Many economists on both the left and the right support carbon taxes. Most politicians on both the left and the right oppose carbon taxes. A widely cited explanation is that carbon taxes are politically unpopular. In a new column in The Hill, I argue that this perception may be based on a misunderstanding:
To understand the politics of carbon taxes, we need to begin by recalling that economists view terms such as “taxes” and “subsidies” differently than the general public does. Economists know the concepts to be quite similar — two sides of the same coin. Both move money from one group to another, and both raise the relative price of some goods and reduce the relative price of other goods.
Many non-economists see taxes and subsidies as being quite distinct: taxes as money taken from the people by the government, and subsidies as money provided from the government. In one case, the money seems to just disappear, and in the other, it magically appears almost as if from nowhere. Of course, neither perception is accurate, but this means that subsidies are the easier sell.
I argue that a properly constructed carbon tax should be no less popular that its less efficient alternatives, such as clean energy subsidies. Consider two policies that have an equal impact on the budget deficit:
If we (hypothetically) say the government is spending $200 per adult on clean energy subsidies, then the total cost of the program would be $50 billion each year. Let’s also make the assumption that the full $50 billion is financed by the budget deficit, to match the mistaken perception that subsidies are free money.
Now, consider an alternative idea: a carbon tax that instead raises $50 billion each year. By itself, this would reduce the deficit by that amount. Thus, to have an equal fiscal impact to the clean energy subsidies, the government would need to rebate twice as much ($100 billion) back to the public.
It’s not that carbon taxes are unpopular; the problem is that all taxes are less popular than subsidies due to “cognitive illusions” held by the public. To make a popular carbon tax, you construct it in such a way as to avoid this sort of cognitive illusion. Create a carbon tax that impacts the budget deficit in the same way as clean energy subsidies.
The perception that carbon taxes are less popular than subsidies is due to the fact that people are comparing it to alternatives with a different impact on the budget deficit. Instead, any carbon tax program should be compared with an alternative that has the same budget impact.
Read the whole thing.
READER COMMENTS
Stéphane Couvreur
Nov 28 2021 at 2:06pm
Hello Scott,
Shouldn’t the efficiency palm go to emission quotas-aka cap-and-trade-, a carbon tax being only the second best (even if it were allegedly revenue neutral)?
Emission quotas allocated to firms for free, tradable and decreasing over time are less distortive, have advantages from a public choice perspective, they guarantee that the emission quotas will not be exceeded. And I would assume they achieve all this at a lower cost than a carbon tax, because they offer fewer opportunities of political redistribution and rent-seeking.
In short, they have the advantage of not containing the word “tax”…
And yet I do observe, as you note in your piece, that many economists favor a carbon tax as a first best option. I wonder if I’m missing something.
So what is the strongest case against free emission quotas?
In Climate casino, for example, Nordhaus writes in a footnote that he fears they will foster corruption if they are allocated to countries. What else?
Best regards,
Stéphane from Paris
Airman Spry Shark
Nov 28 2021 at 3:08pm
I’m prepared to be mistaken, but this is all exactly backwards from how I understand quotas v. taxes. The initial allocation of free quotas is ripe for backroom chicanery, and because there would be transaction costs in their trading there’s no Coasean guarantee that we’d reach the least-cost reduction for the total target.
Matthias
Nov 28 2021 at 8:58pm
Wouldn’t you want to auction off the initial rights, or at least distribute them equally amongst the population?
Giving them out for free to existing polluters just encourages people to pollute more in the run up to implementation?
Airman Spry Shark
Nov 28 2021 at 9:33pm
Certainly, either an auction or a uniform allocation to individuals would be better than Stéphane’s formulation (“Emission quotas allocated to firms for free”).
Scott Sumner
Nov 28 2021 at 4:16pm
Good question. Correct me if I am wrong, but wouldn’t emissions quotas cause gasoline prices to rise? In that case, wouldn’t they be unpopular if not combined with rebates?
Matthias
Nov 28 2021 at 8:59pm
I guess they would effective gas gas prices to rise. But how is that different from a carbon tax?
Wouldn’t a carbon tax also cause the price of burning gas to rise?
Scott Sumner
Nov 29 2021 at 12:21am
Yes, my point is that a carbon tax would be unpopular without a rebate.
