Revenue Neutral Carbon Tax, Continued (II)
August 16, 2012 Uncategorized

I already attempted to address some objections yesterday, especially the general epistemic problem of finding the perfect price: to reiterate, finding the perfect price with a tax isn’t nearly as important when you’ve already got the worst kind of taxes, as long as you tax within the range of plausible estimates of the perfect price. Here are some answers to other objections:

The need to gradually phase in the full tax rate will lead to higher oil use today (unintended consequences):

  • It’s true that an unexpected future price spike under rational expectations should lead to a short-run dash to extract and bid up oil until it reaches its discounted expected future price. Still, if that’s only $160/barrel*** then the mad dash is not going to be enough for an environmental catastrophe (especially considering storage costs). Interestingly this is more relevant now that discount horizons are stretching further in this interest rate environment…

Taxing “bads” is a slippery slope: Remember Robert E. Lee’s point that “It is good that war is so terrible, lest we grow too fond of it”. Taxing externalities might reduce resistance to tax hikes precisely because they’re less awful.

  •  Taking a federal level of taxation of 10%-20% of GDP as given because of political realities, this is an argument that we should allow opposition to the bad (opposition to taxing obvious externalities within reason) to perpetuate the worst (perpetuating payroll taxes) in the hopes that “a spoonful of anti-sugar keeps the medicine from going down”, if my inverse Mary Poppins analogy is correct.   Maybe we actually do want to keep the worst taxes if that makes it easier to keep them in that 10%-20% range… but no, after pollution/drug/alcohol taxes I don’t see any cost-benefit cases that are even close to obvious and reasonable. I mean, if we want to be more classically liberal, legalized taxation of those classic “bads” would actually be an improvement over current bans and command/control regs. I’m not convinced we’ll be any less secure against net tax hikes than we are now, again with the caveat that we bind ourselves to considering taxes within the range of plausible perfect prices.

It’s not clear that we’ll ever see cheap energy if we walk down the taxation path.

  • To keep energy expensive indefinitely, it seems like the tax would have to be in a “sweet” spot where it’s high enough to spur migration to expensive marginal changes in consumption, but not high enough to spur revolutionary investment in an invention with high fixed costs of discovery and low post-discovery variable costs (nuclear fusion technology, for example). It would be trapping us in a local utility maximum when a global maximum exists after the big fixed cost investment. Is that correct? Still, even if we were trapped in the local max, the expectation that energy would stay very expensive wouldn’t put much faith in process innovation and returns to scale on the technologies we already have. I’m sure innovation in the spirit of semiconductor manufacturers and Wal-Mart—-innovation in engineering and scaled logistics—-would bring us incredible improvements even in the overhyped solar arena.  Even beyond that, anyone with the foresight to recognize a sub-optimal “sweet” spot local max should either assemble semi-charitable venture capital or lobby for public R&D in a big fixed investment followed by near-free fusion energy (or equivalent), not oppose a carbon tax. The only way this premise remains is if we implement an energy tax, not a carbon tax. It’s conditional on the reasoning: if it’s about making energy in general more expensive no matter what the external costs because of neolithic “E”nvironmentalism, then yes we’d be in trouble as we’d see non-polluting energy sources taxed too. But if a majority want to constrain development in that fashion,  revenue-neutral carbon taxes are not an effective way to end economic growth. The fact that an “E”nvironmental fringe wants to go beyond carbon taxes doesn’t condemn carbon taxes themselves.

Energy has something of a special role because of its ubiquity in the supply chain, and expensive carbon would wreck growth.

  • I can’t imagine that ~$160/barrel oil*** would wreck the economy, so long as it’s accompanied by an $870 billion income tax cut. We’ve already seen these price thresholds in the absence of a tax cut for periods too brief for beneficial substitution to occur. Forgive my anecdote, but for Pete’s sake, my dad leaves the outdoor Jacuzzi on all winter, even in 0 degree Fahrenheit weather! We can’t claim electricity isn’t too cheap given the current level of external costs! Or try telling an asthmatic that. Or anyone who values tuna without dangerous levels of coal-emitted mercury.  I recognize that carbon demand is generally more elastic than labor supply, but as long as the tax is first order revenue-neutral, any “distortion” from behavioral elasticity is just putting on-book the costs we’re already enduring. It doesn’t matter if energy is more expensive if it’s only because it realizes the costs of violating property rights; if we care about liberty absolutely with no exceptions then we will pay any price to reduce unconsented harm. If we care about liberty reasonably balanced with other values then we will pay any reasonable price to reduce unconsented harm, but not a price beyond the range of plausible perfect prices. Switching payroll taxes for carbon taxes is perfectly reasonable, not only because of the cuts to agency budgets/environmental tax credits we could newly justify politically, but because the $140/ton price falls just inside that requisite plausibility range in the longer run.

We’re already implicitly taxing everyone who values air quality and climate risk reduction in order to ‘subsidize’ cheap energy from fossil fuels. So I’d like to see the data from carbon tax opponents just in case they’re even more right than they think about cheap energy: maybe it would be efficient to tax those clean-air-loving asthmatics even more, using the revenue to boost the subsidy for fossil fuels even higher! Less sarcastically, it’s really tough to imagine (let alone convince myself) of net external benefits of cheap energy as currently produced.

***$140/ton of CO2 is ~$62 tax per barrel of crude if you charge it on elemental carbon content. NYMEX crude is around $100/barrel now, and you’d expect lower demand and tax incidence partly falling on suppliers to result in less than a $62 price hike, so $160/barrel is a high-end estimate all else equal.


More problematic objections to be continued…international coordination and the question of tariffs…


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