Flirting with a carbon tax

by Aaron Wherry

The Wall Street Journal, Associated Press and Nature review the current American discussion of a carbon tax.

“The time seems ripe for this discussion. The president is committed both to raising tax revenue and to dealing with climate change. A carbon tax kills two birds with one stone,” said Gregory Mankiw, a Harvard economist who advised the Romney campaign and has long pushed for more efficient taxation, including a carbon tax.

Al Gore calls on President Obama to implement a carbon tax. The Brookings Institution tables a proposal. And a Treasury Department official invites Republicans to get behind the idea.

“If this is going to be an issue that is part of discussions, there will have to be some interest shown by Republicans if we are going to make any progress,” Gilbert E. Metcalf, the Treasury Department’s deputy assistant secretary for environment and energy, told reporters.

“The administration has not proposed a carbon tax nor is it planning to, but if there is, as part of fiscal reform discussions, there are a lot of pieces on the table, and if Republicans see this as a viable piece, then it could be part of the mix,” he said.

See previously Meanwhile, in the United States, A carbon-tax swap? and ‘A carbon tax should be atop the list’.




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Flirting with a carbon tax

  1. Let’s indulge in a thought experiment for a minute here.

    Suppose the government decides its policy goal should be to reduce smoking, for illustrative purposes suppose the government wants only 1,000,000 cigarettes to be sold yearly in Canada. It can go about this in 3 ways:

    1) impose a tax on cigarette sales – analyze price trends and determine which tax rate would drive cigarette sales down to the desired 1,000,000 sold
    2) sell licenses to sell 1,000,000 cigarettes to convenience stores/etc, allow stores to trade these licenses among each other
    3) impose a regulation that only 1,000,000 cigarettes can be sold in Canada, the government dictates to every store in Canada how many cigarettes it can sell, adds enforcement mechanisms to ensure stores don’t sell more than they’re allowed

    All three approaches would bring about the desired level of smoking. Also, all three approaches raise the price of cigarettes to consumers by the same amount (directly in #1 and #2, indirectly in #3 by way of supply and demand – see Stephen Gordon’s post with the supply/demand curves if you don’t believe me on this)

    From there, how are options 1-3 differentiated? #1 and #2 raise revenue for the government, which could go to income/corporate tax reductions or program spending. #3 does not raise any government revenue, but still imposes the same cigarette price to consumers as #1 and #2. I think a reasonable person would also say that #3 would be the most expensive to administer and #1 the least expensive.

    Any person that believes in free markets and market-oriented mechanisms would agree approach #1 is the most efficient approach to reduce smoking.

    Now, stroke out every mention of the word “cigarette” above and insert carbon. Discuss. Bill and other Tory-leaning posters, I’m looking in your direction.

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