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.
READER COMMENTS
Rob Rawlings
Aug 27 2019 at 10:05am
A tariff is just a particular kind of tax so if you can have a ‘tax on carbon’ there is no logical reason why you could not have a ‘tariff on carbon’.
If 80% of the world’s economies implemented a carbon tax and 20% refused then a carbon tariff based on the estimated carbon footprint of goods being exported by those non-conformers might be justified as better than nothing.
LK Beland
Aug 27 2019 at 10:47am
What you are suggesting–taxing the carbon footprint of imported goods–is much more akin to a VAT border-adjustment tax than to trade tariffs.
Jon Murphy
Aug 27 2019 at 11:29am
Well, yes there is a logical reason. You stated it: a tariff is a particular kind of tax. All tariffs are taxes, but not all taxes are tariffs.
By way of metaphor, it’s like saying “A touchdown is a particular kind of score, so there’s no logical reason you could have a touchdown in baseball.”
Rob Rawlings
Aug 27 2019 at 12:40pm
@Jon: You are correct, I realized I’d made a logic error as soon as I hit enter and was hoping no-one would notice 🙂
I still stand by my overall point though that a ‘carbon-tariff’ may be a better than nothing solution in some circumstances.
Jon Murphy
Aug 27 2019 at 1:19pm
Sure, it may be. It may also not be. The mere existence of an externality does not in and of itself call for intervention.
TMC
Aug 27 2019 at 11:20am
I think the part you missed is ‘ it doesn’t seem that Vietnam is able to pick up the slack’. Manufacturing is being transferred to the US because of the tariffs, and the carbon footprint is lighter. Thus, a higher cost, but lighter carbon footprint is similar to a carbon tax.
Jon Murphy
Aug 27 2019 at 1:20pm
Not necessarily, as Scott points out.
Scott Sumner
Aug 27 2019 at 7:23pm
I certainly do not agree with your claim that manufacturing is being switched to the US. And even if it were, that would not make it a carbon tax. As an analogy, an income tax will reduce gasoline consumption, but an income tax is not a gasoline tax, not even close.
nate
Aug 27 2019 at 12:01pm
Great post!
Mike Hammock
Aug 27 2019 at 4:38pm
I think a simpler way to answer Tyler Cowen’s question would be to say “A tariff is not a carbon tax because producers in the polluting country cannot avoid the tariff by reducing their carbon emissions.”
Mark Z
Aug 27 2019 at 4:46pm
Perhaps Tyler’s economic pessimism is relevant here. If there’s some extent to which we can substitute lower emitting production for higher emitting production to reduce emissions, you’re right. But what if technology is basically fixed, and all we can do to reduce carbon emissions is consume less? Then the effect of the tariff may be similar to the effect of the tax. This is assuming again, perhaps unrealistically, that there’s almost nothing one can do to reduce emission other than to reduce consumption.
Mark Z
Aug 27 2019 at 4:40pm
What if every country in the world imposed tariffs – at the same rate – on specifically all other countries’ fossil fuel industries, while leaving trade in ‘greener’ energies free. Would this basically amount to each country taxing each other country’s carbon emissions?
Scott Sumner
Aug 27 2019 at 7:24pm
No, this would be a much inferior policy. It would distort production location decisions.
Garrett
Aug 27 2019 at 5:36pm
This reminds me of the time I tried to PV my expected future wages to get a sense of what my “human capital” was worth.
While we’re on the subject of properly measured wealth, I suppose a tariff supporter could say that while tariffs may reduce market wealth, they increase our non-market amenities such as “winning” and “making America great again”
BC
Aug 27 2019 at 9:26pm
I think Tyler is basically making a disparate impact argument. His claim is that Chinese manufacturing tends to be less carbon efficient than other regions like the US. So, if we impose a tariff on goods manufactured in China but not in the US then, statistically, high-carbon manufactured goods will incur larger taxes on average than low-carbon manufactured goods, i.e., the tariff will statistically penalize carbon, just as an explicit carbon tax would.
