Carbon taxes that don't work are a bad idea
There’s a perspective that seems to be gaining ground in the energy policy debate: emissions taxes may not be very effective in fighting global warming, but we should support them anyway. Centrist liberal Kevin Drum’s lays it out:
My own take is that even if a carbon tax accomplishes only a third of what its supporters hope for, that still makes it a better way of raising revenue than an income tax, a payroll tax, an excise tax, a capital gains tax, a sales tax, or a dividends tax. If I’m going to discourage an activity, even just a little bit, I’d say we’re better off discouraging energy use than we are discouraging work, imports, investment, or consumption.
Kevin is responding to Tyler Cowen’s pessimism on doing anything about carbon, which nonetheless includes support for such a tax as the lesser evil among alternatives. Cowen’s objections fall into three classes: the small impact of any policy on climate if other countries not take action; specific problems with the effectiveness of cap-and-trade, carbon taxes, and other forms of carbon pricing where they have been tried; and technological objections. Given the second objection, it seems strange that Cowen passes so quickly over other policies.
First, a quick note on Drum.
Drum’s idea that pollution taxes, sin taxes, and other Pigovian taxes are the only way to tax undesirable behavior is absurd. Truly progressive income and wealth taxes essentially tax extreme income inequality, which is every bit as undesirable as pollution. There is real evidence that, at the extreme, inequality leads to worse health outcomes and increases unhappiness. It harms democracy, increasing the political influence of the wealthy few and reducing the political influence of the many.
Untaxed income inequality also contributes to the kind of bubble that created the recent crash. In the face of inequality, more consumption is debt based, which means that investors meeting consumer demand are investing in riskier markets. At the same time, you have more wealth chasing fewer opportunities. It is true that there is no “lump of investment opportunities.” But it is equally true that if total investment in an economy exceeds a certain level, most of the remaining opportunities will be high risk or outright scams. In those circumstances, since most investors look for low risk/ high return opportunities, they gravitate towards the scams. High return in the real world almost always accompanies risk, so investment opportunities which claim to provide one without the other are usually looking for suckers. Drum has written about all this before, so I wish he would remember it when the subject of taxation arises.
One other point is that, to the extent “sin taxes” are effective in discouraging sin, they are volatile as a means of raising revenue and thus a poor substitute for comparatively stable funding sources (if what they are funding is at all important). If we do anything effective at all on climate, we will cut emissions by more than half over three decades or less, probably a lot more if we take the problem seriously. It would be a disaster to fund Social Security or anything important from a declining source of revenue.
Now let’s deal with Cowen’s objections.
The “but China isn’t cutting their emissions” argument ignores that continuing to be a major polluter reduces rather than increasing U.S. leverage in climate negotiations. The big fear other nations have in dealing with the U.S. is that we want them to cut so we can continue to pollute. Taking major steps to reduce our greenhouse gas pollution, and the air and water pollution that accompanies it, would not only make international negotiations easier, it would produce economic gains in form of lower health care costs and increased economic productivity that would far outweigh the expenditures to reduce such pollution.
Another Cowen objection is that carbon pricing, either in the form of a carbon tax or cap-and-trade, is not particularly effective, at least by itself. But such price tinkering is not the only available policy. California has energy efficiency rules that are comparative mild by international standards but strong compared to most U.S. states. Those rules led to per capita California energy consumption staying roughly steady at a time when most of the nation’s per capita consumption rose. Economic evaluations of the net cost of those rules, including energy losses from the rebound effect, show them to be less costly than the size of the energy tax that would have been required to achieve the same effects. I would add that pricing policies such as carbon taxes become more effective in the presence of tough, effective non-price regulation and well-targeted public investment.
Cowen also claims that we don’t have low carbon alternatives for ground transportation. Actually, we do. About 85 percent of ground freight transport could be carried by electric trains, provided we removed bottlenecks, added double tracking, and took other action to greatly improve freight train speed and (especially) reliability. Similarly, about one third of the U.S. population lives in dense enough neighborhoods that we could install electric light rail that would be competitive with automobiles for convenience. Another third lives in medium density neighborhoods where a combination of electrified light rail and inexpensive electric cars (glorified golf carts) would meet most daily passenger transportation needs. There is also a substantial minority of the population who prefers bicycling and walking to driving, who we could accommodate by providing more bicycle paths and better pedestrian infrastructure. And there is great untapped potential for increased telework.
If we developed transit in neighborhoods that can support it, future development would tend to center around transit dense areas. (Transit stops are normally very desirable to developers.) We would find population shifting from transit poor to transit rich neighborhoods in the long run. The medium density neighborhoods I mentioned would tend to grow denser and more transit friendly. Thus, if we can encourage faster growth in low-carbon electricity such as wind and solar, we can drive most of our powered transport with that clean electricity.
Now, this does not mean that there is no reason for pessimism on the climate crisis. But we do not lack either technology or policy that would be effective if implemented. The politics suggest that we are going to ignore what needs to be done. Changing that is not really a matter of optimism or pessimism. It is a matter of action.
If you want to read more on this, my new book Solving the Climate Crisis will be released by Praeger Press at the end of this year, or beginning of 2012.