The Economist letters editor went on holiday (or something) and let two missives into print that need a knuckle rap even though letters aren’t exactly a critical outlet for consequential policy analysis.Â Both writers are articulate and thoughtful and one is a real live economist with a whole career under his belt.
They are also howlingly wrong about this: “First, a ‘one size fits all’ tax requires an impossible calculation of the average cost of reducing emissions over a given period of time.”Â A carbon charge has lots of interesting problems and challenges (so does a cap and trade scheme, of course) but this is exactly, precisely, not one of them: its principal advantage is that to get it right, we only need to know the marginal damage from additional greenhouse gas releases at current levels, whereas to get a cap right, we need to know the whole marginal cost-of-carbonrelease curve and the cost of carbon reduction over the same range.Â To set a cap at some level or another requires no knowledge whatever, but (as is easy to forget) the point of all this is to stabilize climate, not to have a policy.Â The right cap is at the level where marginal cost of further reduction equals marginal benefit thereof, so we have to know where these lines cross and keep updating them (and adjusting the cap) as things change. The cost of reduction, in particular, moves quickly (down) as new policies like this induce technical and managerial learning.
To set a tax, we only have to know the marginal cost of carbon release at the level we’re at now, which is much less daunting (though as carbon releases fall, marginal damage probably also falls and the tax can be reduced some).
None of this means a carbon tax (I wish we could learn to call it a carbon charge, the price of using the air as a greenhouse gas dump) will solve everything. Some ways to efficiently reduce GHG emissions are market failures and require parallel government action (for example, to drive less I need not only shoes and a bicycle, but nice streets to walk on or a bike path (or a tram!) none of which I can buy without government help.