Thursday, May 31, 2007

Hubbard endorses a carbon taxe

Some Republicans believe it is best to avoid the word "tax," unless immediately followed by the word "cut." To them, my advocacy of higher Pigovian taxes is a sure sign that I am another one of those pantywaist Harvard liberals. Most Republican economists bend over backwards to avoid the same fate.

In today's Wall Street Journal, here is what my friend Glenn Hubbard says about policy toward global climate change:

The NCEP proposal meets this test of taking serious action while not imposing economic risks greater than the threat of climate change itself. It comprehensively addresses all U.S. emission of CO2 and other climate change-related gases. It does this using one system: tradable permits. In such a system, the use of coal, oil and natural gas will require permits in proportion to their CO2 emissions, typically sold along with the fuel -- so individuals need not deal with the permit market.

Those businesses and individuals who can reduce their fuel use and emissions most inexpensively will do so. Those who cannot will end up purchasing more permits and supporting those who can. In this way, the program flexibly encourages the least-expensive efforts to reduce emissions without constraining any individual or business. And revenue from the auction of a portion of these permits could be used to reduce the corporate income tax, blunting adverse economic consequences.

All true, but at what price? Permit markets can be uncertain and volatile, especially when they are first introduced, making it hard to gauge the economic impact of the program. Meanwhile, the alternative of an equivalent tax on carbon dioxide offers certainty about the price faced by businesses. In this sense, it is important that the NCEP proposal includes a "safety valve" mechanism -- an upper boundary on the price of tradable permits that limits the cost of the program to the businesses and individuals.

The title of Glenn's article is Capitalism Against Climate Change, but the proposal being discussed here is essentially a carbon tax. The government is getting revenue by auctioning permits, and it is setting the price of those permits via the so-called safety value mechanism.

Why use all these euphemisms? Why incur the expense of setting us a trading market in permits at all? Why not just call a tax a tax? Because, in some circles, "tax" is a four-letter word.