Advocates of a carbon tax argue, correctly, that a tax is a much better way to reduce carbon usage than any system of regulations could be. The reason is that every use of carbon that creates carbon dioxide imposes damage, and a carbon tax based on the amount of carbon dioxide created will cause everyone who creates carbon dioxide to, indirectly, take that damage into account. The carbon tax beautifully scales the payment to the damage: those who create more damage pay more in carbon taxes.
By contrast, a system of regulations or subsidies that favors one energy source over another, or one energy use over another, depends on central planners having information that they cannot possibly have. So, for example, if government planners require that a certain percentage of energy usage come from solar, they do not take account of the cost of solar and they foreclose ways of producing energy, such as natural gas, that produce less carbon dioxide than other ways, such as coal. A carbon tax, by contrast, automatically pushes electricity production away from coal and towards natural gas. As a bonus, if, under a carbon tax regime, solar energy turns out to be less expensive than natural gas, the market will push energy production more in the direction of solar.
That reasoning is fine—as far as it goes. But it doesn’t go far enough. The reason is that economists who advocate Pigovian taxes take as given that the most-efficient way to forestall global warming is to reduce the amount of carbon used. But what if their assumption is incorrect?
This is from my article today at Hoover’s Defining Ideas. The article is titled “A Carbon Tax is Not a Slam Dunk.” Read the rest of it to see why.
READER COMMENTS
Kevin Dick
Aug 21 2019 at 2:17pm
We’ve discussed this before, but I think it’s worth engaging again. Let’s take things up one level first. Do we agree that, to the greatest extent possible, we should employ market-based mechanisms to mitigate anthropogenic greenhouse gas impact? (Assuming for the sake of argument that the expected impacts are severe enough to warrant a policy response.)
If so, do we agree that, as a technical conceptual matter, the goal of those market-based mechanisms is to minimize the deadweight loss? Now, if I recall my advanced grad school micro correctly, this implies a schedule of Pigouvian taxes and subsidies, one of which will be a carbon tax. (And per a previous post of yours, we also need R&D subsidies or prizes for technologies that shift the damage or cost curves altogether.)
So I’d like some clarification from you about your thesis. Are you saying we should not have a carbon tax _at all_? Or are you saying that it’s not an adequate solution in and of itself?
(Note: your points are very good arguments against a carbon cap and trade scheme _altogether_. In a very narrow sense, you can show that a tax and cap and trade are duals. One fixes price and lets the quantity float. One fixes quantity and lets the prices float. But cap and trade is less flexible when there are multiple factors that cause the externality.)
David Henderson
Aug 21 2019 at 5:28pm
Kevin,
Here are my answers, with your questions in italics.
Do we agree that, to the greatest extent possible, we should employ market-based mechanisms to mitigate anthropogenic greenhouse gas impact? (Assuming for the sake of argument that the expected impacts are severe enough to warrant a policy response.)
Yes.
If so, do we agree that, as a technical conceptual matter, the goal of those market-based mechanisms is to minimize the deadweight loss?
No, but we agree that it should be.
Now, if I recall my advanced grad school micro correctly, this implies a schedule of Pigouvian taxes and subsidies, one of which will be a carbon tax.
That’s where you’re wrong, and the point of my article is to show that that’s wrong.
So I’d like some clarification from you about your thesis. Are you saying we should not have a carbon tax _at all_?
No, I’m saying that the case for a carbon tax is not a slam dunk because there well could be cheaper ways of reining in global warming than to reduce carbon. I laid that out pretty clearly in the article.
Or are you saying that it’s not an adequate solution in and of itself?
I’m saying that it could be a wrong solution because there could be cheaper ways.
Kevin Dick
Aug 21 2019 at 7:05pm
Great. We agree on the first point and on the “should” of the second.
I read your article pretty carefully and I don’t understand why you think it contradicts my third point (from which the fourth and fifth subsequently flow).
You make three counterarguments. The first and third are covered by my “schedule of Pigouvian taxes and subsidies.” The second depends on the actual existence of and economies of scale for cost effective geoengineering technologies. Until such technologies exist, their future potential does not seem to be a deadweight loss-minimizing argument against a carbon tax _today_.
