David R. Henderson  

A Carbon Tax Is Not a Price

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But carbon already has a price, or, more exactly, multiple prices. Natural gas has a price; oil has a price; coal has a price. And their prices are related to the valuable carbon component of those fuels because it's carbon that makes those fuels valuable. Just as there's no such thing as a free lunch, carbon is not free.

So why does Professor Gordon claim that taxing carbon means "putting a price on carbon?"

I can only speculate because I don't know him, but here's what I'm willing to bet dollars to doughnuts on: he calls a tax a price in order to lull the reader into thinking that it's not a tax. Later in the piece he admits that it's a tax but in his first mention, which sets the stage, he doesn't.


This is from my latest blog post at the Fraser Institute's blog. The post is titled "A Carbon Tax Is Not a 'Price'". Read the whole thing, which is not long.


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CATEGORIES: Taxation




COMMENTS (24 to date)
ThaomasH writes:

Duh!

No, but once passed, the tax on carbon would become part of the price of fossil fuels, products made from fossil fuels, and the sequestered carbon, creating incentives to use less of and produce more substitutes of the former and produce more of the latter.

Of course we can continue not to tax carbon and go on handing out ad-hoc subsidies and enacting arbitrary administrative measures that produce far greater dead-wight losses that the carbon tax would so that politicians can ignorantly or venally claim they didn't "raise taxes."

Oh that someone would explain to such politicians the concept of the opportunity cost of their feel-good conceit, perhaps with parable about the "seen and the unseen," unintended consequences, and the like.

jeppen writes:

I would say fossil fuels are not very valuable because of the carbon, but because of the hydrogen. The carbon carries hydrogen, which represents most of the energy released on combustion. Natural gas has more hydrogen per carbon atom than coal.

I think it is a good choice to accept an internalizing carbon tax even though other regulation is not lifted up-front. The carbon tax should ease pressure on other regulation and allow its eventual dismantling.

Ken Robinson writes:

A carbon tax in theory represents the externalities that are not reflected in fuel prices. The problem, of course, is that externalities are difficult if not impossible to "price" by their very nature. If pricing them was possible, they wouldn't be externalities in the first place. So no, it's not a price (real prices can only be set via a process of discovery in a free market), it's a government-imposed cost. A tax, in other words.

That said, if one accepts the premise that reducing carbon-based fuel usage is a worthy societal goal, a carbon tax is one of the less market-distorting ways of approaching it since at least it doesn't directly subsidize alternative sources or pick technology winners.

David R. Henderson writes:

@Ken Robinson,
You’ve just summarized my post, except for the part about how it won’t replace regulation.
@jeppen,
The carbon tax should ease pressure on other regulation and allow its eventual dismantling.
Are you willing to bet on that? If so, I have a bet to propose.

Miguel Madeira writes:

I think that, with "putting a price on carbon", he means "putting a price on emissions of carbon dioxide"

Airman Spry Shark writes:

It can be cast as a price, if two premises are accepted. First, that, since the sky cannot be enclosed as pastures were, the government exercises a property right over it on behalf of the people in order to avert a tragedy of the commons. Second, that such property right includes discretion over what emissions to allow.

Given these premises, a carbon tax is the price of a bundled license to emit as much carbon dioxide as would be produced by burning the taxed fuel. That the government is, in this case, a monopoly, and that the price is not set to maximize profit does not change its nature.

Greg G writes:

He's not trying to "lull the reader into thinking it's not a tax." That would have to be a pretty dumb reader. And he doesn't think that carbon is free. You are normally a lot more charitable than this David.

He's just using "putting a price on carbon" as shorthand for "raising the cost of using carbon in order to reduce the amount of carbon burned while raising some revenue for the government via this tax."

He is arguing that it's a tax that's justified, not that it's not a tax at all. If you think it's not a tax that's justified then it's OK to make that argument but let's not beat up on a straw man here.

