Blowing Off Some Steam About a Lot of Hot Air


The title of this article says it all: "Revenue Increases Should Also Internalize Environmental Externalities." Whether to patch gaping budgets or embed big-government structures, taxes solely as "here's how we can get more money" is dangerous; instead, the tax code should do double duty to incentivize and penalize in ways that reverse distortions caused by various externalities that end users aren't currently fully paying for.

A straight carbon tax would have been a lot simpler than our current cap and trade plan. And, as noted in this article, paying polluters not to pollute amounts to a carbon "protection racket." Every third human on Earth lives in China or India. Both are rapidly industrializing, both are against any sort of effective cap, both will gladly accept payments from US companies to not pollute, and both will be more likely to cooperate if we talked with them about getting the price of carbon right through a straight tax rather than through convoluted cap and trade machinations.

But R's run from the word "tax." And D's like complicated policies that make it look like they're doing something really important. So never mind a simpler solution that will actually align our incentives with the behaviors we want to incentivize.

Comments

Joel GL said…
Is there a way to fix "distortions" in pricing that doesn't involve government intervention? Does the problem have to do with the fact that some of the issues under discussion are related to things (like the atmosphere) that are difficult to "own"?
LH said…
Joel, distortions have more to do with what economists call externalities. The quintessential negative externality is pollution: if I'm a producer, and you live next door to me, it doesn't cost me anything to pollute my lot in ways that cause damage to your lot. Absent outside intervention, I will likely over-pollute (i.e. pollute more than is socially optimal). So government gets involved to either regulate the externality (pollution is not allowed) or put a price on it (it will cost you X each time you pollute). The government doesn't necessarily have to get - you and I could just make a private agreement - but usually, the diffuse nature of pollution and the cumbersomeness of having to negotiate thousands of such private agreements makes public involvement more efficient.

Btw, other times governments get involved, all they're doing is making up for when they caused the distortion in the first place. So if I am lobbying for a carbon tax to help price suburban sprawl more correctly, all I am asking for is for the government to compensate for its own policies which helped cause the sprawl in the first place (heavy federal subsidies for highway construction, cumbersome environmental regulations that make it prohibitively difficult to build on urban brownfields, the mortgage interest deduction, etc.).
Daniel Nairn said…
It's sad that the most elegant solutions seem to be the hardest to sell politically. The media would have a hard time coming up with an exciting news angle on "carbon tax."

Also, Obama promised not to raise taxes on anyone making under $250,000. I wander if he would consider a carbon tax breaking this promise, or if he could shift taxes from some other place to make it more revenue neutral.

I'm totally with you on the reasoning here.
LH said…
Daniel, thanks for chiming in. I'm all for making a carbon tax revenue neutral from an overall standpoint (i.e. any revenue raised by it would be refunded back to taxpayers rather than be used by the government). The tricky part is that it won't be revenue neutral for individual taxpayers - if you offset a carbon tax with a payroll tax deduction, you'd have some that would win and some that would lose.

This is what you want - incentivize work, disincentivize driving - but it also means you have just enough people who will lose who will raise a stink. And this administration appears to want to please everyone, instead of making the tough decisions that lead to people changing their behavior in ways that are more socially optimal than the status quo (i.e. driving costs more now = I will drive less).

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