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We Simply Don’t Know

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David Henderson’s recent EconLog post on carbon taxes is excellent [2].

And here, slightly modified, is a comment [3] that I left on his post:


Excellent post. Coase would nod approvingly!

One alternative – not to say better – way of doing what I take you here to be doing is to ask this question: How do we know that we’re not already taxing carbon optimally, or perhaps even super-optimally? There are currently in place taxes – in the U.S. and elsewhere – on carbon fuels (and on activities that emit carbon). The fact that carbon continues to be emitted, and the fact that these emissions plausibly generate “costs,” does not imply that carbon emissions today are excessive.

The gains from using carbon fuels are real, and it’s practically impossible to calculate the additional costs that would result from any government-engineered further reduction in carbon emissions. The economy is too complex, and human ingenuity is too great, to permit any such calculation that would be remotely accurate. We simply don’t know and cannot know, what we’ll give up by any further hike in carbon taxes.

Likewise, we simply don’t know, and cannot know, what we’ve given up so far as a result of the existing taxes on carbon and carbon-emitting activities.

Finally (and to your very point), we simply don’t know, and cannot know, what processes, devices, or institutions human ingenuity will come up with – or, more generally, what new opportunities will unfold – in the future. It very well might be the case that a lowering of carbon taxes – say, by unleashing a bit more economic development – would do more over time to protect the environment and human health and well-being than would any increase in carbon taxes.

Of course, the opposite might also be true – namely, that a raising of carbon taxes would prompt reactions that generate net human betterment. But this latter possibility is, by nearly all carbon-tax proponents, simply assumed to be true. These proponents do not realize the extreme tenuousness of their assumptions.

UPDATE: In response to this comment by Zeke5123 [4], I added this comment [5]:


Negotiation among many people is indeed impractical. But it’s important to keep in mind a feature of Coase’s work that most people overlook – namely, the bilateralness of externalities. The amount of harm that party A ’causes’ to party B is a function not only of party A’s actions (or inactions) but, necessarily, also of party B’s actions (or inactions). Just as it takes two to tango, it takes (at least) two to externality. (I put ’causes’ in scare-quote-marks because, if indeed the low-cost avoider is party B, then the party that is appropriately described as “causing” the harm is not party A but, instead, party B.)

Coase himself, and understandably, complained often that people overlook this most important part of his analysis.

And so the importance of Coase doesn’t disappear or become neutered if negotiations are impractical – that is, if transaction costs are too high to permit the creation and enforcement of property rights and any resulting negotiations among rights holders. Even with unclear property rights and negotiations being impractical, there remains the question: Which of the parties is the lowest-cost avoider of the harm? Maybe it’s the carbon emitters – or maybe it’s some other party. Simply observing that (1) fossil-fuel-burning power sources emit carbon; (2) such emissions contribute to a greenhouse effect; and (3) left unabated and un-adjusted-to, the greenhouse effect will harm humanity, is insufficient to justify imposing carbon taxes or quotas on carbon emissions.