Carbon Taxes?

Well, Tim, I would agree that a national carbon tax would be a good addition to our set of climate policy tools, but let’s be realistic about what it will accomplish.  A carbon tax of $50 per ton CO2 amounts to about $0.45 per gallon of gasoline.  That’s a sizable increase in the price of gasoline, but gasoline demand is really inelastic, especially in the short run, meaning that there will not be a large shift in behavior right away.  Over time, we would expect to see people slowly substitute towards more fuel efficient cars, electric cars, and possibly public transportation.  But unless we get to really high carbon taxes, perhaps $500-$600 per ton CO2, we won’t see major changes for some time.

And it’s a pure increase in home heating costs for anyone using natural gas.  A $50 per ton carbon tax amounts to an increase of about $0.27 per ccf (hundred cubic feet), which would basically increase your home heating bill by about 50% at current prices.  These increases in costs may not be all that big of a deal for most middle class folks since the middle class spends an increasingly small share of their income directly on energy consumption.  The biggest impact of higher energy prices likely will affect people indirectly through the things they purchase, including household items and vacations.

The question though is whether carbon taxes will really curtail carbon emissions.  They probably have to get really high really quickly to have an impact. The Europeans have really high gasoline taxes, and great public transportation, but they still have relatively high carbon emissions from the transportation sector.

The reality of greenhouse gas mitigation is that it is really expensive.  This is why taxes are fine, but unless they are really high and imposed universally throughout the world, they won’t reduce greenhouse gas emissions enough to avoid more than 2 degrees C of warming.  This it not to say we shouldn’t use them, but it’s useful to be realistic about what we can achieve with them.





3 thoughts on “Carbon Taxes?

  1. I think we broadly agree. A few possible counter-points (questions?):

    –Regardless of the elasticity, would you agree that gas should be priced to include externality costs (both short and long-term externalities)? If so, then the carbon tax is only one piece, right? Way back in 2002, Parry and Small called for $1 a gallon tax based in the short-term externalities (air pollution, accidents and congestion). Add a carbon tax on top and I might reconsider my repeated decision to buy a gas guzzling SUV.
    –I agree that a carbon tax is potentially regressive (i.e. a higher portion of income is spent on energy by lower income individuals), but doesn’t a revenue-neutral lump sum rebate offset the regressive nature of the tax–because the absolute consumption of energy increases with income?

  2. Most of the damages estimated by Parry and Small were congestion effects, so no a carbon tax would not help for that. Need per mile, or better, time of day on specific road charges. As we move towards electric cars and increase fuel efficiency, transportation people are realizing that gasoline taxes are terrible ways to finance road and other infrastructure, so we’ll see more arguments in favor of mileage charges. But they are less practical to implement. And in any event, we probably need high weight charges, since trucks actually cause the most damage to roads, and thus are most responsible for repairs needed.

    Sure, lump sum rebates can take the pain out of regressive taxes, but there is a dead weight loss there somewhere in the transfer.

    • Wasn’t arguing for a gas tax in place of a carbon tax–instead arguing that all externalities need to be priced in (pollution, congestion, carbon,…). I agree that the gas tax isn’t perfect for all externalities.

      Not sure what DWL you’re referring to in the lump sum transfer. The standard story is the Lump Sum transfer doesn’t change relative prices so the outcome is still efficient. maybe I’m oversimplifying?

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