Jon Murphy writes:

@greg g

I must disagree with you. I think if he meant, as you suggest, raising the cost of carbon (and, as a bonus, adding to government revenue,) I don't think he'd have phrased his argument as "putting a price on carbon." He'd have said "raising the price of carbon." To me (and I think Prof. Henderson would agree with this), the phrase "putting a price..." strongly implies there wasn't a price before. And he uses that phrasing throughout the post. He never says "raising the price of carbon." It's always "putting a price on carbon."

I also suspect this is done intentionally because this is an op-ed meant for lay readers. Economists like Prof Henderson and myself see the difference but a great many readers wouldn't know or even care. They likely do see carbon as price-free.

Greg G writes:

Jon,

Even lay readers are not nearly dumb enough to think that the fuels themselves have been free. I am quite sure they realize they have been paying for the carbon based fuels they have been using.

It's one thing to argue that his language was sloppy. It's something entirely different to argue that he is literally trying to make people believe the carbon based fuels were free without this tax.

I should have added above that he is really arguing that the externalities that result from the use of carbon are what needs to be priced in.

David R. Henderson writes:

@Jon Murphy,
To me (and I think Prof. Henderson would agree with this), the phrase "putting a price..." strongly implies there wasn't a price before. And he uses that phrasing throughout the post. He never says "raising the price of carbon." It's always "putting a price on carbon."
Yes.

Jon Murphy writes:

@Greg G

Even lay readers are not nearly dumb enough to think that the fuels themselves have been free.

Except he's not saying the fuels have been free. He's saying the carbon emissions have been. And that's the point Prof. Henderson has been making. The emissions aren't free. They're part of the cost of the fuel. What he wants to do is raise the price of the emissions, not "put a price" on them.

Greg G writes:

Jon,

OK then, the dispute is really about whether or not the externalities resulting from carbon fuels are or aren't adequately reflected in the price paid by consumers in the absence of a carbon tax.

If that's what David meant then he used a sort of shorthand for it just as Stephen Gordon used a kind of shorthand for what he meant.

Gordon's main point was that, if you believe that we should try to reduce the use of carbon based fuels, a simple carbon tax is a more efficient way to do that than other types of regulations that government might employ to achieve that result. That shouldn't be very controversial to an economist.

Obviously, if you don't think there is a reason we should want less carbon based fuel to be burned, that's a different issue than which policy is most efficient in reducing carbon burning.

Dylan writes:

@ Jon Murphy

I'm new here so maybe there is a history of debate that I'm not aware of...but isn't this pretty much Econ 101 externalities? There is a price for carbon based fuel, but disposing of the CO2 emissions from the fuel has historically been free. It seems pretty clear that this is what Prof. Gordon and others mean when they use the short hand of putting a price on carbon.

David R. Henderson writes:

@Greg G,
OK then, the dispute is really about whether or not the externalities resulting from carbon fuels are or aren't adequately reflected in the price paid by consumers in the absence of a carbon tax.
No, that’s not the dispute. As I said in the piece, the dispute is about whether a tax is a price. It’s not.

Greg G writes:

David,

OK, if this is just a dispute about the best way to use the jargon then I have no problem with that part of it.

I still think you should acknowledge that Gordon's essay was not really about how to best use the jargon. It was about whether or not a carbon tax is a more economically efficient way to reduce carbon burning than the other possible government interventions that could be used for that purpose.

Surely we agree that a carbon tax would raise the cost to consumers of choosing to burn carbon and that is a more efficient way to produce that reduction in consumption than micromanaging the other ways in which that goal might be achieved.

David R. Henderson writes:

@Greg G,
Did you read the whole of my Fraser blog post? Your latest comment makes me wonder.

Greg G writes:

David,

I just reread his piece and yours. I should have recognized that you did acknowledge that a carbon tax is more economically efficient than other policy options for reducing carbon use. So you are right that I didn't read you carefully enough.

But I still think you didn't read him carefully enough. You say this: "he implicitly assumes a completely unrealistic world in which the carbon tax would replace intrusive government regulation."

I couldn't find where he assumes that replacement would happen at all. He simply argues that replacement of carbon regulation with a carbon tax would be better policy, not that we should assume it will happen.

