Mankiw: One Answer to Global Warming: A New Tax

Greg Mankiw proposes (surprise, surprise) a Pigouvian tax to solve the global warming problem. The focus here is on its political viability:

One Answer to Global Warming: A New Tax, by N. Gregory Mankiw, Economic View, NY Times: In the debate over global climate change, there is a yawning gap that needs to be bridged. The gap is not between environmentalists and industrialists, or between Democrats and Republicans. It is between policy wonks and political consultants.

Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D. ...

Those vying for elected office, however, are reluctant to sign on to this agenda. Their political consultants are no fans of taxes, Pigovian or otherwise. ... Yet this natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class.

But Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. He proposes a tax of $15 per metric ton of carbon dioxide, together with a rebate of the federal payroll tax on the first $3,660 of earnings for each worker.

The case for a carbon tax looks even stronger after an examination of the other options on the table. Lawmakers in both political parties want to require carmakers to increase the fuel efficiency of the cars they sell. Passing the buck to auto companies has a lot of popular appeal.

Increased fuel efficiency, however, is not free. Like a tax, the cost of complying with more stringent regulation will be passed on to consumers in the form of higher car prices. But the government will not raise any revenue that it can use to cut other taxes to compensate for these higher prices. ...

More important, enhancing fuel efficiency by itself is not the best way to reduce energy consumption. ...

A carbon tax would provide incentives for people to use less fuel in a multitude of ways. By contrast, merely having more efficient cars encourages more driving. Increased driving not only produces more carbon, but also exacerbates other problems, like accidents and road congestion.

Another popular proposal to limit carbon emissions is a cap-and-trade system, under which carbon emissions are limited and allowances are bought and sold in the marketplace. The effect of such a system depends on how the carbon allowances are allocated. If the government auctions them off, then the price of a carbon allowance is effectively a carbon tax.

But the history of cap-and-trade systems suggests that the allowances would probably be handed out to power companies and other carbon emitters, which would then be free to use them or sell them at market prices. In this case, the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.

The international dimension of the problem also suggests the superiority of a carbon tax over cap-and-trade. Any long-term approach to global climate change will have to deal with the emerging economies of China and India. ...

Agreement on a truly global cap-and-trade system, however, is hard to imagine. ... A global carbon tax would be easier to negotiate. All governments require revenue for public purposes. The world’s nations could agree to use a carbon tax as one instrument to raise some of that revenue. No money needs to change hands across national borders. Each government could keep the revenue from its tax and use it to finance spending or whatever form of tax relief it considered best.

Convincing China of the virtues of a carbon tax, however, may prove to be the easy part. The first and more difficult step is to convince American voters, and therefore political consultants, that “tax” is not a four-letter word.

Comments

[Jim]

Carbon taxes, like gasoline excise taxes in California, would no doubt in varying degree be diverted to the general fund, while other taxes would not be reduced. Cap and trade neither reduces output of CO2 nor subsidizes research in CO2 emission reduction. A better solution would be to require that polluters divert a percentage of gross income to outside firms for productive emission reduction research, development, and implementation.

[bakho]

"a tax of $15 per metric ton of carbon dioxide, together with a rebate of the federal payroll tax on the first $3,660 of earnings for each worker."

At 7.5% payroll tax, that would be less than $300 per worker.

There are
20 pounds of carbon dioxide per gallon of gas.
20 lb per gal/2205 pounds per metric ton.
=0.00907 Metric tons/gal
0.00907 Metric tons/gal X $15. /Metric ton
= $0.13 /gal

If my math is correct does he think a 13 cent/gallon tax is going to improve fuel efficiency? What is he smoking? Gas goes up and down in price by far more than 13 cents in any given week.

If someone used 1000 gallons of gas to go 20,000 miles at 20 mpg, the tax would be $130, a little over 30 cents per day.

Is $15/ metric ton anywhere near enough tax to be a reasonable incentive?

[Robinia]

Am in agreement that a carbon tax is a more effective (and less easily co-opted) stick. But, what about carrots? We can't get to a smaller carbon footprint by merely punishing people for energy use-- there needs to be excitement and incentives to build the kind of infrastructure and housing that is sustainable and durable.

[bakho]

"More important, enhancing fuel efficiency by itself is not the best way to reduce energy consumption."

