LAST week, a Twitter conversation broke out among a few economists concerning whether any serious economists opposed a carbon tax. No, concluded the tweeters, but Tyler Cowen begged to differ. Mr Cowen writes that he personally favours a carbon tax but can imagine a number of principled reasons other economists might not.
Why would we expect economists to support a carbon tax? It's very close to the economic ideal. Global warming is a phenomenon associated with emissions of greenhouse gases over and above natural cycles—largely those resulting from the burning of carbon fuels humans have dug up out of the ground. We expect normal economic activity to maximise social good because each individual balances costs and benefits when making economic decisions. Carbon emissions represent a negative externality. When an individual takes an economic action with some fossil-fuel energy content—whether running a petrol-powered lawnmower, turning on a light, or buying bunch of grapes—that person balances their personal benefits against the costs of the action. The cost to them of the climate change resulting from the carbon content of that decisions, however, is effectively zero and is rationally ignored. The decision to ignore carbon content, when aggregated over the whole of humanity, generates huge carbon dioxide emissions and rising global temperatures.
The economic solution is to tax the externality so that the social cost of carbon is reflected in the individual consumer's decision. The carbon tax is an elegant solution to a complicated problem, which allows the everyday business of consumer decision making to do the work of emission reduction. It's by no means the only economically sensible policy response to the threat of climate change, but it is the one we'd expect economists to embrace.
Mr Cowen argues for caution on this point for several reasons. A carbon tax will be less effective if it's not universally applied, potentially leading to carbon leakage to countries with looser environmental rules. He worries that where carbon fees have been applied innovation has not been quick to respond. He fears that good subs utes for carbon fuels don't exist, especially in the transport sector, and worries that higher fuel prices might harm the economy. He suggests that a "green-energy subsidies first" policy might make more sense, and he talks about distributional and rent-seeking costs of the policy.
I think the weakness of these arguments is telling, and it's not surprising that Mr Cowen continues to support a carbon tax. What if a carbon price doesn't immediately drive emission reductions? Then the tax will be an effective revenue raiser, much more efficient than a tax on income. Either way you win. The worry about carbon leakage is a real one, but this dynamic also implies that each new country that prices carbon increases the benefit of existing carbon-price policies in other countries.
Subs ution in the transport sector is somewhat problematic, but a viable carbon price would not have much effect on petrol costs at the outset. A carbon tax of $30 per tonne of CO2 would only increase petrol costs by about 9 cents per gallon. This is dwarfed by moves in the market price of petrol. The vulnerability of the American economy to oil shocks argues for an increased tax on petrol, but that's a different policy debate. Mr Cowen seems to ignore the fact that oil is just one small part of the American economy's fossil-fuel use.
A carbon tax would attract rent-seeking, but arguably less than alternative policies, like subsidies or a cap-and-trade system. Importantly, money spent on adaptation or post hoc climate-disaster relief is also subject to rent-seeking and corruption issues. Given that many poor countries with weak ins utions are likely to feel the brunt of the impact of global warming first and are likely to be poor spenders of the aid money that will invariably flow, a carbon tax looks like one of the policy solutions best suited to the minimisation of these ills.
Mr Cowen doesn't mention what I see as one of the most important roles of a carbon tax: as a check on other ill-advised programmes. A carbon tax would have quickly made the net dirtiness of corn-based ethanol obvious (by helping to offset subsidies and making corn-based ethanol more expensive). It would be more difficult to roll out and sustain such misguided programmes with a carbon tax, and the ones that went ahead anyway would do less damage. A carbon tax is also the easiest way to capture whatever low-hanging emission-reduction fruit is out there. Right now, consumers are generally indifferent between similarly-priced goods with wildly different carbon profiles. A carbon tax encourages consumers to realise the easy carbon gains available from switching to good low-carbon subs utes wherever they exist.
The biggest problem with a carbon tax is that America's government seems unable to deliver one. At udes may change, however, and near-uniform economist support for the policy (probably) doesn't hurt its odds of eventual passage.