Fiscal policy and climate change

It becomes more and more difficult to deny that something is happening to the weather and that climate change is a reality. From the point of view of the economist, this implies that there is more scope for distortionary taxation to mitigate climate change, and this brings a series of opportunities to improve the economy in indirect ways. The big fear of business is that sin taxes on pollution will curtail their production and profits. Of course, this is the whole point of these taxes, that is to internalize the effect of pollution, and that often means either reducing production or increasing production costs.

But as Benjamin Jones, Michael Keen and Jon Strand point out, this has also important benefits for businesses: the added tax revenue allows to reduce other taxes, in particular the ones that are bad for business: corporate taxes or income taxes could even be eliminated in a so-called greening of the tax code. This is one important reason one should tax polluting production or energy instead of subsidizing energy-efficient production or alternative energy, as I have already repeated at great lengths on this blog. But this is easier said than done, as the public will surely call for public expenses to cope with climate change. Politically, it is much easier to give firms technology to pollute less than have them buy it because polluting alternatives have become too expensive. But because it is easier politically does not mean it is right.