Is this a straw man argument? We have efficiency standards for everything from refrigerators to flush toilets. Water heaters and other appliances have efficiency standards. Efficiency standards work for everything else. They work for cars too. However, Big Oil makes less money if gas consumption drops too far.

The problem with trying to "price" efficiency is that demand drops as efficiency increases. Those that pay more for energy efficiency end up subsidizing profligate energy wasters. The energy wasters gain at the expense of those that save energy. Energy wasters are leaches on the gains made by those that bring down demand by paying more for efficiency.

A combination of fuel efficiency standards coupled with pricing to keep energy at high enough cost to maintain support for the standards is the best way to achieve efficiency gains. So OK, "fuel efficiency by itself" may not be the best way, but pricing by itself doesn't work either.

The purpose of his arguments seem to be to resist fuel efficiency standards for cars. CAFE standards work. The evidence is clear. All one needs to do is look at oil consumption before CAFE and after CAFE went into effect. CAFE standards enacted in the late 1970s have a drastic effect by 1983.

http://www.eia.doe.gov/emeu/aer/pdf/pages/sec5_20.pdf

[James Killus]

I'm in favor of keeping all the options "on the table" as we have been told in other contexts that this is a good thing to do.

So sure, carbon tax, on the table. Fuel efficiency standards, on the table. Subsidizing more wind, wave, and solar, on the table. More nuclear (which is always subsidized), on the table. Rationing liquid fuels, on the table.

Charging energy officials with fraud for funding denialist PR firms, on the table. Nationalizing energy companies, on the table. Total ban on energy imports, on the table. Waterboarding past and present energy company executives, on the table.

Of course I personally would hate to see many of these options actually used, just like no one really wants to use nuclear weapons in the Middle East. We're just keeping our options open and imagining certain things (and people) as being on the table. The exact nature of the table is now open for discussion.

[robertdfeinman]

First, cars in Europe already get much high gas mileage than those in the US, so all the technological arguments are false. Many of these cars are made by the US firms which claim they don't know how to raise efficiency and have persuaded the UAW to claim the same thing.

Second, taxes can change behavior but they can't invent new technology. Taxes can only provide an incentive to do research, but if that is what's needed why not just provide the money to fund the R&D? None of the coal proposals (carbon sequestration, coal to liquid fuel, etc.) are economically viable. Several of them don't even exist.

The solution, as always, is to cut demand and that means moderating our consumption. This never gets considered by the capitalists because their entire worldview is based upon continual growth which leads to higher profits.

Perhaps you can fool most of the people most of the time, but you can't fool Mother Nature. At some point the resource well will run dry or the climate changes will become unacceptable. Do we want to wait for that or do we start to look for a new economic/social model while we still have time?

[hari]

Invest in public transport - with a vengence!

Like JFK did when he wanted to reach the moon - and beat the Russians (SU).

America is ruled by laissez-fare capitalists who cannot be bothered by anything but free market mechanism!
Any policy which deters the (playful!) free market is a sure non-starter.

Democrats and Republicans alike trust their free market - and the mess they've now inherited!

For example, take close look at TRAMS which move traffic inside city of Vienna (Austria).

CityTrains in W.Europe!

[Bruce Webb]

Okay I am a one note Charley.

Why payroll tax? Why not refundable tax credit? I know the answer but this irresistable need for the Mankiw's of this world to bleat 'entitlements crisis' coupled with every tax policy proposal cutting the dedicated funding for those 'entitlements' is getting a little old.

And BTW just try selling this one to retirees. They get to pay extra to gas their boats and RVs but get an offset on payroll taxes they are no longer paying.

[calmo]

Such a fine post rdf: reduce demand. What could be more startling (radical! Let's have a depression and give the Planet a breather.) than that?
James Hamilton (see side bar) thinks the Saudis are painting over a declining resource base (and now an Arctic scramble tends to confirm this note of urgency)At some point the resource well will run dry or the climate changes will become unacceptable. Do we want to wait for that or do we start to look for a new economic/social model while we still have time?
I'm not sure who the "we" is, but it is not the benefactors of the current "economic/social model".

[Denis Drew]

I was always skeptical about global warming until I recently watched a program on the History Channel about global dimming. Now it makes perfect sense (dimming undeniable -- dimming actually retards warming).

I never worried much about global warming until I watched a program on the History Channel on how global warming could lead to a new ice age if it upset certain Atlantic ocean currents.