I will address the details of your three counterarguments in your article in turn:
(a) More potent greenhouse gases. I don’t believe this implies no carbon tax. I believe it implies we also need a tax on other greenhouse gases. This would be included in my “schedule of Pigouvian taxes and subsidies.”
(b) Geoengineering. I believe it implies a geoengineering subsidy equal to the social cost of carbon. Now, at some point a portfolio of geoengineering solutions could change the impact and cost curves altogether. So when we run the integrated assessment models or their equivalent, the social cost of carbon is lower. But that’s the point at which we would lower or remove the carbon tax in response to the new curves. Unless you believe we are already at that point, a carbon tax would result in less deadweight loss today.
As we discussed last time, there is a longer term meta issue of investments in research to achieve such curve-bending geoengineering. Now, I haven’t actually worked out the detailed logic here, but I suspect you haven’t either. However, I’m reasonably confident if we did, it would say we should offer subsidies or prizes for such research and, again, only lower or eliminate the carbon tax once they exist.
(c) Your third point is really just a special case of (2) where the geoengineering technology is “natural” and exists to day. My “schedule of Pigouvian taxes and subsidies” would obviously include a subsidy for planting trees.
Rob Rawlings
Aug 21 2019 at 2:51pm
I agree that a carbon tax is not a slam dunk as we neither know what the true social cost of carbon is or what technological breakthrough may come along that will solve the problem cheaply in the future. However given the risks involved I find it hard to support the ‘wait and see’ approach and would rather we took some proactive measures now as an insurance policy.
A couple of points David makes seem to have fairly obvious (to me) replies:
If ‘cow farts’ are adding to climate change then we need to guesstimate their social cost and consider a pigovian tax on cow farming too,
If planting trees (or other actions) can reduce net carbon emissions then these actions can be encouraged by allowing carbon (or cow fart) producers to offset their tax bill by paying for the planting of trees (or other carbon absorbing measures). This would encourage free-market activity to find the most cost-effective ways to absorb carbon. This approach may be better than a Pigouvian subsidy and might result in the kind of solution that Ronald Coarse may have approved of.
Floccina
Aug 21 2019 at 3:40pm
The proceeds of a CO2 tax should be paid out for removal of co2 from the air, perhaps people will do this through enhanced weathering, biochar, deep ocean iron fertilization or something else.
Airman Spry Shark
Aug 21 2019 at 5:52pm
The points about methane & geoengineering miss an important aspect of the concern about carbon dioxide: ocean acidification. The thermal effects of CO2 get most of the attention but strategies to mitigate them directly are unlikely to satisfy carbon restriction advocates (although tree planting should).
Duncan Earley
Aug 21 2019 at 10:16pm
The reason I don’t like a carbon tax is once it goes through the political sausage factory it just turns out to be just a new tax and redistribution favoring the wrong groups.
In Australia when we had a carbon tax things like Cows and Steel were excluded due to the politically sensitive nature of those industry’s. Basically the only thing that had a carbon tax was petrol for cars (which already had a big exercise tax on it) and electricity (which in most states is basically government controlled anyway including price controls). The carbon tax ended up being just a tax on the power bills of poor people who couldn’t afford to put solar panels on their roof. Which is why it got killed after the next election.
Benjamin Cole
Aug 22 2019 at 12:14am
By contrast, a system of regulations or subsidies that favors one energy source over another, or one energy use over another, depends on central planners having information that they cannot possibly have,–DH
True, but this applies to how many facets of federal income and payroll taxes as well.
And there are external costs of pollution not captured by the price signal. Air pollution is nearly the classic case for government taxes.
Go with pollution taxes, property taxes and tariffs, and dispense with income taxes.
