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April 14, 2013
David Warsh, Proprietor


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Getting Serious about Climate Change

The Republican Party seems mired in nostalgia. Calvin Coolidge one week, eulogies for Margaret Thatcher the next. Take a closer look, though, and you’ll find powerful forces of regeneration hard at work within the party. As is often the case, the harbingers of change are to be found in California.

Some of this takes place in the broad theater of persuasion. Last week former Gov. Arnold Schwarzenegger hosted a forum at the University of Southern California, where a draft of the third National Climate Assessment Report was discussed. The draft report, by a panel of sixty experts, sees California bearing the brunt of a higher volume of heat waves, heavy downpours, floods and droughts that are already affecting the American people, and which are likely to increase. (A 90-day comment period ended last week; after further revision and review, eventually the report will be submitted to the government..) “The first step for policymakers — and for ordinary citizens too — is to understand the situation we face,” the two-term Republican governor wrote in an op-ed article in the Los Angeles Times.  He lectured the forum audience:

If we are smart, we listen to our doctors, and if we are stupid, we ignore our doctors and it takes a heart attack to realize that we should listen. The National Climate Assessment Report is our physical and these scientists can give us a prescription for what we need to do to improve our climate. It is our duty to listen to them and encourage action — action all over the country.

More telling was the op-ed article tucked away in The Wall Street Journal last week in which former Secretary of State George Shultz and Nobel Laureate Gary Becker, of the University of Chicago, proposed to replace the bewildering  patchwork of existing energy taxes and subsidies (think ethanol!) that has grown up over the years with a single carbon tax levied on all forms of energy, with the idea of “leveling the playing field” among fuels of all sorts, by charging for the amount of atmospheric carbon they emit.

Instead of putting a huge new source of funds at the government’s disposal, however, Shultz and Becker say that the measure should be “revenue neutral,” meaning that whatever sums are realized beyond what the government currently nets should be paid into an account held separate from all the rest, and earmarked to be returned to individual taxpayers.  The aim would be to curb greenhouse gas emissions, nothing more.

To that end, they recommend that a tax be levied close to the point of production (rather than tacked on to gasoline prices and energy bills, as is the case today), and collected by an existing government agency, either the Internal Revenue Service or the Social Security Administration.  If the IRS did the collecting, say Shultz and Becker, an annual distribution – a “carbon tax dividend” — might be paid annually from the fund to every taxpayer and recipient of an Earned Income Tax Credit. Were the SSA the agent, the distribution would go on the same basis to everyone paying into or receiving benefits from the system.

There is no shock –the idea of a tax on carbon that has been gaining momentum in Washington for years. The conservative American Enterprise Institute has been quietly studying the idea for years. After the election, the AEI finally went public in November when it partnered with the Climate and Energy Project at the Brookings Institution, the International Monetary Fund, and Resources for the Future to host a day-long series of discussions. A lucid short report on what went on that day is here.

The difficulties of designing a carbon tax are considerable but not insurmountable. Taxation is an intrinsically messy business. In fact, British Columbia has been experimenting with just such an approach as that proposed by Shultz and Becker  for five years, having started at a relatively low level and increasing by steps to an indicated target, giving producers and consumers alike opportunity to adjust to the system. Once established, Shultz and Becker say, the tax could be raised if greenhouse warming exceeded expectations, or lowered if it did not.

The real problem has to do with how the issue is to be framed.  Many factions, conservative and liberal alike, see carbon taxation as a means to the end of dealing with US budget problems – as a new source of revenues, perhaps antecedent to a value-added tax, designed to replace the century-old system of income taxation with a broad tax on consumption. Others think that any new tax instrument should be confined to dealing with the problem of atmospheric carbon emissions.

The news last week was interesting because it set in opposition more starkly than ever before the broad coalitions vying for control of the Republican Party. George Shultz, 92, and Becker, 82, are at the very pinnacle of the GOP Establishment. In addition to being Secretary of State under Reagan, Shultz served as Treasury Secretary, Labor Secretary and Director of the Office of Management and Budget in the Nixon administration. Becker is the inheritor of Milton Friedman’s mantle as the foremost expositor of market economics. Behind them stands an extensive Hoover Institution task force.  Arrayed against them are the many voices associated with the GOP’s Tea Party wing – populists who believe the identity of the Republican Party depends crucially on its opposition to taxes of any sort.

One anvil on which these issues will be hammered out is the editorial page of the WSJ, where Shultz and Becker’s plan appeared last week to a portentous silence that won’t last very long. That influential forum has been dominated for years by Tea Party tax-cutters and climate-change skeptics. Will it change over time? We’ll see. A major battle for the soul of the Republican Party began last week.

.                           xxx

Raj Chetty, of Harvard University, was awarded the John Bates Clark Medal last week by the American Economic Association. The prize is given annually to an economist judged to have made a durable contribution to economics before the age of forty.

Chetty was cited for having developed a variety of ingenious methods for sifting data to measure behavioral responses of various sorts, especially to tax law changes – “arguably the best applied microeconomist of his generation,” according to the committee’s report.

Named Distinguished Fellows of the AEA were Harold Demsetz, of the University of California, Los Angeles; Stanley Fischer, of the Bank of Israel; Jerry Hausman, of the Massachusetts Institute of Technology; and Paul Joskow, of the Massachusetts Institute of Technology and the Alfred P. Sloan Foundation.

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3 Comments

  1. Will a federal tax on carbon offset the tax that Virginia has just passed on people driving hybrid cars?

    Monday, April 15, 2013 at 7:45 am | Permalink

  2. Mark Newcomb wrote:

    Would such a tax structure be enough to make the US a viable first mover on the world playing field? That could be the key question.

    Monday, April 15, 2013 at 12:20 pm | Permalink

  3. klem wrote:

    “Instead of putting a huge new source of funds at the government’s disposal, however, Shultz and Becker say that the measure should be “revenue neutral,”

    That’s the oldest con in the book, surely we won’t fall falls for that, right? Every new tax enacted around the world today is always revenue neutral when it first begins, but in a few years it becomes revenue positive. It makes no sense for any government to have tax which is revenue neutral. It would be like owning a shoe store and selling shoes at revenue neutral prices. Revenue neutral tax, its a contradiction of terms.

    Wednesday, April 17, 2013 at 7:12 pm | Permalink

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  1. Somewhere else, part 46 | Freakonometrics on Thursday, April 18, 2013 at 12:38 am

    [...] Serious about Climate Change” http://economicprincipals.com/issues/… via [...]

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