This post was suggested by commenter Almost Iowa yesterday.
On November 29, on the eve of the Paris COP 21 event, an open letter in praise of a carbon tax was released:
“Taxing carbon pollution will spur everyone ― businesses, consumers and policymakers ― to reduce climate-damaging emissions, invest in efficient energy systems and develop low-carbon energy sources.
This single policy change — explicitly using prices within existing markets to shift investment and behavior across all sectors — offers greater potential to combat global warming than any other policy, with minimal regulatory and enforcement costs.
We urge negotiators at the upcoming UN Climate Conference in Paris to pursue widespread implementation of national taxes on climate-damaging emissions.
We endorse these four principles for taxing carbon to fight climate change without undermining economic prosperity:
1. Carbon emissions should be taxed across fossil fuels in proportion to carbon content, with the tax imposed “upstream” in the distribution chain.
2. Carbon taxes should start low so individuals and institutions have time to adjust, but then rise substantially and briskly on a pre-set trajectory that imparts stable expectations to investors, consumers and governments.
3. Some carbon tax revenue should be used to offset unfair burdens to lower-income households.
4. Subsidies that reward extraction and use of carbon-intensive energy sources should be eliminated.”
A carbon tax is advocated by libertarians such as Tim Worstall, who writes, “And the point that everyone is making here is that carbon emissions are currently an unpriced externality.
The joy is that we know how to deal with those. The proof might have started with Arthur Cecil Pigou (the guy who first hired Keynes into an economics department) and his discussion of the effects of a superfluity of rabbits in one field on the crops of the farmer next door but the proof is still true. If you’ve unpriced externalities then markets won’t work to deal with this problem. For the entire point of designating them as unpriced is that markets do not take them into account thus given that markets ignore them they can’t solve any problems associated with them.
Given this we do know what to do: we intervene in the market to price those externalities. We could have a cap and trade system, it could be a carbon tax. The general view of the economists working on this is that the carbon tax is better. Sure, there’s a certain disagreement about how large that tax should be: Nordhaus says perhaps $10 a tonne now and $250 a tonne in 30 years’ time.
…”this idea of a carbon tax to deal with climate change is simply the mainstream, scientific consensus one, about how to do that dealing. There’s amazingly little disagreement among the economists who study the point. Hell, even Exxon now applies a $60 a tonne tax to emissions in their internal modelling. There’s also nothing new about this point, it’s the same thing all those economists have been saying for the past decade. It’s also nothing new for me to be saying it, I even wrote a book on the point three years back.
Yes, climate change is a problem we should do something about and that something is a carbon tax. What a very mainstream conclusion. But as I say, there’s a sadness in the fact that just about everyone, from Republican politicians insisting upon no new taxes to green activists insisting that we need the destruction of globalised capitalism to deal with it refuses to actually listen to, or apply, that solution that really is the mainstream scientific opinion on what we ought to be doing about it all.”
But those who mistrust government as a matter of course are reluctant to give them a new revenue stream. Even I, a progressive liberal, see plenty of ways that a carbon tax could be misused.
So, unlike the open letter above, I advocate making the carbon tax 100% revenue neutral. In the U.S., I suggest that all revenues go towards lowering Social Security taxes on employees and employers. Perhaps in the UK it could be spent on their island’s jewel, the National Health Service.
A hypothecated tax is a tax where the money obtained, or part of the money obtained, is used for a particular purpose, rather than spent on a number of things. This is normally used to benefit the cause of the hypothecation. An example is the U.S. gasoline tax, which is spent on highway improvements. For our purposes, the hypothecation would enable transparency as well as benefiting the beneficiary.
As per Wikipedia, “the U.S.gasoline tax is not perfectly hypothecated–about 60% of federal gas taxes are used for highway and bridge construction. The remaining 40% goes to earmarked programs. However, revenues from other taxes are also used in federal transportation programs.”
Structuring a carbon tax to fit in with or mimic the U.S. gas tax would not be a horrible idea, either–the country’s transportation infrastructure badly needs an overhaul.
But these two possible beneficiaries also benefit from one other factor that is important in discussions of a carbon tax–if it works, the revenue will decrease over time. As both Social Security and the U.S. transportation system have other sources of substantial revenue, this could be planned for.
They key is that it would not need to fund a new bureaucracy and would help build no-one’s empire. This is the cornerstone of crafting a palatable carbon tax.
There are many other details to consider–how to stop large scale carbon emissions from emigrating to places with friendlier tax regimes being among them. This would require perhaps tariffs, perhaps treaties, perhaps a combination.
But it could be done. And I think it should be. As part of a program that includes Fast Mitigation and Pre-Adaptation, a carbon tax would give us less of what we don’t want–CO2 and other pollution–and more of what we do want–perhaps Social Security, perhaps transportation infrastructure, perhaps more health care.
Kind of a no-brainer, really.