AMT
Aug 22 2019 at 9:08am
Your whole paragraph on pricing carbon is pointless. “Carbon is already priced.” What do you mean? That natural resources have prices/values? Wow, so insightful! What everyone obviously means when they use the term is to put a “price” aka a tax on the pollution associated with the emission CO2. It obviously has implications for the market and is therefore more of a “market solution” because it works to equate supply and demand efficiently by correcting the pollution externality. The word price is certainly just politicians trying to avoid the word tax, even though it is a pigouvian tax. (See the Simpsons episode where a tax is called a “temporary refund adjustment” https://www.youtube.com/watch?v=XuieYXLiG-8 )
Your points about methane do nothing to counter the arguments in favor of a carbon tax, they only add that we need a methane tax as well! I think it just isn’t mentioned much anymore because it is a symmetrical logic, and it’s easier to say “carbon” or “CO2” rather than greenhouse gases. But the same logic applies for all greenhouse gases.
Your arguments about geoengineering are good, and important. Given the magnitude of cost differences, of course we should just forget about any greenhouse gas taxes and spend a few tens of millions on geoengineering instead. I can also see the argument that it is very uncertain at this moment and therefore quite risky that we might cause some much larger irreversible damage. But that means we should invest a whole ton (Billions!) into researching this topic. I don’t really see how you can say imposing carbon taxes is risky, besides “opportunity cost risk…”(?) The reason people favor it is because we see it as not having any unknown(!) risks, compared to geoengineering.
Regarding tree planting, this also could be a very good idea, but I’m not sure it would be a permanent solution either. I’m far from an expert here, but I thought that trees will absorb and store carbon as they grow, but then what happens when the tree dies and begins to decompose? Is that carbon released back into the atmosphere? So while possibly helpful and cost efficient, not a permanent solution to CO2 emissions. Essentially having more forest means you will reduce the amount of CO2 in the atmosphere, but it might be more like bailing water out of the ship, without plugging the hole (and the bailing stops working when you have reached “peak forest”). At least it buys some time.
Regarding the incentives for companies to find alternative solutions, I don’t think it as bleak as you make it. Practically every industry has an association that pools fees from members to perform research and lobbying on behalf of all members. I don’t think membership is rare either, which you would expect if every company could just free ride.
Jon Murphy
Aug 22 2019 at 9:24am
Which is what he meant by “carbon is priced.” See also John Nye’s article “The Pigou Problem”.
Everything has implications for a market, but not everything is a market solution.
But that’s the point; the tax doesn’t always do that (thus the point about methane). Further, actually identifying an externality and the pricing already done can be difficult (see my short article here).
With respect, that’s just hubris in the extreme. There are always unknowns; we do not know all that is, all that will be, and all that could be. Indeed, part of the point of this article is to highlight some of the unknown risks, not the least of which is “what if a carbon tax isn’t the best solution out there?”
AMT
Aug 22 2019 at 1:50pm
“Which is what he meant by “carbon is priced.””
WRONG. Try reading the article.
“Everything has implications for a market, but not everything is a market solution.”
Nice, pointless axiom that ignores the argument in this case since you, for no reason, ignore it by stopping before the “because.”
“But that’s the point; the tax doesn’t always do that (thus the point about methane). Further, actually identifying an externality and the pricing already done can be difficult (see my short article here).”
WRONG. That’s exactly what the tax does. Your point about methane is completely incorrect, as shown by my own discussion of it. The biggest issue with pricing the externality is about future discount rates. See Greg Mankiw’s Smart Taxes article.
“With respect, that’s just hubris in the extreme. There are always unknowns; we do not know all that is, all that will be, and all that could be. Indeed, part of the point of this article is to highlight some of the unknown risks, not the least of which is “what if a carbon tax isn’t the best solution out there?””
So, we can’t know everything for sure, so we’d better never conclude that one policy is superior to another? Great policy strategy! As I said, the “risk” he is talking about is logically only the opportunity cost. The cost of a carbon tax is the lost efficiency, which we can calculate. That is different from the unknown long run effects on the planet of geoengineering. Your “what if” is pointless because that applies to any situation where we have less than full knowledge. That doesn’t mean using reasonable estimates based on available knowledge is “hubris in the extreme.” I honestly laughed out loud at that! Let’s forget about performing a cost/benefit analysis when we do not have complete information about every parameter!
The problem with geoengineering is that the potential magnitude of the harm is very unknown, and could be catastrophic, so the expected value of implementing the policy is likely going to be low. As I said, we should research this very thoroughly, because being able to know with more certainty what the effects will be is vital to making this policy the superior choice.
