It offers four principles 1. A carbon tax, initially $40 per ton. 2. The carbon tax substitutes for regulations and subsidies and (my words) the vast crony-capitalist green boondoggle swamp, which is chewing up money and not saving carbon. 3. Border adjustment like VAT have 4. "All the revenue should be returned directly to U.S. citizens through equal lump-sum rebates."
That the carbon tax is better than regulations and subsidies in choosing technology gets a lot of press. Yes, should we have rooftop solar cells or utility cells in the desert? Is it better to have battery powered cars or high speed trains? Do we really have to have washing machines that no longer actually clean clothes? And the only way to actually save lots of carbon -- nuclear -- has a much better chance under a carbon tax than hoping our political system will allow it.
But most people forget what economists know best -- that a carbon tax is the only way to change behavior. The answer to energy savings isn't as much new technology as in old behaviors. Turn the lights off. Take fewer trips. Turn the heat down. Move nearer your work. Carpool. Without a carbon tax there is no way for the average bleeding heart Palo Alto climate worrier to realize that one trip to Europe is like driving a car for 10,000 miles. (Planes get about 80 passenger miles per gallon -- but it's a lot of miles to Europe.) Twenty years ago, my then 8 year old daughter, reading about fuel economy standards, piped up "if they make cars more fuel efficient, it will be cheaper to drive. Won't people just move further away?" Indeed.
I try to sell a carbon tax deal to friends who are climate skeptics. Well, our government is going to do something. Given that fact, the carbon tax will cause much less damage than ever increasing regulations and subsidies. And I try to sell it to carbon warrior friends too. The tax instead of the regulations and subsidies, in our political system, is going to save you a lot more carbon.
The last proposal is, I think, the most contentious. Optimal taxation theory, as several of the signatories pointed out in other contexts, says that the carbon tax should go to reduce other distorting taxes. This will create more economic growth. As Holman Jenkins put it,
A tax reform that included a carbon tax to replace taxes that depress work, saving and investment would be an incentive to do everything in a less carbon-intensive way, bringing forth new technologiesHere the authors step back from benevolent-planner optimums and think politically. Well, we live in a political system.
But there is a bright side. One big point of the dividend is to guarantee that revenues will not go to financing ever larger green boondoggles like the California high-speed train to nowhere, or to subsidize a Tesla in every VCs driveway. Carbon dividend means no "green new deal." The view that the tax system is what it is, and a major new source of revenue will not go to reducing marginal tax rates in a growth-oriented reform sounds quite realistic to me. If our Congress were interested in growth-oriented tax system it would already look a lot different than it is today.
A flat dividend is also immensely progressive. It is, effectively a universal basic income. And casual observation on ownership of large houses and jet travel suggests wealth people spew a lot more carbon than poor ones. I guess that is an effort to get Democrats to give up some of their cherished regulations and subsidies to get these long sought goals. (Like any UBI, it's going to make immigration a tougher issue, but we won't go there today.)
Tyler Cowen disagrees with the dividend.
"It strikes me as economists thinking they know what makes good politics, something which economists are rarely good at."Well, he has a point, and I also think economists should emphasize more when they have expertise and when they don't. On the other hand, I don't see anybody else having much better idea what makes good politics these days, and the list of "economists" that created and signed the letter, starting with George Shultz, have immense political experience.
The dividend may not be the economically most efficient thing to do, but it will guarantee a lifetime of political support for the carbon tax! Hamilton figured this out with the assumption of national debt.
It has taken me some time to come around, as attached as I am to reducing marginal tax rates, but the political advantage that out keeps the money from being spent on boondoggles, and creates a constituency in favor of the tax and against spending the results on boondoggles, is strong.
I also worry about the wide range of environmental issues that have been forgotten in the Great Carbon War. Butterflies and Frogs are disappearing. The pacific garbage patch grows. Rhinos and Elephants will be gone long before climate bothers them. Take your pick, if we passed the carbon tax, and if this issue could disappear as one of the issues uniting partisanship and sweeping up the entire environmental movement, it would be a lot better for life on the planet. Once upon a time, there were Republicans in the Sierra Club, Audubon Society, Greenpeace, and other formerly non-partisan organizations. Put carbon behind us, and it could be so again.
