Carbon taxes work when there’s substitutability and revenue is locked down for environmental goals
Thanks to David and Charlie for picking up on and responding to my carbon tax op-ed. I’ve learned a lot from Grist, so I was happy to see this. Some responses to their criticisms.
David’s beef is with the word “spend” in the headline. I agree the headline is stupid, and it was not my idea. It implies that I’m advocating hoarding the revenue. Instead, I was trying to say that the goal is to avoid collecting the tax revenue in the first place, by getting firms to change their polluting behavior. If they’re not polluting, they don’t pay the tax, and there’s nothing to spend. (I wanted to call it “How to Make a Carbon Tax Work.”)
spend“lock some of the tax revenue away” to cushion the blow of higher energy prices on low-income and working families? Why not use it to reduce the (regressive) payroll tax? Why not use it to help train workers laid off in fading industries? Why not use it to fund weatherization and retrofitting of existing buildings, to reduce energy use? Why shouldn’t social and economic justice enter the picture?
The answer is that if the revenue is used for some worthy goal, policymakers might end up trying to maximize the revenue for that worthy goal (as has happened with some regulatory taxes in the past). In this case, that means maximizing pollution. I have some more discussion of this in the longer paper called “Taxation as a Regulatory Tool: Lessons from Environmental Taxes in Europe” [PDF].
Charlie asks whether the changes in Denmark and Norway are a result of the tax. In Denmark, he says the success is because of wind power, energy taxes on coal, and bicycles. I agree completely. But this is the point of the op-ed: wind power and bicycles give firms and individuals something to switch to. If you don’t have substitutes, a carbon tax doesn’t get you reductions.
I discuss energy taxes in “Taxation as a Regulatory Tool,” and I agree they played a role. (They were chopped from the op-ed because rates have fluctuated over time and there wasn’t enough space to present the necessary qualifications.) But again, these taxes were successful because they were coupled with lower energy taxes on natural gas. They gave firms somewhere to go, and that’s the key point: the possibility of substitution, or of changing your behavior easily.
As to Charlie’s and David’s worry about the way carbon taxes will affect lower- and middle-class Americans: Ideally, if the companies do find ways to avoid the tax by switching to cleaner fuels, it doesn’t have some of the regressive consequences. It’s true that prices will go up, and that will hurt those at the economic edge the most. But this will happen with any climate change policy. It seems much more reasonable to pass separate policies to alleviate the situation of those at the economic edge, rather than getting the issue mixed up with the question of a carbon tax.
Charlie has a point about Norway’s exports. The IPCC guidelines right now are to count the emissions where the fuel is produced, but it’s true that some have criticized this, and there’s a debate going on. I’m not sure how to resolve the issue. But it does seem to me that since Norway benefits from those exports, at least some of those emissions should be counted against its account. Moreover, if we’re criticizing the way emissions are measured, it’s worth nothing that international transportation is excluded right now from all counts of CO2 emissions. If those were included, Norway’s emissions would actually go up.
Charlie’s larger point is right, though: it is very difficult to show that the tax itself led to the CO2 outcome. My approach was to put together a theoretical framework, using things we know about how other kinds of taxes work, to make predictions about how a carbon tax might work. It turned out that two of the predictions (about substitutability and locking the revenue down for environmental goals) seemed to be correct, in the sense of predicting the outcomes we see in the four countries with carbon taxes.
No, it’s not a slam dunk case. But does anyone have a better way? (That’s not a rhetorical question: please email me or let me know in comments if you have a better way!)