Tuesday, January 22, 2008


Carbon taxes are the method preferred by many economists with regard to combating climate change. The other alternative would be a Kyoto style cap and trade system. Both methods can be structured to capture the value of the estimated externality of carbon emissions ( the negative effects of climate change). I tend to favor a cap and trade system, but there are problems with market volatility, and rent seeking. (however there is still a lot of money to be made by favored businesses from regulating carbon, even with a tax).

The problem is balancing the economic costs of policy today today with the economic and ecological benefits of reduced climate change in the future. This can be approached by determining just how to value any negative externality associated with carbon ( or any greenhouse gas). This is not done easily.

This value is estimated by Nordhaus ( Using the DICE-2007 model, and based on the science of the IPCC Fourth Assessment) at about $30/ ton, with the average person in the US generating about 5tons/yr, for a total of about $150/year, or .09 /gallon of gas and .01/kwh for electricity. However, according to Nordhaus, the Stern Proposal for reducing global warming estimates the damage from global warming to be closer to $300/ton carbon for the next two decades. It would reduce the estimated damage from global warming by $13 trillion, but at a cost of $27 trillion. In this case we are looking at increasing gas with a $1.20/gallon tax.

There are also proposals to give vouchers to low income people to compensate them for the increased burden of the tax. But, one of the greatest tools for fighting poverty ( and environmental degradation in many cases) is economic growth and technological change. We should look critically at which policies provide the best science based trade-off.

Note: Nordhaus' findings can be found in his report:
The Challenge of Global Warming: Economic Models and Environmental Policy, William Nordhaus, Sterling Professor of Economics, Yale University 2007.

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