Tyler Cowen has some good introductions into the work of the new Nobel Laureates, William Nordhaus and Paul Romer. While both have done lots of outstanding work; I’ll just offer a few random comments on the implications of their ideas for policy.
Nordhaus has done some very influential modeling of the problem of global warming. He calculates the optimal carbon tax at roughly $40 per metric ton. I believe that’s equivalent to about 36 cents per gallon of gasoline. Of course carbon taxes apply to more than just gasoline, most notably the fossil fuels burned in the process of generating electricity, as well as other energy intensive industries such as steel, cement, and the heating of buildings.
I’ve always been struck by the modest size of this estimated optimal tax. To put the number in perspective, Western European countries typically have gasoline taxes that are several dollars per gallon. Alternatively, the price of gasoline in California is roughly a dollar higher than in Oklahoma. An optimal carbon tax would not require a dramatic adjustment in our lifestyles, as evidenced by the fact that Californians continue to rely on the automobile, despite high gas prices. This isn’t to say the effects of a carbon tax are not in some sense “large”, they are. Indeed if they were not large then they would not be effective. Furthermore, the optimal carbon tax is expected to rise substantially over time. Rather my argument is different; an optimal carbon tax does not cause a dramatic change in lifestyles. You can have a carbon tax and still maintain a modern, auto-centric, industrial economy.
In the past, I’ve argued that the GOP should do a deal with the Democrats, agreeing to a carbon tax in exchange for an equal reduction in other more highly distortionary taxes, such as the corporate income tax. You could adjust the progressivity of the payroll tax to make the change both tax revenue neutral and progressivity neutral. Also keep in mind that carbon use has some pretty severe externalities beyond “global warming”, so even if you don’t believe in the former being a huge problem, a tax on carbon is almost certainly less distortionary than a tax on capital. (Think of all the people that die from air pollution, for instance.)
Today, the GOP has already done one half of that deal, without permission of the Democrats. They’ve done the tax cut. What remains is to fill the revenue gap by either cutting entitlement spending, adding a VAT, or adding a carbon tax. I doubt the political will for entitlement cuts exists, and I’d prefer a carbon tax to a VAT. You might ask, “How about letting the national debt as a share of GDP grow without limit?” Do you believe in the tooth fairy?
Paul Romer did important work on the role of ideas in economic growth. Recently, there’s been a lot of concern about the rise of China’s high tech industries—will they become a rival to the US? Here’s Russ Roberts interviewing Romer on a closely related example:
Russ Roberts: So those articles that talk about the threat to our prosperity of 200 million Indian engineers or 200 million Indian software designers are missing the boat.
Paul Romer: Yes, or even worse, the threat to our biotechnology industry if everybody else develops a biotechnology industry. What do we care about?
We don’t care about whether our biotechnology industry makes a profit. What we care about is whether we have a drug that treats Alzheimer’s for somebody who might otherwise have a miserable quality of life. The emphasis on the importance of non-rival goods, such as ideas and discoveries, means that there are gains from scale, from trading with bigger and bigger markets that don’t max out. You keep getting more and more benefits from having more people to trade with. This sounds similar to the usual rationale for trade but it’s really quite different.
If China steals our ideas there are two offsetting factors to consider. The theft is bad in the sense that it discourages innovation, by reducing profits. The theft is good in the sense that ideas can be copied at virtually zero marginal cost, and hence transferring ideas to China can dramatically boost human welfare. In the interview, Romer is somewhat agnostic on exactly where to draw the line on intellectual property rights. So am I.
READER COMMENTS
Benjamin Cole
Oct 8 2018 at 8:38pm
Nice post.
I do get an uneasy feeling if the US manufactures nothing and imports everything , to take Paul Romer’s idea to the extreme.
To finance consumption in this model, the US would have to sell assets furiously, or go deeper into debt.
Macroeconomists often appear tone deaf to the desire of people in democratic nations to control their own destinies.
Recent elections in nations as disparate as Indonesia and Brazil seem to suggest that ” nationalism” is on the rise— but is it really nationalism, or rebellion against a global system that appears to strip individuals and nations of self-direction?
I would be happy to do away with nations and go to a global system of city states, minus all the militaries and wars. But for now we have nations.
Eric Rasmusen
Oct 9 2018 at 2:38pm
My city, Bloomington, Indiana, already does that. We have a trivial amount of manufacturing and import everything from other cities.
