You support a tax on carbon emissions — a rogue or even radical position among many Republicans, including those who accept climate science. Can you briefly state your position on this issue?I’m not a scientist. I don’t even try to pretend to judge the accuracy of climate science. But I understand that science is about probabilities, not certainties. I can read the consensus of scientists, so I take that as a given and go on with economics. I understand that the sooner we deal with this problem, the less costly it’s going to be
And a carbon tax is the most expedient solution?
I’m in favor of tackling climate change in a way that uses the lightest hand of government as possible. That is, to put a price on carbon and incentivize people to reduce carbon emissions through a variety of different channels, allowing individuals to figure out what’s the best way to do that. Is it best to drive smaller cars? Is it best to carpool to work? Is it best to move closer to work? Is it best to commit to public transportation? There’s lots of different ways to change your carbon footprint. Regulations tell you how you should do that, whereas putting a price on carbon nudges people in the direction of reducing their carbon footprint but allows individuals to decide what’s the best way for them to do that.
Let’s get into a bit more detail on the carbon tax you advocate—how will this work?
The basic idea of a carbon tax is mainly to put a price on carbon, to directly raise prices on carbon. Once you put a price on carbon, people will conserve on carbon emissions, just like they conserve on other things that are costly. That doesn’t mean we should raise taxes overall, though. If we put a price on carbon and raise revenue through that carbon tax, we can then take that money and funnel it back to people by reducing sales taxes, income taxes, or other taxes. If we’re smart about how we cut other taxes, there’s no reason that this should be a net tax increase, nor does it need to change the distribution of the tax burden among the rich vs. poor.
Why the emphasis on revenue neutrality?
There’s no question that all consumers are going to end up paying higher prices for carbon-intensive goods. If you want to make this politically palatable to people, so that they’re incentivized but not necessarily worse off, you need to turn around and say, “Look, whatever revenue we’re collecting from this, we’re giving back to you.”
Is advocating a carbon tax political suicide for Republicans? Is it politically feasible?
Ultimately, if we want good carbon policy, the key is not to convince the politicians, the key is to convince the voters. Unlike professors like me, politicians don’t have tenure — they’ve got to get elected constantly. Once the voters want this, the politicians will quickly decide they want it too. I’m a big believer that in our democratic system, the politicians aren’t the leaders, the voters are the leaders. That’s why I write op-eds, because ultimately I want to convince the general public.
The vast majority of Republican presidential contenders are resisting modest steps to address climate change and even rejecting the science of climate change. What do you make of this state of affairs, of the infighting and polarization within the Republican Party on this issue?
I think [a carbon tax] scares people on the right because they’re of the view that this is not just trying to put a price on carbon, this is also trying to expand the size of government. Those two issues should be debated very distinctly.
If we start with a small carbon tax and the revenue really were rebated, I think over time a lot voters would say, “That worked out reasonably well.” And if we push it a little bit and continue to rebate it, they’ll see that it works just fine, and we can actually make more progress going forward.
What will it take to mobilize and unify the Republican Party around this issue?
I think you can get buy-in from people on the right if you can convince them that we’re going to cut income taxes, which they’ve been paying, in order to add carbon taxes, which they may not be fond of, but maybe aren’t as bad an income taxes.
Why a carbon tax and not a cap-and-trade system?
A carbon tax is much simpler. In cap-and-trade, one of the issues becomes: how do you allocate those permits for carbon emissions? A fully auctioned cap-and-trade system is very, very close to a carbon tax. But in practice, people who write the bills often don’t auction [all the permits] off, and [politicians] start using these permits to start paying off particular constituencies politically. That means that you’re basically pricing carbon, but you don’t have the revenue that you can use to reduce people’s taxes.
Do you think that good climate policy could actually be a boon for the U.S. economy — that it could increase economic productivity and be a net positive in the long run?
It’ll be a net positive in the sense that we won’t have to deal with fallout from climate change. But no — if it weren’t for the impact on climate, we wouldn’t be doing this. I don’t think a carbon tax would be a good thing in and of itself. I wouldn’t still be in favor of a carbon tax for some other economic reason. Sometimes people on the green side want to push this as a big boon to the economy independent of the climate stuff, and I find that overselling the point.
Carbon pricing — whether carbon tax or cap-and-trade — can’t on its own provide the big, swift emissions cuts to keep warming below 2 degrees Celsius and stave off the worst climate impacts. What complementary policies are necessary?
