Commenting on this recent EconLog post by Scott Sumner, Thomas Lee Hutcheson writes:
The point of a carbon tax (tax on net emissions of CO2 and methane) is that is is exactly as large as it needs to be (requiring the least amount of lifestyle changes) to minimize those future costs. If future costs are not large, neither will be the tax on net emissions of CO2 and methane. The idea is to minimize the sacrifice.
In response to Mr. Hutcheson’s comment, I wrote (and posted as a reply at EconLog) the following (here slightly amended):
Mr. Hutcheson: Who will determine in practice what is the optimal carbon tax “to minimize those future costs.” And how will this determination in practice be made? We already tax carbon fuels, and we’ve done so for a long time. How do you know that the current array of taxes – include those on retail gasoline sales – aren’t optimal? Perhaps these taxes are now even super-optimal. There is no way to know.
We can, of course, draw graphs on whiteboards and create models with specified parameters and reaction functions. The former are analytical tools that only enable us to understand and describe some general, abstract features of optimally set taxes. The latter – the models – unavoidably are infused with many assumptions – some explicit, some implicit – the realism of many of which we cannot really know. Our knowledge is especially meager if the modelers purport to make predictions for decades out.
Of course, we can’t know future-generations’ preferences. But this fact is minor. More importantly, we can’t know what discoveries and innovations will happen in the future. To truly know what is the optimal level of taxation of carbon we’d have to know the different kinds of discoveries and innovations that would emerge under each of the countless different possible alternative levels and systems of carbon taxation. We cannot begin to know any such thing.
The fact that humanity continues to emit carbon does not tell us that the current level of emissions is too high. Nor is such knowledge given to us by fact that the earth continues to warm (even if, as I willingly grant, all of this warming is the product of human activity). We do not know and we cannot know.
In the face of such inescapable ignorance, a perfectly legitimate course of action is to do nothing – or nothing further – to tax or regulate with the aim of reducing carbon emissions. Indeed, I believe that this course of (government in)action is the best one available, at least until god chooses to share with us its detailed knowledge about such matters. I hold this belief with reinforced confidence because of the fact that carbon fuels themselves have overwhelmingly powered (and continue to power) the countless innovations that have made human existence safer and more comfortable.
Do the following mental experiment. Suppose you could go back in time to circa 1900 and prevent the introduction and use of air-conditioning. Suppose further that you know that if you chose to prevent air conditioning, the world in 2022 would have less carbon in its atmosphere. That result would indeed be an advantage. But not an advantage without cost.
How much less carbon in the atmosphere in 2022 would you think is minimally necessary to justify a world without air conditioning? How much less carbon in the atmosphere today would you think is minimally necessary to justify a world with 50 percent less air conditioning? With ten percent less air conditioning? How could someone in 1900 have known such a thing?
Now do the same mental experiment, not with air conditioning, but instead with automobiles.
All one can do in such mental experiments is to guess, and to guess rather wildly at that. And, frankly, that’s all one can do when attempting today to calculate the optimal carbon tax.
I believe to be preposterous the widespread presumption that we possess, or can come to possess, sufficient knowledge to inform us what will be the likely full consequences of further raising carbon taxes. In practice, we cannot know if any increase in such taxes will move us closer to or further from optimality. In the blinding light of this inescapable ignorance, I say that we at least should avoid further artificially raising the cost of carbon fuels – fuels which were a major source of power for the industrial revolution and continue today to be the major source of power to produce the standard of living that affords rich-world denizens the luxury to fret about climate change.
