychological profile from one comment. Good for you. ;)

I don't want to engage in yet another meaningless discussion with climate alarmists (= neomarxists in disguise). I will only post this: :) don't want to discuss it. Which kind of brings into question why you put up your original comment. And your "idisputable, end of discussion" evidence is Lord Monkton? Impressive...

Fan Mail: Is there any other economist writing in English right now who can a) list so many arguments so clearly and b) disclose his own biases or preferences so effortlessly? Not to mention c) direct his (or her) readers to opposing views so graciously? My ONLY problem with Dr. Cowen is that I am afraid an eloquently-argued Cowen perspective will tend to persuade me to reject more correct perspectives, that are not so well-worded!

Economists are not qualified to opine on the effects of doing this or that, or not doing this or that, with or to or regarding "carbon" (<---is this supposed to mean carbon dioxide?). So why would any economist "favor a carbon tax"?

I can understand the generic concept of favoring a Pigouvian tax on [something that has a negative externality]. Does "carbon" [sic; carbon dioxide?] have a negative externality? Says who? Economists?

Who asked them?

point a) is's always looked this bad.

if anything, prudence wouldve suggested treading lightly.

Is this "favor a carbon tax" vs "cap and trade"? That seems unclear in both Tyler's post, and many/most of the comments.


I'm the one who led this discussion astray from Tyler's original post and the comments up to when I jumped in and did so. One of my points was precisely that the discussion up to that point was completely ignoring the real world policy debate, which has been tax versus cap and trade, with tax not having been taken seriously for several reasons by policymakers, including among others, the complete impossibility of passing one in the US Congress. When was the last time in the US we passed an anti-pollution tax for any purpose despite long advocacy of doing so by many economists over the last four decades might I ask?

You've left off the superfreakonomics argument against a carbon tax! Basically we don't know the true costs of the externalities, so why impose large costs that are mere guesswork?

If we really can just shoot some chemicals into the air for a few billion, then a carbon tax would penalize fossil fuels much more than they cost society.


a) Do all serious numerical climate modellers favor a Pigouvian tax?

b) Why should we care and why should it carry any weight with anyone if they do or don't?

As they are not generally economists, they are not qualified to comment on the matter of a Pigovian tax versus some other alternative.

Bingo. And likewise, as economists are not generally climate scientists, they are not qualified to comment on the matter of whether "carbon" (carbon dioxide) leads to the net-negative externalities that might justify a "carbon" tax on Pigouvian grounds.

If an economist were to say, "IF carbon is a problem, I favor a carbon tax", then ok. But if and when an economist says "I favor a carbon tax!" full stop, I have to question how serious of an economist he is.

It's possible that a lot of economists like the idea of a carbon tax but for opposite reasons. Here's a theory:

Liberal economists like the carbon tax because they believe in global warming. Also in their minds the carbon tax is accompanied by growth in revenue and by compensating progressivity somewhere else.
Conservative economists like the carbon tax because it is a flat tax that doesn't tax capital income, which is good even if global warming is a con. Also, in their minds the carbon tax is accompanied by a reduction in income taxes so as to be revenue-neutral.

That's all fine and good but the fact is that if "carbon" (carbon dioxide) is not a problem for anyone anywhere anytime, then there would be no economic justification for a carbon tax any more than there would be an economic justification for an oxygen, hydrogen or nitrogen tax. Economists who have come to decide carbon is a problem are not speaking in their capacity as economists, and have no more authority or expertise on the subject than anyone else.

The only possible justification for a carbon (or similar) tax is if carbon dioxide emission has net-negative externalities. Do 'serious' economists know this? No, because they are not climate scientists. Economists may have formed opinions on the subject of carbon having net-negative externalities, from reading Time Magazine and whatnot, but I'm not sure why we would give that opinion any added weight over the opinions of any other profession, such as actors, butchers, plumbers, etc.

I consider my pessimism a more fundamental description of my views on the issue than any policy recommendation.

