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The public policy blog of the American Enterprise Institute
Nobel laureate Ronald Coase, who died on Monday, criticized “blackboard” economics that lived “in the minds of economists but not on earth.” Coase’s influential work also questioned whether taxing bad but unpriced side effects — like carbon pollution, for instance — was an optimal solution, even assuming transaction costs like identifying harmed parties. It might be better to assign property rights and let people negotiate payment. No need for lots of government meddling.
As it happens, economist Greg Mankiw again makes the case, via his New York Times column last weekend, that a Pigovian carbon tax is the most economically efficient way — certainly as compared to government mandates — for the US reduce to climate-altering carbon emissions. Mankiw:
If the government charged a fee for each emission of carbon, that fee would be built into the prices of products and lifestyles. When making everyday decisions, people would naturally look at the prices they face and, in effect, take into account the global impact of their choices. In economics jargon, a price on carbon would induce people to “internalize the externality.” … [And] the new revenue [could be used] to reduce personal and corporate income tax rates.
Elegant. Simple. But what would Coase make of the idea? Mankiw’s other writings suggests he assumes prohibitively high transaction costs for a property-rights solution to climate change. Imagine assigning global atmospheric property rights and trying to calculate gain and loss. Seems sort of silly. Maybe the Coase theorem doesn’t apply in this case.
But perhaps a carbon tax does run afoul of Coase’s warning against blackboard economics. Mankiw makes the whole thing sound pretty straightforward. Then again, silver-bullet policies are rare. As the Fraser Institute’s (and former AEIer) Ken Green has noted, a national carbon tax would be regressive, raise the cost of energy inputs for business, and likely be layered on top of existing regulations. What would be the right price, exactly? And wouldn’t government become addicted to the new revenue stream? After all, the goal isn’t to maximize tax revenue, but to reduce carbon emissions — and thus carbon tax revenue — over time.
Northwestern University’s Monica Prasad argues that Demark’s experience with carbon taxes is instructive: “Unless steps are taken to lock the tax revenue away from policymakers and invest in substitutes, a carbon tax could lead to more revenue rather than to less pollution. … If we want to reduce carbon emissions, then we should follow Denmark’s example: tax the industrial emission of carbon and return the revenue to industry through subsidies for research and investment in alternative energy sources.” Indeed, approximately 40% of Danish carbon tax revenue is used for environmental subsidies, while the other 60% is returned to industry.
One promising research path is geoengineering. In a recent proposal presented at AEI, Lee Lane and J. Eric Bickel highlighted two methods or reflecting solar radiation back into space. The researchers estimate that for an annual cost of approximately $20 billion to $32 billion, it might be possible to counter a doubling of CO2 emissions and avoid trillions of dollars in future economic harm.
Economists love the carbon tax. The American public, not so much. More work is needed to get the idea off the blackboard.
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