July 7, 2013
Carbon Tax
What Should a Carbon Tax Look Like? Becker
I agree with Posner that the evidence for global warming is serious enough to warrant actions, and that a carbon tax is much more effective than regulations of carbon emissions, such as those recently proposed by President Obama. Yet even if the case for a carbon tax was accepted, and there is powerful opposition in the United States, many issues remain about how carbon taxes should be implemented. My discussion deals with a few of these issues.
Although I believe that the evidence on global warming is sufficiently strong to warrant a carbon tax, the magnitude and timing of the threat from warming is still an open question. For this reason it is wise to start with a low tax rate that can be ramped up over time if the evidence on the damages from warming becomes clearer. Economic theory also implies that the tax should start relatively low and rise over time even if one knew for certain that a catastrophe would occur when the amount of CO2 in the atmosphere exceeded a certain concentration level. The reason is that with a positive interest rate, equalization in the present value of a tax on present and future emissions requires a rising tax rate over time. This is an application of the so-called Hotelling Rule for optimal exploitation over time of depletable resources, such as oil (see the extensive discussion of the application of this Rule and other economic policies to combat global warming in Becker, Murphy, and Topel, "On the Economics of Climate Policy", The B. E. Journal of Economic Analysis and Policy, May, 2011). As it were, the remaining space in the atmosphere for CO2 before disaster strikes is the stock of an exhaustible resource.
In addition, research should be supported on the development of methods and techniques to sequester and mitigate emissions into the atmosphere of CO2 and other greenhouse gases if a major disaster from global warming appears likely. It might even be possible to develop ways to extract some of these gases out of the atmosphere. Expensive methods of carbon removal and extraction would be implemented only when the damage from greenhouse gases looked to be sufficiently serious and imminent.
A carbon tax should not be an addition to but rather a replacement for other subsidies and taxes on different fuels. For example, the United States along with many other developed countries has a vast array of special subsidies to sources of power that emit less carbon than coal, oil, and other fossil fuels. These include subsidies for electric-powered cars, and for wind and solar energy to generate power for electricity generation. These and other special subsidies, regulations, and taxes designed to reduce carbon emissions would be undesirable with appropriate carbon taxes. For these taxes would create an incentive to find other sources of power for cars, electric plants, and other users of fossil fuels in order to reduce their carbon footprint, and hence the size of the overall tax bill.
Some groups support a carbon tax mainly because it raises tax revenue that would be especially welcome in these times of budget deficits. It is tempting to impose a carbon tax because of the revenue yielded beyond the level justified by the need to cut carbon emissions, even when such a carbon tax might have large undesirable effects on the output of gasoline, electricity, and other goods. That is why the justification for a carbon tax because of the threat of global warming should be sharply separated from the desire to have such a tax to raise revenue.
In order to separate the case for a carbon tax because of global warming, George Shultz and I proposed that the revenue from such a tax be distributed annually back to the American population a s a carbon "dividend"(see Shultz and Becker, "Why We Support a Revenue-Neutral Carbon Tax", Wall Street Journal, April 7, 2013). There are several possible ways to distribute this dividend, such as through a lump sum payment to each person with a social security number, or through a per capita rebate. Alaska and several countries have in the past distributed to their populations the revenues from taxes on fossil fuels. A distribution of the revenue to the public might help blunt the strong opposition to a carbon tax because of a belief that it would be used primarily to raise tax revenue to finance additional government spending.
A tax on carbon emissions would be appropriate in light of the real threat from global warming. However, it is important to implement taxes at appropriate levels, and that these taxes are supplemented with the development of mitigation and sequestering methods to reduce the emissions of greenhouse gases if they appear to be on their way to causing major damages. It is also important that the effect of carbon taxes in mitigating global warming be sharply separated from the value of these taxes in raising government tax revenue.
Should There Be a Carbon Emissions Tax? Posner
In my book Catastrophe: Risk and Response, published in 2005, I discussed at some length man-made global warming and what might be done about it. Although atmospheric global warming has slowed in the last few years, ocean temperatures have become warmer at a rate that has resulted in the globe as a whole continuing to warm; and ocean warming is no less ominous than land warming—it can melt methane sheets in the oceans (and atmospheric methane is a considerably more potent greenhouse gas than carbon dioxide, the principal agent thus far of global warming) and it melts arctic and antarctic ice, which raises ocean levels. The consensus of scientific opinion is that unless effective remedial measures are taken, global warming will continue, eventually (quite possibly within this century) reaching levels at which, largely because of rising ocean levels, the cumulative effects on human society, mainly through inundation of coastal regions (where about a third of the world's human population lives) and destruction of agriculture and plant and animal species, will be catastrophic.