One of the beauties of a carbon tax, for me, is that it makes a lot of other policies less necessary. You don’t need all the regulations, you don’t need what economists refer to as control solutions. You let the market work it out.
What about caps on power plant emissions, let’s say, or car emissions standards, or restructuring energy subsidies?
I think putting a price on carbon moves everything in the right direction without the direct regulation. A carbon tax automatically incentivizes low-carbon forms of energy, so automatically wind and solar and technologies we haven’t even heard of yet are going to have an advantage relative to coal. People will automatically start thinking that electric cars are better than gas-powered cars.
I’m personally skeptical when the government tries to direct specific technologies. I mean, one of the open questions is, what are the best technologies of the future? I’d rather have the Elon Musks of the world making those bets than having a bunch of congressmen trying to decide what are the technologies of the future.
I’m conservative — I want limited government. But I want limited government that makes sure the private market is doing the right things. And in this case, the private market won’t do the right thing unless we put the price on this scarce resource.
Elon Musk is an advocate of a carbon tax, with the idea that it could catalyze the cleantech industries, and possibly be a job-creation engine.
Again, I wouldn’t push a carbon tax as a huge job creator. Some jobs will be created, some jobs will be destroyed. Some industries will grow, some industries will shrink. I don’t think the overall economy’s going to boom.
Critics of your work have argued that your economic theories are not politically practical, that—
Oh, maybe not right now, in a political primary dominated by Donald Trump. Right now, the dynamic in the Republican Party seems odd to me. I would never have predicted we would be where we are right now. But as an academic, I’m here to propose ideas, what I think are the right ideas, and convince people that I’m right, and hope that the politics will eventually fall in line.
Also, I’m not a political adviser. When I talk to any candidate, I say, “I’m going to tell you what I think is right, not what I think is politically expedient. Other people are going to tell you what’s politically expedient.” That’s not my job description.
From a Republican standpoint, a carbon tax is a pathway toward deregulation of the energy industry. You can say, look, we’re going to put a price on carbon so people are properly incentivized, they don’t have to meddle in all of your affairs. So, if you believe in deregulation, or a light touch of government, then a carbon tax is consistent with that, and that’s, I think, one of the ways to sell this to the right. Not only is revenue neutrality important, but also that it can go hand-in-hand with the deregulation agenda.
Qui una spiegazione più tecnica:
I appreciate David Leonhardt’s kind words about my recent Times column on the problems with giving away, rather than auctioning, carbon allowances. I thought it might be useful to explain a bit more some of the economics behind what he calls my Rorschach test. Here is the more wonky way of putting some of the arguments.
We can think of the typical household as having to make two decisions. First, the household decides how much to work and consume. This is the standard consumption-leisure tradeoff. Second, the household decides how to allocate consumption between carbon-intensive products and less carbon-intensive products.
Mathematically, we might write utility as
U = u(C) + v(L)
where C is consumption and L is leisure. Consumption is a composite of carbon-intensive consumption C1 and less carbon-intensive consumption C2, which we can write as
There are two margins of adjustment: between C and L, and between C1 and C2.
We start in a situation in which each of these margins of adjustment is distorted. Because earnings are taxed via income and payroll taxes, people have too little incentive to work and consume. In addition, because there is a negative externality associated with carbon, people have too little incentive to move their consumption basket toward less carbon-intensive products. In other words, the relative price of consumption compared to leisure is too high, and the relative price of carbon consumption compared to noncarbon consumption is too low.
The trick is how to fix the second distortion without making the first one worse. A tax on carbon with the revenues used to cut income taxes does that. Everyone who thinks there are negative carbon externalities should agree that is the efficient policy.
A tax on carbon with the revenue squandered via lump-sum handouts to powerful special interests, however, fixes the second distortion but makes the first one worse. The good thing about this policy is that it raises the price of carbon-intensive consumption relative to less carbon-intensive consumption. The bad thing about it is that it also raises the price of consumption relative to leisure—that is, it depresses the real wage. The basic problem is that a new tax on carbon-intensive products C1 is also an additional tax on consumption C, unless there is some other offsetting tax change.
This is where the Rorschach test comes in. A carbon tax without a compensating income tax cut makes one problem better and one worse. The question then is which problem is bigger. I don’t think there is a consensus among economists on this last question. That is why reasonable people can disagree about the bill being debated in Congress.
But there is a consensus, more or less, that we could fix one margin of adjustment without distorting the other margin more. That requires a cut in income or payroll taxes to be a key part of the environmental policy.