Saturday, August 30, 2008

On the carbon tax

Greg Mankiw, a Harvard professor of economics, notes that VP pick Sarah Palin is not a member of the "Pigou Club."

What is that, I wondered? As it turns out, it is my old friend, the carbon tax. Mankiw makes an excellent argument in his 2006 post, The Pigou Club Manifesto.

In general, Americans are taxed too much, directly and indirectly. As an exception, however, this blog strongly endorses the carbon tax, with the proviso that indirect and inefficient carbon taxes such as CAFE standards are rolled back.

Here are some of my own reasons why a carbon tax would be good policy [assuming existing stealth carbon taxes are eliminated]:

  • Simple, direct, and honest. Consumers bear the costs of increased fuel efficiency standards (CAFE) and exotic "clean fuel" blends, but this is not readily apparent to them when they make a purchase.
  • Entirely market-based. The market will choose what technology is the most efficient, and least expensive. At present, we have politicians embarrassing themselves by choosing specific technologies to subsidize. This backfired wildly with corn ethanol. Given the right incentives, the market will choose the technology — as it did with fossil fuels for the past 100 or more years.
  • Helps account for pollution, permitting deregulation in other areas. You don't have to swallow the Sierra Club talking points on global warming to dislike pollution. The absence of a carbon tax in pollution-free forms of energy creates market incentives that combat pollution in whatever way the market decides is best.
  • Exposes the sham of pseudo-market-based systems such as proposed cap-and-trade systems for trading carbon credits, or carbon offsets. Carbon credits, just like fiat currency, are a resources whose supply is infinite, and the size of the market is controlled entirely by politicians. Thus cap-and-trade is a system easily susceptible to convert abuse, because the size of the market has no technical basis in reality.
  • Replaces other stealth taxes. As noted above in other points, a carbon tax permits elimination of highly specific regulations and subsidies, designed with the goal of reducing fossil fuel use and pollution. These government interventions in the markets often have negative side-effects such as an increase in beef prices due to scarcity and price of corn feedstock, due in turn to corn ethanol subsidies.
  • Allows consumers to choose for themselves what to drive, what to burn, what to use. Politicians should take a lesson from the recent spike in oil prices, and the follow-on effects from consumers: those that needed or wanted SUVs continued driving them. Others reduces their driving, bought smaller cars. Politicians did not need to legislate this behavior, the public made their own decisions.
  • Helps stem the flow of US dollars going to autocratic, oil-rich regimes.
  • Avoids outright bans of carbon burning vehicles and machinery. Owners of vintage muscle cars and race cars would rightly be outraged if politicians simply banned heavy-polluting vehicles, for example. The American economy would utterly collapse if burning coal for electricity were banned, as another example.

Pollution-free personal transportation is a worthy goal and logical endpoint, but absent a crisis it will take decades to achieve that goal. A carbon tax is a direct and honest method of aiding that transition.

The negatives of the carbon tax can be easily enumerated, as the negatives of any oil or gas price increase. In particular, as I noted in this post, higher prices hurt the poor the most.

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