I did not realize until I read a New York Times article this morning by the author of the book Freakonomics that Jane Fonda was the main culprit exposing all of us to the danger of a mini ice age due the propaganda effects of her 1979 movie, "The China Syndrome" which scared enough of us out of building enough nuclear power plants -- in fear of the unlikely effects of an unlikely accident -- to thereby leave much of mankind exposed to the treat of icy extinction. :-)

[johnchx]

How about a truly radical bargain: replace the entire Federal corporate income tax with a set of Pigouvian taxes scaled to match the lost revenue.

While revenue-neutral (not a "tax increase"), this would replace a distorting tax with an efficiency-enhancing tax. What's not to like?

(Aside: it is simply an error to confuse the corporate income tax with a tax on "the rich." If you want to raise taxes on those with high incomes, do it directly -- raise the top marginal rates of the personal income tax. If you're concerned about the timing of the flow-through of corporate income to individual tax returns, require S-Corp style reporting for all corporate income. Solve the problem directly, not via a Rube Goldberg device. You'll have my vote; I want to tax the rich.)

[jfben]

I agree with Bakho that $15/ton is too small. Mankiw has previously (WSJ) advocated elimination of the corporate income tax. (johnchx does so immediately above, too.) $60/ton would raise about $360B/year, which is sufficient for this. Think of the resulting unemployment on K Street. (K Street would still be lobbying about regulation, of course. And making campaign contributions for the same reason.) Since double taxation was the original justification for special treatment for capital gains and dividend taxes on individuals, eliminate the special rates when you eliminate the corporate tax, making the individual income tax much more progressive and providing $ for infrastructure spending.

Increase tax $10/year for another 10+ years to $150/ton (2009 $), still well below European levels of gasoline taxes. Use the additional funds to reduce payroll taxes from the bottom up and/or debt paydown. Ten years gives enough time for investment to reduce US carbon-based fuel consumption in an absolute sense, not just per unit of production.

Bush wants to simplify and cut corporate taxes. Populists want to make the individual tax code more progressive. Greens want to cut carbon. Some policy wonks want to switch from income to consumption taxes. Carbon taxes provide a mechanism for a great re-write and simplification of the tax code - if enough politicians have the courage to make big changes.

[James Killus]

Asking politicians to show courage is like asking turtles to fly; it is not one of the design criteria.

What I want from a politician is the desire and ability to create sensible policies that reduce the need for heroics. Decent fire codes for buildings reduce the opportunities for firemen to be heroes. Good prenatal care reduces the use of "heroic" measures at birth. Sensible civil rights enforcement lessens the need to stand defiantly before the burning cross.

I want politicians who enable bland, faceless bureaucrats whose job it is to make society safer, saner, and even more dull. I'm entirely capable of generating my own excitement; I don't need some jackass's war to get my kicks and prove myself a man.

[btgraff]

frankly, the whole argument about taxing carbon, or taxing emissions, is fairly naive - it is just basic economics 101.

the US consumes 20 million barrels of oil per day. say that through taxes alone (on fuels, on emissions, etc.) could reduce that by 1 million barrels per day. what has been achieved? well not as much as you think.

basic econ 101 here - shift the demand curve by 1 milliion bbl/day, and actual world energy use might only decrease by half of that - sort of along what bakho was suggesting - what will happen is that a reduction in US demand reduces world prices, and china, india and other countries will use more of the now cheaper energy (and higher taxes on energy in the US might directly encourage more outsourcing of energy-intensive production specifically to those counries that are not part of kyoto and that keep energy prices low).

any solution to global warming has to do 2 things - reduce demand (through taxes, emmissions limits etc.) AND reducing supply. kyoto is a "demand side" solution - we also need "supply-side" reductions in production - by doing things like NOT pumping oil out of ANWAR, and ironiically enough, making the US (and Canada) even more dependent on energy imports than is the case now (because, of course, countries like saudi arabia and venezuela will keep pumping oil almost as fast as they can - supply reductions have to occur first in the industrialised world, like reducing coal extraction in the US, Europe etc.)

the only other thing to do is to scrap the WTO and repplace it with a GTO (not the car) - Green Trade Organisation - which would be a pact of countries who would agree to reductions in supply and demand of carbon in return for mutual preferential trade access - countries who refused to co-operate would face large tariffs and otehr trade barriers - in effect - imports would face a high tariff in lieu of the countries imposing carbon taxes on themselves.

kyoto isn't enough - the US imposing a few taxes isn't enough - we need something more comprehensive!

