Reihan responds. Let me just say a few more things. First, I described his characterization of carbon pricing as “insane” based on this:
What we need is a $100 billion prize or set of prizes to the person or firm or non-profit entity that can devise a cost-effective means of scrubbing the atmosphere of carbon emissions. This sounds insane, I realize. It is less insane than the far costlier, far less egalitarian regulatory alternative.
Just to clarify.
Next, Reihan may be right that our disagreement over Monica Prasad’s view is a matter of squeezing too much complexity into too little space. I think we shouldn’t read too much into the line that an effective tax is one you hope never to collect. Her main point is that the revenue maximizing rate is less than the socially optimal, emissions reducing rate, and it’s important to structure policies so that the latter is the target.
In practice, this could easily involve taxpayer refunds. One thing that’s important to remember is that consumer behavior is more flexible over the long-term than the short-term, so as the revenues peter out over the long-term as the carbon is being wrung from the economy, there’s also far less consumer pain to accommodate. A buck increase in gas right now would be hard on consumers. They couldn’t adjust easily, thus ensuring the collection of a lot of revenue. That would mean ample resources to help consumers adjust. Twenty years down the road, after two decades’ worth of investments in alternatives, a ten dollar increase in gas might barely register with consumers. You get less revenue, but there’s less need to return it to consumers.
The remainder of his response focuses on two issues — that pricing is likely to be very costly and that something more than pricing will be needed to bring the rest of the world along. On the first point, Reihan writes:
By recognizing that climate change is real, and by proposing modest, low-cost strategies to deal with the downside risks, conservatives will call the bluff of Democrats who advocate a sweeping transformation of the economy, one that will cause a lot of economic dislocation.
Now many Democrats obviously feel that climate change might generate some sweeping changes of its own, and not in a good way. But I think it’s important to be realistic about the kinds of costs pricing might involve. In practice, the explosion in oil prices over the past year is probably more dramatic than anything we can expect to see in a 12-month period from pricing. President Bush recently warned that passage of the Lieberman-Warner bill might raise gas prices by 53 cents a gallon by 2030. Gas has, of course, gone up over 80 cents a gallon in the last year. This hasn’t exactly been a comfortable year for consumers, but it also hasn’t been revolutionary or devastating.
Of course, the intimation that a reasonable bill will result in dramatic dislocations could be enough to derail a pricing policy, whether or not the charge is accurate. Certainly that’s what the coal and oil lobbies are saying in the expensive ad campaigns currently airing.
Reihan is right that it will take more than us saying, look, we’re doing something, to get other countries on board. That is a good first step, however (and in practice, our reluctance to act is probably a significant barrier to progress at an international level). I also think that the best way to incentivize development of the kinds of technologies that will make emission reductions elsewhere easy is to price carbon here. A pricing policy would probably involve research incentives that amount to picking winners. The upside to pricing is that the pricing mechanism itself provides an incentive to develop a limitless range of other technologies that the pols never thought to include in the package of research grants. You don’t get that with a research money only plan.
Reihan is worried that a carbon pricing policy will mainly benefit corporate interests. But that’s where a strong conservative voice could play an important role! Sitting this issue out is not going to get well-meaning conservatives the solution they want, and it may well reduce the quality of the solution we end up with.