Taxes aren’t just too high, they’re too dumb. Whenever we put a tax on something, we get less of it. Yet, incomprehensibly, we continue to tax the things we want more of: income, jobs, and savings. Economists used to like that — they thought taxing good things was “neutral.” But it’s not. In a resource-constrained world, it’s much smarter to cut taxes on what we want — like jobs — and make up the difference by raising taxes on things we want less of: carbon, pollution, and waste. – Bill Shireman, President and CEO of the Future 500
The invisible hand of the market is blind to the effects of inputs and outputs that don’t provide any immediate price signals. No where is that more true than in the fossil fuel derived energy markets, where the price signals for resource depletion, air and water pollution, and climate change are either non-existent, understated, or so delayed as to render any “natural” free market correction an economic and humanitarian crisis.
In the case of anthropogenic global warming [AGW], market forces may react to new shipping lanes in the Arctic or improved crop yields in certain parts of the world, but they will not react to species loss or rising sea levels until we are well past the tipping point of no return. So the only way to drive the market to “decarbonize” our atmosphere is for the government to impose a price signal on fossil fuel generated carbon.
We can do this with either a system of Cap & Trade or with a Carbon Tax. Either method would impose a cost on the release of carbon dioxide from the burning of fossil fuels and adjust the price upward to reflect the environmental costs that the “market” fails to “see”.
In a recent letter to president elect Obama, Jim Hansen, head of the NASA Goddard Institute for Space Studies proposes a carbon tax. Here are some excerpts from the letter:
A rising carbon price is essential to “decarbonize” the economy, i.e., to move the nation toward the era beyond fossil fuels. The most effective way to achieve this is a carbon tax (on oil, gas, and coal) at the well-head or port of entry. The tax will then appropriately affect all products and activities that use fossil fuels.
The public will support the tax if it is returned to them, equal shares on a per capita basis (half shares for children up to a maximum of two child-shares per family), deposited monthly in bank accounts. No large bureaucracy is needed. A person reducing his carbon footprint more than average makes money. A person with large cars and a big house will pay a tax much higher than the dividend. Not one cent goes to Washington. No lobbyists will be supported. Unlike cap-and-trade, no millionaires would be made at the expense of the public.
A carbon tax is honest, clear and effective. It will increase energy prices, but low and middle income people, especially, will find ways to reduce carbon emissions so as to come out ahead. The rate of infrastructure replacement, thus economic activity, can be modulated by how fast the carbon tax rate increases. Effects will permeate society. Food requiring lots of carbon emissions to produce and transport will become more expensive and vice versa, encouraging support of nearby farms as opposed to imports from half way around the world.
As a candidate, Obama supported a Cap & Trade policy that would require all pollution credits to be auctioned. These credits would then be “traded” creating a new source of commission revenue for the financial markets. A 100 percent auction policy would ensure that all industries pay for every ton of emissions they release, rather than politically giving emission rights and credits away to companies on the basis of their past pollution. Obama proposed that a small portion of the auction receipts (~$15 billion/year) be invested in the development of clean energy sources and that the balance be used for rebates to individuals, families, and communities to off-set the increased cost of fuel, natural gas, and electricity.
Personally, I like the administrative simplicity of Hansen’s plan and it’s relative immunity to political and financial gaming. Obama has proven he is open to any good idea — let’s hope he is open to Hansen’s proposal.