[Denis Drew]

Reducing foreign oil use by half to 5 million barrels a day could reduce oil prices in half to $30 a barrel. Together that would yield a savings of about 165 billion dollars a year.

Once lithium batteries are available for hybrid vehicles:
subsidizing the manufacture of the 16.5 million motor vehicles we build every year to the tune of $10,000 apiece would cost 165 billion dollars a year -- which would pay for itself -- pay twice if we charge owner some of the money back for saved gas.

If we can combine the future savings electric generator power run (hybrid) cars with the doubled power output per gallon of the still experimental Scuderi engine -- which introduces pressurized air after the gas (something about the the turbulence interfacing more gas and air molecules I think -- in any case being single-stroke it only needs half as many cylinders) -- we might end up exporting oil. :-)

[Paul]

bakho claims that "CAFE standards work" but one of the products of the CAFE standards is the SUV as someone realized that a truck chassis with seats is a vehicle subject to relatively lax fuel efficiency standards that could carry people. The carbon tax prevents this sort of regulation avoidance.

[anne]

Notice Bakho's fine comments in particular.

Having just been through a lecture on what I found the statrling contribution to global warming of air travel and how much air travel is short range and replaceable by the sort of relatively efficient rail systems avalable in other countries, I am inclined to think we are looking at too few alternatives to limiting carbon emissions.

I too am completely impressed with what was accomplished before 1985 in automobile efficiency by setting insustry standards that were and have been fought fiercely by the industry. So, I happily drive my Prius and careless for General Motors promise to have a Prius in another decade and am minimally interested in a carbon tax.

[anne]

Ah, and about avoidance of efficiency standards for automobiles. We could even include, say, trucks not to mention truck-like automobiles. The craziness about avoiding regulation has been altogether self-defeating for American automobile companies. Heck, the craziness about avoiding regulation just extended to the extreme conservatives on the Supreme Court finding price-fixing fine after we have understood since Teddy Roosevelt was President that price-fixing is a significant problem.

[btgraff]

one of the things about the last 20 years has been that the automakers - both foreign and domestic, have made huge gains in fuel efficiency that have not been reflected int he actual cars they make... by this i mean that improvements have generally meant that cars have more horsepower and have much imporved 0-60mph times than cars of 30 years ago - used to be in 1975, corvettes and bmws could not do much better than 0-60 in 9 seconds - now, economy cars can do this.

colin chapman, the engineering genius behind lotus, realised that a smaller lighter car with a small engine but a good power/weight ratio could easily outperform a bigger heavier car with the a lower ratio, in part because the lighter car also had the advantage in handling and improved fuel efficiency (fewer pit stops!).

the original chysler minivan of the 80s didn't come with a v6 - only a 4. since then, they have grown larger, and now they have even stopped producing the short wheelbase version altogether.

used to be that ford mustangs came with 4 cylinder engines.

there is a benefit to putting a smaller lighter engine in a car - it also allows you to make the car smaller and lighter, which in turn means you don't need as much horsepower. tougher cafe standards can easily be met by sacrificing a little speed - no need for fancy technologies, although sme technologies (supercharging or turbocharging) let you increase peak horsepower with minimal gain in weight.

there seems to be something about the american car market that leads to car models becoming bigger and more powerful every time they are re-designed - it goes back to the 50s - cars like lincolns and dodges were actually downsized in 1960 and 1961 because the cars had grown so much in the late 50s. cars were downsized again in the late 70s as well, with gm leading the way.

i own an old 1990 jeep cherokee - one of the first popular SUVs - it is tiny compared to most of the SUVs on the road today - eventhe replacement for it, the 2008 liberty, is about a foot longer! The Dodge Caravan has grown from 175 inches long to 202 inches!

Want to save fuel - it doesn't take Scuderi's or hybrid to do the trick, just go back to making the vehicles of the same size as the late 80s!

[Francisco]

In a cap-and-trade world, the United States would be a net receiver of transfers from the rest of the world, not a net payer. The marginal cost of pollution abatement is lower in rich countries than in developing ones. (Click here to see the data: http://www.vattenfall.com/climatemap/).
If emissions rights could be traded, the US would emit less CO2 than it does now and sell some emission rights, and developing countries would emit more CO2 and buy those rights.
Click here if you want to read more: www.econweekly.com