An Assault on the Pigou Club

I'm in favor of carbon taxes. I also realize that they are politically infeasible. So does Robert Reich, who proposes an alternate solution to the energy Hydra Head (climate change, exporting money to despots, exposure to potential supply shocks, etc.), and it isn't cap-and-trade:

The best idea I've heard is described as a carbon auction. Companies would have to bid for the right to pollute. And, most ingeniously, the money raised in the auction would be shared equally by all citizens in the form of yearly dividend checks -- just like the residents of Alaska now get yearly dividends for their share of the state's oil revenues.

I mean, it's our atmosphere, right? Think of a national park or a national forest. No company is simply allowed to take what they want from it, free of charge. Why should the atmosphere be any different? In a carbon auction, companies would have to bid against other companies for a portion of the atmosphere they intend to use -- within overall limits that reduce pollution levels.

Get it? It's a win-win. The auction market itself determines who can pollute and by how much. And since companies will inevitably want to reduce their bidding costs, they'll search for new technologies that cut their emissions. And even if companies pass on increased costs to their customers, we'll still be better off because we'll get dividend checks and cleaner air.

Message to presidential candidates: American voters will buy this one. And it's good policy.

Reich is certainly right: a carbon auction is more politically feasible than a Pigouvian carbon tax. But it's also less effective. The overall aim -- to reduce emissions -- is the same, but the Pigouvian tax attacks demand, while the carbon auction takes aim at supply. In order to have the same effect, carbon auctions would have to have a prohibitively high "reserve" (minimum price), and/or the number of available carbon permits would have to be limited in some way, thus mirroring the cap-and-trade system which Reich opposes.

Reich maintains that this system would foster technological improvements in order to reduce their costs. This would be true if the energy industry was competitive, with little or no barriers to entry. In fact, however, the energy industry most closely resembles an oligopoly, with incredibly high fixed costs and many other barriers to entry. As American deregulation has shown, treating the energy industry as if it were a competitive industry can have disastrous results.

The carbon tax may be less politically feasible, but it would certainly have a greater effect. It is regressive, but making it revenue-neutral by combining it with a big expansion of the EITC could off-set most of those negative effects. A carbon auction might be more feasible; it might even be second-best, but it can't be better than that. And, as Matthew Yglesias is wont to say, all progressive policies seem impossible at first; changing the political dynamic is a process. But that doesn't mean that we should stop trying, or automatically settle for the easiest option.

(ht: Greg Mankiw, who doesn't seem impressed with Reich's logic)

Tax Gas

TNR joins the Pigou Club.

i'm attracted by the idea, but even simpler solution seems possible: cut subsidies. if Americans had to pay market prices for gasoline - as Europeans do - then they would consume less of it - as Europeans do. increasing taxes on a subsidized industry makes less sense to me than simply cutting out the subsidies. the effect is the same, but with an added plus: it reduces economic distortions instead of increasing them.