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.