Carbon Tax?
I am still thinking a lot about how to get the market to reflect the “true” cost of carbon-based assets. You could completely disagree with the merits of the climate change argument and still think this an interesting policy to price in the actual cost of importing oil from people that may not like you too much.
For me, the matter is decided, the question is how best to implement it. Below is an interesting approach, proposed by Dr. James E. Hansen:
A “carbon tax with 100 percent dividend” is needed to reverse the growth of atmospheric CO2. The tax, applied to oil, gas and coal at the mine or port of entry, is the fairest and most effective way to reduce emissions and transition to the post fossil fuel era. It would assure that unconventional fossil fuels, such as oil shale and tar sands, stay in the ground, unless an economic method of capturing the CO2 is developed.
The entire tax should be returned to the public, equal shares on a per capita basis (half shares for children up to a maximum of two child-shares per family), deposited monthly in bank accounts. No bureaucracy is needed.
A tax should be called a tax. The public can understand this and will accept a tax if it is clearly explained and if 100 percent of the money is returned to the public. Not one dime should go to Washington for politicians to pick winners. No lobbyists need be employed.
The public will take steps to reduce their emissions because they will continually be reminded of the matter by the monthly dividend and by rising fossil fuel costs. It must be clearly explained to the public that the tax rate will continue to increase in the future.
When fuel prices decline, the tax should increase, to retain the incentive for transitioning to the post-fossil-fuel-era. The effect of reduced fossil fuel demand will be lower fossil fuel prices, making the tax a larger and larger portion of energy costs (for fossil fuels only). Thus the country will stop hemorrhaging its wealth to oil-producing nations.
Tax and dividend is progressive. A person with several large cars and a large house will have a tax greatly exceeding the dividend. A family reducing its carbon footprint to less than average will make money. Everyone will have an incentive to reduce their carbon footprint.
The dividend will stimulate the economy, spur innovation, and provide money that allows people to purchase low-carbon products and a low-carbon lifestyle.
A carbon tax is honest, clear and effective. It will increase energy prices, but low and middle income people, especially, will find ways to reduce carbon emissions so as to come out ahead. The rate of infrastructure replacement, thus economic activity, can be modulated by how fast the carbon tax rate increases. Effects will permeate society. Food requiring lots of carbon emissions to produce and transport will become more expensive and vice versa, encouraging support of nearby farms as opposed to imports from half way around the world.
Beware of alternative approaches, such as ‘percent emission reduction goals’ and ‘cap and trade’. These are subterfuges designed to allow business-as-usual to continue, under a pretense of action, a greenwashing. Hordes of lobbyists will argue for these approaches, which assure their continued employment. The ineffectiveness of ‘goals’ and ‘caps’ is made blatantly obvious by the fact that the countries promoting them are planning to build more coal-fired power plants.
This is brilliant. One benefit not mentioned by the author — it deftly dodges the “moral hazard” inherent in the other proposals — particularly the “offsets trading markets”, which seem to be another Enron in the making (or worse, a way to ship our pollution to China and charge them for it). Of course, the author’s proposal of “giving it back to the public” is hazardous in the same way that “approve the lottery to pay for schools” is hazardous, but I think this proposal is far less hazardous, and more honest, than the others.
Joshua Allen
18 Dec 08 at 07:39
@Josh Allen
I think it is also quite nice. I am currently going through the different variants of the “cap and trade” system now. My intuition is that that this is not the right approach.
I am currently reading http://online.wsj.com/article/SB122826696217574539.html which is a recent article on the matter.
metadouglasp
18 Dec 08 at 08:13
In general I am a big fan of a carbon tax. Hansen’s text on the other hand is quite confused in several areas.
First, I agree that the tax revenue should be returned to the public in total. But why on earth on an equal per capita basis?!? This is one of those things that sounds fair at first, but if you think about it, there is hardly any reason that could justify this. Best to think about the revenue from the tax that you want to pass back to the public as a negative tax. Equal per head essentially means that you give everyone the same absolute tax amount, no one in his right mind would suggest it the other way around, i.e. that the income tax should be designed such that the total $ revenue amount that should be raised is divided by the number of people and then everyone pays that 1/n absolute same dollar amount. Obviously we make this dependent on income.
Second, the tax should not fluctuate with oil prices. The tax should reflect the damage caused by emissions, and that is independent of oil prices. In particular, one of the goals of a carbon tax is to achieve a cost effective emission reduction. For that to work, the tax needs to be the same on EVERY ton of carbon emitted, regardless of the source of the emission. If the tax would adjust with oil prices, what would you do with the tax on emissions from coal burning? Let that change all the time as well? If not, why change the relative cost of emissions between coal and oil as oil prices fluctuate? No, the tax should be a $ per ton of carbon emmission, and that amount should reflect the damage caused by a ton of emission. Actually, this is all textbook 101 econ…
A carbon tax is not progressive. He is simply wrong there. The proper analysis of who is hit hard by this starts not from total emissions (like he does), but rather from marginal costs of reducing of emissions. That makes the analysis much more complicated, but his remark just doesn’t make any sense.
Hansen is a typical case of natural scientist who thinks he can do the economics of this issue on the side. He is not totally wrong, but at the same time clearly doesn’t really understand how taxes etc work. Unfortunately the climate change debate is dominated by people like him. Probably the best and most accessible text on the economics of climate change right now is by Bill Nordhaus, “A Question of Balance”, an excellent book by an excellent economist.
But, don’t take this too negative, in general Hansen is right to ask for a carbon tax
davidacoder
18 Dec 08 at 09:02
That’s a good article, thanks! Some of the quotes are not expected from WSJ; for example, “Third, key people in China read our newspapers. They see the ominous clouds of protectionism under the guise of environmentalism in bills like Lieberman-Warner and they don’t want to be harmed; neither should we, given the trillions of dollars of Treasury bills they hold.” True, but unexpected.
I’ll keep an open mind, in that “cap and trade” *might* be a necessary evil designed to protect American interests and ensure a slow glide rather than crash landing. But even if it turns out to be a necessary evil, it’s best if we dentify it as such and don’t try to pretend that it’s a virtue.
Joshua Allen
18 Dec 08 at 09:03
@davidacoder
thanks for the pointer.
I am reading it now from http://nordhaus.econ.yale.edu/Balance_2nd_proofs.pdf.
metadouglasp
18 Dec 08 at 09:11