"Big Names Bake a Climate Pie in the Sky" complained Holman Jenkins. His complaint, largely, is that the deal won't be kept -- we'll get the tax and regulations, and the dividend promise will disappear into the bowels of Washington.
Besides, since we face a “climate emergency,” wouldn’t the money be better spent on speeding up deployment of wind and solar? As for existing mandates and subsidies, sure, we might expend additional political energy to repeal these. And pigs might fly.This is an important point. As reducing marginal rates and removing deductions sounds nice, our tax reforms (especially the last) reduce marginal rates but don't remove deductions. The VAT with no income tax is a much better system, but many free market economists don't favor it because they don't trust the deal. Trusting the deal, carbon tax in return for no regulations, is a stretch.
However, I can hope that a deal could be struck, carbon tax in return for no new regulations and subsidies, or subsidy extensions -- no "Green New Deal." If we give up that deals can ever be struck and kept, we might as well give up on democracy.
Of course, in the 5th week of a shutdown, over a completely symbolic issue, with great deals on the table that benefit both sides, if only each could let the other have a symbolic victory, is not a great time to advance such hope. But even here, once you realize the shutdown has nothing to do with immigration, you see hope. This is a battle to the end over the Trump presidency. If he backs down, his presidency is finished. The Democrats think they can achieve that, and if they back down their left wing takes over. There is no way out of that one -- and reason to hope that when Washington is bargaining over actual policy and not over a symbolic but life-and-death battle, that they can do it.
The insight that I think gets lost when talking about the carbon tax is that it doesn't have to reduce emissions. Suppose every ton of carbon emitted today creates >$40 in social value. Then the carbon tax is just an efficient tax on something inelastically supplied.
ReplyDeletePigouvian taxation can be better understood as a price than a tax. If everyone pays the social cost of their emissions, then we can afford the destruction of climate change (abstracting from the discrepancy between domestic and worldwide externalities). I think the marginal value of emissions is a good bit lower than the marginal cost of climate change, but prices are a really good way to find out!
I'll be waiting for Mankiw's next meeting of the Pigou Club.
In theory, one could also use the tax to neutralize emissions. For example, a ton of wood chips currently costs about 40$ on the free market. I would guess that a ton of wood binds about a ton of carbon dioxide. So, the 40$ could also be used to buy wood and deposit it an old mine, where it won't decompose due to a lack of oxygen, locking up the carbon for many centuries.
DeleteI wholeheartedly disagree. Energy is critical to an industrial economy. There should be no taxes on energy at all.
ReplyDeleteJames McCown
PhD - Economics, Ohio State University
Ok who kidnapped Dr Cochrane and took over his blog? Continue to subsidize production and then tax it back from the consumer? The IMF estimates that global subsidies run over $5 trillion.
ReplyDeleteHow about instead of more government fiddling - which will end up as twisted and deformed as the ACA when K Street is done - we remove the billions spent on fossil fuel extraction subsidies? The cost of production would rise and prices would rise. The net result would be a pure free market response. And instead of adding to government market distortions it would reduce it.
A handful of examples, courtesy of Oil Change International (their list is much longer):
Intangible drilling oil & gas deduction
Excess of percentage over cost depletion
Master Limited Partnerships tax exemption
Last-in, first-out (LIFO) accounting
Lost royalties from onshore and offshore drilling
Low-cost leasing of coal-production in the Powder River Basin
Intangible Drilling Costs provide less than 100% deduction which means it is no longer a subsidy relative to other industries after the recent corporate tax reform. Moreover, prior to tax reform there were any number of industries eligible for accelerated depreciation- so not really unqiue.
DeletePercentage Depletion is more of a practical solution for very small producers to own interest in oil and gas wells without producing expensive engineering reports to track actual depletion. It's a applies to a small share of overall production.
MLPs are all converting to C-Corps after tax reform. But even before, they were hardly unique. Many businesses have adopted the pass-through form of LLCs and the like in recent years.
LIFO accounting isn't obviously a subsidy or penalty given the high volatility of commodity prices and the cost of extraction. It's also not unique to oil and gas as it applies to any industry that carries inventory.
The government earns royalties from all government lands. You can quibble with what it charges or whether it should own the land or not, but it's hardly a subsidy. In a competitive market the benefit of lower royalties accrues to consumers. This is negligible given the share of federal land in the U.S.
