Tuesday, July 1, 2008

Carbon Taxes For The Long Run

I don't want to be an environmental economist, I really don't, I swear. It's just that writing these sort of posts is about fifty million times easier than trying to be Econbrowser.

So, motivated by the fact that the Green Party's green plan is delusional (somehow, everyone has more money at the end of the day after the new tax and some government spending), I feel compelled to review the whole point of carbon taxes: burn less carbon.

So, we tax carbon. Check. Collect tax revenue. Check. Cut other taxes and increase social spending to achieve 'revenue neutrality'. Check. Watch people adopt more environmentally-friendly alternatives. Check. Uh...collect less tax revenue than before? Uh-oh.

If the carbon tax succeeds at cutting CO2 (and related) emissions 10%, then we collect 10% less carbon tax revenue. This is certainly one of the benefits of cap-and-trade: politicians don't have to return to voters in ten years and say "Remember how we taxed you back then? Well, it worked, so now we need to raise other taxes."

Either way, if as the Green Party suggests, everyone dodges the tax by switching to environmentally-friendly options, that leaves a big red mess on the balance sheet. The tax is probably welfare-improving, but you still can't tax the populace and have everyone end up with more money than we started with.

POSTSCRIPT: I often get very frustrated at how long it would take to construct graphs to illustrate these points in Paint/Illustrator/whatever. Pencil and chalk are still unparalleled instruments.

1 comment:

Gabriel said...

Use Mathematica or Maple or the like. Alternatively, use a scanner.