Wow. Just.... wow.

Most of your argument Tyler argues against rule of law, individual liberty, etc.

How can a nation of free individuals compete globally if competing with slavery in any degree which takes labor's liberty and forces them to produce at low wages and high personal costs.

How can a nation compete without pillage and plundering the land, water, and air if no other nation gives up doing the same.

Many have argued the Clean Air and Clean Water Acts harms the US because the US can't compete with Asia without polluting the water and air with the emissions from mining and manufacturing, and high death rates from weather inversions producing sustained killer smog is just the cost of a healthy economy.

Some have surely argued TGS is the consequence of the Clean Air, Clean Water, and EPA making the US unable to compete with China, not to mention creating a huge burden of older people who should have died as a consequence of all the pollution they lived in.

Plus as David Friedman points out. There is no evidence that the sign of the externality of carbon is negative.

Tyler, on your point No. 1, here's some useful information published in a major Indian newspaper:

Please note my key points in support:

a) CO2 has not been proven unambiguously to impose net costs; instead from what I can see, it almost certainly has net benefits.

b) It is ridiculous for "environmentalists" to pretend to care for "future generations" when India won't even have future generations – because its current generations will die from lack of amenities available through development today.

Let India become FULLY DEVELOPED first. Only then can (or should) anyone (including the Indian government) try to reduce India's carbon emissions.

The biggest problem with a carbon tax is simply that we don't really know what the externalities are. The AGW predictions have not done very well so far (see Hansen 1998 vs reality, sea level not only not seeing accelerating rise but actually falling, failed MET predictions in Britain leading to underpreparedness for snow, etc). And even if they had some demonstrable predictive reliability, one can argue the effects are likely to be net positive, given that this has historically been the case with warming.

Rather than spending trillions on emissions control that doesn't accomplish much even in the best case, we'd be much better served by cutting a billion or so out of the current AGW research budget to look at mitigation.

The old lords of the earth used to take the surplus of the peasants, and spend it on their own luxuries, leaving the poor serfs only enough to survive on until next years harvest. At least the smart ones did. The stupid lords convinced themselves that the peasants could live on less, and that the lords really needed more luxuries, and took more than the peasants could afford to give, and the people went hungry. At which point the peasants got pitchforks and torches and stormed the castle and got rid of the stupid lord, and took back what was theirs. The lords of modernity have convinced themselves that the modern peasants have too much energy, and want to take some of it away. These same lords have no intention of using less energy themselves because they need big castles to show the other lords how important they are and they need winged steeds to fly off to give speeches that upbraid the great unwashed for their foolish greed, and then rush off to meetings with the lords of other realms where they congratulate each other on how important they all are and remind each other how lucky the peasants are to have the wise lords watching over them. Meanwhile, the peasants are down at the local Ace Hardware buying pitchforks and kerosene.

Why do you favor a carbon tax when you acknowledge that it may have not even a marginal positive effect (except if you call reducing the speed to catastrophe a positive effect - though I'd rather say it is marginally less negative)? Do you favor it only relative to some other ideas (carbon trading etc.)?

From my side, I'm against it, because Carbon taxes are, as you laid out above, a tax on energy and taxes on energy hit ALL goods (even financial ones) equally. They raise the cost of living and reduce wellfare, which is the single most important factor if the IPCC is right. If the predictions about Global Warming are right (and I don't say they even might be), then we have a problem, because even the reduction to 1992 levels (as in Kyoto and the EU-trading schemes) will only SLOW the momentum of Climate Change. So, even if we reduce carbon in any significant way all over the world, we will still slide down the drain towards catastrophe.
And in an environment that is pretty unfriendly to humans, only one thing will rescue us technology and wealth. I mean, who would survive on Mars or the Moon? Someone who has a billion dollar and enterprises to construct habitats at his hands or someone who is hard pressed to survive the next month without defaulting on his debt. Rephrased the issue of taxes in this context, at least in my opinion, makes it hard to argue for a tax.

