Common Tragedies

Thoughts on Environmental Economics

Conflict of interest?

Posted by Daniel Hall on November 16, 2007

Presumably the long-term goal of a carbon tax is for emissions — and hence revenues — to decline to zero.  Will the government be willing to cut off the hand that feeds it?

6 Responses to “Conflict of interest?”

  1. Chris said

    Isn’t the idea that the revenues from said tax would fund the development of technologies to reduce carbon emissions? In a purely theoretical sense this should mean that as emissions decrease and revenues decline, the R&D costs of new tech development will also drop. Shouldn’t it?

    I’m probably making some iffy assumptions here, but economics has never been my strong point. Perhaps you know some young, intelligent economists that can explain to me whether or not I’m right to be skeptical of my own argument.

  2. Evan Herrnstadt said

    Isn’t the idea that the revenues from said tax would fund the development of technologies to reduce carbon emissions?

    That is one of many proposals for what to do with the revenues of a carbon tax, and I assume it will occur to some extent. Whether this would happen with an R&D trust fund of sorts, or an increase in general government expenditures on energy, I do not know.

    Since the carbon tax will be highly regressive, a different idea that is making the rounds is that we ought to use the revenues to progressively cut income taxes to keep things distribution-neutral. This has the general benefit of shifting some of the overall tax burden from a good (labor) to a bad (carbon emissions).

    If we do have a carbon tax that really starts to work, i.e., falling carbon emissions reduce revenues, is taxation going to be gradually shifted back onto the shoulders of income? Assuming we use the revenues to revenue-neutrally redistribute the source of general revenues, the carbon tax is going to be contributing to the funding of many government programs. As Daniel implied, these programs die hard. We’ll need to find a new source of revenues, and no politician likes raising taxes.

  3. Evan Herrnstadt said

    I failed to answer your question in my comment. Sorry, I watched the Democratic Debate last night, and I guess something rubbed off on me.

    I guess I’m not entirely clear what you mean by R&D costs falling. Do you mean that as we do more R&D that the marginal innovation will cost less, or do you mean that we simply won’t need as many new carbon-light technologies in the future, having already developed them?

    I’m going to address the former first, as it seems to be what I keep running into as I think about this issue. If this is what you mean, I’m not sure it’s valid. It assumes that marginal innovation will become cheaper as we progress. This might be true due to factors such as better technology for collaboration and information diffusion, but I don’t think that we can necessarily claim that because we have more innovation stock, the flows will become less expensive.

    The latter case is potentially valid. If we can find a suite of technologies that can forever fulfill our energy needs, then the fact that we’re not funding high levels of energy R&D might be an efficient decision anyway. However, these innovators definitely face a conflict of interest as well. The better their technologies work, the less funding their future work gets. I would hope that these researchers wouldn’t respond to this perverse incentive, but who knows?

    Finally, this all assumes that revenues are being funneled directly into R&D. Say we’re funding R&D by increasing general discretionary spending and the carbon revenues dry up. Years down the road, it’s going to be hard to justify cutting these programs so we’ll have to raise taxes, cut spending elsewhere, or increase the deficit.

  4. tidal said

    Well, you can’t say you’re not forward-thinking here! But isn’t this a bit of red herring? We need some sort of carbon cost that properly accounts for its externalities. Same goes conceptually for mercury, NOX, etc. Even if we were raising $0 in tax – implying 0 emissions, we would still need that “tax” out there.

    So you are really just talking about the mix of taxes – sales, payroll, user, income, capital, etc. – that governments decide to use to fund their budgets… ~50 years or more from now… Not unlike the ongoing challenge they face daily today… Granted, because of its intertwined nature with the modern economy, carbon is likely to require a large pigovian tax, and hence perhaps a large intermediate-term revenue source, but still… you just end up back at re-apportioning the burden amongst today’s basic policy options. No?

    In the meantime, I think the idea of increasing taxes on “bads” (e.g. externalities), and reducing taxes on “goods” (e.g. income, entrepreneurship) is more important to debate/model. Semi-utopian navel-gazing about “what about when we are at zero carbon emissions?”… which is going to be very, very challenging to achieve… I appreciate the forward-thinking, but I am not sure it is very practical… Love your blog though…

    Regarding the discussion above about marginal cost of energy R&D declining, I see no reason to assume that – rather just the opposite. You are dealing with the first and second laws of thermodynamics. Whenever I sense extrapolations from experiences with the production of razor blades, or Moore’s-Law-like advances in semiconductors, I sense that there is disconnect. Energy is going to yield efficiencies more grudgingly.

  5. Nick said

    Over time, as the quantity of emissions falls, the higher permit or tax price will offset (some?, all?) of the lost revenue.

    I’d see carbon revenues reaching a plateau, rathing than rising then crashing to zero someday: the point is to internalize the externality; not to completely end the burning of carbon. (though, maybe that will hapeen anyways)

    So, for the sake of argument, let’s say emissions become so low that C-tax revenues become tiny. Two responses:

    1. When this, possibly happens, 50-100 years from now, hopefully government won’t need 30-50% of our income…I can dream!🙂

    2. If #1 hasn’t happened, and government needs the revenue lost as the carbon revenues fall, then no biggie – gov’t can slowly start shifting the tax to somethnig else (back to income, or to another environmental “bad”). Gov’ts shift taxes all the time. I don’t see this as a problem.


  6. Conrad said

    A carbon tax also has the nifty side effect of creating a potential market for “carbon negative” activities. So even if such a tax was set to achieve zero net emissions, there still may be a sizable revenue stream from emitters. Just a thought.


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