Questions About Sumner’s Carbon Tax

Economist Scott Sumner has posted a description of a tax on carbon he would support at The Hill:

Assume the adult population of the United States is 250 million. If we (hypothetically) say the government is spending $200 per adult on clean energy subsidies, then the total cost of the program would be $50 billion each year. Let’s also make the assumption that the full $50 billion is financed by the budget deficit, to match the mistaken perception that subsidies are free money.

Now, consider an alternative idea: a carbon tax that instead raises $50 billion each year. By itself, this would reduce the deficit by that amount. Thus, to have an equal fiscal impact to the clean energy subsidies, the government would need to rebate twice as much ($100 billion) back to the public.

Thus, Americans would on average pay an additional $200 in carbon taxes each year — but everyone would receive a fixed carbon tax rebate of $400, regardless of how much carbon tax one pays. For the same $50 billion price tag as the clean energy subsidies, we’d have a carbon tax program that looks more appealing to the public.

How does this reduce carbon emissions? While the rebate is constant, the amount paid in carbon taxes is proportional to one’s energy use. Consumers would have a powerful incentive to move away from fossil fuel usage.

Only a very modest percentage would be paying out more than the $400 they’d be receiving — and those would be mostly affluent Americans. The net direct effect would be to put money in the pockets of the vast majority of Americans. That, plus the potential environmental benefits, should make it politically popular.

That may sound familiar to you—it’s not unlike something I’ve proposed here from time to time. Better in some ways (simpler); worse in others (for reasons my questions should make clear).

For the sake of argument assume that you do, indeed, want to reduce the volume of carbon we’re emitting. I have some questions for Dr. Sumner:

  1. Why would this incentivize a reduction in carbon consumption? It wouldn’t provide an incentive for the lowest 90% of income earners because their ability to reduce their carbon consumption is extremely limited. They’ve still got to heat their homes, get to work (generally by driving), and so on. They might be able to reduce a little but not a lot. I don’t see how it would provide an incentive for them to reduce their carbon emissions any more than withholding tax incentivizes them to save. And for the top 10% of income earners the incentive isn’t large enough to matter.
  2. If this makes so much sense why hasn’t it been tried? I won’t accept the answer that no one has thought of it.
3 comments… add one
  • Drew Link

    The answer to #2 is that “everyone would receive a fixed carbon tax rebate of $400, regardless of how much carbon tax one pays” is not the way government works. They will just pocket the tax.

    #1 is completely correct.

    Any damned fool, Rube Goldberg scheme will work on paper if the assumptions are all wrong.

  • steve Link

    Peripherally related and since I think someone said they were interested in particulate pollution, link goes to effects of air pollution. At Cowen’s site they also have up a nice short Youtube on effects of pollution from their econ class.


  • Andy Link

    Yeah, this is not an incentive that will do much.

    I look at my own situation and there’s nothing there to make me make significant changes. $200/year net rebate isn’t much.

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