Jose Pablo
Nov 30 2021 at 9:14am
And, very likely, ineffective (or, at least, less effective) with a rebate.
After all, some of the “additional” disposable income will end up “increasing” the consumption of carbon emitting products and services.
To get the same reduction you will need a higher carbon tax per ton of CO2 with the rebate (compare with a “no rebate” scheme). Since the unpopularity of the tax is proportional to the size of the tax, the rebate could cause the tax being more unpopular while not achieving any significant reduction in CO2 emissions.
AWG
Dec 1 2021 at 12:23am
So the solution to the cognitive illusion caused by, and the regressivity of, a carbon tax is to frame it as a fee coupled with a dividend for every citizen.
Christophe Biocca
Nov 29 2021 at 12:18pm
I don’t know what the public choice benefits would be, but it seems to me that “they guarantee that the emission quotas will not be exceeded” is a net-negative.
A carbon tax requires calculating the harm done by an incremental ton of CO2, which already runs into issues, but at least it doesn’t require figuring out the marginal benefit of an extra ton of allowed CO2 emissions, which is an extremely difficult thing to ascertain. If cheap fusion power becomes available, a cap-and-trade scheme will end up reducing emissions much less than what is optimal (because it doesn’t reward doing better than the quota, even if it turns out CO2 reductions are very cheap). If, to the contrary, we cease to make efficiency gains, population increases faster than expected, and/or living standards in the third world jump, a cap-and-trade scheme will end up restricting emissions much more than what is optimal (because the quotas cannot be exceeded, even if it turns out there’s a lot of valuable economic activity being prevented).
Andrew_FL
Nov 28 2021 at 4:51pm
You’re ignoring the part of the population that wants neither a tax nor subsidies.
Scott Sumner
Nov 29 2021 at 12:22am
No, I am not.
Andy Weintraub
Nov 28 2021 at 9:21pm
Promoting revenue neutral carbon taxes would go far to making them more acceptable.
Richard A.
Nov 28 2021 at 9:31pm
Our government has high taxes on imported solar panels while at the same time subsidizes the purchase and installation of solar panels. Congress appears to be adding buy American requirements to green energy subsidies.
Scott Sumner
Nov 29 2021 at 12:23am
Yes, that’s a very counterproductive policy.
Jose Pablo
Nov 29 2021 at 9:21pm
Are you really expecting Governments having a coherent set of policies in place?
Seriously?
Governments all over the world subsidized the production (and/or consumption) of “local” fossil fuels and have, at the very same time, some form of “carbon taxes” taxing … fossil fuel consumption!.
That’s simply put, the way governments ARE. They cannot be otherwise. If you expect other thing from them, you are fooling yourself. Actually if you do so you are the one being “irrational”, not “the Government” which, in the schizophrenic behavior you pointed out, does precisely what it is rational for “them” to do.
Rajat
Nov 28 2021 at 10:51pm
Living in a country (Australia) that tried a carbon tax-with-compensation that was subsequently repealed, I think the trickiest bit is for governments to credibly commit to returning *all* tax revenue to voters/consumers on a per capita or household basis. Our Labor (progressive) government at the time chose to ‘over-compensate’ lower income groups and not compensate higher-income groups. That immediately creates resentment that this was just another left-wing policy. And there was no commitment to ratcheting up compensation over time as the CO2 permit price/ tax rate and revenue rose – as it would need to in order to meet emissions reduction objectives.
Scott Sumner
Nov 29 2021 at 12:26am
Good point. But keep in mind that I am not discussing returning 100% of carbon tax revenue to the public; I’m discussing returning 200% of the revenue. Repealing that sort of program would make roughly 90% of voters worse off (in a direct sense; obviously the indirect effects are far more complex.)
Christophe Biocca
Nov 29 2021 at 12:26pm
Canada has a carbon tax (it has a weird carve-out/alternate system for big industries, which is somewhat distortionary, but does preserve the marginal incentive to decrease emissions), so such a policy isn’t necessarily “unpopular” enough to stop its implementation.
The real problem is that it is not perceived as sufficient. So we’ve ended up with a carbon tax and green energy subsidies, efficiency standards, and everything else. People do not accept the idea that CO2 reductions can be efficiently achieved by a carbon tax alone, no matter how high, and so the criticism from the parties to the left of the Liberals is that they’re simply not doing “enough”.
