Monday, July 8, 2013

Posner Makes the Perfect (Carbon Tax) the Enemy of the Good (Carbon Regulations)

Over at the Becker-Posner Blog (here), Judge Richard Posner makes the by-now familiar case that a tax on carbon would be superior to regulation of carbon emissions. A clear majority of economists agree, as do I, as a matter of theory. However, Posner makes a mistake in treating a carbon tax as a realistic option at this point in time, despite purporting to recognize political obstacles to its enactment. The fact of the matter is that a Congress that cannot pass a bill to subsidize farmers (see here), who are probably the most successful lobbying group in US history, can not possibly enact a tax on anything, let alone on carbon.

This is not the fault of President Obama, but the consequence of the evolution of the filibuster in the Senate, gerrymandering of House Districts, which have solidified the power of Tea Partiers in that body, and the electorate that put them in office in the first place. To accomplish anything on climate change, President Obama had to bypass the Congress, which meant using statutory authorities already in place, i.e., the Clean Air Act. That Act allows the President, through EPA, to promulgate quantity-based regulations, but not to impose anything like a carbon tax. So, simply put, a dysfunctional Congress left the President no option. The only presently feasible path to controlling climate change in the US is regulatory, Posner's (and my own) preference for a carbon tax notwithstanding.

So, the question for Judge Posner is whether he believes the regulatory approach President Obama is taking is better than nothing because that is the only real option.

One more quibble relating to Judge Posner's argument favoring a carbon tax over emissions regulations: he notes, quite rightly, that once emitters meet the regulatory standard they possess no additional incentives to cut emissions, even where doing so might result in net social benefits. But he fails to observe that carbon taxes have problems of their own that require foresight in structuring a tax-based program. Specifically, to the extent carbon taxes raise the price of carbon-based goods (fuels, etc.), presuming demand is reasonably price elastic, demand will fall. But what happens when price falls? All else being equal, we would expect demand to rise. This is known as the "rebound effect." It can be dealt with by inserting a ratchet into the carbon-tax program, which raises the level of tax every so often to minimize demand rebounds. But the fundamental point is that a carbon tax would not be a simple set-it-then-forget-it mechanism.

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