Yesterday we showed that the current level of motor fuel taxes in the United States is set near or above the tax rate required by "optimal" global warming tax policy. I imagine I will soon receive a private e-mail asking me the question, or rather stating an objection to my point, saying that, "sure, but we are not using those tax revenues to DO ANYTHING about global warming."
Let me speak as an economist for the time being. The right way to address such a question is: "it doesn't matter whether we use those tax receipts to build plaster unicorns, to bury underground, to subsidize hockey teams in the Arizona desert, or anything else we might do with those receipts … what matters is that the tax was levied on the action of purchasing a gallon of gas."
Seriously. Yes. The point of optimal taxation in the presence of a negative externality is to discourage the activity that is causing the damage. With a 42.4 cent tax on purchasing a gallon of gasoline (presumably most purchased gasoline is burned), consumers respond by purchasing less gasoline. If consumers pay the tax and continue to purchase the same exact amount of gasoline as before – then the tax is STILL optimal. It would mean that we value driving our cars more than the damage caused by driving our cars. And there would be no economic problem here because we would be paying the full costs of our activities (I am leaving out the other pollution and congestion caused by burning gas for now). If the government collects those tax revenues then it has already sufficiently "dealt with" the externality. If they want to blow the money by bailing out underfunded public pensions, as they surely will one day soon, then fine – the externality is still paid for. If they want to blow the money by building environmentally unfriendly light rail lines to nowhere, then fine, the externality from burning gas has still been paid for. What they do with the tax revenues is no different than what I choose to do with my income after I have earned it. I don't think the U of R cares very much whether I use my money to buy a new pair of binoculars or to upgrade my laptop – a dollar paid to me is a dollar paid to me.
Incidentally, the reader's hypothetical question to me illustrates another reason why regulatory approaches to environmental problems can be inferior to market oriented or common law oriented approaches to problems. In the case of a common law judgment against burners of gasoline – one can easily imagine that a court (ignore transaction costs for now) would require a payment of damages of about 40 cents per gallon of gas burned. But in the case of court awards of damages, the damages are not paid into the general fund of the government only to be doled out at the wishes and whims of the political class, but rather those damages are paid (supposedly) to those who have actually been harmed or who have been placed in harm's way from my actions. In other words, the damages would in fact be more likely to be mitigated. In cases where there are many polluters and pollutees, as the case of burning gasoline, relying on Common Law is probably not enough to protect the environment, but it is nonetheless a useful guidepost for how to compare the effectiveness of existing regulatory policy. That our policymakers are not using the proceeds from the gas tax to build seawalls, to research drought resistant crop seeds, etc. says nothing at all about whether the tax rates are appropriate but rather tells an entirely different story.