I agree with Posner that the evidence for global warming is serious enough to warrant actions, and that a carbon tax is much more effective than regulations of carbon emissions, such as those recently proposed by President Obama. Yet even if the case for a carbon tax was accepted, and there is powerful opposition in the United States, many issues remain about how carbon taxes should be implemented. My discussion deals with a few of these issues.
Although I believe that the evidence on global warming is sufficiently strong to warrant a carbon tax, the magnitude and timing of the threat from warming is still an open question. For this reason it is wise to start with a low tax rate that can be ramped up over time if the evidence on the damages from warming becomes clearer. Economic theory also implies that the tax should start relatively low and rise over time even if one knew for certain that a catastrophe would occur when the amount of CO2 in the atmosphere exceeded a certain concentration level. The reason is that with a positive interest rate, equalization in the present value of a tax on present and future emissions requires a rising tax rate over time. This is an application of the so-called Hotelling Rule for optimal exploitation over time of depletable resources, such as oil (see the extensive discussion of the application of this Rule and other economic policies to combat global warming in Becker, Murphy, and Topel, “On the Economics of Climate Policy”, The B. E. Journal of Economic Analysis and Policy, May, 2011). As it were, the remaining space in the atmosphere for CO2 before disaster strikes is the stock of an exhaustible resource.
In addition, research should be supported on the development of methods and techniques to sequester and mitigate emissions into the atmosphere of CO2 and other greenhouse gases if a major disaster from global warming appears likely. It might even be possible to develop ways to extract some of these gases out of the atmosphere. Expensive methods of carbon removal and extraction would be implemented only when the damage from greenhouse gases looked to be sufficiently serious and imminent.
A carbon tax should not be an addition to but rather a replacement for other subsidies and taxes on different fuels. For example, the United States along with many other developed countries has a vast array of special subsidies to sources of power that emit less carbon than coal, oil, and other fossil fuels. These include subsidies for electric-powered cars, and for wind and solar energy to generate power for electricity generation. These and other special subsidies, regulations, and taxes designed to reduce carbon emissions would be undesirable with appropriate carbon taxes. For these taxes would create an incentive to find other sources of power for cars, electric plants, and other users of fossil fuels in order to reduce their carbon footprint, and hence the size of the overall tax bill.
Some groups support a carbon tax mainly because it raises tax revenue that would be especially welcome in these times of budget deficits. It is tempting to impose a carbon tax because of the revenue yielded beyond the level justified by the need to cut carbon emissions, even when such a carbon tax might have large undesirable effects on the output of gasoline, electricity, and other goods. That is why the justification for a carbon tax because of the threat of global warming should be sharply separated from the desire to have such a tax to raise revenue.
In order to separate the case for a carbon tax because of global warming, George Shultz and I proposed that the revenue from such a tax be distributed annually back to the American population a s a carbon “dividend”(see Shultz and Becker, “Why We Support a Revenue-Neutral Carbon Tax”, Wall Street Journal, April 7, 2013). There are several possible ways to distribute this dividend, such as through a lump sum payment to each person with a social security number, or through a per capita rebate. Alaska and several countries have in the past distributed to their populations the revenues from taxes on fossil fuels. A distribution of the revenue to the public might help blunt the strong opposition to a carbon tax because of a belief that it would be used primarily to raise tax revenue to finance additional government spending.
A tax on carbon emissions would be appropriate in light of the real threat from global warming. However, it is important to implement taxes at appropriate levels, and that these taxes are supplemented with the development of mitigation and sequestering methods to reduce the emissions of greenhouse gases if they appear to be on their way to causing major damages. It is also important that the effect of carbon taxes in mitigating global warming be sharply separated from the value of these taxes in raising government tax revenue.