Tyler Cowen's Marginal Reservations About a Carbon Tax

A Twitter discussion broke out last week on carbon taxes. The question was, "do all serious economists favor a carbon tax?" Mostly the answer was yes. Tyler Cowen, on his Marginal Revolution blog, also favors a carbon tax, but posted some of his reservations. They are worth addressing (they are covered in my new book).

1. Other countries won’t follow suit and then we are doing something with almost zero effectiveness. 
This is true but perhaps the more relevant questions is, is a carbon worse than the alternatives? It so happens that a carbon tax will have greater pollution reduction co-benefits than the alternatives. Then, a second-order set of questions is, does a carbon tax permit, under international trade rules, sanctions against counties that don't follow suit? The answer is maybe, but a carbon tax is legally a better base form which to take trade actions than alternatives like cap-and-trade.

2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse. Yes, possibly, see #1, and plus, this may be overstated.... see Leveling the Playing Field, by Trevor Houser and others.

3. There is Jim Manzi’s point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers.  Denmark remains far more dependent on fossil fuels than most people realize and for all their efforts they’ve done no better than stop the growth of carbon emissions; see Robert Bryce’s Power Hungry, which is in any case a useful contrarian book for considering this topic. I think that reducing greenhouse gas emissions will not require so much game-changers but much smaller, less noticeable increments in conservation and efficiency, most notably in Sweden. Sweden may not have perfected nuclear energy, but it has a much more innovative environment for conservation. Kristianstad, an  80,000-person city has reduced its carbon footprint to virtually zero. Obviously, not every city can do this, but some can, which is better than none. http://www.nytimes.com/2010/12/11/science/earth/11fossil.html?ref=beyondfossilfuels

4. Especially for large segments of the transportation sector, there simply aren’t plausible substitutes for carbon on the horizon. Except conservation. There is a paper by Hammar, Lofgren and Sterner that found that not only do low gas prices beget high consumption, but high consumption begets low gas prices. The explanation is a political economy one -- once people get used to high consumption, and once an infrastructure gets build around low gas prices, people demand low gas prices. But that's not a reason to keep gas prices low. As Herb Stein once told Richard Nixon, "If something can't go on forever, it won't"

5. A tax on energy is a sectoral tax on the relatively productive sector of the economy — making stuff — and it will shift more talent into finance and other less productive sectors. See #2.

6. Oil in particular will become so expensive in any case that a politically plausible tax won’t add much value (careful readers will note that this argument is in tension with some of those listed above). You can't both argue that a carbon tax is harmful and that is won't have any effect.

7. A carbon tax won’t work its magic until significant parts of the energy and alternative energy sector are deregulated.  No more NIMBY!  But in the meantime perhaps we can’t proceed with the tax and expect to get anywhere.  Had we had today’s level of regulation and litigation from the get-go, we never could have built today’s energy infrastructure, which I find a deeply troubling point. Again true, but the point is, is a carbon tax better than the alternatives? At least a carbon tax is the least regulatory of all the options, including cap-and-trade, which still must monitor emissions trading.


8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax. Somewhat true, but generally overstated -- see recent work by Metcalf, Fullerton, and others, which show that for *some* lower-income people, their income is derived from governmental benefits that are indexed to inflation, and would therefore grow with price increases brought on by a carbon tax. Also, work by Sarah West and Rob Williams studied gas prices and substitution, and found that even very modest revenue recycling would remove regressive effects.

9. Jim Hamilton’s work suggests that oil price shocks have nastier economic consequences than many people realize.  But a carbon tax could be big enough to constitute an oil price shock? A $30 per ton CO2 tax amounts to about $0.25 per gallon.

