A big difference between what everyone calls a “carbon tax” and I, at least so far, stubbornly call a climate injury charge (CIC) (because it’s more accurate and anyway this is my blog post and I can do what I want) and a cap-and-trade (CAT) system is (i) neither an economic nor a political tactics issue and (ii) too little discussed: CAT is a coercive regulation (with its worst corners rounded off by the trading part), and CIC (if you think of it the right way) is an act of exchange.
This is a big deal: coercion of an individual (or a firm) by anyone, including government, is just bad, wrong, and costly. It’s not a Kantian nevernever; sometimes it’s the only way to do something worthwhile. But ceteris paribus, it goes on the cost side of a benefit-cost analysis. People don’t like to be forced to do or not do things, and they are right to not like it. Being coerced makes you less of an autonomous, dignified, reflective sort of being and more of a tool. It doesn’t make you smart, because you don’t have choices to make. We should do it reluctantly and regretfully, and only in the absence of better alternatives.
In contrast, paying a CIC properly designed is an act of exchange, and exchange is one of the most mutually respectful, equality-based relationships in human affairs. Expecting people to pay for the global warming costs they choose to impose on others is morally right up there with (i) expecting them to pay for the hamburgers they deny to others by eating them, and (ii) simultaneously empowering them to choose as grownups among soyburgers, hamburgers defiled by overcooking and mustard dissembling francositude, hamburgers properly prepared (rare with relish and ketchup), and all the other options. Don’t want to buy incremental damage to the planet today? Fine, leave it on the shelf. Have a way to create net value with it, for example by lighting a symphony concert hall for an evening of music? Checkout counter is this way.
Prices are also a powerful device for education and information, and more of both are always good. A coercive regulation misrepresents the world, as it is equivalent to asserting that a marginal cost function has an infinite step in it, and this is never true. Worse, it is a dishonesty of government, exactly parallel to a subsidy with no externality behind it. Hugo Chavez systematically lies to Venezuelans by setting the price of gasoline far below its cost, and this mendacity is as important as the waste of resources it induces; we’ve had enough government lying from the W crowd to last us for many decades. In contrast, a CIC price set as nearly as possible at the right level tells the truth as nearly as we can discern it.
Four more cheers for the good old Pigovian tax, these for mutual respect, human dignity and autonomy, an informed citizenry, and honesty in government.