December 23, 2013 9:50AM

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.