IMO to make a carbon tax work you need to pay out the money for removal of CO2 from the air.

Cowen: "If you study energy economics and the environment, you will see an OK present and a dismal future, no matter what policies we choose."

I study energy economics, I'm not too enthused about current policy, but see an OK present and a better future.

The long run trend is for lower energy costs, which promotes economic growth; economic growth tends to lead to greater spending on environmental benefits. I expect these trends to continue into the future, and wonder why Cowen is in effect picking a turning point in one or both trends. What am I missing?

A carbon tax steals wealth and income from non-breeders in favor of the progeny of breeders. Whether this theft is fair or not is NOT a question for economists, except for the type who helped Hitler save fuel in incinerating Jews, gypsies, gays, Russians, political prisoners and Jehovah's Witnesses.

00. CO2 is not a pollutant.

Sorry to toot my own horn, but I spent a good deal of time slogging through William Nordhaus' model in order to tease out some (perhaps) unexpected factoids regarding a carbon tax. The Independent Review published my results here.

There are legitimate points made by Mr. Cowen, but they are all refutable. In order:
(1) Under GATT, we can impose tariffs on imported goods from countries that don't impose a similar tax as we do domestically. This certainly applies to imported oil, but most would argue also to imported goods that use fossil fuels in their manufacture (at the very least, this would be part of a post-Kyoto accord, that countries putting a price on carbon could collect tariffs on goods from countries that don't). I believe other countries would want to collect the tax on their goods themselves rather than letting us collect it. while gathering the tariffs themselves may be attractive to some in and of itself, the greater benefit is that it allows the U.S. to change behavior by using its leverage as the world's biggest consumer.
2. See #1. That problem already exists with environmental regs generally, and you can't push fossil fuel extraction to countries that don't have them as natural resources. You'd have to be more specific before that "reason" makes sense in the real world.
3. I disagree that there's been no major innovation out of Europe. Germany, Denmark and Spain are all major players on the global renewables market; Germany will be getting 35% of its energy from renewables by 2020; France is the leading country on nuclear development. So I just disagree.
4. True. Efficiencies are where the transportation market would combat increased gasoline (or natural gas) prices.
5. First of all, it would be tax on carbon, not on energy. and the alternative energy market is every bit as "productive" (in the sense of high paying and innovative) as fossil fuels. Second, your point that we won't be off carbon for the foreseeable future undermines your suggestion that we'd be transferring talent out of that industry just by putting a price on carbon.
6. I'm not sure what to make of this comment. The tax would either encourage efficiencies and innovation (in which case it "adds value") or it would not be high enough to cause any real economic pain.
7. A carbon tax would be in lieu of, not in addition to, EPA regulations of GHGs. I would also couple it with a phase-out of the production and investment tax credit for renewables.
8. If the tax were truly revenue-neutral, that is every penny collected is returned to the American public in equal shares, then I don't think it would be regressive. Wealthier individuals who lead more fossil fuel intensive lives would pay more in increased costs than they would receive in rebates. Whereas energy efficient folks would receive more in rebates than they pay.
9. Could be. That's a legitimate argument, and really counsels against a high initial price. I would set it really low at the start, to cushion the shock. while a low level may not immediately change behavior, I think it's more important to gt the mechanisms and logistics in place to impose a more significant price in the future, as the pendulum of climate change pulic opinion swings back and folks get used to getting their rebate checks.
9b. From a climate change perspective (which is how I come at this), incentivizing alternatives has the same leveling effect as disincentivizing fossil fuels with a carbon tax. So I'm neutral on that. However, I do believe that the political prominence of the national debt make the tax more attractive than more incentives.
10. If you're talking the massive Waxman-Markey cap-and-trade system, then this last point makes sense. But a relatively simple revenue-neutral carbon tax would not create the morass you fear. This is especially true if it is imposed in lieu of EPA GHG regs, and is coupled with a phase-out both of oil and gas subsideies and alternative energy tax credits.


