Paying for Carbon Emissions-Tax or Permit?

Article excerpt

Pollution is an example of "an externality", the term applied by economists to the costs imposed on society generally by a producer's activities. One way of trying to correct these externalities is by introducing a "Pigovian tax", to encourage the producer to reduce pollution and collect government revenues that may be used to counteract the negative effects of the pollution.

American Nobel laureate Joseph Stiglitz favours a Pigovian tax for dealing with the causes of climate change. "A global externality can best be dealt with by a globally agreed tax rate," he argues. "This does not mean an increase in overall taxation, but simply a substitution in each country of a pollution (carbon) tax for some current taxes. It makes much more sense to tax things that are bad, like pollution, than things that are good, like savings and work."

Greg Mankiw, professor of economics at Harvard University, is urging Americans to raise the tax on gasoline. Not quickly, but substantially. His reasoning: not only would this curb the pollution from petrol, but also it would address road congestion, replace heavy-handed regulation aimed at reducing energy dependence, and raise US$100 billion a year that would make a dent in the looming fiscal gap in the United States.

Mankiw, on his daily blog (www.gregmankiw.blogspot.com), has been adding a growing number of supporters to the "the Pigou Club" who favour Pigovian taxes. He recently noted that the club was bigger than he realised: a Wall Street Journal survey shows 40 of 47 economists who responded believe the Bush government should help champion alternative fuels. Economists generally were in favour of free-market solutions, but acknowledged there are times when you need to intervene.

A majority of the economists said a tax on fossil fuels would be the most economically sound way to encourage alternatives. A tax would raise the price of fossil fuels and make alternatives, which today often are more costly to produce, more competitive in the consumer market. "A tax puts pressure on the market, rather than forcing an artificial solution on it," says David Wyss at Standard & Poor's. He warns that "we're already in the danger zone" because of the outlook for oil supplies and concerns about climate change.

In this country, the Clark Government proposed introducing a carbon tax to help it meet its Kyoto Protocol commitments to reduce greenhouse gas emissions. …