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The case for a carbon tax

We should have a steadily rising carbon tax.

Nobody really wants to hear that, including not just the real opponents of creating such a tax but also hardworking environmental activists and progressive political entrepreneurs who want to create a more exciting alternative. A reader involved with environmental activism, for example, asked me to comment on David Roberts’s Vox article about “supply-side” CO2 restrictions and his contention that “it’s time to apologize to activists and make fossil fuel supply restrictions part of the climate policy toolkit.”

I give all credit where due to activists and 100 percent understand why “keep it in the ground” rather than “let’s have a big tax increase” is the center of their work.

But it’s worth thinking this through analytically.

  • The good thing about restrictions on fossil fuel extraction, from a social viewpoint, is that it reduces pollution. The bad thing is that it raises prices.
  • The good thing about a carbon tax, from a social viewpoint, is that it reduces pollution. The bad thing is that it raises prices.

So these are actually pretty similar ideas. But the carbon tax has two key advantages. One is that on the margin, it pressures the dirtiest sources of energy (right now, coal) while supply-side restrictions pressure the sources of energy for which there happen to be a lot of new exploration for (right now, mostly gas).

Perhaps more importantly, the carbon tax raises revenue as it raises prices, and that revenue can be put to work. Supply-side restrictions, by contrast, generate windfall profits for the fossil fuel producers that don’t get shut down.

Taxing polluters is better.

So what do you do?

What ought to happen is that the US sits down with the European Union and Japan and decides on a carbon tax. The initial tax should be low, but it should be set to escalate. And the three big players in the global economy should also agree to impose a fairly stiff tariff on any country that doesn’t agree to join the carbon tax club.

Right away, a bunch of countries will want to join the club, and with each new country that joins, staying out of the club becomes costlier.

That’s what one of this year’s Nobel Prize winners in economics, William Nordhaus, has been saying for years. And while the argument between him and some people in the scientific community over exactly how high the carbon tax should be (economists are generally more optimistic than scientists about adaptation to 2 to 3 degrees of planetary warming) is important, the basic directionality of the needed change is pretty clear and obvious.

But activists, unlike me, need to find a politics that actually works politically. I think it’s pretty clear that this wonky pitch has failed, over and over again, in a range of times and places.

So folks are trying other things, which is appropriate. Supply-side targets make sense in that regard. The ”Green New Deal” concept seems promising in some ways. Funding moonshot-type research on storage seems like a no-brainer to me, as do prizes for incremental progress on photovoltaic panels. This is all good stuff in the sense that you have to try to solve problems in the world as it exists.

But conceptually, when the problem of climate change first came to be understood, it seemed like the right solution was a graduated tax on greenhouse gas emissions. And decades later, that’s still clearly the first best solution.

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