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A Carbon Untax [Carbonomics, Ch. 7]

December 26th, 2006 by Steven Stoft, Berkeley

A carbon untax is an incentive to use less carbon. Unlike a tax, it raises no revenues for the government, but refunds all revenues to consumers.

“Among policy wonks like me, there is a broad consensus. … if we want to reduce global emissions of carbon, we need a global carbon tax.” So said Mankiw, whom I disagreed with over fuel economy in the previous chapter. I agree completely with Mankiw, on this—the central point of his article in the New York Times. He also mentions that President Reagan’s chief economist, Martin S. Feldstein, a famous opponent of tax distortions, came up with the idea of using a carbon tax back in 1992.

As Mankiw says, there is no disagreement “between environmentalists and industrialists, or between Democrats and Republicans” on the benefits of a carbon tax. He’s right. A carbon tax is the cheapest way to solve the first, and most important, energy-market problem, “the missing cost of carbon emissions.”

But, as Mankiw also reminds us, both American voters and political consultants consider “tax” a four-letter word. Can we find a way around the political lightning rod of “taxes” to save Americans tens of billions of dollars a year by implementing the best economic policy?

Mankiw comes close to finding the way. There are two halves to any tax—how it is collected and how it is spent. The benefits of the carbon tax come entirely from the first half—the charges on carbon, which increase its price and make us all look for ways to avoid using fossil fuel. So economists look for ways the government can spend the tax revenues to make voters happy. Happy enough to forget it’s a tax? Not likely.

Mankiw proposes to spend the carbon tax revenues on a “rebate of the federal payroll tax on the first $3,660 of earnings for each worker.” That is close to the right answer. Others propose reducing income taxes either personal or corporate, and some propose spending it on research and subsidies.

To find the right answer, we must go north to Alaska, where the air is cold and heads are clear. The answer—how the government should spend the money—couldn’t be simpler. Don’t spend it! Just give it back to us, thank you very much. Alaska sends identical checks, for a little over $1000, to every Alaskan resident every June. It collects these revenues from its famous oil pipeline. This is popular. This is an untax.

Taxes raise money for the government. The office football pool collects money and gives it back. That’s not a tax. That’s an incentive to correctly predict the winning team. It’s also fun.

A carbon untax is an incentive to use less carbon. Use the average amount of carbon, and your refund check will exactly cover what you contribute to the carbon pool of money collected from oil, gas and coal companies. Your contribution will not always be obvious, but these companies will raise prices to cover their carbon charges. That’s exactly what’s needed to discourage the use of fossil fuel.

Use more carbon than average, say by flying your own personal jet, and you will pay more in higher fossil prices than you get back in June. Because the rich tend to use far more than average, 60 percent of us are actually below average, and will get back more in June than we pay the rest of the year in higher fossil prices. The less carbon you use, the greater your net winnings—or if you fly your own jet, the less you lose by. That’s why, even though it gives back all the money, the untax works perfectly.[…]

Some people will want to change the untax to pay down corporate taxes, while others will want to spend it on energy programs. Both of these options change the untax into a regular old we-hate-it tax. Let me make this as simple as possible:

• All economists know that a carbon tax or a carbon untax is best.
• If the government keeps the money, it’s a tax.
• If it’s a tax, you can forget it; it will never fly.
• It’s better for lawmakers to implement an untax than to grab for the revenues and get nothing.

Steve Stoft

These are excerpts from chapter 7 of my forthcoming book Carbonomics.

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5 Responses to “A Carbon Untax [Carbonomics, Ch. 7]”

  1. Shivam Goel Says:

    Really well written..I have been following the blogs and “untax” would be appreciated especially in a country like India.

  2. Ben Graedler Says:

    How will you pay for the transaction cost then? Collecting all money costs money and giving it back as well? Doesn’t it? Why do not invest the extar carbon money in boosting renewables so you have a double dividende?

  3. Nuno Says:

    That’s a great article! I may have one idea for the double dividend problem raised by Ben Graedler. What about allow more tax credits from personal investments in renewable technologies, or from giving money to research institutes in the field? As such, the citizen has the empowerment to choose where his refund check is going to be (better) used to boost clean energy technologies.

  4. Steven Stoft Says:

    Thanks for the comments. First I would say that personal tax credits for personal energy investments would be very prone to gaming and would be complex.

    The double dividend question has a surprise answer which is revealed in Chapter 18: Untaxing is Fair.
    As it turns out, unless you think a poll tax (capitation tax) used to pay off another tax is a good idea because it increases efficiency (and I do not know anyone that agrees with this) you must logically reject the double dividend approach in favor of the untax.

    This is nice because it means economics agrees with politics. The untax wins on both.

  5. Kratom Says:

    Thanks for the article, Will be appreciated by many counties if they take the initiative..

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