Tuesday, February 06, 2007

A tax we could love...OK, tolerate...

There is a glacial movement toward a Pigovian tax to address both global warming issues and energy problems. In fact, some are betting real money on it. Let me introduce - the Carbon Tax.
Any real, lasting solutions will have to be extremely simple, and—because of the high cost implicit in reducing the use and emissions of fossil fuels—will also have to benefit those countries that impose them in other ways. Fortunately, there is such a solution, one that is grippingly unoriginal, requires no special knowledge of economics, and is extremely easy for any country to apply. It's called a carbon tax, and it should be applied across the board to every industry that uses fossil fuels, every home or building with a heating system, every motorist, and every public transportation system. Immediately, it would produce a wealth of innovations designed to save fuel, as well as new incentives to conserve. More to the point, it would produce a big chunk of money that could be used for other things. Anyone for balancing the budget? Fixing Social Security for future generations? Cutting income tax dramatically? As a little foreign-policy side benefit, users of the tax would suddenly find themselves less dependent on Gulf oil or Russian gas. [More]
This idea has been popping up in strange places, and I would not be surprised to see one or two of the dozens of presidential candidates adopt it like Gore did the Internet.

Economist Greg Mankiw makes the most coherent case for this idea:
With the midterm election around the corner, here's a wacky idea you won't often hear from our elected leaders: We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren't fond of this kind of proposal, but policy wonks keep pushing for it. [More of a must-read article]
Down here on the farm, I see a lot to love about this idea. Oh sure, the initial reaction will be to lobby for an exemption, like we always do, and a refund of what we pay, but I think this idea has some legs.

First, the extra income sure would be handy to pay my Social Security. And yours, I guess. It could pay for more troops if you want. The point is a carbon tax would be a considerable source of revenue and we are a profession that consumes tax dollars. We want plenty of federal income, right?

Second, a carbon tax could slow the rush to live in the country. The commuting circles around major employment areas would likely shrink or at least slow their expansion rate. With all the farmer complaints about sprawl - while hard to justify - this is one defense.
The first answer is that as we extend our time horizon, gasoline's price-elasticity, or price sensitivity to break free of the jargon, gets larger -- a lot larger. Going out several years or more, individuals have greater scope to take actions that economize on gasoline. They can junk the gas-guzzler, or at least not replace it with another one when the old one gives out. They might calculate the dollar tradeoffs between density (high rents but less need to drive) and sprawl (the reverse) and pick up stakes for a less car-dependent area. They may gravitate toward job opportunities closer to home. And they can make more durable commitments to behavioral changes that reduce the need to drive, like forming a carpool or buying a roadworthy bicycle or selling the far-away vacation home. [More]
Finally, a carbon tax would reward renewable energy sources making ethanol more competitive. The carbon in corn comes from the air, and hence would likely be treated differently than fossil fuels. And don't talk to me about our fuel costs being onerous. Outside irrigation, most of us have much bigger costs to tackle.

In short, I think agriculture could look past their knee-jerk tax reaction to see the power of assessing the externalities of fossil fuel consumption. Producers in the EU have managed. We can too.

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