Tuesday, April 22, 2008

Carbon tax or Pigou Club, whatever...

I've been skeptical of the carbon tax, well not the tax per se but the way some economists seem to want to implement it:
"We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade."

Gas prices have risen by more than 10 cents per year this year and I see no change in our driving behavior:

Source: http://www.newjerseygasprices.com/retail_price_chart.aspx

I've often thought that a higher tax would be needed to change behavior and as far as I can tell right now even with a 50 cents tax I don't see us (personally with all our errands and kids activities) changing our driving habits in the short run (at least for the next 2-3 years). We've got to go where we've got to go. See Matthew Kahn's "The Environmental Impact of Suburbanization" in Journal of Policy Analysis and Management (2000). However, here's a story that contradicts my point:
The high cost of gasoline has helped fuel a sharp increase in MBTA riders over the first two months of the year and a decrease in the number and length of traffic jams, according to T officials and traffic specialists. The number of T trips rose from 27 million in February 2007 to nearly 30 million in February 2008, up more than 11 percent for the month, Massachusetts Bay Transportation Authority officials said. The numbers were up about 5 percent for January. Combined, the average increase is 8.3 percent.

I don't see a similar story for the Washington region however with its Metro system chronically underfunded and overstretched.

Studies of the price elasticity of gasoline are inconclusive. For instance, Thomas Sterner's
"Fuel taxes: An important instrument for climate policy" published in Energy Policy (2006) finds the elasticity to be high but only in the long run but does not address how long the long run is. Jonathan E. Hughes, Christopher R. Knittel, and Daniel Sperling's "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand", UCEI WP (2006) finds "that gasoline taxes would need to be significantly larger today in order to achieve an equivalent reduction in gasoline consumption."

Lastly, a cautionary tale from Monica Prasad:
"But a carbon tax isn’t a new idea. Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries — in the case of Norway, emissions have actually increased by 43 percent per capita. An economist might say this is fine; as long as the cost of the environmental damage is being internalized, the tax is working — and emissions might have been even higher without the tax. But what environmentalist would be happy with a 43 percent increase in emissions?"

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