Brian Saxton
Oct 8 2018 at 11:29pm
Isn’t your proposed deal basically what was on the ballot in Washington state as I-732 in 2016? That proposal was, ahem, not conspicuously supported by the environmental lobby there.
I only bring this up to suggest that there are pretty significant political economy challenges for carbon taxes whose revenue is either already spoken for, or is intended to be refunded. Of course, you never claimed otherwise.
MikeP
Oct 9 2018 at 6:45am
Rather my argument is different; an optimal carbon tax does not cause a dramatic change in lifestyles…. In the past, I’ve argued that the GOP should do a deal with the Democrats, agreeing to a carbon tax in exchange for an equal reduction in other more highly distortionary taxes, such as the corporate income tax.
Considering that the optimal carbon tax is supposed to be the entirety of global warming policy, i.e., it replaces all other subsidies and mandates with respect to energy — including stunningly wasteful mandates like fuel economy standards — it is very possibly an improvement on the inefficient policy we face even today.
But in the real world, the media and political mind share on this topic is dominated by sociopaths like the Citizens’ Climate Lobby, whose carbon fee and dividend most decidedly would cause a dramatic change in lifestyles.
In direct contradiction to the research of Nordhaus, they target a CO2 level or temperature rather than wealth:
And “revenue neutral” doesn’t mean the same thing to these people that it means to you:
Also keep in mind that carbon use has some pretty severe externalities beyond “global warming”…
It is deeply illustrative of progressive thinking that the predicted health benefits of lowering fossil fuel consumption are utterly dominated by reduced local air pollution, but such policies are sold to the public as global warming policies. It’s hard to overestimate the dishonesty.
Watch this play out in the future. Nordhaus’s award will be seen in the media as supporting evidence for environmental policy that is far far to the left of what Nordhaus and his research support.
Bill
Oct 9 2018 at 12:40pm
Robert Murphy (Institute for Energy Research and Texas Tech Univ) has written extensively on the carbon tax. (Google “Robert Murphy, carbon tax.”) One of the points he has made relates to your ” … carbon use has some pretty severe externalities beyond ‘global warming’, … (Think of all the people that die from air pollution, for instance.)” Murphy argues that other policies are already in place that target air pollutant emissions associated with the combustion of materials containing carbon.
Scott Sumner
Oct 9 2018 at 12:48pm
Everyone, I agree that there are formidable political problems with getting to a good policy regime, in this area as in so many others.
Sad!
nobody.really
Oct 9 2018 at 2:56pm
Well, among the obvious political challenges to your proposal is what you’ve already observed:
You seem to have a limited grasp of “deals.” If half the deal is “done,” that means there’s no longer an incentive for half the parties to do a deal. Yes, the revenue gap remains to be filled. But if Republicans had the slightest interest in filling it, they would have done so when passing the tax cut. They didn’t, because they don’t.
Floccina
Oct 9 2018 at 1:01pm
Ideally a co2 tax would not raise any net money for the Government. We would put less in the air and the revenue would be paid out to those who remove co2 for the air semi-permanently (hundreds of years), which might be cheap.
Mark Z
Oct 9 2018 at 1:37pm
One problem I have with externality-based policies is that, if we’re really striving for efficiency, if taxes on negative externalities are appropriate, shouldn’t we also be offering subsidies for positive externalities? People discussing externalities seem to focus almost excuslively on one side of things, which can actually reduce efficiency if the Pigovian tax is imposed on an action that has net positive externalities.
Now one might note companies already receive lots of subsidies, but those don’t usually seem intended to (let alone succeed at) correct for positive externalities.
nobody.really
Oct 9 2018 at 2:44pm
Yes, we should. And yes, it’s hard. We had a discussion about incentivizing geo-engineering a while back.
So, failing to address positive externalities, we might result in an inefficient tax. But inefficient compared to what? Compared to, say, an INCOME TAX? Because pretty much NO ONE favors discouraging income.
Given the inefficiency of an income tax, I suspect that almost any substitute/supplementary mechanism of public finance would improve economic efficiency.
Thaomas
Oct 9 2018 at 3:09pm
If it would be good to offset the distributional effects of a carbon-tax-for-corporate-tax exchange (I agree it would be) why was it not good to off set the distributional and deficit enhancing effects of the reduction in corporate taxes in 2007? And while we are at it how about a VAT-for-wage-tax exchange?
Larry
Oct 10 2018 at 2:12am
Has anyone done a study that contrasted national monetary policies with the stability of economic growth across countries? Could be good.
Comments are closed.