As a once-sensible economist I supported a “revenue neutral carbon tax” as one major prong of global warming strategy. The simple idea is that such a program would qualify as “No Regrets.” If CO2 turns out to be really bad, then the tax assures that we’ve properly considered those damages in our day to day decisions. If it turns out that CO2 is no big deal, well, you still need to raise revenues somehow, and perhaps distorting the energy and land use markets is no worse than distorting labor or capital markets. The premise behind revenue neutrality is that for every dollar we raise in carbon taxation we would eliminate $1 of taxes on something else that we don’t want to be taxing, like labor effort.
But I no longer take hallucinogenic drugs. There is no chance that once a carbon tax is enacted, that major reductions or eliminations of other taxes would take place. And once a carbon tax is in place, there is no chance that other distortionary measures taken to prevent or deal with global warming would be unwound. What we are almost sure to end up with is carbon taxation on top of those other existing programs.
Do I have evidence that leads me to think this way? Well, public choice theory suggests I have every reason to think this way. But ignoring that, two major historical episodes suggest that I am not being cautious enough. First, examining the history of financial sector reform, you never see in the aftermath of a crisis the scrapping of the old rules and regulations that presumably failed or had a hand in the crisis in favor of a cleaner and better set of new rules. In every case in American history what we have seen is a layering of a new set of rules and oversight onto the old set – presumably to not upset the old coalitions that have been built up over time to rely on those. For example, after the very disasterous set of National Bank Era regulations promulgated a series of increasingly severe crisis in the latter half of the 19th century, the new Federal Reserve System was layered right on top of the old National Bank regulations. When the Fed regulations failed during the Depression, we layered a new set of rules on top of those. And so on.
But the era of Prohibition demonstrates quite clearly what would happen if we ever got around to passing a carbon tax. Here is more from Last Call:
Much of the liquor revenue was treated as additive, and helped to pay for the new government initiatives that began to proliferate in the second half of Franklin Roosevelt’s first term. To the economic conservatives who had sponsored Repeal, the combination of high taxes and new programs defined a perfect hell. They had defeated the Drys, but in their own view they had ended up similarly vanquished.
Update: Just saw this piece on WWRD.