There is some scientific dissent from the scientific consensus on the catastrophic effects of continued global warming, but most of the dissent is not scientific; it is by businesses that burn fossil fuels and by rightwingers who believe that global warming is a myth propagated by liberals.
As long as global warming is gradual, and catastrophic effects are not felt for the next 50 to 100 years, there is room for hope that geoengineering will limit or even reverse global warming. Ways of trapping the carbon dioxide produced by burning oil, coal, natural gas, and forests may be developed or sunlight may be blocked by injecting sulfur compounds into the atmosphere, which would reduce the amount of sunlight that reaches the earth (though could create other forms of pollution—sulfur dioxide, for example, creates acid rain). Or safe means of piping carbon dioxide emitted from electrical generating plants underground might be developed. There are even suggestions for "whitening" roofs (on a very large scale) to increase earth's reflection of the sun's rays.
But there is no guaranty that global warming will be gradual. It may turn abrupt; there are a number of examples in earth's geological history when this happened. For example, a period called the "Younger Dryas" at the end of the last ice age is believed to have seen an increase in the average global temperature by 7 degrees centigrade, which is 12.6 degrees fahrenheit, in only 10 years. Were that to happen again, it would be an unbelievable catastrophe. The probability of abrupt global warming cannot be estimated; but heading off even catastrophic events that are uncertain can make good economic sense if the resources required to do so are modest.
The President in just the last month has proposed an ambitious program of limiting carbon emissions from coal-burning electric plants and other sources of carbon dioxide. The hope is that the program if successful will inspire other countries, especially rapidly industrializing ones (notably China), to follow suit. The hope seems quite unrealistic.
A more efficient method of limiting global warming than regulatory controls such as proposed by the President (and that as described promise to be a bureaucratic nightmare) would be a tax on carbon emissions, which I advocated in my 2005 book and which a number of countries have adopted. This would be a regulatory tax, aimed at reducing output, in this instance carbon dioxide as a byproduct of electric power generation in power plants that use coal, oil, or natural gas as their fuel; vehicles or vehicle makers could be subject to a carbon emissions tax as well. But like most regulatory taxes, a tax on carbon emissions would also produce tax revenues, because some emitters of carbon dioxide would be unable or unwilling (because of cost) to reduce their emissions to the level at which they would owe zero tax. Even if the revenues from a carbon emissions tax were modest, they probably would be sufficient to fund the entire tax program, and in that respect would be less costly to the government than a regulatory program. They would be less costly to the entire society in fact, because the administration of a tax levied on, say, vehicle manufacturers and electrical power plants would be much less costly than the administration of a regulatory program.
Moreover, a serious weakness of a program of setting limits on carbon emissions is that once the limit is reached, the carbon emitter has no further incentive to reduce its emissions, while if regulation takes the form of a tax on emissions there is an incentive to reduce those emissions all the way to zero, to eliminate the tax burden entirely, provided that this can be done at a cost less than the tax.
It is important, by the way, that the tax be on the carbon, not just on the coal, gasoline, natural gas, or other products (or activities, such as deforestation by fire) that when burned release carbon into the atmosphere. With a tax on carbon, the emitter is given an incentive not only to reduce the burning of fuels that contain carbon but also to produce less carbon per quantity of fuel burned. If the tax is just on, say, tons of coal burned, the producer will be indifferent to the amount of carbon that each ton of coal that is burned emits, rather than having an incentive to minimize that amount.
I am sure all this is obvious to the President and his advisors. The reason for his proposing a cumbersome, bureaucratic, costly regulatory program rather than a regulatory tax may be that the imposition of any new tax triggers a hysterical reaction on the part of business and conservatives. It is the fear of such a reaction that led the President to call the regulatory tax in his health care plan a "penalty," which jeopardized the constitutionality of the plan, though the plan managed to avoid invalidation by one vote in the Supreme Court. The fear could have been overcome in health care and could be overcome in carbon control by making an offsetting cut in some other federal tax, such as the corporate or estate tax, neither of which is an efficient tax.