CARBON TAX: AN ECONOMIC ANALYSIS

On the subject of cap-and-trade, Mankiw’s analysis is skewed to make his point. (Why wouldn’t it be? Cap-and-trade is the main competitor with his tax idea as an answer to controlling emissions.) Mankiw seems to assume allowances would be given to power companies and big emitters while it has been proven a portion of the credits must be not given but auctioned. He contends that international trading systems have failed whereas the EU’s system has not yet entered Phase 2, where it will prove itself. His point about the necessity of participation by China and India is correct, though their willingness to comply might change if and when the US seizes the initiative. Why he thinks a global “carbon tax” would necessarily be easier to administer than a global cap-and-trade system is not clear: They would both be massive undertakings. But so is global climate change.

One Answer to Global Warming: A New Tax
N. Gregory Mankiw, September 15, 2007 (NY Times)

WHO
policy wonks (British economist Arthur Pigou, chief Reagan economist Martin Feldstein and Harvard economics professor/President Bush-Mitt Romney adviser N. Gregory Mankiw) vs. political consultants

There is nothing simple about a "carbon tax." It works in some cases but not in others. It is probably not politically possible. (click to enlarge)

WHAT
Policy wonks advocate the use of a tax on emissions (aka “carbon tax”) as the obvious way to mediate climate change. It is not a politically viable idea.

WHEN
Pigou proposed the idea of corrective taxes (“Pigovian taxes”) in the early 20th century. Feldstein proposed a “carbon tax” in 1992.

WHERE
- Republican consultants: use “tax” only before the word “cut”
- Democratic consultants: use “tax” only before the words “on the rich”

WHY
- A “carbon tax” would affect everyone who drives a car or uses fossil fuel-generated electricity but wonk Gilbert Metcalfe (economist, Tufts) has shown how the revenues could be used to cut payroll taxes: $15/ ton of carbon + payroll tax rebate on workers’ 1st $3660 earnings.
- Would a legislated requirement for better auto fuel efficiency work better? Carmakers would pass the cost to car buyers without generating revenues to offset the burden on lower incomes. Fuel cost savings would be dependent on irrational consumer choices and lead to more driving, more road congestion and more accidents.
- Cap-and-trade is dependent on the handling of allowances and problematic in the absence of participation by China and India.

There are a lot of emissions trading programs going on right now. Some are working better than others. (click to enlarge)

QUOTES
- Mankiw: “Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D.” (NewEnergyNews: Whenever anybody ends a point with “Q.E.D." it is very likely an oversimplification. Especially in discussions about climate change.)
- Mankiw: “Mr. Feldstein has devoted much of his career to studying how high tax rates distort incentives and impede economic growth. But like most other policy wonks, he appreciates that some taxes align private incentives with social costs and move us toward better outcomes.”