Where oil subsidies do matter are direct subsidies for consumption which you see all around the world- primarily in the developing world. Those don't really exist in the U.S. outside special support for heating oil for the poor.
Comment to J.McLean -- Good exposition to the "oil company subsity" claim the Green Left invented decades ago. Depreciation/depletion and other costs are due to all taxpayers in a Net Income system.
DeleteSame old tired denials. And now the IMF is a green left institution.
DeleteSince the impacts of the items listed above are negligible I guess the oil companies will have no problem if Congress takes them all away. Run that one up the flagpole and see what happens.
Oil companies would prefer you get rid of IDCs if they can be eligible for the same capital deductions as other companies.
DeleteBig companies like Exxon would prefer you get rid of IDCs because it hurts small producers, and hence benefits them. Small producers would object because it will raise their costs.
No one will care if you get rid of MLPs. Like I said, literally every one is converting to a C-Corp.
LIFO is a non-unique as discussed.
Feel free to charge higher royalties for new federal land. Companies bid a lease bonus for those lands. As the royalty goes up the bonus goes down. Unclear what the optimal point is so industry really doesn't care.
"A flat dividend is also immensely progressive. It is, effectively a universal basic income." Doesn't a UBI reduce the incentive to work? How might that reduce the pro-growth effects of replacing regulation with a carbon tax?
ReplyDeleteHow would a UBI effect migration incentives, keeping in mind Friedman's adage, "You can have open borders or you can have a welfare state but you can't have both?"
On the other hand, if the US taxed all 5 billion metrics tons of annual CO2 emissions at USD 40 per ton, the tax would raise about USD 200 bn. This is on the order of 1% of nominal GDP and less than USD 1,000 per person. Is this incentive sufficient to change behaviors?
What's a reasonable estimate of the deadweight loss of administering the new carbon tax, the associated border adjustment tax, and associated dividend payments?
If the US were the only country that introduced a material carbon tax, what would happen to US trade, FDI, etc? Would the US be walling itself off behind a 'carbon curtain?' If so, what would be the consequences for innovation, productivity growth, and living standards?
If other large carbon emitters don't mitigate emissions, what marginal effect would the US be having on global CO2 concentrations and on temperature distributions globally? Can the program be structured to mitigate the obvious game theoretic incentives to defect?
How do the combined costs of the carbon tax, border adjustment tax, and dividend program compare to alternative approaches, including cap-and-trade, and adaptation?
I'm impressed by the credentials of the people who've signed this letter, and I believe it's a useful contribution to the discussion. But I also doubt that most of the signatories have had a chance to familiarize themselves with the issues sufficiently to argue the merits persuasively. I don't claim to have any of the answers. But I'd be interested in seeing the answers before taking a view myself.
Krugman and Stiglitz oppose... so maybe it is a better idea than it first appears.
ReplyDeleteThe border tax adjustment is sound in theory but is a recipe for trade disputes over the carbon content of imports (what is the the carbon content of a Chinese t shirt), protectionist tariffs in the guise of BTAs and a massive bureaucracy to administer the system. Is it worth it?
"(what is the the carbon content of a Chinese t shirt),"
DeleteDoubtful that anyone will ask that question. A bigger question is the carbon content of aluminum and steel coming from China.
In British Columbia, a modest carbon tax that was used to reduce other taxes so it was revenue neutral appears to have reduced CO2 so it does work. Given the US deficit, part of the revenue should go to reducing that deficit. Perhaps by treating the "dividends" as regular income to be partially taxed back.
The first and immediate casualty of such a tax would be the thermal coal industry. A sensible implementation of a carbon tax would do away with the bio fuel mandate.
Patrick Sedgley -- Right on! Don't also rule out the domestic enforcement issues. If any economist wants to reduce the "wedge" that adds to inefficiency, enforcemtnt and collection costs can be very high.
DeleteFor years, I have prepared US personal income taxes and enforcement is becoming more vicious by the years. I can only applaud the Congressional cuts in IRA appropriations, lowering auditing activity. God save the free worker/contractor who is invisible to the system.
Imagine all the jobs such a carbon tax will provide for Dept. Energy (?) auditors.
The government employees' unions will support this overwhelmingly (unless their Green socialism already has sold their souls to the cronies).
