Carbon Taxes vs. Carbon Subsidies

To address global warming, many economists advocate raising carbon taxes while lowering income taxes or other distorting taxes. This makes sense in principle—if global warming concerns are valid—but in practice the approach can easily generate more cost than benefit.

For those who believe global warming merits a policy response, therefore, the question is whether any policy change can generate greater benefit than cost.

The answer is yes: removal of existing carbon subsidies. As documented by economist Lucas Davis (Berkeley), many countries keep gasoline and diesel prices far below market levels, thus encouraging over-consumption. These subsidies harm economic efficiency, independent of global warming.

Other policies have the same features as carbon subsidies: they reduce economic efficiency and encourage over-consumption of energy. One example is the deductibility of mortgage interest, which means bigger houses and therefore higher heating and cooling bills. A second example is agriculture subsidies, which encourage production in inefficient locales that require energy-intensive techniques like irrigation.

Repeal of all such policies is thus a no-brainer. When policy is shooting the economy in the foot, the best response is less shooting, not new taxes to fund a bullet-proof shoe.