Jose Pablo
Nov 29 2021 at 9:09pm
Many (all) developed countries already have a “carbon tax” in place: after all, a very significant part of gas and electricity prices are taxes.
In the US (in Europe is even “worse” … or “better” depending on your point of view) gas taxes vary from 58 cents per gallon in California and Pennsylvania and 18-19 in Mississippi and Arizona. For an average car emission rate of 9 g of CO2 per gallon, this means a carbon tax of between 21 and 55 dollar per metric ton of CO2.
You can just double the gas taxes and “voilà” there you have a “carbon tax”. Somehow, I don’t see politicians doubling gas taxes any time soon … and, for the very same reason, don’t see them introducing a carbon tax with similar effects on driving (and electricity consuming) voter’s pockets.
Floccina
Nov 29 2021 at 4:36pm
Also regulation. According to one MIT study a CO2 tax would reduce CO2 by 6 to 14 times more per dollar than CAFE regulations. It is an Illusion that CAFE regulations are free. They are a hidden tax. I hate hidden taxes, IMHO people should know what Gov is costing them.
Jose Pablo
Nov 29 2021 at 8:51pm
“The perception that carbon taxes are less popular than subsidies is due to the fact that people are comparing it to alternatives with a different impact on the budget deficit”
“People” (the “jury” that decides what is “popular” and what is not) don’t decide the “popularity contest of political measures” based on their impact on the budget deficit.
Most people on the US pay very little taxes. After all, the top 40% earners pay 86% of Federal Taxes. And the perception of the bottom 60%, (shaped by constant political messages), is that “other people” pay for the government subsidies. So why they should care about deficits?
On the other hand, they know (even if the economists try to deny it, actually more if they do so) that carbon taxes would have a clear and significant impact on their “individual “pockets (they don’t care about “macro”).
Voters have rejected carbon taxes twice in the State of Washington and burned down France when they tried to introduce a carbon tax there. I would not assume that all this has happened because of a flaw in the design of the way that carbon taxes affect the deficit.
The average voter could not care less about the deficit (they are fully aware that nobody never is going to repaid them and even less so the majority of the voters). They do care about paying more for gas and electricity and about signaling that they care about other people “energy poverty”.
That the rich can keep harming the planet because they have the money to do so (which is the “popular” translation of “carbon taxes” for non-economist) is a political no go. No matter what happens with the deficit.
nobody.really
Dec 1 2021 at 4:50am
Many good points about the basic irrationality of “the public” when it comes to public finance. That said,
If I recall correctly, France’s Yellow Vest protests were driven in part by the realization that the carbon tax was being passed largely to pay for repealing a wealth tax–that is, to subsidize the rich. Macron was shocked, shocked to learn that regressive taxes are unpopular; quelle surprise.
As many people have remarked here, the public may find a carbon tax more palatable if they are persuaded that 100% of the revenues would returned to the public on some equitable basis. As a matter of public finance, I don’t see why a carbon tax couldn’t be used simply to finance government services–but as a matter of politics, I can appreciate the benefits of a simpler message.
Jose Pablo
Dec 1 2021 at 11:43pm
The French don’t need a reason to burn down the country and events very seldom respond to a single cause, but the protest started following the proposal of an increase in gas prices and died down when the proposal was abandoned.
In any case, using price increases to curb demand for fossil fuels is unpopular and politicians are “wired” to react against them not to implement them. Biden recent tapering of the oil reserves following the oil price increase as an example. If history is a guide, the increase in gas prices that a carbon tax is designed to cause, will be followed by the government releasing oil reserves to reduce that very same prices.
And no matter what you do with the proceeds. A carbon tax, if works, can only mean voters consume less gas and less electricity because they are priced out of these goods. They are not going to like it.
Do you really think that if you handed them some cash and say to them “but you are not allowed to expend this cash in emission producing goods or service” they are going to be ok with “the rich” (that horrible group!) still consuming the products they can no longer afford?
And once this “hand out” became an “entitlement” (as it sure will, again, use history as a guide), how are the government going to phase it out? After all the final objective of a carbon tax is to reduce the tax base until making it disappear.
Using a carbon tax (aimed at reducing emissions) to finance a kind of (declining) UBI … I really don’t get it
Comments are closed.