1. Some Dismal Economics of Carbon Pricing in Honor of Bob Rosner
Robert Topel
University of Chicago

2. Background: Climate Externalities and “Pigouvian” Taxes
Economists think of anthropogenic climate change as a classic problem of externality
Current users of fossil fuels do not recognize the full costs of their actions
“Too much” is used relative to the efficient outcome
The (facile?) solution is to fashion a tax on FF use, equal to the external cost borne by current and future generations
Then current users face the full costs of their actions
Will only burn a unit of FF today if current value > full costs, inclusive of future harm
Outcome would be efficient
Sounds easy, doesn’t it?
The vast majority of economists favor a carbon tax as the best way to mitigate harm from FF use

3. Background (cont.)
The challenges in constructing and implementing a harmonized carbon tax are daunting
Estimating future harm—calibrated costs are all over the place
Applying a proper discount rate to future harm—advocated discount rates vary widely
Achieving international cooperation when free-riding is rational
Different countries will value climate “investments” differently—China v. U.S.
These challenges are often cited as key reasons for the failure, thus far, to implement widespread carbon taxes
So I’m going to ignore them—assume all those problems could be solved
Political Economy of Carbon Taxes
Would a carbon tax equal to the cost of future harm provide net benefits?
Maybe, maybe not—much depends on what is done with the (huge) tax revenue

4. A preliminary question: Relative to the private sector, how efficient is government at allocating resources?
110%? (more efficient)
100%? (equally efficient—there is no government waste)
90%?
70%?
50% or less?

5. Key Takeaways: The Political Economy of Taxing Carbon
EPA estimate of current “cost of carbon”(2015) = $37/ton
Includes cost of all future harm and rate of discount to the present
Don’t worry how they got that “estimate” or its ingredients. Just assume it’s true
Apply T = C to oil market (analysis applies broadly, but oil fixes ideas)
C = $12/barrel of oil burned today (2017)
Mitigating impact depends on response of quantity consumed
The market is very large and demand and supply elasticities are small
=> Q doesn’t change much, but tax revenues are huge
Harmonized (worldwide) tax would collect about $200 in taxes for each $1 of benefit (reduced damage)
Sensitive to changes in elasticities of supply and demand
Is such an “ideal” tax worth it? Depends on:
What gets done with the tax revenue—does government grow?
Your view of the relative efficiency of government spending

6. Why Economists Like Carbon Taxes:
An Ideal Pigouvian Tax of T=C Eliminates the Deadweight Loss from Excess Use

7. The Effects of Imposing Carbon Taxes
Tax T in each country n
Reduces price Ps received by sellers
Raises price paid by buyers
Reduces consumption and so reduces DWL in proportion

8. The Effects of a Carbon Tax Calculate Benefits per Dollar of Government Revenue

9. Two Cases (1) Harmonized tax in all countries (2) Unilateral tax in U
Two Cases (1) Harmonized tax in all countries (2) Unilateral tax in U.S.

10. How Pessimistic is this Tale?
Benefits per dollar of taxation are tiny
Doesn’t mean it isn’t worth doing--key question is what is done with the government revenue
Two key points:
A carbon tax equal to the true cost of carbon may actually reduce welfare—it might be harmful
Positive theory of political economy of carbon taxation. Helps to understand the nature of opposition and support for “doing something”
Those who think the government should be bigger tend to think a “doing something” is a good idea
Those who don’t, don’t

11. Public Choice Carbon Taxes and the Efficiency of Government

12. Case 1: g=0 Revenue Neutral Carbon Taxes Produce a “Double Dividend”

13. Case 2: g=1 Government Grows by the Increase in Carbone Tax Revenue

14. Case 3: 0<g<1 Government Fingers are Not Completely Sticky

15. Key Points
Most economists & policy makers think the case for taxing carbon is obvious—only public opinion stands in the way. This view is wrong.
The efficiency of taxing carbon isn’t clear. If government spending is relatively inefficient—as most seem to believe—then carbon taxes can easily reduce welfare, even though they mitigate climate damage
Positive (as opposed to normative) economics point: Views on the efficacy of carbon taxation are crucially linked to views on the relative efficiency of government