I wilol let tham have a Carbon Tax, if they repeal the 16th Amendment first. If theyy won't do that, I am joining the Gilets Jaunes.
ReplyDeleteYou really need an edit function.
DeleteI will let tham have a Carbon Tax, if they repeal the 16th Amendment first. If they won't do that, I am joining the Gilets Jaunes.
Fat Man (me too) -- Repealing the 16th Amendment is a worthy goal, but as Alice Rivlin pointed out some years ago, it would not bar a EU-style credit invoice VAT, if enacted in unison by all the States. (They could use their own rate structures, as in Europe.)
DeleteThis could work when the 16th Amendment is repealed, because Article 1, Section 3, would kick back into force (the 60% persons clause is irrelevant). Each State would be apportioned, per capita, its fair share of the Federal budget to remit to the US Treasury.
That would be a good fillip for tax-victim people to move out of high-tax States and into those with a lower VAT.
Apparently my spell check thinks tham is a word in the English language.
DeletePost in haste, repent at leisure.
A few reminders:
ReplyDelete1. Americans pay the lowest excise taxes on gasoline and diesel of the rich, developed club members. Canada is close behind. Americans pay more than Venezuelans and citizens of other 3rd world countries.
2. Oil price shocks have either catalyzed or exacerbated most of the recessions in the post-war period. High excise taxes reduce that vulnerability to oil price shocks.
3. Small particulate matter emissions are highly correlated with carbon emissions. Urban air quality has improved in North America since the 1970s but pollution remains. Health experts are warning that COPD rates will continue to increase going forward.
As a result, pundits in the past have proposed "No regret climate change policies" that would recognize significant benefits from hydrocarbon emissions even if the some the more radical forecasts of climate change damage turn out to be incorrect.
4. North America is in the midst of an obesity epidemic. That means lower worker productivity, higher health costs and increased demand for opioids.
North Americans really should use their automobiles less and self-propel more.
5. No so long ago, the US invaded and occupied Iraq, ostensibly to protect the US cheap energy entitlement. That created Da'esh/ISIS/ISIL which is good or bad depending on one's perspective. Aerial bombing ultimately results in civilian deaths, so it certainly helps the USA to maintain its terrorist reputation which could be a positive for national security.
Another benefit is that the world pays less attention US-supported expulsions of Arab from East Jerusalem and the on-going illegal settlements of the West Bank, the wonderful Hilltop Youths, etc.
6. Low density suburbs make for poor social capital. Worse yet low density suburbs in areas of semi-arid forests make for a death trap.
7. The US federal government could benefit from more tax revenue in order to avoid the risk of a structural deficit.
@Patrick Sedgley
ReplyDeleteBoth Krugman and Stiglitz have gone on record to support carbon taxes. Why they did not sign this initiative is an open question.
Every other rich, developed country uses a VAT, except the oh so very exceptional USA.
If the USA did carbon tax and other measures, correctly, they could be used as barriers to entry to discourage goods from exporters who seek to subsidize their manufacture through pollution.
How do the distinguished signatories propose to sell their carbon tax to China, India, Africa, etc?
ReplyDeleteOnce the carbon tax produces a dividend how do you possibly constrain the level of the tax?
ReplyDeleteWhile it is certainly impressive when Democrats and Republicans agree on something, there seems to be a non-trivial segment of the population that believes climate change is natural and not man-made. Unfortunately, this segment seems to impede any legislative progress with respect to climate change.
ReplyDeleteAnonymous -- "Impede ... progress" is to snear at political opposition that has its own arguments, however much you might think they are unworthy. I believe in "climate change" but I do not believe human activity "is causing it." Why do you? Because one of your "thought leaders" has told you so?
DeleteMy own scepticism of the "human cause" based on forecasting models comes from my experience with the accuracy of macro forecasts, and the compounding of computing errors.
I have grown more sceptical about economic forecasting over the years.
Personally, I believe that "Climate Change" has become a religion complete with prophets of doom and stories of the apocalypse. If you you are open to alternative scientifically based views on the subject of climate and energy policy, I recommend that start reading: "Watts Up With That?: The world's most viewed site on global warming and climate change"
ReplyDeletehttps://wattsupwiththat.com/
You want to run yet more of the economy through the government?
