The Case against “Smart Taxes” on Carbon
posted by Josiah Garber on April 22, 2009
in Economics, Politics
Today is Earth day, and a week ago we “celebrated” tax day. It is fitting, in a sense, that Earth Day and Tax Day are only one week apart. Those who blame global warming on human activity see taxation as an effective and desirable means of preventing environmental global catastrophe. In a recent publication, former Bush advisor Greg Mankiw has extended an “open invitation to join the Pigou club” by embracing the idea of regulating greenhouse gases with corrective taxes.[1]
The idea behind corrective taxes is relatively simple. British economist A.C. Pigou explained how markets need correction: the use of goods we buy in markets generates external costs. The price we pay for goods are internal, but any type of pollution (noise, air or water borne) imposes a real cost on other people outside the transaction. In such instances the amount of goods that consumers buy will be excessive because they do not bear the full costs. Taxes on goods that generate negative externalities internalize costs to consumers, provided that they are set at the right level. Hence taxes can correct markets that oversupply goods, in theory.
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