Carbon Taxes and the Fiscal Cliff: Evidence from Iceland

Could tough budget choices nudge our wise political leaders to seek efficient public policies such as a revenue generating carbon tax?  The NY Times scores some debate points today making the case in this article.   My old friend Gib Metcalf now plays a key role in the U.S Treasury Department and his past research at Tufts is discussed.   I highly recommend his Brooking’s Hamilton Project piece on carbon taxes. Gib convincingly argues that it would be efficient to bundle a labor tax cut with a carbon tax increase.  If you like to boil life down to a bumper sticker; reject “Got Garlic?” and embrace “tax waste, not work”.    For those who are interested in the political economy of how the U.S Congress votes on carbon legislation, I suggest reading my empirical paper that will soon be published in Economic Inquiry.    For any proposal you can think of, will Representatives and Senators from poor, high carbon, conservative areas vote for it?

Author: Matthew E. Kahn

Professor of Economics at UCLA.

6 thoughts on “Carbon Taxes and the Fiscal Cliff: Evidence from Iceland”

  1. embrace “tax waste, not work”.

    I prefer ‘tax the bad, not the good’ as it has a wider scope and compelling framing, but yours is at least alliterative.

    1. I like it, as “work” is a warm fuzzy word and “waste” a cold prickly — it could work.

  2. Matt:

    I believe you meant Ireland in your title, not Iceland. I don’t think the later even has much carbon pollution with so few people and so much geothermal energy!

    Good post regardless…


  3. Matthew: any views on my optimistic argument that the geography of renewable energy offers some hope, as it could become a wedge issue for Republicans in the Plains and Southwest, where the wind and solar energy is?

    After all, there are now 20 times as many jobs in renewable energy as in coal-mining (Brookings). In my pre-election map, of the six swing states with high growth in renewable jobs (CO, FL, NC, NM, NV, VA) Obama carried all but NC.

    Anecdata: Chuck Grassley (R-IO) actively supports renewal of the wind PTC. Even hard-right Jeff Flake (R-AZ), who is against a carbon tax, PTCs, and EPA regulation of CO2, supports Obama’s opening of public lands to solar farms. I can’t find even such token gestures to renewables in the statements of Ted Cruz (Tea Party and Oil&Gas, TX).

    IMHO, the imminent expiry of the wind PTC (though shambolic policy) is not such bad news for the industry as advocates claim. Previous halts led to nearly complete stalls in investment, as the turbines were uneconomic without subsidy, and it made sense to wait for renewal. Now wind is pretty competitive without the subsidy, and there’s no prospect of it coming back. No PTC also removes the inefficiencies and rents of the project chokepoint “finding rich guys who need tax credits as offsets”. (This is one reason why FITs, which simply supply a clean price signal, are a better support mechanism than tax credits.) So I’d expect to see a drop, as marginal farm projects are pruned, and then resumed and more sustainable growth powered entirely by markets and the learning curve.

  4. For any proposal you can think of, will Representatives and Senators from poor, high carbon, conservative areas vote for it?

    Probably the single most important moment ahead of us figuring out how to completely kill the US coal industry.
    And I do mean completely. That is the top of the list. And that includes barging coal across the ocean.

    Of course Kentucky et al. will oppose this. And that is perfectly understandable. Coal mining is both their heritage and a source of their “jobs”.
    The key will be to find a way to entice them. To make them an offer they can’t refuse…

    I see only one way:

    Promising Kentucky et al. multiple nuclear power plants and job training for positions within the plants.
    Promising Kentucky et al. wind farms and job training for positions upon the farms.
    Promising Kentucky et al. multiple natural gas fired plants and job training for positions within the plants.
    Paying Kentuckians et at. money not to mine coal.

    How we get from here to there will take as great a leader as the country has ever seen.
    Coupled with continued droughts and rogue hurricanes.
    But that’s where we have to go, and we need to be their as of yesterday.

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