Pigou and the Carbon Tax, Again

I just read a piece by a Professor at Tufts regarding Cap and Trade and the infamous Pigou Tax. Remember the Pigou Tax is a tax imposed by the Government on some action with negative externalities whose sole purpose is to deter the action and reduce the negative externalities.

So let's say we believe this CO2 tale of woe, yes it has been a hot summer, and we further believe that if we reduce use of CO2 producing energy sources then we reduce the results that this CO2 stuff produces.

Now follow the bouncing ball:

1. These Pigou folks say if we tax energy then the higher price will reduce demand.

2. Yet the demand is highly inelastic, yes that is an economic's term. It means that if I drive back and forth to work and there is no alternative then I will still drive and it will just cost more. I cannot use less. If I need heat in the winter then I will use the same gas, oil, electricity, whatever. There just is not that much excess that we have a discretionary choice. The consumer has no control over their usage. The consumer cannot shift to an alternative. Thus a tax is just that, a tax.

3. The good professor states:

Most taxes and charges have negative economic impacts that are only offset by the revenue they raise for important government functions. A carbon fee, in contrast, has efficiency enhancing benefits while it raises revenue to address the U.S. federal budget deficit. Greenhouse gas emissions are a classic externality whereby firms and individuals do not take into account the social cost of their activity. Unlike most economic transactions where the full social cost of a good or service is reflected in the market price, externalities lead to market prices that are below the social cost associated with producing or consuming the externality-generating product.

Economists have long understood that levying a tax or fee on an externality can improve economic efficiency. In this case, levying a carbon fee would not only contribute to a reduction in harmful greenhouse gas emissions but also raise substantial revenues to contribute to fiscal sustainability. In contrast to a cap-and-trade program, it raises revenue in a predictable manner that avoids the problems of short-run price fluctuations that contribute to volatility in carbon revenues.

4. The above just makes no sense to me. The assertion that a tax will decrease demand has never been demonstrated with any basis in fact and the paper seems no to do so as well. First as we have shown the demand is inelastic. Thus it will not reduce the usage and thus not lower CO2. Sorry guys, the laws of physics really do work whereas the "laws" of macroeconomics are just balderdash! Second if the Government gets more money then what do you think it will do .... it will spend it several times over! Just look at the current administration. It has spent TARP several fold before it even got it all back. These folks have no sanity. It is like giving a homicidal maniac more bullets! Thus the good professors logic has no basis in any fact, it is outright nonsense.

5. The good professor concludes:

• A carbon fee has additional benefits beyond reducing greenhouse gas emissions and raising revenue to contribute to deficit reduction.
• A carbon fee obviates the need for costly subsidies through the tax system for carbon free energy investment thereby providing additional avenues for deficit reduction.
• A carbon fee will reduce emissions of small particulate matter that occur from the burning of fossil fuels and which are a source of public health concern.
• A carbon fee can be the centerpiece of U.S. efforts to reduce greenhouse gas emissions.
• A carbon fee ensures that the U.S. need not put in place inefficient and cumbersome regulations to reduce greenhouse gas emissions.
• A carbon fee would help the U.S. take leadership in the international arena in the area of climate change and help it meet its commitments in international agreements to reduce emissions.
• A carbon fee can border adjust in ways that are more likely to be WTO compliant than cap-and-trade systems thereby preserving the competitiveness of U.S. carbon-intensive industries.

In fact as we simply demonstrate it will do none of the above except avoid regulations. The Markey-Waxman "Bill from Hell" was a give away to more special interests that one could count. So the good professor apparently says we should just take the money and give it to the Government. The US taking leadership is just a feel good thing. The problem is China and India and no matter what the US does they will act in their own interests and totally disregard us. Anyone who have ever done business outside the US would know that fact, as I have for the past 40 years. I regret that I have the distinct disadvantage of experience that appears to be lacking in the good professor.

6. The US economy needs a turn around. I believe that Hayek was correct in that the US economy was built upon and will only survive and thrive upon an entrepreneurial base. Taking money from the economy and handing it to the Government will further starve that investment base. The result will be a destruction of the engine that makes our society work.

7. The solution is a technological solution. New and more efficient energy sources. We have the ability but we seem to be pushing it all over to our new competitors, China and India. We need more engineers and less economists and politicians. We need entrepreneurs who create value rather than destroy value.