Making the Most of Putin’s Carbon Tax

April 1, 2022

The day before the Russian invasion of Ukraine I wrote about Vladimir Putin’s imposition of a global carbon tax. Glad to see the Wall Street Journal has finally caught on.

Greg Ip in Wall Street Journal:

So the U.S. seems set to benefit from Russia’s shrunken market share. Will the climate? Past oil-price spikes such as after the 1973 Arab embargo did spur conservation but little permanent migration from fossil fuels because the alternatives weren’t practical. Now, though, electric vehicles are fast gaining mainstream acceptance. If gasoline stays above $4 per gallon, that will nudge the trend along.

Meanwhile, even as the European Union shifts gas supply from Russia to the U.S., its total consumption is set to decline as it steps up its transition to net zero. The Netherlands and Portugal have announced new offshore wind investment, Belgium is delaying the closure of nuclear-power plants, and France is ending subsidies for new gas heaters while increasing them for electric heat pumps.

Energy markets are notoriously fickle and much could go wrong with this scenario. Shortages of critical metals have driven up the prices of batteries and solar panels, dimming their appeal, while shortages of inputs and labor are hampering U.S. shale production. Soaring energy costs and inflation may precipitate recession, destroying demand and driving prices back down.

And the war could end. A peace agreement could weaken Europe’s resolve to replace Russian with U.S. gas. Even without such an agreement, informal boycotts of Russia could fade with time.

But if Russian oil and gas are stigmatized for the long run, it’s a good bet that both the climate and the U.S. will be better off.

Gernot Wagner for Bloomberg Green:

It’s rare to be able to point to Economics 101 to give the full picture of how to address a particular policy challenge—and how not to. This is one of those instances. 

Taxes and other regulations drive a wedge between what consumers pay and what producers get. That wedge comes with its own costs. It also has some clear benefits. For one, fossil energy use comes with massive external costs, from local air pollution to climate change. That calls for governments to step in and put a price on otherwise unpriced consequences of energy extraction, transportation and use. 

With energy prices spiking, governments are inclined to provide relief via direct subsidies or various forms of tax holidays. The trouble is that doing so sets the wrong incentives. High energy prices tell consumers to use less of that particular form of energy, and they tell producers to look for alternative supplies. Artificially lowering energy prices has the exact opposite effect. 

Removing a tax lowers prices for consumers, encouraging them to use more energy. It also raises prices to producers, increasing their total revenue. Russian President Vladimir Putin can only thank each Western government attempting to provide relief to its citizens by lowering energy taxes. Europe is spending hundreds of millions of dollars each day on Russian gas alone. 

What to do instead? One answer is to increase taxes specifically on Russian oil, gas and coal. That would help support Western governments’ broader sanctions. It would hurt Putin’s war effort. But it would not provide relief to consumers dependent on Russian energy.

That relief should come in form of direct cash payments. The key part: Do not link them to energy use. Austria just passed energy subsidies lowering the cost of each kilometer driven, each cubic meter of gas burned, and each kilowatt hour of electricity consumed, in a package worth €1.3 billion. Instead of these kinds of subsidies, the Austrian government should have simply given each of its 4 million households a €325 check. The rich will not need the money. The poor household will likely get more relief this way than via artificially lowered energy bills. Given that the rich will not need the money, there are indeed better ways to target relief—but whichever form it takes, it must not be tied to energy use. 

California’s rebate of $400 per registered car isn’t tied to each mile driven, at least. But it only benefits drivers, not those who have arranged their lives in the Golden State to live without a car, either by necessity or by choice. Much better then to give the same $400 to each resident, regardless of whether they own a car. 

There are other direct measures aimed at lowering energy demand, from subsidizing public transit to encouraging working from home, since it reduces the energy used in commuting and heating office buildings. All of this should have been done five weeks ago, immediately after the invasion. But better late than never. The key insight behind all these measures: Actually lower energy demand. Don’t encourage its use in the midst of a fossil-fueled war. 

One Response to “Making the Most of Putin’s Carbon Tax”

  1. rhymeswithgoalie Says:

    The poor household will likely get more relief this way than via artificially lowered energy bills. Given that the rich will not need the money, there are indeed better ways to target relief—but whichever form it takes, it must not be tied to energy use.

    Good. Let the poor recognize themselves how much the high cost of energy eats their general support check.


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