Confessions of a Supply-Side Liberal

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"Henry George and the Carbon Tax": A Quick Response to Noah Smith

The title is a link to Noah Smith’s post "Carbon Taxes Won’t Work.  Here’s What Will."  

I have to be quick because I have proofs to read for my new AER paper with Dan Benjamin, Ori Heffetz and Alex Rees-Jones.  One downside of blogging is that your coauthors know what you are doing instead of working on your joint paper with them.  

Forgive me, Noah, if I am missing something in only skimming your post, but I wanted to say that a carbon tax or a gasoline tax isn’t just about global warming.  I like the national security argument for lowering the price of oil that, say, Iran gets, as well as the global warming argument.  I second you in advocating scientific research as the most effective way to address global warming.  But the revenue from the carbon tax can help pay for this research and other important government functions.    

To the extent that oil or coal in the ground is in inelastic supply, increasing taxes on oil and coal in many countries around the world at the same time is somewhat like Henry George’s land tax that came up in the conversation when Clive Crook told Michael Kinsley about this blog, as reported in Clive Crook’s post "Supply-Side Liberals."  Note that if oil or coal is in inelastic supply like this, the before-tax price of oil and coal might go down so much that the after-tax price of oil and coal doesn’t change that much.  If so, the quantity used might not change that much either.*  So the direct benefit on the global warming front of a carbon tax might be small.  But the benefit in raising revenue to pay for research to solve the global warming problem could be huge.  

Overall, relative ineffectiveness at slowing global warming would lead to a smaller optimal level of a carbon tax, but the revenue side alone is pretty favorable, as long as the government doesn’t give away all of the potential revenue by using “Cap and Trade.”

*Note:  I have to give credit where it is due for this idea that worldwide carbon taxes will push down the price of oil or coal enough that there might not be much effect on use.  When I was a visitor at the Center for Economic Studies in Munich last Summer, I learned this at lunch from one of the other visitors there, who was unsuccessfully (I think) trying to persuade one of the graduate students in Munich to work on it.  I hope that someone has worked on this idea or plans to work on it.  

Filed under longrunfiscal growth class

  1. supplysideliberal posted this