Posted by Rich Sweeney on February 21, 2008
I like the folks over on Grist and read their blog daily. But today’s post on “taking control of energy prices” was awful. In it, Alan Durning argues that since energy prices are going up over time, we should use an energy tax to somehow preempt or substitute this increase and redistribute the money. There is so much wrong with the logic in this argument that I can’t even muster a coherent criticism. My only thought is to mail Mr. Durning my copies of Mankiw and Rubinfeld.
Apparently my terse post warrants some further comment. I honestly would’ve posted more before but I’m unusually busy today. Anyways, quickly, here’s my problem with the Grist post: it talks about price increase and taxes as if they’re somehow substitutes, and completely ignores to role prices actually play, which is to equilibrate supply and demand. Energy prices are rising because of increase in demand. Yet Durning confuses a shift in the demand curve with a movement along the demand curve. Simultaneously shifting the supply curve and the demand curve would result in some intermediate quantity and an even larger increase in price. How does that solve anything on the distributional side? Given that energy demand is so inelastic, a tax or a cap on energy would be largely passed on to consumers. You could turn around and redistribute this revenue so that everyone received the same increase in price, but then we’re just right back where we started (see for example Metcalf and Greenstein). Going any further than that, ie making the tax/ redistribution plan progressive is an idea, I guess, but why use energy and not just the tax code?
I think its been well documented on CT that I’m all for a carbon tax or cap as right now there is excess demand for fossil fuels because their prices do not represent their true costs. But I think the case for such Pigouvian measures is strong enough; and I’m not quite sure what private energy companies or regressive price increases have to do with it.