Forty of 47 economists who answered the question said the government should help champion alternative fuels. “Economists generally are in favor of free-market solutions, but there are times when you need to intervene,” said David Wyss at Standard & Poor’s Corp. “We’re already in the danger zone” because of the outlook for oil supplies and concerns about climate change, he said.
A majority of the economists said a tax on fossil fuels would be the most economically sound way to encourage alternatives. A tax would raise the price of fossil fuels and make alternatives, which today often are more costly to produce, more competitive in the consumer market. “A tax puts pressure on the market, rather than forcing an artificial solution on it,” said Mr. Wyss.
A tax like this would give positive incentives for alternative energy without specifying precisely which forms are best. Firms could cut carbon emissions by increasing efficiency, shifting to clean power sources, or any combination of factors. Farmers who shift to practices which build up soil carbon could even get a credit against energy consumption.
The Carbon Tax Center is a handy source of information about how such a tax could be implemented in a politically progressive manner. They argue that the tax is inherently progressive, since wealthier people consume more energy as it is, and the benefits go to everyone equally. If the revenue from carbon taxes is used to cut other taxes (ideally through a larger Earned Income Tax Credit and reduced rates across the board), the tax would not be any more costly to the average consumer, and ought to do no net harm to the economy. Individual businesses would have to adapt, and undoubtedly would.
The benefit of a carbon tax is that it discourages exactly what we think is bad – excess carbon emissions. Those emissions place costs on society at large which no one feels responsible for. Those costs are then external to the market place, which is why economists call them externalities. Externalities distort markets and make them inefficient.
By my thinking, the fundamental role of government is to address those sorts of market inefficiencies, and one way to do that is by using tax policy to bring externalities back into the costs that markets set. Raising taxes by the right amount can do exactly that.
This calculus becomes very real when we ask, as the Wichita Eagle does whether three more coal-fired plants would matter. The answer is yes, but only incrementally. The utility has a choice. It can build those plants, paying whatever coal costs down the line, plus the current cost of the plant, plus maintenance and taxes for the next 20 years. It can also build a natural gas plant, with the attendant costs. It could build wind turbines, which would have yet another set of costs.
The marginal cost to the environment of 3 large coal plants is, of course, modest. The same is true of each vote cast in an election, or every dollar gathered from taxes. It all adds up, though. Adding a tax on carbon emissions would change that cost analysis. Maybe it would still be worth building all three plants, but maybe it would be more economical to build two big coal plants and a large wind farm. Maybe two of the plants could be replaced by renewable energy sources.
A carbon tax decreases the margin of the coal plant over other fuels. That difference in cost could be spent building a different kind of plant, but could also be spent to fund research into cleaner, more efficient technologies. A utility that produces less energy from coal, and uses the a portion of the tax saving to invest in research could still come out ahead financially while encouraging innovation.
The decision that the utility makes today will have serious impacts on the cost of electricity down the line. Undoubtedly they will have to pass the costs of a carbon tax on to their consumers, who would surely prefer the power coming from renewable sources when it becomes cheaper. Choosing to build these plants today will lock consumers into higher energy prices down the line, since some form of regulation of coal power seems increasingly inevitable.
To my mind, some sort of carbon tax makes more sense than an “upstream” cap-and-trade system. Both wind up making things more expensive for consumers, but capping upstream basically means rationing fuel production, which seems foolish. The problem, after all, is mostly from consumption – the demand side, not the supply side. The European cap-and-trade system caps emissions makes much more sense, because it is levied on a gradually increasing range of carbon emitters, beginning with industry, and gradually moving to transportation and individuals. Combine a carbon tax levied at the scale of refineries with an expanding cap-and-trade system like we see in Europe, and you incorporate costs and incentives on all the scales. Balance increased carbon taxes with decreases in overall taxation, and the system remains fair and effective.