Jon Murphy
Aug 22 2019 at 2:58pm
AMT-
Rather than attempt to address each point you made, I’ll just sum by saying I think you’re missing the point of both Henderson’s article and my criticisms of your comment to him. I am happy to take this offline, but I’ll need more from you rather than just shouting “WRONG!” at everything anyone says.
AMT
Aug 22 2019 at 3:36pm
I understand the English language well enough to know what both you and Henderson communicated. If anyone is failing to understand what the other is saying, that would be you.
I did not think it was necessary to fully explain what it implies to say: “carbon is already priced. Natural gas, oil, and coal all have prices and their prices are somewhat related to the amount of carbon they contain…adding a tax would raise the prices…(but)…setting a tax does not “price carbon.””
He literally provides the vital clues: “have prices” that are only “somewhat” related to carbon content, which implies that these prices are, unsurprisingly, set by supply and demand.
Honestly, you see my reply, yet you claim I “just” shout that you were wrong?
AMT
Aug 22 2019 at 3:53pm
Addendum(accidentally hit enter before completing last post): No one, besides those who are confused, thinks that the term “pricing carbon” as it is used in the context of discussing carbon taxes, means setting any prices of hydrocarbons based on their carbon content. We all have figured out that “pricing carbon” actually means taxing CO2 emissions. I mean, shouldn’t the context be a dead give-away?!
David Henderson
Aug 22 2019 at 7:30pm
You write:
Notice that you found even yourself having to put the word price in quotation marks. If you look at the literature, you will find that, by and large, people who refer to setting a price on carbon don’t do that.
Also, you’re wrong on your claim. They want to put a tax on CO2, not on “the pollution associated with the emission [of] CO2.”
Finally, if you have no problem referring to a tax on carbon as “pricing carbon,” can I take it that you have no problem referring to a tax on alcohol as “pricing alcohol?” And if you do have a problem referring to it as “pricing alcohol,” what stops you from referring to it that way?
AMT
Aug 23 2019 at 8:22am
I used quotation marks to emphasize that the term is unusual in its usage. I know other people don’t do that, but what does that matter in this context? I never said or implied that using the word price is correct (as emphasized by my quotation marks!), I simply said it is painfully obvious what the actual, intended meaning is. So, “pricing alcohol” is the same. You can instantly deduce this is a misnomer for an alcohol tax, created by a politician who is trying to limit pushback.
To be extra courteous to those who misuse this price term, they might argue they mean we are putting a price on the negative externality, so people have to pay for the cost they are imposing on others (which before had no price!). But in this context they are only implying that if they say “price on carbon pollution” or pricing “CO2 emissions,” rather than simply “pricing carbon,” but maybe you can give them a break for abbreviating? However, even then, that price is to be paid to a government in the form of a tax…so really that’s the term we should use.
Yes, I am fully aware it is a tax on CO2. Perhaps it was not clear enough, as I meant to say “tax on CO2 emissions” (because the CO2 emissions ARE the pollution!). The “associated with” term apparently was confusing, but I was trying to convey that the pollution is created through the emissions.
David Henderson
Aug 23 2019 at 12:54pm
Dear AMT,
It looks as if we might be iterating here on the “pricing carbon” issue and it comes out in your discussion of the “pricing alcohol” issue. Indeed you go even beyond my hedge about motives.
You write above:
Recall that I had written:
The difference is that I allowed that it was in my more cynical moments that I had this doubt about intentions whereas in your case you had no such hedge. You’re quite confident that the motive would be to limit pushback.
Fred Foldlvary
Aug 22 2019 at 9:48am
If particular emissions cause damage, then the absence of a payment by the polluter becomes an implicit subsidy to the polluter and its customers. Price subsidies have a deadweight loss, and fee market should have no subsidies, therefore a pure market requires the elimination of such subsidies.
robc
Aug 22 2019 at 11:21am
I think any article discussing Pigou must include a discussion of Coase somewhere, even if it is a sentence explaining why Coase doesn’t apply in this particular case.
