Taxing carbon to save the planet

Tax carbon, then rebate the money. 

The idea is out there and we will be seeing more of it.

The idea is to get people to use less fossil fuel by making it more expensive, and then to rebate the money to everyone equally. Two birds with one stone: Save the planet and distribute money from rich energy users to the energy-thrifty poor.

It might backfire, It might damage the economy. People may hate it. Or it might work and save the planet.

Stodder

Economist Jim Stodder looks at arguments both for and against a carbon tax/rebate plan. He finds fault with three of them. He teaches international economics and securities regulation at Boston University, with recent research on how carbon taxes and rebates can be both income equalizing and green. He was a college classmate, then received a Ph.D. from Yale in economics. His website is: 

www.jimstodder.com

Guest Post by Jim Stodder

     "You will hear some bad arguments."

First, let’s hear from the Right:

Bad Argument Against:  A carbon tax/rebate plan is pointless because it will hurt us and China won't go along.

Carrots and sticks can make them. We do have to make this work because China pumps out about twice the CO2 emissions as the U.S. (10 billion vs 5 billion metric tons per year). They have about 4 times as many people, however, so China’s rate per-capita is half of ours (7.4 vs 14.8 metric tons).  

Per Capita Emissions

But they do deserve some carrots. “OK, you in the West got to loot and pollute the earth for 200 years to build up your wealth. We've just got started and now we have to pay the same tax rate as you?” That’s going to be the response of most of the world’s population. Good luck on getting them to think otherwise.

The good news is they can pay the same carbon tax and get a rebate. This is basic economics. As long as the rebate is based on something independent of their CO2 output--like an equal global per-capita rebate--then it has no effect on how much they pay per ton of CO2 this year. That tax still goes up with every extra ton. Plus, most educated Chinese recognize that heavy pollution is killing millions of their people. I have spoken with parents in Shanghai and Beijing who are worried sick about this.

But what if they won’t play along--what’s the stick? Yale’s William Nordhaus (an old teacher of mine) has the answer. The rich countries can put a unified tax on carbon and tax the imports of any country that won’t joint them. The EU has agreed to do this. If the other rich countries agree, that will make it in China’s and other countries' interest to tax themselves. That way the tax will do less harm to their GDP than having it all lumped onto their exports. You can see Nordhaus’s Nobel Prize lecture.

https://www.nobelprize.org/prizes/economic-sciences/2018/nordhaus/lecture/

Another Bad Argument Against: It's not fair to the U.S. working class because a carbon tax is regressive.

That’s correct, it would be – if there were no rebate. An energy tax is regressive, meaning lower income families pay a larger portion of their income. The “yellow vest” movement in France was based on this, and almost brought down President Macron’s government. “Macron worries about the end of the world,” they said. “We just worry about the end of the month!”

But the same argument for redistribution to poorer countries works for poorer families. The rich consume more energy per-capita, so an equal per-capita rebate winds up highly progressive, and makes low income households net winners. An economics prof at University of Massachusetts wrote a book on it: Boyce

What about our friends on the Left? They have been seduced by the following siren song.

Bad Argument For a carbon tax/rebate: The cost of renewable energy has plummeted, and green energy is more labor intensive. Therefore, the green transition will be a productivity revolution and raise everyone’s living standards.  

That first sentence is completely correct but – the second doesn’t follow, at least not on any time-scale that’s politically relevant. As political columnist Fareed Zakaria has pointedly argued, a Green Transition poses huge macroeconomic risks. A carbon tax high enough to be effective will mean most of that fossil fuel still in the ground has to stay there, forever. In energy-company speak, that means “stranded assets” – things we invested in yesterday for a high return but are just stuck with today.  

But it’s not just Big Energy that’s hurt by a carbon tax. (If only!) It’s all the companies that service it and its regions and all the people who’ve invested there.  

My pessimistic view on the Green Transition is still a minority position among most US economists. (See Paul Krugman’s optimistic take, for example.) But I have good company like Nobel Laureate Joseph Stiglitz. There is a way through, but let’s recognize the economic headwinds we’re facing.   

This summer I made a presentation at a conference to lay out the case that the U.S. will need massive stimulus expenditures to ease these necessary birth pains. My 15-minute talk is in “Panel I” (the third YouTube clip) and starts at 16 minutes and 20 seconds.  

We do have to do this. I think we can ultimately get most conservatives on board when they recognize our duty to conserve the earth for future generations--an ethical and spiritual duty. But we won’t do that with the cop-out Right pessimism about why it’s all (#1) hopeless or (#2) so unfair. And we won’t make it easier by a comfy Left optimism that it’s going to be (#3) just a nice walk on a sunny day.