Let's talk about something different (economics)

[drwex]

http://blogs.reuters.com/felix-salmon/2014/02/04/the-realistic-and-the-optimal-ways-to-overhaul-energy-taxes/

Felix Salmon is probably my favorite economics writer/blogger at the moment. He does have a weird fascination with the (high) art market but he's generally common sense and quite readable. At least, to me. That might be a side-effect of having spent 8 years working in financial services, but I think he's writing for a general audience. He also tends to stay out of politics which has more or less polluted what Krugman is writing these days. Whether or not I agree with Krugman's politics, I think he's less interesting when he writes political stuff.

In this blog entry, Salmon is making an argument for a carbon tax, as opposed to our present (convoluted) scheme of energy credits and subsidies. Whether or not you think taxing carbon emissions is a good idea, I think replacing a complex government scheme with a simpler one is likely to be for the better. Of course it'll get more complex as more details get added, but starting simple is better than starting complex.

I also take it as an item of faith that anthropogenic warming is happening and that its unchecked effects will be catastrophic within our or our childrens' lifetimes. I believe that useful action requires governmental-level change. The two schemes that are most often floated are a "cap and trade" scheme of credits, or a carbon tax. I strongly favor the latter.

Cap and trade, which is currently being tested in California and parts of Europe, is supposed to be more market-friendly, but I think that's something of a hoax, since it's a case of the government setting up an artificial market, setting controls on it (caps), and choosing who is able to participate in it. For example, both CA and the EU have disallowed environmentalists from buying up carbon credits and then "retiring" them, effectively taking carbon out of the system. When you have that overt a government hand in things, calling it a "free market" is fakery of the first order.

Salmon argues that a carbon tax would be revenue-generating and progressive, both of which are potentially true but he doesn't go as far as I would like, which is to say I want the carbon tax to be revenue-neutral. So long as the tax becomes a revenue source there's an incentive to keep it in place and increase it. If the revenue generated from the tax were disbursed so that once the cost of the program was accounted for the net change in government income was zero then the incentives to grow the tax would be much less. And since it would apply to everyone and every industry the government would not have to be so rigid a gatekeeper as in cap-and-trade.

Yes, I'm a raging socialist and this is purely a redistributive effort that takes money from people who make messes and reimburses people for the costs they incur in dealing with such messes. That and the word "tax" mean this has exactly zero chance of ever being enacted in Washington. But I can dream, in between apologizing to my children for the massively fucked-up state in which we're going to hand them the world.

Comments

[wotw]

One advantage of cap-and-trade is that as soon as you pass a tax, people will start lobbying for you to repeal it. But with cap-and-trade, the opposite happens: The people who have bought credits have a vested interest in maintaining the system and therefore will lobby to maintain it.

An offsetting advantage of carbon taxes is that cap-and-trade is an additional barrier to start-up firms that need permits because it's one more thing you've got to raise capital for.

But the most important difference is that in order to get the carbon tax right, you have to estimate the optimal tax rate, whereas in order to get the cap-and-trade program right, you've got to estimate the optimal quantity of permits. For various complicated and technical reasons, I believe the former is usually going to be a lot easier than the latter.

[drwex]

I agree that people lobby to repeal taxes but people also lobby to maintain them, particularly when they're viewed as 'sin' taxes (alcohol, tobacco, and gasoline being the three most common I know about). I suspect that pitching a carbon tax as a sin tax might work, though perhaps not, as those I listed are consumption taxes.

It's my understanding that most economists who've spoken on the issue favor a revenue-neutral tax, despite its drawbacks.

[(Anonymous)]

I haven't read much of Salmon, though doing so might help my cholesterol. I greatly appreciate Krugman for having not only the economics chops but also the stomach to take on the nonsense that otherwise would pass for wisdom in the political world.
- E

[drwex]

help your cholesterol?

[edichka2.livejournal.com]

High in omega-3's.
- E

[drwex]

I was wondering if "-E" was you. Good to see you, man.

[cos]

I'm pretty sure everyone who analyses this in terms of policy favors a plain carbon tax over cap and trade, and that the only reason cap and trade is a thing is because people believe it's more politically viable because ideologues who hate "taxes" but favor things that sound like "market" can be won over.

[drwex]

I would believe that's true in general, but I'm not sure it's true in California and I'm doubtful that's true in the EU, which seems to have no problems with other taxation schemes.