But I think this statement of Coase’s is hard to overcome:
“All solutions have costs and there is no reason to suppose that government regulation is called for simply because the problem is not well handled by the market or the firm.”
David Henderson
Aug 22 2019 at 11:43am
You write:
I think any article discussing Pigou must include a discussion of Coase somewhere, even if it is a sentence explaining why Coase doesn’t apply in this particular case.
In an earlier draft, I had a statement similar to the one you suggest. Then I thought, “Oops. I’d better reread ‘The Problem of Social Cost,’ by Coase,” which I hadn’t reread in over 20 years. I started to do so and got up against my deadline. It’s on my list for the next few weeks and, if I end up thinking it’s apt, I’ll update or, more likely, do a new post.
Bob Murphy
Aug 22 2019 at 12:54pm
rob,
I wrote an article that used the tree-planting possibility as a way to illustrate Coase vs. Pigou.
robc
Aug 22 2019 at 10:02pm
Great article, thanks for linking.
Everyone saying carbon tax is a slam dunk needs to read it.
Dustin
Aug 22 2019 at 12:29pm
cow farts: So? It isn’t either or. CO2 is bad. Reducing CO2 emissions is good whether or not we address cow farts.
geo-engineering: There is no serious proposal for fully offsetting the effects CO2 emissions, which is why you didn’t include one. Again, it isn’t either or. We can have taxes in the near term until we figure out geo-engineering (if we figure it out).
trees: Again, it isn’t either or. And trees would take a looong time to have a measurable effect. We don’t have a lot of time. I mean, even the article you referenced indicates this would take 50 – 100 years and should only be seen as a backstop once we reduce current CO2.
We needn’t only one solution. It can be all of these plus a carbon tax. In fact, a carbon tax could pay for some of these. Something you haven’t discussed is the long-term benefit of educating humans to be more conscientious about the externalities of our actions. Reduce, reuse, recycle. There is no way around this.
Honestly, this entire argument seems to be ideology first.
Jon Murphy
Aug 22 2019 at 3:18pm
It is, though. Resources are scarce. Resources spent toward reducing CO2 rather than methane means fewer resources to devote toward methane. Given the goal is about global warming, one would want to devote resources to where they are likely to be most effective.
As a silly example, consider the following:
Let’s say we have two potential solutions to global warming and, for the sake of argument, let’s assume both are 100% effective. One solution costs $100 billion and one solution costs $100 million. Which solution would be preferable? Seems to me the second: it accomplishes the same goal with fewer resources, meaning the remaining resources could be spent toward other uses.
There is nothing ideological about this in the least. It is just the recognition that we live in a world where resources are scarce (aka where things have cost). So, there is always a trade-off faced.
Dustin
Aug 22 2019 at 10:29pm
Demonstrate the resource scarcity and ROI of the a/b investment cases. Otherwise this is a strawman. Frankly, I don’t believe you.
Besides, a carbon tax would raise funds in the near term. There are your resources to battle cow farts.
Jon Murphy
Aug 23 2019 at 8:29am
I’m sorry, what don’t you believe? That resources are scarce? I mean, that’s just reality: if you spend a resource towards A you cannot subsequently spend that exact same resource toward B. Or, put more poetically, allow me to quote from what is probably the best economics textbook on the market, Universal Economics by Armen Alchian and William Allen (ed. by Jerry Jordan). This comes from Page 3 and is the opening lines:
Or do you not believe that one form of global warming solution has a higher ROI than the other? I’m relying on Prof. Henderson for that, but it is largely irrelevant to my point, which was to simply say there is a trade-off involved between diverting resources from one solution to another. There is an “either-or” choice. True, the choice is not 100%, but that’s irrelevant: nothing in life ever is 100%, but that does not mean there are not trade-offs. I still face a trade-off between buying books and going out for pizza even if I consume both. If I spend $70 in books (which I did just last night), that necessarily means I have $70 less to spend on pizza. I will still consume pizza, but not as much if I hadn’t bought the books (all else held equal).
No. Again, trade-offs. Those resources are diverted from other uses (specifically, uses that the emitters of carbon would have devoted them toward). Those resources do not just appear. The trade-off is still faced.
