Questions - Session III

David Montgomery

PARTICIPANT: Doesn't the needed level of carbon tax depend in part on what to do with the carbon tax, for example, re-invest it in pollution control?

DR. MONTGOMERY: There has been a lot of work on this issue. It always makes sense to separate how you raise revenue to pay for something from what it is that it makes sense to do. That I think is mostly how we have approached the analysis of carbon tax.

The primary effect of a carbon tax is to give an incentive for reducing emissions. We have assumed that the revenues are recycled through general tax reform, because we wanted to separate an analysis of what are the costs of reducing emissions from an analysis of, are there opportunities to come up with a better tax system than the United States has now. Lots of economists have thought for a long time that we have needed a better tax system in the United States, and have not gone very far in achieving it. We have been trying to focus on the cost of emission reductions.

The use of revenues from a carbon tax to subsidize specific kinds of improvements in energy efficiency or adoption of alternative energy technology does not change the costs of those investments. The real economic cost stays exactly the same, no matter whether it is paid by a taxpayer or by a government. So the estimates of the costs of reducing climate emissions would not be different if we assume that the revenues went to pay for subsidizing particular kinds of changes in reductions in carbon emissions. In fact, if those subsidies were directed at relatively inefficient ways of reducing emissions, they would actually increase the costs. The incentive that is provided by the higher cost of energy will, by itself, direct attention toward those emission reductions.

So I think we need to keep separate each of those effects. The primary effect of a carbon tax is incentives. That produces a reduction in emissions. How the revenues are utilized, the question of who pays for something, doesn't change the real economic cost.

PARTICIPANT: What makes these changes happen within the time frame you're talking about? You are essentially saying let's delay ten or 20 years. What are the incentives that prevent us from getting to the point 20 years from now where we are again saying let's delay 20 years?

DR. MONTGOMERY: It is not a policy of doing nothing, and I didn't say anything like that. The challenge for policy is to move climate science forward enough that there can be a consensus of whether or not it is worth doing. The second challenge for policy is to design ways of stimulating R&D investment as a hedge against the possibility that it will be needed in the future. That is not a trivial challenge, but it is one that is not even addressed by calls for targets and timetables for immediate emission reduction.

Anything we do over the next five or ten years is going to be transitory, because it is going to be changing peoples' behavior. That is the only way to drive down emissions rapidly. It is not building the base for the kind of long term changes in energy technology that would be necessary if ultimately it was decided that significant reductions in greenhouse gasses are needed.

That is what the policy should be focusing on, and it is an illusion to think we even accomplish anything for the environment by adopting targets and timetables for the next five to ten years.

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