Response to Scott Sumner on the Carbon Tax
In a comment on Bryan Caplan’s latest post, “Climate Shock Bet: Daniel Reeves Responds,” November 10, 2021, co-blogger Scott Sumner writes:
Revenue neutral carbon taxes are a low hanging fruit that we have foolishly declared impractical.
Are they really low-hanging fruit? It’s not that clear. I wrote about this in “A Case Against the Carbon Tax For All Ideologies,” July 28, 2018. The gist of my argument is this:
If it turns out that the most efficient way to deal with global warming is a carbon tax, then, yes, the carbon tax is the best way to deal with global warming. But we don’t know that the most efficient way to deal with global warming is with a carbon tax. All we know is that the most efficient way to reduce carbon usage is with a carbon tax.
But there are other alternatives for dealing with global warming that don’t involve reducing carbon usage. Most geo-engineering solutions are in this category.
Take an extreme case. Let’s say that using the Nordhaus model, you conclude that the optimal carbon tax, given that your goal is to reduce carbon usage, is $40 per ton. This will cost hundreds of billions of dollars and even trillions of dollars over years. But what if a geo-engineering solution that doesn’t involve reducing carbon costs only $1 billion. You can’t argue that the carbon tax would reward the person or company–I’m looking at you, Nathan Myrhvold–that produces this solution. The reason: the geo-engineering solution didn’t reduce carbon one iota. So we will have chosen a very expensive solution when a cheaper one was available.
In that case, the carbon tax is not low-hanging fruit at all.
Now you might argue that there’s no harm done because a carbon tax could replace other taxes that cause even more deadweight loss. That could be true. But if you look at the various proposals, the most likely is a carbon tax that simply gives a rebate per family. So there is no reduction in deadweight loss.
You also might argue that there is no harm done by a carbon tax because it’s internalizing an externality. But if you argue this, you’re begging the question. When we as economists observe an externality, we want the least-cost solution and that is not necessarily a tax solution.