Dustin
Aug 23 2019 at 1:25pm
You’re making a conceptual argument that has no factual basis in the proposed policies. Demonstrate the resources required for options A and B, how they are mutually exclusive of one another, and the ROI of their investment in options A vs B.
“No. Again, trade-offs. Those resources are diverted from other uses (specifically, uses that the emitters of carbon would have devoted them toward). Those resources do not just appear. The trade-off is still faced.”
Again, this isn’t relevant. The emitters of carbon would use the funds for further consumption. Instead, the taxed funds could be used to reduce incremental consumption and be diverted to battling cow farts.
Rob Rawlings
Aug 23 2019 at 5:46pm
@Jon: I’m also a but unconvinced on this point. If activity A has a social cost of $50 a unit and activity B has a social cost of $30 a unit why does taxing activity A use up resources needed to tax activity B? Theory tells us taxing both will minimize deadweight loss.
Am I missing something ?
Jon Murphy
Aug 23 2019 at 10:56pm
Simply put: every second spent taxing, enforcing, etc activity A’s tax is one second that cannot be spent taxing, enforcing, etc Activity B’s tax.
Rob Rawlings
Aug 24 2019 at 9:51am
In which case I remain unconvinced.
A Pigovian reduces the deadweight loss associated with the external cost but introduced a new one – the administrative cost of collecting the tax.
So I suppose there will be some marginal cases where the second is greater than the first, but there is no obvious reason to think that is the case with proposed taxes on carbon and methane.
Jon Murphy
Aug 24 2019 at 11:04am
@Rob Rawlings
Unconvinced of what? That resources are scarce? Or that targeting methane is preferable to targeting CO2?
If the latter, that’s fine but irrelevant to the point I am making. The point I am making is this: resources are scarce. To use a resource in one manner necessary excludes that exact same resource from being used in another manner. If I am using my car to drive to Washington DC, I cannot, at that precise moment, use my car to also drive to New York. If I commit 100% of my resources to combating CO2, I cannot also commit 100% of my resources to combating methane.
I think you guys are reading more into my point than I am actually saying. My objection was to Dustin’s “it isn’t either-or” comment. I am merely pointing out that it is either-or, that choices will have to be made because resources are indeed scarce. Thus, it makes sense to consider which issues one should address with one’s scarce resources. The “optimal” mix of climate policy response may not (indeed, probably is not) 100% carbon tax and 0% methane (or vice versa). It’s probably X% carbon and 100-X% methane. But it cannot, by a matter of physics, be 100% carbon and 100% methane. That is all I am saying.
Mark Z
Aug 23 2019 at 1:15am
Actually, the more viable one option is, the more wasteful the other ones likely become.
Fir example, if the cost of removing carbon from the atmosphere in 100 years will be extremely cheap, then most of what we forego today to reduce future carbon emissions will essentially have been pointless.
And didn’t he include two examples – sulfur dioxide and mass tree planting – of proposals that could significantly offset emissions? The cost of carbon removal is generally declining fairly rapidly as technology improves (https://www.sciencemag.org/news/2018/06/cost-plunges-capturing-carbon-dioxide-air).
And – much as it may contradict the spirit of environmentalism today – there is simply no urgent reason why we need to drastically cut emissions immediately. It is definitely a real possibility (especially if we follow certain environmental policies recently proposed in congress) that we will impose enormous costs today only to find in a few decades that we could’ve accomplished the same thing at far less cost simply by waiting.
LK Beland
Aug 22 2019 at 12:40pm
Two of the points seem very weak, in my view.
1- One can relatively easily tax GHG emissions proportionally to their green house effect potency.
2- One can relatively easily provide tax credits for net sequestration of CO2 (e.g. tree planting).
The third point is more fundamental: if geo-engineering solutions are cheaper, why not choose them? In my opinion, it boils down to risk.
The risks of geo-engineering are quite high (e.g. http://climate.envsci.rutgers.edu/pdf/20Reasons.pdf ). On the other hand, the economic effect of shifting taxation from income tax to a carbon tax is quite small. In fact, in many dimensions, a carbon tax is similar to a VAT, which is a much more efficient way of collecting revenue than personal and corporate income tax. A revenue-neutral carbon tax could in fact improve the efficiency of our tax system. For example, a $50/ton carbon tax would be sufficient to eliminate the US corporate income tax.
