Carbon taxes in the NYT

Lots of people are ripping in to Monica Prasad after her op-ed in the NYT on carbon taxes. She says that

Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries… [T]he insight they provide is that if reducing emissions is the goal, then a carbon tax is a tax you want to impose but never collect.

There may be some truth in that: if the regulator’s goal is to maximise revenues, rather than maximise welfare, then their tax level is unlikely to be optimal. I guess Prasad is really saying that the problem is with regulators who don’t act in the best interests of the community that they’re chosen to serve. However, I don’t really see why any regulatory scheme is less open to failure as a result of incompetent or misguided implementation by the regulator.

Secondly, if emissions rose as a result of the tax when they were supposed to decrease, then the tax was too low. It’s not the fault of the tax that it was set too low, and it’s ridiculous to blame the concept of carbon taxes for emissions increases. If an emissions trading system has a cap that’s too high and is set up through cronyism rather auctions then it’ll be a bad system, too. We wouldn’t blame the idea of carbon trading for its failure, though, and nor should we condemn taxes based on poorly designed taxation schemes.

  • Being an economist of little brain, I suppose I missed something in Prasad’s piece as it seemed fine to me. She did highlight that Denmark was in a position to move to alternatives.

    And this idea of putting taxes back into something other than cleaner technology seems out of whack. If you take the strting point that there is a market failure because the cost of emissions (carbon) is not borne by the producer, then surely the proceeds of the tax should also be directed at that failure rather than being given back as a general rebate.

  • “If you take the strting point that there is a market failure because the cost of emissions (carbon) is not borne by the producer, then surely the proceeds of the tax should also be directed at that failure rather than being given back as a general rebate”

    True, that is a good policy rule of thumb. However, the purpose of the tax is to set the right relative price so the allocation of resources is correct, not necessarily to improve investment in new technology.

    It may be possible that reducing distoritionary taxes (eg income taxes) from the proceeds of a pigovian tax is more socially efficient, in which case thats what we should do.

    However, given the bounded rationality of institutions, in this case government, I like the idea of a rule of thumb where we use the funds from a pigovian tax to fund investment or public good work in the industry it was taken from – that way we don’t end up with a government that uses the pigovian tax as a revenue gathering device.

  • What Matt said: the tax is corrective, the proceeds can be used for whatever you like. In terms of reducing environmental damage, there doesn’t even need to be a tax levied. You could have a tax which is only levied if an upper limit on emissions is breached, rather than levying it on every unit. If the tax was set correctly then there’d be no difference between the outcomes in terms of the incentives to reduce emissions.

    As you and Matt say, the problems arise when governments get money hungry. A heuristic like putting the money into the regulated industry might prevent that, in which case it’d be desirable. I’m not sure that where you put the money really matter though. Governments need to be seen to be doing something, and they need money to spend to do stuff. Increasing revenues is always going to be attractive to a politician who doesn’t make a living off being a perk-buster.