02 Dec 2014

The Case for a Carbon Tax Is Much Weaker Than You Think

Climate Change, Shameless Self-Promotion 14 Comments

This is a pretty “Square One” type of post, where I explain the textbook case for a carbon tax and how reality differs from it in myriad ways. The context is a carbon tax (I mean, “fee”) introduced by Senators Whitehouse and Schatz. An excerpt:

Furthermore, even if we set aside the problem of “leakage,” there is still the matter that the U.S. and state governments already impose significant penalties on CO2emissions, and give subsidies and mandates encouraging “alternative” technology and fuels. For example, federal and state gasoline taxes were not set up as carbon taxes, but to the gasoline consumer they have a similar effect. Currently, federal and state gas taxes average about 42 cents per gallon, which is higherthan what the “optimal” tax on a gallon of gas (about 37 cents) would be, if the social cost of carbon were indeed $42/ton.

To carry this point further, Sens. Whitehouse and Schatz should also put in their bill the elimination of the ethanol mandate, the EPA’s power plant regulations, all CAFE standards on fuel economy, all energy efficiency mandates, and they should remove all regulatory hurdles for the Keystone Pipeline—after all, once their proposed carbon tax has cured the “market failure,” we should let individual businesses and households choose their optimal behavior guided by the market. That’s what the textbook analysis says, upon which they rest their legislation. Are they willing to do all of that, or do they not actually believe in the textbook treatment of negative externalities after all? These considerations show that the Whitehouse and Schatz plan isn’t really about adjusting the “costs of pollution” but instead is about giving the federal government more control over the economy, and energy sector in particular.

14 Responses to “The Case for a Carbon Tax Is Much Weaker Than You Think”

  1. Keshav Srinivasan says:

    Bob, when you bring up Keystone, it has the potential to reduce your credibility with a lot of liberal and moderate readers, because it sounds like what a typical shill for the oil industry would say. They’ll probably think to themselves “Why does this economist even care about a tiny issue like the Keystone pipeline, unless he works for people who have a vested interest in it?” To be clear, I personally don’t think you’re any kind of shill (you’re a principled anarcho-capitalist after all), but that’s the impression a lot of people might get.

    • Yancey Ward says:

      Why does this economist even care about a tiny issue like the Keystone pipeline

      Who is calling it a tiny issue other than you?

      • Keshav Srinivasan says:

        Other than environmental activists, most liberals and moderates think of this is a tiny issue, and they don’t really care whether it’s approved or not. So if they see someone who cares deeply about it being approved, their natural inclination is to suspect that that person has a vested interest in its approval.

        • Yancey Ward says:

          Really? Why is Obama threatening a veto? Why couldn’t the Senate find 60 votes to allow it to go forward? This is a concern to 1/2 of the political establishment- by definition, not a “tiny” issue.

    • JSR08 says:

      It’s amazing what passes for “shilling” these days. You can genuinely believe that something is a good idea because of the perceived benefits (personal or not), and if there are larger forces that would presumably benefit from that something then you must be shilling for them and can be easily dismissed. I wonder, Keshav, would it be fair for me to say that you’re shilling for the medical industry because (hypothetically) you support the development and subsequent sales of an Ebola vaccine?

      • Keshav Srinivasan says:

        I’m not saying that it’s fair to assume that a person who supports a policy must be doing so for some hidden agenda. I’m just saying that fair or not, cynicism is the default assumption for a lot of people. If an issue seems unimportant to them and important to someone else, they assume that the person probably has a vested interest in it.

  2. Scott H. says:

    “For example, federal and state gasoline taxes were not set up as carbon taxes, but to the gasoline consumer they have a similar effect.”

    The gasoline tax is akin to a Pigouvian subsidy so that vehicle users can help pay for public roads. That is wholly separate from the concept of a social cost of carbon tax. Why does the “similar effect” matter?

  3. Josiah says:

    I’m for the elimination ethanol mandate, CAFE standards, approval of Keystone, etc. However, with the exception of Keystone, none of these policies were enacted solely (or even primarily) to deal with climate change. So there’s nothing inconsistent about keeping these policies and enacting a carbon tax to deal with climate change.

    • Keshav Srinivasan says:

      Even Keystone isn’t just about climate change. It’s also about other environmental issues, like the risk of pipeline-related spills and disasters, as well as non-carbon related environmental effects of fracking.

      • Yancey Ward says:

        Wow, sounds like you don’t consider it a “tiny” issue. I think you are protesting too much.

      • Enopoletus Harding says:

        Also, eminent domain.

        • guest says:

          Yes. That’s the reason I’m against the pipeline.

          It will violate private property rights.

          • Bob Murphy says:

            Guys, I certainly am not in favor of landowners having a pipeline laid against their will. I am saying though that no environmentalist who talks about “we just want to put a price tag on CO2 emissions” is going to be OK with Keystone if the investors paid the carbon tax bill.

        • Josiah says:

          Eminent domain issues don’t have anything to do with whether the State Department allows the project to go forward. They are completely separate issues.

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