More importantly, we can track the effect of a revenue-neutral carbon tax on the economy, as well as its effectiveness w.r.t. GHG emissions reduction, as we escalate it. We can scale it back if necessary. Geo-engineering is often a genie which cannot be put back in the bottle.
Mark Z
Aug 23 2019 at 1:01am
I don’t think we should leave scaling the tax back to legislators, for obvious reasons. It seems it should be automatically tethered (not exactly but perhaps proportionally) to the cost of carbon removal. Some forms of geo-engineering, it’s worth noting, basically just amount to carbon removal, and are not liable to be any more risky than, well, emitting less carbon.
Ultimately, I think there are likely really two ways a carbon tax works, and it’s (at least mainly) not by reducing total fossil fuel consumption. Absent technological improvements, a carbon tax that fails to make renewables broadly cheaper than fossil fuels just slow the rate of fossil fuel consumption and therefore emissions, but we’ll eventually burn through all of it anyway, just a bit slower. The main productive mechanism of a carbon tax seems to be inducing the advancement of green energy technology. The second way is inducing the advancement of carbon removal technology by using the tax to pay for carbon removal.
And I think it’s a bit inconsistent to be an optimist about the pace of advancement of green energy technology but a pessimist about the advancement of carbon sequestration or geo-engineering technology.
benjamin weenen
Aug 22 2019 at 1:30pm
Obviously the price of the tax adjusts with the external costs. So any mitigating technology would simply result in a lower tax.
So still a slam dunk.
Mark Z
Aug 23 2019 at 12:47am
David, it seems like your second two points really indirectly imply that the cost of removing carbon from the atmosphere should be the upper bound of a tax on carbon emissions (the ideal tax would be the minimum of the external cost and the cost of removal, but the former is pretty hard to know of course).
I guess the question is, why finance the subsidy with anything other than a carbon tax? If we take the extreme (likely incorrect) position that the external cost of emissions are surely higher than the cost of carbon removal, making removal automatically ‘worth it,’ why not just pay the lowest bidders to remove carbon using money from a carbon tax, where the rate (and therefore also removal subsidy) is set such that net carbon emissions are zero?
Perhaps the consumer surplus from fossil fuels is much higher than whatever else might be taxed to finance the subsidy? Alternatively, maybe if we expect the cost of carbon sequestration to decline enough in the coming decades anyway, the best course is to neither tax emissions nor subsidize sequestration quite yet and just wait until we can do the latter much more cheaply.
Vivian Darkbloom
Aug 23 2019 at 3:03am
Typically, those Pigou Club members are staunchly opposed to subsidies of any sort and I’ve never understood the difference in market distortion between a positive subisidy and a negative tax. Is it because central planners are better at identifying negative externalities than positive ones? Losers better than winners? In this respect, I agree with David. If there are two players in a market–A and B–wouldn’t a subsidy to A in the amount of x have the same market effect as a tax on B in the amount of x? Or, is the justification that a Pigouvian tax distorts the playing field less if there are multiple players, including those potential players not yet in the market? I once asked Mankiw to explain this theoretical difference, but never got a reply…
Certain types of subsidies, for example, tax credits, may even be less distortive than a Pigouvian tax. In order to benefit from a tax credit (other than refundable individual credits which are not business credits) one at least first has to make a profit…
If someone can elucidate the reasoning here, I would be grateful.
Kevin Dick
Aug 23 2019 at 3:14am
So I went and dug up the numbers on your solutions, to the extent they existed.
On the specific issue of controlling methane emissions being a potentially more cost effective global warming strategy than controlling CO2 emissions, the EPA actually calculates the relative greenhouse impact here:
https://www.epa.gov/ghgemissions/overview-greenhouse-gases
CO2 emissions in the US have 8X the warming impact of methane, according to the EPA methodology.
So unless you have numbers showing that administering methane emissions control would be _much_ easier than administering a carbon tax, your first objection would seem to be fairly weak. We’d have to do the detailed calculation of course, but given the relative greenhouse impact, it’s not looking good for methane abatement completely eliminating the need to reduce CO2.
