In December, President Clinton will travel to Kyoto, Japan, to attend a world conference on global warming.
At that time, he is expected to commit the United States to a policy of reducing greenhouse gases to 1990 levels. Press reports indicate that one major option being considered by the administration for achieving this goal is a carbon tax that would sharply raise the price of energy consumption, including gasoline and electricity.
For some years, economists have been studying the potential for taxes to achieve environmental goals at lower cost than traditional command-and-control regulatory policies. They are virtually unanimous in believing that properly designed tax policies are superior to regulation because they allow for much greater flexibility and efficiency in achieving environmental objectives. In theory, such a tax should exactly equal the social cost of pollution.
The superiority of taxes to achieve environmental goals has led some economists to suggest a possible win-win situation, in which revenue from environmental taxes is used to offset worse taxes. For example, carbon-tax revenues could be used to reduce taxes on labor, thereby reducing a distortionary tax while at the same time compensating workers for the cost of the tax. This has been dubbed the "double dividend" tax policy.
At first glance, it appears that adoption of such a tax policy provides a costless solution to the dilemma of needing to act on global warming before all the science is in. Although the Clinton administration treats global warming as absolute certainty, the evidence is in fact very ambiguous. However, if it were possible to devise a tax policy to reduce greenhouse gases that was also worth doing in the absence of global warming, then it is not necessary to resolve the scientific question before moving forward.
At first, there was considerable support among economists for the double-dividend policy. But as further research on the subject was done, more and more questions were raised about its efficacy.
One of the most important contributions to the debate was done by the Dutch economists A. Lan Bovenberg and Ruud A. de Mooij. They pointed out that carbon taxes would raise the prices of consumer goods and that this was equivalent to a cut in real wages. Even if all the revenue from the tax is used to cut taxes on labor, the tradeoff still increases distortion in labor markets, making the economy worse off. Thus, Messrs. Bovenberg and Mooij conclude that "environmental taxes typically exacerbate, rather than alleviate, pre-existing tax distortions - even if revenues are employed to cut pre-existing distortionary taxes."
Economist Lawrence Goulder of Stanford points out another problem with using environmental taxes to offset other taxes. To the extent that such taxes raise commodity prices, they will reduce consumption. This, in turn, will lower the revenue yield of the tax, which limits the government's ability to offset other taxes.
If revenue recycling cannot offset all of the economic costs of a carbon tax, the result will be a substantial reduction in economic welfare. Even the administration's own analyses concede this result. One such analysis concluded that a $100 per-ton carbon tax would cut economic growth in half by 2005.
Economists are now much more skeptical about finding costless ways of dealing with global warming through tax policy. This means that the benefits of reducing global warming must justify the cost of the measures adopted to deal with it. Since losses in real output today are irreversible, while the benefits of reducing global warming are uncertain at best, this strongly suggests that we should move cautiously in adopting policies to reduce global warming.
Bruce Bartlett is a senior fellow with the National Center for Policy Analysis and a contributing writer for The Washington Times.
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