Sunday, July 15, 2012

America != Europe. How's that for insight?

I'm planning to write a post on how a revenue neutral carbon tax might, just might, have a shot in the US in the medium term.  First though I have to disagree with William's argument that a revenue-neutral carbon tax is the only way to go - or to be more fair, is the best political approach.

I'll just sycophantically second Eli's first comment to William's post that both taxing and regulating can work.  The other main point I'll make is that taxes are sticky in the US - they don't like to go up.  Saint Ronnie approved a rate increase in the US gas tax from 5 cents to 9 cents in 1983, and it's now 18.4 cents, a net decrease after inflation.  Regulations by contrast do get tougher - not only the CAFE standards that Eli talks about at length, but also the nickel-and-dime increases in regulations on coal plants that are helping natural gas in putting a squeeze on that industry.

It's a fact of life in the US that we accept regulation more readily than taxes and especially tax increases.  Seems like it might be a little different elsewhere.

I suppose regulation is somewhat less transparent, but you could also think of it as a solution to a coordination problem.  A tax approach makes the solution appear as painful as possible, and because we'll underachieve the solution regardless, we might consider a solution that doesn't highlight the pain and therefore gets more done.

Three other points.  It's helpful to clarify assumptions in any discussion, and in this case are we assuming the people are economically rational actors divorced from real world psychology and politics, or are we having a meaningful discussion?  Personally I prefer the latter, but it's helpful to identify your assumption if you want to talk about the former.

Second, at least in the US, a significant carbon tax that has any remote chance of passing political muster will have some balancing combination of exemptions and financial support for those interests and people/constituencies most affected by the tax.  The exemptions will distort the economics, and the financial support raises the question of where the money will come from if your carbon tax is revenue neutral.  These aren't easy political issues.

Finally, William points out that putting a floor on the price for carbon allowances in a cap and trade system contradicts the argument that allowances let you set right emission levels, something that's a lot harder to do with taxes.  He's right, but this gets back to initial assumptions - the cap-and-trade isn't a platonic ideal but an assessment of what's politically and economically achievable.  Putting a floor (or ceiling) on the price is a way to correct for misjudgments at the beginning as to what would be achievable in the future.

UPDATE:  William responds in the comments.