Virtues of a Carbon Tax

Michael O'Hare and Matt Yglesias (via Megan McArdle subbing at Instapundit) makes this very good point about carbon taxes:

Tragically, if you tell people you're going to tax their ft ossile
fuels, they freak out and your political career dies a swift and
merciless death. But if you tell people you're going to subsidize alternative energy sources
the people will like that. Functionally, however, these are basically
the same thing, except for the fact that the tax method works much,
much better.

This is unfortunately true.  As I have posted a number of times, I am skeptical that man-made global warming and the net of the problems (and opportunities) it brings will be bad enough to justify the economic cost of slowing or reversing CO2 emissions.  However, I can imagine being convinced that efforts to limit CO2 emissions are necessary.

Regulations on emissions, whether to the air or into shared waterways, is one of the few areas of government action that actually facilitate the smooth operation of strong property rights.  As I explained before, one could easily imagine a world of strong property rights bogged down in constant suits and counter-suits, as any property owner could rightfully sue over molecules of emissions that crossed their property line from another.  Certainly I can imagine private solutions and agreements that could have developed in the absence of government to sort this out, but government emissions restrictions, when done well, are not an unreasonable approach.

Of course, there are a lot of bad ways to manage emissions, and the government has tried about all of them.  New source controls, which are still debated and, incredibly, supported, represent all the worst of government hubris in trying to micro-manage solutions and technologies rather than just defining the desired outcome.  If anything, new technology subsidies (think ethanol) have been even worse, acting more like political pork and rent-seeking than intelligent pollution policy.

However, the government, especially the environmental lobby which tends to be full of technocrats and statists, greatly prefer the government micromanagement approach.  The impossibility of the task should be clear.  Take CO2 reduction -- to micromanage the reduction, the government would have to sort through every source of CO2, every available technology, and come up with a prioritized plan for investment to get the most reduction for the least $.  And even if the tried, they would be wrong, because this is a problem with a billion variables.  And even if they happen to get it right, they would not implement it, changing their plans the minute the Archer Daniels Midland lobbyist walked in the door. 

To understand the complexity, take one example: electric cars.  Hey, everyone loves the idea of electric cars -- they are zero emissions, right?  Well, sort of.  Actually they are emissions outsourcing devices, shifting emissions from the individual car's tailpipe to the power plant where the electrical charge is coming from.  Now, that power plant is a lot more efficient at burning fossil fuels, so often the net is better, but what if the marginal electricity production is coming from coal?  Does that net reduce CO2?  And, if electric cars reduce carbon emissions, does $10,000 investing in electric cars reduce more or less carbon emissions than $10,000 in solar?

These decisions are impossible to make, but we don't have to.  Every day, markets and price signals help individuals make such tradeoffs rationally.   That's why a carbon tax, that raises the price of CO2 emissions fairly directly, would be a much more efficient approach to managing emissions.

Update: People have asked about emissions trading.  Emissions trading schemes are OK, in that they help push emissions reductions towards the people who can do it most efficiently.  What I don't like about them is they are a government form of incumbent subsidy - basically industry incumbents get a tradeable asset of value, while new and future entrants do not.

  • Joel

    Emissions trading doesn't have to support the incumbents; it only does so when the credits are allocated to past polluters. Why not instead auction them off to all comers?

  • Bob Smith

    Assuming CO2 reductions are necessary (a point which I don't grant), let's all be clear what a carbon tax is: a defacto increase in required fuel economy. Environmentalists have proclaimed for years that they know what's best, including what kind of cars we should drive, and they happily use profoundly anti-democratic means to force us to their will. Demands for higher government fuel economy standards have been mostly ignored of late, which has really got their goat. By reframing the issue as a carbon tax, they get what they want without public backlash, since the general public isn't sufficiently educated to call their bluff.

  • http://knappster.blogspot.com Kn@ppster

    Taking it as a given that emissions reductions are a legitimate goal, why a tax? Why not just an offset requirement? With cars, there's no particular reason why the manufacturer couldn't simply buy carbon storage for the average lifetime emissions of each vehicle, and slap a certification sticker on the car as it rolls off the assembly line. Yes, the cost would be passed on to the consumer, but all costs are. The manufacturers could start their own carbon storage enterprises or buy from others. Their choice -- as long as their product was effectively a zero-net-emissions product.

    Ditto for power plants, etc. -- instead of taxes or complicated "trading" schemes, just tell them that their emissions will henceforth be considered a tort that they can offset/mitigate voluntarily or pay for in court.

  • Max

    I have a remark on the clearing of the air pollution and the waterways. I think that this is right, that those laws were at least helpful to the environment and the health of the people. The problem is that the government doesn't stop at what is necessary and goes on to pass laws that become harmful to the economy and very restrictive to the individual liberties.

    Let's just take the air pollution thing as an example. It started off with the bad conditions during the 70s and 80s where smog and acid rain plagued the cities. As a result the government and its research facilities concluded that factories and cars create too much NO and other pollutants which are dangerous (PROVABLE) to human health. As a result they restricted the factories and cars in their emissions (KATs and filters). It was a net possitive effect, but this didn't stop the research facilities, who were in need of more money and feared for their jobs. So, they said that the emission level has to drop further to ensure health saftey, due to cancer-risks by smaller particles.
    Then the micro particle scare (ambient particular matter) came up (meassured in micrometers (0.001 - 100)) and now the legislation process will turn on this, because they smell money and restricting personal liberties in it...

    This is the aspect of over-regulation, which always results from little positive and sane outlines and ends up harming people..

  • Jamie

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