Economics, Energy and the Environment, Pethokoukis

Could a carbon tax work in the real world?

Image Credit: shutterstock

Image Credit: shutterstock

Nobel laureate Ronald Coase, who died on Monday, criticized “blackboard” economics that lived “in the minds of economists but not on earth.” Coase’s influential work also questioned whether taxing bad but unpriced side effects — like carbon pollution, for instance — was an optimal solution, even assuming transaction costs like identifying harmed parties. It might be better to assign property rights and let people negotiate payment. No need for lots of government meddling.

As it happens, economist Greg Mankiw again makes the case, via his New York Times column last weekend, that a Pigovian carbon tax is the most economically efficient way — certainly as compared to government mandates — for the US reduce to climate-altering carbon emissions. Mankiw:

If the government charged a fee for each emission of carbon, that fee would be built into the prices of products and lifestyles. When making everyday decisions, people would naturally look at the prices they face and, in effect, take into account the global impact of their choices. In economics jargon, a price on carbon would induce people to “internalize the externality.” … [And] the new revenue [could be used] to reduce personal and corporate income tax rates.

Elegant. Simple.  But what would Coase make of the idea? Mankiw’s other writings suggests he assumes prohibitively high transaction costs for a property-rights solution to climate change. Imagine assigning global atmospheric property rights and trying to calculate gain and loss. Seems sort of silly. Maybe the Coase theorem doesn’t apply in this case.

But perhaps a carbon tax does run afoul of Coase’s warning against blackboard economics. Mankiw makes the whole thing sound pretty straightforward. Then again, silver-bullet policies are rare. As the Fraser Institute’s (and former AEIer) Ken Green has noted, a national carbon tax would be regressive, raise the cost of energy inputs for business, and likely be layered on top of existing regulations. What would be the right price, exactly? And wouldn’t government become addicted to the new revenue stream? After all, the goal isn’t to maximize tax revenue, but to reduce carbon emissions — and thus carbon tax revenue — over time.

Northwestern University’s Monica Prasad argues that Demark’s experience with carbon taxes is instructive: “Unless steps are taken to lock the tax revenue away from policymakers and invest in substitutes, a carbon tax could lead to more revenue rather than to less pollution. … If we want to reduce carbon emissions, then we should follow Denmark’s example: tax the industrial emission of carbon and return the revenue to industry through subsidies for research and investment in alternative energy sources.” Indeed, approximately 40% of Danish carbon tax revenue is used for environmental subsidies, while the other 60% is returned to industry.

One promising research path is geoengineering. In a recent proposal presented at AEI, Lee Lane and J. Eric Bickel highlighted two methods or reflecting solar radiation back into space. The researchers estimate that for an annual cost of approximately $20 billion to $32 billion, it might be possible to counter a doubling of CO2 emissions and avoid trillions of dollars in future economic harm.

Economists love the carbon tax. The American public, not so much. More work is needed to get the idea off the blackboard.


9 thoughts on “Could a carbon tax work in the real world?

  1. Carbon taxes beg the question that CO2 emissions actually cause harm. This is far from a certainty. I believe that I receive a net benefit from higher CO2 levels. I believe most humans do.

  2. Carbon taxes might be easy to sell in Cambridge, but they will never be politically acceptable in Iowa. No wonder Club Pigou has so few members, especially outside of the eastern intellectual establishment.

    I agree with Jardinero1: I think that I benefit from higher CO2 levels, and I’m not certain that I can identify a population that suffers. Recent temperature trends and satellite data indicate that the predicted greenhouse effect, that is, tropospheric warming, is not present. Nor has increased tropospheric water vapor appeared, so there is no feedback loop.

    It is far too early in the investigation of the role the CO2 plays in climate to be proposing public policy initiatives to reduce emissions, especially considering that the third world’s emissions from the combustion of fossil fuels is going to increase a great deal.

    I have no idea why any economist might think that increasing energy costs can possibly be a desirable thing, unless he subscribes to AGW religion, ignoring increasing evidence that there has been no warming for 17 years, and that a cooling trend appears to be incipient.

    • What is it about writer Onkels that finds a 17 year leveling of average surface temps somehow dismissive of the problems we are likely to face due to AGW?

      With nearly 150 years of physics on the role of co2 and the greenhouse affect it would be irresponsible for this writer to assume that implementing emission’s lowering policy would be premature because we “just don’t know enough”. This claim ignores risk and are easy claims to make because of long time scales.

      “Benefitting” from higher co2 levels ignores the physics and atmospheric chemistry from the warnings of a plurality of scientists. To suggest these findings are a “religion” would be to denounce how science works in totality, or is this writer just cherry-picking climate science?

      • Whew!
        At least it’s only a “plurality”!
        I’ll say it again: there is no tropospheric warming. The system is obviously more complex than the AGW zealots imagine it to be.

        With no support for the models from direct observations, implementing public policy prescriptions of dubious effect would be, let’s say, less than rational.

  3. The carbon tax discussed is not the one gaining traction in House or Senate. The “good” carbon tax we should discuss returns the money collected to American households. Have to protect Americans and American businesses. Also let’s talk climate action and point out that a carbon tax does two things like nothing else and both are needed yesterday; one, crosses international borders easily and two, touches every consumer and producer of energy.

    • There is no “good” carbon tax.

      All such taxes, designed to achieve some “desirable” goal rather than to raise revenue is the most efficient way from the broadest population of taxpayers, result in misallocation of capital and deadweight loss from the cost of the bureaucracy that “returns the money” to some politically-favored class of taxpayers.

      Tell me, please, why higher costs for energy are desirable. Lower energy costs, coupled with necessary regulation, will result in greater economic growth and the accumulation of the wealth that might be used in the future for adaptive strategies, once we understand the process more clearly.

    • An interesting point Mark. I believe the province of British Columbia implemented such a revenue-neutral tax (through the form of a tax swap) that reduced emissions and reduced consumption of energy, while their GDP grew at a rate faster than other Canadian provinces.

      Wealth was not accumulated by anyone, because all of the money associated with higher energy costs were returned to taxpayers through lower taxes.

      Some people just can’t comprehend the concept of revenue-neutrality.

      • “… and reduced consumption of energy, …”
        The higher tax in B.C. merely provided an incentive for Canadian drivers to purchase gasoline in Washington State.
        They responded enthusiastically, much to the delight of gasoline retailers in Bellingham, WA and other cities.

        I watched a driver from B.C. fill five 5-gallon cans in addition to the tank in his vehicle.

        Ironically, rather than decreasing fuel consumption, the tax increased it, because B.C. drivers are willing to drive the extra distance to the US to avoid the tax.

        Be careful what you wish for.

      • Let me get this straight. The govt collects $ thru a huge bureau (no cost there?) and then gives it back and everyone is better off??? CO2 is a phoney issue designed
        to line pockets. Why can’t attention be turned to real
        air and water pollution?

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