J Scheppers writes:

Dr. Henderson:

This is a great topic, and the discussion from Jon Murphy, Greg G, and yourself in the comments illuminate it further. Let me try to pull from all three and see if I can add.

First, Dr. Henderson is very clear that Carbon already has a price. I agree.

Second, Greg G. believes that carbon has an externality that is not directly paid for by the specific parties involved in a transaction to provide energy for a fee. I think all three of you could agree with that wording.

Third, Jon Murphy brilliantly points out that the externality is paid for by those incurring the impact of the cost. They simply are not necessarily a part of the agreement to transact for energy.

While I agree with Dr. Henderson's points of why it is a tax and why there are the multitudes of distortions that already exist and are part of the price, I hypothesis this alternate view point:

A tax even if implemented and removing all the regulation and even perfectly set to the real damaged caused likely will not improve the condition.

From a property rights perspective, the currently aggrieved party does not have a property right not to be carbon polluted. If we add a tax to price this cost on the original energy transaction, this transfers the right to pollute to the tax collector. This still leaving the aggrieved with substantial damage costs and no rights. The tax collector likes the money and makes sure he prices the externality to maximize the tax collectors long run revenue with little care for the aggrieved.

The tax collector now spending the collected taxes distorts other markets by spend the unearned portion of the tax. (I posit the earned portion of the tax is the amount reduced carbon damage the aggrieved incurred.)

If a tax is truly warranted it should be paid to the aggrieved. To the extent the aggrieved is a party to the energy decision would nullify the need to duplicate the payment.

Transferring full property right and paying the aggrieved only shifts the costs and may make the energy producer more careful, but likely reduces the care of the aggrieved from incurring damages.

Josiah writes:

"Putting a price on carbon" is a shorter way of saying "putting a price on carbon dioxide emissions."

Josiah writes:

Prof. Henderson,

Last year you wrote a post arguing for the use of tolls to fund roads on the grounds that "charging a price for using the road is a better way of paying for roads than using taxes."

Suppose someone responded that there already was a price on using the road (after all, cars aren't free), and that you used the word "price" to obscure the fact that tolls were really taxes. Would you find this a convincing response?

David R. Henderson writes:

@Josiah,
Suppose someone responded that there already was a price on using the road (after all, cars aren't free), and that you used the word "price" to obscure the fact that tolls were really taxes. Would you find this a convincing response?
No.

Mark Bahner writes:
OK then, the dispute is really about whether or not the externalities resulting from carbon fuels are or aren't adequately reflected in the price paid by consumers in the absence of a carbon tax.

Does anybody really think that the externalities from the mining and burning of coal in the United States for electricity are adequately reflected in the price paid by consumers for that electricity?

The financial viability of coal-fired power plants in the United States is heavily dependent on the fact that they're allowed to dump massive amounts of illness-inducing particulate matter, nitrogen oxides, and sulfur dioxide into the atmosphere.

Mark Golden writes:

The first part of the blog post is silly. As noted above, "carbon" here is just shorthand for CO2, not the fuels' carbon content. You could have just asked someone knowledgeable before publishing. (Note: hydrogen also gives the fuels value, not just carbon.) And "price" is shorthand for covering proposals for either a tax or a cap-and-trade program, like the one for sulfur dioxide. Some climate activists debate which would be better. Others say the important thing is to "put a price on carbon" either way.

But the end of the blog post is right on. Few proponents say much about getting rid of mandates in exchange for charging for the external costs. Hoover's George Shultz is the exception. If others would be stronger on deregulation--and stress a revenue-neutral structure--conservatives would be more likely to support this essential action.

Peter Gerdes writes:

Of course hydrocarbons are not valued for their carbon content. They are valued for their energy content which is a consequence of the arrangement of both the hydrogen and carbon molecules.

As far as putting a "price" on carbon it is a perfectly reasonable rhetorical presentation of the fact that a carbon tax is not (necessarily) an attempt to raise revenue, decide who should be forced to fund government, or express moral disapproval but only to internalize the externality imposed by carbon.

The issue of the other regulations isn't a counterargument. It is an argument that maybe one should demand concensions in return for a carbon tax.

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