A trade war is not a carbon tax
By Scott Sumner
Tyler Cowen recently asked this question:
Is the trade war with China a carbon tax?
Of all the questions I’ve seen Tyler ask, this is the easiest to answer. A trade war is not a carbon tax, and indeed it’s not even close to being a carbon tax.
What would be a close substitute for a carbon tax? The answer to this question is also pretty straightforward. A cap and trade system for carbon emissions, with the permits auctioned by the government, would be a fairly close substitute for a carbon tax. But even cap and trade is inferior to a carbon tax, despite being a close substitute. More than a decade ago, Tyler explained one of the reasons why:
When there is uncertainty about the location of the social optimum, and uncertainty about elasticities, a carbon tax and cap-and-trade are by no means equivalent. If you see very high costs from setting the binding cap too low and choking off growth — as Samuelson mentions — you should prefer the carbon tax. The price of carbon is more certain and you bear less risk from uncertainty about how fast solar power and other technologies will develop. Alternatively, you might say that risk is transformed into price risk rather than “you can’t exceed this cap no matter what” risk.
I also suspect that carbon taxes are easier to implement. While on theoretical grounds they look quite similar, carbon taxes are actually more efficient in practice. Two years ago, Tyler seemed to agree, arguing that it makes sense for conservatives who favor a carbon tax to oppose cap and trade:
Conservative intellectuals never have turned against the idea of a carbon tax, as evidenced by Greg Mankiw’s leadership of the Pigou Club. Cap-and-trade is somewhat less popular, but that is probably the correct point of view, given the time consistency problems with governments that increase the supply of permits, as has happened in Europe.
To summarize, Tyler correctly argued that there is no inconsistency in supporting one and opposing the other, despite being close substitutes. He correctly takes others to task for some sloppy thinking, for equating carbon taxes with cap and trade.
While cap and trade is similar to carbon taxes, tariffs are completely, utterly, entirely different. Both carbon taxes and cap and trade are policies aimed at internalizing carbon externalities. The goal is not to make us poorer, rather the goal is to make us richer, if we were to measure wealth properly (including non-market amenities such as the environment.) They encourage us to produce a high level of output in a more carbon efficient manner.
In contrast, tariffs are clumsy tools that destroy wealth. They make us poorer. If the planet were to return to the Stone Age, with 98% of population killed by an asteroid, that would reduce carbon emissions. But that disaster would not be “like a carbon tax”. And there would be no shame in economists who favored a carbon tax also being opposed to asteroid strikes that killed 98% of humanity. Tariffs destroy wealth for no good reason—that are the economic equivalent of self-mutilation.
Now let’s return to Tyler’s recent post:
I know that in my Twitter feed I am told a “carbon tax is GOOD” and the “Trumpian trade war with China is BAD.” But isn’t Trump’s trade war, at least indirectly, a tax on carbon emissions?
I like the older Cowen posts better. Two different things can both cause X, without being essentially alike. And tariffs are nothing at all like carbon taxes, even though both are examples of the billions of potential public policies that have the effect of reducing carbon emissions. BTW, tight money is a far more effective way to reduce carbon, and it’s also “not a carbon tax.” A $40/hour minimum wage would also reduce carbon emissions, and is also not “like a carbon tax”.
PS. It’s also possible that Tyler was just joking around, teasing progressive pundits. That means I just killed a fly with a sledgehammer. OK, let’s go with that analogy. A carbon tax is killing a fly with a fly swatter. Cap and trade is killing a fly with a rolled up newspaper. And trade wars are killing a fly with a sledgehammer. And while a rolled up newspaper might be called a fly swatter, a sledgehammer is definitely not a fly swatter.
PPS. I understand that words can be used loosely, not according to their literal meaning. Thus John Dean once told Nixon that Watergate was a “cancer on the presidency” without meaning it literally. But that case, cancer was a good metaphor. If “cancer” is a metaphor for dangerous, growing, and out of control, then “carbon tax” should be a metaphor for “public policy to deal with externalities in a precise, surgical, and efficient manner”. That’s the whole point of carbon taxes.