March 2007
What are the advantages and disadvantages of carbon and gasoline taxes? At this March 29 conference, Ian W. H. Parry of Resources for the Future and AEI's Kenneth P. Green, Kevin A. Hassett, and N. Gregory Mankiw examined the pros and cons of carbon and gasoline taxes, discussed possible levels at which they could be set, and compared taxation to regulation as an alternative way to address environmental concerns.
N. Gregory Mankiw
AEI and Harvard University
Higher Pigovian tax rates are an economically and politically beneficial idea for the United States. Carbon emissions affect third parties who are not part of the market transaction and taxes can help correct the market failure. Taxes are an economist's approach to lowering carbon emissions. Regulations like Corporate Average Fuel Economy (CAFE) standards are counter-productive and increase congestion and other indirect effects; cap-and-trade markets unfairly donate revenue to existing polluters.
The U.S. government is going to spend money and will need taxes to fund its spending. A tax on gasoline is better than income and other taxes. The wealthy will reduce emissions and the poor will not lose money. Studies show that those in lower income brackets devote a significantly smaller proportion of their income to fuel.
A Pigovian tax is not a popular idea nationally, nor is it politically feasible at this time, but it is an idea that needs to be pursued. It is the best method to lower carbon emissions.
Ian W. H. Parry
Resources for the Future
Carbon-dioxide (CO2) emissions should be taxed at a reasonable level that will equal the future world costs of each ton emitted. By including GDP losses, health impacts, and other factors, most studies suggest that a price of $5-15 per ton is necessary. Fiscally, a CO2 emission tax is ideal. Revenues from the tax could be used to reduce other taxes, and the cost of reducing emissions is far less under a tax than a CO2 emissions permit market. Permit trading would create volatile CO2 prices and deter outside investment in the market.
A CO2 tax could present possible problems. It is politically difficult to implement a new tax, revenues could be wasted by unwise spending, and important producers may require additional compensation. The cap-and-trade system could be made possible if as many allowances as possible are auctioned off and a price ceiling and floor is used to control permit-price volatility.
Kevin A. Hassett
AEI
"Energy independence" is an economically meaningless term in today's global economy. The United States imports more than sixty percent of its oil. Even if we began to produce more domestically, oil is a world commodity set at a world price. Price fluctuation in the Middle East would have the same effect on domestic prices. Using up domestic resources simply makes our economy more susceptible to market disruptions in the future.
The U.S. government currently plays political favorites in subsidizing alternative energy. These energy sources are limited; devoting all U.S. corn to ethanol production would produce only enough ethanol to replace twelve percent of gasoline consumed. Implementing a CO2 emissions tax would drive up the prices of environmentally harmful fuels and provide enough revenue to reduce other taxes.
A carbon tax of $15 per ton would generate $80 billion per year in revenue while raising the prices of carbon-based energy sources. U.S. reliance on carbon-based fuels would drop considerably, and the additional revenue would allow for a 28 percent reduction in corporate tax rates. Current U.S. energy policy is intellectually and politically unjustifiable. Erasing everything and enacting a carbon tax would be a great step forward for our country.
Kenneth P. Green
AEI
There are ten problems related to a carbon tax: First, the carbon tax does not guarantee any set level of reductions. Especially in the United States and Canada, the wealthy are likely to continue spending at high prices since they already have so much money. Second, this tax could be dead on arrival on the Right, as well as for green groups who do not want to be seen as a new IRS. Third, will the tax be offset? We may end up with an additional tax instead of a replacement tax. Fourth, the Left may push to overcompensate for the regression of the tax and make it redistributionist. Fifth, since we do not truly know what the benefits or risks of climate change are, the carbon tax is completely arbitrary and may not offer the benefits projected by supporters. Sixth, the tax may disturb the existing free market in carbon offsets. Currently, people can go out and buy carbon permits or alternative fuels that are lowering emissions. Seventh, taxing externalities, like carbon emissions, is a difficult idea since there are so many. How can we tax one and not another? Or do we just tax as many as possible? An eighth argument is that a carbon tax will improve national security, which is not so. The two last arguments are based on possible U.S. emotions. Carbon taxes would affect the very industries that fueled the growth of our nation. Finally, decreasing the corporate taxes as a carbon-tax offset simply gives more money to the wealthy and increases income inequality. These devil's advocate arguments illustrate conflicting viewpoints that may destroy any carbon tax success.
AEI intern Jenna Lally prepared this summary.
