15 Oct 2014

Would Milton Friedman Have Supported a Carbon Tax?

Climate Change, Shameless Self-Promotion 3 Comments

My sources say no. And one of them is Milton Friedman from 1999. (Thanks to Keshav–I think?–for digging that one up.)

3 Responses to “Would Milton Friedman Have Supported a Carbon Tax?”

  1. Ivan Jankovic says:

    that’s a pitfall of accepting the narrative about Milton Friedman as a great free market economist. There are always a bunch of people who can very plausibly claim, “even Milton Friedman believed (or would have believed had he been alive) X,Y,Z”.

  2. Andrew_M_Garland says:

    An appeal to authority is not an argument or analysis. An appeal to a dead authority is madness. If Friedman had published an analysis of taxing pollution, then one could analyze that. It seems there is no such paper.

    Friedman did point out that governments are not run by angels. It is an illogical mistake to pose some theory and rely on a non-political, non-grasping implementation of that theory by government. An intent is not enough. The theory must fit what real people are going to do now and in the future. There is almost an unbroken record of “reforms” quickly turning to schemes which benefit the politicians and bureaucrats implementing them, and not benefitting the intended people.

    Here is how carbon credits have worked in India.
    ( http://www.dnaindia.com/india/1739776/report-are-toxic-gases-being-created-just-to-earn-carbon-credits )
    === ===
    [edited] The CDM scheme allows firms manufacturing HCFC-22 to earn huge carbon credits by destroying its byproduct, HFC-23. Since the cost of producing HCFC-22 is lower than the revenue generated by the sale of carbon credits issued for destroying HFC-23, it is possible that HCFC-22 is being manufactured solely for the purpose of destroying its byproduct and earning carbon credits instead.

    Over 50% of the total carbon credits issued until July 2012 were for the destruction of HFC-23 (Hydro Fluoro Carbons-23).

    Renewable energy projects like wind, solar and biomass, together, account for less than 30% of the total carbon credits issued in India. The figure is 20% for the world.
    === ===

    And here is a problem with “taxing pollution” in general, called Pigou taxes. These taxes don’t make sense to me, as actually justified and applied by governments.

    Say I manufacture things. Government employees calling themselves economists decide that I am harming my fellow citizens at the rate of $80 per ton of the CO2 I produce. So, I pay that tax, increase my prices 10% and sell 10% less each year than I could at the lower price. Say I produce 10,000 tons of CO2 and pay $800,000 in CO2 tax yearly.

    I am causing harm to people who are not my customers. One can think of it as my customers paying $800K yearly to the government, with my company in the middle, for permission to harm others, because my customers benefit sufficiently from buying my product.

    The government collects this tax and spends it on bureaucracy and other value-losing, socially negative projects, as usual.

    The tax has only assured that my customers are getting at least as much value from my products as the cost to produce them plus the CO2 tax. So, the manufacture of my products is overall socially beneficial. I am not able to sell to the 10% of customers who don’t value my product at its now higher cost.

    The big question. If the government is not using the tax to directly offset the harm to others, then I am merely paying the government for permission to harm others. They are still harmed. I am licensed to harm one group (or everyone) as long as I sufficiently benefit my customers. The government happily runs what amounts to a protection racket, protecting me from those harmed as long as I pay enough to the government. The level of the CO2 tax is irrelevant, but is conveniently tied to the noble computation of harm from CO2 emmisions.

    One might propose that the CO2 tax will be used to lighten the tax burden on others. But, this isn’t how taxes are set (what the market will bear) and doesn’t account for the individual harms brought to others. What about the harm to foreigners?

    So, if one believes that CO2 causes extra death, drought, hunger, displacement from rising oceans, bees dying, wandering deserts and such, a Pigou tax is not nearly enough and is not paid to the proper people. (I don’t believe that CO2 is a problem at all, by the way.)

    Instead, such taxes are “Bootlegger and Babtist” constructions. The climate alarmists propose a noble purpose (the Babtists), and the politicians lick their lips at their increased ablity to collect more tax and fund more family-run schemes to save the environment (the Bootleggers).

    How can one justify Pigou taxes that in practice merely fund politicians rather than pay the people supposedly harmed?

    • Harold says:

      Here is my stab at justification. An ideal market will produce a certain amount of your good – the efficient amount. An ideal market will incorporate the damage caused. If the market fails to include the damage, then there will be more produced than the ideal, efficient amount. The tax restores the efficient level of production. The beneficiaries are the people receiving tax rather than those suffering harm, but that does not affect the efficiency.

      If the tax could be correctly assessed and transferred without cost, then we would restore the efficient market level of production.

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