Friday Night Video: McKitrick on Carbon Taxes
If you have paid much attention to the debate about carbon taxes, you know that there is a “Pigou Club,” of which Harvard economist Greg Mankiw is a founding member, and that these members advocate a tax on carbon. Here’s my reading of their argument:
(1) Burning carbon-based fuels creates greenhouse gases.
(2) These greenhouse gases warm the planet past the amount that’s optimal.
(3) A tax on carbon is (a) a tax on a negative externality and, therefore, (b) is a good idea.
(4) As a bonus, the government can make the tax on carbon revenue-neutral by reducing one or more of the many other taxes–on income, labor, capital, etc., thus reducing distortions elsewhere.
If one believes (1) and (2), it seemed that there was a case for 3(b) and 4. It seemed straightforward: tax a negative externality and you reduce distortions and then you can use the revenue to reduce other distortions.
Ross McKitrick’s talk, along with an earlier Econlib article by Bob Murphy, has convinced me that that may be wrong. The tax interaction effect undercuts the conclusion and it could undercut it substantially. The bottom line is that the optimal carbon tax, assuming (1) and (2) are correct, is below the one that one would otherwise estimate as the optimal carbon tax, and could be well below.
Bob Murphy gives some highlights of the talk here.
The Pigou Club doesn’t have just economists. It has politicians and pundits too. So I don’t necessarily expect the latter to respond. But, as far as I know, good economists who are members of the Pigou Club–three who come to mind are Tyler Cowen, Greg Mankiw, and William Nordhaus–have not responded to this critique. Has anyone seen a response by any of these three?