Joe Romm on the Carbon Tax

October 23, 2013

Part 2 of Thom Hartmann’s interview with Dr. Joe Romm of

See part 1 here.

The topic is a carbon tax – the subject of a new piece in Washington Monthly that asks, could carbon taxes become a useful tool of monetary policy.

The Federal Reserve has been trying to create inflation for several years now without very much success. Paul Krugman explains the liquidity trap the best, but to describe the problem briefly: when prices and wages are rising, people are more likely to buy things or invest their money, because otherwise, their money will gradually lose value. Paying off old loans is easier, too, because they are worth relatively less as time passes. When prices are relatively stable as they are now, the opposite is true, and economic activity is slower, which is why Ben Bernanke and other central bankers have been working to stimulate inflation.

Legislatures around the world are part of the problem. They keep cutting their budgets (or in our case, clumsily hacking the budget to pieces), which has done serious damage to the economy around the world. These policies have also suppressed prices. When governments borrow and spend on a large scale, the amount of money in circulation in absolute terms increases, and prices rise.

If simply increasing prices were the only goal, then legislatures could achieve it while reducing their deficits by instituting some kind of tax on consumption, such as a sales tax. In other countries, value-added taxes routinely contribute to inflation. The problem is that people might respond simply by buying less, so the tax wouldn’t do anything for the economy as whole. For inflation to stimulate economic activity, incomes must rise along with prices.

But what if the government returned the money from the tax to citizens through a refund? Then not only would prices increase, but so would incomes. This way, legislatures could aid central banks in their inflationary efforts without adding to their deficits.

Of course, something along these lines has already been proposed: a revenue-neutral, tax-and-dividend carbon fee, which would have the added benefit of discouraging fossil fuel combustion.

Estimates for the total value of a national carbon tax depend on how much would be charged per ton of emissions, but they vary between about 0.5 and 0.8 percent of gross domestic product. If all of that revenue were distributed through a dividend, price indexes would presumably increase by about the same fraction. Since inflation remains at 2 percent or below, that’s a substantial effect. The increase might be slightly less, since firms would find ways of producing many goods using less carbon and thus avoiding some of the tax. On the other hand, if the redistribution scheme were somewhat progressive — if the poor received proportionally more of the refund than the the wealth — the economic stimulus would be exaggerated, because the poor spend more of their money than do the rich.

Maybe such a policy would be politically infeasible, but I’m holding desperately to the hope that this month’s catastrophe in Congress might somehow create an opportunity for new coalitions to present their ideas. A carbon tax would not only mitigate global warming, it would also help to end the economic recession. In other words, it would be like pad thai, fireworks, and motherhood all at the same time.

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10 Responses to “Joe Romm on the Carbon Tax”

  1. kingdube Says:

    That enhanced atmospheric CO2 creates dangerous warming is a dubious proposition at best (the Earth is now mildly cooling for 17 years). However, that enhanced atmospheric CO2 stimulates all life (terrestrially and in the oceans) is indisputable.

    The childish notion that wind and solar provide free energy is just that…childish. They’re hugely expensive with their own appreciable unintended consequence. While their intermittency assures that 100% fossil backup is perpetually required.

    CAGW is a theology with no more legitimacy than Adam and Eve.

  2. the redistribution scheme were somewhat progressive — if the poor received proportionally more of the refund than the the wealth — the economic stimulus would be exaggerated, because the poor spend more of their money than do the rich.

    … it would be like pad thai, fireworks, and motherhood all at the same time.

    Redistributing government’s existing fossil fuel revenues in the form of a Hansen dividend would be just that.

    Carbon tax advocates are sometimes accused of coveting a carbon tax revenue increase. Adding “-and-dividend” to their pitches makes them feel this suspicion is unjust, but it may not make everyone feel that way.

    Start with the dividend.

  3. mbrysonb Says:

    Kingdube, you’re badly misinformed, and apparently smug, too, seeming to think that everyone else who dares to disagree with you is stupid. Which is stupid. Where did you get the idea that someone serious about climate change thinks wind and solar energy are free? Could you have missed the word ‘carbon’ just before ‘free’? At this point (in the right locations) wind and solar are approaching cost-competitiveness with coal (and that’s leaving out the externaity of carbon emissions). As for “theology”, from the basic mechanism (Tyndall and Arrhenius) to the latest IPCC report, science has established the threat to be real and very serious. Of course science is, in principle, fallible, so maybe, just maybe, it’s not reallly that bad– but rollling the dice on it is about as stupid a thing as our civilization has ever done. AGW denial is what’s theological– it’s got all the epistemic earmarks of young earth creationism, and you’re displaying them in spades.

    • greenman3610 Says:

      wind has already passed new coal in price. solar rapidly approaching, has already past grid electricity in some locations.

      • That’s price as in kWh delivered divided by amortization plus O&M.  Converting that energy to dispatchable power, adding reactive power, and the other details of actually making a grid work aren’t included.

  4. Carbon tax will not fix exponential resource demand. It is a stopgap, maybe a useful temporary one. It distracts us from the core issue, exponential resource demand driven by our compound interest based economic system. There is no way a system based on percent GDP growth can be compatible with sustainability. The whole notion that inflation is necessary for job growth shows the utter futility of this model facing the reality of resource depletion and AGW. It results in income and consumption concentrated in the few wealthy. In that world, the wealthy buy expensive electric pickups and SUVs and get the tax breaks for carbon subsidies. People are still looking for a way to have unlimited growth. It will not happen. One good part of the economic system is that it does eventually reflect our activity and commerce. Given the recession, it is saying cheap oil is gone. We got a temporary fix from frack gas, but tar sands are already showing their futility.

  5. Nick Carter Says:

    Methinks King Dubious may be a sock puppet. Syntax suggests from a foreign country. Don’t feed the trolls!

    • “kingdube” believes what he says according to his comments on wattsupwiththat: :)

      Unfortunately there is only one entity on all the Earth that can stop the EPA’s abuse – and that entity is Mother Nature herself. The good news is that she is doing so. Global cooling will continue. But then, AGW will most likely morph into AGC (Anthropogenic Global Cooling). Be warned!!

      So, now remind me: why do some see AGW as ‘the greatest moral challenge of our times’? Because we are consciously denying clean water and basic sanitation to 100′s of millions of the poorest peoples on the basis of this idiotic premise.

    • andrewfez Says:

      ‘Don’t feed the trolls!’

      I think his quota is just one comment per blog article. I haven’t seen him respond to any criticism.

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