Last week’s Washington Post carried an interesting op-ed that argued for a carbon tax. The nut graph:
The only effective way to begin reducing greenhouse gas emissions and slow global climate change is to make it more expensive to emit carbon dioxide. Unless businesses and consumers pay a price for carbon dioxide, neither will make the investments in technology and changes in energy use needed to dramatically reduce emissions.
The authors—two researchers from RAND Corporation—also put forth a nifty idea about how to cushion the economic impacts of new taxes:
[A]ll the proceeds collected by the government would be returned to Americans each year when they file income taxes….
A carbon dioxide tax with refund is fair because the people responsible for the most emissions would pay the most. The tax would also be progressive. Many Americans with lower incomes would find the refund would more than defray the higher costs of gasoline and electric power.
In short, they call for a per-head rebate, kind of like the Sky Trust idea we’ve written about already (e.g., deep in the bowels of this post). I love the Sky Trust idea (and, by extension, the idea of a per-head carbon tax refund) since it focuses policymakers’ attention on one of the core challenges of climate change policy: how to make it fair, especially to low income folks.
Still, you know me: I love to quibble…
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To a large extent, I agree completely with the arguments the authors make in favor of carbon taxes.
First, a tax is a lot easier to administer than a cap and trade system. With a tax, there’s no auction, no grandfathering worries, fewer wacky complications within the electricity sector. Taxes are just plain simpler—and where climate policy is concerned, simplicity is a virtue.
And second, a tax gives a better guarantee of price stability. There’s no chance of a carbon “price shock” with a tax, nor of a collapse in carbon prices (as happened in the early stages of the European emissions trading system). And businesses love predictability—without it, it’s hard to plan investments. So a cap & trade system has to be designed very carefully in order to reduce the chance of wild price swings—something that a tax does by design.
But what I don’t like about this op-ed is that it elevates the principle of price stability over effectiveness.
For example, the authors stress the difficulty of setting the initial emissions limits right—particularly, that a limit that’s too high or low may send inconsistent price signals at the outset of the program. That’s fair enough, I suppose.
But how is that any more worrisome than a system that sends consistent price signals, if it turns out later that those price signals were too low to be effective?
I’m willing to be proven wrong here. But in my view, if we use carbon taxes as the only pricing mechanism to slow global warming, we may never get the emissions reductions we need. And by the time we figure out that any particular level of carbon tax is just too low to be effective—and to generate the political will needed to adjust the tax rate upwards—North Americans may have emitted literally billions of tons of additional CO2.
I, for one, would be willing to accept a little bit of price fluctuation to prevent that from happening.