Over the weekend a prominent Republican, former Treasury Secretary Henry Paulson, came out for a more-comprehensive attack on global warming than anything the Environmental Protection Agency has proposed: In a New York Times essay, he called for a tax on carbon. Economist and Times columnist Paul Krugman quickly challenged Paulson: A carbon tax won’t happen because of politics, so will Paulson support “second-best” solutions?
Economists agree that regulating carbon-dioxide emissions like other pollutants doesn’t work. Carbon is everywhere: producing energy, driving cars, making cement. "We’re talking about hundreds of millions of sources," says Robert Stavins, an environmental economist at Harvard, "so the whole notion of trying to reduce those emissions with source-by-source regulations is simply infeasible."
A carbon tax is a tax on carbon sources, proportionate to how much carbon each source emits. "It provides incentives for everyone" to use less carbon, says Stavins, "from the electical generator, to the cement company, to myself, in terms of running the dishwasher."
So a carbon tax is like a bug bomb. Everything else -- the world of second-best solutions -- is running around your apartment with a flyswatter.
MIT economist Michael Greenstone proposes a different metaphor for second-best solutions. "I like to think of all of these policies as kind of a bank shot in the game of billiards," he says. "You’re shooting the ball to one side of the table, although the pocket is on the other." So it’s harder to make your shot -- and you may hit something you don’t mean to.
He uses fuel-efficiency standards for cars as an example. Although the standards "do make cars more fuel-efficient," he says, "they also cause people to drive more. You've reduced the cost of driving."
Similarly, because the EPA’s new power-plant regulations aim at carbon-intensity, not carbon emissions, they produce some unintended effects, says University of Colorado economist Daniel Kaffine. Because gas is less carbon-intensive than coal, the strategy "sort of acts like a tax on coal and a subsidy to gas," he says. "But what we really want is a tax on both coal and gas."
Meanwhile, evaluating the tradeoffs creates work for economists. "You know, given this menu of second-best policies," says Kaffine, "how do they compare against the reference point of doing nothing?"