TAX WHAT YOU DON'T WANT:

Doom Or Boom? (Reihan Salam, 04.13.09, Forbes)

A carbon tax, in contrast, is far more transparent. If the goal is to set clear price signals, carbon taxes are clearly preferable to cap-and-trade. James Hansen, head of NASA’s Goddard Institute for Space Studies and a leading voice for aggressive action against climate change, has raised the specter of electricity suppliers threatening the public with blackouts if a serious cap is enforced. The rolling blackouts that plagued California in the summer of 2005--which helped drive then-Gov. Gray Davis out of office--could be a hint of what’s to come.

To prevent this outcome, Hansen favors a carbon tax that pays out all of its revenue in the form of a dividend. Think of it as a green version of Alaska’s Permanent Fund, one that would be of particular benefit to Americans who live in big cities and strenuously avoid airplanes. It is easy to see why Hansen, an undeniably brilliant man, likes this idea. Unlike cap-and-trade, which, as Thune and Ensign have demonstrated, is pretty frightening to strapped middle-income households, tax-and-dividend instantly creates its own constituency: every household that gets a net benefit out of the deal.

As a committed urbanite, tax-and-dividend would certainly serve my narrow self-interest. Yet there is a serious downside to this approach. Hansen notes that cap-and-trade has been a bust in Europe, but neglected to mention that a carbon tax failed to prevent per-capita carbon emissions from increasing sharply in Norway. As Northwestern sociologist Monica Prasad has noted, however, Denmark used a carbon tax to far greater effect: between 1990 and 2005, per-capita carbon emissions in Denmark fell by a stunning 15%. Denmark didn’t achieve this through a tax-and-dividend approach, like that favored by Hansen. Rather, the Danes give the tax revenues to firms that switch to alternative energy sources.

Mr. Salam's focus is far too narrow here. Revenue from gas taxes provide an opportunity to reduce taxes on investment, savings, and income. As gas use falls those revenues can be made up by phasing in other forms of consumption taxes. Gas taxes are merely a wedge with which to begin the long overdue reform of the entire tax code.

Posted by Orrin Judd at April 13, 2009 6:31 AM