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.
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The Cost of Cap-and-Trade

The Obama administration plans to establish a cap-and-trade system to reduce carbon emissions. Economists generally consider a cap-and-trade system[1] or a Pigovian tax[2] to be the best methods to correct market failures caused by externalities[3]. Both methods purposefully increase the cost carbon dioxide producing goods and services. Commitment to carbon dioxide emissions seems to come at a time when many climate scientists are expressing skepticism about the link between carbon dioxide emissions and global warming, and about the anthropogenic contribution to climate change.
Tom Lobianco, writing for the Washington Post in “Obama climate plan could cost $2 trillion,” reports that,
President Obama's climate plan could cost industry close to $2 trillion, nearly three times the White House's initial estimate of the so-called "cap-and-trade" legislation, according to Senate staffers who were briefed by the White House.
At the meeting, Jason Furman, a top Obama staffer, estimated that the president's cap-and-trade program could cost up to three times as much as the administration's early estimate of $646 billion over eight years. A study of an earlier cap-and-trade bill co-sponsored by Mr. Obama when he was a senator estimated the cost could top $366 billion a year by 2015.
Paul Fuhr reports for the examiner.com in “More than 700 scientists discredit man-made global warming fears,” that
According to a new report, the 700-plus scientists are “now more than 13 times the number of U.N. scientists who authored the media-hyped IPCC 2007 Summary for Policymakers.” Many of the scientists are “affiliated with prestigious institutions” including NASA, the U.S. Navy, the U.S. Defense Department, Princeton University, as well as countless others.
Skeptical scientific voices are enjoying more and more company in past weeks, especially in light of a recent article published in The Australian that says Japanese scientists are largely rejecting man-made global warming claims. Japanese Geologist Dr. Shigenori Maruyama, professor at the Tokyo Institute of Technology’s Department of Earth and Planetary Sciences, said this month that “there was widespread skepticism among his colleagues about the IPCC's fourth and latest assessment report that most of the observed global temperature increase since the mid-20th century 'is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.'"
According to a report published by the U.S. Senate Committee on Environment and Public Works, Maruyama noted that when this question was raised at a Japan Geoscience Union symposium last year, "the result showed 90 percent of the participants do not believe the IPCC report.”
I am not a climate scientist, but I do know something of the collection and reporting of data. Linking of climate change to carbon dioxide emissions is extraordinarily difficult. The only forecast of which I am familiar, discussed in “A Prediction Market for Global Warming,” finds that a forecast of no climate change more predictive over long periods than the .03 degree Celsius benchmark set by the IPCC. Meanwhile, at Hubdub, Armstrong leads Gore 64 to 36%.
[1] A cap-and-trade system would establish a permissible level of carbon dioxide to be emitted per year. The permissible level of emission would be below current levels. The government would sell the permits to polluters. To maintain production, polluting firms would be forced to adopted or create technologies to reduce carbon dioxide emissions or curtail production. The government could continue to reduce emissions by attaching a periodic reduction of emissions to permits, or by buying back permits.
[2] A Pigovian tax, named after Cecil Pigou, would attach a per unit tax on fuels that release carbon dioxide into the atmosphere. Greg Mankiw is a leading supporter of a carbon dioxide based Pigovian tax (See “The Pigou Club Manifesto”).
[3] An externality is the byproduct or spillover of the production, sale or consumption of a good or service that affects a third party who did not a participant in its production, sale or consumption.

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