Scott is correct that a tariff is *facially neutral* with respect to carbon: Chinese goods would incur a tax regardless of carbon emitted in their manufacture. The tariff does not on its face penalize or discriminate against carbon so, in that sense, a tariff is much different from a carbon tax. Tyler’s question is really whether facial neutrality is what matters or whether statistical impact should be considered instead. There are many other contexts in which people claim that a policy is discriminatory or penalizing if it produces statistically disparate outcomes, even if it is facially neutral.
Scott Sumner
Aug 28 2019 at 9:10pm
That’s possible, but it would not make a tariff like a carbon tax. It’s also possible that a tariff would boost carbon emissions, by making China poorer and more reliant on coal. Or more nationalistic and hence more reliant on coal.
Thaomas
Aug 28 2019 at 9:26am
Scott, You have been trolled by Tyler. He does not think that the trade war is a close equivalent to a carbon tax.
H
Scott Sumner
Aug 28 2019 at 9:07pm
That’s quite likely.
save_ecosystems
Aug 31 2019 at 5:11am
The carbon tax and cap-and-trade are useful but not sufficient because these measures tamper with the consequences rather than eradicating the root causes. The extent of the environmental damage makes degrowth the most practicable way out of the crisis. The imminent collapse of ecosystems can only be stopped by economic diminution, dispensing with all unnecessary products and reducing the total production to the most essential. The transition into real sustainability can only happen by downscaling production and consumption. https://www.degrowth.info/en/ https://degrowth.org/ https://en.wikipedia.org/wiki/Degrowth
Warren Platts
Sep 14 2019 at 1:45pm
I must say that I think Scott’s argument boils down to mere special pleading. I have looked at this issue in some detail and have come up with some back-of-the-envelope calculations that should be roughly accurate.
In round figures, USA has officially reduced its CO2 output by about a billion tonnes per year since the 2005 peak. Of that 2/3 is mainly due to switching from coal to natural gas made possible by the fracking revolution, 1/6 is due to increasing renewables, and 1/6 due to offshoring of U.S. industrial production since China PNTR.
Thus, that last 1/6th shouldn’t even count against U.S. reductions. But it is worse than that. As other commentators (and Tyler) pointed out, a lot of our imports are more carbon intensive than similar products made here. Note that China’s carbon output per dollar of GDP is 3X the USA’s.
But in terms of heavy industries, it is much worse than that figure. I think David Koch himself said that the fertilizer he imports from China is 5X more carbon intensive than the fertilizer he produces here in USA. Similarly, Dan DiMicco has told me that Chinese steel is about 6 or 7 times more carbon intensive than steel produced by Nucor.
Thus, assuming a multiplier of 4 is probably conservative. Thus, if offshoring reduced U.S. emissions by 133,333,333 tonnes annual, that in turn caused an increase in China’s CO2 emissions by about 666,666,667 tonnes. As a result, the official U.S. CO2 emission reduction should really be roughly 333,333,333–one third of the reported figures!
As for tariffs being a carbon tax, again, very roughly, over the past year roughly $40 billion in collected tariff revenue has apparently caused nearly a 20% reduction in imports from China by value. So the actual physical goods is probably higher than that, given yuan devaluation, and large-country tariff effects. But let’s call it 20%
Thus a reduction of 20% imports would reduce China’s CO2 emissions by approximately 133,333,333 tonnes. Thus with the $40 billion tariff, that amounts to a $300/tonne “carbon tax”, if you will.
If that seems expensive, consider that 100 gallons of gasoline will produce a ton of CO2. Thus at $3/gallon, that’s $300 spent per ton of CO2 produced.
If we could reshore all of our lost industrial production, U.S. CO2 emission reduction within our borders would only be 833,333,333 tonnes, but when the reduction in China’s CO2 is figured in, total global CO2 reductions because of U.S. actions would be 1,333,333,333 tonnes. Thus, if one is really serious about CO2 reductions, reshoring of U.S. industrial production is some very easy to obtain low-hanging fruit.
Thus, whatever you want to call it, and regardless of whether Tyler was joking or not, Trump’s tariffs are indeed functioning as a carbon tax.
Comments are closed.