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The most important aspect of getting pricing “correct” in economics is that the relative prices between goods captures the true relative opportunity costs of consuming/producing those goods. Much of the research I have seen on fossil fuel energy use suggests that the relative prices are not right. Nor are the absolute prices. A recent paper by Nordhaus demonstrated for example, that the current price of electricity from coal generation is dramatically lower than the true “social marginal costs” of burning another unit of coal.

It would seem therefore that a tax on coal equivalent to its negative external impact would make sense. Why would we do this? Because we want both users and producers to “feel” the full impacts of their choices, and have the other fuel options run a fair horse race. Of course, hobbling coal is one way to make the race fairer. But just as we see people celebrate subsidies for wind and solar and biodiesel and the like, why then would we not favor subsidies for natural gas (NOTE I AM NOT SUPPORTING THAT! This is another epistemological point)? A subsidy for natural gas would be almost required given our second best energy policy environment today.

It is easier to shower subsidies than to raise taxes. And thusfar we’ve been unsuccessful at implementing an across the board tax on carbon dioxide. So if folks continue to believe that coal and to a lesser extent oil are major problems and that they are not properly priced, then where are the folks pushing for natural gas subsidies? After all, not only has the recent boom in natural gas generated somewhere around $100 billion per year in “welfare” using a simple back of the envelope calculation, none of those benefits include the positive externality that substituting gas for coal reduces mercury, soot and other toxic emissions (e.g. coal ash is radioactive) – which I would argue are very large impacts and much longer lasting regardless of the price of gas (the low price of which much the consumer surplus is derived).

And if you’d like to argue that focusing on relative prices alone neglects possible negative externalities from energy use in general, I’ll make two points. First is that low energy prices are good. If you think there are negative (external) consequences of poor people being poor, then anything that makes their lives better would seem to be a positive external consequence. So we’d not want to tax energy use any more than we’d want to force people to be homeless.

Second, how much does current tax policy suppress income and output in the United States today? We already know that the Dead Weight Loss of taxation alone means that the economy is in the area of $1 to $2 trillion smaller because of the inefficient tax system. And individual consumption is probably much smaller than it otherwise would be because government at all levels already spends (net of transfer payments) several trillion dollars as well. So you would really have to advocate that we need to reduce output by more than the 25% (apx) of GDP that is already being suppressed by current policy. I don’t care that the current suppression of GDP was not done with the intention of reducing energy use, that’s what it HAS done in any case.

As I’ve said earlier, the fact that one cannot even bring this idea up in polite company tells us all we need to know about whether we are in the realm of religion or science.

4 Responses to “Optimal Tax Policy for Fracked Gas”

  1. I do not understand. How is a tax on what you call “energy” different from a tax on food, or literacy? I understand the Pigouvian argument that burning coal causes pollution, so we tax coal and use the money to clean up the environment. Sounds nice. But paper mills are also polluters and we do not tax books especially to clean those up. If “energy” is a primary to industrial production, then surely food is all the more so. In some states (Ohio) restaurant dinners are taxed as luxuries, but groceries are not. So, at MacDonald’s in Ohio, always say that it is “To go.” Here in Texas, we tax groceries, but not water. Actually, according to tax theory, we should tax water about 50% to encourage savings and promote investment in alternatives.
    Ever see anyone who was too poor to afford any clothes? I think it was Kentucky, where if I bought a t-shirt with a logo, it was taxed, but a plain white one was not. We waste gazillions every year on fashions. Taxing clothing would encourage investment in research to replace clothing with natural growth products, so you could have red feathers one day and iridescent purple ones the next, and yellow fur one day or orange the next. I like X-woman Mystique’s large blue scales, like leaves. Seems better than clothing… Maybe if we taxed clothing enough, we could bubble the cities and raise the temperatures so that we would not need clothing at all (mostly). It would encourage people to be healthier, which would make Obamacare afforable.

  2. Harry says:

    If you close the loopholes in clothing tax policy, you could afford to subsidize the domestic zipper industry, and if you mandated 56% metal zippers, think of the benefits to the working men and women in the steel business. The USDA could buy up all the buttons and store them in the cheese caves.

  3. wintercow20 says:

    Oh, I’m not advocating an energy tax … I’m just trying to speak the language of those who do. !!!

  4. Harry says:

    WC, are people pushing for natural gas subsidies? I know you are not.

    Also, I know he is a straw man, did you catch Al Gore today?

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