Wednesday, January 01, 2014

A carbon-reduction tax credit is a carbon tax, and that's a good thing

Stoats of the world can take pleasure in this proposal by outgoing senator Max Baucus to simplify the approximately one billion Amercian clean energy tax incentives and to provide instead a tax credit based on how much carbon reduction (above a threshold) is produced per unit of electricity or unit of transportation fuel.

There's no economic difference between providing a tax credit that reduces from a higher baseline, versus imposing a tax that increases from a lower baseline, so long as they're equally comprehensive. That is a problem with Baucus' proposal in that it's not comprehensive (e.g., no incentive for conservation and no incentive for carbon savings below the threshold) but I expect a similar problem would result from an overt carbon tax that went through political processing. So I disagree with the article's distinction between this credit and a tax. What the credit also does is make it easier poltically to do a trade at some point - we'll give up this carbon reduction tax credit in return for (hopefully) a more comprehensive carbon tax.

There's also a problem in the failure to reward technological development that's too distant to be commercially rewarding, but that could be handled differently.

Just a proposal, but a good one.