Tuesday, October 6, 2009

Gas taxes are still the best option to reduce CO2 emissions

I have advocated numerous times on this blog that high gas taxes are required in order to take into account the various negative externalities of gas consumption. Yet, in the real world, not only are gas taxes low, other means to reducing gas consumption are applied, such as fuel-efficiency standards and special taxes on gas-guzzlers. How do they really compare.

Rüdiger Pethig looks at combinations of the three and finds that gas taxes dominates them all. The reason is that a gas tax is the closest you can get to a CO2 emissions tax. And to reduce the emissions of CO2, nothing beats the price mechanism. The other two means just increase the price of cars, but do not impact the price of gas, and thus the marginal effect of gas consumption: you just end up driving more and consuming only slightly less gas.

And this without even considering that gas taxes can replace labor distorting labor income taxes, while standards provide no revenue.


James said...

This carbon tax/labour tax tradeoff is such a no brainer, and been talked about for decades amongst academics and environmentalists. Why aren't any Government's doing it?!

Anonymous said...

While I quite agree on the need for a significant carbon tax, one would be brave indeed to implement it now. Once the current wave of ill-informed optimism has subsided and the political class realizes $70 oil is still way too high to permit **any** real economic recovery, they can think about carbon taxes, lagged by a year or two.

Policy Pete