A recent Mid East seminar at Columbia featured a fascinating presentation by Jason Bordoff, the leader of the Columbia Global Energy Center. Unfortunately, due to technical and time constraints, there was little time to discuss the relative efficacy of carbon taxation or its current policy substitute, carbon trading.
Carbon taxation (or carbon trading) is now common but not uniform at all among many industrialized countries, but is likely to become more addressed as concerns about global warming become more amplified in democratic countries.
This script is based on a recent, rather extensive review of the subject by Professor Govinda R. Timilsina (also of the World Bank) that is published in the current edition of the Journal of Economic Literature 2022 60 (4) pp 1456-1502. The review is comprehensive both in terms of the author’s text but also for its extensive Bibliography on these issues. My purpose is to focus attention on the political economy side of Carbon Taxation rather than to elaborate the Timilsina survey.
- Carbon taxation makes sense even if one doesn’t subscribe to all the alleged “findings” in the growing literature in Climatology and the current public debates over the incidence and implications of global warming. One doesn’t have to accept the most extreme global warming “findings,” to be in favor of more rational taxation programs for hydrocarbons as there are other benefits to a rationally implemented, long term policy contour of a generalized carbon taxation format for both the United States and for other countries as well.
- Internationally, it is unlikely that all countries will implement an identical carbon tax profile and to some extent, this is not detrimental to the success of carbon taxation. It allows poorer, less industrialized nations a longer period of wealth growth as smaller contributors to the world’s emission of various hydrocarbon gasses and particulates. It will also allow them to raise the relative price of carbon emission as their national wealth grows.
- A striking benefit for carbon taxation as compared to the trading of carbon emission permits is that a uniform carbon tax rate that escalates over time is its automaticity and comparative lack of a centralized and growing bureaucracy to police the various aspects of carbon trading permits. In principle, one can achieve roughly the same result from either system, but trading the rights to emit carbon gasses involves substantial regulation and enforcement personnel—in short, an enlarged bureaucratic functions. All that is required is a clear statement of the rate of the carbon tax for each form of the many hydrocarbons in a mature, industrial economy. The carbon content of natural gas, or gasoline or diesel or fuel oil is a scientific datum, so the beginning tax rate can easily be determined for each type of fuel. What perhaps matters more is the gradient of the curve that describes the tax rate over time. Presumably, the tax rate should grow in concrete steps as the costs of hydrocarbon emission rise and as the desire to “clean up the environment” seems to grow apace. We see that program as extending over say a 30 year or longer horizon as we gain knowledge about the social costs of emitting hydrocarbons. A long contour also incentivizes private agents to modify production processes and the actual products that use hydrocarbons. How steep the time curve of taxation should be or the intervals at which the tax rate increases can be settled in a nationally held debate over costs and benefits.
- Tax universality—In our view, everyone should be subject to the tax because rising carbon taxes should motivate users to reduce their consumption of hydrocarbons in whatever form they arise: driving a car or truck, consuming electricity derived from a hydro carbon input, taking a plane or train or bus trip; going on tour ship, or simply buying products or services whose inputs require hydrocarbons. The main issue that we see arising in the United States is the old bugaboo, FAIRNESS, with respect to the income class of the consumer. That’s the essential political economy concern.
- Traditional Welfare Economics attempts to differentiate between welfare economic costs even if there is no “compensation” paid. However,compensation is a politically loaded topic, and, in my view, the easiest way to neutralize the compensation issue is to rebate ALL OF THE COLLECTED CARBON TAXES PAID back to the public. That is to say, carbon taxation should not be viewed or used by politicians as a disguised income tax. Rather, it seems to me that the equity considerations militate redistributing the tax revenues gained from carbon taxation on the base of the withholding taxes paid on wage and salary income only.
- Various countries have instituted carbon taxation, with different rates of tax per unit of carbon emission and with different time profiles of taxation. The fact that different countries with different political systems create different “cost-benefit” implications from different tax rates over time is an artifact of different political systems. So be it. The real issue is health and not every country will value the incremental benefit of restricting carbon emissions. For the United States, there is an issue that could be resolved within the understanding that it is a Federal not a State issue that should fall under the interstate prohibition of barriers to trade between separate States.
- A Federal Statute that levied the same tax rate and time profile would be highly desirable. It would achieve a badly needed uniformity for the penalty of emitting hydrocarbons as between states. Presumably, States that feel more strongly on ecological grounds could add their own additional time profile and we might hope they would remit proceeds similarly rather than use State carbon taxation as a State revenue device. They could refund by using their own State income tax structures. At the least, a Federal minimum would exist. A Federal Statute would also not require a vast bureaucratic undertaking, another benefit of universality.
- Ironically, I made this same proposal to Senator Al Gore at a non-partisan Economics and Environment event held in Golden Colorado in 2005 or 2006 before the release of his major social media contribution, An Inconvenient Truth. The Senator seemed to like it a lot at the time, but I am unaware of any subsequent speeches or advocacy publications by Senator Gore advocating this policy proposal.