The Lovable Carbon Tax
Last week I met with 25 economists, including a number of Nobel Prize winners, to ponder the next recession. I am sworn to Chatham House rules, so I can’t tell you who was there or what they said. We spoke freely. What did we learn from the last recession? Do governments have the right tools to fight the next one? Fur was flying, as you can imagine. Opinions about interest rates and jailing rogue bankers were all over the place.
But at one point a strange hush and murmuring of agreement came over the group. We all agreed on one thing, one tax that would make the world better: a carbon tax. Right now. Last month, more than 3,500 economists—a record number—signed an open letter calling for a carbon tax to fight climate change. Several of the economists at the meeting told me something to the effect of, “I never signed a letter before but I signed this one.”
Signers included 27 Nobel Prize winners, the four living former chairs of the Federal Reserve (from Janet Yellen to Alan Greenspan), and all but one of the former heads of the President’s Council of Economic Advisers, Republicans and Democrats alike. (Note: I signed it too!)
Many economists distrust government action and prefer markets to work out problems, so the breadth of agreement on the use of a carbon tax to address climate change is striking and rare. President Harry Trumanonce asked (perhaps apocryphally) for a one-handed economist who wouldn’t always say, “on the one hand, on the other hand.” But if he were advised on climate change, there wouldn’t be a problem.
Why the agreement between left wing and right wing, downbeat and upbeat, political and non-political economists? In part, the carbon tax letter reflects the virtually unanimous scientific consensus that humans are causing climate change. Reducing carbon will massively limit economic, social, and political disruption. Social and natural scientists stand apart from climate change deniers, like the House Republicans who recently forced adjournment of a hearing on climate denialism. There is virtually no debate among scientists that climate change is caused by humans unleashing carbon and methane.
Calling for a carbon tax follows the very principles taught in Economics 101. Markets fail if prices aren’t right. Much of the price paid for carbon use is paid not by the user but by someone else—other humans besides the users and those not yet born. Fossil fuel use imposes an externality, a problem in which a market transaction occurs but the parties don’t pay or recognize the full cost. If the price is artificially too low, too much will be used. One example is vices like cigarettes and alcohol, whose costs spill over to society. So-called sin taxes on cigarettes and alcohol aim to discourage their use.
A carbon tax is the new sin tax. And economists are on record opposing sin.
Courtesy : Forbes