An interesting question emerged from some discussion surrounding my last carbon tax post. How big will the tax be? The letter says $40 a ton, but then rising. But how far? And in response to what question?
It occurs to me that the two obvious targets lead to radically different answers.
1) The social cost of carbon. This is what economists usually think of as the appropriate Pigouvian tax. In order to pollute, you pay the cost you impose on others by your pollution.
Even the worst-case scenarios now put the cost of carbon emissions at 10% of GDP in the year 2100. Discount that back, divide by all the carbon emitted between now and then, and, you're going to get a pretty small tax.
2) Temperature or quantitative guidelines. Or, "whatever it takes to stop the global temperature from rising more than 1.5 degrees C." Such a tax has to be high enough to basically stop us from using fossil fuels. It would be radically higher, and impose economic costs far higher than 10% of GDP.
When you set a goal of a quantity with no attached price, the price can get pretty high.
I see now some of the back and forth chatter. Anti-carbon types warn that any tax "won't be enough." Now I know what they mean.
So who sets the tax, and on what basis, are important issues we're all fudging over.
Of course, a cynic would take the view that the tax will be set to
3) Maximize government revenue.
Given the behavioral elasticities, that is likely to be a good deal less than #2, as to high a tax will quickly erode the tax base.
PS: to my may CO2-is-not-a-problem commenters. If (or perhaps when) it's all proved to be a hoax, a carbon tax is a lot easier to undo than the alternative regulatory approach!