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Would carbon tax revenues be too volatile?
Every now and then I come across arguments I have not heard before, and then I pass them along:
...relying on carbon taxes is also a terrible way to finance the government. We are talking about half a trillion dollars or so in revenue, so the percentage of financing would be quite large. Income fluctuates, and that is a problem, but the spending on a particular set of items, like fossil fuels, has the potential to fluctuate even more. Example: suppose we really are facing an oil production peak, and scarcity causes the price to spike? Every 10% rise in oil prices will tend to cause something like a 5% reduction in long run demand (I’m rounding here – and thanks to Gar Lipow for his valuable work in collating the evidence), but this also means less carbon tax revenue, potentially a lot less. This is a serious problem, one that the green taxers have not really confronted.
The wise guy answer is that we could buy U.S. government revenue insurance from the Chinese, or barring that, from Dubai.
Addendum: Here are some useful numbers.
Posted by Tyler Cowen on September 24, 2007 at 07:16 AM in Economics | Permalink
Comments
Is this necessarily more volatile than a highly progressive income tax? See CA during the last recession.
Posted by: Jody at Sep 24, 2007 7:41:05 AM
This doesn't seem very convincing--he is using a long-run demand figure to talk about short-run revenue fluctuations--long term trends could be dealt with by scheduled tax rate adjustments, and oil burning is only part of the carbon emissions portfolio anyway.
I doubt very much that short-term fluctuations in carbon emissions are greater than short-term fluctuations in income, particularly capital-gains income. Is there evidence to support this?
Posted by: matt wilbert at Sep 24, 2007 7:58:16 AM
Isn't the entire point of a carbon tax to cut down on the use of carbon? The long term goal is to drive the usage of carbon as fuel as low as possible, so it seems a bit daft to think of the tax as a new source of general revenue for the government. I've always thought it would be nice to apply all the carbon tax revenue to working on the pollution / global warming problem.
Posted by: Sol at Sep 24, 2007 8:00:08 AM
before talking about a carbon tax, how about we recognize that there is no connection between carbon emissions and global warming.
http://www.prisonplanet.com/archives/global_warming/index.htm
Posted by: kid mercury at Sep 24, 2007 8:16:21 AM
I would rather see carbon taxes go to providing rebates on hybrid/fuel efficient cars, rather than payroll taxes.
This would have a several effects.
1. People would use their carbon heavy machines less.
2. They would switch to cheaper, more efficient alternatives sooner because (a) they're cheaper because of the rebates (b) the cost of operating them is less because they use less carbon based fuels or none at all.
3. Manufacturers would have an incentive to offer more hybrids, electric vehicles etc... because the demand for them would sky rocket.
As Mankiw aptly mentioned, the main stumbling block to carbon taxes is that:
Republican consultants don't advise using the word "tax" unless followed by "break" and Democratic consultants don't advise the word "tax" unless followed by the phrase "on the rich".
Posted by: Robert at Sep 24, 2007 8:16:31 AM
Why not buy insurance from the american people? pass the tax, but put all the revenue into a carbon-fund income tax rebate, so the carbon tax is revenue-neutral. This would also guarantee political support for the carbon tax once people start getting the checks. People will irrationally value the check in the mail more than the offsetting hit on their electric bills.
Efficient pigouvian taxes shouldn't be held hostage to making good decisions about deficits, social security, or revenue volatility.
Posted by: DK at Sep 24, 2007 8:23:45 AM
Excellent point by Jody above. Indeed both these revenues would be highly dependent on economic growth and do make long-term planning difficult. Furhtermore, a tax that seeks to drive down usage is extremely time-inconsistent. When the short-term pain is high it only takes one election to reverse the tax on some pretext or the other esp. when it falls on the middle class.
Posted by: sa at Sep 24, 2007 8:33:47 AM
At least part of a carbon tax should be paid out to those who extract co2 from the air and keep it from going back for a couple of hundred years or more. I think that biochar/agichar/terra preta has promise to enable farmers to do just that affordably.
Posted by: Floccina at Sep 24, 2007 9:09:50 AM
The author is talking about long-run demand, but there is also some short-term volatility in fuel use (and hence emissions) from inter-annual weather variability. The DOE estimates that US CO2 emissions fell 1.3% from 2005 to 2006, due partially to milder winter and summer weather. Any idea how this compares to fluctuations in income (and income tax revenues)?
Posted by: Daniel Hall at Sep 24, 2007 9:41:14 AM
Just include coal and LNG in the carbon tax. It would at least remove "peak oil" as a threat. And I would guess electricity usage is even less elastic than fuel usage for driving/flying. In the long, long run, as nuclear/solar/wind generates all the power for our all-electric transportation technologies, then we'll worry about how to replace those revenues.
Posted by: Mark at Sep 24, 2007 10:06:32 AM
DK makes a good point -- so what if it fluctuates? the only reason to care is if we become dependent upon it as a source of revenue. But we shouldn't. Instead, it should be some sort of rebate.
the biggest complaint about gasoline taxes, and thus about carbon taxes, is that it hits the poor hardest. Whether a straight rebate or a reduction in social security taxes (e.g., the first 10k of income each year is not subject to FICA) would be a way to avoid the problem posited. Let the amount fluctuate if necessary, based on prior year actual revenues.
Posted by: ah at Sep 24, 2007 10:11:37 AM
The real solution to such variable income is to tie it to an expenditure that has a high degree of correlation to the income, such as subsidizing less carbon intensive energy sources. However given the current state of government expenditures you can't expect that the money won't just get mixed up with the general funds and be used to continue to fund unsustainable social programs.
Talking about fuel price increases as hitting the poor the hardest is a red herring. Firstly, this is true of any consumer product. Secondly, the long-term consequences of fossil fuel consumption also falls disproportionatly on the poor. Whether it be health costs such as high cancer rates around refineries (rich people don't live near refineries) or more volatile weather patterns which will effect food price stability and increase property damage.
Posted by: asiequana at Sep 24, 2007 10:51:14 AM
Properly applied, a carbon tax should be completely rebated on an equal per capita basis. It applies the incentive to not use fossil fuels at the consumption points, keeps the revenue out of the government's hands, and ameliorates the worst regressive effects of such a tax.
Without the above, I will never support a carbon tax. Any other use of the revenue will bring a veritable host of rats to the table.
Posted by: Yancey Ward at Sep 24, 2007 10:57:01 AM
Fluctuating revenue will constrain government spending. I vote yes. But don't abolish payroll taxes, because that's paid to seniors. Any politician who risks a 10% cut in Social Security will soon be out of office (unless you want to inform everyone that SS is really welfare and break the payroll tax connection). Abolish individual income taxes and let the states, government agencies and Defense Department sweat it out.
Posted by: 8 at Sep 24, 2007 12:12:22 PM
8: don't abolish payroll taxes, because that's paid to seniors ... Abolish individual income taxes and let the states, government agencies and Defense Department sweat it out.
To clarify, national defense is not an essential public good, but wealth transfers to seniors is?
Posted by: Jody at Sep 24, 2007 1:18:36 PM
Taking the opportinity to inform everyone that SS is really welfare and break the payroll tax connection will probably do more good in the long run than any carbon reduction.
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