ReplyDeleteOne gallon of gasoline turns into about 20 lbs of CO2 (ignoring CO2 released in the extraction, refining and distribution). A $40.00 per ton carbon tax is only $0.40 per gallon - and that will not be enough to make a big change in consumer habits. To make real changes the tax would probably have to rise to the $100 to $300 per ton range.
ReplyDeleteInsightful post. Settled my stomach after Jenkins's column left me conflicted at the breakfast table.
ReplyDeleteTo the pessimistic commenters:
If you're a empirical, pax-americana, rule-of-law, conservative libertarian, but this climate bargain still makes you feel queasy, judge not only its merits but also the alternatives. Read the left's "Green New Deal." It slashes the military in half, eliminates 87% of U.S. energy production, and bans "non-essential" cars. A lefty environmentalist writes at The Guardian "take railways and utilities and energy grids back into public control; regulate corporations to phase out fossil fuels; and raise taxes to pay for massive investment in climate-ready infrastructure and renewable energy — so that solar panels can go on everyone’s rooftop, not just on those who can afford it." This plan invites cronyism and inefficiency.
A climate bargain, while imperfect, trades a mediocre tax (price on carbon) for elimination of regulations and subsidies. The statists hate this exchange. We might paraphrase Churchill, and judge the emissions trade by the enemies it has made.
Andrew Friedman -- Indeed, when the USA has been reduced to the level of 1875 again, with a population 8 times larger, it might be easy for a technoligically advanced China or India to arrive and set up a new government.
DeleteEurope, of course, would be in the 18th centry again.
I love the pollution taxes. Is there a constitutional right to pollute the air that other people breathe. Lead, that used to be in gasoline, is in everybody's soil now.
ReplyDeleteAdd on property taxes, sales taxes, Pigou taxes and tariffs and you have a much better tax system than one that relies on unenforceable and horribly complicated income and payroll taxes.
I am pleased you discussed this thoughtfully, and Tyler Cowen's issue are worth looking at. I am mostly concerned a carbon tax would not cause the other tax cuts and deregulation. Instead it would add on more regulations, as tax enforcement and the border tax adjustment idea is rediculous, as an unmeasurable basis for any tax (guesswork at best; crony discrimination at worst).
ReplyDelete"Of course, in the 5th week of a shutdown, over a completely symbolic issue, with great deals on the table that benefit both sides, if only each could let the other have a symbolic victory, is not a great time to advance such hope." -JC
ReplyDeleteThe problem is that symbols do matter. For expectations about the fairness and enforceability of future contracts.
Going forward, the economic potential of Latin America is enormous and, if managed properly, could help significantly enrich Americans. It is not in the long-term collective interests of Americans to build this albeit symbolic wall, precisely because it would signal/confirm that Americans are racists, thugs and bullies, and capitalism is nothing more than a zero-sum game.
The truth is more nuanced. US policy elites believe in well-defined secure economic property rights as long as the USA can make significant exceptions based on ethnicity, race or sectarian criteria. That attitude will not help US-based multinationals in Latin America (many of whom who are staffed by people who are far better informed, competent and forward looking than most US voters).
Please take careful note that the current US regime is playing to all the stereotypes about modern freemarket capitalism that radical left-wing militants and their national liberation guerrilla movements have preached for decades.
America's lax immigration policies/hunger for cheap labour have no doubt caused problems. Neo-Malthusian crisis in Central America has indeed the potential to dump millions of low socio-economic status security refugees into the USA but Trump's wall, strewn with racism and gratuitous insults, is not the solution.
If you were back in Rome the surplus energy was from wheat. So that was what you taxed. You tried to find a sweet spot, enough to finance the army etc, but not enough to drive the peasants off the soil and into the city.
ReplyDeleteNow the surplus energy responsible for everything we see around us is fossil fuel and more specifically diesel. So tax it directly, hopefully eliminating some of the current Rube Goldberg system.
A problem may be the amount of surplus energy in the new marginal oil barrel. Is there enough surplus to run a complex society? We are coasting down hill on the legacy energy, cheap conventional oil, hydro, nuclear. New sources are more expensive in terms of both energy and capital. Shale oil is still on average losing money and not paying much in taxes.
So the effect of carbon taxes may be magnified by effects on the lower energy return resources, now the majority of production. It is similar to taxing the marginal Roman wheat farmer who is tilling a less productive hillside. The energy system may be more fragile than it first appears.
