Carbon taxes

Well, yes Irwin. Quite.

All of this makes it even more urgent that attention be paid to green policies, as these will not only reduce the emission of greenhouse gasses, but dependence on carbon-based fuels. George Osborne has been trying to do just that by pressing for a tax on carbon or on CO2 emissions. "There are very strong arguments for shifting the burden of taxation away from work and investment and towards pollution," says the shadow chancellor in what might be a precursor of a new Tory slogan: "pay when you burn, not when you earn".

Payroll taxes make it expensive for businesses to create jobs; income taxes discourage workers from taking jobs, especially when an overly generous benefits system is available. Government subsidies of "winners" such as renewable and nuclear energy are costly and must be paid for by job-destroying taxes, or still more borrowing. And they don\’t create sustainable jobs.

There is a simple rule that should guide policy – tax bads, not goods. Pollution is bad, jobs are good. CO2 emissions are especially bad. It would be imprudent to ignore the possibility that they might be contributing to global warming; we have seen how countries in which God has seen fit to locate oil and gas can use them as a foreign policy weapon.

So, tax those emissions or the use of fuels that produce them.

Great. So what level should these taxes be set at? How about equal to hte damage that such emissions do? That\’s the logic of Pigou taxation after all. And what is that level? Around $85 a tonne CO2 according to Stern. And what are emissions? 500 million tonnes a year from the UK. Some $40 billion a year then. OR, when we run it through the PPP exchange rate, take account of time etc, the Defra idea of about £15 billion a year.

How much do we already pay in such emissions taxation? Why, around and about (some say much more but that\’s being a little over the top) £15 billion a year. So, good, problem solved.




7 thoughts on “Carbon taxes”

  1. “So what level should these taxes be set at? How about equal to hte damage that such emissions do? That’s the logic of Pigou taxation after all.”

    Is it? Not being contrary here, but isn’t the idea to correct an externality by providing an incentive to alter behaviour. Wiki suggests this: “A tax shifts the marginal private cost curve up by the amount of the tax. Faced with this cost increase, the producers have an incentive to reduce output to the socially optimum level by reducing the marginal externality to the marginal tax.”

    I’m not in favour of emissions taxing, but surely the logic would be to raise them until behaviour changes.

  2. Sorry. Failed to close my tag.

    Tim adds: No. The point is “socially optimal”. There are costs and benefits to everything. We want behaviour to change to the point that we are fully accounting for the costs of the externalities in our calculation of costs and benefits. We don’t want behaviour to change to the point where the externalities no longer exist….for that is failing to take account of the benefits of the actions that we’ve just taxed out of existence.

    For example, some water buffalo farting does indeed increase the chance that a Bangladeshi farmer will be drowned along with boiling flipper in 2200 or so. That’s a bad thing, a cost. But that water buffalo farting also means that some rice farmer can plough his paddy this year and next. That ‘s a good thing, a benefit. What we want is the socially optimal balance between people eating this year and people and flipper not drowning/boiling in 2200. Thus, we discourage the use of the water buffalo today by taxing the amount of damage that such use will cause in the future (I’m ignoring discount rates and lots of other complexity). We don’t ban wbs, we just make sure the use covers the bad things.

  3. Yes, I see that – thanks for the explanation – but the idea of changing behaviour is still there. What troubles me about emissions is that is a point beyond which behaviour can’t change, or can’t change without accompanying structural changes in the economy and society. At that stage, which we might have reached some time ago, such taxes are just taxes and don’t do anything at all to balance perceived externalities.

    Either I travel to work or I don’t. If I do, how does an increased tax (or even the present level of tax) optimise the social consequences of my action?

    Tim adds: Marikets don’t adjust immediately. In fact, there’s at least one serious economist who thinks that it takes a century to reach a new equilibrium after an exogenous shock….and a change in tax rates can be considered such. I think a century is probably too long but that’s just opinion. The increased tax will alter your decisions over the entire timespan that you take such decisions. Which job you take next, whether you commute, home work, drive, walk, cycle….all are, over time affect by that tax change.

  4. Irwin’s argument that “CO2 emissions are especially bad” is based on the possible contribution of such emissions to “global warming”. It is sad to see that someone whose articles are usually soundly argued feels it necessary to assert a tenet of the anthropomorphic climate change religion to justify the anathematisation of thug-led regimes like Russia and Venezuela and other less overtly thuggish but still unattractive regimes in the Middle East and Africa. Why visit the intellectually barren wastes of ACC when it seems obvious that not decreasing the extent to which the use of oil and gas underpins Western economies gives the regimes of which Irwin disapproves inordinate influence over our lives?

  5. “Great. So what level should these taxes be set at? How about equal to hte damage that such emissions do? That’s the logic of Pigou taxation after all.”

    The same logic also says that the income tax, VAT, etc. should be set at zero, as they don’t have specific negative externalities. If that approach gives enough revenue for all government functions, then great, problem solved.

    If not, then a tax will have to be increased beyond the optimum Pigovian point. At that point, I’d say it still makes more sense to increase resource based taxes such as fuel duty, as that will continue to reduce a negative externality and therefore be less damaging than increasing income or sales based taxes.

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