Wednesday, July 28, 2010

The Case for a Carbon Tax

Marginal Revolution: Ross Douthat's case against cap-and-trade
Even if we cut government spending a lot, some taxes will have to go up. This seems like the least bad tax to raise or create, since it has some chance of producing a better outcome. It's hard to say that about most of the other potential tax boosts. I'd also cut the tax deduction for mortgage interest, of course. That too could improve the quality of outcomes....

That all said, I still don't like Waxman-Markey and in that regard I agree with Ross. The bill seems to bureaucratize the energy sector, forgo most of the revenue opportunities, produce massive time consistency problems (postpone real adjustment and then give out more permits over time), and all without getting public buy-in to the idea of higher carbon prices.

I'll also stress -- again -- that a carbon tax needs to be combined with the strong deregulation of the energy sector, and the weakening of NIMBY, in particular for wind power.
When he says "bureaucratize the energy sector" that includes creating many new opportunities for rent seeking and regulatory capture. Do we really think the financial industry did such a good job with housing that we ought to let them have a crack at energy as well?

If we decide it is important to address greenhouse gases, Waxman-Markey is not the answer.

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