Pigovian tax

Definition from wikipedia

A pigovian tax is a tax levied to correct the negative externalities of a market activity. For instance, a Pigovian tax may be levied on producers who pollute the environment to encourage them to reduce pollution, and to provide revenue which may be used to counteract the negative effects of the pollution.

The best answer to America’s “problem” with energy, and with private automobiles in particular is to simply tax (mainly fuel) to compensate for the negative externalities. Pollution, mayhem, free parking, noise — all of these have a cost which is not being paid for by their users.

See Mankiw’s ( past chairman, Council of Economic Advisers in the George W. Bush administration)  The Pigou Club Manifesto.

Money collected via such taxes would best be used to lower payroll taxes — or to lower taxes on wages and/or investment generally, as Holman Jenkins points out in his column…

Business World: Pork, the New Green Meat

Holman W. Jenkins, Jr., June 20, 2007. Wall Street Journal

Al Gore (among many others) deserves a hand for conjuring up the present mood of public acquiescence to legislative proposals aimed at global warming. Over to you, Congress: Whether we face a climate crisis, we certainly now face a climate pork crisis.

We already are paying thrice for Washington’s love affair with corn- based fuel, in the form of higher taxes, higher gasoline prices and higher food prices. Yet because of the prodigious amounts of energy and fertilizer used in its cultivation, corn-based ethanol provides little or no net reduction in CO2 over the gasoline it displaces.

Big surprise: Congress is taking advice from farm lobbyists and Archer Daniels Midland, not climate scientists. And donor groups have plenty more ideas for how Congress can shovel money at “alternative energy” and justify it by citing global warming. An even bigger pinata are the competing bills to award various companies lucrative “emissions rights.” Many a candlelit dinner will undoubtedly be held with lobbyists to haggle over which industries to include in this “solution.”

By now, whatever their disagreements about the reality and risks of man-made climate change, all parties to the climate debate ought to be able to lay down their cudgels long enough to agree on one thing: Congress needs external help to avoid committing dumb, useless, costly policy.

The public says it fears global warming, but the public will also make sure nothing done in the name of global warming damages voters’ lifestyle in a way voters can notice. Thank heaven for small favors. The U.S. accounts for 22% of the world’s carbon dioxide emissions. Before the year is over, China will become the world’s biggest outputter. Anything Congress does will be, at best, a gesture and an experiment, at worst, a special-interest blowout. And there’s every reason to expect the worst — a spasm of subsidies, mandates and prohibitions better calculated to win campaign donations and snooker voters than to deal rationally with a possible human role in climate change.

Congress, after all, is a machine for matching pronouncements with policy actions in a way that will get members re-elected; any relation to desirable policy ends is largely incidental. Global warming, meanwhile, is a true conundrum — nothing is known with any certainty about the risks we face or whether we can do anything to avoid them.

Whatever we think we understand about climate change is likely to be revised radically in the years ahead. Worse, the finger one day will be pointed at science itself, perhaps unfairly, for all the political mobilization done in its name. Given much evidence of earthly cooling and warming in recent millennia, all too pat is the intuition that the current trend can be rounded down to a single variable: human fossil fuel consumption.

Don’t be surprised (though the public surely will be) when an awkward new trend inevitably appears in the temperature record: cooling. This won’t prove or disprove a warming effect from human CO2, only that many variables, feedbacks and chaotic wildcards shape our climate.

Not for the first time Washington faces a dangerous meeting of legislative incompetence, public simplemindedness and the opportunity for extreme mischief. Not for the first time it makes sense to appoint a blue-ribbon commission to lift policy above everyday horse-trading. We realize we’re tempting fate here, but such a commission could hardly do worse than Congress. Which brings us to Al Gore, this little Pigovian.

No, we don’t refer to his new plus-size physical presence, but to his recent pronouncements suggesting he has become a follower of the late British economist Arthur Pigou, who said tax bads and not goods. Mr. Gore advises not only adopting a carbon tax, but using it to offset payroll and income taxes. We should be taxing carbon, not work, he says.

Never mind that Mr. Gore just as enthusiastically endorses tradable emissions permits, apparently unaware the two proposals are redundant. Here he revives a valuable idea from the serious environmental literature of the ’90s, that of the “double dividend.” Let this idea frame a new climate commission’s marching orders.

To wit: In addressing the speculative and uncertain risks of man- made climate change, let’s make sure we also do some good for the economy. That means using a carbon tax to reduce existing distortions in the tax code. As Resources for the Future’s Richard Morgenstern enumerated in a 1996 paper: “Taxes on labor discourage work effort; those on savings reduce the pool of capital available for investment; and those on investment discourage risk-taking.”

This path is infinitely preferable to the Kyoto path, not to mention the successor path recently unveiled by President Bush, of trying to negotiate a climate policy with other major nations, a formula more likely to produce connivery in empty gestures and political favor- trading than good policy.

By shifting the tax burden away from work, saving and investment, the U.S. would offer other nations an example they could follow out of economic self-interest rather than a common vision of sackcloth and ashes. Such an approach would put consumers and businesses in charge of finding the most efficient ways to reduce carbon output, rather than relying on Washington to exercise an improbable clairvoyance (and probable corruption) in picking winning technologies.

Most of all, by reducing the dead weight of taxes on labor and capital, it would speed the accumulation of wealth and knowledge in society, which can only help humanity adapt to whatever challenges it faces in the future.