One narrative about the Yellow Vest protests in France is that politicians should not adopt energy taxes to change behaviors that lead to climate change. In this telling, the political costs of wise energy policy are too high. This is an overly simple reading of the French experience and is a convenient excuse for those corporate interests hurt by use of well-designed taxes to address environmental problems.
I have argued before in this blog about the need for raising the gas tax in Maine. The French protests were triggered by an increase in the tax on diesel fuels, but those protests are about much more, which is seen in the fact that protests continued even when the diesel fuel tax was rolled back.
In fact, part of the problem here is that France had created incentives to use diesel fuel by taxing it less than gasoline. The idea was that diesel cars were more fuel efficient and, because of the false promise of “clean diesel engines,” a more environmentally desirable automotive technology. It is much easier for politicians to use subsidies or regulations to encourage a specific technology than it is to use taxes to discourage behaviors that contribute to environmental problems like global change. We see this in the U.S. with subsidies for all kinds of energy types – wind, solar, ethanol, and even fossil fuels. This approach requires policy makers to pick “winners” among competing technologies, like the French had done with diesel engines. (We see this picking of winners in the U.S. in what I have termed the false promise of biofuels.)
The alternative is to use taxes (the fancy economics term is Pigovian taxes) to address the hidden costs of technology (externalities in economics jargon). Then markets do what they do best, create incentives for people to make consumption decisions and firms to make production decisions based on complete information about benefits and costs.
Using this logic to address the impending crisis of global change, including climate change, calls for an economy-wide carbon tax. A well-designed tax of this type would have the following attributes:
- It would apply to all forms of energy at the source (the mine, the well, importation) and would tax energy based on the total greenhouse gas emissions expressed in terms of carbon dioxide equivalents. So, for example, methane emissions would have a higher tax because of their greater greenhouse gas contributions.
- This would mean that the costs of emissions would be embedded deeply into economic decision making. The full costs of economic activity would be built into prices.
- This would reduce the expenditure of funds for lobbyists to affect energy policy, part of a vast system of rent seeking behavior in the U.S. economy.
- The tax should be revenue neutral. Some other tax should be reduced by an equivalent amount so that the people do not feel an additional tax burden. The best way to do this would be by reducing the most regressive Federal tax we have, the payroll tax that funds the Social Security Trust Fund. A fair way to do this would be to reduce the tax on both employer and worker on a first dollar earned basis. So workers would not pay a payroll tax, for example, on the first $5,000 of income each year. At the same time, again to instill a greater sense of fairness, the cap on earnings subject to the payroll tax should be eliminated. (In 2018, incomes above $128,700 are not subject to the Social Security tax.)
- A carbon tax should be introduced at a lower level than is needed and then increased automatically and routinely. The Economist suggests starting at $50 a ton of carbon dioxide emissions and rising to $200 a ton over 25 years. This would allow firms and households to begin planning for their response to the rising tax levels.
The beauty of such approach is that it fixes what markets fail to do; it forces markets to reflect the hidden environmental costs of energy use. At the same time it takes advantage of what markets do well, it encourages efficient decisions by firms and consumers based on full information of costs and benefits.
We should not draw the wrong lessons from the mistakes of French policy, which engendered such a sense of unfairness in society. The yellow vest protests are not really about raising energy taxes; that was merely the trigger that unleashed much greater underlying forces. Rather, we can learn from that experience how to better use taxes both to address environmental challenges and to enhance fairness in society.
There is clear scientific consensus that global change is real and threatening to our modern culture. Now is the time to act and there is no better approach than an economy-wide tax on the greenhouse gas emissions from the production and use of energy from all sources.