Moving on to planting trees, the US Forest service has a detailed study of the cost of CO2 abatement through afforestation here:
https://www.fs.fed.us/pnw/pubs/pnw_gtr888.pdf
As you can clearly see in Figure 8, the expected supply of afforestation rapidly drops below a $50/ton subsidy
Now, it would take a long post of references, but my read of the _sober_ SCC literature from people like Nordhaus is that it is between $15 and $42 in 2020 depending on what equilibrium climate sensitivity and discount rate you use.
It would of course require a detailed analysis to know for sure, but it certainly doesn’t look like there’s enough afforestation supply at these prices to _completely_ supplant (pun intended) the usefulness of a carbon tax as part of the mitigation portfolio. So this would seem to weigh strongly against your third point as well.
Which leaves your second point. As far as I could tell from the literature, there is no geoengineering technology that currently appears cost effective at scale in the $15-42/ton range. So it’s based on speculation, which is valid. If we knew with 100% certainty there would be a very cheap, very scalable geoengineering technology in 2050, we wouldn’t worry about CO2 at all today.
But no problem, markets fail, use markets. We just subsidize a geoengineering futures market using some metric like millionths of a degree temperature reduction. The carbon tax is then capped using a formula that plugs the futures prices into the impact assessment models.
On a meta note, I’d be happy to debate either David or Jon Murphy on this topic (or both). I respect both you guys (David is actually on my list of top 10 economists worth listening to) and it would be rare treat to have a discussion with people who want to do even less about climate change than I.
Mark Z
Aug 23 2019 at 6:38pm
Project Vesta (https://projectvesta.org) claim’s to cost as little as $10 per ton of carbon removed.
I like the idea of a decarbonization futures market. Traders could sell commitments to finance the removal of a ton of carbon within the next 5, 10, 25 years, and the state could purchase the cheapest bundle of futures necessary to meet a set of fixed time point goals (e.g., reduce net emissions to x_1 in 25 years, and/or to to x_2 in 50 years, etc. No matter what the targets, this would tell us about market expectations of future decarbonization costs.
Kevin Dick
Aug 23 2019 at 7:31pm
They don’t even have a pilot yet as far as I know, so not a scalable production technology. But the futures market would give us a good read on the probability it does achieve that level.
Dustin
Aug 24 2019 at 4:48pm
Jon
You’ve not demonstrated we can’t do both. The vague, disconnected conceptual argument about scarce resources has no basis. Even if we can’t do both, you’ve not demonstrated how resources would be put to better use fighting methane.
In fact, you’re providing a good framework to never make a decision.
Jon Murphy
Aug 24 2019 at 5:10pm
I mean, it’s the basis of all economics and physics, so I’m not really sure what more I can say here.
I’m not saying you can’t do both in that you could spend some time doing X and some time doing Y. What I am saying is you can’t do both with the exact same resources. As you devote resources to X, there are necessarily fewer resources to devote to Y. At the margin, there is an either-or choice to be made, and thus looking for the most effective way to employ resources is necessary.
That was never my intent; I’m taking the relative effectiveness as a given from Prof. Henderson as part of the discussion on “either-or.” Whether or not those scarce resources are better spent facing carbon dioxide or methane is irrelevant.
Dustin
Aug 26 2019 at 7:25am
Jon
I’m not debating that “scarce resources” isn’t a concept. I’m arguing that it can’t be vaguely cited as a policy defense. Dave says, “don’t do A, do B, because of scarce resources” and assumes his is own conclusion without showing the math of how resource scarcity supports his argument.
I could say the reverse, “don’t do B, do A, because of resource scarcity”, and it would be equally unsubstantiated. I could also say, “don’t eat oatmeal for breakfast because of scarce resources.” Sure, resource scarcity is a thing, but it just doesn’t make any sense as an argument in this context.
So my challenge is with the application of the argument. And I contend that we can 1) pass a carbon tax, and 2) use the raised funds to battle [the effects of] cow farts. The resource offset would take for of reduced consumption, and that’s exactly what we want.
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