July 31, 2018

WE ARE ALL NEOCONOMIST NOW:

TARIFFS HURT LONG-RUN GROWTH. CARBON TAXES WILL SPUR IT. (JOSEPH MAJKUT , 7/31/18, Niskanen Center)

While carbon taxes and tariffs superficially resemble each other, they are different in important ways -- and those differences explain the case for carbon taxes and the case against tariffs.

Both a tariff on imports and a tax greenhouse gas emissions will affect consumer prices and raise revenue. With a carbon tax, redistribution is used to bolster the policy. In the case of the MCA, revenue goes to funding other tax cuts and to infrastructure spending, both of which offset the costs of the new carbon tax to the poor. MCA revenue also funds research to decrease the long-term costs of transitioning to low-carbon energy. Those are transfers, and would lead to increased government spending, but they are aimed at reducing the burden of carbon pricing and investing in economically productive projects.

Of course, new government spending does not come for free. A carbon price, though levied on producers and emitters, will increase the prices to households of energy and consumer goods whose production leads to carbon emissions. Those increased costs will be real, but small in aggregate. The most comprehensive analysis of the MCA indicates that the negative effect on GDP will be small, reducing annual output in the first decade by a steady 0.1--0.2 percent against current policy.  

That small burden will be worth it in the long term because a carbon tax corrects for a market failure, by creating an artificial price signal to represent the damages expected from today's carbon emissions that will add up over the next few centuries. While estimates of the future damages from CO2 emissions vary widely, it is hard to argue they are zero and credible estimates reach much higher than the carbon prices imposed by the Market Choice Act (see chart below). By pricing carbon emissions at or below expected damages, thereby reducing emissions at a lower cost than the economy would suffer in the future, we can expect overall welfare to go up in the long term. That is one of the key insights of climate economics.

Posted by at July 31, 2018 3:42 PM

  

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