I support placing a price on carbon. As I’ve taught Sustainable Energy Law over the past several years and watched the political process unfold, my thinking has veered away from the traditional cap-and-trade approach. For the reasons below, I now believe the best approach is an initially modest, revenue-neutral carbon tax. This isn’t an original proposal; many others have proposed some version of a revenue-neutral carbon tax in the past. But these proposals deserve renewed consideration in light of the political and financial situation in which the country now finds itself.
(1) Even folks who supported the House-passed Waxman-Markey bill must admit that it was a beast. Any program that has the government administering a massive cap-and-trade system, which of necessity is going to include offsets, is going to be rife for favoritism and speculation. For many, ‘cap-and-trade’ has become synonymous with big government bureaucracy, a political non-starter.
(2) There is growing sentiment to eliminate subsidies for big oil and coal. Tax credits (and guaranteed loan programs) for alternative energy sources are also likely to be on the chopping block soon. It is a superficially attractive argument that all energy “subsidies,” including those for renewables, should get the same treatment.
(3) The whole basis for renewable energy tax credits is to level the playing field -- not only to account for subsidies and government-funded fossil fuel infrastructure, but for the external costs that fossil fuel combustion imposes on society. Our leaders need to start talking in terms of these externalities. Even without accounting for climate change, the National Academies place the societal costs from fossil fuel combustion – primarily health care costs -- at $120 billion per year.
(4) While tax increases are always politically challenging, it seems that subsidies are drawing even more ire from both sides of the aisle. For one worried about climate change, placing a price on carbon (disincentivizing fossil fuels) and giving tax credits to alternative energy sources (incentivizing alternatives) have the same leveling effect.
(5) The proposal is that, as the tax credits for alternatives are drawn down, the price of carbon ratchets up at identical levels.
(6) The revenue-neutral aspect needs to be emphasized. The tax is collected at every wellhead, mine and port of entry, based on the carbon content of the fuel. Every dollar collected is returned to the public in equal amounts, by checks issued each Spring. The initial level would have to be low, because the cost will no doubt be passed upstream to end users and drastic price increases will scare many (at least until they start getting their rebate checks).
(7) The low level of the initial tax would not dramatically change behavior. But we need to deal with the politically possible. And, significantly, even a low initial price on carbon would establish the mechanisms to allow for a higher tax in the future, once the pendulum of climate change public opinion swings back and people start appreciating the annual rebate checks.
(8) The personal incentives for increasing efficiencies will be easily understood, as people who are energy efficient will receive more in rebates than they pay in increased costs, while folks who live fossil-fuel-intensive lives will be net losers.
(9) Though the tax itself will be revenue-neutral, this would ultimately be a debt reducer, another political selling point. This is because government will be spending less on alternatives, even though the playing field between alternatives vs. fossil fuels continues to be as level as it is under the present system.
(10) Many Republicans, such as Senators Collins, Corker, Murkowski and Alexander, have supported some version of a revenue-neutral carbon tax in the past. Senators McCain and Graham, who recognize the threats of climate change, could return to their statesmen roots and get behind such a plan (likely needed to offset Democratic coal-state opposition).
(11) EPA regulations of greenhouse gas emissions are being finalized now and, absent the formidable legislative hurdle of amending the Clean Air Act, EPA has little choice but to issue such regulations. A revenue-neutral carbon tax could replace rather than add to such regulations.
(12) Under international law, a carbon tax would also allow the U.S. to place a tariff on incoming goods from countries that don’t place a price on carbon. This is political selling point by itself; more importantly, it would allow the U.S. to exercise its leverage as the world's biggest consumer to influence behavior in developing countries.
(13) If, as some believe, the threats of climate change prove to be overblown, then the low initial tax will not make much difference on the macro level. At most, it would minimally encourage efficiencies and cleaner and more domestically generated energy sources. If, as most scientists believe, the harmful effects of climate change become more pronounced, then the mechanisms are in place to set a price on carbon that will have a meaningful emission-reduction effect.

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