"We are coasting down hill on the legacy energy, cheap conventional oil, hydro, nuclear. New sources are more expensive in terms of both energy and capital."
DeleteMy guesstimate is that at $0.10 per kwh for energy (electricity, natural gas, gasoline, all other sources), life will carry on pretty much as it is. Take the price for energy to $1.00 per kilowatt hour and then life becomes radically different.
A not insignificant problem of carbon tax is that should a technology that is capable of cutting down the emissions be created, it may (because of Jevons' paradox) push emissions higher. As such you will have to have a pretty nontrivial procedure for adjusting such taxes (and I cannot readily propose such procedure)
ReplyDeletePavel Shevchuk - The paradox is true and what is unsaid is that An Agency, with enforcement powers (the power to impose higher costs on 'polluters') would have no way to plan how to implement this (without tyranny).
DeleteTo cite Hayek, it is a pretense of knowledge to believe "we" could design a system to run the world ecosystem from a control room; much less that trustworthy humans could be found, and fired if they turn out to be "bad cops."
"We" need to design a system of property rights, and incentives, to encourage desired behavior. This would be the "nudge" idea, of which I am not fully persuaded - because I just hate government in my guts, irrationally.
Wishful thinking, without question. "Revenue neutral" 'carbon tax' was introduced in 2008 in the Canadian province of British Columbia. It was implemented at the same time as a reduction in provincial income tax rates were implemented--the two measures were tied together. Fast forward to 2017, a socialist government takes power in British Columbia, and voila!, two new measures were introduced and passed by the legislature: (i) the 'revenue-neutral' feature of the 'carbon tax' was eliminated, and (ii) the income tax rates were increased. A mere nine years had passed by that point. Dr. Cochrane engages in wishful thinking in this article. Practical politicians are current period oriented; taxes are the one measure that they can control at will, and they are not reticient to alter tax policy to suit their needs. Lest we forget, the introduction of the income tax was intended to be a temporary measure with revenues devoted to the reduction of debt incurred to pay for war expenditures of WWI. The Arab has a proverb about a camel, a tent, and it goes like this... if you let the camel's nose into a tent, the whole camel will follow, almost surely. Beware economists promising manna.
ReplyDeleteThe United States is running a Federal deficit of 4% of GDP. No one wants cuts to spending that would affect them personally, the "right" does not want cuts to military spending and no one want a tax increase they would bear. A carbon tax that raised net revenue for the Federal government would not be a bad route out of your current fiscal box. (The proposed confiscatory taxes on high incomes and/or wealth, whether fair or not, would simply not raise enough revenue.)
DeleteI saw a link in today's WSJ "Capitol" newsletter (under other things they are reading) to an interesting Brookings Institution item which pointed out the much-cited 70% tax rates, which B.Sanders and the new socialist congressp'on from New York are advocating, ARE ALREADY CURRENT LAW. Does that surprise anyone? The Republicans did it in 2017, by applyhing the new 21% corporate rate to the top salaries also paid by those corporations. Look it up.
DeleteCongress does not like "rich people," even when the Big Business Party is in control.
The Brookings Institution item is at https://www.brookings.edu/blog/up-front/2019/01/29/ocasio-cortez-wants-to-raise-the-tax-rate-on-high-earners-the-tax-cuts-and-jobs-act-already-did/?mod=djemCapitalJournalDaybreak
DeleteAnd, to correct my spelling, it was in "Capital Journal" rec'd 1/30/19 6am
Is the recent failed French gasoline tax an example of how such a tax would be received? If I understand the proposal, the rebates would be critical for having the consumers buy in.
ReplyDeleteWhile the idea of a carbon tax with all of the proceeds returned to the citizenry is the best approach, does anyone think that the politicians would allow this to happen? Unless the legislation included specific language that stated if all of the funds weren't returned to the citizenry the legislation would be immediately self-cancelling. It doesn't take too much imagination to see AOC or Bernie Sanders wanting to subsidize someone or Marco Rubio wanting to fund daycare or whatever is his cause of the moment. I doubt if politicians would want to give up this revenue stream when the could raise more by saying that the climate change is getting worse and we need to use less carbon.
ReplyDeleteThis comment has been removed by a blog administrator.
ReplyDelete