9b. A more prosperous economy may, for political and budgetary reasons, lead to more subsidies for alternative energy, and those subsidies may do more good than would the tax.  Maybe we won’t adopt green energy until it’s really quite cheap, in which case let’s just focus on the subsidies. There a case for limited R&D subsidies because fossil fuel industries already have a much greater market share than renewables, so renewables need some R&D subsidies just to keep up. See work by Acemoglu et al, and by David Popp. But who believes that subsidies are really, on the merits, a great idea? If carbon is what we are worried about, shouldn't we just price carbon instead of trying to lower the price of everything else?

10. The actual application of such a tax will involve lots of rent-seeking, privileges, exemptions, inefficiencies, and regulatory arbitrage. More than subsidies? More than cap-and-trade? The Waxman-Markey bill doled out $378 billion in allowances given away to industries that were at the table. It was virtually co-written with the Edison Electric Institute.

On Jon Huntsman

Last night, during the Republican presidential candidates debate, former Utah Governor Jon Huntsman said this:

"When you make comments that fly in the face of 98 out of 100 climate scientists, to call into question the science of evolution, all I am saying is that in order for the Republican Party to win, we can't run from science. By making comments that basically don't reflect the reality of the situation, we turn people off."

I have been asked what it would take for carbon taxes to become a reality. What it will take is for a legion of sensible Republicans to say what Jon Huntsman has said. Arnold Schwarzenegger, John McCain, Lindsey Graham, Bob Inglis, and Lamar Alexander are all Republicans that have at some point acknowledged climate change. Some versions of Mitt Romney have also done so, although other versions of Romney are more equivocal. I am not going to call Jon Huntsman's statement "courageous," because that should be reserved for statements that are less popular than Huntsman's position. If just a small number of distinguished Republicans are willing to lead the party and play ball on climate change, then carbon taxes will be seen as the most palatable policy option. This will especially be true in the foreseeable future, in which government balance sheets will be under scrutiny, and not just from Standard and Poor's.

Physical, Human, and Social Capital, and Their Effects on Social and Economic Change

My PhD advisor, Jim Wilen, has already cemented his place in economic history as one of the great thinkers and researchers in fisheries economics and policy. I won't recount the numerous honors that have rightly recognized his contributions to this vitally important area of public policy. Nor will I attempt to list those of his students that have benefited from his intellectual stewardship.

My unfinished idea about environmental law derives from Wilen's groundbreaking work on the role of capital in fisheries economics. In one of the most influential unpublished papers ever, Common Property Resources and the Dynamics of Overexploitation: the Case of the North Pacific Fur Seal," (1976) Wilen sets out a bioeconomic model of the fur seal industry, combining a biological model of fur seal reproduction and an economic model of the fur seal harvesting industry. In my mind, Wilen's big idea in this paper is that fishing capital is "sticky" and that this is what makes overexploitation so persistent in some cases. Especially in fishing (and chasing after other marine resources), there tend to be huge sunk costs and relatively low variable costs, so that boats can be going out and chasing species that have already crashed, and are in danger of permanent overfishing (i.e., for most purposes, extinct); if there is no real alternative use for the capital, then there is nothing to be lost by going out even when the target species has already crashed, and trying to catch the very last of that species. That is the great danger of overcapitalization in fishing and other marine exploitations -- the tendency to lock in certain behaviors that will persist long after the economic warning signals have sounded about overexploitation.

Wilen's works co-exists and stands on the shoulders of many other fisheries economists -- Anthony Scott, H. Scott Gordon, and Colin W. Clark, to name just a few. But in terms of value-added applied impact on fisheries policies, I think this contribution stands on its own.

My project is to extend this insight to other areas of environmental and natural resource policy. Climate change is one of several areas that must grapple with questions about capital. Many have written about how the energy infrastructure of most of the world's advance economies is "sticky" because of the expensive, long-lived nature of electricity generation plants. Insofar as that is unchangeable, we have indeed locked in high emissions for decades, and we owe that to the physical capital that has been constructed, the human capital that is narrow and specific to certain electricity generation technologies, and the social capital that seems to be predicated on certain industries, practices, and methods of electricity generation (like coal mining). Capital is sticky, and that is what makes change hard.