Clean Energy Subsidies vs. A Carbon Tax (Jeffrey Miron, 1/22/24, Cato)

The existing scientific consensus implies that carbon and other GHC emissions (henceforth, “emissions”) constitute an externality, meaning an effect of one person’s actions on other economic actors, in ways not mediated through prices. Air pollution from cars and factories, fertilizer runoff from farms, and loud noises from highways and airports are standard examples.

In the presence of externalities, free markets produce too much of the externality‐​generating good, and government can in principle improve economic efficiency.

The standard approach is a tax that raises the good’s price, which lowers its production and thus the externality. Measured economic output goes down, but true economic output—measured output minus the externality—goes up.