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The
debate is over
Challenges to the Economic
Approach:
The Case for Market
Intervention
Free Market Strategies
Carbon
Taxes
-'Double
Dividend'
-Subsidies
-Case
Study: Boulder, Colorado
Emissions
trading: Cap and Trade
Economic Adaptation
Further
Information
Comments & questions to:
awerth@macalester.edu
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Carbon Taxes
The idea of carbon
taxes is based on the ideas of Arthur Pigou, an economist who developed
the concept of market externalities. According to his ideas, a
negative externality (i.e. cigarette smoke) could be accounted for by
taxing the producer (cigarette tax) and using the money generated to
counteract the effects of the externality (smoking prevention
campaigns). This type of tax is also known a “sin tax” .
These kinds of taxes can have two main functions: They can raise
revenue and they can alter the incentives of the market through
price. The latter means that if you raise the price of the good
(i.e.CO2) people will respond to the higher price by buying less
overall. The consumption of the good is therefore
discouraged. Both of these functions happen at the same time, but
depending on the goal of taxation, the effect of one of these aspects
can be emphasized over another. Raising revenue is probably the
more common of the two, because the price increase required to
significantly reduce consumption is often politically unfeasible.
The large collection of revenues is likely to be unpopular, especially
without a very good plan for the funds. The contentiousness of
new taxes in the current political climate in the U.S. means that
finding an appropriate and equitable use for the revenue is of prime
importance.
‘Double Dividend’
Possibly the best strategy for carbon taxes would be
to introduce it as part of a revenue neutral package and avoid the idea
that the tax is a sacrifice. The idea is that the revenue
collected from a carbon tax would be used to decrease another tax, such
as income tax. The prospect of this is that not only is it more
politically viable, but also will directly compensate for the collected
revenue . This policy would have two major effects on the
incentive structure. First, it would decrease the income tax,
which has long been criticized for discouraging investment and wealth
and instead tax consumption of goods (in relation to carbon
intensity). This could effectively curb consumption of goods and
services that are carbon intensive, while allowing people more money to
save or invest in renewable goods and services. The second effect
is that the link to public money through tax reduction effectively
means that fossil fuel users must pay the public to pollute. This
not only reflects a direct adjustment of the market externality, but
also creates a link that reminds people that burning fossil fuels is a
cost to public welfare.
Subsidies
A related topic that is often overlooked is the
subsidy issue. A subsidy is the inverse of a tax because it is
money that is given to certain goods to make them cheaper and encourage
their use. Subsidies can be a tool to encourage the use of
beneficial products or technologies when existing market prices are
distorted. California used large subsidies like this to start
some of its early wind farm projects. The disadvantage to
subsidies is that it must come from existing tax or other revenue and
drains a budget. This has incited opposition; in fact
California’s early wind farms became known as subsidy farms.
Before we go any further, though, lets take a reality check. It
turns out fossil fuels are subsidized by the U.S. government on the
order of $210 Billion a year ! Given the push to regulate carbon
emissions, it makes a lot of sense to remove subsidies from fossil
fuels to renewable energy, effectively getting a double benefit.
In fact as part of its first 100 hours of legislation in 2007, the
110th Congress passed a bill to remove approx $14 billion from fossil
fuel to renewable energy sources.
Case Study: Boulder,
Colorado
In late 2006, Boulder Colorado became the first city
in the United States to impose a tax on carbon.
The bill created a small tax on electricity equaling about $16 dollars
a year per household that would be used by the government to fund
household and industrial energy audits and efficiency programs.
This is a small step, but nonetheless a step in the right
direction. The goal of this tax is clearly to raise revenue, but
it is a first step in many of the larger changes they plan to
make. The ability for pilot projects such as this can also be a
first step for further adoption of the measure.
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Last updated: 2/2/2006
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