Revenue neutral carbon taxes

[Berkut]

OK, so I am sure we have all heard of carbon taxes, or carbon tax credits. Idea being you internalize the market externality of pollution by taxing those who create carbon.


A twist on this is the revenue neutral carbon tax. In this scheme, all revenues from those carbon taxes are immediately disbursed back to consumers. There are various versions, but the current idea as I understand it is that you just take the revenue, and divide it up as direct payments, potentially even done in a progressive manner.


This seems like such an obvious solution. A penny saved is in fact a penny earned, and the desire to avoid those costs would drive innovation and efforts to avoid those costs.


I don't understand the reluctance to do this. If you are a libertarian, this should be *exactly* the kind of market driven solution to carbon pollution you would embrace. If you care about global warming, I cannot imagine a better way to align incentives of those producing energy with what we need.


Who is *against* this, other than those who are actually part of the fossil fuel industry?

[Maximus]

The kind of people who are in favour of pissing off the right people.

[grumbler]

I actually prefer cap-and-trade to the carbon tax, since I'd rather have the guaranteed reduction in output than the guaranteed cost of output, though either option is better than nothing.  The problem I see with the carbon tax is that "raising taxes" (necessary to ensure continued reduction in output) has a far more negative political connotation than "lowering emission allowances" does.

China's CaT pilot program has been more effective than expected, because the companies involved are banking emission credits, which is what we want to see.

[DGuller]

I agree that cap and trade system seems to be superior to carbon taxes, on account of economic efficiency.  The main problem with implementing any solution is of course the aggressive ignorance and anti-elitism of the large enough portion of the American public.

[mongers]

I agree that cap and trade system seems to be superior to carbon taxes, on account of economic efficiency.  The main problem with implementing any solution is of course the aggressive ignorance and anti-elitism of the large enough portion of the American public.

I think that's a little bit unfair, many countries have an ignorant block of consumers entrenched in the political system; many Russians don't give much for the environment, Australians and Canadians punch above their weight with energy intensive lifestyles and many, many Brits couldn't give a toss, as exhibited by Brits making up the largest block of international air travellers or the ones who 'read'/post on their phone whilst at the side of the road with their engines running.

[viper37]

Who is *against* this, other than those who are actually part of the fossil fuel industry?

it depends of who is proposing this, the level of trust you have in this person to actually follow through with the investments needed.

the temptation will be great for a leftist party to increase spending, not to give money directly back to tax payers.   You'll get even more people not paying any taxes receiving "free" money.

And eventually, if it works, there will be less money for the government to redistribute, via direct deposits or via different inefficient public spending programs.  What will happen at that time?  People will be happy to receive less money?  They'll agree to service cuts because there is now less money in the pool?  Doubtful.  Past experiences of government redistributing temporary surplus has lead to complication when the revenues goes down.

[The Minsky Moment]

Carbon taxation has always enjoyed broad ideological support among economists for exactly the reason Berkut mentions - it is a market solution that puts a price on an externality.  Greg Mankiw and the late Marty Feldstein are/were big proponents among others.   The opposition is motivated by corporatism not libertarian purity.

[Admiral Yi]

I prefer a carbon tax over cap and trade because the latter hands an asset over to incumbents.  The ones who have been polluting are the ones who receive a gift.

[The Minsky Moment]

You can design a carbon tax to achieve the same result as cap and trade and vis-a-versa.  Either adjust price to impact quantity or quantity to impact price.  Cap and trade is just as prone to political manipulation because the caps need to regularly adjusted and lobbyists are well situated to hinder that process over time.  Or simple bureaucratic inertia has the same impact. The European ETS experienced that problem.  The choice really comes down to what is easier to administer and more flexible, probably carbon tax.

[Barrister]

Who is *against* this, other than those who are actually part of the fossil fuel industry?

Okay, so I'm personally in favour of revenue-neutral carbon taxes.  But the term "revenue neutral" can mean a lot of things.

Here in Alberta when the NDP brought in our carbon tax they said it would be "revenue neutral".  What they meant is that they would spend every dollar that came in, so it would be revenue neutral for the government.  Yet they actually used the words "revenue neutral" to describe the tax.

Other taxes have been sold on the idea of being revenue neutral, and that hasn't always worked out in practice.

Finally, since a carbon tax is naturally going to be paid more by wealthier citizens (who have larger homes, larger cars, go on more trips, etc), the payments to consumers are going to wind up being redistributionist - which some don't like.

[grumbler]

I prefer a carbon tax over cap and trade because the latter hands an asset over to incumbents.  The ones who have been polluting are the ones who receive a gift.

Modern cap and trade uses auctions to sell the specified number of tons of allowance (with a price floor), so no one receives a gift.  It's also politically easier to lower allowances than raise taxes.

Both methods can accomplish the same thing.  Where they differ is whether you want to control the cost of pollution via tax or the level of pollution via cap.  I'd argue that in practical terms, though, cap and trade has proven much more effective in an analogous situation (sulfur dioxide reduction).