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Brooks Wilson's Economics Blog: Nordhaus and a Carbon Tax

Wednesday, October 27, 2010

Nordhaus and a Carbon Tax

The slow growth of the economy, high levels of deficits, and mounting government debt are all pressing issues.  William Nordhaus, the Sterling Professor of Economics at Yale, describes how a properly instituted carbon tax improves all three problems in “Carbon Taxes to Move Toward Fiscal Sustainability” for The Economists’ Voice
The desirable features of any tax are that it raises revenues in a manner that has minimal distortionary effect on the economy and reinforces other objectives of national policy. The following are the major reasons that a carbon tax meets these objectives. I will provide these in a summary form. The background literature provided below explains these in greater detail.

· A carbon tax can raise a substantial amount of revenue over the coming decades.

· It is an instrument that has been used in other countries and is well understood.· It is virtually the only tax under consideration that will increase economic efficiency because it reduces the output of an undesirable activity (carbon dioxide emissions)…

· The carbon tax will move a long way toward implementing Congress’s and the Administration’s goals for climate change policy…

· A carbon tax will help meet international commitments that the U.S. has undertaken to reduce its carbon dioxide and other greenhouse gas emissions. 

· A carbon tax will have substantial public health benefits because it will reduce harmful emissions, particularly those associated with burning coal.

· A carbon tax can buttress or replace many inefficient regulatory initiatives and will thereby provide yet another improvement in economic efficiency.

· A carbon tax could supplement ore replace the cap-and-trade approach to limiting emissions…
If I believed that carbon dioxide emissions were the cause of recent global warming, that the cost of unfettered carbon dioxide emissions were catastrophic or even very high, and that U.S. action would spur others to act similarly, I would certainly support the proposal.

As it is, it has value but as a replacement to current tax systems.  Even if carbon dioxides are not a serious problem, carbon based fuels emit other pollutants that are harmful if not catastrophic in nature as noted by Nordhaus.  While it might be more efficient to target each carbon based pollutant, it might be simpler to target carbon based fuels.  Also as noted, a carbon tax could and should replace “many inefficient regulatory initiatives.”  Sign Nordhaus up for the Pigou Club and sign me up too.


  1. Taxing carbon emissions will have more of an effect on the end user, than the emitter. The increased costs associated with direct taxes or cap & trade will be passed on to the consumer. If the government placed a binding ceiling on the companies then consumer price would be stable, but only to the point that we begin losing power. Without the reasonable expectations of making a profit there is no incentive for companies to improve infrastructure or expand production. Long term solutions need to provide incentives to move away from carbon based fuels and develop new forms and sources of energy.

  2. Ilse Rojano6/11/10 3:07 PM

    From the reasons given in the blog, I believe that taxing carbon will have a positive effect on the economy now and in the long run.

  3. Erica Caffey8/11/10 4:40 PM

    If the carbon tax did what it says it will do, I would certainly support the proposal. Global warming is increasingly becoming an issue internationally, and if the carbon tax were to decrease carbon emissions that were causing it why not support it? It will not only help our world's health, but personal health also.

  4. Sabine Wohlschlag10/11/10 9:15 PM

    I believe that overall creating a carbon tax will be beneficial to the United States. Currently, as much as carbon is used in our country, taxing it could help put money towards our national debt. Furthermore, eventually the tax will give people incentives to invest in and create better ways of using energy, which will lead to the improvement of our environment, as well as possibly creating new jobs.